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How are natural gas pipeline rates determined?

Natural gas transmission utility pipeline rates are calculated based on the assets that are used and required to be used to deliver (or ship) natural gas from natural gas producers to end-use customers (industrial companies, distribution utilities, gas co-ops, and others), as well as the costs of operating those assets. Rates for regulated natural gas transmission services in Alberta are set based on rate-of-return regulation (or cost-of-service regulation) where a utility recovers its reasonable and necessary costs (its revenue requirement), including a reasonable return on its capital investment (sometimes called its rate base) necessary to provide safe and reliable utility service to customers. The return on capital investment (or the reasonable return determined) is set through a generic cost of capital proceeding which involves and applies to all regulated utilities in Alberta. This open, evidence-based, public proceeding process invites interveners (for example industrial or residential consumer groups representing customers) to present evidence and test the information provided by ATCO Pipelines (the only AUC rate-regulated high-pressure natural gas pipeline operator in the province, although AltaGas Utilities Inc. has some high pressure natural gas pipelines included in its distribution rates). At the conclusion of the cost of capital proceeding the Commission makes a decision on what is an appropriate and reasonable equity ratio (the proportion of equity to debt in the utility’s balance sheet) and return on equity for each of the utilities, including ATCO Pipelines. A residential customer will be charged the individual ratepayer’s portion of the approved costs of utility service related to both natural gas distribution and transmission pipeline utility service.

The natural gas transmission charge on utility bills is the operating costs plus the AUC approved return for the transportation of natural gas on rate-regulated e high-pressure transmission pipelines, which deliver natural gas to distribution pipeline system. The gas transmission company does not own the natural gas it is transporting, but it does own the small amount of natural gas used to maintain sufficient pipeline pressure.

The AUC sets rates with the specific goal to ensure that the utility and its stakeholders have an opportunity to earn a fair return on their investment, while ensuring that customers receive safe and reliable service at just and reasonable rates. 

Background

The AUC approved in principle the integrated method for determining regulated gas transmission rates in its Decision 2011-160 that combines the physical assets of the two rate regulated natural gas transmission companies servicing Alberta utility customers, ATCO Gas and Pipelines Ltd. (operating as ATCO Pipelines) and NOVA Gas Transmission Ltd., under a single rate and service structure. This integration agreement was put in place to streamline natural gas transmission services and address competitive pipeline issues, which went into effect on October 1, 2011. Through this streamlined integrated process, ATCO Pipelines costs are determined in an AUC regulatory proceeding with the approved revenue requirement (costs) charged on a monthly basis to NOVA Gas Transmission Ltd. for inclusion in its revenue requirement. NGTL’s rate design, cost allocation, and rates charged to customers are subject to examination under the jurisdiction of the National Energy Board, Canada’s federal energy regulator. In this integrated approach, only NOVA Gas Transmission collects payment directly from customers using the Alberta system.