On the heels of a spectacular discovery on its turf, Canada’sNorthwest Territories has tossed a red hot potato into the lap ofthe nation’s natural gas community. The government in Yellowknifeis calling on the National Energy Board to take control of the11,000-mile Nova pipeline grid’s tolls and development away fromthe Alberta government.

A formal legal demand by the territories says the time has cometo end a division of powers that has lasted for 45 years since theAlberta legislature created Nova, as Alberta Gas Trunk Line, tobuild the grid as an instrument of provincial economic developmentpolicy under the supervision of provincial regulators. Thetradition has been rendered obsolete by expansion of the gasindustry and the 1998 takeover of Nova Corp.’s gas transportationoperations by TransCanada PipeLines Ltd., according to territorialleaders.

Service and tolls on the Nova grid are key factors in prospectsfor northern gas development – but attempts by territorialauthorities to break into the inner circle that controls the systemhave been repeatedly rebuffed. The demand was crafted at the sametime Chevron Canada dramatically demonstrated the North’s gaspotential with a discovery in the Liard area in the southernterritories. A single well found reserves of 400-600 Bcf, which itis expected to produce at a rate of up to 100 MMcf/d.

Replies to the territorial appeal have not yet started tosurface before the NEB, although industry sources say the demandhas ignited a flurry of activity among gas producers, shippers,transporters, marketers, regulators, governments and their lawyers.The NEB has yet to decide to hold special hearings, incorporate theissue into other cases involving TransCanada or refer it to thecourts as a national duel over constitutional divisions of powersand resource rights. A similar dispute in the early 1990s overNova’s British Columbia counterpart, Westcoast Energy, ended up inthe courts. The NEB was awarded jurisdiction over Westcoast, overclaims by the B.C. government.

The action on Nova comes as no surprise to industry veterans,who have been waiting for it almost since the beginning ofderegulation and integration of the Canadian gas industry with itsAmerican counterpart. The dean of Canadian oil and gas lawyers,John Ballem, predicted eight years ago that it was only a matter oftime before a challenge to the old order like the territorialdemand came along. In a celebrated 1991 paper in the Alberta LawReview, Ballem also warned that a legal appeal would have strongchances of ending what he called Nova’s “charmed life.” Even atthat time, before the Westcoast ruling and smaller cases decidedOttawa’s way since, Ballem observed that virtually all theprecedents favor federal control over major installations like theNova pipeline grid.

Numerous cases had evolved a legal “test” with predictableresults. Canadian courts repeatedly have ruled that if facilitieswithin one province are “essential” for national or internationaltransportation, they are under federal jurisdiction. Aboutfour-fifths of the gas flowing in the Nova grid goes tolong-distance pipelines to the U.S. and central Canada.

Ballem warned that an appeal for federal authorities to takeover supervision of Nova could be lodged by any organizationdissatisfied with its tolls or access to its lines. The demand bythe Northwest Territories is such a case.

The territorial government’s lawyers – the Vancouver firm ofLawson Lundell Lawson & McIntosh, which includes departing NEBmember Diana Valiela as of June 1 – say their client needs “relief”from the way the Nova grid’s affairs are handled now. The appealsays territorial authorities repeatedly attempted – only to berebuffed – to get in on negotiations on a new tolling system amongNova, the Canadian Association of Petroleum Producers and the SmallExplorers and Producers Association of Canada.

The Northwest Territories stands to lose under the new system,which is now awaiting approval by the Alberta Energy and UtilitiesBoard. The change creates distance-based rates – the farther gastravels, the higher the tolls – to replace a “postage-stamp” feeset at a uniform level regardless of where production originates.Territorial authorities point out development of northern gasdepends on access to markets across the Nova and Westcoast gridswithin Alberta and B.C. The territorial government points out thatwhile northerners have a say at the national level before the NEBon Westcoast services and tolls, they have no such recourse inNova’s case. The territorial appeal for a change says switching tofederal control over Nova “will permit the NEB to ensure that thetolls and tariffs for the Alberta system are designed in a mannerconsistent with those applying on the Canadian system (ofTransCanada), and will ensure that the tolling methodology reflectsthe need to encourage continued exploration and development of newnatural gas reserves wherever located within Canada.”

While Westcoast has built an extension into the NorthwestTerritories, delivery options via the B.C. grid are limited. Novahas yet to reach into the territories. The territorial governmentsuggests that regulatory politics are to blame. A border crossingwould erase any claim for the Nova system to stay under Albertajurisdiction, and protecting this “provincial status” by refusingto extend the lines “serves as a significant impediment” todelivering northern gas, the territorial government said.

The appeal suggests that Nova’s special status also is steadilybecoming less deserved because TransCanada continues to integratethe operations and staff of the Alberta pipeline grid into a”seamless” system spanning the continent. While TransCanada hasalways been under federal jurisdiction, it was able to keep Nova’sspecial provincial status at the time of the takeover by assuringthe NEB that the Alberta grid would stay a separate legal entityfor purposes of tolls and services.

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