Gaz Métro Limited Partnership
Establishment of a receipt rate for natural gas, R-3732-2010
ARGUMENT BY GAZ MÉTRO
Origin:
Follow-Up Request Concerning the Argument-Related Questions
Addressed to the Participants on November 26, 2010
Requestor:
Régie de l’énergie
For introductory purposes, Gaz Métro notes that in each of the Régie’s three questions,
the way the question is phrased presumes that the Régie has jurisdiction if and only if a
given activity or a given asset – a pipeline, for example – forms part of Gaz Métro’s
exclusive right. In Gaz Métro’s opinion, it is true to say that if an activity is part of its
exclusive right, then the Régie necessarily has jurisdiction. However, the fact that an
activity does not necessarily form part of Gaz Métro’s exclusive right does not mean in
and of itself that the activity in itself or the assets that are used to carry out the activity
are not regulated. Clarification concerning these points is provided in Answer 3 below.
Preamble:
Gaz Métro requests that a component of the receipt tariff be charged to producers when
the transmission pipelines of the Gaz Métro system are used to transmit natural gas
intended for delivery outside the territory.
Question:
1.
Please explain how the transmission, by Gaz Métro, of natural gas intended for
delivery outside the territory is an activity that falls under its exclusive distribution
right and is therefore regulated by the Régie, particularly in respect of Sections 1
and 63 of An Act respecting the Régie de l’énergie.
Answer:
Gaz Métro would like to clarify the meaning of the term “transmission” as it is to
be understood in this case. Gaz Métro notes that some confusion has occurred
over the use of the term, which is employed both in An Act respecting the Régie
de l’énergie (the “Act”), for the service proposed in this application and the
related rate, but also by interprovincial transporters. Gaz Métro wishes to point
out that it is not providing, and does not intend to provide, an interprovincial
“transportation” service, either itself or through a third party. It is simply asking
the Régie to approve a tariff for an intra-provincial service, called “transmission”
for the purposes of the application, that is like all the other services it offers to its
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Establishment of a receipt rate for natural gas, R-3732-2010
customers, i.e. between two points, one being a receipt point and the other a
delivery point, both located in Québec. The word “transmission” as used in the
application relates to natural gas transmission activities solely on the Gaz Métro
system. The final destination of the gas, after it has been delivered to a delivery
point in Québec, in this case to the junction with another pipeline, is not under
Gaz Métro’s responsibility. The potential producer will be responsible for
“transportation” outside Québec as the latter will, if it so wishes, have to acquire
its own transportation capacity on the interprovincial system so it can deliver the
gas outside Gaz Métro’s territory.
We would point out that the Act grants Gaz Métro an exclusive right in specific
activities, namely the operation of a distribution system and the transmission and
delivery of natural gas. These rights are confined to a given territory, namely the
Gaz Métro franchise, which has been established in various government decrees
over the years.
To carry out its activities, Gaz Métro has assets. The value of those assets forms
the rate base that must be recovered through rates. Some of those assets are
listed in Section 2 of the Act in the definition of “natural gas distribution system”.
This definition makes particular reference to pipelines for the transmission of
natural gas in a given territory. Obviously, transmission as referred to in the Act
consists of intra-territorial transmission, as interprovincial transportation is not
under the Régie’s jurisdiction. These transmission pipelines are therefore similar
in every way to Gaz Métro’s current transmission pipelines, which we incidentally
call “transmission pipelines” internally (such as, for example, the pipeline
extending from the Mauricie region to the Saguenay) for internal purposes of
asset functionalization for the allocation of costs. In potential requests for
investment, Gaz Métro will therefore request to include in its rate base pipelines
located entirely in its territory that enable it to offer the receipt service, for which a
rate must be established to provide producer customers with terms of reference.
These new or existing Gaz Métro pipelines which could transport natural gas
towards interprovincial or international systems, which are responsible for then
transmitting the gas outside the territory if the producer wishes, are therefore
pipelines entirely located within the franchise’s territory carrying natural gas from
a point A to a point B. Consequently, these Gaz Métro natural gas pipelines, if
they are built and operated by Gaz Métro, will come under the jurisdiction of the
Régie, which can therefore allow Gaz Métro to recover the costs through a rate,
which is the reason for this request. There are various costs underlying this rate,
particularly those related to the transportation activity (or transmission activity, as
referred to internally) within Gaz Métro’s territory. However, the service does not
use any interprovincial “transportation” asset, and obviously no costs for this
service offered by a third party are included in the proposed rate. When the
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natural gas is delivered to point B, Gaz Métro returns the natural gas to the
customers and the customers ensure that the natural gas is shipped outside the
province of Québec by a third party to a location that they and they alone
determine. The fact that the natural gas will potentially be shipped on by a third
party outside Gaz Métro’s territory is not relevant to the establishment of a rate
for pipelines located entirely in the territory.
In conclusion, Gaz Métro wishes to stress that a legally untenable situation would
arise if the Régie were to decide that it could not set a tariff for Gaz Métro’s intraprovincial natural gas transportation service on the grounds that such gas is
ultimately intended to be shipped outside of its territory or the province. In fact, it
should be recalled that a producer wishing to inject natural gas is required to
send Gaz Métro a “nomination” no later than 10 a.m. on the day preceding the
effective delivery date. This nomination must indicate whether the natural gas is
being delivered in Gaz Métro’s territory or whether it is to be delivered to an
interconnection point with TCPL/TQM in order to then be potentially shipped
outside the province (see on this topic Q/A 4.3, Gaz Métro – 1, Documents 2.4
and 10.1, Gaz Métro – 1, Document 2.10). Given that the nomination can be
modified daily or even, in some cases, intra-day (see on this topic Q/A 58.3,
Gaz Métro – 1, Document 2.58), a Gaz Métro transmission pipeline could
sometimes be under the Régie’s jurisdiction and sometimes under another
jurisdiction, depending on the destination of the gas. This possibility of “double
jurisdiction” is, in our opinion, contrary to the spirit of the Act. An activity or a
service cannot be regulated intermittently by the Régie, particulary as in both
cases Gaz Métro will have received the gas from the producer at a receipt point
within its franchise and will have delivered it to another point within its franchise.
Preamble:
The evidence reveals that a connection pipeline could potentially be built by Gaz Métro
between a receipt point and the TCPL/TQM system.
Question:
2.
Please explain how a pipeline between a receipt point and the TCPL/TQM
system, which could be used in whole or in part to ship natural gas outside the
territory, comes under Gaz Métro’s exclusive distribution right and is therefore
regulated by the Régie.
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Establishment of a receipt rate for natural gas, R-3732-2010
Answer:
Gaz Métro is of the opinion that a precise factual basis would be required to
permit the application of the various principles of law in question and applicable
to a specific pipeline. In this regard, the courts have specified, on several
occasions, that the question of which jurisdiction an intra-provincial pipeline
connected to an interprovincial system falls under is a highly factual one.
Gaz Métro, but also the producers, based on our discussions, have not imagined
all possible scenarios for this emerging industry. It also Gaz Métro’s opinion that
a decision regarding this question is not a prerequisite for processing the request
presented by Gaz Métro in this application. This application does not concern the
establishment in abstracto of principles concerning a particular pipeline and
potentially having broader implications than what is required to decide the merit
of the Gaz Métro’s application.
Gaz Métro wishes nevertheless, to the best of its knowledge, to offer the
following observations that, we hope, will be able to guide the Régie in its
decision regarding the establishment of a tariff for a receipt service provided
using assets belonging to Gaz Métro.
We wish to emphasize that Gaz Métro has only been formally approached at this
time for the potential installation of facilities required by the receipt service in
Gaz Métro’s existing system. The other cases have been considered and
presented because they will potentially be present, in the short or long term,
depending on the location of the production sites and the size of their volumes. In
the eventuality contemplated by this question, according the information gathered
to date and the various scenarios for the shipment of gas to market, Gaz Métro
could be asked to ship natural gas in new pipelines connected to the
interprovincial transmission system, either for consumption along this new
pipeline or to another point for consumption either within its territory – in another
consumption zone – or outside its territory. Under this scenario, these new
Gaz Métro facilities would constitute transmission (or transportation as explained
in Question 1) and distribution systems within the meaning intended by the Act
and may therefore be regulated by the Régie, if they are built and operated by
Gaz Métro.
As mentioned in the answer to the preceding question, Gaz Métro is not offering,
and does not intend to offer, an interprovincial transportation service. It is simply
asking the Régie to approve a tariff for an intra-provincial transmission service
that is like all the other services it offers to its customers, i.e. between two points,
one being a receipt point and the other a delivery point, located in Québec. The
final destination of the gas, after it has been delivered to a delivery point located
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Establishment of a receipt rate for natural gas, R-3732-2010
in Québec, either in Gaz Métro’s territory or to the junction with another pipeline,
does not change this reality and the related legal consequences. As mentioned,
the potential producer will be responsible for “transportation” outside Québec and
will, if it so wishes, have to acquire its own transportation capacity on the system
so it can deliver the gas outside the province. After the gas has been delivered
to a delivery point, it can go in several directions. All the gas pipeline systems are
in some way interconnected and gas flow does not necessarily match the
commercial reality between a customer and its service provider. The assets, not
the final destination of the gas, must therefore be considered here in order to
establish the Régie’s jurisdiction. We refer the Régie to the answer to Question 1
concerning the intra-territorial nomination of volumes, which are, however, initially
announced, in order to be shipped outside Gaz Métro’s territory.
With this request, Gaz Métro is therefore only proposing rates principles that
could be applied to new pipelines between a receipt point within its territory and
the interprovincial system for which the interconnection is also located within its
territory. Gaz Métro’s request, in fact, only covers the establishment of a rate or
the approval of methodologies enabling the establishment of a rate for the use of
new facilities that, if they are built and operated by Gaz Métro, could constitute
facilities contemplated by the Act.
Preamble:
In response to question 6.1 of the Régie’s Request for Information No. 2 (Gaz Métro-1,
Document 1.64), Gaz Métro presents a connection diagram illustrating a case where the
receipt point is upstream from the raw gas processing plant.
Question:
3.
Please explain how the transmission of raw gas between a well and a processing
plant can be an activity that comes under Gaz Métro’s exclusive distribution right
and is therefore regulated by the Régie.
Answer:
First of all, Gaz Métro would like to stress that the possibility raised by the Régie,
according to the preliminary information obtained from the producers, would
represent a relatively rare case. Usually, it is expected that the producers will
exercise the activity of transmitting raw gas, i.e. gas that has not yet been dried
and, as applicable, processed.
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On a different note, Gaz Métro wishes to go back to its introductory comment to
these answers. As mentioned, the way the question is phrased assumes that the
Régie only has jurisdiction if an activity or an asset – a pipeline, for example –
forms part of Gaz Métro’s exclusive right. In Gaz Métro’s opinion, it is true to say
that if an activity forms part of its exclusive right, the Régie necessarily has
jurisdiction; however, the fact that an activity does not necessarily form part of
Gaz Métro’s exclusive right does not mean that the activity in itself or the assets
that are used to carry the activity out are not regulated.
Gaz Métro’s exclusive right obviously covers regulated activities because they
are explicitly provided for in the Act. Moreover, there are other activities that,
while they do not form part of Gaz Métro’s exclusive right, are nevertheless
carried on by Gaz Métro and regulated by the Régie. An example is the sale of
natural gas: this activity is explicitly excluded from Gaz Métro’s exclusive right by
Section 63, paragraph 2, of the Act. Yet, the Régie regulates the cost of natural
gas through Section 52 of the Act. Another example is the activity of storage and
the related underlying asset, the LNG plant. This plant is used to carry on an
activity that is explicitly excluded from Gaz Métro’s exclusive right by Section 63,
paragraph 2, of the Act. Despite this fact, the LNG plant is a Gaz Métro asset that
is regulated by the Régie just like the activity of storage under, in particular,
Section 1 of the Act.
Furthermore, should an activity carried on by Gaz Métro not be covered by its
exclusive right or more broadly by the Act, as in the case of the sale of natural
gas or the activity of storage, an asset related to that activity could nonetheless
be regulated. Indeed, assets prudently acquired and useful for the operation of
the natural gas distribution system, of which the transmission pipelines form a
part, may, under Section 49(1) of the Act, be included in the rate base for
purposes of establishing rates. Consequently, Gaz Métro could own assets – its
business offices, for example – included in its rate base without the activity of
acquiring and maintaining immovables being part of its exclusive right.
Briefly, the question of whether the Régie has jurisdiction to regulate an activity
or an asset is not limited to determining whether the activity is covered by
Gaz Métro’s exclusive right. It also necessary to look at whether the assets in
question are useful for the operation of the natural gas distribution system, of
which the transmission pipelines form a part, and may therefore be included in
the rate base of the purposes of establishing rates.
To close on the question of the correspondence between “exclusive right” and
“jurisdiction of the Régie”, the pipeline referred to in this question could be an
asset useful for the operation of the natural gas distribution system provided it
meets the criteria established by case law. This question is obviously highly
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factual. If an investment project involving this type of pipeline were considered,
Gaz Métro would apply for the authorization set forth in the Act and would submit
the facts justifying such a request.
In conclusion, Gaz Métro is of the opinion that a decision regarding this question
is not a prerequisite to processing the request presented by Gaz Métro in this
application.
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