Jurisdictional Battle Develops Over Maxhamish Pipeline in BC

As predicted by National Energy Board (NEB) member Jean-Paul Theoret in a winter speech to a Quebec lawyers' conference, the first results of unleashing competition in the formerly stable Canadian natural gas pipeline community are "messy markets" and potentially "messy outcomes." That became clear in one of the first tests of the NEB's declared intentions to encourage growth of a true market in transportation services by making flexibility and adaptability the watchwords for a new era of light-handed regulation.

A big fuss has developed over a small deal, the sale of a 68-kilometer (43-mile) link called Maxhamish Pipeline between an expanding B.C. gas field and the mainstream transportation grid . After building it about two years ago as one of many producer-driven cracks in former Canadian monopolies, Alberta Energy Co. agreed to sell the Maxhamish link to Westcoast Energy Inc. for incorporation into its B.C.-wide system.

The B.C. Ministry of Energy is fighting the deal, saying the result would be an excessive concentration of corporate power that could hurt development of provincial resources (and provincial government royalties). As long as the contested pipeline belongs to AEC, it falls under the jurisdiction of the B.C. Oil and Gas Commission. The ownership change would transfer authority over operations and tolls to the NEB, which has ruled over the Westcoast grid since its birth in the 1950s because it is primarily dedicated to carrying gas destined for out-of-province markets.

In a "paper hearing" conducted by exchanges of documents rather than oral testimony before the NEB, the director of the B.C. ministry's oil and gas branch said the case raises two concerns. In an affidavit, Karen Koncohrada said the province "is concerned about a provincially-approved and regulated pipeline falling under federal regulation simply as a result of a change in ownership. We are also concerned that the acquisition of the Maxhamish pipeline will further concentrate the gathering assets in northeast B.C. in the hands of a single owner." Corporate concentration spells "market power" in Westcoast's case, Koncohrada said.

By a 1998 NEB decision that followed extensive industry discussions, Westcoast operates under a system that has come to be known officially as "light-handed regulation." It allows tolls and processing fees to be established by confidential, negotiated agreements rather than the traditional cost-of-service apparatus of public disclosure and hearings. The Maxhamish deal is part of a wider package that covers Westcoast's service terms for AEC production in northeastern B.C. The NEB has taken a first step toward enforcing the light-handed-regulation approach by rejecting an attempt by the B.C. ministry to force disclosure of the pipeline sale contract. The wider issues raised by this approach to regulation remain to be resolved, and a resort to the courts is not ruled out.

B.C. maintains the issues are fundamental. Koncohrada said "the concentration of ownership in Westcoast's hands may not severely affect large producers who, because of their size, may be able to negotiate effectively with Westcoast for the provision of gathering and processing services. However, the ministry is concerned that smaller producers, simply because of their size and the quantity of gas they provide, may not be in a position to negotiate as effectively with Westcoast, and may be unable to obtain terms which are as advantageous as those obtained by larger producers."

No gas producers have stepped forward in outright opposition to the Maxhamish pipeline deal. But the case is being monitored formally by four corporate interveners: Imperial Oil Ltd., Southern Company Energy Marketing Canada Ltd., Burlington Resources Canada Energy Ltd. and Canadian Forest Oil Ltd. Burlington has told the NEB it is interested in any effects on cost of using Westcoast services. Canadian Forest has predicted the deal "will affect the cost of, and access to, gathering and processing in northern B.C. and the Liard area (the nearby, gas-rich southwestern Northwest Territories)."

Westcoast describes the B.C. energy ministry's thinking as "patently wrong." The Vancouver-based pipeline company says "the fact of the matter is that Westcoast is in the business of providing transportation services to third parties. AEC is not. Through its ownership and operation of the (Maxhamish) pipeline, Westcoast will be able to provide gathering and processing services to third parties with gas supply in the area. In the future, Westcoast will be able to further expand and extend the pipeline to connect additional sources of gas supply and to provide service to other area producers."

The B.C. pipeline company says the policy of light-handed regulation "is specifically designed to allow all parties, regardless of their size, fair access to Westcoast's gathering and processing services." The NEB is urged to consider the Maxhamish sale to be part of the development that the B.C. government seeks. "AEC has invested significant amounts of capital in the province to exploit the province's resources . . . benefits which accrue to AEC and, for that matter, to Westcoast are part of the public interest consideration."

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