UBC Theses and Dissertations

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UBC Theses and Dissertations

Canadian natural gas deregulation 1988

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CANADIAN NATURAL GAS DEREGULATION By ALEXANDER JOSEPH BLACK B.A.(Hons), Lakehead U n i v e r s i t y , 1982 LL.B., The U n i v e r s i t y o f Dundee, 1984 THESIS SUBMITTED IN PARTIAL FULFILLMENT THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES (FACULTY OF LAW) We accept t h i s t h e s i s as conforming t o the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA J u l y 1988 (c) Alexander Joseph Black, 1988 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of the requirements f o r an advanced degree a t the U n i v e r s i t y of B r i t i s h Columbia, I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the head of my department or by h i s o r her r e p r e s e n t a t i v e s . I t i s understood t h a t c o p y i n g or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a llowed without my w r i t t e n p e r m i s s i o n . F a c u l t y of Law The U n i v e r s i t y of B r i t i s h Columbia 1956 Main M a l l Vancouver, Canada V6T-1Y3 Date: J u l y , 1988 i i ABSTRACT Canadian n a t u r a l gas d e r e g u l a t i o n has t erminated government p r i c e s e t t i n g i n favour of p r i c e s determined by market f o r c e s . However, the t r a n s p o r t a t i o n of the commodity remains r e g u l a t e d due t o the m o n o p o l i s t i c nature of the d i s t r i b u t i o n system and the Canadian economies o f s c a l e which p r e c l u d e b u s i n e s s r i v a l r y . T h i s paper attempts t o d i s c e r n whether the t r a n s i t i o n t o a new regime i s f o l l o w i n g the l e g a l p r i n c i p l e s u n d e r l y i n g p u b l i c u t i l i t y r e g u l a t i o n . Promotion of the p u b l i c i n t e r e s t i s t h e r e f o r e a p e r v a s i v e theme of t h i s paper. While r e g u l a t o r y law a l l o w s c e r t a i n forms o f d i s c r i m i n a t i o n i n the s e t t i n g of r a t e s and the p r o v i s i o n of s e r v i c e s , i t p r o h i b i t s undue or u n j u s t d i s c r i m i n a t i o n . The t h e s i s proposed h e r e i n f ocuses on r e g u l a t o r y t h e o r y and the p o s s i b i l i t y t h a t i n c i d e n t s of undue d i s c r i m i n a t i o n may have been exacerbated by the d e r e g u l a t i o n p r o c e s s . The examination begins w i t h a review of the d i s c r i m i n a t i o n p r o v i s i o n s of s e c t i o n 92A of the C o n s t i t u t i o n Act 1867, the s o - c a l l e d "Resource Amendment". More a t t e n t i o n i s d i r e c t e d t o p u b l i c u t i l i t i e s t h eory g i v e n i t s c o m p e l l i n g a p p l i c a t i o n t o the n a t u r a l gas i n d u s t r y . D e r e g u l a t i o n i s then d i s c u s s e d i n c l u d i n g an a n a l y s i s of " d i r e c t s a l e " c o n t r a c t s i n v o l v i n g the commodity as w e l l as the "bypass" of the l o c a l p i p e l i n e d i s t r i b u t i o n systems. i i i Some c o n c l u s i o n s are then made con c e r n i n g c o m p e t i t i o n and changing commercial c o n d i t i o n s . Grave doubts are v o i c e d as t o whether the N a t i o n a l Energy Board i s p r o p e r l y a p p l y i n g the p r i n c i p l e s o f p u b l i c u t i l i t y r e g u l a t i o n d u r i n g the t r a n s i t i o n t o a more market o r i e n t e d n a t u r a l gas environment. One important c o n c l u s i o n i s t h a t d i r e c t s a l e c o n t r a c t s should be encouraged i n the core market as w e l l as i n the i n d u s t r i a l market by the N a t i o n a l Energy Board i n o r d e r t o promote upstream c o m p e t i t i o n among gas producers i n the p u b l i c i n t e r e s t . F i n a l l y , i t i s hoped t h a t these doubts w i l l be r e s o l v e d by the Board i n i t s new (RH-1-88) p u b l i c h e a r i n g which w i l l address i s s u e s r e l a t e d t o d e r e g u l a t i o n , i n c l u d i n g d i r e c t s a l e s and the a n c i l l a r y s e l f - d i s p l a c e m e n t and o p e r a t i n g demand volume (ODV) methodology. i v TABLE OF CONTENTS 1. I n t r o d u c t i o n 1 2. J u r i s d i c t i o n Over Canadian N a t u r a l Gas U t i l i t i e s 5 2.1 S e c t i o n 92A of the C o n s t i t u t i o n A c t 1982: 5 The Resource Amendment. 3. A d m i n i s t r a t i v e S t r u c t u r e and Theory of P u b l i c U t i l i t y R e g u l a t i o n 15 3.1 The N a t i o n a l Energy Board 15 3.2 Re g u l a t o r y T r i b u n a l s i n A l b e r t a , Manitoba 21 and O n t a r i o 3.3 The Nature of R e g u l a t i o n 26 3.4 Rate Determination and D i s c r i m i n a t i o n 3 5 4. D e r e g u l a t i o n of N a t u r a l Gas P r i c i n g and Marketing Regimes 46 4.1 The D e r e g u l a t i o n Process 4 6 4.2 "Surplus Gas" and S e c u r i t y o f Supply 53 4.3 The Commercial Nature of a Take-Or-Pay C o n t r a c t 58 5. The D i r e c t S a l e s Controversy i n Manitoba 66 5.1 D i r e c t Purchases of N a t u r a l Gas 66 5.2 C o n t r a c t u a l I m p l i c a t i o n s o f Displacement 70 6. The "Cyanamid" Bypass Issue i n O n t a r i o 85 6.1 Background 85 6.2 Commercial I m p l i c a t i o n s 90 8. C o n c l u s i o n 96 B i b l i o g r a p h y 101 i 1. INTRODUCTION Promotion of the p u b l i c i n t e r e s t i s a p e r v a s i v e theme i n p u b l i c u t i l i t i e s r e g u l a t i o n . Canadian n a t u r a l gas u t i l i t i e s are p r e s e n t l y i n a s t a t e of f l u x which i s i n d u c i n g r e g u l a t o r s t o c l a r i f y the meaning of the p u b l i c i n t e r e s t i n l i g h t of new commercial c o n d i t i o n s . In p a r t i c u l a r , t h e s e e x i g e n c i e s have been brought about by the s o - c a l l e d d e r e g u l a t i o n p r o c e s s where the f o r m e r l y p r e s c r i b e d p r i c e of n a t u r a l gas has been t e r m i n a t e d i n favour of commodity p r i c e s determined by market f o r c e s . However, the t r a n s i t i o n t o a more ma r k e t - o r i e n t e d regime has not been e f f e c t e d without d i f f i c u l t i e s . Inherent i n these d i f f i c u l t i e s i s the f a c t t h a t the t r a n s p o r t a t i o n o f the commodity remains r e g u l a t e d out of n e c e s s i t y . The p r e s e n t m o n o p o l i s t i c i n t e r p r o v i n c i a l p i p e l i n e system and l o c a l d i s t r i b u t i o n companies a l l r e q u i r e r e g u l a t i o n s i n c e the Canadian economies of s c a l e p r e c l u d e b u s i n e s s r i v a l r y . T h e r e f o r e , i t i s the r o l e of n a t u r a l gas t r a n s p o r t a t i o n r e g u l a t o r s t o a c t as a s u b s t i t u t e f o r c o m p e t i t i o n and t o attempt t o m i r r o r the s upply and demand c o n t r o l s o f the f r e e market. However t h i s r o l e i s i n h i b i t e d t o some e x t e n t by a legacy of the o l d regime. For i n s t a n c e , TransCanada P i p e l i n e s Ltd.(TCPL) i s the m o n o p o l i s t i c i n t e r p r o v i n c i a l c a r r i e r who a l s o a c t s as a broker of the commodity. While t h e r e w i l l always be a r e l a t i o n s h i p between the marketing and 2 t r a n s p o r t a t i o n segments of the i n d u s t r y , i t seems t h a t the p r e - d e r e g u l a t i o n supply c o n t r a c t s of TCPL have lo c k e d consumers i n t o i n o r d i n a t e l y h i g h p r i c e s . Although lower gas p r i c e s might now be o b t a i n e d i n the d e r e g u l a t e d environment, consumers are p r e c l u d e d from b e n e f i t t i n g because the d i s t r i b u t i o n system tends t o be f u l l y c o n t r a c t e d . S e v e r a l p r o v i s i o n s p e r t a i n i n g t o c o m p e t i t i v e gas p r i c i n g a re c o n t a i n e d i n the October 31, 1985 intergovernmental Agreement t h a t commenced the d e r e g u l a t i o n p r o c e s s . Two s a l i e n t p r o v i s i o n s i n c l u d e the bypass and d i r e c t s a l e concepts. The former r e f e r s t o the a b i l i t y of c e r t a i n end- u s e r s t o s e v e r c o n n e c t i o n s t o the l o c a l d i s t r i b u t i o n companies (LDC) and o b t a i n cheaper s e r v i c e from the main t r u n k l i n e . Even though t h i s downstream c o m p e t i t i o n appears prudent, i t s e f f e c t w i l l a c t u a l l y be d i s c r i m i n a t o r y t o the remaining LDC u s e r s who w i l l have t o absorb h i g h e r r a t e s . Concern over the a f f e c t of bypass on the p u b l i c i n t e r e s t has been i n t e n s e . A p p e l l a t e d e c i s i o n s a g a i n s t the f e d e r a l government c o n f i r m p r o v i n c i a l j u r i s d i c t i o n over the e n t e r p r i s e y e t an i n t e r e s t i n g c o n s t i t u t i o n a l b a t t l e f o r l e g i s l a t i v e competence continues enroute t o the Supreme Court of Canada. The l a t t e r concept r e f e r s t o the a b i l i t y o f end-users t o n e g o t i a t e l e s s expensive commodity s a l e s d i r e c t l y from producers. Although d i r e c t s a l e s dispense w i t h the broker f u n c t i o n s of TCPL and the LDC's, i t i s n e v e r t h e l e s s thought t h a t t h e s e companies c o u l d p r o f i t w i t h f a i r c a r r i a g e charges. They c o u l d a d j u s t t o the new c o m p e t i t i v e environment i n t h e i r 3 brokerage c a p a c i t y by r e n e g o t i a t i n g e x i s t i n g c o n t r a c t s t o r e f l e c t changed commercial c o n d i t i o n s . Furthermore, t h i s c o u l d promote a h e a l t h y upstream c o m p e t i t i o n . In Manitoba a d i r e c t s a l e i n i t i a t i v e t h a t might have brought lower gas p r i c e s t o r e s i d e n t i a l and commercial u s e r s has been rebuked by the f e d e r a l N a t i o n a l Energy Board. S i n c e d i r e c t s a l e s have only been allowed t o i n d u s t r i a l concerns, a l l e g a t i o n s have s u r f a c e d t h a t the Board has unduly d i s c r i m i n a t e d between customer c l a s s e s . T h i s paper attempts t o d i s c e r n whether th e d e r e g u l a t i o n p r o c e s s f o l l o w s the l e g a l p r i n c i p l e s u n d e r l y i n g u t i l i t y r e g u l a t i o n . I n c i d e n t s of undue d i s c r i m i n a t i o n i n the s e t t i n g o f p r i c e s and the p r o v i s i o n of s e r v i c e s may have been exacerbated by the p r o c e s s . Thus, b e f o r e a d d r e s s i n g n a t u r a l gas d e r e g u l a t i o n , i t i s thought important t o p r e s e n t a j u r i s d i c t i o n a l overview and a d i s c u s s i o n of the p h i l o s o p h y of p u b l i c u t i l i t y r e g u l a t i o n . For i n s t a n c e , the new r e s o u r c e amendment t o the c o n s t i t u t i o n makes s i g n i f i c a n t p r o v i s i o n s c o n c e r n i n g d i s c r i m i n a t i o n i n p r i c e s or s u p p l i e s by producer p r o v i n c e s . However, i t s impact has not y e t been j u d i c i a l l y c o n s i d e r e d . Hence, a s a l i e n t s u b j e c t o f r e g u l a t o r y t h e o r y i s the consensus t h a t d i s c r i m i n a t i o n i n p u b l i c u t i l i t y r a t e s and s e r v i c e s w i l l always occur y e t should o n l y be p r o h i b i t e d when the d i s c r i m i n a t i o n becomes undue o r u n j u s t . For i n s t a n c e , p r e f e r e n t i a l p r i c e s are sometimes a f f o r d e d t o i n d u s t r i a l customers. A p r o p e r l y s t r u c t u r e d p r i c e advantage can i n h i b i t 4 them from s w i t c h i n g t o another energy source. Contemporaneously, these customers c o n t r i b u t e t o the o v e r a l l maintenance of the gas d i s t s t r i b u t i o n system thereby b e n e f i t t i n g those who pay h i g h e r r a t e s , such as r e s i d e n t i a l and commercial u s e r s . However, t h i s p r e f e r e n c e can become unduly d i s c r i m i n a t o r y i f d i s c o u n t s i n the i n d u s t r i a l s e c t o r are, i n e f f e c t , s u b s i d i z e d by u n j u s t i f i a b l y h i g h p r i c e s i n the r e s i d e n t i a l and commercial markets. Indeed t h e r e i s an i n h e r e n t tendency f o r a m o n o p o l i s t i c marketer t o charge as much as p o s s i b l e i n those s e c t o r s o f the market, such as the r e s i d e n t i a l and commercial, where no e f f e c t i v e c o m p e t i t i o n e x i s t s . T h i s d i s c r i m i n a t i o n t o p i c w i l l be e x t e n s i v e l y developed because of i t s more immediate and c o m p e l l i n g r e l a t i o n s h i p t o t h e d e c i s i o n s of r e g u l a t o r y t r i b u n a l s . H o p e f u l l y t h e s e t o p i c s w i l l p r o v i d e i n s i g h t i n t o the s p e c i f i c problems f a c i n g the Canadian r e g u l a t i o n o f n a t u r a l gas s e r v i c e s . 5 2. JURISDICTION OVER CANADIAN NATURAL GAS UTILITIES Canadian c o n s t i t u t i o n a l law i s a fundamental r e f e r e n c e p o i n t f o r an a n a l y s i s o f the Dominion's n a t u r a l gas u t i l i t i e s s i n c e both the f e d e r a l government and the p r o v i n c e s have r i g h t s p e r t a i n i n g t o the commodity and i t s t r a n s p o r t a t i o n . T h i s c h a p t e r c o n c e n t r a t e s on a r e l a t i v e l y new element of the c o n s t i t u t i o n t h a t p e r t a i n s t o p u b l i c u t i l i t i e s . In p a r t i c u l a r , the n a t u r a l r e s o u r c e d i s c r i m i n a t i o n p r o v i s i o n s i n s e c t i o n 92A o f the C o n s t i t u t i o n A c t 1867 w i l l be addressed because of t h e i r p o t e n t i a l impact upon produ c i n g p r o v i n c e s as w e l l as the u l t i m a t e d e t e r m i n a t i o n of r a t e s . 2.1 SECTION 92A OF THE CONSTITUTION ACT 1982: THE RESOURCE AMENDMENT Other commentators have addressed the c o n s t i t u t i o n a l law r e l a t i n g t o n a t u r a l r e s o u r c e s e x p l o i t a t i o n , i n c l u d i n g t h a t of o i l and g a s . 1 Rather than r e - i t e r a t i n g the b a s i c j u r i s d i c t i o n a l parameters of the C o n s t i t u t i o n A c t 1867, 2 t h i s c h a p t e r addresses a r e l e v a n t amendment f o l l o w i n g the U s e f u l commentaries i n c l u d e : G.V. La F o r e s t , N a t u r a l Resources and P u b l i c P r o p e r t y under the Canadian C o n s t i t u t i o n (U. Toronto, Toronto,1969); M. Crommelin, " J u r i s d i c t i o n over Onshore O i l and Gas i n Canada" (1975) 10 U.B.C.L.Rev. 86; J.B. Ballem, " O i l and Gas under the New C o n s t i t u t i o n " (1983) 61 Can. Bar Rev. 547; B.W. Semkow, "Energy and the New Canadian C o n s t i t u t i o n " (1984) 2 J.E.R.L. 107; A.R. Thompson, "An Overview of O i l , Gas, and M i n e r a l D i s p o s i t i o n Systems i n Canada" (1986) 32 Rocky Mt. Min. L. I n s t . 3-1. C o n s t i t u t i o n A c t, 18 67, 30 & 31 V i c t , c.3 (Imp.); f o r m e r l y the B r i t i s h North America A c t 1867, renamed by Sc h e d . l o f the C o n s t i t u t i o n A c t 1982, which i s Sched.B o f the Canada A c t 1982, c . l l (UK). 6 p a t r i a t i o n o f Canada's c o n s t i t u t i o n from the U n i t e d Kingdom i n 1982. Under s e c t i o n 92A, the s o - c a l l e d N a t u r a l Resources Amendments, p r o v i n c i a l power over n a t u r a l r e s o u r c e s was strengthened i n a p r o c e s s whereby d i v e r g e n t i n t e r e s t s were accommodated. On one hand, a b a s i c t e n e t of Canadian f e d e r a l i s m i s the e x i s t e n c e of f r e e - t r a d e throughout the n a t i o n . 4 On the o t h e r hand, changes were s u c c e s s f u l l y sought by the p r o d u c i n g p r o v i n c e s t o balance the nationwide f r e e - t r a d e i n t e r e s t . By expanding p r o v i n c i a l r e s o u r c e j u r i s d i c t i o n , i t was hoped t h a t r e g i o n a l c o n t r o l over t h e i r economic development would i n c r e a s e . 5 Each p r o v i n c e i s e x c l u s i v e l y empowered t o make laws p e r t a i n i n g t o the e x p l o r a t i o n , development, management and c o n s e r v a t i o n o f f o r e s t r e s o u r c e s , and non-renewable r e s o u r c e s i n the p r o v i n c e , 7 as w e l l as e l e c t r i c a l energy f a c i l i t i e s . 8 The Resource Amendments a l s o convey n o n - e x c l u s i v e powers i n r e l a t i o n t o a d d i t i o n a l s u b j e c t s . P l e n a r y p r o v i n c i a l t a x i n g power has been c o n f e r r e d i n r e l a t i o n t o t h e i r n a t u r a l r e s o u r c e s . However, such taxes must not d i f f e r e n t i a t e C o n s t i t u t i o n A c t 1867 as amended by ss.50 and 51 of the C o n s t i t u t i o n Act 1982, d e s i g n a t e d as s. 92A of the C o n s t i t u t i o n Act 1867 and Sched.6. M.A. Chandler, " C o n s t i t u t i o n a l Change and P u b l i c P o l i c y : The Impact of the Resource Amendment ( S e c t i o n 92A)" (1986) 19 Can. J . P o l . S c i . . 103 a t 122-3. R.D. C a i r n s , M.A. Chandler, W.D. M o u l l , "The Resource Amendment ( S e c t i o n 92A) and the P o l i t i c a l Economy of Canadian F e d e r a l i s m " (1985) 23 Osgoode H a l l L . J . , 253 a t 263. supra note 3 a t s . 9 2 A ( l ) ( a ) . I d . s . 9 2 A ( l ) ( b ) . I d . s . 9 2 A ( l ) ( c ) . 7 between p r o d u c t i o n o f the re s o u r c e r e t a i n e d i n the p r o v i n c e and t h a t exported t o o t h e r p r o v i n c e s . 9 Whereas a p r o v i n c e p r e v i o u s l y c o u l d o n l y l e v y d i r e c t t a x es, i t i s no l o n g e r u l t r a v i r e s t o i n d i r e c t l y t a x re s o u r c e s • i n s u b j e c t t o the the n o n - d i f f e r e n t i a t i o n p r o v i s o . Derogation of t h o s e p r o v i n c i a l powers enjoyed b e f o r e the Resource Amendments may not be made even though those powers have not been s e t out i n the a m e l i o r a t e d A c t . 1 1 Should a c o n f l i c t a r i s e , p r o v i n c i a l laws would be rendered i n o p e r a t i v e t o the ext e n t o f competing, s u i j u r i s f e d e r a l laws under the d o c t r i n e of f e d e r a l paramountcy. 1 2 T h i s paper i s concerned w i t h Canadian n a t u r a l gas d e r e g u l a t i o n i n l i g h t o f the l e g a l p r i n c i p l e s u n d e r l y i n g p u b l i c u t i l i t y r e g u l a t i o n , i n c l u d i n g those p e r t a i n i n g t o d i s c r i m i n a t i o n . Perhaps one o f the more r e l e v a n t Resource Amendments i s the one p r o v i d i n g f o r the export o f r e s o u r c e s from p r o v i n c e s . "s.92A(3) In each p r o v i n c e the l e g i s l a t u r e may make laws i n r e l a t i o n t o the export from the p r o v i n c e t o another p a r t o f Canada of the primary p r o d u c t i o n from non-renewable n a t u r a l r e s o u r c e s and f o r e s t r y r e s o u r c e s i n the p r o v i n c e and the p r o d u c t i o n from the f a c i l i t i e s i n the p r o v i n c e f o r the g e n e r a t i o n o f e l e c t r i c a l energy, but such laws may not a u t h o r i z e or p r o v i d e f o r d i s c r i m i n a t i o n i n p r i c e s o r s u p p l i e s exported t o another p a r t o f Canada. , , l j (emphasis added) Id. s.92A(4). For a u t h o r i t i e s on the pre-1982 p o s i t i o n , see: Can.Indust. Gas & O i l L t d . (CIGOL) v. Saskatchewan, [1978] 2 S.C.R. 545, [1977] 80 D.L.R. (3d) 449; see a l s o C e n t r a l Can. Potash Co. v. Saskatchewan, [1979] 1 S.C.R. 42, [1978] 88 D.L.R. (3d) 609. supra note 3 a t s.92A(6). Id. s.92A(3). Id. s.92A(2). 11 12 13 8 "Primary p r o d u c t i o n " 1 4 i s d e f i n e d i n the S i x t h Schedule o f the C o n s t i t u t i o n A c t 1867 and i m p l i c i t l y i n c l u d e s n a t u r a l gas. While the p r o v i n c e s do not have j u r i s d i c t i o n t o c o n t r o l i n t e r n a t i o n a l e xports under s e c t i o n 92A, they can make laws a p p l y i n g t o exports w i t h i n Canada. Although s e c t i o n 92A has not y e t been j u d i c i a l l y c o n s i d e r e d , an example of i t s p o t e n t i a l a p p l i c a t i o n e x i s t s w i t h A l b e r t a l e g i s l a t i o n c o n c e r n i n g e x p o r t s from t h a t gas r i c h p r o v i n c e . A l b e r t a enacted the Gas Resources P r e s e r v a t i o n A c t i n 1949 thereby i n t r o d u c i n g the requirement o f a permit i n order t o remove n a t u r a l gas from the p r o v i n c e . 1 5 T h i s A c t 1 6 was s u c c e s s i v e l y r e p e a l e d and r e p l a c e d i n 1956, 1 7 and again i n 1984 w i t h p e r i o d i c t i n k e r i n g t o the p r e s e n t d a t e . 1 8 E v i d e n t l y , the c o n t r o v e r s y a t t a c h i n g t o t h i s s t a t u t e i n v o l v e s the not u n s u b s t a n t i a t e d view h e l d by commentators t h a t i t usurps f e d e r a l j u r i s d i c t i o n . Undoubtedly, the p r o v i n c e s have c o n t r o l over the c o n s e r v a t i o n and p r o d u c t i o n o f t h e i r n a t u r a l r e s o u r c e s , • • i 1 Q i n c l u d i n g o i l and gas. 3 While the A c t makes prima f a c i e v a l i d c o n s e r v a t i o n p r o v i s i o n s f o r the p r e s e n t and f u t u r e needs o f A l b e r t a n s , 2 0 c r i t i c i s m o f i t s p r e d e c e s s o r 2 1 remains apt t o x r 15 16 17 18 19 20 21 Id. s.92A(5). For a d i s c u s s i o n o f the r e g u l a t o r y p r o c e s s i n v o l v e d , see note 64 and accompanying t e x t i n f r a . S.A. 1949 (2nd Sess.) c.2. Gas Resources P r e s e r v a t i o n Act, S.A. 1956, c.19. Gas Resources P r e s e r v a t i o n Act, S.A. 1984, c.G-3.1, S.A. 1986, c.17 and c.D-18.1; S.A. 1987, c.23. Spooner O i l s L i m i t e d v. Turner V a l l e y Gas Co n s e r v a t i o n Board [1933] S.C.R. 629, 4 D.L.R. 545, [1932] 3 W.W.R. 447. Gas Resources P r e s e r v a t i o n Act, supra note 18 a t s.8. Crommelin, supra note 1 a t 119-120. 9 the e x t e n t t h a t i t c o n t r o l s e x t r a p r o v i n c i a l gas marketing. The impugned c o n t r o l mechanism i n v o l v e s terms and c o n d i t i o n s t h a t may be i n s e r t e d i n the removal permit by the A l b e r t a government. S i g n i f i c a n t t o t h i s i s s u e are the s o - c a l l e d " s e l f - d i s p l a c e m e n t " 2 3 and " m a r k e t s " 2 4 c o n d i t i o n s . The former s t i p u l a t e s t h a t e x t r a - p r o v i n c i a l d i s t r i b u t o r s must honour t h e i r e x i s t i n g gas supply c o n t r a c t s . I n v a r i a b l y , these are arrangements w i t h TransCanada P i p e l i n e s L t d . (TCPL), a m o n o p o l i s t i c i n t e r p r o v i n c i a l p i p e l i n e company which p l a y s a d u a l r o l e as a commodity broker. The markets c o n d i t i o n r e q u i r e s m i n i s t e r i a l consent i f a l i c e n s e e wants t o change the downstream arrangements of A l b e r t a gas e x p o r t s from those c o n t a i n e d i n the o r i g i n a l p e r mit a p p l i c a t i o n . These p a r t i c u l a r c o n d i t i o n s had been promulgated by A l b e r t a i n r e a c t i o n t o unplanned i n c i d e n t s of t h e Canadian gas d e r e g u l a t i o n i n i t i a t i v e t h a t ended government p r i c e f i x i n g of the commodity. D e r e g u l a t i o n was supposed to l e t market f o r c e s determine the commodity's p r i c e , presumably l o w e r i n g the c o s t t o Canadian consumers w h i l e d e f r a y i n g the p r o d u c e r 1 s l o s t revenue w i t h i n c r e a s e d e xports t o the U n i t e d S t a t e s . But these expected e x p o r t s d i d not m a t e r i a l i s e due t o an over supply s i t u a t i o n , more c o l l o q u i a l l y known as the "gas bubble". Thus, the removal c o n d i t i o n s seek t o p r o t e c t A l b e r t a Gas Resources P r e s e r v a t i o n Act, supra note 18 a t ss.4,13(2),6; t h i s A l b e r t a r e g u l a t o r y f u n c t i o n i s conducted by the Energy Resources C o n s e r v a t i o n Board (ERCB) and the L i e u t e n a n t Governor, note 72 i n f r a . S.6 o f A l t a . Reg. 271/87. N.B.- Both c o n d i t i o n s apply t o s h o r t - t e r m p e r m i t s . 2 4 S . 4 ( l ) o f A l t a . Reg. 271/87. 10 producers by i n h i b i t i n g d i s t r i b u t o r s from a b r o g a t i n g the l o n g - term TCPL c o n t r a c t s and e n t e r i n g i n t o cheaper a r r a n g e m e n t s . 2 5 Except f o r the e x c l u s i v e p r o v i n c i a l e x p l o r a t i o n , development and c o n s e r v a t i o n powers i n s u b s e c t i o n (1) , Par l i a m e n t can o v e r r i d e o r match the o t h e r p r o v i n c i a l powers i n c l u d i n g s e c t i o n 92A(2) export competence. In the case of i n t e r p r o v i n c i a l e x p o r t s , i t can make laws under the t r a d e and commerce heading which w i l l t y p i c a l l y be paramount t o p r o v i n c i a l l e g i s l a t i o n . Hence, even b e f o r e the 1982 P a t r i a t i o n and Resource Amendments, commentators have qu e s t i o n e d the v a l i d i t y o f s i m i l a r l e g i s l a t i o n by u s i n g an orthodox d i v i s i o n o f powers a n a l y s i s . 2 7 P r i o r t o s e c t i o n 92A, a p r o v i n c e c o u l d not attempt t o r e g u l a t e t r a d e which i s p r o p e r l y a matter o f i n t e r p r o v i n c i a l concern. L a s k i n , C.J.C. s t a t e d : " I t i s t r u e t h a t a P r o v i n c e cannot l i m i t the export o f goods from the p r o v i n c e , and any p r o v i n c i a l marketing l e g i s l a t i o n must y i e l d t o t h i s . " 2 ^ 8 A c c o r d i n g l y , w h i l e the removal permit c o n d i t i o n s may be v a l i d c o n t r a c t u a l l y as regards the gas w e l l p r o d u c e r - p e r m i t t e e , the A l b e r t a L e g i s l a t u r e does not enjoy p r i v i t y w i t h the downstream d i s t r i b u t o r s and the c o n d i t i o n s cannot be imposed upon them. In s t e a d o f p r e o c c u p a t i o n w i t h p r o d u c t i o n concerns, the c u r r e n t D e r e g u l a t i o n i s expounded upon i n Chapter 4 i n f r a . Thompson, supra note 1 a t 3.03[3-4]; s.92(2) supra note 2; P.W. Hogg, C o n s t i t u t i o n a l Law of Canada (2nd ed., Carswell.'Toronto, 1985) a t 354. J.B. B a l l e m , " C o n s t i t u t i o n a l V a l i d i t y o f P r o v i n c i a l O i l and Gas L e g i s l a t i o n " (1963) 41 Can. Bar Rev. 199 a t 218- 219. Ref r e A g r i c u l t u r a l Prod. Marketing A c t [1978] 2 S.C.R. 1198, 84 D.L.R. (3d) 257 a t 319, 19 N.R. 361. 23 26 27 28 11 A l b e r t a Gas Resources P r e s e r v a t i o n A c t d e a l s w i t h consumption matters i n g e n e r a l , and gas e xports i n p a r t i c u l a r . N e v e r t h e l e s s , s i n c e 1982, the permit c o n d i t i o n s would not be u l t r a v i r e s i n the absence of d i s c r i m i n a t i o n between consumers • 2 9 as t o p r i c e s or s u p p l i e s . Not s u r p r i s i n g l y , the removal permit system has been q u e s t i o n e d as b e i n g u n c o n s t i t u t i o n a l t o the e x t e n t t h a t i t may " a u t h o r i s e or p r o v i d e f o r " s e c t i o n 92A(2) d i s c r i m i n a t i o n . 3 0 But d e s p i t e the p l e t h o r a of a r t i c l e s w r i t t e n 3 1 the l e g a l n a ture o f t h i s type of d i s c r i m i n a t i o n remains u n c l e a r . 3 2 A p r o m i s i n g technique t h a t might c r y s t a l l i s e the matter i n v o l v e s comparative law. One h e l p f u l d e f i n i t i o n i s found i n a work on European Community Law: " D i s c r i m i n a t i o n always i n v o l v e s uneven treatment of s u b j e c t s or o b j e c t s i n e s s e n t i a l l y s i m i l a r s i t u a t i o n s by a s i n g l e person or body..." 3 3 S. Blackman, Gas Removal Permits i n A l b e r t a : C o n s t i t u t i o n a l Q u e s t i o n s f ( F a c u l t y of Law, U n i v e r s i t y of B r i t i s h Columbia: A p r i l 20, 1988) unpublished, a t 5- 7,17,10,58. S.92A d i s c u s s i o n was i n f l u e n c e d by the l u c i d comparative a n a l y s i s of my c o l l e a g u e Susan Blackman. M.Kay, " D e r e g u l a t i o n And I n t e r p r o v i n c i a l Trade: D i r e c t S a l e s of N a t u r a l Gas" i n J.O. Saunders (ed.), T r a d i n g Canada's N a t u r a l Resources (Carswell:Toronto, 1987), a t 282. supra note 1; o t h e r u s e f u l commentaries i n c l u d e : J.P. Meekison, R.J. Romanow & W.D. M o u l l , O r i g i n s and Meaning o f S e c t i o n 92A: The 1982 C o n s t i t u t i o n a l Amendment on Resources (The I n s t i t u t e For Research On P u b l i c P o l i c y , 1985); W.D. M o u l l " P r i c i n g A l b e r t a ' s Gas - Co-Operative F e d e r a l i s m and the Resource Amendment" (1984) 22 A l t a . L.Rev. 348. Blackman, supra note 29 a t 19. H. Smit & P. Herzog, The Law of the Eurapean Economic Community: A Commentary on the EEC Treaty,(Mathew Bender:New York, 1976) v o l . 3 a t 556. 12 L i k e o t h e r f e d e r a l s y s t e m s J 4 t h a t might p r o v i d e a u s e f u l comparison, the European Economic Community i s p r e d i c a t e d upon an u n f e t t e r e d flow o f people, s e r v i c e s , goods, c a p i t a l and b u s i n e s s e n t e r p r i s e s between the Member S t a t e s . 3 I t s e n a b l i n g t r e a t y e n j o i n s a g a i n s t d i s c r i m i n a t i o n on the b a s i s of n a t i o n a l i t y . 3 6 Thus the European Community experi e n c e i s s i m i l a r t o a f e d e r a l o r economic system such as Canada t h a t i s 37 based on the n o n - d i s c r i m i n a t o r y f r e e flow o f t r a d e . D i f f e r e n t i a l treatment based on n a t i o n a l i t y t h a t r e s u l t s from l e g i s l a t i o n o r a d m i n i s t r a t i v e p r a c t i s e s o f a Member S t a t e i s t he type o f d i s c r i m i n a t o r y m i s c h i e f t h a t the t r e a t y seeks t o prevent, p r o v i d i n g t h a t t h e r e i s a common Community p o l i c y i n p o i n t . Thus d i s p a r i t i e s t h a t a r i s e from the l e g i s l a t i o n of Member S t a t e s can e x i s t i n the absence o f a common p o l i c y on the m a t t e r . 3 8 For i n s t a n c e , i n a f i s h e r i e s case, Denmark p r e s c r i b e d the a l l o w a b l e c a t c h on s p e c i e s w i t h i n her waters thereby a l l o c a t i n g quotas t o Member S t a t e s based on t h e i r h i s t o r y o f f i s h i n g t h e r e . These measures were t r a n s i t i o n a l , made i n See Blackman, supra note 29, who compares the E.C., U.S.A., & A u s t r a l i a p r o v i s i o n s t o S.92A d i s c r i m i n a t i o n . Smit and Herzog, supra note 33 a t v o l . 1 , p.17; see a l s o Commission o f the EEC v. French R e p u b l i c , d e c i s i o n 167/73 [1974] E.C.R. 359 a t 369, (1974) 14 C.M.L.R. 216 a t p. 22 8. A r t i c l e 7, T r e a t y E s t a b l i s h i n g The European Economic Community, U.N.T.S. 298, No.4300 (1958). On the n e c e s s i t y o f nationwide f r e e t r a d e , see: B.W. Semkow "Energy and the New C o n s t i t u t i o n " (1985) 23 A l t a L.Rev. 101 a t 103. Smit v. Commissie G r e n s o v e r s c h r i i d e n d Beroeps Goederenvervoer, d e c i s i o n 126/82, [1983] E.C.R. 73 a t 92, (1983) 38 C.M.L.R 106 a t 123. See a l s o : C r i m i n a l Proceedings v. Firma J . van Dam en Zonen F d e c i s i o n s 185- 204/78, [1979] E.C.R. 2345, (1980) 27 C.M.L.R. 350. 13 c o n s u l t a t i o n w i t h the Commission pending a common c o n s e r v a t i o n p o l i c y . The Court h e l d t h a t o v e r f i s h i n g charges a g a i n s t a B r i t i s h s h i p c a p t a i n were not d i s c r i m i n a t o r y . The quotas were found t o be o b j e c t i v e , contemplating the needs of the l i t t o r a l p o p u l a t i o n and the need t o t e m p o r a r i l y p r e s e r v e the s t a t u s quo i n the r e g i o n d u r i n g the p e r i o d o f t r a n s i t i o n . 3 9 While the t r a n s i t i o n a l p e r i o d reduces i t s u s e f u l n e s s , an analogy has been noted. Canadian d e r e g u l a t i o n i s thought t o have p l a c e d gas supply c o n t r a c t s i n a s t a t e o f f l u x u n t i l they e x p i r e . During t h i s time, consumers are p e n a l i s e d a c c o r d i n g t o t h e i r p a s t h i s t o r y by the removal permit s y s t e m . 4 0 The q u e s t i o n t h a t c o u l d be addressed by s e c t i o n 92A i s whether the p r o v i n c e of A l b e r t a i s o b j e c t i v e l y c o n d u c t i n g a c o n s e r v a t i o n scheme, which i n c i d e n t a l l y p r o t e c t s t h e s e long term c o n t r a c t s . While proponents suggest t h a t economic c o n s e r v a t i o n j u s t i f i e s the scheme, an answer t o the d i s c r i m i n a t i o n i s s u e should address the e f f e c t s i n consuming p r o v i n c e s . I n t e r e s t i n g l y , Canadian d e r e g u l a t i o n i s not a t r a n s i t i o n a l phenomenon, but r a t h e r seems l i k e l y t o s t a y u n t i l a change i n the f e d e r a l government a l t e r s the p r e s e n t l a i s s e z f a i r e p o l i c y . S u c c i n c t l y s t a t e d , the problems of d e r e g u l a t i n g the commodity p r i c e of n a t u r a l gas have been exacerbated by an i n t e r p r o v i n c i a l p i p e l i n e t r a n s p o r t a t i o n system t h a t remains r e g u l a t e d and t h a t i s t i e d up w i t h long term c o n t r a c t s . Anklagemyndiqheden v. Jack Noble Kerr, d e c i s i o n 287/81, [1982] E.C.R. 4053 a t 4076-4077; (1983) 37 C.M.L.R 431 a t 453. Blackman, supra note 29 a t 49. T9" 40 14 In my v i e w , i t seems u n l i k e l y t h a t the c u r r e n t P r o g r e s s i v e C o n s e r v a t i v e f e d e r a l government w i l l a t tempt t o p o l i t i c a l l y a l i e n a t e A l b e r t a n s and i n t r o d u c e l e g i s l a t i o n t h a t would u n e q u i v o c a l l y p r o h i b i t t h e m i s c h i e f reaped by the a r g u a b l y u l t r a v i r e s removal p e r m i t s y s t e m . In f a c t , i t seems t h a t the p o l i c y o f d e r e g u l a t i o n was s t r o n g l y i n f l u e n c e d by the l o b b y i n g o f t h e o i l and gas i n d u s t r y , a p o w e r f u l western Canad ian i n t e r e s t g r o u p . T h u s , any a t t a c k s upon t h e a l l e g e d d i s c r i m i n a t i o n i n n a t u r a l gas p r i c e s t h a t may be a t t r i b u t a b l e t o h i c c u p s i n the d e r e g u l a t i o n p r o c e s s , appear t o be based upon t r a d i t i o n a l p u b l i c u t i l i t y c o n c e p t s o f d i s c r i m i n a t i o n . W h i l e d i s c r i m i n a t i o n i n t h e b r o a d c o n s t i t u t i o n a l sense remains a p o s s i b l e cause o f a c t i o n , t h o s e c l a i m i n g u n j u s t i f i e d d i f f e r e n t i a l t r ea tment a r e thought t o have a more immediate and p r o b a b l e cause o f a c t i o n i n the p u b l i c u t i l i t y sense o f t h e word . 15 3. ADMINISTRATIVE STRUCTURE AND THEORY OF PUBLIC UTILITY REGULATION An important facet of natural gas public u t i l i t y law i s the formal structure of the p r i n c i p a l federal and p r o v i n c i a l agencies who are responsible f o r the resource's stewardship. This chapter i d e n t i f i e s l e g i s l a t i v e c h a r a c t e r i s t i c s of petroleum regulatory agencies i n Canada, and the provinces of Alberta, Ontario, and Manitoba. A l l of them are tools of government having the common raison d'etre of furthering the public i n t e r e s t . Although the philosophy of public u t i l i t y regulation i s r e l a t i v e l y straightforward, the provision of equitable services to the public i s problematic due to a number of technical economic and f i n a n c i a l factors. 3.1 THE NATIONAL ENERGY BOARD The National Energy Board (NEB) was created by Canadian Parliament i n 1959 with the passing of the s t a t u t e 4 1 bearing the same name. A major impetus to i t s creation was the decision by the federal government to promote the construction of an all-Canadian natural gas trunk p i p e l i n e from Alberta to central Canadian markets. The p i p e l i n e had been long delayed ^ National Energy Board Act, S.C. 1959, c. 46; presently: RSC 1970, c.N-6, amended by: cc. 10,27,44,(1st Supp.), c. 10 (2nd Supp.), 1973-74,c.52, 1974-75-76,c.33, 1977- 78,c.20, 1978-79,c.9, 1980-81-82-83,CC.80,84,116, 1984,c.18(s.209),c.40. (hereinafter referred to as the NEB Act). 16 by problems i n o b t a i n i n g the necessary p r i v a t e f i n a n c i n g . These p e c u n i a r y d i f f i c u l t i e s arose from the r e l u c t a n c e of the American F e d e r a l Power Commission t o a l l o w the purchase of Canadian gas v i a the proposed branch l i n e t o the border town of Emerson, Manitoba. E v e n t u a l l y , the Dominion and O n t a r i o governments agreed t o advance loans and c o n s t r u c t the p i p e l i n e through the rugged Canadian S h i e l d n o r t h of the Great L a k e s , 4 2 a f t e r which the company was allowed t o purchase the segment once i t had a t t a i n e d s u f f i c i e n t s o l v e n c y . Contr o v e r s y over the c o n s t r u c t i o n and governmental a s s i s t a n c e was accentuated f o l l o w i n g the use o f c l o s u r e t o g u i l l o t i n e debate on the e n a b l i n g B i l l d e s p i t e l e g i t i m a t e concerns f o r the t i m e l y f i n a n c i n g of t h e p r o j e c t . Subsequently, the p o l i t i c a l r e s u l t of the 1956 Pipe L i n e Debate saw the c o l l a p s e of the L i b e r a l Government headed by Prime M i n i s t e r S t . L a u r e n t . 4 3 Although the a l l - C a n a d i a n p i p e l i n e was completed i n October 1958, many qu e s t i o n s remained unanswered from the debate which focused on the h a n d l i n g o f the matter r a t h e r than i t s m e r i t s . These q u e s t i o n s i n c l u d e d u n c e r t a i n t y about the scheme as w e l l as charges o f p r o f i t e e r i n g on government c o n t r a c t s . They were addressed by two Royal Commissions whose f i n d i n g s l e d t o the f o r m a t i o n o f the NEB. 4 4 ^ H.G.J. A i t k e n , "The Midwestern Case: Canadian Gas And The F e d e r a l Power Commission" (1959) 25 Can. J . of Economics & P o l i t i c a l S c i e n c e , 129 a t 130. C D . Hunt and A.R. Lucas (eds.), Canada Energy Law S e r v i c e . ( R i c h a r d De Boo: Toronto, 1981) a t 10-1511. 4 4 B.D. F i s h e r , " T h e Role of the N a t i o n a l Energy Board i n C o n t r o l l i n g The Export Of N a t u r a l Gas From Canada (1971) 9 Osgoode H a l l L . J . 553 a t 556. 17 In 1957, The Gordon Commission recommended the es t a b l i s h m e n t o f a comprehensive energy p o l i c y and a n a t i o n a l energy a u t h o r i t y w i t h a d v i s o r y powers on energy and s u p e r v i s o r y powers over export c o n t r a c t s f o r gas, o i l and power . 4 5 Afterwards, the new C o n s e r v a t i v e government l e a d by Prime M i n i s t e r Diefenbaker appointed the Borden Royal Commission w i t h a broad mandate t o make recommendations on the r e g u l a t i o n o f p i p e l i n e company r a t e s and o p e r a t i o n , as w e l l as those matters o f energy p o l i c y f a l l i n g under the l e g i s l a t i v e competence o f Parl i a m e n t . Given the v o c i f e r o u s nature and consequences o f the Pipe L i n e debate, i t was thought t h a t a continuous r e g u l a t o r y framework was the b e s t mechanism t o d e p o l i t i c i z e t he matter and implement these p o l i c i e s . 4 6 When the Commission i s s u e d i t s r e p o r t , 4 7 the government responded q u i c k l y and passed the l e g i s l a t i o n i n J u l y 1959 which implemented i t s recommendations on the c r e a t i o n o f the N a t i o n a l Energy Board and the c o n t r o l o f n a t u r a l g a s . 4 8 Under the A c t , c e r t a i n a d v i s o r y f u n c t i o n s were a s c r i b e d t o the Board, i n c l u d i n g the p r e s e n t requirement t h a t i t make continuous s t u d i e s and r e p o r t s on Canadian energy sources t o the M i n i s t e r o f Energy, Mines and R e s o u r c e s . 4 9 Other Canada, Royal Commission on Canada's Economic P r o s p e c t s . F i n a l Report. November, 1957. (Walter Gordon, Chairman). 4 6 I. McDougall, "The Canadian N a t i o n a l Energy Board: Economic 'Jurisprudence' In The N a t i o n a l I n t e r e s t Or Symbolic Reassurance?", (1973) 11 A l t a . L.Rev. 327 a t 335-337 and Appendix B, I I I . Canada, Royal Commission on Energy. F i r s t Report. October, 1958. (Henry Borden, Chairman). A second r e p o r t was i s s u e d i n J u l y , 1959, c o n c e r n i n g energy supply, demand and export. 4 8 B.D., F i s h e r , supra note 44 a t 558. NEB A c t supra note 41 a t s.22. 18 f u n c t i o n s of an a d j u d i c a t o r y nature are p r e s c r i b e d which p r o h i b i t the c o n s t r u c t i o n and o p e r a t i o n of i n t e r n a t i o n a l or i n t e r p r o v i n c i a l o i l and gas p i p e l i n e s and e l e c t r i c a l power l i n e s , without the approval of the Board. T h i s approval i s s u e s i n the form of a c e r t i f i c a t e of p u b l i c convenience and i s n o n - a s s i g n a b l e i n the absence of Board c o n s e n t . 5 0 L i c e n s i n g and ratemaking are o t h e r q u a s i - j u d i c i a l f u n c t i o n s . 5 1 L i c e n c e s must i s s u e under the Board's a u t h o r i t y i n o r d e r t o export gas from or import i t t o Canada. 5 2 Pursuant t o the rate-making powers, a l l t o l l s are r e q u i r e d t o be " j u s t and r e a s o n a b l e " and the Board may d i s a l l o w r a t e s and p r e s c r i b e o t h e r r a t e s i n t h e i r s t e a d . S i g n i f i c a n t l y , the Act p r o h i b i t s the s e t t i n g of "any u n j u s t d i s c r i m i n a t i o n i n t o l l s , s e r v i c e o r f a c i l i t i e s , a g a i n s t any person or any l o c a l i t y . " The normal e v i d e n t i a l burden i s r e v e r s e d upon p r o o f o f such f a v o u r a t i s m s i n c e the onus of p r o v i n g j u s t i f i e d d i s c r i m i n a t i o n r e s t s w i t h the n a t u r a l gas company. 5 3 However, the problem of d e t e r m i n i n g e q u i t a b l e r a t e s and the f e r r e t i n g out of u n j u s t i f i e d d i s c r i m i n a t o r y p r a c t i c e s i s not s t r a i g h t f o r w a r d . T h i s problem, i n e x o r a b l y i n t e r t w i n e d w i t h t h e complex economic nature of the i n d u s t r y , i s d i s c u s s e d a t l e n g t h below. Id. ss.26,27,40,43(1),44,17(3). R.C. C a r t e r , "The N a t i o n a l Energy Board Of Canada And the American A d m i n i s t r a t i v e Procedure A c t : A Comparative Study", (1969) 34 Sask. L.Rev. 104 a t 110-112. That commentator s t a t e s t h a t the "duty t o d e c i d e " f u n c t i o n w i l l " a f f e c t r i g h t s or impose o b l i g a t i o n s " : S e c u r i t y E xport Co. v. Hetherincrton [1923] S.C.R. 539, 549-551. NEB A c t supra note 41 a t s s . 81,82,17(3). Id. a t ss.50-57. 19 Various other adjudicatory functions have been i d e n t i f i e d . 5 4 The Act places limitations upon commercial pipeline transactions, such as the necessity of the Board to approve sales, amalgamation or abandonment of the enterprise. 3 Another adjudicatory function involves the procedure for the expropriation of pipeline rights of way.56 Altogether, these functions are fa c i l i t a t e d by the Board's a b i l i t y to make i t s own rules of practice and procedure. 5 7 With the approval of the Governor in Council, the Board may use i t s delegated powers to make pipeline safety rules and compel the production of books of account. 5 8 Given the detailed finances of the industry and the ava i l a b i l i t y of creative accounting techniques, this latter provision is important in cost analysis verification. Finally, the statute appears to oust the jurisdiction of the courts to grant the prerogative remedies of mandamus, certiorari and prohibition 5 9 by providing that a l l Board decisions are "f i n a l and conclusive" except for a limited appeal which l i e s to the Federal Court of Appeal on a "question of law or a question of j u r i s d i c t i o n . " 6 0 Despite the extensive statutory control exerted upon the NEB, i t i s not accurate to describe i t as a mere amenuensis of 55 56 57 58 59 60 Carter, supra note 51 at 111-112. NEB Act supra note 41 at s.63. Id. ss.74-75. Id. s.7. Id. ss. 39(2),88. Carter, supra note 51 at 112. NEB Act supra note 41 at ss.19,18. 20 Par l i a m e n t o r the M i n i s t e r r e s p o n s i b l e f o r the s u p e r v i s o r y p o r t f o l i o . T h i s i s e x e m p l i f i e d i n the m i l i e u o f p o l i c y . "Few NEB members admit t h a t the Board i n any way makes p o l i c y " . . . (but) " I t i s c l e a r t h a t the extremely g e n e r a l nature o f these g u i d i n g government p o l i c i e s l e a v e s c o n s i d e r a b l e scope f o r p o l i c y f o r m u l a t i o n by the Board through d e c i s i o n s i n p a r t i c u l a r a p p l i c a t i o n s and through i n t e r p r e t a t i o n i n t he es t a b l i s h m e n t o f proceedings and standar d c o n d i t i o n s . There can be no doubt t h a t the Board makes P o l i c y . 1 1 6 1 Thus, the Board has an i n f l u e n c e i n p o l i c y development sep a r a t e from the p o l i c y d i r e c t i v e s t h a t i t i n h e r i t s through the A c t . The impact of t h i s i n f l u e n c e can be f o r m i d a b l e . One i l l u s t r a t i o n o f t h i s p o i n t may be drawn w i t h the 19 66 a p p l i c a t i o n by TransCanada P i p e l i n e s L t d . t o extend the main l i n e v i a the U n i t e d S t a t e s . 6 2 Although Cabinet i n i t i a l l y d e nied the a p p l i c a t i o n i n the f a c e o f o f p u b l i c o p i n i o n a g a i n s t the p r o p o s a l , i t l a t e r b a c k -tracked and accepted the view propounded by the NEB. Approval was gran t e d f o l l o w i n g a r e - e v a l u a t i o n o f " p o l i t i c a l c o n s i d e r a t i o n s " , c o n s u l t a t i o n s w i t h the Board and o t h e r i n t e r e s t e d p a r t i e s and upon the c o n d i t i o n t h a t the Northern O n t a r i o l i n e handle 50% of the volumes d e s t i n e d f o r Canadian m a r k e t s . 6 3 T h e r e f o r e , i t i s p o s s i b l e t h a t the d e c i s i o n s o f the Board may have an i n f l u e n c e upon contemporary p o l i c i e s o f the f e d e r a l government, i n c l u d i n g the p o l i c y u n d e r l i n i n g n a t u r a l gas d e r e g u l a t i o n . A.R. Lucas & T. B e l l , The N a t i o n a l Energy Board: P o l i c y Procedure and P r a c t i c e (Law Reform Commission of Canada:Ottawa, 1977) a t 35-36. See (Canada) Report t o G o v e r n o r - i n - C o u n c i l , August, 1966. Lucas & B e l l supra note 61 a t 37. bT 62 63 21 However, the p r o b a b i l i t y and e x t e n t of such an i n f l u e n c e i s a l s o a f u n c t i o n of o t h e r f a c t o r s and p a r t i c i p a n t s . 3.2 REGULATORY TRIBUNALS IN ALBERTA, MANITOBA AND ONTARIO P r o v i n c i a l t r i b u n a l s are the o t h e r important t i e r of r e g u l a t o r y p a r t i c i p a n t s which e x e r t c o n t r o l over the Canadian n a t u r a l gas i n d u s t r y . L i k e the NEB, t h e i r competence o r i g i n a t e s from the c o n s t i t u t i o n a l apportionment of l e g i s l a t i v e power i n our f e d e r a l s t a t e , as s u c c i n c t l y o u t l i n e d e a r l i e r . Often, the t e n s i o n s i n v o l v e d i n the f e d e r a l - p r o v i n c i a l i n t e r p l a y are c h a n e l l e d through them. Hence i t not s u r p r i s i n g t h a t the o i l and gas r i c h p r o v i n c e o f A l b e r t a i s the l o c u s o f a l e a d i n g p r o v i n c i a l n a t u r a l r e s o u r c e management t r i b u n a l t h a t has c o n s i d e r a b l e impact upon the n a t u r a l gas i n d u s t r y . O r i g i n a l l y c r e a t e d 6 4 i n 1938, the A l b e r t a Energy Resources C o n s e r v a t i o n Board (ERCB) i s the p r e s e n t p r i n c i p a l a g e n c y U J whose powers have been p r o g r e s s i v e l y reformed and broadened over the y e a r s . U n t i l 1970, i t s mandate under v a r i o u s p r o v i n c i a l s t a t u t e s i n c l u d e d r e c o v e r y measures t h a t a l lowed a d j a c e n t l a n d owners t o r e c e i v e a f a i r r e t u r n from the f u g a c i o u s underground petroleum p o o l s , the promotion o f s a f e t y and e f f i c i e n c y i n e x p l o r a t i o n and e x p l o i t a t i o n as w e l l as prudent c o n s e r v a t i o n measures. In 1971, the Board was 5? The Turner V a l l e y Gas C o n s e r v a t i o n Act, S.A. 1932, c.6. The Energy Resources C o n s e r v a t i o n Act, S.A. 1971, c.30, now R.S.A. 1980, c.E-11. 22 i n t e g r a t e d t o a d m i n i s t e r numerous s t a t u t e s p e r t a i n i n g t o o i l and gas, h y d r o - e l e c t r i c power, c o a l and m i n e r a l q u a r r i e s and i n t e r - p r o v i n c i a l p i p e l i n e s . Much of the impetus f o r r e g u l a t o r y r e - o r g a n i z a t i o n came from concern over the non- renewable nature of n a t u r a l r e s o u r c e s , e s p e c i a l l y o i l and n a t u r a l gas. Pursuant t o the O i l and Gas C o n s e r v a t i o n A c t the ERCB i s g i v e n a u t h o r i t y t o make " j u s t and r e a s o n a b l e o r d e r s and d i r e c t i o n s " t o promote those purposes of the A c t which are not s p e c i f i c a l l y s t a t e d . These purposes i n c l u d e "economic, o r d e r l y and e f f i c i e n t development i n the p u b l i c i n t e r e s t " of o i l and gas, i n a d d i t i o n t o the p r e v e n t i o n o f w a s t e . 6 7 In o r d e r t o f a c i l i t a t e these purposes, the ERCB i s endowed with wide i n v e s t i g a t o r y and a d v i s o r y powers on petroleum r e l a t e d m a tters. ° Consequently, the Board a s s i s t s the f o r m u l a t i o n of government p o l i c y w i t h the a c q u i s i t i o n and d i s s e m i n a t i o n of t e c h n i c a l i n f o r m a t i o n w i t h a view t o d e t e r m i n i n g supply and demand o f the r e s o u r c e s under i t s s t e w a r d s h i p . 6 9 C o n s e r v a t i o n p r a c t i c e s of the ERCB are c o n t r a c t u a l l y augmented by the requirement of a s p e c i f i c a l l y c o n d i t i o n e d Board l i c e n c e i n o r d e r t o conduct n a t u r a l gas w e l l d r i l l i n g . 7 0 C o n t r o l over n a t u r a l gas i s enhanced by the combination of both l e g i s l a t i v e and c o n t r a c t u a l p r o v i s i o n s t h a t are aimed a t To6- 67 68 69 70 C.L. Brown-John, Canadian R e g u l a t o r y Agencies (Butterworths:Toronto, 1981) a t 44. O i l and Gas C o n s e r v a t i o n Act, R.S.A. 1980, c.O-5, ss.4,7; as amended by the O i l and Gas C o n s e r v a t i o n Amendment Act, 1982, S.A., c.27. Canada Energy Law S e r v i c e supra note 43 a t 30-3015. Id. a t 30-3019. Id. a t 30-3037. O i l and Gas C o n s e r v a t i o n A c t , s . l l ( l ) . 23 p r e v e n t i n g both p h y s i c a l and economic waste. Upstream examples of c o n s e r v a t o r y schemes i n c l u d e the s e p a r a t i o n or p o o l i n g of m i n e r a l i n t e r e s t s and the u n i t i z a t i o n of r e s e r v o i r s so as t o generate the maximum e f f i c i e n t r a t e o f r e c o v e r y . Another scheme i s c a l l e d p r o r a t i o n where p r o d u c t i o n i s e q u i t a b l y shared i n r e l a t i o n t o market demand. E q u i t a b l e p r o d u c t i o n s h a r i n g i s a l s o promoted by the Board's r e g u l a t i o n of t r a n s p o r t a t i o n whereby buyers of the commodity may be d e c l a r e d common pur c h a s e r s , p i p e l i n e s deemed common c a r r i e r s , and • 71 p r o c e s s i n g p l a n t s deemed common p r o c e s s o r s . From both a p r o v i n c i a l and a n a t i o n a l p e r s p e c t i v e , one of the key f u n c t i o n s of the ERCB i s i t s c o n t r o l over the export o f A l b e r t a gas. In o r d e r t o export gas, a removal permit may be o b t a i n e d from the Board f o l l o w i n g an i n q u i r y i n t o a l l a p p l i c a t i o n s . 7 2 The l i c e n c e may s p e c i f y v a r i o u s terms and c o n d i t i o n s i n c l u d i n g the d a i l y and annual amount o f gas t o be removed from each l o c a t i o n , permit term, the r e a s o n a b l y p r i c e d supply of gas t o A l b e r t a n s and the circumstances i n which removal may be i n t e r r u p t e d or d i v e r t e d . 7 3 Among the c o n s i d e r a t i o n s , the ERCB must a s s e s s the p r e s e n t and f u t u r e needs of A l b e r t a n s , the extent of e s t a b l i s h e d r e s e r v e s and the D.E. Lewis & A.R. Thompson, Canadian O i l And Gas (Butterworths:Toronto 1954, r e v i s e d by N.D. Bankes,1988) a t ss.166-173. Gas Resources P r e s e r v a t i o n Act, R.S.A. 1980 c.G-3.1, as amended by S.A. 1984, c.G-3.1, s . 2 ( l ) , S.A. 1986 c.17, s.3, c.D-18.1 and S.A. 1987, c.23. I d . s.5. 24 p r o s p e c t s f o r new d i s c o v e r i e s as w e l l as any o t h e r matter deemed r e 1 e v a n t . 7 4 T h i s l a t t e r l i c e n c e c r i t e r i a was framed d i f f e r e n t l y i n the 1984 Gas Resources P r e s e r v a t i o n A c t which e x p r e s s l y p r o v i d e d t h a t "the expected economic c o s t s and b e n e f i t s " of removal be assessed i n r e s p e c t t o the p u b l i c i n t e r e s t . 7 5 Commentators opined t h a t t h a t p r o v i s i o n allowed "the Board t o r e g u l a t e t r a n s a c t i o n s such as d i r e c t s a l e s , where the producer and end u s e r are the same person, and ensure t h a t the economic c o s t s and b e n e f i t s o f such t r a n s a c t i o n s are i n the p u b l i c i n t e r e s t of A l b e r t a " . 7 6 S i m i l a r l y , an a d d i t i o n a l 1984 p r o v i s i o n expanded the removal permit c r i t e r i a by a l l o w i n g commodity p r i c e c o n d i t i o n s t o be a t t a c h e d t o the l i c e n c e as w e l l as o t h e r c o n d i t i o n s p e r t a i n i n g t o the expected economic w e l f a r e of the p r o v i n c e . 7 7 However these p r o v i s i o n s are no l o n g e r law. N e v e r t h e l e s s , i t i s thought t h a t the p r e s e n t p l e n a r y l i c e n c e c r i t e r i a of "any o t h e r matters c o n s i d e r e d r e l e v a n t by the B o a r d " 7 8 encompasses the former c r i t e r i a and i s s u f f i c i e n t a u t h o r i t y t o m a i n t a i n t h e i r o b j e c t i v e s . Prima f a c i e , i t would appear t h a t A l b e r t a has comprehensive r e g u l a t o r y c o n t r o l of the downstream d i s p o s i t i o n 7"4~~ 75 76 77 78 I d . s.8. See a l s o : Canada Energy Law S e r v i c e , supra note 43 a t 30-3076-86. Gas Resources P r e s e r v a t i o n Act, 1984, c.G-3.1, s . 5 ( 3 ) ( c ) . R.P. Desbarats, L.W. Carson, D.E. G r e e n f i e l d , "Recent Developments i n the Law o f I n t e r e s t t o O i l and Gas Lawyers", (1985) 24 A l t a L.Rev. 143 a t 190. Gas Resources P r e s e r v a t i o n A c t , 1984, c.G-3.1, s.6. Gas Resources P r e s e r v a t i o n Act, s.8(c) supra note 72 (as amended by S.A. 1986 c.17, s.3). 25 of i t s n a t u r a l gas r e s o u r c e s , a t l e a s t u n t i l such p o i n t as the commodity passes the p r o v i n c i a l boundary. But t h e r e are other r e g u l a t o r y a c t o r s e x e r t i n g a u t h o r i t y on the commodity b e f o r e i t reaches the b u r n e r - t i p i n o t h e r p r o v i n c e s . In the case of east-bound gas, the commercial r a m i f i c a t i o n s o f t h i s c o n t r o l may e v e n t u a l l y flow t o the consumer o r end-user v i a the TransCanada P i p e l i n e s L t d . m a i n - l i n e , and subsequently by l o c a l d i s t r i b u t i o n companies. The former e n t i t y has been shown t o f a l l under the j u r i s d i c t i o n o f the f e d e r a l government and the NEB. The l a t t e r e n t i t i e s are p u r c h a s e r - d i s t r i b u t o r s who are s u b j e c t t o the laws o f the p r o v i n c e i n which they are s i t u a t e d . C l e a r l y , t h e r e i s scope f o r l e g a l t e n s i o n s i n t e r - p a r t e s as the p r o v i n c e s seek t o a s s e r t t h e i r i n t r a - p r o v i n c i a l r e g u l a t o r y r i g h t s w h i l e the f e d e r a l government attempts t o a s s e r t i t s c o n t r o l over the i n t e r - p r o v i n c i a l t r a d e of gas. Not s u r p r i s i n g l y , the consumer i n t e r e s t s of the buying p r o v i n c e s d i f f e r from the marketing i n t e r e s t s of A l b e r t a . Two consumer p r o v i n c e s and t h e i r r e s p e c t i v e r e g u l a t o r y a g encies t h a t are p e r t i n e n t t o t h i s study are the O n t a r i o Energy Board ( O E B ) 7 9 and the Manitoba P u b l i c U t i l i t i e s Board ft 0 • (PUB) which r e g u l a t e the domestic market i n each r e s p e c t i v e j u r i s d i c t i o n . W i t h i n O n t a r i o , the OEB i s the p r i n c i p a l energy r e g u l a t o r y and a d v i s o r y t r i b u n a l having j u r i s d i c t i o n over ft i p i p e l i n e s as w e l l as the power t o 7̂  O n t a r i o Energy Board Act, R.S.O 1980, c.33. 8 0 The P u b l i c U t i l i t i e s Board Act, R.S.M. 1970, C.P280, as amended. 8 1 O n t a r i o Energy Board Act, R.S.O. 1980, c.33, P a r t I I I . 26 "make or d e r s approving o r f i x i n g j u s t and reasonable r a t e s and and othe r charges f o r the s a l e o f gas by by t r a n s m i t t e r s , d i s t r i b u t o r s and st o r a g e companies, and f o r the t r a n s m i s s i o n , d i s t r i b u t i o n and sto r a g e o f g a s . " 8 2 L i k e w i s e , the Manitoba PUB has j u r i s d i c t i o n over i n t r a - p r o v i n c i a l p i p e l i n e s 8 3 and the a u t h o r i t y t o " F i x j u s t and reason a b l e r a t e s . . . t o l l s o r sche d u l e s " which must be f o l l o w e d by a p u b l i c u t i l i t y . 8 4 Thus the s t r u c t u r e o f n a t u r a l gas p i p e l i n e r e g u l a t i o n and r a t e s e t t i n g procedures a re l e g i s l a t i v e l y p r o v i d e d f o r i n the consuming p r o v i n c e s o f O n t a r i o and Manitoba. Even though A l b e r t a has a s i m i l a r s t r u c t u r e f o r i t s i n t r a - p r o v i n c i a l gas use, J i t has a d i f f e r e n t s t r u c t u r e f o r e x p o r t i n g as does the f e d e r a l government p e r t a i n i n g t o the i n t e r - p r o v i n c i a l t r a d e of the commodity. D e s p i t e t he d i f f e r e n t a d m i n i s t r a t i v e s t r u c t u r e s and purposes, t h e r e seems t o be a golden th r e a d contemporaneously woven through each r e g u l a t o r y board which u n d e r l i e s t h e b a s i c purpose o f r e g u l a t o r y b o d i e s . 3.3 THE NATURE OF REGULATION H e u r i s t i c a l l y , t he n a t u r a l gas d i s t r i b u t i o n i n d u s t r y i n Canada may be b r o a d l y thought o f as a p u b l i c u t i l i t y . Such e n t i t i e s have been the s u b j e c t o f c o n s i d e r a b l e study i n Canada Id. s . l 9 ( l ) . The Gas Pipe L i n e Act, R.S.M. 1970, C.G50, as amended, ss.2,3,12. Id. s.12; The P u b l i c U t i l i t i e s Board Act, R.S.M. 1970, as amended, C.P280, ss.77,74. P u b l i c U t i l i t i e s Board Act, R.S.A. 1980, c.P-37; Gas U t i l i t i e s A c t, R.S.A. 1980, c.G-4. 27 and a f o r t i o r i , the U n i t e d S t a t e s g i v e n i t s huge and dynamic economy. Many of t h e i r concepts p e r t a i n i n g t o t h i s s u b j e c t are h e l p f u l i n understanding the r e l a t e d concepts e x i s t i n g i n our country, i n c l u d i n g those o f d e f i n i t i o n a l and s t r u c t u r a l c a t e g o r i e s . Hence, a p r e l i m i n a r y c h a r a c t e r i s t i c o f a p u b l i c u t i l i t y has been d e s c r i b e d as the e s t a b l i s h e d r i g h t o f the p u b l i c t o p r o v i d e a s p e c i a l r e g u l a t o r y scheme f o r p a r t i c u l a r i n d u s t r i e s . 8 6 P u b l i c u t i l i t i e s i n v o l v e necessary p u b l i c s e r v i c e s which o f t e n r e s u l t i n a monopoly o f the p a r t i c u l a r e n t e r p r i s e . T h e o r e t i c a l l y , monopolies are the o p p o s i t e o f markets t h a t enjoy p e r f e c t c o m p e t i t i o n o r the optimum e f f i c i e n c y brought about by c o m p e t i t i v e behaviour and performance. In a f r e e market system, c o m p e t i t i o n b e n e f i t s consumers by e l i c i t i n g an e f f i c i e n t d i s t r i b u t i o n o f r e s o u r c e s amongst i n d i v i d u a l s t hereby i n h i b i t i n g the skewed r e a l i z a t i o n o f p r o f i t s by a b u s i n e s s without r i v a l s . O c c a i s s i o n a l l y , the t h e o r y of c o m p e t i t i o n i s s u s c e p t i b l e t o f a i l u r e . Sometimes i t cannot work i n p r a c t i c e due t o the e f f e c t s o f i n d u s t r y c o s t s and the s i z e o f the market which o n l y permit the e x i s t e n c e o f a s o l e J.Bauer, E f f e c t i v e R e g u l a t i o n Of P u b l i c U t i l i t i e s (MacMillan:New York, 1925) a t 1. A l u c i d Canadian account o f p u b l i c u t i l i t y r e g u l a t i o n and n a t u r a l gas c o n t r a c t u a l o b l i g a t i o n s i n O n t a r i o can be found i n "O n t a r i o Energy Board, EBRO # 410-1,411-1,412-1, December 12, 1986, reproduced i n Canada Energy Law S e r v i c e , supra note 43, OEB D e c i s i o n 41. E.W. Clemens, Economics and P u b l i c U t i l i t i e s (Appleton- C e n t u r y - C r o f t s : New York, 1950) a t 25. 28 f i r m . T h i s l a t t e r phenomenon i s b e t t e r known as a n a t u r a l D O monopoly. 0 0 The d i s t i n c t i o n between pure c o m p e t i t i o n and a m o n o p o l i s t i c e n t e r p r i s e has been c r i t i c i s e d f o r b e i n g an over- s i m p l i f i c a t i o n . While i t i s r a r e t o f i n d a b s o l u t e " p e r f e c t " c o m p e t i t i o n i n the f r e e market, p u b l i c u t i l i t i e s may c o n v e r s e l y e x p e r i e n c e forms of c o m p e t i t i o n , such as the a l t e r n a t i v e or s u b s t i t u t e f u e l s a v a i l a b l e t o n a t u r a l gas u s e r s . N e v e r t h e l e s s , the n o t i o n of n a t u r a l monopolies i s b a s i c a l l y sound. C e r t a i n types o f b u s i n e s s such as a n a t u r a l gas p i p e l i n e , are f r e q u e n t l y a f f e c t e d by t e c h n i c a l e x i g e n c i e s t h a t would induce economic i n e f f i c i e n c y i f i t were not f o r a monopoly o f the market. A c c o r d i n g l y , n a t i o n a l i s a t i o n o f the i n d u s t r y i s one way of coping w i t h the p o l i t i c a l l y p e r c e i v e d p q f a i l u r e o f a market economy. T h i s study addresses another " s u b s t i t u t e f o r c o m p e t i t i o n " , 9 0 namely t h a t of n a t u r a l gas u t i l i t i e s r e g u l a t i o n . N a t u r a l monopolies are a s s o c i a t e d w i t h economies of s c a l e , where the d u p l i c a t i o n of s e r v i c e s by competitors i s uneconomic because of the b u s i n e s s ' h i g h f i x e d c o s t s ; and where one b u s i n e s s can operate more e f f e c t i v e l y than those i n a c o m p e t i t i v e environment c o u l d . 9 1 Although Canada does not have many n a t u r a l monopolies, the downstream n a t u r a l gas i n d u s t r y forms p a r t of t h i s category, a t both the l o c a l ^ E. G e l l h o r n & R . J . P i e r c e , Regulated I n d u s t r i e s i n a N u t s h e l l (2nd ed., West:St.Paul, 1987) a t 19-44. 9 J.C. Bonbright, P r i n c i p l e s of P u b l i c U t i l i t y Rates (Columbia U n i v e r s i t y Press:New York, 1961) a t 10-11. 9 0 I d . a t 10. 9 G e l l h o r n & P i e r c e , supra note 88 a t 9-10. 29 d i s t r i b u t i o n l e v e l and a t the lo n g d i s t a n c e p i p e l i n e l e v e l . For i n s t a n c e , the enormous s i z e o f the country and r e l a t i v e l y s m a l l p o p u l a t i o n a re some o f the f a c t o r s p r e v e n t i n g the en t r y o f a competitor f o r TransCanada P i p e l i n e s L t d . , the m o n o p o l i s t i c i n t e r p r o v i n c i a l n a t u r a l gas p i p e l i n e . T h e r e f o r e , d i r e c t governmental r e g u l a t i o n o f n a t u r a l monopolies i n Q2 • g e n e r a l , * and the n a t u r a l gas t r a n s m i s s i o n i n d u s t r y i n p a r t i c u l a r ; appears necessary f o r a v a r i e t y of reasons. R e g u l a t i o n can i n h i b i t t h e excess p r o f i t s o f a monopolist by p r o v i d i n g a mechanism of r e s t r a i n t on the r a t e s t h a t i t charges, as w e l l as the type o f a c t i v i t i e s i n which i t engages. Without r e g u l a t i o n , an i n e f f i c i e n t a l l o c a t i o n of re s o u r c e s c o u l d r e s u l t from the h i g h e r p r i c e s p a i d by consumers t o the m o n o p o l i s t . 9 3 I n v a r i a b l y , p u b l i c u t i l i t i e s a re monopolies or p a r t i a l monopolies which are c o n t r o l l e d by s t a t u t o r y r e g u l a t o r y bodies t h a t determine i n t e r a l i a , charges f o r s e r v i c e s as w e l l as the type o f s e r v i c e s t o be made a v a i l a b l e . T h e i r e n a b l i n g l e g i s l a t i o n tends t o r e q u i r e "non- d i s c r i m i n a t o r y " c o n t r a c t u a l p r o v i s i o n s w i t h customers and t h a t the r a t e s charged be " j u s t and r e a s o n a b l e " . 9 4 Economic C o u n c i l Of Canada, R e s p o n s i b l e R e g u l a t i o n : An I n t e r i m Report ( M i n i s t e r o f Supply and S e r v i c e s Canada, 1979) a t 46. Economic C o u n c i l o f Canada, R e g u l a t i o n Reference: A P r e l i m i n a r y Report (1978) a t 20. T.G. Kane, Consumers and the Re g u l a t o r s (The I n s t i t u t e f o r Research on P u b l i c P o l i c y : M o n t r e a l , 1980) a t 3; see f o r example: s.321, Railway Act, R.S.C. 1970, c.R-2 as am. 30 One of the most c o m p e l l i n g reasons i n support of u t i l i t i e s r e g u l a t i o n i s the p r e v e n t i o n o f d i s c r i m i n a t i o n i n p r i c i n g and p r o v i s i o n o f s e r v i c e s . B r oadly speaking: " S o c i a l norms of f a i r n e s s may be v i o l a t e d when i n d i v i d u a l s are s u b j e c t t o d i f f e r e n t ( d i s c r i m i n a t o r y ) treatment. P r i c e d i s c r i m i n a t i o n , i n e f f e c t , i s a form of income r e d i s t r i b u t i o n r e s u l t i n g from the a b i l i t y o f the s e l l e r t o separate consumers i n t o d i f f e r e n t c l a s s e s based on d i f f e r e n t i n t e n s i t i e s o f p r e f e r e n c e ( e l a s t i c i t y o f demand). 9 5 The e x t e n t o f d i s c r i m i n a t i o n i n the p r o v i s i o n o f s e r v i c e s by Canadian n a t u r a l gas u t i l i t i e s i s b e l i e v e d t o be a c o n t r o v e r s i a l q u e s t i o n . I t i s a l s o a p r o b l e m a t i c one which deserves a l a r g e r treatment than t h i s overview of u t i l i t i e s r e g u l a t i o n can p r o v i d e . Hence i t s r a m i f i c a t i o n s a re e l a b o r a t e d below, both i n a p h i l o s o p h i c a l sense and l a t e r , with a p p l i c a t i o n t o changes i n the i n d u s t r y . Another r a t i o n a l e f o r r e g u l a t i o n i s i t s use "as a proxy f o r f i s c a l p o l i c y " . 9 6 T h i s f r e q u e n t l y occurs i n the c r o s s - s u b s i d i z a t i o n o f s e r v i c e s where r e g u l a t o r s a l l o w c e r t a i n p r i c e s t o be o f f e r e d below t h e i r a c t u a l c o s t , o n l y t o be o f f s e t by o t h e r s e r v i c e s p r o v i d e d above c o s t . 9 7 An analogy t o t h i s l a t t e r reason may be seen w i t h the system of uniform postage stamp r a t e s which comprise the same p r i c e r e g a r d l e s s of whether a l e t t e r i s intended f o r a nearby l o c a t i o n o r f o r a d i s t a n t one. C r o s s - s u b s i d i z a t i o n i s an e f f e c t i v e t o o l t h a t R e g u l a t i o n Reference:A P r e l i m i n a r y Report, supra note 93. G.B. Doern, "Regulatory Processes and Re g u l a t o r y A g e n c i e s , " i n G.B. Doern and P.Aucoin (ed s . ) , P u b l i c P o l i c y i n Canada (Macmillan:Toronto,1979) 158 a t 164. Id. 31 p r o v i d e s a b a s i c l e v e l o f s e r v i c e t o a l l persons w i t h i n a p a r t i c u l a r j u r i s d i c t i o n , having been d e s c r i b e d by one commentator t o be " t a x a t i o n by r e g u l a t i o n " . 9 8 Economic reasons f o r r e g u l a t i o n are not n e c e s s a r i l y the s o l e c r i t e r i a s i n c e Canada has committed i t s e l f t o w e l l known r e g u l a t o r y measures f o r non-economic reasons such as c u l t u r a l o r s o c i a l concerns. H i s t o r i c a l l y , the b u i l d i n g of t h i s n a t i o n was a t l e a s t p a r t l y achieved through r e g u l a t o r y support f o r the Canadian P a c i f i c Railway t o c r e a t e a t r a n s c o n t i n e n t a l r a i l r o a d , and the implementation of p r o t e c t i v e t r a d e t a r i f f s t o f o s t e r the nascent manufacturing i n d u s t r y . In contemporary Canada these o b j e c t i v e s may be i l l u s t r a t e d i n the b r o a d c a s t i n g i n d u s t r y . The Canadian Radio and T e l e v i s i o n Commission has a mandate t o promote c r e a t i v e Canadian content t h e r e , 9 9 even though i t s success i n p r e s e r v i n g the e l u s i v e Canadian i d e n t i t y remains d o u b t f u l . Other i n d u s t r i e s have been s u b j e c t e d t o s o c i a l p o l i c y o b j e c t i v e s b e s i d e s the communication i n d u s t r y . These o b j e c t i v e s are not s t a t i c but can change over time as i s shown by the case o f r a i l w a y r a t e s i n Canada. From 1886 u n t i l the Railway A c t of 1903, c o n t r o l over r a t e s was v e s t e d i n a f e d e r a l c a b i n e t sub-committee which was c a l l e d the Railway Committee of the P r i v y C o u n c i l . The A c t c r e a t e d the Board of Railway Commissioners as the body w i t h the r e q u i s i t e "detached 9F 99 R.A. Posner, " T a x a t i o n By R e g u l a t i o n , 1 1 (1971) 2 B e l l J o f Econ. & Management Sc i e n c e a t 22-50. R e s p o n s i b l e R e g u l a t i o n supra note 92 a t 52. professionalism"- 1- necessary f o r the d a i l y s u p e r v i s i o n of the r a i l w a y s . I t was consumed i n t u r n by the Canadian T r a n s p o r t Commission (CTC) pursuant t o the 1967 N a t i o n a l T r a n s p o r t a t i o n A c t which r e c o g n i s e d the d i v e r s i t y and growth i n the v a r i o u s n a t i o n a l t r a n s p o r t a t i o n systems. The CTC was accorded e x t e n s i v e a d v i s o r y and p o l i c y f u n c t i o n s t o compliment i t s . • 1 0 1 s t r i c t r e g u l a t o r y c a p a c i t y . U J- A t t e n t i o n was s h i f t e d t o the n a t i o n a l t r a n s p o r t a t i o n system as a v i a b l e economic e n t e r p r i s e from the p r e v i o u s emphasis on i t as an instrument used p r i m a r i l y t o promote n a t i o n a l p o l i c y o b j e c t i v e s . 1 0 2 Hence the f u n c t i o n of r e g u l a t i o n i s s u b j e c t t o change w i t h the e f f l u x i o n of time and w i t h s o c i a l , economic and p o l i t i c a l v i c i s s i t u d e s . For i n s t a n c e , concern over t r a d e and commerce, f o r e i g n t a k e - o v e r s o f Canadian b u s i n e s s e s and new b u s i n e s s e s c o n t r o l l e d by non-Canadians, r e s u l t e d i n the c r e a t i o n of the F o r e i g n Investment Review Agency (FIRA) i n 1973 by the former L i b e r a l government l e d by Mr. Trudeau. The r e l a t i v e economic n a t i o n a l i s m and s t r i n g e n t c r i t e r i a o f t h a t f e d e r a l agency was superseded by a new agency, Investment Canada, c r e a t e d i n 1985 by the P r o g r e s s i v e C o n s e r v a t i v e government headed by Mr. Mulroney. P a r l i a m e n t a r y a t t i t u d e s c o n c e r n i n g the d i r e c t r e g u l a t i o n o f f o r e i g n investments had been a f f e c t e d i n t e r a l i a , by an economic r e c e s s i o n , as w e l l as c r i t i c i s m from H.N. J a n i s c h , "The Role Of The Independent Reg u l a t o r y Agency i n Canada" (1978) 27 U.N.B.L.J 83 a t 90, 89-94. Id- R e s p o n s i b l e R e g u l a t i o n supra note 92 a t 52. TuTF 101 102 33 i n t e r n a t i o n a l f i n a n c i e r s and the U n i t e d S t a t e s ' government. u Under the c a p i t a l i s t i d e o l o g y of the p r e s e n t government, "Canada i s open f o r b u s i n e s s a g a i n " , 1 0 4 t a c i t a l l y i m p l y i n g t h a t p r e v i o u s r e g u l a t o r y measures had i n h i b i t e d b u s i n e s s . Changes i n the the p o l i t i c a l c omposition of the government thus tend t o i n v o l v e t i n k e r i n g w i t h the r e g u l a t o r y framework. P o l i t i c a l l y , i t i s a l e g i t i m a t e way i n which t o d i r e c t l y c o e r c e d e s i r e d behaviour from i n d i v i d u a l s . A f t e r a l l , r e g u l a t i o n i s "one instrument of governing from a range of o t h e r i n s t r u m e n t s " . 1 0 5 I t i s a powerful instrument whose pro c e s s can i n c l u d e the r e n d e r i n g of p o l i c y a d v i c e , r e s o l u t i o n of d i s p u t e s , the conduct of s p e c i a l i z e d r e s e a r c h and the a d m i n i s t r a t i o n of s u b s i d i e s . Advantages may be o b t a i n e d from th e d e l e g a t i o n of r e s p o n s i b i l i t i e s t o a s o - c a l l e d q u a s i - independent r e g u l a t o r y board i n s t e a d o f having the same f u n c t i o n s performed by r e g u l a r government departments. The government can c o n t r o l the r e g u l a t o r y body's mandate without b e i n g as c l o s e l y bound by the d o c t r i n e of m i n i s t e r i a l r e s p o n s i b i l i t y f o r the r e g u l a t o r y d e c i s i o n s . 1 0 6 The d o c t r i n e i s one of a c c o u n t a b i l i t y t o P a r l i a m e n t based upon n o n - l e g a l p o l i t i c a l c onventions. Canadian r e g u l a t o r y h i s t o r y d i s p l a y s : E . J . A r n e t t , "From FIRA To Investment Canada" (1985) 24 A l t a . L.Rev. 1 a t 1-3. See "Notes f o r a speech by the Prime M i n i s t e r t o the members of the Economic Club of New York, December 10, 1984". Doern, supra note 96 a t 160. I d . a t 172-174. 34 "a c o n s t a n t process of working out the t e n s i o n s i n h e r e n t t o our commitment t o p a r l i a m e n t a r y r e s p o n s i b i l i t y and the need f o r r e g u l a t o r y t r i b u n a l s which f a l l t o some degree o u t s i d e the sphere of immediate p o l i t i c a l c o n t r o l " . 1 0 7 In the U n i t e d S t a t e s , r e g u l a t o r y agencies are seemingly more independent than the Canadian model. Congress overviews t h e i r f u n c t i o n and may frame l e g i s l a t i o n t o r e v e r s e t h e i r d e c i s i o n s , y e t they are otherwise d i s t a n c e d from c o n g r e s s i o n a l c o n t r o l . The P r e s i d e n t doesn't c o n t r o l or d i r e c t them s i n c e they are not p a r t o f the e x e c u t i v e branch o f g o v e r n m e n t . 1 0 8 More p u b l i c a c c o u n t a b i l i t y accrues t o the Canadian c a b i n e t f o r t h e i r behaviour than accrues t o the American c a b i n e t because of the d i f f e r e n t government h i e r a r c h i e s . D e s p i t e the b e n e f i t s of u t i l i t i e s r e g u l a t i o n , c e r t a i n problems have been i d e n t i f i e d by c r i t i c s o f the p r o c e s s . The b e n e f i t s may be outweighed by the c o s t s r e l a t e d t o the a d m i n i s t r a t i o n of r e g u l a t o r y programmes. Cost a n a l y s i s and e f f e c t i v e r e g u l a t i o n i s s a i d t o be i m p r a c t i c a b l e due t o the enormous s i z e o f some u t i l i t i e s . A d a p t a t i o n t o market or t e c h n o l o g i c a l changes has caused problems i n a d d i t i o n t o the concern t h a t p r i v a t e i n t e r e s t s may unduly i n f l u e n c e t h e i r nominal r e g u l a t o r s . U 3 Furthermore, some p u b l i c f i n a n c e commentators a l l e g e t h a t government i n t e r v e n t i o n i n g e n e r a l , J a n i s c h , supra note 100 a t 87. I d . a t 87-91. G.B. Reschenthaler, "Regulatory f a i l u r e and c o m p e t i t i o n " (1976) 19 Canadian P u b l i c A d m i n i s t r a t i o n 466 a t 470-471. 35 and r e g u l a t o r y agencies i n p a r t i c u l a r , w i l l not f a i r e b e t t e r i n the event of the c o m p e t i t i v e market f a i l i n g . 1 1 0 A p e r n i c i o u s aspect of r e g u l a t i o n has been i d e n t i f i e d as i t s i n c l i n a t i o n t o s t i f l e t he c o m p e t i t i o n which c o u l d otherwise c h a l l e n g e the r e g u l a t e d monopolies. An American commentator suggests t h a t the detriments of a n a t u r a l monopoly are exagerated and t h a t r e g u l a t i o n has an adverse s o c i a l and economic i m p a c t . 1 1 1 I t i s n e v e r t h e l e s s submitted t h a t the r e g u l a t o r y p r o c e s s i s worthwhile d e s p i t e i t s d e f i c i e n c i e s , e s p e c i a l l y i n Canada which has a more l i m i t e d economy than i t s nei g h b o u r i n g economic l e v i a t h a n . Perhaps one o f the l e a d i n g problems w i t h p u b l i c u t i l i t y r e g u l a t i o n i s i n i t s attempt t o l e v y e q u i t a b l e p r i c e s t o customers f o r s e r v i c e s rendered. 3.4 RATE DETERMINATION AND DISCRIMINATION N a t u r a l gas u t i l i t i e s r e g u l a t i o n i s thought t o be a s u b s t i t u t e f o r the i n v i s i b l e hand and c o m p e t i t i v e p r i c e s of the f r e e market. The r e g u l a t o r y p r o c e s s n o r m a l l y achieves t h i s g o a l by dete r m i n i n g the c o s t of the s e r v i c e t o be p r o v i d e d by the r e g u l a t e d f i r m . These c o s t s are es t i m a t e d f o r a p a r t i c u l a r p e r i o d and they may comprise the expenses i n h e r e n t i n running the b u s i n e s s , such as d e p r e c i a t i o n , p l a n t , f i n a n c i n g , l a b o u r and ot h e r o p e r a t i n g c o s t s . A maximum r a t e s c a l e i s then s e t which s i m u l t a n e o u s l y a l l o w s enough revenue 1 1 0 B~! L e s s e r , "Comments on 'Regulatory f a i l u r e and c o m p e t i t i o n ' by G.B. Reschenathaler" (1977) 20 Canadian P u b l i c A d m i n i s t r a t i o n 389. 1 1 1 R.A. Posner, " N a t u r a l Monopoly and I t s R e g u l a t i o n , " (1969) 21 Stan.L.Rev. 548 a t 635-636. 36 t o be generated from the u t i l i t i e s ' customers p l u s a reas o n a b l e p r o f i t . 1 1 2 P u b l i c u t i l i t y r a t e s have s e v e r a l important f u n c t i o n s . T h e i r r o l e i n c l u d e s the s e t t i n g o f charges t h a t a l l o w a f a i r r a t e o f r e t u r n from the venture so t h a t the company i s i n a p o s i t i o n t o a t t r a c t f u r t h e r c a p i t a l f o r expansion. These charges t r y t o promote an e f f i c i e n t p r i c e through lower p r o d u c t i o n c o s t s , i n s u b s t i t u t i o n f o r the way i n which c o m p e t i t i o n encourages e f f i c i e n t p r i c i n g . Consumer demand may be p u r p o s e f u l l y i n f l u e n c e d by the d e s i g n o f r a t e s . A w e l l s t r u c t u r e d d e s i g n a d j u s t s the p r i c e s and i m i t a t e s the the adjustment i n a c o m p e t i t i v e market where demand i s g e n e r a l l y expected t o i n c r e a s e w i t h lower r a t e s o r c o n v e r s e l y l e s s e n w i t h h i g h e r r a t e s . 1 1 3 Inherent t o these f u n c t i o n s i s the d e s i r e t o ec o n o m i c a l l y p r o v i d e a community w i t h adequate u t i l i t y s e r v i c e . A f o u r t h , d i s t i n c t f u n c t i o n o f u t i l i t i e s r a t e s has the g o a l of t r a n s f e r r i n g p u r c h a s i n g power or r e d i s t r i b u t i n g income from the consumers t o the u t i l i t y company, and e v e n t u a l l y t o i t s s h a r e h o l d e r s and c r e d i t o r s . 1 1 4 However, the standar d used t o determine t h i s f u n c t i o n i s not e n t i r e l y based on f i s c a l c r i t e r i a s i n c e customers do not s o l e y pay f o r what they consume. V a r i o u s socio-economic and p o l i t i c a l f a c t o r s tend t o i n f l u e n c e the pr o c e s s and induce one c l a s s o f u t i l i t y u s e r s t o TTT S.B. Bryer & R.B. Stewart, A d m i n i s t r a t i v e Law and Re g u l a t o r y P o l i c y (2nd ed., L i t t l e , B r o w n & Co.:Boston, 1985) a t 223-224. 1 1 3 Bonbright, supra note 89 a t 49-58. 1 1 4 I d . a t 59. 37 s u b s i d i z e the c o s t s of another c l a s s . For example, income r e d i s t r i b u t i o n may occur when r e s i d e n t i a l r a t e s are more i n e l a s t i c than those of i n d u s t r i a l u s e r s . Although the c o s t o f s e r v i c e f o r i n d u s t r i a l u s e r s as a c l a s s may be l e s s than f o r r e s i d e n t i a l u s e r s , i t has been argued t h a t the former c l a s s s h o u l d pay h i g h e r r a t e s . 1 1 5 A c c o r d i n g l y , i t i s the duty of r e g u l a t o r y t r i b u n a l s to determine whether t h i s type of b i a s c o n s t i t u t e s undue or u n j u s t d i s c r i m i n a t i o n . One way o f answering t h i s q u e s t i o n i s t o c o n s i d e r the s o c i a l and economic e f f e c t s of v a r i o u s r a t e d e s i g n s t h a t s e t d i s c r i m i n a t o r y p r i c e s . I t i s p o s s i b l e t o g i v e a p r i c e advantage t o a c e r t a i n customer c l a s s and i n h i b i t them from s w i t c h i n g t o another energy source w h i l e a t the same time c o n t r i b u t i n g t o the o v e r a l l maintenance of the system thereby b e n e f i t t i n g those who pay h i g h e r p r i c e s . In o r d e r t o c a l c u l a t e the maximum r a t e s t h a t a u t i l i t y may l e v y , i t i s necessary t o f i r s t determine i t s o p e r a t i n g expenses and r a t e base. A f i r m ' s r a t e base i s the v a l u e of i t s f a c i l i t i e s and c a p i t a l investments and a s s e t s employed i n r e n d e r i n g the s e r v i c e . T h i s f i g u r e i s m u l t i p l i e d by another parameter c a l l e d the r a t e of r e t u r n which i s a percentage of the former f i g u r e . The product of the e q u a t i o n i s the amount or a l l o w a b l e r e t u r n t h a t a r e g u l a t e d monopoly w i l l be p e r m i t t e d t o earn and by i m p l i c a t i o n , pass on t o i n v e s t o r s i n J.P. Tomain, Energy Law In A N u t s h e l l (West:St. Paul, 1981) a t 111, 116. 38 the c o n c e r n . 1 1 6 Thus a major i s s u e i n r e g u l a t o r y h e a r i n g s i s the e q u i t a b l e e v a l u a t i o n o f the c a p i t a l used i n the venture. U n l i k e Canada, the U n i t e d S t a t e s has p r o v i s i o n s i n i t s c o n s t i t u t i o n p r o t e c t i n g p r o p e r t y r i g h t s , and these have p r e s e n t e d unique c o n s t i t u t i o n a l c h a l l e n g e s r e g a r d i n g the method of e v a l u a t i n g a f i r m ' s r a t e base. There, an e a r l y a p p e l l a t e d e c i s i o n h e l d t h a t owners of p r i v a t e p r o p e r t y were p r o t e c t e d from r a t e r e g u l a t i o n t h a t had the e f f e c t of e x p r o p r i a t i n g i t without j u s t compensation o r without due pr o c e s s under the F i f t h and Fourteenth Amendments. The maximum r a t e s were based upon the " f a i r v a l u e " t e s t t h a t i n c l u d e d r e f e r e n c e t o the pr e s e n t replacement c o s t o f the pr o p e r t y , the o r i g i n a l c o n s t r u c t i o n c o s t s l e s s d e p r e c i a t i o n , the market v a l u e of i t s s t o c k s and bonds, as w e l l as the esti m a t e d e a r n i n g c a p a c i t y under p a r t i c u l a r s t a t u t o r y r a t e s . 1 1 7 Most s t a t e s do not con t i n u e t o f o l l o w t h i s r a t e base e v a l u a t i o n method which i s i t s e l f a compromise between two oth e r competing t e s t s . The U n i t e d S t a t e s Supreme Court no lo n g e r r e q u i r e s a d e t a i l e d r a t e base formulae p r e d i c a t e d upon the " f a i r v a l u e " t e s t . The p r e v a i l i n g r u l e s t a t e s t h a t i t " i s the r e s u l t reached and not the method employed" t h a t i s the main f a c t o r i n deter m i n i n g " j u s t and reas o n a b l e r a t e s " . 1 1 8 P r e s e n t l y , the matter i n v o l v e s economics and the s e l e c t i o n o f l b A.J.G. P r i e s t , P r i n c i p l e s Of P u b l i c U t i l i t y R e g u l a t i o n (Miche: C h a r l o t t e s v i l l e , 1969, v o l s . l & 2) a t 138-142. 1 1 7 Smvth v. Ames 169 U.S. 466 (1898) per H a r l a n J . 1 1 8 FPC v. Hope N a t u r a l Gas Co. 320 U.S 591, 601-603 (1944) per Douglas J . 39 a formula t o cope w i t h the e f f e c t o f i n f l a t i o n on a s s e t s . One way i s t o determine the r e p r o d u c t i o n c o s t of i n s t a l l i n g equipment, but t h i s technique can r e s u l t i n a book va l u e g r e a t e r than the o r i g i n a l c o s t s . The f e d e r a l r e g u l a t o r y commissions and most s t a t e commissions espouse the c a l c u l a t i o n o f the o r i g i n a l c o s t of a s s e t s l e s s d e p r e c i a t i o n even though i t may tend t o lower the book v a l u e s . 1 1 9 When viewed mathematically, the r a t e l e v e l of a f i r m may be expressed as i t s o p e r a t i n g expenses p l u s , i t s r a t e base as m u l t i p l i e d by the percentage f i g u r e termed r a t e of r e t u r n . A r a t e l e v e l does not comprise the s p e c i f i c r a t e s t h a t w i l l be l e v i e d nor t h e i r i n t e r - r e l a t i o n s h i p as t h i s parameter i s found i n the r a t e s t r u c t u r e . T h i s l a t t e r concept i s a l s o r e f e r r e d t o as r a t e d e s i g n , and i t a p p o r t i o n s t h e s p e c i f i c r a t e s t h a t are chargeable t o v a r i o u s c a t e g o r i e s of c u s t o m e r s . 1 2 0 The o b j e c t i v e of a u t i l i t i e s ' r a t e s t r u c t u r e i s t o meet i t s f i n a n c i a l needs, y e t d i s t r i b u t e t h i s burden e q u i t a b l y amongst i t s customers, w h i l e d i s c o u r a g i n g waste o f the s e r v i c e and encouraging o p t i m a l use. Other c r i t e r i a i n c l u d e r a t e s t h a t are simple, understandable, p u b l i c l y a c c e p t a b l e and t h a t eschew undue d i s c r i m i n a t i o n . 1 2 1 But these c r i t e r i a o f t e n r e p r e s e n t c o n f l i c t i n g e x i g e n c i e s . I n e v i t a b l y , the r a t e s t r u c t u r e r e p r e s e n t s a compromise among these f a c t o r s and i t can be r e s t r u c t u r e d from time t o time t o a l t e r the d i s t r i b u t i o n of the system's b e n e f i t s . l l y L.W. Weiss & A . D . S t r i c k l a n d , Regulation:A Case Approach (McGraw-Hill:New York, 1976) a t 16. 1 2 0 Tomain, supra note 115 a t 112-115. 1 2 1 Bonbright, supra note 89 a t 291-293. 40 I n d i v i d u a l r a t e s i n v o l v e the s u b j e c t of microeconmics and the r e l a t i o n s h i p between marginal c o s t and p r i c e . M a r g i n a l c o s t i s t h a t c o s t i n c u r r e d from the p r o d u c t i o n of another i n c r e m e n t a l u n i t or a l t e r n a t i v e l y the s a v i n g s gained by a v o i d i n g p r o d u c t i o n of t h a t commodial u n i t . Given t h a t the economy has a f i n i t e c a p a c i t y f o r p r o d u c t i o n a t any one time, an o p p o r t u n i t y c o s t " f o r the a l t e r n a t i v e s t h a t must be f o r g o n e " 1 2 2 e x i s t s from the c h o i c e t o produce more o r l e s s of a p a r t i c u l a r s e r v i c e or good. By the f a c t o f p r o d u c i n g more of one p a r t i c u l a r s e r v i c e , s o c i e t y makes a c o r o l l a r y d e c i s i o n t o produce l e s s o f another. A r a t e s t r u c t u r e s h o u l d r e f l e c t m a r g i n a l c o s t s i f consumers are t o make i n t e l l i g e n t purchase d e c i s i o n s s i n c e demand f o r more o r l e s s of an item must r e f l e c t the supply c o s t of more o r l e s s . 1 2 3 M a r g i n a l c o s t s i n v o l v e the v a r i a b l e p r o d u c t i o n expenses t h a t p e r t a i n t o a t o a p a r t i c u l a r s e r v i c e or item, such as a widget. The d i r e c t p r o d u c t i o n expenses contemplated by the m a r g i n a l c o s t formula i s d i s t i n g u i s h e d from the o v e r a l l p r o d u c t i o n o r c o n s t a n t c o s t s which are not a f f e c t e d by a d d i t i o n a l o r reduced widget p r o d u c t i o n . The l a t t e r c o s t s are of a f i x e d c h a r a c t e r because they are not dependent on nor p r o p o r t i o n a t e t o v a r i a t i o n s i n output. They are sometimes r e f e r r e d t o as as j o i n t c o s t s and may i n c l u d e the i n d i r e c t and n o n - a t t r i b u t a b l e c o s t s of two o r more types of n a t u r a l gas T2~Z 123 A.E. Kahn, The Economics of R e g u l a t i o n : P r i n c i p l e s and I n s t i t u t i o n s (John Wiley & Sons:New York, 1970) V o l . 1 a t 66. Id. a t 65-66. 41 s e r v i c e t o v a r i o u s c l a s s e s o f customers from one p i p e l i n e s y s t e m . 1 2 4 Rate s t r u c t u r e s i n use have tended t o a v o i d the f u l l y d i s t r i b u t e d o r average c o s t measurement i n the s e t t i n g of r a t e s , even though i t p r o v i d e s a s t r a i g h t f o r w a r d mechanism t h a t can y i e l d the r e q u i r e d aggregate revenue f o r a f i r m . One disadvantage of the method i s i t s r e l a t i v e l y a r b i t r a r y a l l o c a t i o n o f j o i n t c o s t s among customers. M a r g i n a l c o s t r a t e - s e t t i n g appears more d e s i r a b l e due t o i t s e f f i c i e n c y i n the a l l o c a t i o n o f r e s o u r c e s . N e v e r t h e l e s s , m a r g i n a l c o s t p r i c i n g i s d i f f i c u l t t o apply t o a r e g u l a t e d n a t u r a l monopoly because i t doesn't a l l o w f o r the r e c o v e r y o f f i x e d c o s t s when these are h i g h and the marginal c o s t s are v e r y s m a l l . Some elements o f mar g i n a l c o s t p r i c i n g may be used i n the r a t e schedule i n o r d e r t o e l i c i t more customers thereby keeping the o v e r a l l c o s t s down, however i t can not be used as the s o l e p r i c i n g c r i t e r i o n . Furthermore, i t i s not easy t o c a l c u l a t e t h i s parameter s i n c e r e g u l a t e d f i r m s u s u a l l y s e t " d i f f e r e n t p r i c e s f o r d i f f e r e n t c l a s s e s o f customers, d i f f e r e n t amounts of s e r v i c e purchased" and d i f f e r e n t time p e r i o d s . 1 2 6 Components of n a t u r a l gas m a r g i n a l - c o s t r a t e s i n c l u d e charges f o r the volume o f gas purchased, and f i x e d a d m i n i s t r a t i o n c o s t s such as c o n n e c t i o n and metering. These r a t e s a l s o p r o p o r t i o n a l l y 1 2 4 W.K. J o n e s f Cases And M a t e r i a l s On Regulated I n d u s t r i e s (2nd ed., The Foundation Press I n c . r M i n e o l a N.Y., 1976) a t 191-195. 1 2 5 G e l l h o r n & P i e r c e supra note 88 a t 194-197. 1 2 6 Weiss & S t r i c k l a n d , supra note 119 a t 18. 42 comprise the n a t u r a l gas p l a n t c o s t s i n c u r r e d i n p r o v i d i n g s e r v i c e c a p a c i t y t o the customer a t peak p e r i o d s such as w i n t e r - t i m e when demand i s g r e a t e r than i n summer. 1 2 7 Hence, a p e r v a s i v e c r i t e r i o n of p u b l i c u t i l i t y r a t e s i s t h a t they cover the " v a l u e - o f - t h e - s e r v i c e " . 1 2 8 The d i f f i c u l t y i n a r r i v i n g a t t h i s v a l u e i s the s u b j e c t of p u b l i c r e g u l a t o r y h e a r i n g s where i n t e r v e n o r s r e g u l a r l y u t i l i s e complex socio-economic and f i n a n c i a l data t o advocate the p o s i t i o n of t h e i r r e s p e c t i v e i n t e r e s t groups. Much e f f o r t i s d i r e c t e d t o the examination o f t e c h n i c a l data i n an attempt t o t e a s e out p r o o f of undue d i s c r i m i n a t i o n . A d m i t t e d l y , d i s c r i m i n a t i o n can not be prevented e n t i r e l y as shown by the d i s p r o p o r t i o n a l c o n t r i b u t i o n t o aggregate revenues made by the d i v e r g e n t r a t e s of d i f f e r e n t customer groups. Once a l l the c o n s i d e r a t i o n s are made, d i s c r i m i n a t i o n may indeed be s o c i a l l y d e s i r a b l e , such as t o d i s t r i b u t e gas under postage st a m p - l i k e r a t e s even when a c o s t a n a l y s i s made between c i t y and country u s e r s does not j u s t i f y i t . 1 2 9 R e g u l a t o r s must t h e r e f o r e d e c i d e when the a n a l y s i s as a whole j u s t i f i e s d i s c r i m i n a t i o n and under what circumstances i t does not. M a r g i n a l cost-based r a t e s are not the o n l y a l t e r n a t i v e t o f u l l y - d i s t r i b u t e d r a t e s . C e r t a i n d i s c r i m i n a t o r y r a t e s , b l o c k r a t e s or m u l t i p a r t r a t e s e x i s t y e t they do not have " a l l of the c o n s u m e r - r a t i o n i n g advantages of u n - q u a l i f i e d m a r g i n a l - Tfl Id. a t 20-21. 1 2 8 P r i e s t , supra note 116 a t 337. 1 2 9 Id. a t 344-345. 43 c o s t p r i c i n g . 130 While m a r g i n a l - c o s t r a t e s may be t h e o r e t i c a l l y more e f f i c i e n t i n the s h o r t run, they must be q u a l i f i e d by the e x p e c t a t i o n of consumers t h a t u t i l i t y r a t e s w i l l remain s t a b l e f o r a r e l a t i v e l y l o n g time. A c c o r d i n g l y , some r e g u l a t o r y commentators and economists b e l i e v e t h a t a r a t e d e s i g n should be based on p e r s i s t e n t or long-run marginal c o s t s . They argue t h a t s t a b i l i t y i n r a t e s would be encouraged but acknowledge the i n h e r e n t problems i n e s t i m a t i n g c o s t f u n c t i o n s f o r twenty y e a r s or more, and t h e long-term marginal c o s t assumption t h a t the output r a t e w i l l be enhanced i n d e f i n i t e l y f o l l o w i n g an i n c r e a s e i n p l a n t c a p a c i t y . 1 3 1 D i s s a t i s f a c t i o n w i t h s t r i c t l o n g -run o r s h o r t - r u n m a r g i n a l - c o s t p r i c i n g has r e s u l t e d i n the use o f a n o t a b l e r a t e s e t t i n g t e c h nique. T h i s p o p u l a r a l t e r n a t i v e d e r i v e s from j o i n t c o s t s i n c u r r e d by n a t u r a l gas u t i l i t i e s i n the c a p i t a l i n t e n s i v e c o n s t r u c t i o n of p i p e l i n e s , compressor s t a t i o n s , and a c q u i r i n g o f r i g h t s of way. Although t h e i r f i x e d overhead c o s t s are r e l a t i v e l y h i g h , t h e i r i n c r e m e n t a l c o s t s are r e l a t i v e l y low. "In such an i n d u s t r y , p r i c e s s e t t o equal t o the i n c r e m e n t a l c o s t of i n c r e a s i n g p r o d u c t i o n or s e r v i c e s by another u n i t w i l l not earn enough revenue t o cover f i x e d overhead c o s t s , . . . A l o n g run p o l i c y o f i n c r e m e n t a l or marginal c o s t p r i c i n g w i l l t h e r e f o r e not be p o s s i b l e i n such an i n d u s t r y . " 1 3 2 In o r d e r t o pay the the s o - c a l l e d wages o f c a p i t a l , and i n o r d e r t o minimize the i n e f f i c i e n c y , r e g u l a t o r s advocate T3TJ 131 132 Bonbright, supra note 89 a t 395. Id. 400-402, 319. B r y e r & Stewart, supra note 112 a t 514. 44 d i s c r i m i n a t o r y p r i c e s among v a r i o u s customer c l a s s e s a c c o r d i n g t o a s t r u c t u r e t h a t i s the i n v e r s e o f the normal demand e l a s t i c i t y curve. For example, n a t u r a l gas u t i l i t i e s might s e t s e t low r a t e s f o r i n d u s t r i a l u s e r s because such customers may switch t o a l t e r n a t i v e competing f u e l s i f gas i s p r i c e d a t a h i g h e r r a t e . D e s p i t e making an allowance f o r the a c t u a l c o s t s i n s e r v i n g d i v e r g e n t c l a s s e s o f customers, h i g h e r r a t e s are u s u a l l y l e v i e d t o r e s i d e n t i a l and commercial customers because t h e i r demand i s l e s s e l a s t i c . 1 3 4 S i n c e t h e s e c l a s s e s of customers p l a c e a g r e a t e r v a l u e on gas s e r v i c e , they pay a h i g h e r share of the f i x e d c o s t s than do i n d u s t r i a l u s e r s who p l a c e a l e s s e r v a l u e on the s e r v i c e . Given the i n a b i l i t y of i n c r e m e n t a l c o s t s t o cover average c o s t s (due t o h i g h f i x e d c o s t s ) , the j u s t i f i c a t i o n f o r t h i s form of r e g u l a t o r y p r i c e d i s c r i m i n a t i o n i s t o minimise a l l o c a t i v e waste w h i l e r e c o v e r i n g o r pa y i n g f o r f i x e d i n v e s t m e n t . 1 3 5 P u b l i c u t i l i t i e s are o f t e n i n an environment o r economy of s c a l e t h a t f o s t e r s l o n g run d e c r e a s i n g c o s t s , w i t h the u n i t c o s t d e c r e a s i n g as t o t a l output i n c r e a s e s . 1 3 6 Thus another example of p r i c e d i s c r i m i n a t i o n t h a t has been j u s t i f i e d by r e g u l a t o r y agencies i s the t r a d i t i o n a l d e c l i n i n g b l o c k r a t e . T h i s s t r u c t u r e i n i t i a l l y charges customers a r a t e s u f f i c i e n t t o c over f i x e d c o s t s as w e l l a demand and customer c o s t s . I t i s designed t o pay f o r the e n t i r e s e r v i c e c o s t by both sma l l 134 135 136 I d . a t 516. Weiss & S t r i c k l a n d , supra 119 a t 22. Br y e r & Stewart, supra note 112 a t 515-516. Weiss & S t r i c k l a n d , supra note 119 a t 22-23. 45 and l a r g e u s e r s , y e t i t encourages g r e a t e r consumption by l o w e r i n g the r a t e s as more of the commodity i s u s e d . 1 3 7 Rate d i s c r i m i n a t i o n between c l a s s e s of customers i s t h e r e f o r e j u s t i f i e d i n many i n s t a n c e s due t o the economic e x i g e n c i e s of the n a t u r a l monopoly. F i n a l l y , the Canadian n a t u r a l gas u t i l i t i e s i n v a r i a b l y conduct d i s c r i m i n a t o r y p r a c t i c e s without b e i n g t a i n t e d by the c o n n o t a t i o n t h a t the word " d i s c r i m i n a t i o n " normally a f f o r d s . However, not a l l forms of d i s c r i m i n a t i o n i n e f f e c t are a c c e p t a b l e , and indeed some types may be p a t e n t l y u n f a i r t o c e r t a i n c l a s s e s of customers w h i l e u n j u s t l y b e n e f i t t i n g o t h e r s . R e g u l a t o r s have a duty t o i d e n t i f y and p r o h i b i t undue o r u n j u s t d i s c r i m i n a t i o n . The g o a l o f r e g u l a t i o n i s t o p r o v i d e maximum c o s t s a v i n g s t o a l l n a t u r a l gas u s e r s w h i l e f e r r e t i n g out i n s t a n c e s of undue p r i c e d i s c r i m i n a t i o n . U n f o r t u n a t e l y , such i n s t a n c e s may have been i n a d v e r t e n t l y exacerbated by the Canadian d e r e g u l a t i o n of p r i c e s f o r the commodity. A c c o r d i n g l y , a g e n e r a l d i s c u s s i o n of the d e r e g u l a t o r y p r o c e s s i s thought t o be necessary, i n o r d e r t o b e t t e r understand the e x t e n t of a l l e g e d undue d i s c r i m i n a t i o n i n the n a t u r a l gas i n d u s t r y . Tomain, supra note 115 a t 117-118. 46 4. DEREGULATION OF NATURAL GAS PRICING AND MARKETING REGIMES N a t u r a l gas p r i c e s i n Canada have been f r e e d from d i r e c t government c o n t r o l s i n c e October 1986. The impetus f o r t h i s l e g a l change has come from v a r i o u s i n d u s t r y i n t e r e s t s and c e r t a i n economic e x i g e n c i e s . T h i s impetus was f a c i l i t a t e d by the e l e c t i o n o f a P r o g r e s s i v e C o n s e r v a t i v e government i n 1984 which d i s m a n t l e d the i n t e r v e n t i o n i s t N a t i o n a l Energy Program of the former L i b e r a l government. N e v e r t h e l e s s , i t seems t h a t t h e long-term arrangements made under t h e former regime have l e f t a c o n t i n u i n g l e g a c y . T h i s l e g a c y has the p o t e n t i a l t o i n h i b i t t he a l t r u i s t i c free-market p r i n c i p l e s i n v o l v e d i n the commodity's p r i c e d e r e g u l a t i o n . 4.1 THE DEREGULATION PROCESS The p r i c i n g and marketing o f n a t u r a l gas i n Canada i s undergoing a remarkable pr o c e s s o f d e r e g u l a t i o n . T h i s process began i n March 1985 when the governments o f Canada, A l b e r t a , B r i t i s h Columbia and Saskatchewan r e c o g n i z e d the need f o r a more m a r k e t - o r i e n t e d n a t u r a l gas p r i c i n g mechanism thereby a g r e e i n g t o e s t a b l i s h the necessary market s e n s i t i v e r e g i m e . 1 3 8 However the c o n d i t i o n s r e q u i r e d f o r such a regime The Western Accord: An Agreement between the Governments o f Canada, A l b e r t a . Saskatchewan and B r i t i s h Columbia on O i l and Gas P r i c i n g and T a x a t i o n . March 28 1985. 47 were s e t f o r t h i n a separate document s i g n e d by the same p a r t i e s . On October 31, 1985, the intergovernmental Agreement on 1 TO N a t u r a l Gas P r i c e s and Markets was executed w i t h the express i n t e n t i o n t o c r e a t e a "more f l e x i b l e and market- o r i e n t e d " 1 4 0 regime f o r the domestic p r i c i n g o f Canadian n a t u r a l gas. The Agreement d e c l a r e d an i n t e n t t o : " f o s t e r a c o m p e t i t i v e market f o r n a t u r a l gas i n Canada, c o n s i s t e n t w i t h the r e g u l a t e d c h a r a c t e r of the t r a n s m i s s i o n and d i s t r i b u t i o n s e c t o r s of the gas i n d u s t r y " . In o t h e r words, the t r a n s m i s s i o n segment of the i n d u s t r y was not t o be d e r e g u l a t e d whereas the p r i c i n g o f n a t u r a l gas as a domestic commodity would be t o t a l l y d e r e g u l a t e d e f f e c t i v e November 1, 1 9 8 6 . 1 4 2 Subsequently, the p r i c e of n a t u r a l gas s o l d i n i n t e r p r o v i n c i a l t r a d e i s determined by n e g o t i a t i o n . S i g n i f i c a n t l y , the Agreement d i d not p u r p o r t t o derogate from Canada's c o n s t i t u t i o n a l a u t h o r i t y over i n t e r p r o v i n c i a l and i n t e r n a t i o n a l t r a d e . 1 4 3 A l s o p r o t e c t e d were the powers and a b i l i t i e s o f the p r o v i n c i a l s i g n a t o r i e s i n r e l a t i o n t o the ownership and management o f t h e i r n a t u r a l r e s o u r c e s . 1 4 4 The consuming p r o v i n c e s who were not s i g n a t o r i e s t o the Agreement were encouraged t o promote the e f f e c t i v e n e s s o f the market- TT9 - 140 141 142 143 144 Agreement Among The Governments Of Canada, A l b e r t a , B r i t i s h Columbia and Saskatchewan on N a t u r a l Gas Markets and P r i c e s . October 31, 1985; (the s o - c a l l e d Hallowe'en agreement). Id. Clause 1. Id. Clause 4. Id. Clause 2. Id. Clause 21. Id. Clause 22. 48 s e n s i t i v e gas p r i c i n g regime. They are e n j o i n e d t o enact l e g i s l a t i o n and d i r e c t t h e i r r e s p e c t i v e r e g u l a t o r y agencies i n o r d e r t o p r o v i d e consumers w i t h a l t e r n a t i v e supply sources, and d i s t r i b u t o r s w i t h g r e a t e r f l e x i b i l i t y i n p r i c e d e t e r m i n a t i o n . 1 4 5 N e v e r t h e l e s s , the e f f i c a c y o f the d e r e g u l a t o r y p r o c e s s seems t o be i n f l u e n c e d t o some ext e n t by the a f t e r e f f e c t s of the p r e v i o u s regime. N a t u r a l gas p r i c e s had p r e v i o u s l y been determined by market f o r c e s u n t i l the mid 1970's. The 1973 o i l embargo and p r i c e h i k e s by the O r g a n i z a t i o n of Petroleum E x p o r t i n g C o u n t r i e s (OPEC), as w e l l as i n c r e a s e d demand and "extreme upward p r e s s u r e " 1 4 6 on Canadian n a t u r a l gas p r i c e s caused the f e d e r a l government t o i n t e r v e n e d i r e c t l y i n t h e p r i c i n g of the r e s p e c t i v e commodities. The f e d e r a l government, through the N a t i o n a l Energy Board (NEB) r e g u l a t e d the export p r i c e of n a t u r a l gas which i n A p r i l 1977 was determined pursuant t o the s o - c a l l e d s u b s t i t u t i o n v a l u e method. T h i s r e l a t e d the p r i c e o f n a t u r a l gas exported t o the U n i t e d S t a t e s w i t h the c o s t of r e p l a c i n g crude o i l imported i n e a s t e r n C a n a d a . 1 4 7 On November 1, 1984, f e d e r a l export p o l i c y was r e v i s e d t o a l l o w e x p o r t s t o the U.S.A. a t n e g o t i a t e d p r i c e s . 1 4 8 IdL Clause 26. 1 4 P i p e l i n e Review Panel Report, A Review Of The Role And O p e r a t i o n s Of I n t e r p r o v i n c i a l And I n t e r n a t i o n a l P i p e l i n e s In Canada Engaged In The Buying;. S e l l i n g . And T r a n s m i s s i o n Of N a t u r a l Gas June 1986, a t 69. Id- Department of Energy Mines and Resources, Backgrounder document 85/162 (a) a t 1. 147 148 49 L e g i s l a t i o n 1 4 9 enacted i n June 1975 enabled the f e d e r a l government t o u n i l a t e r a l l y s e t domestic p r i c e s f o r petroleum or t o conclude p r i c i n g agreements w i t h the producing p r o v i n c e s . The t h r e a t o f these o v e r r i d i n g r e g u l a t o r y powers had the p r a c t i c a l e f f e c t o f keeping domestic o i l and gas p r i c e s a r t i f i c i a l l y low. A l b e r t a , the l a r g e s t producer i n Canada, countered w i t h s i m i l a r l e g i s l a t i o n 1 5 0 t h a t p e r m i t t e d the p r o v i n c e t o u n i l a t e r a l l y s e t the minimum A l b e r t a border p r i c e f o r gas s o l d o u t s i d e i t s t e r r i t o r y , o r a l t e r n a t i v e l y n e g o t i a t e a p r i c e w i t h the f e d e r a l government. U l t i m a t e l y , both s i d e s agreed upon the s o - c a l l e d "Toronto c i t y g a t e " A formula which was a whole-sale r e f e r e n c e p r i c e f o r commodity d e l i v e r i e s t h e r e , and which allowed f o r d e d u c t i o n of the p i p e l i n e c a r r i e r s ' t r a n s m i s s i o n charges i n o r d e r t o d e r i v e the producers' f i e l d p r i c e . From November 1, 1975 the p r i c e s of A l b e r t a n a t u r a l gas s o l d i n t e r p r o v i n c i a l l y were determined by agreements between Canada and A l b e r t a , and these p r i c e s were l i n k e d t o crude o i l p r i c e s . 1 5 2 F o l l o w i n g the 1984 d e f e a t of the L i b e r a l government headed by Mr. Trudeau, the p r e s e n t P r o g r e s s i v e C o n s e r v a t i v e government l e d by Mr. Mulroney was e l e c t e d w i t h a mandate t o d i s m a n t l e the i n t e r v e n t i o n i s t N a t i o n a l Energy P o l i c y of the former a d m i n i s t r a t i o n . When the 1985 c o l l a p s e i n the world market brought o i l p r i c e s t o approximately the same l e v e l as 1 4 y Petroleum A d m i n i s t r a t i o n Act, S . C , 1974-75-76, c.47. 1 5 0 N a t u r a l Gas P r i c e A d m i n i s t r a t i o n A c t , S.A. 1975, c.70; N a t u r a l Gas P r i c i n g Agreement Act, S.A., 1975 c.38. 1 5 1 P i p e l i n e Review Panel Report, supra note 146, a t 70. 1 5 2 Backgrounder, supra note 148. 50 the Canadian r e g u l a t e d p r i c e , an i d e a l c l i m a t e f o r d e r e g u l a t i o n of t h a t commodity arose s i n c e no d r a s t i c p r i c e i n c r e a s e would reach consumers and engender p o l i t i c a l o p p o s i t i o n . 1 5 3 Although the p r i c e o f Canadian crude o i l was d e r e g u l a t e d June 1, 1 9 8 5 , 1 5 4 the "Hallowe'en" Agreement on N a t u r a l Gas Markets and P r i c e s p r o v i d e d f o r a one year t r a n s i t i o n p e r i o d f o r gas s o l d d o m e s t i c a l l y . 1 5 5 The p e r i o d o f t r a n s i t i o n , November 1,1985 t o November 1, 1986 allowed f o r the p r e s c r i p t i o n of p r i c e s by the r e s p e c t i v e governments. Afterwards, the former benchmark A l b e r t a border p r i c e was e l i m i n a t e d by d e l e g a t e d l e g i s l a t i o n 1 5 6 which e f f e c t i v e l y implemented the market p r i c i n g regime. I n s t e a d of r e g u l a t e d producer p r i c e s , a netback p r i c i n g system was i n t r o d u c e d whereby: "producers r e c e i v e d the netback from t h e " (marketing arm o f TransCanada P i p e l i n e s Ltd.) "Western Gas Marketing (WGML)-distributor n e g o t i a t e d wholesale p r i c e s r p l l e d - i n w i t h the netback from export s a l e s . " 1 5 7 To3~ 154 155 156 157 A . J . Black, "Comparative L i c e n s i n g Aspects of Canadian and U n i t e d Kingdom Petroleum Law" (198 6) 21 Tex. I n t . L . J . 471 a t 492. The Western Accord, supra note 13 8 a t 3. N a t u r a l Gas Markets and P r i c e s Agreement, supra note 139 a t Clause 3. Order SOR/86-1049 dated October 30, 1986 which d e c l a r e d t h a t s s . 53-65 of the Energy A d m i n i s t r a t i o n A c t (Canada) d i d not apply t o any producer p r o v i n c e e f f e c t i v e November 1, 1986; and R e g u l a t i o n SOR/86-1050 dated October 30, 1986 which revoked the Energy A d m i n i s t r a t i o n Act, P a r t I I I R e g u l a t i o n s , CRC c.1261; and the A l b e r t a N a t u r a l Gas P r i c e s R e g u l a t i o n s , 1986 SOR/86-838, which were revoked e f f e c t i v e November 1, 1986. R. Hyndman, Impact of N a t u r a l Gas D e r e g u l a t i o n i n Producing P r o v i n c e s : A l b e r t a ( A l b e r t a Dept. of Energy:1987) a t 8. 51 T h i s system was intended t o g i v e producers an i n p u t by r e q u i r i n g t h e i r approval of s h i p p e r s * downstream n e g o t i a t e d netback p r i c e s . 1 5 8 During the t r a n s i t i o n p e r i o d b e f o r e complete d e r e g u l a t i o n , d i s t r i b u t o r s c o u l d e i t h e r make purchases from s h i p p e r s a t new or r e n e g o t i a t e d p r i c e s , or d i r e c t l y n e g o t i a t e purchases from producers p r o v i d i n g t h a t 1 5Q e x i s t i n g c o n t a c t s are honoured. The governments undertook not t o o b s t r u c t the r e s u l t i n g commercial t r a n s a c t i o n s f o r the p r i c e s under e x i s t i n g c o n t r a c t s which were r e q u i r e d t o be r e n e g o t i a t e d i n good f a i t h • i fin p r i o r t o November 1,1986. F a i l u r e t o r e n e g o t i a t e those c o n t r a c t s would r e s u l t i n the p r i c e b e i n g determined by a r b i t r a t i o n . 1 6 1 E f f e c t i v e November 1, 1985 consumers were p e r m i t t e d t o d i r e c t l y purchase from producers a t n e g o t i a t e d p r i c e s or i n d i r e c t l y v i a b u y - s e l l arrangements with d i s t r i b u t o r s g i v e n the a v a i l a b i l i t y of c o n t r a c t c a r r i a g e . 1 6 2 U n f o r t u n a t e l y , problems were encountered i n n e g o t i a t i n g new n a t u r a l gas c a r r i a g e c o n t r a c t s due t o the m o n o p o l i s t i c nature o f the downstream system and the c o n t i n u e d e x i s t e n c e of p r i o r t r a n s m i s s i o n arrangements. For i n s t a n c e , TransCanada P i p e l i n e s L i m i t e d i s the s o l e Canadian p i p e l i n e system t r a n s p o r t i n g n a t u r a l gas from western Canada t o e a s t e r n markets, o p e r a t i n g as both a commodity br o k e r as w e l l as a c a r r i e r . TransCanada both t r a n s p o r t s gas —m. 1 5 9 N a t u r a l Gas Markets and P r i c e s Agreement, supra note 139 a t Clause 10. 1 6 0 I d . Clause 13. 1 6 1 Id. Clause 14. 1 6 2 I d . Clause 5. 52 volumes owned by o t h e r s , and i t purchases approximately 40% of Canada's p r o d u c t i o n under long-term c o n t r a c t s w i t h n e a r l y 700 s o - c a l l e d system producers who are p r i m a r i l y l o c a t e d i n A l b e r t a . The p r o d u c t i o n from the v a r i o u s gas p o o l s of the system producers i s then i n v a r i a b l y r e s o l d under long-term c o n t r a c t s t o d i s t r i b u t o r s i n Canada and the U S A . 1 6 3 T h e r e f o r e gas purchased d i r e c t l y from independent o r non-system producers has the p o t e n t i a l t o d i s p l a c e o r o b v i a t e those volumes which otherwise would have been purchased by a d i s t r i b u t o r from TransCanada. Another d i f f i c u l t y encountered w i t h d e r e g u l a t i o n d e a l s w i t h the t e r m i n a t i o n o f the A l b e r t a border p r i c e f o r gas. S i n c e many supply c o n t r a c t s made r e f e r e n c e t o t h i s parameter, t h e i r c o n t r a c t p r i c e s became u n a s c e r t a i n a b l e . 1 6 4 Given the l a c k of c e r t a i n t y f o r t h i s e s s e n t i a l term, a b i n d i n g a r b i t r a t i o n procedure was promulgated by A l b e r t a i n o r d e r t o s e t the p r i c e s of c o n t r a c t s bound by i t s l e x l o c i . 1 6 5 However, those d i s t r i b u t o r s who are p a r t i e s t o supply c o n t r a c t s w i t h TCPL are not s u b j e c t t o A l b e r t a ' s a r b i t r a t i o n l e g i s l a t i o n i f t h e i r r e s p e c t i v e agreements are governed by the law o f a d i f f e r e n t j u r i s d i c t i o n . Hence, some d i s t r i b u t o r s are q u e s t i o n i n g the v a l i d i t y of l o n g term supply arrangements with TCPL i n o r d e r to* reap the b e n e f i t s o f d e r e g u l a t i o n , i n c l u d i n g the cheaper d i r e c t s a l e s promised by the new regime. • L b J Annual In f o r m a t i o n Form, TransCanada P i p e l i n e s L t d . , March 24, 1987, a t 3. 1 6 4 N a t u r a l Gas Marketing Act, S.A. (1986) c.N-2.8, s . l 2 ( l ) , 1 6 5 I d . s,12(2) and A r b i t r a t i o n A ct, R.S.A. 1980, c.A-43 as am. by S.A. 1983 c.18 and S.A. 1986 c.10, s.17. 53 In a d d i t i o n t o p r i v a t e c o n t r a c t u a l arrangements, broader p o l i c y matters are i n v o l v e d i n the pr o c e s s from the r e g u l a t e d n a t u r a l gas p r i c i n g regime t o the new d e r e g u l a t e d s t r u c t u r e . For i n s t a n c e , both t i e r s o f government a n t i c i p a t e d t h a t reviews would be made of the procedures used t o determine how much gas i s s u r p l u s t o Canadian needs and the needs of the pro d u c i n g p r o v i n c e . These reviews of s u r p l u s t e s t s would address the p u b l i c i n t e r e s t i n s e c u r i t y o f supply and presumably " r e s u l t i n s i g n i f i c a n t l y f r e e r a c c e s s " 1 6 7 t o Canadian and export markets. 4.2 "SURPLUS GAS" AND THE SECURITY OF SUPPLY Removal of n a t u r a l gas from the p r o v i n c e o f A l b e r t a i s s u b j e c t t o l e g i s l a t i o n 1 6 8 which r e q u i r e s t h a t an a p p l i c a t i o n be made t o the Energy Resources C o n s e r v a t i o n Board ( E R C B ) 1 6 9 a u t h o r i z i n g the removal. Issuance and amendment o f removal p e r m i t s may be made a c c o r d i n g t o terms and c o n d i t i o n s p r e s c r i b e d by the ERCB as approved by the L i e u t e n a n t Governor 17 0 i n C o u n c i l . However a removal permit w i l l not i s s u e u n l e s s the ERCB d e c i d e s t h a t i t i s i n the p u b l i c i n t e r e s t of A l b e r t a h a v ing r e g a r d i n t e r a l i a , t o the needs of A l b e r t a n s , p a r t i c u l a r s o f r e s e r v e s and any o t h e r r e l e v a n t m a t t e r s . 1 7 1 T6-5- 167 168 169 170 171 N a t u r a l Gas Markets and P r i c e s Agreement, supra note 139 a t Clause 16. Id- Gas Resources P r e s e r v a t i o n A ct, S.A. 1984, c.G-3.1, as am. by S.A. 1986, c.17. Id. ss.2, 1 ( 1 ) ( a ) . I d . s.4. Id. s.8. 54 One e f f e c t o f the October 31, 1985 Agreement p e r t a i n i n g t o the p u b l i c i n t e r e s t was t o r e q u i r e t h a t the r e s p e c t i v e p r o d u c i n g p r o v i n c e s of A l b e r t a and B r i t i s h Columbia i n i t i a t e a • • 17? review o f t h e i r s o - c a l l e d s u r p l u s t e s t s . F o l l o w i n g a r e q u e s t made t o the ERCB by the A l b e r t a M i n i s t e r of E n e r g y , 1 7 3 a review was m a d e 1 7 4 of the formulae and procedures used t o ensure s e c u r i t y o f supply i n t h a t p r o v i n c e . The Board concluded t h a t the p r e v i o u s l y used gas s u r p l u s and d e l i v e r a b i l i t y t e s t s d i d not s u i t the new d e r e g u l a t e d environment. These t e s t s , based upon a 25 year p e r i o d , c a l c u l a t e d those volumes o f gas s u r p l u s t o the p r e s e n t and f u t u r e requirements o f the p r o v i n c e . 1 7 5 Rather than r e l y s o l e l y on c o n t r a c t s , the ERCB d e v i s e d a new 15 y e a r based mandated s u r p l u s t e s t t h a t p r o v i d e s f o r the volume of gas needed t o p r o t e c t core u s e r s . 1 7 6 T h i s group i s d e f i n e d a r b i t r a r i l y t o i n c l u d e r e s i d e n t i a l customers, commercial customers and s m a l l i n d u s t r i a l u s e r s . The new s u r p l u s c a l c u l a t i o n i s an approximation t o be used i n c o n j u n c t i o n w i t h the ERCB's judgement i n d e c i d i n g whether or not new removal permits should i s s u e . 1 7 7 Under t h i s t e s t , i t i s expected t h a t the gas r e t a i n e d t o p r o t e c t A l b e r t a consumers N a t u r a l Gas Markets and P r i c e s Agreements, supra note 139 a t Clause 23 ( i ) . 1 7 L e t t e r dated 2 December 1985, from A l b e r t a M i n i s t e r of Energy. A l b e r t a Energy Resources C o n s e r v a t i o n Board Report 87-A, Gas Supply P r o t e c t i o n For A l b e r t a : P o l i c i e s And Procedures. March 1987. Id. a t v. I d . a t 20. I d . a t 17. 174 175 176 177 55 w i l l not d i f f e r s u b s t a n t i a l l y from those volumes expected t o 1 7ff be under c o n t r a c t A f u r t h e r h e a r i n g was conducted by the ERCB i n c o n j u n c t i o n w i t h the A l b e r t a P u b l i c U t i l i t i e s Board f o l l o w i n g . 1 o n the d i r e c t i o n s of the p r o v i n c i a l government. o u The Boards recommended t h a t r e s i d e n t i a l and commercial customers be deemed t o be a core market worthy of s p e c i a l p r o t e c t i o n because t h e i r : "dependence on n a t u r a l gas i s so fundamental t h a t assurance of s u p p l i e s i s always a p r i o r i t y " . . . and t h a t "[T]hese customers may be p r o t e c t e d e i t h e r through r e l i a n c e on gas u t i l i t y companies...or through d i r e c t s a l e s arranged w i t h producers or b r o k e r s , p r o v i d e d t h a t these d i r e c t s s a l e s i n v o l v e l o n g term commitments on both s i d e s . " 1 8 These customers are t o be p r o t e c t e d by l o n g term c o n t r a c t s of • 1 ft o approximately 10-15 y e a r s . 0 " Small i n d u s t r i a l u s e r s were n o t a b l y excluded from t h i s d e f i n i t i o n of c o r e customers as the A l b e r t a PUB b e l i e v e d 1 8 3 t h a t i n c l u s i o n of t h a t group would be c o n t r a r y t o i t s e n a b l i n g l e g i s l a t i o n . N e v e r t h e l e s s , one noteworthy e f f e c t of the October 31, 1985 agreement has been t o r e a s s e s s the nature o f p u b l i c i n t e r e s t i n the new d e r e g u l a t e d p r i c i n g system. T h i s p u b l i c i n t e r e s t i s s u e was c o n c u r r e n t l y addressed at the f e d e r a l l e v e l f o l l o w i n g a review by the N a t i o n a l Energy TT8~ 179 180 18-1 182 183 I d . a t v. A l b e r t a PUB/ERCB Report NO.E87128/87-C, Gas Supply and T r a n s p o r t a t i o n S e r v i c e I n q u i r y , Dec. 29, 1987. Order i n C o u n c i l 484/87. A l b e r t a PUB/ERCB Report NO.E87128/87-C, supra note 179 a t 11. I d . I d . a t 20. 56 Board (NEB) of the Canadian formula used i n determining n a t u r a l gas s u r p l u s . 1 8 4 S i n c e the removal o f n a t u r a l gas from Canada i s s u b j e c t t o l e g i s l a t i o n which r e q u i r e s an export o r d e r or l i c e n c e 1 8 5 from the NEB, t h a t Board must have regard i n t e r a l i a , t o f o r e s e e a b l e Canadian requirements and t r e n d s i n d i s c o v e r i n g g a s . 1 8 6 These n a t i o n a l p u b l i c i n t e r e s t requirements are r e f l e c t e d i n the new "Market-Based Procedure"^ which s c r a p s the former r e g u l a t e d s u r p l u s t e s t . The p r e s e n t procedure p r e v e n t s i n t e r f e r e n c e w i t h t h e market as l o n g as the needs o f Canadians are met w h i l e p r o v i d i n g f o r r e g u l a t o r y i n t e r f e r e n c e s h o u l d a d d i t i o n a l e x p o r t s prevent supply of f o r e s e e a b l e Canadian demand. The ad o p t i o n of the Market-Based procedure supersedes the r e s e r v e s - t o - p r o d u c t i o n - r a t i o procedure which r e q u i r e d f i f t e e n times t h e amount of r e s e r v e s f o r each y e a r ' s p r o d u c t i o n . The former procedure complements the n a t i o n a l energy p o l i c y of l e t t i n g market elements determine p r i c e s , whereas the l a t t e r procedure might have induced r e s t r i c t i o n s i n exports c o n t r a r y t o p o l i c y and the n a t i o n a l p u b l i c i n t e r e s t . 1 8 8 In N a t i o n a l Energy Board Review o f N a t u r a l Gas S u r p l u s Determination Procedures. Reasons For D e c i s i o n . J u l y 1987. B r i t i s h Columbia has a l s o reviewed i t s s u r p l u s d e t e r m i n a t i o n procedures and has promulgated a 15 year s u r p l u s t e s t : B.C. M i n i s t r y of Energy, Mines and Petroleum Resources, Review Of The B r i t i s h Columbia N a t u r a l Gas S u r p l u s Determination Procedures, Reasons For D e c i s i o n , J u l y 1987. The N a t i o n a l Energy Board Act, R.S.C 1970, c.N-6. Id. s. 83. NEB S u r p l u s Determination Procedures, supra note 184 a t 26. Backgrounder: N a t i o n a l Energy Board News Release 87/44, "NEB Adopts New N a t u r a l Gas S u r p l u s Determination Procedure", Sept. 9, 1987, a t 1-2. 185 186 187 188 57 a p p l i c a t i o n s f o r l i c e n c e d export of n a t u r a l gas, the NEB w i l l now p r o t e c t s e c u r i t y of supply by a two stage s u r p l u s gas t e s t c o n s i s t i n g o f p u b l i c h e a r i n g s and the ongoing s u r v e i l l a n c e of the marketplace. M o n i t o r i n g of the marketplace w i l l i n c l u d e p u b l i c a t i o n by NEB s t a f f of a b i e n n i a l energy supply and demand a n a l y s i s . 0 : 7 The p u b l i c h e a r i n g s stage w i l l i t s e l f c o n s i s t of t h r e e components. A complaints procedure w i l l e n t e r t a i n g r i e v a n c e s of Canadian u s e r s who are unable t o c o n t r a c t f o r commodity purchases on s i m i l a r , not i d e n t i c a l terms t o those of a 1 on . , . proposed export. I f a complaint i s m e r i t o r i o u s , the NEB may deny the r e l e v a n t export a p p l i c a t i o n or f a c i l i t a t e an o p p o r t u n i t y t o c o r r e c t the s i t u a t i o n by s t a y i n g i t s d e c i s i o n . 1 9 1 A d d i t i o n a l l y , an impact assessment of the proposed e x p o r t s on the Canadian energy market must be f i l e d w i t h the NEB by a l l a p p l i c a n t s f o r export l i c e n c e s . F i n a l l y , 1 9 2 export p r o p o s a l s s h a l l c o n t i n u e t o be v e t t e d by the NEB having regard t o the Canadian p u b l i c i n t e r e s t as r e q u i r e d by the Board's • 1 empowering A c t . 3 J However, some concern e x i s t s t h a t the NEB would o n l y be a b l e t o monitor exports and not u t i l i s e the complaints procedure i f the r e c e n t Canada-US Free Trade Agreement i s implemented. Indeed, one 1987 f e d e r a l r e p o r t d i s c l o s e d t h a t some export p r i c e s had f a l l e n below t h e i r NEB S u r p l u s Determination Procedures, supra note 184 a t 26. 190 Id. a t 24. 192 1 9 1 Id. a t 25. Id. a t 25-26. 1 9 3 The N a t i o n a l Energy Board Act, R.S.C. 1970, c.N-6, s.83 58 A l b e r t a and B r i t i s h Columbia domestic c o u n t e r p a r t s , c a u s i n g the f e d e r a l government t o a s s e r t i n d i f f e r e n c e t o such e a r l y 1 Q4. r e s u l t s . ' 4.3 THE COMMERCIAL NATURE OF A TAKE-OR-PAY CONTRACT The new f e d e r a l and p r o v i n c i a l c r i t e r i a f o r deter m i n i n g s u r p l u s gas volumes and s e c u r i t y o f supply a re p u b l i c law i n i t i a t i v e s aimed a t f u r t h e r i n g the i n t e n t i o n o f the October 31, 1985 Agreement. 3 J One important o b j e c t o f the Agreement s t a t e s t h a t : "Access w i l l be immediately enhanced f o r Canadian buyers t o n a t u r a l gas s u p p l i e s and f o r Canadian producers t o n a t u r a l gas markets w h i l e a t the same time a s s u r i n g t h a t the reasonably f o r e s e e a b l e requirements o f gas f o r use i n Canada are p r o t e c t e d . " 1 9 6 D e s p i t e t h i s i d e a l the p r o v i s i o n s o f the Agreement are not p r i v a t e l y e n f o r c e a b l e by e i t h e r consumers, producers, s h i p p e r s or d i s t r i b u t o r s , s i n c e the Agreement i s a p o l i t i c a l document 1 Q7 • . not a l e g a l one. A c c o r d i n g l y , i t i s thought t h a t the p r a c t i c a l e f f e c t o f the d e r e g u l a t i o n p r o c e s s may be b e t t e r • L y 4 Energy P r i c i n g News, N a t u r a l Gas Report. Vol.7 No. 10, Oct. 13, 1987. See: Free-Trade Agreement Between Canada and the U n i t e d S t a t e s of America, t e x t as i n i t i a l e d by C h i e f N e g o t i a t o r s on December 10, 1987, S i g n a t u r e o f the Agreement: January 2, 1988. 1 9 N a t u r a l Gas Markets and P r i c e s Agreement, supra note 139. Id. a t Clause 2. N a t i o n a l Energy Board Reasons For D e c i s i o n . MH-1-87. dated September 1987. Manitoba O i l and Gas C o r p o r a t i o n , A p p l i c a t i o n dated 25 May 1987, as amended, f o r Orders D i r e c t i n g TransCanada P i p e l i n e s L t d . t o Receive, T r a n s p o r t and D e l i v e r N a t u r a l Gas and F i x i n g T o l l s . 196 197 59 understood f o l l o w i n g an a n a l y s i s of the c o n t r a c t u a l arrangements between some the major p a r t i c i p a n t s i n the i n d u s t r y . One s a l i e n t aspect p e r t a i n i n g t o the v o l u n t a r y o b l i g a t i o n s between commercial buyers and s e l l e r s o f n a t u r a l gas i s the u b i q u i t o u s take-or-pay c l a u s e . T h i s type of p r o v i s i o n s t i p u l a t e s t h a t a buyer must purchase gas d u r i n g a f i x e d term and pay f o r i t d e s p i t e not having taken d e l i v e r y d u r i n g t h a t term, even though d e l i v e r y may be had a t a l a t e r 1 Q R time. Many such arrangements predate the November 1, 1986 d e r e g u l a t i o n of p r i c e s a t a time when most e a s t e r n Canadian consumers o r end-users purchased gas from seven p r i n c i p a l d i s t r i b u t i o n companies. These d i s t r i b u t o r s purchased the m a j o r i t y o f t h e i r volumes from TransCanada P i p e l i n e s L t d . (TCPL) under s e p a r a t e s o - c a l l e d CD C o n t r a c t s . However, these d i s t r i b u t o r s a l e s c o n t r a c t s do not match TCPL's producer supply c o n t r a c t s which are l o n g term "take-or-pay" supply arrangements. The c o n t r a c t s between TransCanada and the d i s t r i b u t o r s contemplate the e x i s t e n c e of a commodity charge and a demand charge, except f o r those r e l a t i v e l y few d e a l i n g w i t h the t r a n s p o r t a t i o n o f gas volumes not owned by the p i p e l i n e company. The former charge i s f o r gas a c t u a l l y taken by the | y t > P i p e l i n e Review Panel Report, supra note 146 a t 16. TransCanada P i p e l i n e s L t d v. N a t i o n a l Energy Board (1986) 72, N.R. 172 a t 174, (Fed. C.A.). A f f i r m i n g NEB d e c i s i o n RH-5-85 which i s reproduced i n the Canada Energy Law S e r v i c e , supra note 43, NEB d e c i s i o n 41, "TransCanada P i p e l i n e s L t d - A v a i l a b i l i t y of S e r v i c e s " Reasons f o r D e c i s i o n , May 1986. 60 gas p u r c h a s e r whereas the l a t t e r i s a charge f o r the maximum amount t h a t the buyer may take and i s payable even i f no gas i s a c t u a l l y t a k e n . 2 0 0 Demand charges, which are based upon the peak ( e i t h e r a c t u a l or estimated) usage of t h e buyer, may be thought of as a p o r t i o n of the o v e r a l l r a t e f o r gas s e r v i c e . u x Another v a r i a t i o n of take-or-pay c o n t r a c t u a l c l a u s e , a l s o known as a minimum annual o b l i g a t i o n , a p p l i e s when a buyer o b l i g a t e s h i m s e l f t o take a minimum q u a n t i t y of gas over a term c e r t a i n f o r a f i x e d p r i c e . I f d e l i v e r i e s are not nominated then the purchaser must n e v e r t h e l e s s make . . . 9 0? minimum payments t o the s u p p l i e r . These type o f c l a u s e s , which f i r s t appeared i n the U n i t e d S t a t e s , owe t h e i r o r i g i n t o the h i g h f i x e d c o s t s a s s o c i a t e d w i t h a n a t u r a l gas p i p e l i n e as w e l l as the d e s i r a b i l i t y p e r c e i v e d by producers i n l o c a t i n g an a s s u r e d market. Since acceptance o f long-term supply c o n t r a c t s o f t e n prevented a c a r r i e r from e x p l o i t i n g o t h e r North American markets d u r i n g the p o s t World War I I c o n s t r u c t i o n e r a , the take-or-pay c l a u s e consequently gave c a r r i e r s a p r e d i c t a b l e cash flow and l e s s e n e d the p r o b a b i l i t y t h a t t h e i r p r i n c i p a l buyers would a r b i t r a r i l y m i s t r e a t t h e m . 2 0 3 E v e n t u a l l y d i f f i c u l t i e s developed w i t h t h i s c o n t r a c t u a l p r a c t i c e a f t e r the once c o n t i n u o u s l y expanding n a t u r a l gas market became the v i c t i m of H.R. W i l l i a m s and C.J. Myers, O i l and Gas Law (Matthew Bender:New York, 1987) V o l . 8 a t 151. 2 0 1 I d . a t 233. I d . a t 979. 2 0 3 J.H. Foy, "Take-or-Pay Clauses i n Gas C o n t r a c t s : Why We Have Them and the Problems They Are Now Causing" 23 E x p l o r a t i o n & Economics of the Petroleum I n d u s t r y (1985) a t 17.01(1-2}. 61 the 1973 and 1979 o i l c r i s e s t h a t p r e c i p i t a t e d the i n s t a b l e c y c l e s of o v e r s u p p l y and s h o r t a g e . 2 0 4 Between 1970 and 1977, demand f o r Canadian n a t u r a l gas o u t s t r i p p e d supply and d u r i n g t h a t time TransCanada a c t i v e l y ? 0 5 n e g o t i a t e d l o n g term purchases from A l b e r t a p roducers. A s u r p l u s o f supply then developed c a u s i n g f i n a n c i a l d i f f i c u l t i e s w i t h the take-or-pay charges owed t o producers f o r t h a t p e r i o d . F a i l u r e t o take d e l i v e r y of the minimum annual o b l i g a t i o n by the c a r r i e r - p u r c h a s e r then rendered prepayments due f o r the gas not taken. These c o n s i d e r a b l e d i f f i c u l t i e s were addressed i n 1982 by the s o - c a l l e d "Topgas" r e f i n a n c i n g agreement and i t s subsequent amendment whereby TransCanada e f f e c t i v e l y borrowed money t o meet i t s " t a k e - o r - pay" o b l i g a t i o n s . 2 0 6 Indeed, the A l b e r t a gas producers were induced by the o v e r - s u p p l y s i t u a t i o n t o lobby f o r immediate and l o n g term f r e e r a ccess t o the U n i t e d S t a t e s export market. T h i s c o n c e s s i o n was made i n exchange f o r the r i s k of p r i c e decreases i n a s o f t , d e r e g u l a t e d domestic market. When the world p r i c e o f o i l r e c o v e r e d and U.S. gas r e s e r v e s d e c l i n e d , i t was f o r e c a s t e d t h a t i n t e r f u e l p r i c e c o m p e t i t i o n would then upwardly d r i v e gas p r i c e s . Id. a t 17.01(4}. P i p e l i n e Review Panel Report, supra note 146 a t 16. J . Park, "Developments i n N a t u r a l Gas Purchase C o n t r a c t s " (1984), 22 A l t a . L. Rev. 43. Hyndman, supra note 157 a t 3. 62 T h e r e f o r e , the gas bubble rendered d e r e g u l a t i o n " p o l i t i c a l l y p o s s i b l e " 2 0 8 as a r e s u l t o f the c o n t r a c t s problem which i t had helpe d t o c r e a t e . Hence the Hallowe'en Agreement: "was p r e d i c a t e d on the U.S. market opening up f o r a d d i t i o n a l exports i n advance o f , or i n tandem with, Canadian d e r e g u l a t i o n . The f a i l u r e o f t h a t t o happen has put severe s t r a i n s on the d e r e g u l a t i o n p a c k a g e . " 2 0 9 Some of these t e n s i o n s and inadequacies o f the r e s u l t a n t d e r e g u l a t i o n p r o c e s s are d i s c u s s e d below, p e r t a i n i n g t o the the i s s u e s o f d i r e c t s a l e s and p i p e l i n e bypass. However, i t i s thought t h a t an e l a b o r a t i o n o f the take-or-pay problem i s i n o r d e r a t t h i s j u n c t u r e , i n c l u d i n g d i s c u s s i o n o f the remedia l Topgas programme. Topgas e s t a b l i s h e d two banking companies i n c o n j u n c t i o n w i t h the producers and a consortium o f l e n d e r banks which m o d i f i e d approximately 2400 of TransCanada 1s gas purchase p i n c o n t r a c t s . x u In 1982, arrangements were made w i t h the " f i n a n c i a l i n t e r m e d i a r y " 2 1 1 Topgas Holdings L i m i t e d and over 98% o f TransCanada's c o n t r a c t e d producers t o r e f i n a n c e and make take-or-pay advances. T h i s arrangement p r o v i d e d f o r a 60% r e d u c t i o n i n the TransCanada 1s minimum y e a r l y purchase o b l i g a t i o n s . In 1983 the o v e r - c o n t r a c t e d problem p e r s i s t e d and another f i n a n c i a l i n t e r m e d i a r y , Topgas Two Inc. was 209 210 211 I d . I d . a t 1. Park, supra note 206. TransCanada "Annual I n f o r m a t i o n Form", supra note 163 a t 9. 63 c r e a t e d i n a s s o c i a t i o n w i t h 93% o f the producers and the s y n d i c a t e of banks. R e f e r r e d t o c o l l e c t i v e l y as the Topgas programme, both i n i t i a t i v e s r e f i n a n c e d the prepayments owed by TransCanada p r i o r t o the agreement and then advanced the take-or-pay monies due t o the producers by the o v e r - c o n t r a c t e d TransCanada, w i t h p r o v i s i o n f o r the advancement of subsequent p a y m e n t s . 2 1 3 Over $2.7 b i l l i o n was advanced by Topgas t o producers f o r the p r e p a i d gas which s h a l l be d e l i v e r e d t o TransCanada over a 10 year p e r i o d , the l a t t e r who w i l l repay the l o a n s upon r e s a l e . 2 1 4 In e f f e c t , the take-or-pay l i a b i l i t i e s were s h i f t e d from TCPL onto the producers. The payment of p r i n c i p a l and i n t e r e s t i s based upon TCPL m a i n t a i n i n g i t s downstream market share f o r which i t had made upstream supply arrangements. Hence, when the markets expanded the producers would then o b t a i n the revenue r e q u i r e d t o make these p a y m e n t s . 2 1 5 Topgas a l s o reduced the minimum annual o b l i g a t i o n exposure t h a t would otherwise be due from TransCanada. However, the r e f i n a n c i n g arrangement f u r t h e r p r o v i d e d t h a t i n t e r e s t on the unpaid balance be added t o TransCanada•s c o s t of s e r v i c e , which i s a charge deducted from the p r i c e r e c e i v e d by the producer a t the A l b e r t a border. T h i s r e s u l t e d i n lower well-head gas p r i c e s . 2 1 6 fT? Id. a t 9-10. 2 1 3 Park, supra note 206 a t 44. 2 1 4 TransCanada "Annual I n f o r m a t i o n Form", supra note 163 a t ?15 1 0 ' ttZ- Hyndman, supra note 157 a t 5. P i p e l i n e Review Panel Report, supra note 146 a t 16-17. 64 While lower p r i c e s were r e c e i v e d by the producers, the Topgas Agreement a l s o r e s u l t e d i n the f e d e r a l government l o s i n g t a x revenue, A l b e r t a l o s i n g both t a x and r o y a l t y revenues, and both t i e r s o f government n o t i o n a l l y i n c u r r i n g some of the i n t e r e s t due from TransCanada 1s borrowed m o n i e s . 2 1 7 The A l b e r t a government responded i n 1986 wit h l e g i s l a t i o n " • L O p r o v i d i n g f o r a l e v y on A l b e r t a Gas d e l i v e r e d t o TCPL. Rather than the p i p e l i n e company c o l l e c t i n g the i n t e r e s t c a r r y i n g c o s t s from i t s producers out o f i t s c o s t of s e r v i c e charges, the Act d e s i g n a t e s TCPL t o c o l l e c t these c o s t s from i t s customers and d e p o s i t them i n t o a "take-or-pay c o s t s s h a r i n g f u n d " . 2 1 9 The r e a l i t y o f the market p l a c e i l l u s t r a t e s t h a t commercial e x i g e n c i e s have the a b i l i t y t o e f f e c t and sometimes n e u t r a l i s e the c o n t r a c t u a l enforcement of long-term n a t u r a l gas s a l e s a g r e e m e n t s . 2 2 0 For i n s t a n c e , s u c c e s s i v e m o d i f i c a t i o n and and r e n e g o t i a t i o n o f long-term Canadian gas export c o n t r a c t s took p l a c e w i t h buyers i n the U n i t e d S t a t e s between 1979 and 1984. Even though Canadian n a t u r a l gas was demanded i n huge volumes d u r i n g the 1970's, domestic American demand f o r the imports f e l l as domestic p r o d u c t i o n rose i n the 1980's. In some cases, the exposure t o take-or-pay charges dropped n e a r l y 50% or was f o r g i v e n e n t i r e l y by producers who Id. Take-Or-Pay Costs S h a r i n g Act, S.A. 1986, c.T - O . l . Id., s.3-5. G.B. Greenwald, " N a t u r a l Gas C o n t r a c t s Under S t r e s s : P r i c e , Q u a n t i t y , and Take o r Pay" (1987) 5 J.E.R.L. 1 a t 8. 217 218 219 220 p e r c e i v e d t h e s e r i o u s n e s s of the s i t u a t i o n . 2 1 T h e r e f o r e , n a t u r a l gas t r a n s p o r t a t i o n i s not o n l y a f f e c t e d by r e g u l a t o r y and c o n t r a c t u a l p r o v i s i o n s s i n c e an interdependency c l e a r l y e x i s t s w i t h b u s i n e s s and commercial c o n s i d e r a t i o n s . 66 5. THE DIRECT SALES CONTROVERSY IN MANITOBA Canada's d e r e g u l a t i o n p r o c e s s has promised cheaper n a t u r a l gas f o r consumers v i a d i r e c t s a l e s from producers. I n t e r p r o v i n c i a l c a r r i a g e would be made by the m o n o p o l i s t i c TransCanada P i p e l i n e s L t d . (TCPL) under more c o m p e t i t i v e arrangements than those i n v o l v i n g gas s o l d t o d i s t r i b u t i o n companies by t h a t c a r r i e r i n i t s brok e r f u n c t i o n . N e v e r t h e l e s s , t h e r e i s a c e r t a i n i r o n y v i s a v i s the e x t e n s i v e take-or-pay c o n t r a c t r e n e g o t i a t i o n s . Under the s a n c t i t y of c o n t r a c t s p r i n c i p l e , l o c a l d i s t r i b u t i o n companies are being f o r c e d t o honour t h e i r long-term s e r v i c e c o n t r a c t s w i t h TCPL and not o b v i a t e o r 11 s e l f - d i s p l a c e " them w i t h d i r e c t s a l e arrangements. Hence, the d i r i g i s t e N a t i o n a l Energy Board has r e f u s e d t o gr a n t t r a n s m i s s i o n o r d e r s t o a t h i r d p a r t y co- o p e r a t i v e a s s o c i a t i o n i n Manitoba which wants t o a l l e v i a t e r e s i d e n t i a l r a t e s . T h i s has r e s u l t e d i n a l l e g a t i o n s o f u n j u s t d i s c r i m i n a t i o n i n p r i c e s and i n e f f i c i e n t i n t e r f e r e n c e i n the supposedly d e r e g u l a t e d p r i c e o f the commodity. 5.1 DIRECT PURCHASES OF NATURAL GAS F o l l o w i n g the October 31, 1985 A g r e e m e n t , 2 2 2 the P r o v i n c e o f Manitoba sought t o take advantage of the N a t u r a l Gas P r i c e s and Markets Agreement, supra note 139. 67 d e r e g u l a t e d environment i n order t o o b t a i n lower p r i c e d n a t u r a l gas f o r Manitobans. I t had c r e a t e d the Manitoba O i l and Gas C o r p o r a t i o n (MOGC) by l e g i s l a t i v e f i a t 2 2 3 t o a c t as i t s agent i n the b r o k e r i n g of n a t u r a l gas f o r both p r e s e n t and f u t u r e i n d u s t r i a l , commercial and r e s i d e n t i a l consumers i n the p r o v i n c e . 2 2 4 The Crown c o r p o r a t i o n MOGC then n e g o t i a t e d d i r e c t s a l e s agreements w i t h A l b e r t a producers a t a p r i c e t h a t was $1 cheaper than the $3/Mcf p r i c e under e x i s t i n g c o n t a c t s . T h i s a c t i v i t y r e f l e c t e d t he p o l i c i e s o f the p r o v i n c i a l government formed by the s o c i a l i s t New Democratic P a r t y , which was adamant i n i t s d e s i r e t o p r o v i d e cheaper n a t u r a l gas f o r i t s 200,000 r e s i d e n t i a l c u s t o m e r s . 2 2 5 S i n c e n e g o t i a t i o n s f o r c a r r i a g e had f a i l e d , i n order t o have TransCanada P i p e l i n e s L i m i t e d t r a n s p o r t these gas volumes, MOGC was r e q u i r e d t o make a p p l i c a t i o n t o the N a t i o n a l Energy Board (NEB) f o r the s t a t u t o r i l y p r e s c r i b e d 2 2 6 i n t e r p r o v i n c i a l gas t r a n s m i s s i o n o r d e r . A f t e r a p u b l i c h e a r i n g t he NEB dec i d e d a g a i n s t t he a p p l i c a n t i n September 1987. The Board opined t h a t the proposed: "gas volumes t o be t r a n s p o r t e d would i n essence d i s p l a c e a l l volumes p r e s e n t l y b e i n g purchased by each o f the d i s t r i b u t o r s - ICG and GWG" ( I n t e r C i t y Gas U t i l i t i e s [Manitoba] L t d . and G r e a t e r Winnipeg Gas Co.) "to serve markets i n Manitoba. T h i s would e f f e c t i v e l y r e s u l t i n the t o t a l replacement o f the d i s t r i b u t o r ' s c o n t r a c t e d f i r m s u p p l y . . . " and " c o n s t i t u t e s s e l f - d i s p l a c e m e n t i n substance and i s not i n the p u b l i c i n t e r e s t . . . " 2 2 7 TZT Manitoba O i l and Gas C o r p o r a t i o n Act, C.C.S.M., c. 034 — _ - - - J . - * ' - *ZZ NEB Reasons f o r D e c i s i o n MH-1-87, supra note 197 a t 1. 225 226 227 R. Gage, Pawley vows t o f i g h t NEB on n a t u r a l gas p r i c e s . The Globe and M a i l (Toronto), September 29, 1987 a t B6. NEB A c t , supra note 41 a t s. 59(2). NEB Reasons f o r D e c i s i o n MH-1-87, supra note 197 a t 6. 68 The Board f u r t h e r h e l d t h a t the p r o p o s a l was i n c o n s i s t e n t with the " o r d e r l y t r a n s i t i o n " 2 2 8 t o a market o r i e n t e d environment contemplated under the October 31, 1987 Agreement on N a t u r a l Gas P r i c e s and Markets. The d e c i s i o n invoked a v o c i f e r o u s response from Manitoba Premier Pawley whose c a b i n e t then announced t h a t i t was a p p e a l i n g the NEB d e c i s i o n t o the F e d e r a l Court of Appeal. Subsequently, another noteworthy i n i t i a t i v e i n v o l v i n g the e x p r o p r i a t i o n of the ICG Manitoba gas monopoly was d r o p p e d , 2 3 0 making the Appeal a p r i n c i p a l instrument i n o b t a i n i n g the cheaper gas promised by d e r e g u l a t i o n . However, l e a v e t o appeal was r e f u s e d by the F e d e r a l Court of Appeal on A p r i l 24, 1988. Afterwards, Premier Pawley's New Democratic P a r t y (NDP) government was r e s o u n d i n g l y d e f e a t e d i n an A p r i l 27, 1988 g e n e r a l e l e c t i o n , the Manitoba C o n s e r v a t i v e p a r t y having formed a m i n o r i t y government. The l a t t e r w i l l now r u l e a t the p l e a s u r e o f the p r o v i n c i a l L i b e r a l and New Democratic p a r t i e s ; 2 3 1 o b v i o u s l y the nature o f t h i s c o a l i t i o n w i l l a f f e c t Manitoba's n a t u r a l gas p o l i c y . S i g n i f i c a n t l y , p r o v i n c i a l concerns over the a v a i l a b i l i t y o f d i r e c t s a l e s are being v o i c e d i n a new forum. P r i o r t o the r e f u s a l f o r l e a v e by the ™ i i : 2 2 9 Energy P r i c i n g News, N a t u r a l Gas Report V o l . 7, No. 12, December 8, 1987. On November 18, 1987, a N o t i c e of Motion was f i l e d f i l e d f o r Leave t o Appeal t o the F e d e r a l Court of Appeal. 2 3 G. York, Manitoba drops p l a n t o buy gas f i r m . The Globe and M a i l (Toronto), January 5, 1988. 3 G.York, Manitoba NDP w i l l permit T o r i e s t o assume power. The Globe and M a i l (Toronto), A p r i l 28, 1988 a t A1-A2. 69 F e d e r a l Court of Appeal, the N a t i o n a l Energy Board ordered a new h e a r i n g (RH-1-88) which p e r t a i n s t o a wide range of matters i n c l u d i n g the d i r e c t s a l e c o n t r o v e r s y and i t s so- c a l l e d s e l f - d i s p l a c e m e n t r u l e . 2 3 2 These responses are r e s p e c t i v e l y thought t o r e f l e c t the u n d e r l y i n g causes of the d i r e c t s a l e c o n t r o v e r s y . S i n c e l a r g e commercial buyers have been a b l e t o n e g o t i a t e d i r e c t s a l e s as an i n c i d e n t of the d e r e g u l a t i o n p r o c e s s , a l l e g a t i o n s of d i s c r i m i n a t i o n towards s m a l l customers or the s o - c a l l e d core customers have been made when t h e i r attempts t o seek d i r e c t s a l e s have been thwarted. Conversely, some i n d u s t r y commentators have argued t h a t Manitoba's b i d t o a c t as broker f o r the p r o v i n c e would d e t r a c t from the t h r e s h o l d o f buyers and s e l l e r s necessary t o make market s e n s i t i v e p r i c i n g w o r k . 2 3 3 One i n d u s t r y i n s i d e r was induced by the NEB's Manitoba t r a n s m i s s i o n d e c i s i o n t o q u e s t i o n what the f e d e r a l government meant by i t s d e f i n i t i o n of d e r e g u l a t i o n . He suggested t h a t an e l u c i d a t i o n by the p a r t i e s t o the s o - c a l l e d Hallowe'en Agreement might r e d r e s s the p r e s e n t s i t u a t i o n which al l o w s d i r e c t s a l e s t o l a r g e i n d u s t r i a l u s e r s but not o t h e r s . 2 3 4 A c c o r d i n g l y , i t i s f e l t t h a t the e f f i c a c y of t h e d e r e g u l a t i o n p r o c e s s should be s t u d i e d t o the e x t e n t t h a t i t N a t i o n a l Energy Board, Hearing Order RH-1-88. February 17, 1988. - . j _ D. Slocum, P r o p o s a l by Manitoba O i l not i n p u b l i c i n t e r e s t : NEB. The Globe and M a i l (Toronto), October 2 3 4  2 0 ' 1 9 8 7 - See Gage, supra note 225, per Gary Hoffman, v i c e - p r e s i d e n t of ICG. 70 contemporaneously promotes a more market o r i e n t e d p r i c i n g regime and a f f e c t s p r i v a t e c o n t r a c t u a l r i g h t s and c a p a c i t i e s . For i n s t a n c e , the d e n i a l of Manitoba's access t o the TCPL p i p e l i n e system was d i s t i n g u i s h e d from e a r l i e r a p p r o v a l s of d i r e c t s a l e s on the grounds t h a t these a p p r o v a l s r e l a t e d t o s p e c i f i c end-users and d i d not usurp a l l the market o r supply arrangements of a d i s t r i b u t o r . The N a t i o n a l Energy Board's d e c i s i o n l a r g e l y t u r n e d on the concept of displacement gas as w e l l as the s t i p u l a t i o n t h a t the e x i s t i n g l o n g term c o n t r a c t s between TransCanada and the p r o v i n c i a l d i s t r i b u t o r s must be h o n o u r e d . 2 3 5 While t h i s p a c t a sunt servanda d o c t r i n e i s an o b j e c t i v e , i t s use appears designed t o serve a p a r t i c u l a r s e t o f i n t e r e s t s , namely the p r o t e c t i o n o f TCPL's marketing p o s i t i o n . D e r e g u l a t i o n i s t h e r e f o r e f o r c i n g tough r e g u l a t o r y d e c i s i o n s between the new d i s t r i b u t o r - p r o d u c e r arrangements and the e x i s t i n g ones of the monopoly c a r r i e r . 5.2 CONTRACTUAL IMPLICATIONS OF DISPLACEMENT A m u l t i p l e l a y e r o f c o n t r a c t u a l r e l a t i o n s e x i s t s i n the d i s t r i b u t i o n o f n a t u r a l gas from the well-head t o the burner- t i p . Implementation of the new regime's d i r e c t s a l e s a f f e c t e d c e r t a i n arrangements by the " i n a p p r o p r i a t e d u p l i c a t i o n of demand charges" t o some of TransCanada•s c u s t o m e r s . 2 3 6 These d i f f i c u l t i e s were f o r e s e e n by the governments who were p a r t i e s t o the October 31, 1985 Agreement. They r e c o g n i z e d the Z J b NEB Reasons f o r D e c i s i o n MH-1-87, supra note 197 a t 6-7. 2 3 6 TCPL v. NEB ( a f f i r m i n g RH-5-85) supra note 199 a t 172. p o t e n t i a l problems i n v o l v e d i n d i r e c t s a l e d i s p l a c i n g a " c o r r e s p o n d i n g volume" t h a t would otherwise be purchased by an • • • 9 T 7 end-user from a l o c a l d i s t r i b u t i o n company. ~" An attempt t o a v o i d t h i s anomaly was made by e n j o i n i n g the N a t i o n a l Energy Board t o f a c i l i t a t e d i r e c t s a l e s through the p r e v e n t i o n of i n a p p r o p r i a t e double demand charges t h a t might a r i s e from • 0 T ft d i s p l a c e d gas volumes. One of the arguments b e i n g u t i l i s e d by Counsel f o r the Manitoba O i l and Gas C o r p o r a t i o n (MOGC) i n v o l v e s the submission t h a t the October Agreement and subsequent NEB r u l i n g s a u t h o r i z e displacement s i m p l i c i t e r by d i r e c t purchases. However, the m i s c h i e f t h a t i s t o be prevented i s the displacement by d i s t r i b u t o r s of t h e i r C o n t r a c t Demand (CD) supply c o n t r a c t s w i t h T C P L . 2 3 9 T h i s f o l l o w s from the d e f i n i t i o n o f s e l f - d i s p l a c e m e n t adopted by the N a t i o n a l Energy Board i n the RH-5-85 and RH-3-86 d e c i s i o n s : " G e n e r a l l y , s e l f displacement occurs when a d i s t r i b u t o r r e p l a c e s any p o r t i o n of i t s p r e s e n t l y c o n t r a c t e d f i r m supply w i t h an a l t e r n a t e s upply o r makes any o t h e r arrangement t h a t accomplishes the same e n d . " 2 4 0 From t h i s d e f i n i t i o n , the NEB i n the Manitoba a c t i o n l i s t e d t he key i s s u e as b e i n g whether the proposed arrangements Id. a t 174. N a t u r a l Gas Markets and P r i c e s Agreement, supra note 139 a t c l a u s e 7 and 10. Manitoba O i l And Gas Corp. N o t i c e of Motion For Leave t o Appeal Order No. MH-1-87, R e p r e s e n t a t i o n s S u p p o r t i n g Leave t o Appeal, Fed. C A . A c t i o n No. 87-A-402 a t 7; Andrew R. Thompson, Counsel f o r the A p p e l l a n t . N a t i o n a l Energy Board d e c i s i o n RH-3-86, s.11.2, a t 72. RH-5-85 i s reproduced i n the Canada Energy Law S e r v i c e . supra note 43, NEB d e c i s i o n 41. 23T 238 239 240 72 c o n s t i t u t e d , " i n form and/or substance" s e l f - d i s p l a c e m e n t . While the Board d i d not f i n d t h a t the d i r e c t s a l e arrangements c o n s t i t u t e d " s e l f displacement" i n form, i t h e l d t h a t they c o n s t i t u t e d the concept i n s u b s t a n c e . 2 4 1 Hence i n t h e i r a p p l i c a t i o n f o r l e a v e t o appeal, the A p p e l l a n t s a v e r r e d i n t e r a l i a t h a t the NEB made an e r r o r i n law i n a p p l y i n g these O A p r u l i n g s t o the p r e s e n t f a c t s . H * E q u i t a b l e n a t u r a l gas c o s t a l l o c a t i o n and t o l l d e s i g n are the s a l i e n t i s s u e s i n the s e l f - d i s p l a c e m e n t c o n t r o v e r s y . For i n s t a n c e , when a p r e v i o u s customer of a l o c a l d i s t r i b u t o r concludes a d i r e c t s a l e , he i s o b l i g e d t o pay demand charges t o TCPL f o r t r a n s p o r t a t i o n s e r v i c e under t h a t arrangement. But p r i o r t o November 1, 1988, the d i r e c t p urchaser had t o pay a d u p l i c a t e demand t o l l t o the d i s t r i b u t o r t o indemnify i t s demand charges which were unabsorbed because of t h e l a t t e r ' s arrangement and volumes b e i n g d i s p l a c e d . Rather than burden t h e d i s t r i b u t o r ' s remaining customers w i t h t h e s e demand charges payable f o r the untaken gas, p r o v i n c i a l r e g u l a t o r s had imposed the c o s t s on the d i r e c t p u r c h a s e r . 2 4 3 Thus, i n response t o the governments' request t o prevent d u p l i c a t i o n of demand charges, the N a t i o n a l Energy Board adopted a new c o s t a l l o c a t i o n system. Under the o l d system, the f i x e d c o s t s and a l l o w a b l e investment r e t u r n of TCPL were a l l o c a t e d w i t h r e f e r e n c e t o the " c o n t r a c t demand" volumes s p e c i f i e d i n i t s gas s e r v i c e ^ 4 l NEB d e c i s i o n MH-1-87. supra note 197 a t 6. 2 4 2 N o t i c e of Motion, supra note 239 a t 5-6. RH-5-85, Canada Energy Law S e r v i c e supra note 43, NEB d e c i s i o n 41, a t 10-4422, para.2.2. 73 c o n t r a c t s . These c o n t r a c t s charge a buyer f o r those commodity volumes a c t u a l l y purchased and r e c e i v e d from TCPL. The buyer c o n c u r r e n t l y owes f i x e d t r a n s p o r t a t i o n charges f o r the maximum amount o f gas t h a t the c a r r i e r - b r o k e r agreed t o s e l l and d e l i v e r , even though the buyer may have nominated and r e c e i v e d l e s s . 2 4 4 Present c o s t a l l o c a t i o n i s based on the o p e r a t i o n a l demand volume (ODV) c r i t e r i a . 2 4 5 T h i s i s d e f i n e d as f o l l o w s : "A d i s t r i b u t o r s o p e r a t i n g demand volume w i l l be determined t o be the c o n t r a c t e d demand, as s p e c i f i e d i n the d i s t r i b u t o r ' s CD c o n t r a c t w i t h TCPL, l e s s the t o t a l amount by which the d i s t r i b u t o r ' s CD volumes are d i s p l a c e d . 4 6 Rather than making a d i r e c t purchaser pay double demand charges, the new system s t i p u l a t e s t h a t the d i s t r i b u t o r w i l l pay f o r the amount of c o n t r a c t demand (CD) s e r v i c e t h a t i t r e c e i v e s from TCPL. D i r e c t purchasers who d i s p l a c e system gas w i l l l i k e w i s e pay demand charges f o r the a c t u a l t r a n s p o r t a t i o n s e r v i c e t h a t i t r e c e i v e s from TCPL. Hence, TCPL would r e c o v e r a l l o f i t s a u t h o r i z e d f i x e d c o s t s . 2 4 7 Fundamentally, the o p e r a t i n g demand volume methodology i s intended t o h e l p f r e e up n a t u r a l gas markets i n Canada pursuant t o the meaning of the October 1985 A g r e e m e n t . 2 4 8 Although the NEB does not have a u t h o r i t y over TCPL's s a l e of gas as a commodity, i t does have j u r i s d i c t i o n over the i n t e r p r o v i n c i a l p i p e l i n e company i n i t s f u n c t i o n as a TCPL v. NEB ( a f f i r m i n g RH-5-85) supra note 199 a t 177. RH-5-85, Canada Energy Law S e r v i c e supra note 43, NEB d e c i s i o n 41, a t 10-4424, para.2.2. 2 4 6 TCPL v. NEB ( a f f i r m i n g RH-5-85) supra note 199 a t 177. 2 4 Z I d - a t 178. 2 4 8 Canada, NEB News Release. 17 June 1987 a t 2. t r a n s p o r t e r o r c a r r i e r o f the commodity. 2 4 9 T h i s power e n t i t l e s t he N a t i o n a l Energy Board t o make o r d e r s f i x i n g t r a n s p o r t a t i o n charges t h a t have the e f f e c t o f v a r y i n g the c o n t r a c t s between TCPL and the l o c a l d i s t r i b u t o r s . 2 5 0 U n f o r t u n a t e l y , i t i s not always c l e a r where a l a w f u l v a r i a t i o n o f t r a n s p o r t a t i o n charges becomes a wrongful v a r i a t i o n of a commodity c o n t r a c t i n arrangements t h a t contemplate both f u n c t i o n s . Thus, w h i l e the ODV's e f f e c t i n t e r f e r e d w i t h the c o n t r a c t u a l r e l a t i o n s between TCPL and i t s d i s t r i b u t o r s , i t was an a c t i o n e n t i r e l y based upon the t o l l making power of the B o a r d . 2 5 1 S i g n i f i c a n t l y , " s e l f - d i s p l a c e m e n t " by a d i s t r i b u t o r was made an e x c e p t i o n i n RH-5-85 and RH-3-86. The Board has denie d o p e r a t i n g demand volume (ODV) r e l i e f t o d i s t r i b u t o r s who d i s p l a c e t h e i r own gas volumes c u r r e n t l y under c o n t r a c t t o T C P L . 2 5 2 T h i s p a r t i c u l a r r a t i o n a l e attempts t o prevent d i r e c t s a l e s from undermining "the s a n c t i t y o f e x i s t i n g c o n t r a c t s " between TCPL and the ICG-GWG d i s t r i b u t o r s i n M a n i t o b a . 2 5 3 U n f o r t u n a t e l y , the reasons o f the NEB do not s t a t e why the s a n c t i t y of these arrangements must be r e s p e c t e d when the c o n t r a c t u a l i n t e r e s t s o f o r d i n a r y d i r e c t p u rchasers may otherwise be a f f e c t e d . 7 ? T 250 251 252 253 NEB Act, supra note 41. S e c t i o n 50 permits the Board t o make o r d e r s r e l a t i n g t o " t r a f f i c , t o l l s , o r t a r i f f s . " Saskatchewan Power Corp. e t a l . v. TransCanada P i p e l i n e s e t a l . [1981] 2 S.C.R. 688 a t 702, 39 N.R. 595, per L a s k i n , C.J. TCPL v. NEB ( a f f i r m i n g RH-5-85) supra note 199 a t 180. N o t i c e of Motion, supra note 239 a t 16-18. see: NEB d e c i s i o n MH-1-87, supra note 197 a t 5. 75 When the NEB h e l d t h a t the Manitoba a p p l i c a t i o n would " i n essence d i s p l a c e a l l v o l u m e s " 2 5 4 under c o n t r a c t between the d i s t r i b u t o r s and TCPL, i t arguably d i g r e s s e d from i t s e a r l i e r d e f i n i t i o n o f " s e l f - d i s p l a c e m e n t . " That d e f i n i t i o n r e f e r r e d t o a d i s t r i b u t o r ' s attempt t o conclude a d i r e c t s a l e whereas the a p p l i c a n t i n the Manitoba h e a r i n g was c l e a r l y not one of the l o c a l d i s t r i b u t i o n companies. I t was MOCG, a separate c o r p o r a t e e n t i t y t h a t was not a p a r t y t o those arrangements. Saying t h a t the a p p l i c a t i o n would amount t o s e l f - d i s p l a c e m e n t of a l l t he d i s t r i b u t o r s volumes i s a misnomer t h a t r e q u i r e s a b i g i m a g i n a t i v e l e a p i n order t o be c o n v i n c i n g . F i r s t o f a l l , as a matter o f semantics, MOGC c o u l d not d i s p l a c e i t s e l f g i v e n i t s t h i r d p a r t y nature. Secondly, the arrangement i n c l u d e d an "o p t i n g out" procedure so t h a t MOGC would not d i s p l a c e a l l c o n t r a c t u a l arrangements. More i m p o r t a n t l y , t h e N a t i o n a l Energy Board d i d not g i v e e x p l i c i t reasons f o r h o l d i n g t h a t t h i s s o r t o f c o n s t r u c t i v e s e l f - d i s p l a c e m e n t was a g a i n s t the p u b l i c i n t e r e s t . Furthermore, i t i s thought t h a t the Board may have p r e s e r v e d the T C P L - l o c a l d i s t r i b u t o r arrangements, w h i l e w r o n g f u l l y a p p l y i n g i t s t r a n s p o r t a t i o n j u r i s d i c t i o n i n order t o s q u e l c h MOGC's d i r e c t purchase o f the commodity. Support f o r t h i s argument i s d e r i v e d from the Hallowe'en Agreement of October 31, 1985 which contemplated changes i n p r o v i n c i a l l e g i s l a t i o n t h a t might p r o v i d e " a l t e r n a t i v e sources o f supply" " 2^ A ID. a t 6. t o consumers . 3 3 A f o r t i o r i , t h e former f e d e r a l M i n i s t e r who shepherded t h e Agreement p u b l i c l y commented t h a t " l i t t l e c u s t o m e r s " such as r e s i d e n t i a l and commerc ia l u s e r s would be f r e e t o a r r a n g e c o - o p e r a t i v e arrangements o r d e a l s i n o r d e r t o s e c u r e d i r e c t s a l e s . 2 5 6 T h u s , i t would appear t h a t the type o f arrangement r e q u e s t e d by Man i toba was s u p p o r t e d by the p u b l i c p o l i c y o f d e r e g u l a t i o n . M o r e o v e r , the NEB may have e r r e d i n law as r e g a r d s the r e l a t i o n s h i p between the p u b l i c i n t e r e s t and s e l f - d i s p l a c e m e n t . F o r i n s t a n c e , the N a t i o n a l Energy Board A c t e x p r e s s l y p r o h i b i t s u n j u s t d i s c r i m i n a t i o n i n the p r o v i s i o n o f s e r v i c e s , f a c i l i t i e s o r the l e v y i n g o f t o l l s , 2 5 7 y e t t h e Board d i d no t f i n d t h e d e n i a l o f a c c e s s t o c a r r i a g e s e r v i c e s t o f a l l under t h i s h e a d i n g . R a t h e r , i t d i s t i n g u i s h e d t h e s e c t i o n 59(2) d i r e c t s a l e t r a n s m i s s i o n o r d e r s t h a t had been p r e v i o u s l y g r a n t e d . "The e f f e c t o f g r a n t i n g t h i s a p p l i c a t i o n would be t o p e r m i t s e l f - d i s p l a c e m e n t , would not be c o n s i s t e n t w i t h the o r d e r l y t r a n s i t i o n t o m a r k e t - s e n s i t i v e p r i c i n g as con templa ted i n the Agreement and would be c o n t r a r y t o t h e p u b l i c i n t e r e s t . " 2 5 8 S i n c e a l l p r e v i o u s d i r e c t s a l e t r a n s m i s s i o n o r d e r s were g r a n t e d t o l a r g e i n d u s t r i a l u s e r s the B o a r d ' s d e c i s i o n pr ima f a c i e appears t o undu ly d i s c r i m i n a t e between c l a s s e s o f N a t u r a l Gas Markets and P r i c e s Agreement , s u p r a note 139 a t c l a u s e 26. Hon. P a t r i c i a C a r n e y , M i n i s t e r o f E n e r g y , Mines and R e s o u r c e s (Canada) , p r e s s c o n f e r e n c e c i r c a O c t . 3 1 , 1 9 8 5 ; which i s RH-5-85 E x h i b i t B -29 , as c i t e d i n : N o t i c e o f M o t i o n s u p r a note 239 a t 15 e t i n f r a . NEB A c t s u p r a no te 41 a t s . 5 5 . NEB d e c i s i o n MH-1-87. s u p r a note 197 a t 7. 2315 256 257 258 77 9 . . . . c u s t o m e r s . In o t h e r words , e n d - u s e r d i s c r i m i n a t i o n such as t h i s a g a i n s t r e s i d e n t i a l and s m a l l commerc ia l c o n c e r n s i s w r o n g f u l i n t h e absence o f a c c e p t a b l e c o s t c r i t e r i a . Thus a l t h o u g h t h e Man i toba l e a v e t o a p p e a l a p p l i c a t i o n i n v o l v e s a l t e r n a t i v e grounds t h a t a r e b o t h narrow and t e c h n i c a l , i t a l s o e n t a i l s t h e b r o a d e r i s s u e o f m a r g i n a l c o s t p r i c i n g and r e a s o n a b l e r a t e s f o r g a s . Some o f t h e s e i s s u e s were c a n v a s s e d i n a p r o v i n c i a l h e a r i n g h e l d by t h e P u b l i c U t i l i t i e s Board (PUB) o f Mani toba p r i o r t o t h e f e d e r a l r e g u l a t o r y d e c i s i o n . 2 6 1 B a s i c a l l y , t h i s h e a r i n g was convened i n o r d e r t o s e t Man i toba gas r a t e s f o l l o w i n g a l o n g - t e r m c o m m o d i t y - c a r r i a g e c o n t r a c t between TCPL and the l o c a l d i s t r i b u t o r s GWG-ICG. In f a c t , an a n c i l l a r y m a t t e r t o t h e Man i toba d i r e c t s a l e a f f a i r i n v o l v e s t h e term o f t h i s a r rangement . In p a r t i c u l a r , w h i l e t h a t s o - c a l l e d CD c o n t r a c t was s t i p u l a t e d t o e x p i r e O c t o b e r 31 , 1995, the t e r m i n a t i o n o f the r e g u l a t e d A l b e r t a B o r d e r p r i c e would have made i t v o i d f o r u n c e r t a i n t y i f new p r i c i n g p r o v i s i o n s were not made. These were made by a Gas P r i c i n g Agreement (GPA), w i t h an e x p i r y da te o f O c t o b e r 31, 1988. N o t i c e o f M o t i o n , s u p r a note 239 a t 2 0 - 2 1 . B o n b r i g h t . s u p r a note 89 a t 370-374. Man i toba PUB Order 8 9 / 8 7 . d a t e d May 13, 1987; p u r s u a n t t o a P u b l i c H e a r i n g To I n q u i r e In to The A p p l i c a t i o n s Of G r e a t e r Winn ipeg Gas Company And ICG U t i l i t i e s (Manitoba) L t d F o r An Order Or O r d e r s A p p r o v i n g A Change In Ra tes And Other M a t t e r s , h e l d i n W i n n i p e g , F e b . 9 t o 14, 16, 17 and March 16 t o 20, 1987. 259" 260 261 78 In the absence of v i t a l p r i c i n g terms, i t i s thought that the CD Service contract would be unenforceable. 2 6 2 However subsequent to the NEB's Manitoba decision, the p r o v i n c i a l gas u t i l i t i e s and the agent of TCPL entered into a one year contract with Manitobans paying less than before for gas yet more than the d i r e c t sale p r i c e of the commodity. 2 6 3 Given that the GPA contract was soon to expire, i t i s d i f f i c u l t to see why the NEB refused MOGC d i r e c t sale transmission orders which would otherwise be e f f e c t i v e October 31, 1987 since there would be no other arrangements whatsoever to d i s p l a c e . 2 6 4 Therefore, i t i s thought that the NEB f a i l e d to advance the public i n t e r e s t i n f a c i l i t a t i n g lower gas p r i c e s . Included i n the Gas P r i c i n g Agreement are provisions for a Competitive Marketing Program (CMP) which i s a p r i c e d i f f e r e n t i a l scheme whereby large end-users are afforded discounts. I t i s estimated that s i m i l a r discounts i n Ontario have resulted i n r e s i d e n t i a l users paying almost twice the p r i c e f o r natural gas at that time. Large end-users are discouraged from switching to non TCPL system gas by these A.J. Black, The V a l i d i t y of the 198 6 Natural Gas "Contract For Demand Service" between TransCanada Pipelines Ltd. and Greater Winnipeg Gas Co., unpublished Directed Research for Prof. Andrew R. Thompson, Faculty of Law, University of B r i t i s h Columbia, Jan. 18, 1988. Janet Keeping, "Righteous Indignation, The Public Interest and Deregulation of Natural Gas" (1988) 21 Resources 5 at 7; (The Newsletter of the Canadian I n s t i t u t e of Resources Law). The new rate i s $2.30/Mcf, down from approximately $3.00. The November 1, 1988 s i t u a t i o n i s what i s now before the NEB i n the RH-1-88 Hearing. No p r i c i n g arrangements have yet been made by TCPL and i t now appears generally accepted that i f no new agreements are made then the CD Contracts w i l l not be enforceable a f t e r Nov. 1, 1988. 79 concessions which are set forth in special long term commodity supply co n t r a c t s . 2 6 5 Accordingly, one commentator considered these discounts to be "unduly discriminatory because they are not cost based." 2 6 6 Hence, discounts of this nature are anti- competitive to the extent that they inhibit the large industrial users from concluding direct sales with non-system users. Indeed, the Manitoba PUB considered that these discounts might result in unduly discriminatory r a t e s . 2 6 7 For instance, due to the Canadian economy of scale, the monopolistic nature of natural gas transportation may only be economically effici e n t i f regulation attempts to mirror the competitive free market and marginal cost p r i n c i p l e s . 2 6 8 Thus the Manitoba Board concluded that: M.J. Trebilcock, Manitoba Hearing supra note 2 61, "Pre- f i l e d Evidence on Behalf of the Ministers of Consumer and Corporate Affairs and Energy and Mines" submission of Professor Michael J. Trebilcock, at 13 & 9. Id. at 14. N.B.: A new buy-sell contracting arrangement, called a PRC, i s being used by TCPL to support the CMP. Following a series of paper transactions, end-users in Ontario pay a uniform price and obtain their discount in Saskatchewan. This legal "slight of hand" appears to have the effect of eliminating the jurisdiction of the Ontario Energy Board to to make a finding of price discrimination. Manitoba PUB Order 89/87, supra note 261 at 22. The PUB can investigate public u t i l i t y t o l l s or charges. If i t opines these to be excessive, unjust, unreasonable or unjustly discriminatory, i t has plenary power to fix just and reasonable rates: Public U t i l i t i e s Board Act, R.S.M 1970, as am., C.P280, ss. 64(1)(2),74,77. For a thorough discussion of rate design and marginal cost pricing, see: Bonbright supra note 89 at 49-59, 291-293, 395; Bryer & Stewart, supra note 112 at 223- 224, 514-516. 80 "Due t o a number o f c o n s t r a i n t s , t h e r e i s not a f r e e c o m p e t i t i v e market f o r n a t u r a l gas s a l e s t o d i s t r i b u t o r s f o r r e s a l e t o core customers i n Manitoba. ... The Board does not c o n s i d e r t h a t the Companies were a b l e t o n e g o t i a t e on a v o l u n t a r y b a s i s ... because of the c o n s t r a i n t s l e v e r e d a g a i n s t them and the overwhelmingly s u p e r i o r b a r g a i n i n g power o f T C P L . " 2 6 9 Some of these r e s t r a i n t s t o market o r i e n t e d c o m p e t i t i o n were i d e n t i f i e d as s a n c t i t y of c o n t r a c t s , the s e l f - d i s p l a c e m e n t r u l e and double demand charges. Other c o n s t r a i n t s i n c l u d e d the gas removal permit system i n the p r o v i n c e o f A l b e r t a and c o n t r a c t u a l c o n s t r a i n t s a s s o c i a t e d w i t h TCPL. But much t o i t s c h a g r i n , the Manitoba Board d i d not see any p l a u s i b l e a l t e r n a t i v e t o the p r i c e s t h a t were s e t f o r t h i n the Gas P r i c i n g Agreement ( G P A ) . 2 7 0 Hence, the Manitoba P u b l i c U t i l i t i e s Board and other p r o v i n c i a l r e g u l a t o r y boards are thought t o be i n a predicament l a r g e l y caused by the l o n g term CD C o n t r a c t s e x i s t i n g between TransCanada and the l o c a l d i s t r i b u t i o n companies. Although t h e r e i s an o b l i g a t i o n t o pay a f i x e d t r a n s p o r t a t i o n charge (CD t o l l ) the CD C o n t r a c t s are not t a k e - or-pay s i n c e t h e r e i s no o b l i g a t i o n t o take o r pay f o r gas as a commodity. However, these d i s t r i b u t o r s a l e s c o n t r a c t s do not match TCPL's take-or-pay producer supply c o n t r a c t s . Since TransCanada i s o v e r - c o n t r a c t e d t o producers, i t i s r e l u c t a n t t o r e n e g o t i a t e the CD C o n t r a c t s s i n c e i t would r e c e i v e l e s s revenue t o repay the producers. Manitoba PUB Order 89/87. supra note 261 a t 17 & 19, 2 7 0 Id. a t 18 & 19. 81 R e g u l a t o r y boards must t h e r e f o r e v e t t h e r a t e s of l o c a l d i s t r i b u t o r s i n an e c o n o m i c a l l y e f f i c i e n t manner. They are concerned about l o s i n g l a r g e i n d u s t r i a l customers t o a l t e r n a t i v e f u e l s w i t h the r e s u l t t h a t the remaining "core" r e s i d e n t i a l and s m a l l commercial u s e r s w i l l have t o bear h i g h e r r a t e s . T h e r e f o r e they are w i l l i n g t o approve the streaming o f gas by the c o m p e t i t i v e d i s c o u n t s o f f e r e d t o l a r g e i n d u s t r i e s as an i n c e n t i v e f o r them t o remain connected w i t h the l o c a l d i s t r i b u t i o n system. Furthermore, t h e r e does not seem t o be much economic sense i n p r o t e c t i n g l o c a l d i s t r i b u t o r s from the c o m p e t i t i o n of t h i r d p a r t y d i r e c t s a l e s . Any o p p o s i t i o n from t h e p i p e l i n e c a r r i e r would seem unfounded as lo n g as i t i s assured o f i t s t r a n s p o r t a t i o n c o s t s , as w e l l as a f a i r r e t u r n f o r i t s s e r v i c e s . T h e r e f o r e , the d i r e c t s a l e c o n t r o v e r s y r e a l l y seems t o i n v o l v e an i d e n t i f i c a t i o n o f the p a r t i e s who w i l l a c t u a l l y bear the burden of displacement. One commentator says t h a t : "The i n t e r e s t s p r i n c i p a l l y i n j u r e d by such displacement must s u r e l y be the system producers who e i t h e r l o s e s a l e s o r must c u t p r i c e s t o f o r e c l o s e displacement. T h i s form of c o m p e t i t i v e i n j u r y , however, i s c o n s i s t e n t ^Mf n t n e e f f i c i e n t f u n c t i o n i n g o f market f o r c e s . " 1 In o t h e r words, the producers who are under long-term c o n t r a c t t o the TCPL "system" would stand t o l o s e money by such c o m p e t i t i o n . A d d i t i o n a l l y , TCPL would l o s e money t o the ex t e n t o f i t s i n t e r e s t as a commodity broker. While t h i s form of economic i n j u r y would be h e a l t h y f o r the economy as a ^ 1 T r e b i l c o c k . supra note 265 a t 6. 82 whole, v a r i o u s lobby groups e f f e c t i v e l y r e p r e s e n t the v e s t e d i n t e r e s t s a g a i n s t d i s r u p t i o n o f the s t a t u s quo by the d i r e c t s a l e arrangement. In the absence of s i g n i f i c a n t new exports t o the U n i t e d S t a t e s , the government of A l b e r t a , the producer a s s o c i a t i o n s as w e l l as TCPL, are keen t o r e c e i v e the g r e a t e s t amount of revenue p o s s i b l e from the commodity's i n t e r p r o v i n c i a l s a l e . I t i s submitted t h a t t h e i r i n t e r e s t s do not n e c e s s a r i l y r e f l e c t those o f the consuming p u b l i c who sho u l d be b e t t e r p r o t e c t e d . While the d i f f e r e n c e i n i n t e r e s t s i s not s u r p r i s i n g , the q u e s t i o n t h a t needs t o be addressed i s the type of r e l a t i o n s h i p t h a t should e x i s t between consumers and producers. Although d e r e g u l a t i o n unbundled the t r a n s p o r t a t i o n component of n a t u r a l gas from the merchandizing component, the former appears t o be i n d i r e c t l y i n f l u e n c i n g o r " r e g u l a t i n g " the l a t t e r . A c c o r d i n g l y , the d i s t r i b u t i o n o f n a t u r a l gas i n Canada i s a d m i n i s t r a t i v e l y beleagured. One reason f o r t h i s i s the downstream d i s s a t i s f a c t i o n o f the p r o t e c t i o n a f f o r d e d t o TransCanada's gas marketing i n t e r e s t s . P a r t l y as a r e s u l t o f t h i s d i s s a t i s f a c t i o n , the N a t i o n a l Energy Board has decid e d t o conduct a p u b l i c h e a r i n g on TCPL's t o l l s , as w e l l as a myriad of o t h e r r e l a t e d i s s u e s . Designated as Hearing Order RH-1-88, the new i n q u i r y w i l l proceed i n two phases and i s not expected t o conclude u n t i l a f t e r October 1 9 8 8 . 2 7 2 I n c l u d e d among the i s s u e s t o be addressed are displacement and o p e r a t i n g demand * ? T 2 N a t i o n a l Energy Board, Hearing Order RH-1-88. February 17, 1988. 83 (ODV) methodology. For i n s t a n c e , the h e a r i n g w i l l ask whether s e l f - d i s p l a c e m e n t should now be allowed, and i f so, whether i t s h o u l d be phased-in. A l s o s l a t e d f o r examination i s the n e c e s s i t y o f m a i n t a i n i n g the ODV r e l i e f concept and the circum s t a n c e s when i t should be granted f o r s e l f - d i s p l a c e m e n t v o l u m e s . 2 7 3 Thus the new h e a r i n g w i l l a f f e c t t he p o s i t i o n o f the Manitoba O i l and Gas C o r p o r a t i o n (MOGC) and i t s e f f o r t s t o b r i n g lower, more cost-based n a t u r a l gas p r i c e s t o the r e s i d e n t i a l and ot h e r core customers o f t h a t P r o v i n c e . P a r t i c u l a r l y , MOGC has r e q u e s t e d 2 7 4 t h a t t he s e l f - d i s p l a c e m e n t and ODV i s s u e s be framed a g a i n s t the f a c t i n t e r a l i a , t h a t TCPL w i l l not, b a r r i n g r e - n e g o t i a t i o n , have e n f o r c e a b l e p r i c e p r o v i s i o n s w i t h t he l o c a l d i s t r i b u t o r s a f t e r October 31, 1988. Th e r e f o r e , i n l i g h t o f the new he a r i n g ' s scope, one i n t e r e s t e d p a r t y has d e s c r i b e d the proceedings as the " f i r s t meaningful o p p o r t u n i t y f o r the s e l f - d i s p l a c e m e n t p r o h i b i t i o n t o be r e - e x a m i n e d . " 2 7 5 However, w h i l e the NEB has c u r i o u s l y s t a t e d t h a t i t i s not " q u e s t i o n i n g the c o r r e c t n e s s o f i t s e a r l i e r • • 2 7 ft d e c i s i o n s , " " ' 0 i t n e v e r t h e l e s s seems otherwise, s i n c e these d e c i s i o n s w i l l be r e - e v a l u a t e d i n e f f e c t , i f not nomi n a l l y . I d. a t Appendix IV, p . l . A.R. Thompson, Counsel f o r MOGC and the M i n i s t e r of Energy and Mines, Gov't o f Manitoba; RH-1-88 N o t i c e o f I n t e r v e n t i o n a t 3. J.D. B r e t t , Counsel (of Thompson, Dorfman, Sweatman; B a r r i s t e r s and S o l i c i t o r s , Winnipeg) f o r GWG and ICG U t i l i t i e s (Manitoba) L t d . ; l e t t e r t o NEB dated March 3, 1988, a t 5. J.S. K l e n a v i c , NEB S e c r e t a r y ; l e t t e r dated March 8, 1988 t o J.W.S McQuat, Q.C., V i c e - P r e s i d e n t , TCPL. zTT 274 275 276 84 Although the d e c i s i o n s of the N a t i o n a l Energy Board are i n t e r p r o v i n c i a l i n j u r i s d i c t i o n , they i n v a r i a b l y have an impact upon those p r o v i n c i a l r e g u l a t o r y t r i b u n a l s whose d e c i s i o n s a f f e c t n a t u r a l gas customers. In p a r t i c u l a r , the Manitoba d e c i s i o n has e f f e c t i v e l y f e t t e r e d t h a t p r o v i n c e ' s consumers i n such an obtuse manner t h a t one commentator has d e s c r i b e d the Board as "a mere handmaiden t o the p o l i t i c a l 0 7 7 . , p r o c e s s . " What i s needed now i s f o r the N a t i o n a l Energy Board t o c y s t a l l i s e i t s own concept o f p u b l i c i n t e r e s t so t h a t i t may be understood i n l i g h t of the c o m p e t i t i v e n a t u r a l gas environment. I t i s t h e r e f o r e hoped t h a t the NEB a r r i v e s a t a s a t i s f a c t o r y d e c i s i o n r e g a r d i n g the displacement i s s u e i n o r d e r t o g a l v a n i z e the o b j e c t i v e s o f d e r e g u l a t i o n . Rather than p r o t e c t i n g TCPL from i t s o v e r - c o n t r a c t e d supply l i a b i l i t i e s , the NEB should g r a n t e i t h e r MOGC or ICG/GWG a d i r e c t s a l e t r a n s m i s s i o n order once t h a t commodity s e l l e r and monopoly p i p e l i n e ' s CD s e r v i c e c o n t r a c t s e x p i r e . Such a c t i o n s might induce TCPL and n a t u r a l gas producers t o r e - n e g o t i a t e t h e i r supply c o n t r a c t s thereby f o s t e r i n g the upstream c o m p e t i t i o n t h a t i s needed t o d i s t r i b u t e the downstream b e n e f i t s of d e r e g u l a t i o n . Keeping, supra note 263 a t 7. 85 6. THE "CYANAMID" PIPELINE BYPASS ISSUE IN ONTARIO One noteworthy aspect of n a t u r a l gas d e r e g u l a t i o n i s the p r o v i s i o n f o r i n d i v i d u a l end-users t o l i t e r a l l y bypass a l o c a l d i s t r i b u t i o n company w i t h t h e i r own c o n n e c t i o n t o the main i n t e r p r o v i n c i a l t r u n k l i n e . While the former e n t e r p r i s e i s w i d e l y accepted t o f a l l under f e d e r a l j u r i s d i c t i o n , a Canadian c o n s t i t u t i o n a l law argument i s r a g i n g over the c o n t r o l of l o c a l bypass p i p e l i n e s . In a unique s e t of j u d i c i a l appeals which addressed the d i v i s i o n of powers, the s e undertakings have r e c e n t l y been h e l d t o f a l l under p r o v i n c i a l competence. Although the matter i s i n a s t a t e of f l u x u n t i l i t i s a d j u d i c a t e d by the Canadian Supreme Court, p r o v i n c i a l c o n t r o l of bypass p i p e l i n e s , i f a f f i r m e d , w i l l have s i g n i f i c a n t commercial i m p l i c a t i o n s . 6.1 BACKGROUND Changes i n the p o l i c y p e r t a i n i n g t o n a t u r a l gas p r i c i n g a l l o w s consumers t o purchase gas d i r e c t l y from A l b e r t a p roducers a t n e g o t i a t e d p r i c e s or i n d i r e c t l y v i a b u y - s e l l arrangements, g i v e n the a v a i l a b i l i t y o f c o n t r a c t c a r r i a g e from d i s t r i b u t o r s . 2 7 8 Most l o c a l d i s t r i b u t i o n companies (LDC's) i n e a s t e r n Canada are p a r t i e s t o long-term supply c o n t r a c t s w i t h z l i i N a t u r a l Gas p r i c e s and Markets Agreement, supra note 139 at C lause 5. 86 TransCanada P i p e l i n e s L t d . (TCPL), and t h e i r r e s i d e n t i a l and commercial customers do not appear t o have y e t b e n e f i t t e d from t h i s p o l i c y . However, some l a r g e i n d u s t r i a l customers have e i t h e r taken advantage of TCPL's c o m p e t i t i v e marketing programmes or n e g o t i a t e d d i r e c t purchases a f t e r the e x p i r a t i o n o f t h e i r c o n t r a c t s w i t h the L D C ' s . 2 7 9 The former t r a n s a c t i o n s i o n are programmes p r o v i d e d f o r i n the Hallowe'en Agreement t h a t accords p r i c e d i s c o u n t s t o i n d u s t r i a l customers so t h a t the gas s o l d remains c o m p e t i t i v e w i t h a l t e r n a t i v e f u e l c o s t s . In O n t a r i o , one i n d u s t r i a l end-user i s l e a d i n g a b a t t l e i n the i n c r e a s i n g l y p o p u l a r d e s i r e t o take n a t u r a l gas d e l i v e r i e s d i r e c t l y from p i p e l i n e s u p p l i e r s r a t h e r than through the LDC's. T h i s d e r e g u l a t i o n phenomenon i s b e t t e r known as " p i p e l i n e bypass". The p r o t a g o n i s t i n t h e matter i s Cyanamid Canada Inc., a l a r g e f e r t i l i z e r p l a n t t h a t seeks t o c o n s t r u c t i t s own p i p e l i n e t o the TCPL system, e n t i r e l y b y p a s s i n g the l o c a l d i s t r i b u t i o n company, Consumers Gas Co. L t d . Cyanamid c o n s i d e r e d the venture a t t r a c t i v e because of t h e s i g n i f i c a n t gas supply c o s t s a v i n g s . Conversely, bypass i s a matter of concern t o remaining LDC customers. T h e i r r a t e s c o u l d p r o p o r t i o n a l l y i n c r e a s e g i v e n the lower volumes t h a t would be a v a i l a b l e t o meet the L o c a l D i s t r i b u t i o n Companies' f i x e d c o s t s . 2 8 1 J . Keeping, "Bypass P i p e l i n e s " (1987), 20 Resources 1 (The N e w s l e t t e r of the Canadian I n s t i t u t e o f Resources Law) . N a t u r a l Gas P r i c e s and Markets Agreement, supra note 139 a t Clause 8. Keeping, supra note 279. 2T9- 280 281 87 In o r d e r t o proceed, Cyanamid i n c o r p o r a t e d a s u b s i d i a r y , Cyanamid Canada P i p e l i n e Inc. (CCPI) as a f e d e r a l l y i n c o r p o r a t e d company. I t a p p l i e d t o the N a t i o n a l Energy Board f o r a u t h o r i z a t i o n 2 8 2 t o c o n s t r u c t and operate the 6.2 km. bypass p i p e l i n e . The NEB granted the o r d e r 2 8 3 i n December 1986. S h o r t l y a f t e r Cyanamid's N.E.B. a p p l i c a t i o n , the O n t a r i o Energy Board (O.E.B.) commenced a h e a r i n g on i t s own motion i n the matter and determined t h a t i t had j u r i s d i c t i o n over bypass p i p e l i n e s i n the p r o v i n c e . 2 8 4 P r i o r t o the N.E.B. d e c i s i o n , the O.E.B. then s t a t e d a c a s e 2 8 5 f o r the o p i n i o n of the O n t a r i o D i v i s i o n a l Court so t h a t i t s o p i n i o n c o u l d be v e r i f i e d . On March 26, 1987 the c o u r t a f f i r m e d p r o v i n c i a l j u r i s d i c t i o n over the t y p i c a l bypass f a c i l i t y d e c l a r i n g i t t o be a l o c a l work or u n d e r t a k i n g pursuant t o s e c t i o n 92(10) of the C o n s t i t u t i o n Act, 1867, s u b j e c t t o c e r t a i n c r i t e r i a . 2 8 6 P r o v i d e d t h a t they are e n t i r e l y l o c a t e d w i t h i n the p r o v i n c e , bypass f a c i l i t i e s must i n t e r a l i a , be owned, operated, c o n t r o l l e d , and maintained se p a r a t e from the i n t e r p r o v i n c i a l work t o which they are connected. T h e i r purpose must not be e s s e n t i a l t o the i n t e r p r o v i n c i a l work, nor may they have any d i r e c t e f f e c t upon i t but r a t h e r t h e i r NEB A c t , supra note 41 a t s.49. Canada Energy Law S e r v i c e supra note 43, N.E.B. d e c i s i o n 42, "Cyanamid Canada P i p e l i n e Inc.", Dec. 1986. See a l s o NEB Orders XG-13-86 and MO-63-86. Id. O.E.B. d e c i s i o n 41, "Bypass o f L o c a l Gas D i s t r i b u t i o n Systems" (OEB f i l e #EBR0 410-1,411-1,412-1) Dec. 12, 1986. O n t a r i o Energy Board Act, R.S.O. 1980, c.332, s.31. Re O n t a r i o Energy Board and Consumers' Gas Co. e t a l . (1987) 59 O.R. (2d) 766. 88 purpose must be t o serve an O n t a r i o u s e r . 2 8 7 A f t e r t h i s r e s u l t , Cyanamid withdrew from t h e p r o c e e d i n g s and the l o c a l u t i l i t y abandoned i t s NEB d e c i s i o n appeal. T h i s l e f t Cyanamid w i t h prima f a c i e v a l i d NEB o r d e r s a l b e i t o r d e r s which are s u b j e c t t o the t h r e a t of s a n c t i o n s by O n t a r i o i f indeed acted upon. T h e r e f o r e , t h i s p e c u l i a r a b i l i t y o f one j u r i s d i c t i o n ' s t r i b u n a l t o e f f e c t i v e l y render another's d e c i s i o n nugatory may, a c c o r d i n g t o one commentator, be a " n a t u r a l consequence" of Canadian f e d e r a l i s m . The i s s u e of p r o v i n c i a l l e g i s l a t i v e competence over t y p i c a l bypass p i p e l i n e s was r e f e r r e d t o the O n t a r i o Court of A p p e a l . 2 8 9 S h o r t l y a fterward, Cyanamid's a p p l i c a t i o n t o the N a t i o n a l Energy Board was granted d i r e c t i n g a r e f e r e n c e review of t h a t Board's o r i g i n a l d e c i s i o n t o the F e d e r a l Court of A p p e a l . 2 9 0 On November 27, 1987, t h a t c o u r t o v e r r u l e d the d e c i s i o n a t f i r s t i n s t a n c e , h o l d i n g t h a t the NEB d i d not have j u r i s d i c t i o n over the proposed f a c i l i t i e s which were u l t r a v i r e s the l e g i s l a t i v e competence of P a r l i a m e n t . The F e d e r a l Court o f Appeal d i d not c o n s i d e r i t t o be an i n t e r p r o v i n c i a l work or u n d e r t a k i n g of the k i n d e x p r e s s l y r e s e r v e d t o the f e d e r a l government under s e c t i o n 92(10)(a) of the C o n s t i t u t i o n Ac t 1867. Furthermore, the endeavour was not viewed as an T8T 288 289 290 Id. Kay, supra note 30 a t 284. Order i n C o u n c i l O.C. 1079/87, dated A p r i l 30, 1987; pursuant t o : Courts of J u s t i c e A ct, S.O., 1984 c . l l , s. 19. N a t i o n a l Energy Board Order d e c i s i o n dated May 29, 1987; pursuant t o : N a t i o n a l Energy Board A c t R.S.C. 1970, c.N- 6, s. 17(1); F e d e r a l Court Act, S.C. 1970-71-72, c . l , s.28 (4) . 89 express e x c e p t i o n from p r o v i n c i a l power pursuant t o the Peace, Order and Good Government (POGG) d e c l a r a t o r y p r o v i s i o n s found i n s e c t i o n 9 1 ( 2 9 ) . 2 9 1 The O n t a r i o Court of Appeal r e l e a s e d i t s d e c i s i o n on February 15, 1988, h o l d i n g t h a t the CCPI p i p e l i n e i s s u b j e c t t o p r o v i n c i a l l e g i s l a t i v e a u t h o r i t y . In essence, the c o u r t c o n c u r r e d w i t h the reasons o f the F e d e r a l Court of Appeal d e c i s i o n as enunciated by Mr. J u s t i c e MacGuigan. Any appeal from t h a t d e c i s i o n l i e s as of r i g h t t o the Supreme Court of Canada, and on A p r i l 12, 1988, a N o t i c e o f Appeal was f i l e d by Cyanamid Canada P i p e l i n e Inc. and Cyanamid Canada i n c . 2 9 3 Another a p p l i c a t i o n was made f o r l e a v e t o appeal t o the Supreme Court of Canada i n the F e d e r a l Court matter. Leave was g r a n t e d on A p r i l 25, 1988 a p p a r e n t l y because the s i m i l a r O n t a r i o Court of Appeal matter would i n any event, be b e f o r e the Court. C u r r e n t l y , i t i s intended t h a t both cases w i l l be argued t o g e t h e r i n the Supreme Court as one c o n s t i t u t i o n a l q u e s t i o n . However the Court's schedule may p r e c l u d e a d e c i s i o n f o r a t l e a s t a year i f not l o n g e r . 2 9 4 Thus, d e s p i t e these two c o m p e l l i n g a u t h o r i t i e s i n favour of p r o v i n c i a l competence, the matter remains i n a s t a t e o f f l u x u n t i l a z j y J- Ref. r e Bypass P i p e l i n e s . [1987] F.C.A., unreported. Reasons f o r judgement by MacGuigan,J., concurred i n by: Mahoney and Stone,JJ. 2 9 2 Ref. r e Bypass P i p e l i n e s [1988] Ont.C.A., unreported. P e r s o n a l Communication, C. Kemm Yates, Counsel f o r Cyanamid, 27 A p r i l 1988. The Appeal i s a v a i l a b l e pursuant t o s.37 of the Supreme Court A c t and s.l9(7) of the O n t a r i o Courts Of J u s t i c e A c t . Id. 293 294 90 f i n a l a d j u d i c a t i o n i s rendered. N e v e r t h e l e s s , p i p e l i n e bypass remains a c o m p e l l i n g matter due t o i t s commercial i m p l i c a t i o n s . 6.2 COMMERCIAL IMPLICATIONS Support f o r bypass p i p e l i n e s was s t a t e d by the P i p e l i n e Review pan e l who d i s c u s s e d i t s o p t i o n a l use i n the p r o v i s i o n o f n o n - d i s c r i m i n a t o r y n a t u r a l gas t r a n s p o r t a t i o n s e r v i c e s . The p a n e l b e l i e v e d t h a t l a r g e i n d u s t r i a l u s e r s should be a b l e t o c o n s t r u c t and operate t h e i r own bypass p i p e l i n e s , p r o v i d i n g t h a t a r e g u l a t o r y a p p l i c a t i o n f o r the s e r v i c e met the standard c o n s t r u c t i o n s p e c i f i c a t i o n s . Importantly, the bypass would have t o be e c o n o m i c a l l y j u s t i f i a b l e and c o u l d not be warranted i n the presence of another reasonably c o m p e t i t i v e d i s t r i b u t i o n s y s t e m . 2 9 5 In a market o r i e n t e d regime, the Panel r e p o r t e d t h a t gas customers should be a b l e t o n e g o t i a t e d i r e c t s a l e s from a producer and choose the type of t r a n s p o r t a t i o n s e r v i c e s t h a t they d e s i r e d , i n c l u d i n g bypass s e r v i c e s . Although bypass o p e r a t i o n s c o u l d r e s u l t i n s i g n i f i c a n t l y h i g h e r c o s t s t o remaining system customers, the i n i t i a t i v e would r e s t w i t h the d i s t r i b u t o r t o o f f e r "unbundled t r a n s p o r t a t i o n r a t e s which w i l l be c o m p e t i t i v e w i t h the bypass o p t i o n . " Thus the Panel thought t h a t p r o v i n c i a l r e g u l a t o r s should have the power of a p p r o v a l over the bypass o p t i o n p r o v i d e d t h a t i t i s i n the " b e s t i n t e r e s t s of core customers". P r o v i n c i a l r e g u l a t o r s P i p e l i n e Review Panel Report, supra note 146 a t s.3.2.5. 91 c o u l d then approve those s p e c i a l t r a n s p o r t a t i o n r a t e s o f a d i s t r i b u t o r i n o r d e r t o prevent a l a r g e u s e r s e e k i n g the the bypass o p t i o n has c r y s t a l i s e d . Some opponents t o bypass c r i t i c i s e i t s p o t e n t i a l t o p l a c e i n c r e a s i n g l y h i g h e r c o s t s upon core customers such as r e s i d e n t i a l and commercial u s e r s who cannot a f f o r d t o switch t o a l t e r n a t i v e f u e l s as e a s i l y as c o u l d l a r g e i n d u s t r i e s . One p a r t i c u l a r l y c o l o u r f u l t u r n o f phrase has d e s c r i b e d the economic impact of a bypass as a death s p i r a l : "Death s p i r a l r e f e r s t o the impact on r a t e s o f a customer b y p a s s i n g the system c a u s i n g the remaining customers t o cover the f i x e d c o s t s t h a t a re not absorbed by the customer who l e f t the system t o bypass. Rates are i n c r e a s e d c a u s i n g o t h e r s t o l e a v e the s y s t e m . " 2 9 7 S i n c e the r e l e v a n t l o c a l d i s t r i b u t i o n company was a p a r t y t o a lo n g term gas supply c o n t r a c t from TCPL, i t s f i x e d demand charges under t h a t arrangement would c o n t i n u e once the bypass buyer l e f t the i n t e r - p r o v i n c i a l p i p e l i n e ' s s o - c a l l e d "system." These charges would be unabsorbed by the bypass end-user and would have t o be app o r t i o n e d by the remaining u t i l i t y c u s tomers. 2 9 8 Given the u n r e l i e v e d demand charges, O n t a r i o ' s r e g u l a t o r y t r i b u n a l d e c i d e d a g a i n s t a p o l i c y opposing the o p t i o n , w h i l e r e c o g n i s i n g a p u b l i c i n t e r e s t need t o m e r i t o r i o u s l y e v a l u a t e each bypass a p p l i c a t i o n , i n t e r a l i a c o n s i d e r i n g economic and bypa s s opt i o n . 296 Yet d e s p i t e these p r o v i s i o n s , o p p o s i t i o n t o 2-9-6" 297 Id. a t s.5.3.5. Canada Energy Law S e r v i c e , supra note 43, O.E.B. d e c i s i o n 41 a t s.5.36; p.60-1843. Id. a t s.5.37; p.60-1844. 298 c o s t f a c t o r s . y S i m i l a r l y , the p r o v i n c e of B r i t i s h Columbia has endorsed bypass as a r e s u l t of i t s commitment t o d e r e g u l a t i o n and a d e s i r e t h a t i t s gas u t i l i t i e s remain c o m p e t i t i v e . An important desiratum t h e r e i s t h a t the bypass c o n t r a c t s o f i n d u s t r i e s and u t i l i t i e s " r e f l e c t the t r u e c o s t of s e r v i c e t o a l l c a t e g o r i e s of customers" i n o r d e r t o gl e a n the b e s t from t h i s new form o f gas s e r v i c e as w e l l as the c o n v e n t i o n a l t y p e . 3 0 0 However, n e g a t i v e s p e c u l a t i o n p e r s i s t s c o n c e r n i n g bypass' a b i l i t y t o "allow market s i g n a l s t o flow" J"- L v i a the p r o v i n c i a l r e g u l a t o r y Boards t o the d i s t r i b u t o r u t i l i t i e s as was hoped f o r by the N a t i o n a l Energy Board. Manitoba has u n e q u i v o c a l l y opposed the bypass o p t i o n as b e i n g i n e f f i c i e n t and a g a i n s t the p u b l i c i n t e r e s t , which i n t h a t p r o v i n c e ' s view can be b e t t e r served by a s i n g l e d i s t r i b u t i o n system f o r each f r a n c h i s e a r e a . 3 0 2 T h e i r p o s i t i o n i s a l i v e t o the economic r a m i f i c a t i o n s of the death s p i r a l problem. T h i s problem has been noted i n the U n i t e d S t a t e s where commentators on t h e i r d e r e g u l a t i o n p r o c e s s have s a i d t h a t a death s p i r a l : I d . a t s.6.9; p.60-1845. B r i t i s h Columbia, M i n i s t r y of Energy, Mines & Petroleum Resources, News Release, 1987:10, March 19, 1987. Canada Energy Law S e r v i c e , supra note 43, NEB d e c i s i o n 42 a t s.7.5, p.10-4474. Manitoba P u b l i c U t i l i t i e s Board, Order No. 158/86, a t 21. 93 " c o n s i s t s o f response t o a h i g h l y e l a s t i c market whereby h i g h e r p r i c e s mean l o s s o f b u s i n e s s w i t h fewer s a l e s u n i t s over which t o spread f i x e d c o s t . The r e s u l t i s a f u r t h e r i n c r e a s e i n p r i c e t o cover the i n c r e a s e i n u n i t c o s t u n t i l the b u s i n e s s i s no l o n g e r v i a b l e . " 3 0 3 In o r d e r t o prevent the d u p l i c a t i o n o f f a c i l i t i e s and economic i n e f f i c i e n c y , o t h e r s have suggested t h a t a d i s t r i b u t i o n u t i l i t y reduce i t s r a t e s t o l a r g e i n d u s t r i a l u s e r s who are contemplating a bypass o p t i o n . T h i s c o s t - b a s e d approach would l e s s e n the i n c r e a s e i n the r a t e s t o the u t i l i t y ' s o t h e r customers and contemporaneously would make the o p t i o n l e s s a t t r a c t i v e t o the proposed b y p a s s e r . 3 0 4 S i g n i f i c a n t l y , the f e d e r a l government has not contemplated u s i n g the s e c t i o n 92(10)(c) d e c l a r a t o r y powers of the C o n s t i t u t i o n A c t 1867, which when read w i t h s e c t i o n 91(29) would enable P a r l i a m e n t t o assume j u r i s d i c t i o n over the Bypass p i p e l i n e s . 3 0 5 By deeming them t o be " f o r the ge n e r a l advantage of Canada," the d i s p u t e over j u r i s d i c t i o n c o u l d be r e s o l v e d i n favour o f c e n t r a l government. For i n s t a n c e , t h i s 3U3" 304 305 F o s t e r A s s o c i a t e s , Inc., D e r e g u l a t i o n Of N a t u r a l Gas S a l e s To Large Volume I n d u s t r i a l Users, r e p o r t prepared f o r The American Gas A s s o c i a t i o n (Washington, D.C, August 1987) a t 44. Canada Energy Law S e r v i c e supra note 43, NEB d e c i s i o n 42 a t s.7.2; p.10-4472. For a more thorough d i s c u s s i o n on the f e d e r a l d e c l a r a t o r y power, see: I.H. F r a s e r , "Some Comments on Su b s e c t i o n 92(10) of the C o n s t i t u t i o n A c t , 1867" 29 M c G i l l L . J . (1984) 558; V.C. MacDonald, P a r l i a m e n t a r y J u r i s d i c t i o n By D e c l a r a t i o n [1934] 1 D.L.R. 1; P. Shwartz, " F i a t by D e c l a r a t i o n - S.92(10)(c) o f the B r i t i s h North America A c t " (1960), 2 Osgoode H a l l L . J . 1; K. Hansen, "The F e d e r a l D e c l a r a t o r y Power Under The B r i t i s h North America A c t " (1968) 3 Man. L . J . 87; A. L a j o i e , Le Pouvoir d e c l a r a t o i r e du Parlement ( U n i v e r s i t e de Montreal: Montreal,1969). 94 power has been used over 469 times i n Canada, o f t e n i n r e s p e c t of r a i l w a y s , c a n a l s , t e l e g r a p h s , telephones, harbours, o i l r e f i n e r i e s and o t h e r e n t e r p r i s e s . Thus i n an i n c i d e n t when f e d e r a l r e g u l a t o r y competence was denied t o P a r l i a m e n t , 3 0 6 j u r i s d i c t i o n was assumed over the g r a i n t r a d e f o l l o w i n g a d e c l a r a t i o n t h a t g r a i n e l e v a t o r s and r e l a t e d m i l l s were works f o r the g e n e r a l advantage of the c o u n t r y . 3 0 7 I t i s however d o u b t f u l t h a t the p r e s e n t f e d e r a l , P r o g r e s s i v e C o n s e r v a t i v e government would c o n s i d e r such an a c t i o n because of t h e i r i d e o l o g y . R e c e n t l y , t h i s p h i l o s o p h y has r e s u l t e d i n the s o - c a l l e d Meech Lake A c c o r d . 3 0 8 N e v e r t h e l e s s , w h i l e the f e d e r a l government i s not d i s p o s e d t o d e c l a r i n g bypass p i p e l i n e s t o be a work f o r the g e n e r a l advantage o f Canada, t h i s p a r t i c u l a r type of i n t e r v e n t i o n does not, by i t s e l f seem t o be i n the p u b l i c i n t e r e s t . A c c o r d i n g t o one commentator, bypass i s not c o n s i s t e n t w i t h the e f f i c i e n t f u n c t i o n i n g o f the Canadian n a t u r a l gas market. C a p a c i t y c o s t s are a l l o c a t e d i n such a way as t o motivate l a r g e end-users t o commit s o c i a l and economic waste 3tnr 307 308 R. v. E a s t e r n Terminal E l e v a t o r Co. [1925] S.C.R 434, [1925] 3 D.L.R. 1. Hogg, supra note 26 a t 491-492. Meech Lake Accord, An intergovernmental Agreement signed June 3, 1987 by the Prime M i n i s t e r and a l l 10 P r o v i n c i a l Premiers ( i n o f f i c e a t t h a t time) t h a t i n t e r a l i a r e c o g n i z e s the d i s t i n c t nature of Quebec, and g i v e s the p r o v i n c e s the r i g h t t o 1) s e l e c t judges f o r the Supreme Court of Canada, 2) s e l e c t Senators f o r appointment t o Canada's upper House of Parliament, 3) v e t o f u t u r e c o n s t i t u t i o n a l amendments. I f implemented as an amendment t o the Canadian C o n s t i t u t i o n , c e r t a i n powers of the f e d e r a l government w i l l be l e s s e n e d i n favour of the P r o v i n c e s w i t h arguably adverse e f f e c t s f o r n a t i o n a l u n i t y . 95 by d u p l i c a t i n g t r a n s p o r t a t i o n f a c i l i t i e s t h a t a l r e a d y e x i s t . Furthermore, the remaining u s e r s w i l l c o n s t i t u t e a s m a l l e r customer base who would have t o absorb the f i x e d c o s t s o f the l o c a l d i s t r i b u t i o n company w i t h an i n c r e a s e i n r a t e s . Rather than promote the i n e f f i c i e n t c o m p e t i t i o n o f downstream bypass, i t t h e r e f o r e seems more e f f i c a c i o u s t o promote upstream c o m p e t i t i o n among producers, p r e f e r a b l y through the i n s t r u m e n t a l i t y o f d i r e c t s a l e s . i U F i n a l l y , w h i l e the p r i c i n g o f n a t u r a l gas has been d e r e g u l a t e d , i t has been seen t h a t the t r a n s p o r t a t i o n component remains r e g u l a t e d g i v e n the m o n o p o l i s t i c nature of TCPL and the l o c a l d i s t r i b u t i o n companies. U n f o r t u n a t e l y , the r e g u l a t o r y regime t r a n s i t i o n has not been e f f e c t e d without f r i c t i o n . One e x a c e r b a t i n g f a c t o r i s the d u a l r o l e of the I n t e r p r o v i n c i a l TransCanada (TCPL) p i p e l i n e as a c a r r i e r and a merchant which seems t o have l o c k e d r e s i d e n t i a l and commercial gas u s e r s i n t o u n c o m p e t i t i v e l y h i g h e r purchase p r i c e s . Consequently, i t appears l i k e l y t h a t the Canadian p r o c e s s of d e r e g u l a t i o n w i l l c o n t i n u e over the next few ye a r s . H o p e f u l l y , the l e g a l i n c i d e n t s o f the p a r t i c i p a n t s w i l l be p r a g m a t i c a l l y adapted e i t h e r through r e s p o n s i b l e p u b l i c r e g u l a t i o n and/or p r i v a t e n e g o t i a t i o n , so as t o r e f l e c t the c u r r e n t commercial r e a l i t y . T*?? T r e b i l c o c k . supra note 265 a t 5-6. See the t e x t accompanying note 271 supra 96 7. CONCLUSION T r a n s i t i o n a l d i f f i c u l t i e s are being encountered as the d e r e g u l a t i o n p r o c e s s e v o l v e s . Although t h e s e problems were not t o t a l l y unexpected i t seems t h a t the promises of a new market o r i e n t e d environment have not l i v e d up t o the e x p e c t a t i o n s t h a t they have c r e a t e d . T h i s can be seen i n the a d m i n i s t r a t i v e t h w a r t i n g of Manitoba's attempt t o o b t a i n cheaper gas s e r v i c e f o r r e s i d e n t i a l and commercial u s e r s . S e v e r a l c r i t i c i s m s t h e r e f o r e r e s u l t from the d e c i s i o n of the N a t i o n a l Energy Board i n t h i s matter. E a r l i e r the NEB had e f f e c t i v e l y p r o h i b i t e d s e l f - d i splacement by a l o c a l d i s t r i b u t o r and then expanded t h i s p r o h i b i t i o n t o apply t o the t h i r d p a r t y Manitoba O i l and Gas C o r p o r a t i o n (MOGC). However, i t i s d i f f i c u l t t o see how MOGC's a p p l i c a t i o n f o r a d i r e c t s a l e t r a n s m i s s i o n order c o u l d r e s u l t i n s e l f - d i s p l a c e m e n t s i n c e i t h i t h e r t o had no system c o n t r a c t s or gas volumes t o d i s p l a c e . While the Board h e l d t h a t the a p p l i c a t i o n d i d not c o n s t i t u t e s e l f - d i s p l a c e m e n t i n form, i t n e v e r t h e l e s s opined t h a t i t would a c h i e v e t h a t r e s u l t i n substance i f granted. Furthermore, the p u b l i c i n t e r e s t c o n s i d e r a t i o n s t h a t i n f l u e n c e d the d e c i s i o n s are both undeveloped and u n c o n v i n c i n g . P o l i t i c a l c o n s i d e r a t i o n s appear t o have i n f l u e n c e d the NEB i n the e x e c u t i o n of i t s l e g i s l a t i v e mandate t o promote the 97 p u b l i c i n t e r e s t and prevent undue d i s c r i m i n a t i o n . The NEB a c c u r a t e l y noted t h a t the s o - c a l l e d Hallowe'en Agreement was not a l e g a l document but was r a t h e r a p o l i t i c a l one. U n f o r t u n a t e l y , the N a t i o n a l Energy Board seems t o have d i g r e s s e d from i t s l e g i s l a t i v e mandate and b a s i c p u b l i c u t i l i t i e s t h e o r y by p l a c i n g t oo much a t t e n t i o n on the p o l i t i c a l c o n s i d e r a t i o n s . I t i s w e l l known t h a t the produc i n g i n d u s t r y p a r t l y agreed t o the d e r e g u l a t i o n p r o c e s s as a q u i d pro quo f o r expected enhanced exports t o the U n i t e d S t a t e s . I t seems t h a t the f a i l u r e o f these exports t o m a t e r i a l i s e has l e f t the pr o d u c i n g i n d u s t r y r e l u c t a n t t o absorb the domestic l o s s e s t h a t t r u e c o m p e t i t i o n might p r o v i d e . I t should be remembered t h a t producers asked f o r d e r e g u l a t i o n when p r i c e s were being kept a r t i f i c i a l l y low i n order t o b e n e f i t e a s t e r n Canadian consumers. With the d e c l i n e o f gas p r i c e s i n the f r e e market the a t t r a c t i o n o f d e r e g u l a t i o n f o r producers has p a l e d . Having been encouraged by the Hallowe'en Agreement, the N a t i o n a l Energy Board enabled breach o f c o n t r a c t s by i t s d i r e c t s a l e s p o l i c y . P a r a d o x i c a l l y , i t then p o n t i f i c a t e d on the s a n c t i t y o f c o n t r a c t s t o uphold TCPL's c o n t r a c t s w i t h d i s t r i b u t o r s through i t s s e l f - d i s p l a c e m e n t r u l e even when those c o n t r a c t s were becoming u n e n f o r c e a b l e . Although the TransCanada system producers would stand t o l o s e money by the c o m p e t i t i o n from d i r e c t gas s a l e s , the economic i n j u r y would be h e a l t h y f o r the economy as a whole. U n f o r t u n a t e l y , the reasons o f the NEB i n the Manitoba Hearing do not e x p l a i n why 98 the s a n c t i t y o f these c o n t r a c t s must be r e s p e c t e d when the c o n t r a c t u a l arrangements between TCPL and o r d i n a r y d i r e c t p u r c h a s e r s can be a l t e r e d . The e f f e c t however i s t h a t the NEB f a i l e d t o f a c i l i t a t e new d i r e c t s a l e arrangements where t h a t form of c o m p e t i t i o n c o u l d e f f i c a c i o u s l y occur. The p r i c i n g of the commodity c o n t i n u e s t o be r e g u l a t e d t o the e x t e n t t h a t r e g u l a t i o n of the commodity's t r a n s p o r t a t i o n charges i n d i r e c t l y a f f e c t s p r i c i n g . T h e r e f o r e , the stewardship o f Canada's m o n o p o l i s t i c gas d i s t r i b u t i o n system by the N a t i o n a l Energy Board c o n t i n u e s t o be important. T h i s importance becomes more pronounced when gas consumers a l l e g e r a t e s o r s e r v i c e s t h a t exceed the l i m i t s of d i s c r i m i n a t i o n t h a t are p e r m i s s i b l e by r e g u l a t o r y l e g i s l a t i o n and t h e o r y . C l e a r l y t h e r e i s a need f o r some d i s c r i m i n a t i o n i n Canadian gas r a t e s , e s p e c i a l l y i n the p r e f e r e n t i a l p r i c e s a f f o r d e d t o i n d u s t r y . I f such d i s c r i m i n a t i o n d i s c o u r a g e s t h i s c l a s s of customer from s w i t c h i n g t o c o m p e t i t i v e f u e l s , the r e s u l t may be t h a t remaining gas u t i l i t y u s e r s w i l l i n c u r lower r a t e s because volume throughput i s maintained. Conversely, s i n c e t h e i r demand i s l e s s e l a s t i c , the h i g h e r r a t e s are u s u a l l y l e v i e d t o r e s i d e n t i a l and commercial customers. T h i s i s a c c e p t a b l e u t i l i t y t h e o r y . Although some u s e r s w i l l understandably s w i t c h t o competing f u e l s i f i t i s more economic, i t i s submitted t h a t r e g u l a t o r s are j u s t i f i e d i n endeavouring t o prevent t h i s change i f o t h e r c l a s s e s of customers would s u f f e r s i g n i f i c a n t d etriment. R e g u l a t i o n s h o u l d b alance the concerns of a l l customer c l a s s e s s i n c e the 99 b e n e f i t s o f a n o n - d i s c r i m i n a t i n g f r e e market can not be ach i e v e d w h i l e the n a t u r a l gas i n d u s t r y c o n t i n u e s t o d i s p l a y m o n o p o l i s t i c c h a r a c t e r i s t i c s . E v e n t u a l l y t h e r e a r r i v e s a p o i n t when d i s c r i m i n a t i o n becomes undue. Given the broad l e g a l meaning of "undue d i s c r i m i n a t i o n " , i t seems d i f f i c u l t t o d e f i n e t h i s p o i n t i n the a b s t r a c t r a t h e r than as a judgement on the c o n d i t i o n s e x i s t i n g i n a p a r t i c u l a r case. N e v e r t h e l e s s , i n my view "undue d i s c r i m i n a t i o n " has happened and i s b e i n g condoned t o the e x t e n t t h a t NEB p o l i c i e s i n h i b i t lower p r i c e d d i r e c t s a l e s and c o n v e r s e l y p r o t e c t the marketing p o s i t i o n o f TCPL. L i k e the gas t h a t flows downstream, t h i s p r o t e c t i o n i s i n d i r e c t l y a f f o r d e d t o the l o c a l d i s t r i b u t i o n companies and t h e i r gas supply arrangements. Hence, the p i v o t a l N a t i o n a l Energy Board a c t i o n s can a f f e c t the a b i l i t y o f the r e l e v a n t r e g u l a t o r y t r i b u n a l s t o p r o t e c t the p r o v i n c i a l p u b l i c i n t e r e s t . A c c o r d i n g l y , t h e r e a re grave doubts as t o whether the NEB i s p r o p e r l y a p p l y i n g p r i n c i p l e s o f u t i l i t y r e g u l a t i o n . H o p e f u l l y , the Board w i l l r e d r e s s the problem of undue d i s c r i m i n a t i o n and the a v a i l a b i l i t y o f d i r e c t gas s a l e s a t the RH-1-88 Hearing. However, not a l l o f the p r o v i n c i a l r e g u l a t o r y powers have been emasculated as shown by the r e c e n t bypass a p p e l l a t e d e c i s i o n s . In the F e d e r a l Court o f Appeal d e c i s i o n , the p r o v i n c i a l l e g i s l a t i v e competence over l o c a l works and und e r t a k i n g s i s c l a s s i c a l l y r e a f f i r m e d v i s a v i s a t y p i c a l bypass p i p e l i n e . From a n a t u r a l gas r e g u l a t o r y s t a n d p o i n t , 100 t h i s d e c i s i o n i s s i g n i f i c a n t because i t confirms the p r o v i n c e ' s power t o c o n t r o l the undue d i s c r i m i n a t i o n i n r a t e s t h a t might accompany a bypass p i p e l i n e . In o t h e r words, i n d u s t r i a l bypass o r d e r s c o u l d l e a v e a l o c a l d i s t r i b u t i o n company wit h unabsorbed c o s t s which would have t o be met by the remaining customers. Rather than r i s k a death s p i r a l w i t h t h i s type o f unhealthy downstream c o m p e t i t i o n , i t i s suggested t h a t the producers upstream sho u l d be encouraged by r e s p o n s i b l e r e g u l a t i o n t o engage i n h e a l t h y c o m p e t i t i o n through d i r e c t s a l e s . The death s p i r a l would be stopped s i n c e the c o m p e t i t i v e l y p r i c e d d i r e c t s a l e s would d i s c o u r a g e end-users from l e a v i n g the l o c a l d i s t r i b u t i o n system. N a t u r a l gas r e g u l a t o r s have a c o m p e l l i n g concern over e q u i t a b l e n a t u r a l gas r a t e s and s e r v i c e s . In view of the p r e s e n t c o n t r o v e r s i e s , the f u t u r e f o r n a t u r a l gas p u b l i c u t i l i t i e s r e g u l a t i o n w i l l c e r t a i n l y not be u n e v e n t f u l . H o p e f u l l y the N a t i o n a l Energy Board w i l l be a b l e t o respond r e s p o n s i b l y t o the c h a l l e n g e o f changing commercial c o n d i t i o n s i n the d e r e g u l a t i o n epoch. 101 BIBLIOGRAPHY TABLE OF CASES Anklagemyndigheden v. Jack Noble Kerr, case 287/81, [1982] E.C.R. 4025, (1983) 37 C.M.L.R. 431. Commission of the EEC v. French R e p u b l i c , case 167/73 [1974] E.C.R. 359, (1974) 14 C.M.L.R. 216. C r i m i n a l Proceedings v. Firma J . van Dam en Zonen, cases 185- 204/78, [1979] E.C.R. 2345, (1980) 27 C.M.L.R. 350. FPC v. Hope N a t u r a l Gas Co. 320 U.S. 591 (U.S. Supreme Court 1944) . N a t i o n a l Energy Board d e c i s i o n RH-3-86. N a t i o n a l Energy Board, Canada. N a t i o n a l Energy Board Reasons For D e c i s i o n . MH-1-87. dated September 1987. Manitoba O i l and Gas C o r p o r a t i o n , A p p l i c a t i o n dated 25 May 1987, as amended, f o r Orders D i r e c t i n g TransCanada P i p e l i n e s L t d . t o Receive, T r a n s p o r t and D e l i v e r N a t u r a l Gas and F i x i n g T o l l s . O n t a r i o Energy Board d e c i s i o n r e : Bypass of L o c a l Gas D i s t r i b u t i o n Systems. OEB f i l e #EBR0 410-1, 411-1, 412-1; Dec. 12, 1986. R. v. E a s t e r n Terminal E l e v a t o r Co. . [1925] S.C.R. 434, 3 D.L.R. 1. (Supreme Court of Canada). Re O n t a r i o Energy Board and Consumers' Gas Co. e t a l . . (1987) 59 O.R. (2d) 766. (O n t a r i o D i v i s i o n a l C o u r t ) . 102 Ref. r e Bypass P i p e l i n e s [1987] unreported. ( F e d e r a l Court of Appeal. Re. r e Bypass P i p e l i n e s [1988] unreported. O n t a r i o Court o f Appeal. Ref r e A g r i c u l t u r a l Prod. Marketing A c t [1978] 2 S.C.R. 1198, 84 D.L.R. (3d) 257, 19 N.R. 361. Saskatchewan Power Corp. e t a l . v. 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