P:~\."\T\C~ 0F RRITISH COL '\1,,1.\ l~ T. L:. :\'I.~ TTER OF the Utilities Co:-nmission Act, S.B.C. 1980, c. 60, as amended and r" THE '\L-\ TTER OF Inland '\atural Gas Co. Ltd. anj an Inquiry into Complaints respecting Transportation Service to Large Industrial Custo:ners 5EFORE: J.D. V. Newlands, Deputy Chairman: and N. \1artin~ Commissioner ORDER WHEREAS Mr. W.J. Grant, Director of Engineering for the Commission was empowered by Section 93 of the Utilities Commission Act to review complaint matters pertaining to transportation rate schedules and transportation service on the Inland Natural Gas Co. Ltd. ("Inland!!) system; and WHEREAS the inquiry into complaints respecting transportation service to large industrial service customers on the Inland system took place on January 27, 1988 in Vancouver; and WHEREAS Mr. Grant submitted his report to the Commission on February 5, 1988; and WHEREAS the Commission has reviewed the report and is satisfied that the recommendations are appropriate and in the public interest. NOW THEREFORE the Commission Orders Inland Natural Gas Co. Ltd. as follows: 1. Approval is granted to the Recommendations contained in the Inquiry into Complaints Respecting Transportation Service to Large Industrial Customers on the Inland Natural Gas Co. Ltd. System. The Report is attached as Appendix A. 76~iif ~a~e Schedules 1t, 12. 15, 16. 1 e with Recommendations contained in the Report and ~;,::.:ept2.n:.:e and filir.g no later than :\~arch 15, 19S5. D,!.TED - at the Cit\ . ' c: V2.'-,:.:ouve:-, in the Provin:e 1-11/---. ' Columbia, this , , ' day of February, 1988. 4.ttachment '"". .... . i i;, .._ .", --(--14 --2 -'8 " \ -------- ----------) ) February 16, 1988 ) ) Gas 7 , 13, 19~ 2C~ :2: 2';: 2:2 in re :0 the of British Deputy Chairman _ A"~:": .:.
INLAND NATURAL GAS CO. LT O. Inquiry Into Complaints Respecting Transportation Service to Large Industrial Customers
INLAND NATURAL GAS CO. LTD. Inquiry Into Complaints Respecting Transportation Service to Large Industrial Customers \V.J. Grant Fe)ruary 5, 1988
L\BLE OF CONTENTS :..r57 OF ,; 7TE'-:;)E.ES ;-\ . Bt\CKGROU0:D B. DISCLTSSIO\l B.I Force \\ajeure B.2 Article VI - Indemnification B.3 Other Tariff Schedule Issues B.lt 'iJ;!hich Sc~edules to Approve? B.5 The Husky Complaint C. RECO\1 "'ENDA nONS C.I Force Majeure C.2 Indemnification C.2.l General C.2.2 Revenue vs Volume Credits C.2.3 Take-or-Pay C.3 Concessions C.lt Nomination Lead Times e.5 Return of Gas C.6 Balancing C.7 Service to Sales e.S Letter of Credit C.9 First Call P:-iority C.IO Housekeeping e.ll Schedules 2 3 6 7 10 I j II I 1 1 1 II 12 12 12 12 13 13 13 13 ! 3 14 1L
INLAND NATURAL GAS CO. LTD. Inquiry Into Complaints Respecting Transportation Service to Large Industrial Customers Id in the Utilities Commission Hearing Roo:Tl 2: \0:00 a.m .. Januarv LIST OF I-\TTENDEES Name Raymond \~cDonald Brian Wallace David Kay Wayne Silk Gary Hudson Donald Bews Joseph Pelrine Gordon Dittmer Harry Scott Dick Gathercole Victoria Wong Don Fairbairn Cal Johnson Da vid \~asuhara BillA.rthur Simon Wong William Grant Paul Gronert (i) , 27. 1933 Firm (Representing) Northwood Pulp ~ Timber Ltd. Bull, Housser &. Tupper (Industrial Customers) Husky Oil Operations Ltd. Unocal Canada Mobil Oil Mobil Oil Davis &. Company (Mobil Oil) Petro-Canada Wainoco Oil Corporation B.C. Public Interest Advocacy Centre Lawrence &. Shaw (Consumers, Crestbrook) Inland Natural Gas Co. L tel. Russell &. Du\1oulin (Inland) Inland Natural Gas Co. Ltd. Inland Natural Gas Co. Ltd. B.C. Utilities Commission B.C. Utilities CO~:lmission B.C. Utilities Corn,nission
INLA"lD N.ATURP,L GAS CO. LTD. Inquiry Into COr.lD!aints Respecting jransportation Service to Large Incust,;al Customers .A. BACKGROL1"lD Inland initiated transportation service for its large industrial custo'ners lr. October 1985. The transportation service is intended to allow industrial customers to contract direCtly with producers or brokers for their own supply of natural gas, rather than being obligated to purchase commodity directly from Inland. At that time Inland was the first distributor utility in British Columbia to offer transportation service to its customers. The initial schedules of the utility were put in place by the Commission on an interim basis. They were a matter of complaint by industrial customers from inception. The Commission took various actions to improve the tariffs during the course of calendar 1986, but by October 1986 detailed formal complaints were filed by industrial customers. These complaints were accommodated to allow direct sales to occur effective the contract year commencing November 1, 1986. The Commission then determined that it would deal with the complaints and other transportation matters as Phase I of its Rate Design Hearing for Inland. That hearing proceeded in the first half of 1987 and culminated in a Decision of the Commission dated June 17, 1987. T"e June Decision of the Commission dealt \vith 'llanv cont~ntious terms of t:-ansportation service offered by Inland. The Commission directed that Inland a;-nend its transportation schedules significantly in several areas. During the course of the hearing, the number of transportation schedules offered by Inland expanded considerably so that Schedules 15 through 22 are now ent ire]v c,:,voted to transportation service for la, indust:-ial custo,-;-,ers. custo:;)€:'rs provided nd ffs on O::::t,~ issuance of nd's revised t u on 2J, 1987.
2 The CO;'I~nissi0n dete:-;nined t:ta: i: would deal with th1.3 c()m;:::::=.:nt t"r()ug~ an inquiry by '\.J. Grant under Section 93(2) of the Utilities Comrnission ,-\ct. That clause al]o\vs the Commission to act on t;le report 0f t;)e person appointed to make the inquiry. On November 24, 1987 various interested parties were requested to make submissions on the Terms and Conditions within the Inland Large Industrial Sales and Service Tariffs which might be in conflict with previous Commission directions. Submissions were received from \tir. R.B. Wallace on behalf of the industrial customers, Ms. E.S. Decter on behalf of a group of producers, and Mr. J.M. Pelrine on behalf of \10bil Oil. Inland responded to those submissions by correspondence dated December 10, 1987 and December 24, 1987. The inquiry into these matters was held on January 27, 1988. The form of the inquiry was a round-table discussion of the issues with all parties participating. Mr. Gathercole, on behalf of residential and commercial customers generally, joined the meeting for those issues which he felt had significant impact on his clients. B. DISCUSSION Two issues could potentially thwart the government ini tiatives to encourage a competitive market in the purchasing of natural gas. These issues revolved around the force majeure conditions imposed by the transportation tariffs and the indemnification requirements under Article 6 of the Transportation Agreements (in the event that Inland had insufficient natural gas to meet its firm c0~~:rniti-ne:Jts as a reslJ!: of failure of sup;:>ly by tra:l ,~:;:2:~\":'1 customers). Due to t'le impo:-tarce of these issues they we:-e addressed first at the rv.
3 8.1 ForCe \1aleure The force majeure clause pr0vldes Iniand with broad Force \1 in the event of a failure by the utility to provide natural gas. -:-he clads,: provides virtually no force majeure coverage to producers delivering gas under transportation service unless Westcoast declares force majeure. The clause also amends the previous force majeure clause offered to industrial customers so that an industrial customer can no longer claim force majeure for events such as an explosion at the industrial plant. Mr. Wallace argued that Inland had not met the intent of the Commission's directions in its June 17, 1987 Report. On page 17 of that report the Commission stated that, "A force majeure provision is intended to provide relief for contractual obligations where events occur beyond control of the contracting party. Inland's concern that shippers may not offer adequate diversity of gas supply is not a force majeure question but one of whether adequate back-up supply is provided sufficient to reduce the risk of a failure of gas supply in reasonable circumstances. Inland has required this diversity of gas supply under applicable schedules. Inland is therefore directed to remove Article 12.3 from the Schedule 15 Transportation Agreement and similar provisions in other agreements." Mr. Pelrine argued that the obligation to deliver gas by producers should be no different from the obligations of Inland's dominant sales gas supplier, Westcoast. The arguments of ~.1r. Wallace and 'vIr. Pelrine were suppo:-ted the producer group. \1r. Gathercole pointed out that the core customers were rely Oil the use of t transportation customers natura! 0"1 the fi ve d nted out ust cust0'-ners had concess cOSt of transpo:-tation re liable d 1 very curtailment periods. He therefore fel-t: that the security of SU~
gas will be eq'Jaily reliable to that available under utility purc\lases. Inland noted :~at it had been the utility's position t~rC'ug:,out t;;e c:::velopment of transportation service that "those who benefit from the new markets should bear t:,e risk". In justifying the force majeure clause \1r. Johnson stated that new risks should not be passed on to the core market. He therefore argued that the Commission should visit those new risks where they should be allocated. When pressed to identify any new risks which would justify a more onerous force majeure clause than that which is faced by Westcoast, Inland felt that diversity of gas supply and physical access to the gas supply were two items. The Commission has already ruled in its previous Decision that the requirement for adequate diversity of gas supply and adequate back-up is accommodated through the independent consultant review of gas st.!pplies a'ld the requirement for first call priority gas as specified in the Transportation Tariffs. Indeed, the producers argued that experience this winter shows that the extensive back-up supplies of the producers direct sales have resulted in more reliable delivery of natural gas to industrial customers under Direct Sales than that available through the B.C. Petroleum Corporatio;-; ("Sere"). Inland argued that other bottlenecks on the Westcoast system were in par-t responsible for the reduced reliability of the Bepe gas compared to that provided from the producers. In either alternative the fact remains t:lat diversity cf gas supply is dealt with elsewhere in the Tariffs and does not pose :,e:ter access to es:coas: u~:e~ De. even if cu: :0 a leve
5 demand ("CD"), Inland could always phys:ca:!y take its full CD ar:d :ne:,:,:)\' leave other customers downstream short. They argued that this would no! be the case if industrial gas were in short suppiy. While the financial liabilities related to the alternative contracts might be different it is noteworthy' that Inland has the same physical access to the \'!;'estcoast pipeline in either event. On the basis of the inquiry held, I recommend that Inland be instructed to provide force majeure for producers under large industrial transportation schedules equivalent to the force majeure rights enjoyed in the Westcoast/Inland Agreement. The industrial customers also took exception to the changes that Inland has made to its force majeure availability for industrial customers. The new force majeure clause has altered that which existed previously in Schedule 11. This matter was not discussed at the Rate Design Hearing and did not co:ne to the attention of the industrial customers until October 1987. Inland stated that they had consciously reduced the force majeure coverage for the end-use customers to "tighten-up" the force majeure clause. I believe that Inland should have been responsible for alerting the Commission and its indust::-ial custo:ners of the limitations it \I/as writing into the new Jarge industrial customer tariff schedules. :\s such, recommend that the force majeure clause be altered to provide the same level of force majeure coverage to end-use customers as that which existed in the old Schedule 11. Inland may seek alteration to the force majeure clause as a separate matter to be addressed in the future, or at a future rate hea:ing. Ho\vever, I b:::!leve it ;<; important that Inland demonstrate its need for a more stringent force :-najuere clause and all ustrial customers be given an 0pDortunity to S:2::> th:=!ir" ,).\ views before Commission alte:-s force ma]eure terms ._;:;:,. ~~dus: custo;ners.
6 D , ro . D osed a force mai , eure clause in ::is October 29. 1937 submissio:l which ;s ~c.scd u:)on t~e force majeure c~ause ~n t~e o:d SC~jedule 11 modified only where required to reflect the existing contractual arrangements. believe the industrial customers' proposed force majeure clause is preferable to the alternative proposed by the producer group and reflects the recommended action on this matter. B.2 ,-\rticle VI - Indemnification The arguments against the existing indemnification clause required by Inland revol ve around the limitation to claim force majeure and the open-ended liability which could result from the indemnification. The producers were most concerned that because of the existing force majeure clause the producers could become liable for an open-ended expense as a result of what otherwise would be force majeure conditions and items which were beyond the control of the producers. Obviously, the proposed changes to the force majeure clause recommended in Section B.1 \vill go some way to comfort the producers that items of indemnification are likely to result from conditions which are within the producers control to remedy. The producers generally. and clearly statec by \io~il Oil, also took exception to the open-ended lla)ility that they could face from the indemnification clause. "r. Pelrine argued that the expenses related to the indemnification should be limited to direct expe:lses incurred by Inland. B,)th Inland ar:d \'r. Gathercole argued that the indemnification should also cover all expenses cOilsequent:3.1 ex;:,e;-:se<;. not pote:lt liabilities ceu re t ir un: ni:ied eXDenses bv hland which vlsltec 0:"'1 :he cere C,JS:O~ e:--s.
.:\s a res~!t of :~e discussIon at t'ie should be made to the indemnification c!ause: It should be clear that the indemnification applies only to non-force majeure events. Inland should be required in the indemnification clause to act as a "prudent expert" in its actions to ensure gas supply to needy customers and to minimize the expense incurred in obtaining alternate product. This last item will place an onus on Inland to acquire interruptible sales or service gas, peaking gas, unauthorized overrun gas, fuels other than natural gas, or an orderly emergency curtailment of other industrial users to avoid the potential of system failure to critical customers. However, I agree with Inland and Mr. Gathercole that the liability under this indemnification should cover all costs that are eventually visited on the utility. B.3 Other Tariff Schedule Issues In Inland's correspondence of December 10, 1987, the utility makes numerous concessions to the industrial customers complaint of October 29, 1937. recommend those concessions be reflected directly into all relevant lar~e industrial tariff schedules. In addition to those issues conceded by Inland there was discussion on several items of the industrial customers submission of October 29, 1987. times, all parties agreed that a s~x :7Ionth nomination lead time instit in trensportat sc 13 ma event a customer to switch fro should provide an i;;;P'2tU5 to I:,iland to recuirements thet are demandec \~' eSi:CQast. 7 r-t...:: "~' ' . : .. : . ... " "' -~ - ,--::, < . : \\'it;; lei ~e n for trc. to sa~'2s.
s 1:-:" (, ()~ '::~e hdust:-ia! Suj:-nission deals with t~e :-et~r0 of '2:?.<: taken by Inland. The tariff currently provides for a return of the gas \vi:ni;, 180 days 3.: a tilne convenient to ComDany a:ld shipper. It is ;:>ro?osec: ::-:2: ::~e tariff :,e altered to read "'liithin one hundred and eighty days, but as soon as practical". Further, Inland agreed to receive a Commission instruction to prepare a report on the feasibility of reducing the time-lag in the return of gas to a shorter duration than the existing 180 days. Item 7 of the Producer Sujmission deals with balancing of gas volumes. This clause in the transportation schedules has become outdated as new balancing arrangements have come into place on the Westcoast syste:n. Inland, Westcoast and the other customers are in the process of developing new balancing arrangements and Inland will file changes to the schedules as these new arrangements are solidified. This action is acceptable to the industrial customers and the producers. Item 10 of the Producers Submission deals with the tariff condition that states that if an end-use customer switches back to sales from service. and should Inland be subject to higher gas prices as a result, then the customer may be required to pay a rate higher than the tariff rate for sales gas. Although the industrial customers would prefer this clause be removed, they did not strongly oppose its cur,ent inclusion. As this is an item of imDorta:Jce to the Commission and to Government Policy I recommend the clause be left in the tariffs. By so doing the customers will be clearly aware of the potential price liability they face when switching back to sales schedules. revenue versus volume credits fro~n \t'estcoast. and take-or-Dav liabilitv "'itil " t .. the Be It is unce:-s:ood that the vo ::. .5 lns:itutec on \\ estcoas: syste~n as a result of the ,ecen: ~ • 1 \\' i j 1 lv to -,:;,t" ta:-if£s S0 as to rer-r,ove ,
9 of the take-or-pay hder~,nification, it '.vas agreed :,y a;] parties that In;,::"':"! would write letters to each customer who had o~tained an exclusio:1 irorn !3.ke-or-pay lia~ility from the sepe. Tlte industrial customers took exception to Inland's requirement for an irrevocable letter of cred·it in an amount equal to the maximum amount payable by shipper in a transportation agreement for a period of 120 days. Inland pointed out that a letter of credit would only be required from shippers who appeared to be a credit risk. After further discussion with respect to the length of the period that the letter of credit should cover, Inland agreed that 90 days would be sufficient. This alteration to Paragraph 7 of the General Terms and Conditions should therefore be required. A final matter addressed by the industrial group related to an error in the wording of Clause 14.8 of the Transportation Schedules. The word to in the third last line of Clause 14.8 should be changed to the word £y. \'any of the issues that the producers wished to cover were dealt with under the submission of the industrial customers. The residual items addressed by the producers focused on the review of gas supplies and the determination of prst call priority gas by Inland. The producers point out that the Independent Gas Supply Consultant will review the gas supplies and provide advice to Inland. Since Inland will not have an opportunity to view the parameters of the gas supply offered by the producers in a particular sale, guidelines need to be established so that the independent consultant can determine what ievel of first priority gas should be provided. Inland resisted this notion arguing that if ?~.)ducers wish to have a lower requirement for first priority g2S ~::ev . Jl-l provide all information to Inland staff. The producers do not agree \vith Inland si,:ce Inland is extend it's flon-utility vestments o oil brokerage. In the circumstances :,elieve that Inland must develop Q wo,:,a~;e Ii:s: p:-Iority review process to r-- .. • • . cor:forrn w LornmlSS!On Cl rectlOns
10 :937 (P2.,;,=s 23 and 2!.L). That Decision directed Inland to :-nodify i":s firs"! call priority c;ause to allow the Company to either increase or decrease the percer.~a£e of :irst call priority gas depending on the diversity of gas sU:'Dl:: offered for a particular contract. Inland has changed its tariff wording but not provided a means of making the review operational. If Inland is unwilling to develop a review process which recognizes the confidentiality of the producers, the Commission should reconsider the degree of separation between utility and non-utility activities of Inland. This matter was addressed in the June Decision of the Commission at pages 26 and 27. I therefore recommend Inland develop a review program and report back to the Commission by June 30, 1988. B.4 Which Schedules to Approve') In the submission from the industrial customers, Mr. Wallace suggested that the Commission approve only Schedules 21 and 22 for the large industrial customers. He noted that these two schedules are the only ones being used by large industrial customers at this time. Moreover, he did not wish to expend his time and effort reviewing terms and conditions of the several other schedules which are not currently being utilized. Inland would like to see all the schedules put in place. The utility points out that much work has gone into the development of these schedules and they should be available to custo:-ners when choosing sales or transportation service. ree '\'l:h Inland that i: would be profitable to approve 21: c~ :'"" Schedules, 11 through 22. Since the schedules other than Schedules 21 an2 22 ha ve not ,ec benefit of vee\' revie\\' t C-JstO:fle:s iss ion Id mial for f'Jture co, to ::hes'2 t3.~i£is.
1 1 h3S volunteered to :l1ake tv Sc:tedules 21 and 22, plus the recommendations of the Commission on specific items, into all of its large industrial schedules. 8.5 The Husky Complaint Husky Oil Operations Ltd. wrote to the Commission on October 19, 1987 advising that a temporary settlement of the term of the Inland/Husky Agreement had been reached. At that time Hus!<y proposed that the matter be reso1 ved at the same time as the industrial customers complaint. I was advised by Mr. Wallace (on behalf of Husky) that Husky and other industrial customers would prefer to raise the matter of long-term contract conditions with the Commission at a future date. Inland agreed with Mr. Wallace and on that basis the matter was not addressed at the January 27, 1988 inquiry. C. RECOMMENDATIONS C.l Force Majeure Inland should alter this clause to provide force majeure for producers under large industrial transportation schedules equivalent to the force majeure rights enjoyed in the Westcoast/Inland Agreements. The force majeure clause should a1s0 be altered to provide the same level of force majeure coverage to end-use custo:ners as that which existed in the old Schedule 1 1. C.2 Inde:nnlfica:!on C.2.1 General ;11 r'e levant schedules s Id eG so it is c t: Indemnification applies on;v to non-force majeure events.
12 bland will ~e rec;ui:-ed to ac: as a "prudent expert" in its actior:s to ensure gas supply to needy customers and to minimize the expense incurred in obtaining alterna:e product. It covers all costs for which the utility could be legally held liable. C.2.2 Revenue vs Volume Credits As soon as Inland receives documentation from Westcoast that the volume credit mechanism is in effect as a result of the recent NEB Decision, Inland should apply to remove this indemnity from all relevant tariffs. C.2.3 Take-or-Pay Inland should write letters to each customer who has obtained an exclusion from take-or-pay liability from the BCPC. C.3 Concessions The concessions made in Inland's correspondence of December 10, 1987 regarding the industrial customers complaint of October 29, 1987 should be directly reflected in ~ relevant large Industrial tariff schedules. C.4 Nomination Lead Times ,A., six-month nomination lead time should be included in all transportation service schedules. The 13-month not shouid re:n for sales schedules and t~e eve:)! c custo:ner wishes to fro· ::-c:":sQortation to sa
13 C.5 ~eturn of G·~s r\]l re;evant schedules s:ioGld be altered to read: ''\''ithin one hundred and eighty days but as soon as practical" Inland should submit a report to the Commission on the feasibility of reducing the ISO day period. e.6 Balancing Inland should file changes to the relevant schedules as soon as details are finalized with Westcoast. C.7 Service to Sales The tariff currently contains a clause stating that if an end-use customer switches from service to sales, and this results in Inland being subject to higher gas prices as a result, then the customer may be required to pay a rate above the sales rate. This clause should remain as is. e.S Letter of Credit Inland should change the relevant tariffs to show the period to be 90 days. C.9 First Call P,iorit;' m:and should develop an operational review progra:lI reDort to CO:THniss:on 30, 1988.
~ • r The:. ~r::: to in the third to last line of clause 1u .S of the Trar,s;)or:ation Schedu;es should be changed to the word EY, e.g. Schedule 21, sheet 'l(). 236. C.II Schedules Inland should make all the changes to its tariff necessary to accommodate the recommendations included in this report. Thls is to apply to Schedules 11, 12, 15, 16, 17, 18, 19, 20, 21 and 22. Inland should file all tariff pages, new and revised, by mid-\1arch 1988 at which time the Commission should grant approval.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.