In case anyone missed the lessons of new pipeline construction,hot regulatory fights and negotiating marathons, some newdescriptions for the state of Canadian natural gas transportationhave been coined at the National Energy Board.

Enter an era in Canada of “competition amongst the few.” Andwith that comes “messy markets.” And “messy outcomes.” And”flexibility” among regulators determined to let the new era takeits course. NEB member Jean-Paul Theoret used the candid languageto explain the times in an address to the Quebec chapter of theCanadian Bar Association in Montreal.

Theoret said “it is clear that the horse is out of the barn. Inthe last little while, the (Canadian) gas pipeline industry hasevolved from something close to a pure monopoly to a marketcharacterized by competition amongst the few . . . we now havedirect competition taking place between pipeline companies.”

Theoret described the change as resulting from a flurry ofconstruction of bypass pipelines since the late 1990s – chiefly theAlliance, Vector and Southern Crossing systems, but also a stringof shorter alternatives to the traditional mainstays: TransCanadaPipeLines, its Nova grid in Alberta and Westcoast Energy’s BritishColumbia system. The NEB approved the projects to comply withenergy deregulation and free-trade policies as well as to respondto demand among gas producers, consumers, distributors and traders.

Alliance and Vector allow for gas deliveries across thecontinent without using Nova or TransCanada. Southern Crossingenables the heavily-populated lower mainland of B.C. to obtainAlberta gas without using Westcoast. Theoret observed that eventhough TransCanada-Nova and Westcoast continue to own a majority ofdelivery services, “the introduction of transportation routes hasincreased choices to gas shippers.” At the same time, thecompetition “is posing serious challenges for the ‘incumbent’pipelines.”

Theoret said the competition-amongst-the-few era differs sharplyfrom the old cost-of-service period when franchises and revenueswere guaranteed by a “regulatory compact” ensuring stability. Thenew times require pipelines to be able to improve their returns bydevising new and better services, and to be exposed to takinglosses if they perform poorly.

But it is still a period that falls short of perfect competitionbecause the traditional mainstays continue to dominate gastransportation in Canada, to the point where some major regionssuch as Manitoba and northern Ontario are still served only bythem. The result is a “messy market structure.”

Theoret said to the extent that pipelines are allowed tocompete, rather than be forced to comply with old-fashioned rulestying their rates to costs of services, “there is a greaterpotential for the abuse of market power in the’competition-amongst-the-few’ model. The regulator must balance thebenefits of pricing and service flexibility against the need toprotect captive customers. The challenge is to ensure that thisprotection is not so tight that all incentives to innovate arecompletely diluted.”

Theoret predicted “the first byword for regulation will beflexibility. In a messy market structure, characterized byimperfect competition amongst a few companies, the regulator mustbe prepared to adopt flexible approaches . . . since eachpipeline’s situation will be unique, it is unlikely that a’one-size-fits-all’ approach will be viable over the long term.”

The NEB member also predicted “in a messy market we will have toaccept some messy market outcomes . . . it is highly probable thatat any point in time there will be some parties who are ‘winning’and others who will feel they are ‘losing.’ In this situation, theregulator will have to guard against abuses of market power, whilenot always achieving a perfect standard of fairness.”

Theoret said Canadian authorities will have to focus on the”long-term outcomes” – ensuring that regulatory approaches still tobe evolved ensure there can be adequate pipeline capacity for thegas markets, services that respond to shippers’ needs and pricingthat reflects market values for transportation. “The bywords forthe regulator must be flexibility, balance, restraint and thecreativity required to respond to new market and consumer needs.”

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