NEB 1.1 Tolls and Tariff Matters Cost Allocation i) TransCanada Settlement Application, PDF page ...

451 Pages·2014·4.4 MB·English

by  Shawna Collins

TransCanada PipeLines Limited NEB 1.1
Application for Approval of Mainline 2013 – 2030 Response to Information Request
Settlement RH-001-2014

IR Number: NEB 1.1
Category: Tolls and Tariff Matters
Topic: Cost Allocation
i) TransCanada Settlement Application, PDF page 75-76 of 100
Reference:
[A3S7T7]
ii) TransCanada Settlement Application, PDF page 74 of 100
[A3S7T7]
iii) NEB Reasons for Decision, RH-003-2011, 27 March 2013, PDF
page 116 of 276, [A3G4A3]
Preamble: Reference i) states that segmented costs, by individual cost item, were
derived for each year of 2015 through 2020 using four methods:
geographical, ratio of rate base, gas plant in service, and 50% energy and
50% energy distance.
Reference ii) states that the first adjustment to the Compliance Tolls is to
ensure that the Eastern Triangle recovers Eastern Triangle costs. This is
reflected in step 1 of the toll calculation. There are three stages in the toll
calculation.
Reference iii) states that the Board found that TransCanada’s proposed
cost allocation methodology in the RH-003-2011 application resulted in a
reasonable allocation of Mainline costs, and was appropriate.
Request: a) Why is a transition to segmentation reflected in step 1, rather than,
for example, a shift between energy and energy distance cost
determinants using the existing cost allocation methodology,
considered to be a more appropriate way to increase the share of
overall system costs to the Eastern Triangle shippers?
b) If the Board approves the proposed cost allocation methodology,
illustrate how this proposed methodology would be functionally
distributed between energy and energy distance billing determinants
at each stage of the toll calculation.
Response:
a) As an initial matter, it was not TransCanada’s objective as part of the transition to
segmentation “to increase the share of overall system costs to the Eastern Triangle
shippers.” Rather, TransCanada seeks to establish tolls during this period that reflect
cost causation principles as the tolling methodology transitions to segmented tolling.

June 17, 2014 Page 1 of 2
TransCanada PipeLines Limited NEB 1.1
Application for Approval of Mainline 2013 – 2030 Response to Information Request
Settlement RH-001-2014

Although other cost allocation approaches could have been utilized, TransCanada
believes the methodology chosen best reflects costs on a segmented basis.
TransCanada’s proposed method isolates the Eastern Triangle costs and applies them
directly to the Eastern Triangle shippers (both short haul and long haul) to ensure
only those using the Eastern Triangle segment are paying for Eastern Triangle costs.
In doing so, the cost allocation among the energy and energy-distance components as
approved in the RH-003-2011 Decision is maintained. Please see the response to
part b).
Segmentation reflects the expectation that shippers generally will be increasingly
provided on an intra-segment basis, meaning that shippers will be increasingly using
service within a single segment as opposed to the more traditional longer-haul service
that would otherwise span multiple segments. Changing the weighting applicable to
factors such as energy and energy-distance may achieve directionally similar results,
but such an approach is an allocation of total system costs rather than a direct
assignment of the segment costs. Presently, TransCanada does not expect changes in
energy and energy-distance to be as significant as the shift to primarily intra-segment
service under the Settlement.
The purpose of Step 1 of the proposed toll methodology is to have all paths using the
Eastern Triangle segment, both long haul and short haul, recover Eastern Triangle
segment costs. A shift of cost among the energy and energy-distance billing
determinants would not achieve this objective as effectively as the proposed method.
b) Since the Settlement tolls are determined as a percentage of Compliance Tolls, using
the 3-step methodology, the resulting distribution of cost between the energy and
energy-distance billing determinants is the same as that of Compliance tolls –
16% energy and 84% energy-distance.

June 17, 2014 Page 2 of 2
TransCanada PipeLines Limited NEB 1.2
Application for Approval of Mainline 2013 – 2030 Response to Information Request
Settlement RH-001-2014

IR Number: NEB 1.2
Category: Tolls and Tariff Matters
Topic: Cost Allocation
Reference: i) TransCanada Settlement Application, PDF page 75-76 of 100
[A3S7T7]
ii) TransCanada Settlement Application, PDF page 74 of 100
[A3S7T7]
iii) TransCanada Settlement Application, PDF page 77 of 100
[A3S7T7]
iv) TransCanada Application for 2012-2013 Tolls, Section 7, Toll
Design, pages 17-18, PDF pages 18-19 of 65, [A2C6Q0]
v) TransCanada Settlement Application, Attachment 2: Written
Evidence of John J. Reed, page 30, A48; PDF page 32 of 63,
[A3S7U0]
Preamble: In reference i), TransCanada explains that segmented costs, by individual
cost item, were derived for each year of 2015 through 2020 using four
methods. Among these methods, pipeline integrity costs will be allocated
by geography and the depreciation expense will be allocated to segments
based on the appropriate segment depreciation rate applied to the
segment Gas Plant in Service (GPIS).
In reference ii) TransCanada states that tolls for the 2015 to 2020 period
are not purely segmented tolls because Eastern Triangle shippers are
recovering both Eastern Triangle segment costs as well as an allocated
portion of remaining system costs.
Reference iii) states that the annual Discretionary Miscellaneous
Revenues (DMR) have been split evenly between Prairies, NOL and
Eastern Triangle.
Reference iv) lists the current cost allocation methodologies approved by
the Board in RH-003-2011.
Reference v) states that Mainline costs that are geographically
distinguishable would be assigned to a particular segment, while costs
that cannot be geographically distinguished would be allocated pursuant
to the approaches approved in the Decision.
Request: a) Clarify if the statement made in reference v) is applicable to a
possible cost allocation methodology that could be in place in 2021.

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TransCanada PipeLines Limited NEB 1.2
Application for Approval of Mainline 2013 – 2030 Response to Information Request
Settlement RH-001-2014

Discuss, at a high level, possible cost allocation models that could
be used to allocate costs both within a segment and among the
segments in 2021.
b) Describe the underlying calculation to determine how pipeline
integrity costs will be allocated among the three segments.
c) Explain why depreciation costs are proposed to be allocated based
on GPIS rather than the current methodology of ratio of rate base.
d) Describe why the current allocation of weighted-average gross
revenue requirement of other costs is no longer an appropriate
methodology for allocating DMR.
Response:
a) The statement made in Mr. Reed’s evidence at p. 30, ll. 22-24 as noted in reference v)
is applicable to the proposed segmented toll design post-2020. As discussed in the
Application, the tolls for the Eastern Triangle for 2015 through 2020 would also
reflect full recovery of the Eastern Triangle costs.
There are a number of possible cost allocation and toll design methodologies that
could be used to allocate costs to a segment and within a segment in order to develop
natural gas transportation tolls starting in 2021. For example, such approaches include
postage stamp, zonal, zone-gate, zone of delivery, zone matrix, and pure distance, and
more than one of these approaches can be found to be just and reasonable for a
particular pipeline. Within these approaches, whether and the degree to which
distance should be reflected is a primary consideration in terms of allocating costs
and designing tolls. This determination can be guided by, among other factors, the
current and projected contracting of the system, the supply points and markets on the
system, system flows and system dynamics. As discussed in the Application (Section
6.3, p. 79, ll. 23-25), there is no pre-established toll design methodology for any of
the Mainline segments for the post-2020 period.
TransCanada has not evaluated the pros and cons of every potential cost allocation
approach that could be utilized starting in 2021. However, as discussed in
Section 2.2.2 of the Additional Written Evidence, TransCanada believes that its
proposed Tolling Parameters after 2020 would be consistent with just and reasonable
tolling, reflecting the evolution of the Mainline’s contracting practices, and the
Board’s historical treatment of rolled-in versus incremental or stand-alone tolling.
b) For purposes of deriving the proposed 2015 – 2020 tolls, TransCanada looked at the
pipeline integrity costs that were forecast within each segment on a geographical
basis. The percentage of these costs forecast in each segment resulted in an average
allocation among the Prairies, NOL, and Eastern Triangle segments of 25%, 50%, and

June 17, 2014 Page 2 of 3
TransCanada PipeLines Limited NEB 1.2
Application for Approval of Mainline 2013 – 2030 Response to Information Request
Settlement RH-001-2014

25%, respectively. For the remainder of the forecast pipe integrity costs that were not
known on a segment basis, the same percentage allocation for each segment was used.
c) Depreciation costs are proposed to be allocated among segments based on GPIS
because depreciation expense is a direct function of the GPIS of the given segment
(i.e., GPIS multiplied by depreciation rate equals depreciation expense). It should be
noted that there currently is no method by which depreciation expense is allocated
among the three segments. Rather the current method using ratio of rate base is
applicable to allocate the system wide depreciation expense to the Energy and
Energy-Distance components of the integrated tolls, not to allocate depreciation
expense across segments.
d) The current method of gross revenue requirement used to allocate DMR to the Energy
and Energy-Distance components of the integrated tolls remains unchanged under the
proposed tolls because Settlement tolls are based on a percentage of Compliance tolls.
However, the proposed toll methodology requires an allocation of DMR revenues
among segments, which has not been previously required. TransCanada chose to
allocate the DMR among segments equally as no more specific information was
available. Also see the response to NEB 1.1.

June 17, 2014 Page 3 of 3
TransCanada PipeLines Limited NEB 1.3
Application for Approval of Mainline 2013-2030 Response to Information Request
Settlement RH-001-2014

IR Number: NEB 1.3
Topic: Toll adjustments/ revenue variances
Reference: i) TransCanada Settlement Application, Attachment 1: Settlement
Agreement, Article 13.2, PDF page 27 of 121, [A3S7T8]
ii) TransCanada Settlement Application, Attachment 1: Settlement
Agreement, First Amended Appendix B, PDF pages 57-58 of 121,
[A3S7T8]
iii) TransCanada Compliance Filing, 1 May 2013, PDF pages 37-38 of
38, [A3H4G0].
iv) TransCanada Additional Written Evidence, 5 May 2014,
PDF pages 7-9 of 28, [A3W4T9]
v) TransCanada Settlement Application, PDF page 63-64 of 100
[A3S7T7]
vi) TransCanada Settlement Application, PDF page 85 of 100
[A3S7T7]
Preamble: Reference i), states that firm service tolls shall, subject to a review by the
settling parties prior to 1 January 2018, be fixed between 2015 and 2020.
The tolls shall be based on a forecast of billing determinants and costs
and shall be designed to recover the forecast revenue requirement during
2015-2020, adjusted to account for the amortization of the Eastern
Triangle’s Bridging Contribution over 2015-2030.
Reference ii) provides the 2015-2020 revenue forecast.
Reference iii) is the 2014-2017 revenue forecast in the Compliance
Filing.
Reference iv) describes the recent Mainline Open Season Results and the
changed market conditions, and notes a very cold 2013-2014 winter.
Reference v) states that the existing Long Term Adjustment Account
(LTAA) will be included in the Mainline’s rate base and will include an
adjustment to eliminate any and all variances between the actual and
forecast revenue requirement and the actual and forecast revenue from
2015 to 2020, net of incentive mechanism adjustments. During 2015-
2020, the LTAA will be amortized at the annual Mainline System
composite depreciation rate. After 2020, the LTAA balance will be
included in the Eastern Triangle rate base and amortized at the Eastern
Triangle depreciation rate.
Reference vi) states that for purposes of establishing tolls for the 2018
through 2020 period, the forecast of annual revenue requirement and

June 17, 2014 Page 1 of 6
TransCanada PipeLines Limited NEB 1.3
Application for Approval of Mainline 2013-2030 Response to Information Request
Settlement RH-001-2014

billing determinants for those years will be reviewed before
1 January 2018 with the LDCs. Depending on the outcome of the review,
the tolls would be adjusted on a prospective basis.

Request: a) Assume that the RH-003-2011 tolls were to remain in place until
2017, i.e. the status quo.
a.1) Confirm whether the 2014-2017 revenue forecasts provided in
the Compliance Filing continue to reflect the status quo. If they
do not, provide revised revenue forecasts for 2014-2017 under
the RH-003-2011 tolls, and list any assumptions.
a.2) Provide estimated toll levels for 2018-2020 absent the
adoption of the settlement application.
b) Does the 2015-2020 revenue forecast fully capture the revenue
changes that may have occurred in reference iv)? If not, describe any
variances.
c) Explain why revenue variances between 2015 and 2020 are more
appropriately captured in the LTAA, the balance of which will be
recovered by Eastern shippers starting in 2021, rather than an
adjustment to the toll levels, which would mean that variances are
recovered by all shippers. List any applicable tolling principles.
d) Explain why, as stated in reference vi), only the settling parties will
be consulted when reviewing tolls prior to 2018. Should more open
consultations be envisioned than those stated in the reference, please
describe how they will be conducted.
e) Could the review process discussed in reference vi) result in further
additions/removals from the LTAA between 2018-2020 rather than a
prospective adjustment to tolls? If so, discuss what factors are
involved in that determination.
f) Discuss the likelihood of the LTAA having a credit balance at the
end of 2020. Explain why it is appropriate to transfer the balance to
the Eastern Triangle Rate Base, especially in light of the possibility
of the LTAA having a credit balance?
Response:
a) a.1) If the RH-003-2011 tolls were to remain in place, the types of disputes between
TransCanada and its shippers that gave rise to the Settlement would likely
return. Accordingly, the Compliance Filing 2014-2017 revenue forecasts would
likely not be reasonable. Therefore, TransCanada has created two revenue

June 17, 2014 Page 2 of 6
TransCanada PipeLines Limited NEB 1.3
Application for Approval of Mainline 2013-2030 Response to Information Request
Settlement RH-001-2014

forecasts for the 2014-2017 period, tabulated below in Table NEB 1.3-1, which
represent a range of possible outcomes assuming Compliance Tolls remain in
effect through to the end of 2017.
The revenue forecast labeled “Short-Haul Weighted Revenue,” reflects a
scenario under which RH-003-2011 tolls remain in effect and short-haul firm
transportation increases. This forecast assumes the following:
• Compliance Tolls remain in effect through 2017.
• 2014 and 2015 revenues are updated for recent information.
• The Eastern LDCs (or some other parties) file and are successful in a
Section 71 application to connect their proposed pipeline project of
1200 TJ/d with the TransCanada Mainline at Maple by November 2016.
• Approximately 700 TJ/d of firm contracts that were expected to be received
onto the Mainline at Parkway under Settlement would instead be received at
the new Maple interconnect point.
• Approximately 300 TJ/d of firm short haul contracts that were expected to
be received onto the Mainline at Parkway under Settlement would now
completely bypass the Mainline and be served directly off of the new
Eastern LDC pipeline facilities.
• A switch of approximately 200 TJ/d of firm long haul contracts to short haul
contracts would occur with receipt point onto the Mainline at Maple.1
• DMR revenue continues to be estimated at the same level as in the
Settlement tolls case because Discretionary Service pricing flexibility
continues under RH-003-2011 Compliance Tolls conditions, and the lost
contract quantities and associated revenues from the assumed success of the
Eastern LDC proposed pipeline project is reflected within the change to
Mainline firm contract levels stated above.
The revenue forecast labeled “Long-Haul Weighted Revenue” reflects a
scenario under which RH-003-2011 tolls remain in effect and a greater
proportion of long-haul firm transportation is maintained. This forecast assumes
the following:
• Compliance Tolls remain in effect through 2017.
• 2014 and 2015 revenues are updated for recent information.
• Either a Section 71 Application is not filed or is not successful, no pipeline
is constructed for a 1200 TJ/d connection to the Mainline at Maple.
• The firm contract levels as of October 31, 2015 from the Settlement are held
constant and expected to continue through 2017.

1 This 200 TJ/d switch from long haul to short haul is in addition to what is already represented within
Settlement contract quantities.

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TransCanada PipeLines Limited NEB 1.3
Application for Approval of Mainline 2013-2030 Response to Information Request
Settlement RH-001-2014

• DMR revenue continues to be estimated at the same level as in the
Settlement tolls case because Discretionary Service pricing flexibility
continues under RH-003-2011 Compliance Tolls conditions.
The forecast annual revenues resulting from these two scenarios are presented in Table
NEB 1.3-1, along with a comparison to the Compliance Filing revenue forecast for the 2014-
2017 period.
Table NEB 1.3-1: Revised 2014-2017 Revenue Forecasts
$ (millions)
2014 2015 2016 2017
Compliance Filing Revenue Forecast2 1,440 1,523 1,660 1,776
Short-Haul Weighted Revenue 2,159 1,712 1,169 811
Long-Haul Weighted Revenue 2,159 1,767 1,563 1,441
a.2) Please see Attachment NEB 1.3a-2 for a range of estimated toll levels for the
2018-2020 period absent the adoption of the Application, and assuming the
conditions of the RH-003-2011 Decision remain in place under the same two
scenarios as described in response (a.1): Short-Haul Weighted Revenue or
‘Long-Haul Weighted Revenue.
The Revenue Requirement in each of the years used in the toll calculations is
consistent with the Revenue Requirement reflected in the Application for most
cost items. However, some costs were modified to reflect changes in the event
the Application is not implemented. Specifically, the costs under this scenario
are adjusted as follows:
• ROE assumed at 11.5% on 40% equity thickness
• TransCanada Contribution is removed
• contributions to the LTAA of $95 million for 2015 – 2017 are included
• bridging contribution is removed
• no capacity additions are included
• associated depreciation, return and tax effects of these changes are included
The billing determinants and DMR used in the toll calculations is the same as
that used to calculate the revenues in response a.1).
The tolls reflected in Attachment NEB 1.3a-2 represent the “Surrogate” toll
stage of the RH-003-2011 Compliance Toll calculation where the annual
revenue generated from tolls recovers the annual revenue requirement and does

2 See Compliance Filing and Application for Review and Variance of NEB Decision RH-003-2011, Part B –
Compliance Filing to the RH-003-2011 Decision, Attachment B3 – Multi-Year Fixed Tolls, Tab 3: 2013 –
2017 TSA Balance and Net Revenue Requirement Threshold Determination, Schedule 3.0, Sheet 1 of 1,
Line 2.

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TransCanada PipeLines Limited NEB 1.3
Application for Approval of Mainline 2013-2030 Response to Information Request
Settlement RH-001-2014

not reflect an adjustment to get tolls to an equivalent Empress to Union SWDA
(Dawn) toll of $1.42/GJ as was done in the Compliance tolls.
b) In a general sense, the 2015 – 2020 billing determinant and revenue forecast as
provided in the Application are consistent with the results of the recent Mainline
Open Season and the recent FT contract changes that have occurred on the Mainline
since the implementation of the RH-003-2011 Decision. TransCanada anticipated
many of the open season bids that occurred.
While the specifics may differ somewhat, it is not possible to determine those
differences at this time. This is due to uncertainty about the contractual commitments
that will result from the open season, because the process is still ongoing whereby
bidders choose whether or not to execute a precedent agreement, which binds them to
either enter a contract at the completion of construction or pay their share of
construction costs. This process can lead to lower contractual commitments than the
bids received in the open season.
c) TransCanada has proposed to capture any revenue variances in the LTAA during the
2015 through 2020 period of the Proposed Tolls as opposed to making annual
adjustments to the Proposed Tolls in order to provide a greater degree of toll stability
and toll certainty from year-to-year for shippers, which is consistent with the
approach established by the Board in the RH-003-2011 decision for the Compliance
Tolls. In addition, as stated on p. 90 of the Application, assigning the LTAA to the
Eastern Triangle starting in 2021 also reflects the compromises and commitments
made by both TransCanada and the LDCs as part of the settlement negotiations that
led to the Application. In any event, Eastern Triangle shippers represent the majority
of the Mainline billing determinants such that even a system-wide allocation of a
remaining LTAA balance at the end of 2020 would have been borne primarily by
Eastern Triangle shippers.
Lastly, as a practical matter, TransCanada now projects that there will be a positive
TSA balance at the end of 2014 that, consistent with the approach set forth in the
Application of applying the TSA balance to the LTAA, will make the LTAA balance
positive at the end of 2014 (See the response to part f) below). As a result, the
magnitude of any LTAA balance that would otherwise be reflected in Eastern
Triangle tolls post-2020 per the Application would be significantly mitigated.
TransCanada believes that this approach of eliminating the LTAA balance entering
2015 would be consistent with cost-causation in that a system-wide obligation
(i.e., the LTAA balance) would be eliminated or virtually eliminated by a system-
wide revenue collection greater than the system-wide revenue requirement (i.e., the
TSA balance).
d) and e)
While the Settlement speaks only of a review between TransCanada and the LDCs,
TransCanada intends to have discussions with the TTF prior to 2018 that will address
the forecast of annual revenue requirement and billing determinants for 2018-2020

June 17, 2014 Page 5 of 6