Appendix 2 Written Evidence of TQM: Business Risk and Total Return Comparison

Transcription

1 Appendix Written Evidence of TQM: Business Risk and Total Return Comparison

2 NATIONAL ENERGY BOARD IN THE MATTER OF the National Energy Board Act and the Regulations made thereunder; AND IN THE MATTER OF an Application by Trans Québec & Maritimes Pipeline Inc. for orders pursuant to Part I and Part IV of the National Energy Board Act. TRANS QUÉBEC & MARITIMES PIPELINE INC. 00 AND 00 COST OF CAPITAL APPLICATION APPENDIX WRITTEN EVIDENCE OF TQM: BUSINESS RISK AND TOTAL RETURN COMPARISON December 00

3 Page of.0 INTRODUCTION AND SUMMARY 0 0 Q. What is the purpose of this evidence? A. This evidence compares the business risk and total returns of Trans Québec & Maritimes Pipeline Inc. ( TQM ) to those of other Canadian pipelines. The comparison is intended to address the requirement of the fair return standard that a fair return on capital should be similar to the return available from investment in other enterprises of similar risk (the comparable investment standard). TQM has chosen Canadian pipelines that it believes to be relevant comparisons to TQM. Dr. Carpenter provides comparisons with U.S. interstate gas pipelines and U.S. gas local distribution companies ( Gas LDCs ) in his evidence (Appendix ). Q. Why is it important for the National Energy Board ( Board or NEB ) to consider the risks and returns of comparable pipelines? A. Determination by the Board of a fair return on capital for TQM requires compliance with the fair return standard. If overall risk is similar, the fair return standard requires that the total return must also be similar. TQM has selected what it believes to be the most relevant Canadian comparables. Since no two entities are identical, the comparables differ from TQM in various ways but the differences can be understood and considered in a comparative analysis. For example, differences in business risk can be compared between pipelines to evaluate whether differences in returns are justified by differences in business risk. Q. What are the results of the comparative analysis? A. The results show that TQM s total return has diverged from those of Canadian comparables and that current differences in total returns are not explained by differences in business risk. In fact, TQM s business risk has increased since the RH-- Decision while its total return has decreased relative to Canadian comparables. The conclusion is that TQM s total return as determined by the NEB return on equity formula ( NEB ROE

4 Page of 0 0 Formula or Formula ) and a 0% deemed equity ratio would not meet the fair return standard. Q. How is this evidence structured? A. Section presents historical total return information for TQM and Canadian comparables. Section evaluates whether it is reasonable to compare the return of TQM to the comparable samples when applying the fair return standard. The evaluation by TQM adopts the business risk analysis of Dr. Carpenter who concludes that TQM s business risk has increased since. Section also demonstrates that the differences between TQM s total return and the total returns of the pipelines in the Canadian comparable samples cannot be explained by differences in business risk. Section provides conclusions..0 RETURN COMPARISONS Q. What comparables were used in this analysis and why were they chosen? A. Two comparable sample groups were used in the analysis. The first sample group (Non- Formula Sample) contains Maritimes & Northeast Pipeline Management Ltd. ( M&NP ), Alliance Pipeline Ltd. ( Alliance ), Enbridge Inc. s Alberta Clipper ( AB Clipper ), Line Extension ( Line Extension ), and Southern Lights ( Southern Lights ) projects, and Trans Mountain Pipe Line ( TMPL ). The total returns of the pipelines and expansions in this sample have been determined through negotiation or settlements approved by the NEB. The second sample group (Formula Sample) is composed of the TransCanada PipeLines Limited Mainline ( TransCanada ) mainline natural gas transmission system ( TransCanada Mainline ) and the Foothills Pipe Lines Ltd. System ( Foothills ). The rates of return on equity ( ROE s) of the TransCanada Mainline, Foothills and TQM have all been determined since the RH-- Cost of Capital proceeding by the NEB ROE Since Board approval of a transfer in February 00, Foothills includes what was previously known as the TransCanada B.C. System after TransCanada purchased it from Alberta Natural Gas Company Ltd.

5 Page of 0 Formula, but the equity ratios of the TransCanada Mainline and Foothills have been increased to reflect increases in business risk. Q. Are there other relevant Canadian comparables whose returns are determined through settlements? A. Yes. The Enbridge Mainline is one. Specific returns were not approved by the NEB, but actual total returns ranging from.0% to 0.0% for the period -00 as reported by the Dominion Bond Rating Service ( DBRS ) suggest that the total returns as determined through Enbridge s settlements are higher than those of TQM. The Enbridge Mainline is included in the comparison analysis although it is not included in either the Non-Formula Sample or the Formula Sample because the Enbridge settlements do not explicitly state an ROE or equity ratio. Q. On what basis is the comparative analysis made? A. The comparative analysis is made on the basis of total return on capital. A company s total return on capital is comprised of the return on equity capital (rate of return applied to deemed equity component of the capital structure) and the return on debt. In its RH-- 00 Phase II Decision relating to the TransCanada Mainline the NEB stated: 0 and The Board also agrees with TransCanada that the case law establishes that it is the overall return on capital to the company which ought to meet the comparable investment, financial integrity and capital attraction requirements of the fair return standard. it is the Mainline s overall return on capital, resulting from the combination of the Mainline s capital structure, ROE and cost of debt (set out in Section.), that must be examined in light of these standards. When examining the cost of capital for the Mainline, the Board is of the view that, since the Mainline s tolls National Energy Board Reasons for Decision, TransCanada PipeLines Limited, RH--00, Phase II, April 00, Cost of Capital ( RH--00 Phase II Decision ), page.

6 Page of 0 0 recover the actual rather than the market cost of debt, establishing a fair total equity return is the paramount concern in this case when ensuring that a fair return on capital has been determined. Given that it is the overall or total return which must meet the fair return standard, this evidence compares total returns. Q. Are returns agreed to in settlements relevant for comparison purposes? A. Yes. It is appropriate and instructive to consider total returns derived through settlements as part of a comparative analysis. However, these comparisons are best made on an aggregate rather than individual basis. Settlements are by definition characterized by trade-offs which may not be readily apparent to those not directly involved in the settlement. Consequently, the returns derived through an individual settlement may not always be reflective of a market required return when considered in isolation from other settlement components and the specific facts and circumstances at the time of the settlement. Furthermore, the returns from these settlements may be reduced from market levels since they are negotiated against the NEB ROE formula which itself does not reflect market levels of return. In contrast, a directional indication of market expectations for acceptable returns on existing and new capital investments can be derived by considering the returns of multiple settlements. In this context, TQM observes that settlements in recent years applicable to NEB regulated pipelines have consistently yielded returns that exceed returns derived solely through application of the NEB ROE Formula. The magnitudes of these differences in returns are not explainable on the basis of differences in business risk. RH--00 Phase II Decision, pages -0.

7 Page of Q. How do the total returns of the pipelines in the Non-Formula Sample differ from TQM s over time? A. Figure. shows that over time the total annual returns of TQM have decreased while the total returns of M&NP, Alliance, and TMPL have increased or remained constant. New projects including AB Clipper, Line Extension and Southern Lights will have higher returns than TQM s current return when they come into service. The total returns plotted in Figure. are calculated assuming an after tax cost of debt of.%. 0 The total returns for 00 and 00 for TQM reflect the NEB ROE Formula and a 0% deemed equity ratio. The 00 total return for M&NP is based on its 00 settlement which includes a % return on.% equity. The total return plotted for M&NP from is based on a % return on % equity, which was re-established several times over this period. 0 The total return for Alliance is based on an adjusted ROE of.% on an equity ratio of 0%. The adjusted ROE was calculated by taking the negotiated % ROE and adjusting it downward by basis points to account for the risk of locking in ROE for a -year period relative to accepting the NEB ROE Formula. This adjustment factor is explained in the evidence of Dr, Kolbe in Appendix. The total return for the Alliance Taylor expansion s is based on an.0% ROE and an equity ratio of 0%. This ROE was calculated using the approved ROE of.% from the NEB GHW--00 Decision and adjusting it downward by basis points to account for the risk of locking in ROE relative to accepting the NEB ROE Formula through 0, as explained in the evidence of Dr. Kolbe in Appendix. This adjustment is conservative given the year lock-in time period. Alliance Pipelines Ltd. GHW--00 Facilities and Toll Methodology Decision, September 00.

8 Page of TMPL s total return is based on an adjusted ROE of 0.0% and an equity ratio of %. The adjusted ROE was calculated by taking the negotiated 0.% ROE and adjusting it downward by basis points to account for the risk of locking in ROE for a year period relative to accepting the NEB ROE Formula. This adjustment is conservative given the short year lock-in time period. The total returns for AB Clipper and Line Extension are based on a negotiated NEB formula ROE plus a basis point premium with an equity ratio of %. 0 The total return for Southern Lights is based on an adjusted ROE of.% on an equity ratio of 0%. The adjusted ROE is calculated by taking the negotiated % ROE and adjusting it downward by basis points to account for the risk of locking in ROE for years relative to accepting the NEB ROE Formula. Figure. TQM vs Non-Formula Sample Allowed Total Returns.00%.%.0%.%.00%.%.0%.%.00% TQM MN&P Alliance AB Clipper/Line Extension Southern Lights TMPL Taylor Expansion

9 Page of 0 Figure. shows that the total returns of the companies in the Non-Formula Sample are higher than those of TQM. Q0. How do the returns of the pipelines in the Formula Sample compare to TQM s returns over time? A0. The total returns of the companies in the Formula Sample are provided in Figure.. The only factor that has caused a change in relative allowed total returns in this sample is a change in equity ratio. TQM was awarded the same equity ratio as the TransCanada Mainline and Foothills (0%) in the RH-- Decision. Since then, the TransCanada Mainline and Foothills have had increases in their equity ratios and now operate pursuant to settlements that result in actual ROEs that exceed the allowed. Figure. TQM vs Formula Sample Allowed Total Returns.0%.%.00%.%.0%.%.00% TQM Mainline Foothills

10 Page of Q. How do the total returns of the Enbridge Mainline compare to TQM s returns over time? A. The actual total returns for the Enbridge Mainline as reported by DBRS are provided in Figure.. The total returns of TQM have decreased while the actual total returns of The Enbridge Mainline have increased over time. Figure. TQM Approved vs Enbridge Actual Total Return 0.0% 0.00%.0%.00%.0%.00%.0%.00%.0%.00%.0%.00% TQM Approved Returns Enbridge Mainline Actual Returns 0 The Enbridge Mainline s actual ROE has ranged from 0.% to %, and its equity ratio has ranged from % to.% over this time period. The total actual returns of the Enbridge Mainline are higher than TQM s returns. Q. What conclusions can be drawn from the comparative analysis? A. The total returns for the companies in the Non-Formula Sample, the negotiated returns of the Enbridge Mainline, and the total returns of the Formula Sample are higher than the total returns for TQM based on a deemed 0% equity ratio and the NEB ROE Formula.

11 Page of 0 0 As shown in the following section, these differences in return cannot be reconciled by differences in business risk alone. The conclusion is that a Formula on 0 total return for TQM would not meet the fair return standard..0 ESTABLISHING COMPARABILITY Q. How is the comparative analysis organized? A. The analysis is organized in two sections. The first section assesses the business risk of TQM and evaluates the change in that business risk since. The second section compares the business risk of the pipelines in the sample groups and the Enbridge Mainline to that of TQM. For comparison to Canadian pipelines, business risks of each of the pipelines and pipeline projects in the samples, and factors which mitigate those risks, were evaluated, using sources of public information. The results of this evaluation were organized into standardized business profiles, included as an Attachment to this evidence. Each profile provides a description of the pipeline, and a review of its long-term and short-term business risk factors. Q. Are long term business risks weighted differently than short term business risks? A. Yes. In conducting the comparative risk analysis, TQM agrees with the conclusion of Dr. Carpenter that long-term business risks should be given greater weight than short-term business risks. Q. Please summarize the results of the comparative analysis. A. The results are summarized in Table -.

12 Page 0 of Table - Comparative Business Risk Summary Pipeline/Project Short-Term Risk Long-Term Risk Overall Risk Relative to TQM 00 Total Return (Assuming.% after-tax debt rate) 00 Total Return TQM O&M fixed for term of settlement. 0% of cost of service covered by deferral accounts. Little revenue risk. Predominantly dependant on WCSB which has decreased supply capability. Partially offset by supply at Dawn and potential LNG. Competition in New England threatens utilization of the PNGTS extension (over half of rate base). Significant competition from alternative fuels in the Québec market. TransCanada contracts on TQM provide limited mitigation. Significant non-renewals in 0 could drive stand-alone treatment of TQM leading to a toll increase and loss of competitiveness and/or toll design changes that lead to non-recovery of invested capital. -.% (NEB Formula ROE.% on 0% equity ratio). Applied-for:.% (% on 0%)..% (NEB Formula ROE.% on 0% equity ratio) Applied for:.% (% on 0%) M&NP (00 Settlement) Lower than TQM. At risk for O&M variance within the year. % of cost of service covered by deferral accounts. Revenue deferral accounts. Alliance Lower than TQM. Flow-through of cost variances. Similar to TQM. Back-stopped for 0 years until 0 by which time over 0% of capital would be recovered. Supply risk greater than TQM as this risk has increased due to the downgrade of off-shore reserves but somewhat mitigated by Deep Panuke, the possibility of LNG plants and New Brunswick production. M&NP is protected from competitive risk as it is the only pipeline connected to its supply areas. Similar to TQM. Fully contracted for initial -year term, with years remaining..% recovery of capital assured through initial contracts. Depreciation incentive to renew on U.S. segment. Default/capacity risk: Creditworthy shippers. Financial assurances. Re-sell the capacity Similar to TQM.% Similar to TQM.% (% on.%). (.% as adjusted for ROE lock-in on 0%)..0% as adjusted for ROE Lock-in on 0% for Taylor expansion Not available, Settlement only covers 00.% (.% as adjusted for ROE lock-in on 0%)..0% as adjusted for ROE Lock-in on 0% for Taylor expansion

13 Page of Pipeline/Project Short-Term Risk Long-Term Risk Overall Risk Relative to TQM 00 Total Return (Assuming.% after-tax debt rate) 00 Total Return Enbridge Mainline Higher than TQM. High cost risk with some costs fixed for years. % of cost of service covered by deferral accounts. Low revenue risk due to Transportation Revenue Variance deferral mechanism. Incentives tied to service levels. AB Clipper/Line Extension Higher than TQM. Non-capital costs will be included in future Enbridge Mainline incentive tolling settlement. Likely to have little revenue risk but will have cost risk. In-service date provision. Initial target capacity provision on AB Clipper. TMPL (00-00 settlement) Higher than TQM. High cost risk with limited deferrals, and inflation of costs over a five-year term. Revenue risk based on capacity incentives. Initial target capacity risk on expansion projects. Southern Lights Lower than TQM. No revenue or cost risk due to deferral type mechanism. All costs recovered from Committed Shippers. Similar to TQM. Minimal supply risk given outlook for oil sands production. Minimal competitive risk in US markets served. Refinery conversions tie refineries to Canadian supplies. Line reversals reduce access to US markets from competing supplies. Lack of contractual protection, and potential for competition to transport growing supplies. Similar to TQM. Minimal supply risk given outlook for oil sands production. Minimal competitive risk in U.S. markets served Refinery conversions tie refineries to Canadian supplies Line reversals reduce access to U.S. markets from competing supplies. Lack of contractual protection, and potential Similar to TQM 00 actual total return:.% Similar to TQM.% (.0% ROE on % equity ratio) (NEB Formula ROE + basis points 0.% on %equity ratio). Not available.% (NEB Formula ROE + basis points 0.% on % equity ratio) for competition to transport growing supplies. Similar to TQM. Similar to TQM.0%.0% Minimal supply risk given outlook for oil sands production. (0.%, as adjusted for (0.%, as adjusted for Low competitive risk due to captive markets ROE Lock-in, on % ROE Lock-in, on % in B.C. and declining US supplies in California equity.) equity.) and Alaska North Slope. California markets forecast to require additional imports of refined products in the future. Lack of contractual protection, and potential for competition to transport growing supplies. Lower than TQM. Low supply risk as supply available from Midwest refineries and from recycling diluent. Low market risk as diluent is required to transport growing oil sands production. Lower than TQM.%.% as adjusted for ROE Lock-in on 0%.%.% as adjusted for ROE Lock-in on 0%

14 Page of Pipeline/Project Short-Term Risk Long-Term Risk Overall Risk Relative to TQM 00 Total Return (Assuming.% after-tax debt rate) 00 Total Return TransCanada Mainline (00-0 settlement) Southern Lights is allocated % of revenue from Uncommitted Shipper revenue. Lower than TQM. O&M risk within a year. 0% of cost of service covered by deferral accounts. Revenue deferral accounts. Foothills Lower than TQM. Incentive agreement for G&A costs, but all other cost variances are flowthrough. 0% of cost of service covered by deferral accounts. Revenue variances are flowthrough. Risk of shipper termination rights if certain benchmarks are not met. Similar to TQM. Predominantly dependant on WCSB which has decreased supply capability. Supply and competitive risk due to contract profile. Competes with Rockies and other basin supplies and potential LNG supplies. Diversified markets. Similar to TQM. Predominantly dependant on WCSB which has decreased supply capability. Diversified markets. Competition due to increasing Rockies production. LNG provides competition in California and potentially in Pacific Northwest markets. Similar to TQM.% Similar to TQM.% (NEB Formula ROE.% on 0%) (NEB Formula ROE.% on %).% (NEB Formula ROE.% on 0%).% (NEB Formula ROE.% on %

15 TQM 00 and 00 Fair Return Application Page of 0 0. TQM Business Risk Q. What is the overall assessment of TQM s business risk? A. TQM s overall business risk has increased since it was last reviewed by the Board in the RH-- proceeding. Long-term business risk has increased in the areas of supply risk and competitive risk. The following review of TQM s business risk is supported by the detailed analysis contained in the evidence of Dr. Carpenter. Q. Has the relative risk assessment between TQM, Foothills and the TransCanada Mainline changed since the RH-- Decision? A. No. In the RH-- Decision, the Board stated: The Board recognizes that the gas pipelines have some individual characteristics, described in its views above, which differentiate one from another. On balance, however, the Board is of the view that the overall business risks of TransCanada, Foothills, ANG, and TQM balance out such that a similar common equity ratio can be given to those four pipelines. It is TQM s view that this balance has not changed over time. Like Foothills and the TransCanada Mainline, TQM has experienced an increase in business risk since. The NEB has assessed increased supply and competitive risk for the Mainline since. Capacity on TQM is part of the TransCanada Mainline integrated system so TQM has experienced similar increases in supply and competitive risk. Q. How has the NEB found that the TransCanada Mainline s supply risk has increased since RH--? A. The Board has twice increased the TransCanada Mainline cost of capital, due in part to an assessment of increase in supply risk. The RH--00 Decision increased the NEB RH-- Decision, page. Foothills now includes what was previously known as the B.C. System after TransCanada purchased it from ANG.

16 Page of 0 0 TransCanada Mainline equity ratio from 0% to %. The RH--00 Phase II Decision increased the equity ratio to %. Q. How has TQM s supply risk increased since the RH--00 Phase II Decision? A. To demonstrate the increase in TQM s supply risk since the RH--00 Phase II Decision, TQM provides the TransCanada TQM Throughput Study filed as Appendix to the Application. Since 00 TransCanada s supply forecast for the Western Canada Sedimentary Basin ( WCSB or Basin ) has declined, and TQM s supply risk has increased. There is no longer an expectation of future supply growth, and the likelihood of a sustained production decline has increased. There is also greater uncertainty with respect to future supplies than was the case in 00 due to increased volatility in gas prices and uncertainty associated with developing unconventional resources. Q0. How has the level of optimism regarding Basin supply changed since 00? A0. Prior to 00, WCSB supply had increased significantly over a 0 year period. The Ladyfern discovery in 00 also provided more optimism that larger gas pools remained to be discovered and that gas supply would continue to increase, albeit at a slower rate. The industry was generally more optimistic. Although TransCanada reflected a similar optimism in its 00 supply forecast, it did state that the Basin was maturing and suggested that there was more downside risk than upside potential if the Basin did not perform as expected considering the high price environment. What TransCanada has observed since is that the risk of there being more downside than upside has been realized. The industry s view in 00 was that there was a lag in production development and that production would eventually increase. While production has increased in some years, it has not been sustained. In 00, there was a view that high gas prices would be the catalyst for significant activity and sustained supply growth. The significant activity levels since 00 have not translated into material supply growth. While gas well connections increased from an estimate of,00 in 00 in the evidence

17 Page of filed in the RH--00 proceeding to a high of,00 in 00, production has remained essentially flat. Q. How does TransCanada s 00 supply forecast compare to other supply forecasts? A. In general, other supply forecasts are lower. For example, Figure. shows scenarios from a November 00 NEB Report. Bcf/d Figure. Supply Forecast Comparison Historical NEB Continuing Trends NEB Fortified Islands NEB Triple E Q. What factors have led TransCanada to be less optimistic about WCSB supply than in 00? A. TransCanada is less optimistic due to the following factors: The trend of higher supply cost; NEB Canada s Energy Future Reference Case Scenarios to 00, November 00.

18 Page of 0 Diminishing shallow drilling prospects, which have been the engine of supply growth; No significant increase in activity in the high resource potential areas, in spite of higher gas prices, primarily due to the high risk nature of developing the resource in an uncertain price environment; Unconventional supply estimates are lower; Mackenzie pipeline has been delayed; Uncertainty and costs introduced by Government decisions on income trusts and royalties; and Higher Canadian currency exchange rate resulting in lower revenues for producers. 0 TransCanada has not only reduced its supply forecast since 00, its level of optimism about future supply has also changed. Q. Does the short-term performance of the Basin influence the longer-term supply view? A. Yes. Short-term performance of the Basin is informative and does influence the longerterm view. When the Basin supply is not performing as expected given a set of inputs, then the longer term view would also have to be adjusted accordingly. For instance, while past forecasts have assumed relatively flat supply costs as a result of technological improvements, the recently experienced increase in supply costs has placed this assumption in question. As illustrated in Figure. there has been a step change in supply costs that does not seem to be short-term or temporary in nature. Figure. presents a history of the -year rolling average of finding and development costs. This actually masks the recent dramatic increase in annual finding and development costs. TransCanada s long-term forecast has not fully considered the impact of higher supply costs and its forecast would be lower if the current trend of higher costs is sustained.

19 Page of $.0 Figure. Gas and NGL Finding and Development Costs (-year rolling average) $/Mcfe :) $.00 $.0 $.00 $.0 $.00 $0.0 $ E 00F 00F Higher costs reduce supplies available at a given price level, and create uncertainty with respect to the economic viability of future supplies. The discovery of smaller and smaller gas pools and falling initial production ( IP ) rates indicate a trend towards higher costs and lower gas supply availability in the future. These factors are evidence of increased supply risk. 0 Q. Are there any factors which offset TQM s increased supply risk? A. Yes. TQM s supply risk is partially offset by the potential for alternative supplies from Dawn, but Dawn supplies may not completely substitute for declines in WCSB supplies to TQM or be available at delivered prices in Québec that are as competitive as was WCSB gas historically. The future potential for LNG supply could also mitigate some of TQM s supply risk. TQM is preparing an application for facilities connecting the receipt point at Gros Cacouna to the existing TQM system. The Rabaska terminal has also been approved and would connect to the TQM system. However, LNG as a supply source is inherently risky on two grounds. First, there is the risk that the regasification projects will not materialize due to environmental, regulatory and market reasons. Second, even if they are

20 Page of 0 0 successfully developed, there is a risk of underutilization of these projects if LNG supplies themselves are tight or not available. The supply of LNG is subject to global competition, and unlike pipeline supply it can be (and is) diverted to other markets at a short notice depending on the nature of the upstream contracts the regasification facility is able to secure. Overall, TQM s supply risk is similar to that of the Mainline, and has increased since and since 00. Q. Has TQM s competitive risk increased since? A. Yes. TQM serves two markets, the Québec market through the Gaz Métro distribution network and the New England market via the Portland Natural Gas Transmission System ( PNGTS ) extension. Competition has increased in both markets. Q. What is the assessment of competition in the Québec market? A. Competition has intensified in the Québec market since. Natural gas has become less competitive relative to both fuel oil and electricity over the last decade. TQM s industrial customers in Québec have declined in number and reduced their aggregate throughput volumes since. Gaz Métro faces a continuing prospect of losses in industrial load due to fuel switching, with of its industrial customers (representing annual load of roughly Bcf) at risk. This risk is not offset by the recent addition of the Bécancour cogeneration plant, since its future utilization is uncertain (it will not operate for all of 00, and possibly beyond). This trend introduces significant uncertainty around the future use of TQM s assets that serve gas customers in Québec. Q. How does competition in the New England market impact TQM? A. Competition to serve the New England market impacts the PNGTS extension to East Hereford which serves this market in conjunction with the PNGTS system. The PNGTS

21 Page of 0 0 extension currently constitutes % of TQM s rate base. The Throughput Study shows reduced throughput on this extension in 00 as a result of LNG imports. The New England market has become more competitive with the construction of the Canaport and Northeast Gateway LNG projects, and approval of the Neptune project that will serve this market. Current PNGTS customers will have options to source their gas from other locations such as these LNG plants so they may not utilize the PNGTS extension to make deliveries in New England. This risk increases as the contracts that PNGTS customers have to East Hereford on the TransCanada Mainline expire throughout 00 to 00. This constitutes a major increase in competitive risk faced by TQM since the RH-- Decision. Q. How does the increase in competition in Québec and New England impact TQM? A. The main TransCanada transportation contract on TQM expires in 0, at which point % of TQM s invested capital will remain to be recovered. If the increase in competitive risk leads to decontracting in one or both markets, the total cost of the TQM system may have to be recovered from much lower volumes. As a result, TransCanada could face pressure to change the Mainline toll design and remove all or part of the contracted capacity on the TQM system from the Mainline integrated system. Full standalone treatment of TQM would result in a to increase in tolls to TQM s markets which would further negatively impact the competitiveness of TQM. The idea of standalone tolling of TQM has been raised in the past, most recently by the Alberta Department of Energy during the Gros Cacouna receipt point proceeding (RH--00). Q. Has TQM s overall business risk changed since? A. Yes. Both supply risk and competitive risk have increased TQM s long-term business risk creating greater uncertainty around the recovery of capital invested in TQM s assets before the end of the economic life of these assets. The evidence of Dr. Carpenter (Appendix ) provides a more detailed analysis of TQM s business risk.

22 Page 0 of 0 0. M&NP.. M&NP Total Return Comparison Q0. What has the Board said in the past about the business risk of M&NP? A0. In the RH--00 Phase II Decision the Board stated: With respect to differences in circumstances, the Board notes that some of these pipelines returns were set at a time when the cost of capital was higher than it is currently. Further, two of the pipelines, Alliance and M&NP, locked in their returns for a number of years. A higher return may be required for bearing the risk associated with locking in returns or rates over an extended period of time. Q. Is it necessary to consider adjusting the return of M&NP to reflect the lock-in of the return for a number of years and for it being set at a time when the cost of capital was different? A. No. M&NP s 00 return is based on a one-year settlement for 00, which set the ROE at % and equity ratio at.%, resulting in a total return of.%. Therefore, M&NP s 00 return is directly comparable to TQM s without considering whether an adjustment is required for locking-in its return. Q. Is any adjustment required to the M&NP return to account for the greenfield nature of the investment? A. No. All else equal, a new pipeline should not and does not require a greater return than an existing pipeline. Each has capital deployed for the same purpose and each has a long-term horizon. Differences in the risk associated with the market being served or the supply source are included in the evaluation under these topics. RH--00 Phase II Decision, page.

23 Page of M&NP Risk Comparison Q. How does the current business risk of M&NP compare to that of TQM? A. M&NP s current business risk is similar to that of TQM. Relative to TQM, M&NP has higher supply risk, which is partially offset by greater contractual support from a 0-year backstopping agreement with ExxonMobil, lower competitive risk and lower short-term risk. Q. How does M&NP s contract protection differ from that of TQM? A. M&NP s actual contract profile is less significant than the risk mitigation offered by the fact that ExxonMobil has agreed to contract any otherwise uncontracted capacity of M&NP over the first 0 years of operation. The ExxonMobil backstop provides great certainty that M&NP will recover its capital and its return on capital over this period. Since M&NP had a % depreciation rate, which was recently increased to.%, there is less than five years of exposure following expiry of the backstop agreement. As discussed above, TQM could experience decontracting on all or part of its system in a much shorter timeframe. Q. What is the supply outlook for M&NP relative to TQM? A. The supply risk of M&NP has increased with the downward revision of Sable Island gas reserves. This risk is partially offset by the possibility of LNG plants that could deliver to the M&NP system. M&NP s supply risk is also partially offset by potential gas reserves in New Brunswick and gas supply from the Deep Panuke project. The supply risk of TQM has increased over time, as the supply capability of the WCSB has decreased. On balance, since both M&NP and TQM have the potential to transport LNG, M&NP s supply risk is greater than TQM s because of its reliance on a smaller reserve base. Maritimes & Northeast Pipeline Management Ltd. (M&NP) Tolls Settlement and Application for Final Tolls January 00 December 00 (00 Tolls Settlement)

24 Page of 0 0 Q. What is the competitive risk for M&NP relative to that of TQM? A. M&NP s competitive risk is lower than that of TQM. M&NP is the only pipeline connecting gas supplies in its supply area. This mitigates the competitive risk as M&NP producers must either accept lower netbacks in the face of competition or shut in their gas. TQM faces greater competitive risk since the producers in the WCSB and other basins have market options for their gas. In addition, TQM serves the Québec market which has competition from alternative fuels. Q. What is the short-term risk for M&NP relative to that of TQM? A. M&NP has lower short-term risk than TQM. M&NP has % if its cost of service covered by deferral accounts while TQM has only 0% deferral account coverage. Both are protected from revenue risk. Q. Please summarize the comparison of M&NP to TQM. A. M&NP is a relevant and meaningful comparable to TQM in application of the fair return standard. M&NP s total return is higher than the current return of TQM, while the business risk of M&NP is similar to TQM s risk.. Alliance Pipeline.. Alliance Total Return Comparison Q. What has the Board said in the past about the business risk of Alliance? A. In its RH--00 Phase II Decision, the Board stated: The Board accepts that the level of risk faced by Alliance is sufficiently similar to the Mainline to make comparison relevant. However, when making comparisons, there is validity in adjusting Alliance s return to account for differences in circumstances. In particular, prior to comparing it with the Mainline, the return of Alliance should be adjusted to reflect the different risk-reward relationship of the two pipelines and the cost of capital environment that existed at the time that Alliance s return was set.

25 Page of 0 0 Unlike the Mainline, Alliance took on construction cost risk, locked in its return over an extended period of time, and took on some capacity risk. On the other hand, Alliance s long-term contracts tend to mitigate, in part, these additional risks. Comparison with Alliance s return ought to account for the different set of circumstances, including construction cost risk, whether such a risk was mitigable or not, and differences in the cost of capital and interest rate environment that prevailed at the time the return was set. Q0. What is TQM s response to these concerns? A0. TQM addresses the Board s concerns in three ways. The first is to point to a 00 NEB Decision that approves an.% ROE on 0% equity ratio for an Alliance expansion in the current capital market, and without construction cost risk. The second is to explain why an adjustment for the Alliance capital incentive mechanism is not required. This discussion is included in the evidence of Dr. Kolbe (Appendix ). The third is to adjust the negotiated ROE downward by basis points to account for the risk of locking in ROE for a multi-year period relative to accepting the NEB ROE Formula. This adjustment factor is explained in the evidence of Dr. Kolbe (Appendix ). Q. Please describe the reaffirmation of Alliance s.% ROE on 0% equity ratio. A. The Board approved Alliance s Taylor expansion in the GHW--00 Decision. Alliance did not purport to accept construction cost risk for the expansion. The cost of the expansion and the toll for the new service reflects an ROE of.% and an equity ratio of 0%. However, the Board specifically found that the founding compact of Alliance was only the tariff 0 and did not extend to the negotiated agreement which established the incentive rate of return. The result is that the Board approved a return of.% for Alliance without any of the differences in circumstances that existed in. 0 TransCanada PipeLines Limited 00 Mainline Tolls and Tariff Application, RH--00 Phase II Decision April 00, pp. -0. Alliance Pipeline GHW--00 Decision, page.

26 Page of 0 0 Q. Alliance was initially a greenfield pipeline. Can greenfield pipelines be directly compared to existing pipelines? A. Yes. The returns of greenfield and existing pipelines should only reflect nondiversifiable risks, since other risks can be eliminated through diversification. As such, greenfield pipelines and existing pipelines can be compared just as existing pipelines can be compared against each other. In other words, comparison of total returns of greenfield and existing pipelines is relevant and meaningful in application of the fair return standard provided that business risk differences are appropriately accounted for... Alliance Business Risk Comparison Q. How does Alliance s business risk compare to TQM s? A. The overall business risk of Alliance is similar to that of TQM. Q. Please describe the long-term risk faced by Alliance relative to TQM. A. Alliance is fully contracted for the primary term of its contracts. Also, Alliance s U.S. contracts include an incentive for contract renewal, which would likely lead to the renewal of matching capacity on the Canadian system. Alliance relies on gas produced from the WCSB, although it is connected to an area of supply growth and is able to attach new supply if necessary. Alliance delivers to a competitive market which has access to many other end markets. Alliance also faces default/capacity risk as it agreed to calculate its demand charges as costs divided by the greater of, MMcf/d or contracted capacity. The effect of this clause is to place the risk of shipper default on Alliance, rather than other shippers, at least initially. This capacity risk is mitigated by the creditworthiness of Alliance s shippers, the financial assurances obtainable under the Alliance tariff and the opportunity for Alliance to re-market the capacity of the defaulting shipper. Calpine s insolvency Alliance Toll Principles, Article.

27 Page of 0 freed about 0 MMcf/d of capacity on Alliance in the spring of 00. Alliance was able to re-contract the capacity on a short-term basis (currently under contract from 00 to 00) and may continue to do so. Nevertheless, Alliance faces greater capacity risk by virtue of its agreement not to allocate the impact of shipper defaults to other shippers. TQM s contract with TransCanada expires in 0, providing contract protection similar to that of Alliance. TQM s supply risk related to the WCSB is somewhat offset by access to alternative supply basins through Dawn and the prospect of LNG supplies. TQM has a high level of competitive risk in its Québec and New England markets, but does not face default/capacity risk. On balance, Alliance has similar long term risk to that of TQM. Q. How does the short-term risk of Alliance compare to the short-term risk of TQM? A. Alliance has lower short-term risk than that of TQM. TQM has greater cost-risk exposure since Alliance flows through all annual variances automatically while TQM has limited deferral accounts. Q. Please summarize the comparison of Alliance to TQM. A. Alliance is a relevant and meaningful comparable to TQM in application of the fair return standard. Alliance s overall business risk is similar to that of TQM s risk while Alliance s total return is higher. Alliance Pipeline, Application for Tariff Amendment Award of Available Firm Service Capacity, August, 00.

28 Page of 0 0. Oil Pipelines Comparison Q. Does TQM believe that it is relevant and meaningful to compare the risks and returns of oil pipelines to those of gas pipelines, including TQM, in application of the fair return standard? A. Yes. Q. How has the Board viewed comparisons to oil pipelines in the past? A. In the RH--00 Phase II Decision, the Board assessed the comparison made by TransCanada of its Mainline and the Enbridge Mainline and gave it no weight. The Board stated: The Board does not agree with TransCanada s proposition that Enbridge is of comparable risk to the Mainline. The Board notes that it has traditionally viewed oil pipelines as riskier than gas pipelines, given oil pipelines common carrier status supported only by monthly nominations, and because of operational complexities arising from the multi-product nature of their operations. None of the evidence presented by TransCanada supports the conclusion that the changed environment in which the Mainline operates has reduced or eliminated these differences in business risks. Further, even if these pipelines were of comparable risk, the Board notes that Enbridge s financial parameters have been determined through negotiation for the past decade and are reflective of the package agreed to for an oil pipeline at the time those settlements were negotiated, not of cost of capital for a gas pipeline in 00. The Board gave no weight to the comparison with Enbridge. NEB Decision RH--00 Phase II, pp. -.

29 Page of 0 0 Q. What is TQM s response to the Board s statements? A. TQM has analysed the differences between oil and gas pipelines in greater detail, and has sought to understand what the Board describes as the origin of the traditional view of relative risk between gas pipelines and oil pipelines. When comparing the historical circumstances to the situation that exists today, it is clear to TQM that the traditional view does not hold and that TQM s business risk is comparable to that of Enbridge and TMPL. Q0. What are the origins of what the Board describes as the traditional view of the relative risks of gas and oil pipelines? A0. TQM understands that the common carrier/contract carrier difference between oil pipelines and gas pipelines stems from the National Energy Board Act, although new oil pipelines and expansions of existing oil pipelines are increasingly underpinned by long term contracts. This is a risk issue that relates to the term of contractual commitments and the creditworthiness of the contracting shippers. It also relates to the certainty of revenue recovery, since contract carriers recover fixed costs from contract holders through demand charges, whereas common carriers collect all costs over forecast volumes. Another related difference is that in the past when oil pipelines such as TMPL and the Enbridge Mainline set tolls according to their cost of service, their earnings were subject to variations between forecast and actual volumes and costs since they had no deferral accounts. An oil pipeline could apply for new tolls based on revised volumes and/or costs if the return on equity were forecasted to vary by over 00 basis points from the approved level. This recourse left oil pipelines exposed to some degree of volume risk and cost risk due to the lag between filing new tolls and having them approved, and the explicit allowance of a 00 basis point variance in the achieved ROE. NEB, Orders TO--, TO--, and TO--, by letter dated June 0, re: Adjustment of Tolls and Tariffs of Certain Oil and Oil Products Pipeline Companies.

30 Page of 0 0 These differences related to contract and common carriage appear to have been the primary reason that oil pipelines were traditionally considered riskier than gas pipelines and awarded higher equity ratios. TQM has been unable to find any NEB decision that expresses a conclusion that the relative business risk of oil pipelines is higher than gas pipelines due to operational complexities arising from the multi-product nature of the operations of oil pipelines. In the RH-- Decision, The Enbridge Mainline (then Interprovincial Pipe Line) was awarded % equity on the basis of business risk. Later in the RH-- proceeding, TMPL was awarded a % equity ratio on the basis of business risk, while TQM, Foothills, and the TransCanada Mainline were awarded a 0% equity ratio. Q. How do the tolling methodologies and circumstances today compare to those that may have led to the traditional view of the relative risk of oil and gas pipelines? A. There have been significant changes since the early 0s. At that time, TQM, the Enbridge Mainline and TMPL applied for cost-of-service based tolls. However, the Enbridge Mainline and TMPL have not calculated rates using their traditional methodology for over a decade. The traditional methodology was replaced by settlements that are based on a different model. They are no longer exposed to the same level of risk and earnings variability. Since, TQM s average contract term has decreased by approximately %. This has diminished although not eliminated the higher relative risk exposure of operating under the common carrier regulatory model with contract terms of one month. As a result of these changes, oil and gas pipelines are more relevant for comparison purposes. The appropriate comparison is to current returns in the current risk environment, as illustrated in the recent commercial agreements for AB Clipper and Line Extension, and TMPL, all of which have explicit ROEs and equity ratios, and to the actual returns of the Enbridge Mainline as generated by its negotiated settlements.

31 Page of 0 0 Q. Are oil pipelines exposed to additional risk due to complexities arising from the multi-product nature of their operations? A. TQM does not believe so. Presumably this is the risk that operating a multi-product, batched pipeline could result in contamination, degradation and the loss of liquids that would affect an oil pipeline s earnings. There is no evidence that an oil pipeline has been exposed to any such risk. The Enbridge Mainline, for instance, has traditionally recovered any such costs as a part of its cost of service. These costs are recovered as part of the Starting Point associated costs under the Enbridge Mainline current settlement, and the Enbridge Mainline generates revenue through the collection of allowance oil as an offset to these costs. The Enbridge Mainline also has tariff protection against claims of loss from shippers, and in the past has recovered the cost of a contamination claim through a Non-Routine Adjustment under its Incentive Tolling Settlement. In the case of TMPL, costs associated with contamination and degradation are treated on a flow-through basis in the settlement. 0 TMPL also has tariff protection against loss claims from its shippers. Q. Are there any other considerations which have changed the relative risks of oil and gas pipelines since the early 0s? A. Yes. In the RH-- Decision, the Board considered supply risk to be low for both oil and gas pipelines. In describing supply risk for oil pipelines the Board stated: The Board s view on crude oil supply risk is that the resource base, in terms of both the remaining established reserves as well as discovered and undiscovered resources, is sufficiently large and diversified to support the existing pipelines beyond their current NEB Decision RH-- pp ; NEB Decision RH--, pp. Enbridge Pipelines, 00 Revenue Requirement, April, 00, note to Statement 0. Enbridge Pipelines, 00 Revenue Require`ment, April, 00, draft tariff NEB No., p. Enbridge Tariff NEB 0, p, Article. Enbridge Pipelines, Calculation of 00 Tolls, Statement 0., SEP II Line / Recoverable Payment, Page. 0 TMPL ITS. Schedule..

32 Page 0 of 0 truncation dates under most circumstances. In particular, the Board anticipates that a future decline in conventional oil supply from the WCSB will tend to be offset by an increased supply of unconventional oil. In describing supply risk for gas pipelines the Board stated: There are other risk factors which were examined in these proceedings but which the evidence suggested should be given lesser weights. These risk factors included the method of regulation under which each pipeline operates and the adequacy of the supply available to it. The Board is of the view that these factors have, at this time, only a marginal impact on the overall risk of pipelines. As previously discussed, since the RH-- Decision the Board, in Decisions RH--00 and RH--00 Phase II, has acknowledged that the WCSB related supply risk for the TransCanada Mainline has increased. Forecast oil supply has remained robust, with projected supply increases more than adequate to fill all the proposed expansion pipeline capacity out of western Canada, as illustrated in Figure.. RH-- Decision, page. RH-- Decision, page. CAPP Presentation CAPP Oil and Gas Industry Outlook June, 00.

33 Page of Figure. Forecast of Marketable Crude Supply and Pipeline Capacity Million b/d Enbridge Clipper TransCanada Keystone KM Transmountain Enbridge Southern Access Existing Export Capacity Refinery Consumption Capacity Required Marketable Crude* CAPP Moderate Growth Case * Marketable Crude is CAPP s 00 Moderate Growth Case plus diluent imports 0 CAPP s forecast projects enough supply to fill all existing/planned expansions. This indicates that supply risk for an oil pipeline is now lower than the supply risk for a gas pipeline. The divergence in supply outlook for gas pipelines and oil pipelines is a major change that impacts their relative risk. All else equal, this lowers the risk of oil pipelines relative to gas pipelines. Q. Please summarize TQM s analysis of the traditional view that oil pipelines are riskier than gas pipelines. A. The traditional view does not represent the relative risks as they exist today. Using Enbridge and TMPL as benchmarks, their tolling methodology has changed substantially TransCanada s estimation of current capacity and proposed capacity.

34 Page of 0 0 since the early 0s, and there is no evidence that there is any greater risk due to greater operational complexity. Also, gas pipelines now have higher supply risk and reduced contractual underpinnings. Further, as explained in Mr. Engen s evidence, the investment community now finds gas transmission pipelines to be more risky than oil pipelines. Comparisons made to oil pipelines are more relevant today than years ago when the Board conducted the RH-- proceeding... Enbridge Mainline... Enbridge Mainline Total Return Comparison Q. Is the Enbridge Mainline a relevant and meaningful comparable for TQM? A. Yes. The Enbridge Mainline settled its rates, then entered a - settlement, a settlement, and is now operating under a settlement. The Enbridge Mainline s total return is not included in the Non-Formula Sample as the returns used to calculate tolls are not available from the settlements. Actual total returns as reported by DBRS ranging from.0%-0.0% for the period -00 are provided in Figure. and are used for comparison in this analysis.... Enbridge Mainline Risk Comparison Q. How does the business risk of the Enbridge Mainline compare to that of TQM? A. The Enbridge Mainline has similar overall business risk relative to TQM. TQM faces higher supply risk and competitive risk while the Enbridge Mainline faces higher shortterm cost risk arising from its Incentive Tolling Settlement and higher risk due to the lack of contractual protection. Q. How does the Enbridge Mainline s supply risk compare to that of TQM? A. The supply outlook for the Enbridge Mainline is illustrated by the following summary statement by Thomas Wise of Purvin & Gertz:

35 Page of 0 0 Purvin & Gertz forecasts the total blended crude oil supply from Western Canada for refineries and pipelines to increase from approximately,,000 barrels per day (B/D) in 00, by nearly 00,000 B/D in 00 and by another 0,000 B/D by 0. Nearly all of this volume increase will have to be exported to refining markets. A May 00 forecast of total crude oil supply by the Canadian Association of Petroleum Producers (CAPP) is much higher. This outlook suggests that the Enbridge Mainline supply risk is less than that of TQM. Q. How does the Enbridge Mainline s competitive risk compare to that of TQM? A. The Enbridge Mainline faces little competitive risk in its main market areas. As U.S. mid-west refineries increase their ability to process heavy Canadian crude oil blends, they become more dependent on Canadian supplies. Further, a number of existing oil pipelines that have historically transported crude from the Gulf Coast to mid-west markets have been or will be reversed, reducing the ability of supplies from the Gulf Coast to compete with Canadian supplies. In contrast, TQM faces increased competitive risk in both its Québec and New England market areas, exposing it to substantial longterm risk. The Enbridge Mainline does face additional risk due to its lack of contractual protection and the prospect of competition to transport growing supplies. Q. How does the Enbridge Mainline s current settlement affect its annual revenue risk? A. The Enbridge Mainline has very little short-term revenue risk because its Incentive Toll Settlement includes a Transportation Revenue Variance ( TRV ) which, unlike a deferral account, ensures recovery in the subsequent year. The TRV does not require approval before being passed through in tolls. While there is some volume risk Thomas Wise of Purvin & Gertz Inc., Outlook for Crude Oil Exports and Pipeline Capacity from Western Canada, prepared for TransCanada Pipelines MH--00 Application, Appendix -, Exhibit B-e, p., lines -.

36 Page of 0 0 related to expansion projects, the Enbridge Mainline is almost completely protected from revenue variance by the TRV. Q0. How does the Enbridge Mainline s current settlement affect its exposure to shortterm cost risk? A0. The Enbridge Mainline is exposed to short-term cost risk. The Enbridge Mainline s 00 to 00 settlement puts about % of the Enbridge Mainline s forecast 00 costs at risk (this is apart from the costs associated with the Terrace expansions). This risk stems from using a Starting Point in the cost forecast, which is an incentive envelope making up about half of forecast costs. The Starting Point is inflated at half of the inflation rate over the course of the settlement. To the extent that associated annual costs are below the Starting Point, and earnings exceed a threshold level, excess earnings are shared 0/0 with shippers. To the extent actual cost of the incentive envelop exceed the escalated levels, the shortfall is fully to the account of Enbridge shareholders. There are some other sources of risk related to costs in the Enbridge Mainline s current settlement. It includes an annual integrity cost allowance of $ million per year. Enbridge can benefit by spending no more than 0% of this allowance cumulatively over the term of the settlement, and is at risk of incurring integrity costs in excess of this allowance. Power costs are a flow-through item, except with a guaranteed savings to shippers of $ million, with % of savings in excess of $ million to the account of the Enbridge Mainline. The tolling for the Terrace Expansion places the Enbridge Mainline at risk for some cost variances within defined ranges. 0 The Enbridge Mainline s current settlement also includes incentives tied to the level of Enbridge Pipelines, 00 Revenue Requirement, April, 00, Schedule. Incentive Tolling Principles of Settlement for the Years between Enbridge and CAPP, Article, p.. Incentive Tolling Principles of Settlement for the Years between Enbridge and CAPP, Article, p.. Incentive Tolling Principles of Settlement for the Years between Enbridge and CAPP, Article, pp Incentive Tolling Principles of Settlement for the Years between Enbridge and CAPP, Schedule G, Terrace Toll Agreement, Schedule B.

37 Page of 0 0 service. These are defined in the categories of quality and predictability, reliability, flexibility and miscellaneous. These incentives are very detailed, and have a maximum penalty of $0 million, growing to $0 million over the term of the settlement, with no cap on the amount of the potential bonus to the Enbridge Mainline if it performs well. Fixing of the costs in the incentive envelop for five years puts Enbridge at greater shortterm cost risk than TQM, even though TQM has only 0% of its cost of service covered by deferral accounts. Q. How does Enbridge s overall risk compare to that of TQM? A. Enbridge s current overall business risk is similar to that of TQM. Enbridge faces somewhat higher short term cost risk and higher risk due to a lack of contractual support but lower supply risk and less competition in its market areas. Q. Please summarize the comparison of the Enbridge Mainline s risk and return to TQM s risk and return. A. The Enbridge Mainline is a relevant and meaningful comparable to TQM in application of the fair return standard. The Enbridge Mainline has similar overall business risk to TQM and higher actual returns... Enbridge Alberta Clipper and Line Extension Projects Q. Please describe the AB Clipper and Line Extension projects. A. AB Clipper is a proposed crude oil pipeline providing service between Hardisty, Alberta and Superior, Wisconsin along the existing Enbridge right-of-way. The,0 kilometre segment has been proposed to shippers to resolve expected capacity constraints. The proposed in-service date is late 00 to mid-00. Initial capacity is expected to be 0,000 barrels per day (bpd), with ultimate capacity available of up to 00,000 bpd. The project will be integrated into the existing Enbridge system. Enbridge s Line currently transports crude oil from Hardisty to the U.S. border. The

38 Page of 0 0 Line Extension project will extend Line upstream from Hardisty to Edmonton by connecting three existing, but currently deactivated, segments of pipe. The project involves the construction of km of new pipe and related facilities. When completed, Line will have an average annual capacity of 0,00 bpd. The proposed in-service date is March, AB Clipper and Line Extension Total Return Comparison Q. Is it relevant and meaningful to compare the returns of AB Clipper and the Line Extension to the returns of TQM? A. Yes. The returns of AB Clipper and Line Extension are indicative of returns currently required by pipelines. AB Clipper and Line Extension both have a negotiated total return equal to the NEB Formula ROE plus basis points on an equity ratio of %. For the year 00, their total returns would be.%. If the Board ROE Formula changes, the parties have agreed to negotiate a new benchmark ROE. Q. Should any adjustments be made to AB Clipper and Line Extension ROEs for the purpose of comparison to TQM? A. No. An ROE adjustment is not required as discussed in the evidence of Dr. Kolbe (Appendix ). Dr. Kolbe found no adjustment is required for construction cost risk, and the return is not locked-in. The target capacity provisions and in-service date provision of AB Clipper are considered as differences in business risk.... AB Clipper and Line Extension Risk Comparison Q. How does the business risk of AB Clipper and Line Extension compare to that of TQM? A. AB Clipper and Line Extension overall business risk is similar to that of TQM. Relative to TQM, these projects have similar long-term and higher short-term risks. Line Extension Application, Appendix. p. ; and the Alberta Clipper Commercial Agreement with CAPP pp. -.

39 Page of 0 0 Q. Why are the long-term risks of these projects similar to TQM s long-term risk? A. The long-term risk of these projects is similar to that of TQM because the projects have lower supply risk (discussed above) and less competition in their market areas, offset by a lack of contractual protection and the prospect of competition to transport growing supplies. In contrast, TQM faces increased competitive risk in both its Québec and New England market areas, and increased supply risk exposing it to substantial long-term risk. On balance, the long term risk of the projects is similar to that of TQM. Q. How does the short-term risk of these projects compare to the short-term risk of TQM? A. These projects will be integrated into the Enbridge Mainline and would be subject to the next incentive tolling settlement due to be negotiated in 00. Should the settlement be similar to the current agreement where cost levels are fixed for a five year term and approximately % of the cost of service is at risk. The projects are subject to an inservice date provision which subjects them to risk if a set in-service date is not met. AB Clipper also faces an initial target capacity mechanism which places it at risk if an initial target capacity is not met. TQM does not face risk in these areas. Overall, the projects have higher short term risk than TQM. Q. Please summarize the comparison of the risk and return for AB Clipper and Line Extension to TQM s risk and return. A. The AB Clipper and Line Extension projects have similar overall business risk to TQM, and higher total returns.

40 Page of Trans Mountain Pipe Line... TMPL Total Return Comparison Q0. Is it relevant and meaningful to compare the returns of TMPL to the returns of TQM? A0. Yes. The returns of TMPL are indicative of the returns currently required by pipelines. The settlement between CAPP and TMPL is premised on an ROE of 0.% and an equity ratio of %. This results in a total return for TMPL of.0%. Q. Does TMPL s ROE require adjustment for the fact that it has a capital cost incentive mechanism for expansion projects? A. No. As discussed in the evidence of Dr. Kolbe (Appendix ), no such adjustment is required. The expansion target capacity provisions of the TMPL expansion projects are considered as differences in business risk. Q. Does TMPL s ROE require adjustment for the fact that its ROE is locked-in for years? A. Yes. The negotiated ROE of 0.% has been adjusted downward by basis points to account for the risk of locking in ROE for years relative to accepting the NEB ROE Formula. This adjustment is conservative given the short time period of the lock-in. The adjustment factor is discussed in the evidence of Dr. Kolbe (Appendix ).... TMPL Risk Comparison Q. How does the business risk of TMPL compare to that of TQM? A. TMPL has similar business risk when compared to TQM. TMPL has greater short-term cost risk than TQM and a lack of contractual support. These are offset by lower supply risk and less competition in its market areas. Application by Terasen Pipelines (Trans Mountain) Inc. for 00 Incentive Toll Settlement dated October, 00.

41 Page of 0 0 Q. Why is TMPL s long-term risk similar to that of TQM? A. TMPL has lower supply and competitive risk. Given the outlook for oil production, TMPL s supply risk is the same as that of Enbridge, AB Clipper and the Line Extension project discussed above. TMPL has lower competitive risk because it has captive B.C. markets and access to growing U.S. markets due to declining indigenous production in California and declining supplies of Alaska North Slope crude oil. California markets are also expected to import additional refined products in the future, with the TMPL system as possible supply source. TMPL faces higher relative risk due to its lack of contractual protection from competition should it arise. On balance, TMPL has similar long-term risk to TQM. Q. How does the short-term risk of TMPL compare to the short-term risk of TQM? A. TMPL faces somewhat higher short-term risk than TQM, resulting from the terms of TMPL s Settlement. This Settlement fixes O&M and other costs for a fiveyear period without deferral account coverage, with only 0% of the cost of service covered by deferral accounts. It also contains capacity incentives, such that when throughput exceeds.% of design capacity, TMPL retains % of the revenue earned, while shippers are awarded the remaining %. On the other hand, if actual throughput is less than 0% of design capacity during months of apportionment, TMPL is penalized by $0,000 per % shortfall to a maximum of $00,000 per month. However revenue shortfalls are flowed through to shippers if throughput drops below 0% of capacity, so long as the shortfall does not occur during a time of apportionment. The settlement also exposes TMPL to an initial expansion capacity verification process which would impact return if the initial target capacity of the expansion is not met.

42 Page 0 of 0 0 Q. Please summarize the comparison of TMPL s risk and return to TQM s risk and return. A. TMPL is a relevant and meaningful comparable to TQM in application of the fair return standard. TMPL has similar overall business risk and higher total return than TQM.. Enbridge Southern Lights Project Q. Please describe the Southern Lights project. A. The Southern Lights diluent pipeline involves development of a new pipeline system to transport light hydrocarbon liquids from the Chicago area back to Western Canada where the light hydrocarbon liquids are required as diluent for the transportation of heavy crude production from the oilsands. The system will include the construction of 0 km of 0-inch pipe from Chicago to Clearbrook, Minnesota, and the reversal of an existing km light crude line (Line ) from Clearbrook to Edmonton. This new system will have an initial capacity of 0,000 bpd and is targeted to be in service in 00. The project also includes the Light Crude Capacity Expansion Program ( LCCEP ), involving the construction of 0 km of 0-inch pipeline from Cromer, Manitoba to Clearbrook, plus an expansion of the capacity of Enbridge s Line light crude pipeline. The combined effect of removing Line from light crude service, together with the LCCEP, will be a net increase in light crude capacity of approximately,000 bpd... Southern Lights Total Return Comparison Q. Is it relevant and meaningful to compare the returns of Southern Lights to the returns of TQM? A. Yes. The return proposed in the Southern Lights application and endorsed by CAPP is indicative of the return currently required by pipelines. For Southern Lights, Enbridge has negotiated an ROE of % and an equity ratio of 0%. These have been fixed for the

43 Page of 0 0 -year term of the committed shippers contracts, and are subject to a 00 basis point adjustment for capital cost variances. Q. Does Southern Light s ROE require adjustment for the fact that it has a capital cost incentive mechanism? A. No. As discussed in the evidence of Dr. Kolbe (Appendix ), no such adjustment is required. Q0. Does Southern Light s ROE require adjustment for the fact that its ROE is lockedin for years? A0. Yes. The negotiated ROE of % has been adjusted downward by basis points to account for the risk of locking in ROE for years. The adjustment factor is discussed in the evidence of Dr. Kolbe (Appendix )... Southern Lights Risk Comparison Q. How does the business risk of Southern Lights compare to that of TQM? A. Southern Lights supply risk is low as diluent supply is available from mid-west refineries and from recycled diluent. Market risk is low as diluent will be required to transport growing oil sands production. Short-term risk is low as there is full passthrough of cost and revenue variances. Further mitigating risk is that fact that Southern Lights receives % of the revenue generated from uncommitted shippers, whereas all of its costs are recovered from committed shippers. Southern Lights overall business risk is lower than that of TQM while its total return is higher.

44 Page of 0 0. TransCanada Mainline and Foothills.. TransCanada Mainline and Foothills Return Comparison Q. Are the returns of the TransCanada Mainline and Foothills comparable to the returns of TQM?? A. Yes. The total returns of the TransCanada Mainline and Foothills can be compared to those of TQM, although the comparison is somewhat circular since all three have their ROE set by the NEB Formula. The comparison shows total returns for the TransCanada Mainline and Foothills to be higher than that for TQM, solely due to increases in equity ratios. Both the TransCanada Mainline and Foothills had their equity ratios set at 0% in the RH-- proceeding. The Board increased the TransCanada Mainline s equity ratio in the RH--00 Decision from 0% to % and in the RH--00 Phase II Decision from % to %. The recent 00 TransCanada Mainline Tolls and Tariff Settlement, approved by the Board in Order TG-0-00, set the TransCanada Mainline s equity ratio at 0% for the settlement term, from The Board approved a settlement increasing Foothill s equity ratio from 0% to % in Order TG The TQM equity ratio is still 0%... TransCanada Mainline and Foothills Risk Comparison Q. How do the business risks of the TransCanada Mainline and Foothills compare to that of TQM? A. The business risks of these systems continue to be, on balance, similar to TQM as the Board determined in the RH-- Phase II Decision. Foothills and the TransCanada Mainline have similar supply risk and lower competitive and short term risk. Q. Please explain the supply risk faced by the TransCanada Mainline and Foothills relative to TQM. A. The supply capability of the WCSB has declined since the RH-- Decision as discussed by the Board in the RH--00 and RH--00 Phase II Decisions, which

45 Page of 0 0 resulted in increases of the TransCanada Mainline equity ratio. Capacity on TQM is part of the TransCanada Mainline integrated system so TQM is also predominantly dependent on the WCSB for supply. The TransCanada Mainline and Foothills have somewhat greater supply risk than TQM, since TQM has some potential for greater supply diversity. These potential sources of supply to TQM have some uncertainty as described in Section. above. While the TransCanada Mainline has access to some of the same potential sources of supply, these sources would only utilize the eastern portion of the TransCanada Mainline system. Q. Please explain the competitive risk faced by the TransCanada Mainline and Foothills compared to TQM. A. TQM has higher competitive risks than either the TransCanada Mainline or Foothills. TQM faces significant competitive risk as described above. The TransCanada Mainline is also exposed to these risks, although it has other and more diversified markets. Foothills and the TransCanada Mainline face competitive risk as they compete with Rockies and other basin supplies and potential LNG in their markets. Foothills also has more diversified markets than TQM, which reduces relative competitive risk. Q. Please describe the short-term risk faced by the TransCanada Mainline and Foothills compared to TQM. A. The TransCanada Mainline has deferral account coverage for 0% of its cost of service, Foothills has 0% coverage and TQM has 0% coverage. The TransCanada Mainline and Foothills have revenue deferral accounts, while TQM is protected from revenue risk by the TransCanada contract. Therefore, none of these pipelines face revenue risk. TQM has higher short-term risk than the TransCanada Mainline and Foothills. Q. Please summarize the comparison of the TransCanada Mainline and Foothills to TQM. A. The TransCanada Mainline and Foothills have higher equity ratios of 0% and % respectively, compared to TQM s last approved 0% equity ratio. This difference is not

46 Page of 0 supported by differences in business risk, since all three systems have similar business risk, as they did at the time of the RH-- Decision..0 CONCLUSION Q. What conclusions can be drawn from this evidence? A. The analysis in this section shows that comparable pipelines in Canada enjoy higher total returns than TQM, and that this gap cannot be explained by differences in relative business risk. It is clear from this analysis, and the U.S. comparisons presented in Dr. Carpenter s evidence, that approved total returns for TQM for 00 and 00 based on the NEB Formula ROE and a deemed equity ratio of 0% would be below the total return required by the market. This conclusion is reflected in a number of negotiated returns for other comparable Canadian pipelines. An increase in TQM s total return is required in order to meet the fair return standard.

47 Attachment: Business Risk Profiles Page of Business Risk Profiles Trans Québec & Maritimes Pipeline ( TQM ) Profile System Description Competitive Position Contract Profile Rate of Return on Common Equity Common Equity Ratio The TQM pipeline system is km long and transports natural gas from Saint-Lazare, west of Montréal, where it is connected to the TransCanada Mainline, to the south shore of the St. Laurence river near Québec City. It is also connected to PNGTS in the northeastern United States. TQM total capacity is approximately 0 MMcf/d, and in 00 deliveries amounted to Bcf. TQM primarily delivers gas to Gaz Métro and PNGTS. Alliance and Vector compete for supply of Western Canadian gas going into eastern Canada and north-eastern United States. Tolls for deliveries off of the TQM system have been driven upward as a consequence, affecting the competitiveness of Western Canadian gas. TQM faces potential competition in the north-eastern U.S. market from M&NP and from new LNG terminals being built to supply that market area. TQM faces competitive risk in the Québec market from alternative fuels. TQM carries gas on behalf of the TransCanada Mainline to various points of interconnection under a Transportation Service Agreement between the two parties. This contract currently extends to October, 0. TQM also has an additional contract with TransCanada for, 0 m ( MMcf/d) to serve the Bécancour power plant which expires in 0. The NEB Formula ROE for 00 is.% and for 00.%. TQM is requesting an % ROE for 00 and 00. Decision RH-- set TQM s deemed equity at 0%. TQM is requesting a 0% equity ratio for 00 and 00. Short-Term Risks Revenue Cost TQM s partial settlement for tolls from 00 to 00 allows for variances between actual and forecast other service revenue to be recorded in a revenue deferral account. These variances will be credited to the net revenue requirement in the test year immediately following. There is no revenue risk on the TransCanada contract volumes as TransCanada pays the net revenue requirement in instalments. 0% of TQM s cost of service is covered by deferral accounts under TQM s partial settlement for tolls from 00 to 00. O&M is set for the term of the partial settlement, with TQM at risk for variances. Operating Construction Cost TQM faces the risk that facility costs are found to be imprudent and disallowed. Tariff provisions exist ensuring shippers pay monthly charges regardless of failure to deliver gas because of force majeure situations. Long-Term Risks Revenue and Cost Market TQM s future revenues are tied to Gaz Métro s sales and deliveries to the Québec domestic market and to U.S. markets through PNGTS. Gaz Métro s sales are very sensitive to changes in the prices of alternate fuels. Natural gas remains a secondary fuel source behind hydro-electricity in Québec, which is TQM s primary market. This is due to the relatively high cost of natural gas from the distant WCSB supply, the low residential electricity rates, and the dual fuel-switching capabilities of industrial

48 Attachment: Business Risk Profiles Page of customers. The completion of the Canaport LNG terminal in New Brunswick, and the Gateway LNG project in New England will likely take market share away from WCSB gas, affecting utilization of the PNGTS extension. Alliance and Vector pipelines have reduced throughput on the Mainline resulting in significant de-contracting which has increased Mainline tolls. This reduces the competitiveness of WCSB gas into eastern Canada and the U.S. northeast through the TransCanada Mainline, pushing up tolls charged for delivery into TQM s market. The TQM system faces the following market risks: That competing pipelines will be built into the markets that it serves; That it will lose markets to existing competitors; That it will lose markets to competing fuels; and That expected demand growth fails to materialize. Supply WCSB supply risk has increased as recognized by the NEB in Decisions RH--00 and RH -00 Phase II. WCSB supply capability has decreased since the RH--00 Phase II Decision as shown in the current flow forecast. Recent factors include: Higher supply cost; Reduced potential for shallow drilling prospects; No increase in activity in high potential drilling areas due to high risks; Unconventional supply estimates are lower; Mackenzie pipeline has been delayed; Higher Canadian currency resulting in lower revenues for producers; and Uncertainty and costs introduced by government decisions on income trusts and royalty structure. The growing demand for gas in Western Canada will decrease the amount of gas available for export. The Gros Cacouna LNG terminal and/or the Rabaska LNG terminal, if built, will help ease supply concerns for the Québec and the Ontario natural gas markets. The projects are forecast to be on stream in the 0/0 timeframe. Supply risk is also partially mitigated from access to alternative supply basins through Dawn. Contracts TQM carries gas on behalf of the TransCanada Mainline to various points of interconnection under a long-term Transportation Service Agreements between the two parties. This main contract expires on October, 0. TQM also has an additional contract with TransCanada for, 0 M ( MMcf/d) to serve the Bécancour power plant which expires in 0. Deferred Tax Liability TQM carries a deferred tax liability of approximately $. million (end of 00) that will increase future tolls making TQM less competitive.

49 Attachment: Business Risk Profiles Page of Depreciation TQM has approximately % of gross plant left to recover at the end of test year 00. Operating Regulatory TQM faces major competitive threats in its markets. This increases the risk that there will be significant contract non-renewals in 0 and that TQM may be exposed to decisions that deal with the issue of long-term cost recovery. In addition, regulation may not be able to shield TQM from the fact that the market will not be receptive to tolls that allow full recovery of capital invested. Subject to Canadian environmental and pipeline integrity/safety policy and regulation. TQM Pipeline 00 Final Tolls Application, Tab, page.

50 Attachment: Business Risk Profiles Page of Maritimes & Northeast Pipeline ( M&NP ) Profile System Description Competitive Position Contract Profile Rate of Return on Common Equity Common Equity Ratio M&NP extends approximately 0 miles in Canada and the U.S. and has the capacity to transport approximately 0 MMcf/d of natural gas from Goldboro, Nova Scotia to domestic and export markets in the U.S. Northeast. M&NP is the only pipeline serving its supply area. M&NP has a 0-year commitment from ExxonMobil to backstop M&NP's capacity. ExxonMobil will contract and pay for any firm transportation capacity up to a maximum of,0 MMBtu/d from Goldboro to St. Stephen, N.B. which has not been contracted by other parties during the term of the agreement. Combined with the quantities under contract to ExxonMobil, M&NP has assurance that,000 MMBtu/d will be contracted on its system for 0 years. M&NP is contracted at,000 MMBtu/d, with contract expiries ranging from 00 to 00 and a weighted average contract term of years. %, as per 00 toll settlement..%, as per 00 toll settlement. Short-Term Risks Revenue Revenue variance is subject to deferral account treatment. Cost Operating Costs M&NP has accepted risk on cost of service items including O&M expenses for 00, with % of its cost of service covered by deferral accounts. Operating Construction Cost M&NP faces the risk that facility costs are found to be imprudent and disallowed. Recently constructed single line system without compression. Demand charges payable during force majeure. Long-Term Risks Revenue and Market Cost The U.S. Northeast market is served by a number of competing pipelines. The completion of the Canaport and Gateway LNG terminals provide an alternative source of gas supply to Canadian supplies shipped on M&NP. Competitive M&NP is the only pipeline connecting gas supplies in its supply area. This mitigates Agreement for Purchase of Unsubscribed Firm Capacity and Rate Agreement with Respect to Firm Service Agreement for Rate Schedule MN ( Backstop Agreement ) by Maritimes & Northeast Pipeline Limited Partnership and Mobil Oil Canada Properties and Mobil Canada Products Limited, June,. M&NP, 00 Toll Settlement, Article. M&NP, 00 Toll Settlement, Article. M&NP, 00 Toll Settlement, Article. M&NP, 00 Toll Settlement, Article. M&NP Tariff, Sheet, Section. and Sheet, Section.

51 Attachment: Business Risk Profiles Page of competitive risk as producers have no choice but to take lower net backs in the face of competition or shut in their gas. Supply The physical supply available to M&NP is uncertain, as evidenced by the recent downgrade of Sable reserves. This is somewhat offset by potential access to future LNG, the development of New Brunswick supplies and the development of the Deep Panuke project. No existing pipes compete with M&NP out of the supply basin. Contract Exposure to supply and market risk is mitigated by M&NP s backstopping agreement with ExxonMobil. Default risk is not a significant risk for M&NP due to this backstopping, and the high credit quality M&NP s shippers. None of M&NP s shippers who have their credit rated by an agency are rated below investment grade. Deferred Tax Liability M&NP s tax allowance is calculated on a flow-through basis. Depreciation M&NP had approximately % of gross plant left to recover at the end of 00. Operating Regulatory Long-term contracts reduce the exposure to regulatory decisions that deal with the issue of long-term cost recovery. Long-term load factor uncertain. Subject to Canadian and U.S. environmental and pipeline integrity/safety policy and regulation. M&NP 00 Toll Settlement Volume A Schedule,.

52 Attachment: Business Risk Profiles Page of Alliance Pipeline Profile System Description Competitive Position Contract Profile Rate of Return on Common Equity Common Equity Ratio Alliance consists of approximately miles of pipeline system in Canada and miles in the United States transporting approximately. Bcf/d of natural gas from Northern Alberta for delivery to the U.S. Midwest. Alliance has a strong competitive position as a result of its long-term contracts. Substantially all of Alliance s capacity was initially contracted for years. These contracts have an -year remaining term, with strong prospects for contract renewal given the renewal incentive contained in the Toll Principles for the U.S. pipeline. Shippers on the U.S. segment are required to give notice of renewal in the tenth year of their contracts. If a shipper chooses not to extend its contract, then the depreciation recovered from that shipper will be increased over the remaining five years in order to cause the depreciation rate over the term of the contract to average %. Alliance did lose 0 MMcf/d of contracts as a result of the bankruptcy of Calpine. This 0 MMcf/d has been remarketed for a -year contract term from 00 to 00. Alliance s sponsors stipulated a % ROE subject to adjustment based on variances between actual and estimated construction costs. Due to capital over-expenditure, the actual ROE for the Canadian portion of Alliance is.%. The ROE is fixed at this level for the term of its initial -year contracts. 0 This ROE was recently re-affirmed in the GHW--00 Taylor expansion Decision. As discussed in the evidence of Dr. Kolbe (Appendix ), a -basispoint downward adjustment can be applied to the ROEs of both Alliance and the Taylor expansion to reflect the lock-in of ROE, relative to accepting the NEB ROE Formula 0%. This equity ratio was recently re-affirmed in the GHW--00 Decision. Short-Term Risks Revenue Alliance calculates tolls as cost divided by capacity. The Alliance Toll Principles state that [t]he Demand Charges will be calculated based upon the higher of the sum of Contracted Capacities or,0 0³m³/d (, MMcf/d) for the Primary Term and any extension of the Primary Term of the Transportation Service Agreement. Alliance was substantially fully contracted for the Primary Term so it faces little risk due to annual revenue variation. Alliance faces capacity/default risk in the short-term described under long-term risk. Cost Operating Cost Tolls are calculated to recover all variances between estimated and actual costs. Alliance Pipeline L.P. Transportation Service Agreement for Firm Transportation of Natural Gas, Appendix B, Toll Principles (Alliance Tolls Principles), Article. 0 Alliance Toll Principles, Article. Alliance Toll Principles, Article. Alliance Pipeline Limited Partnership, Application, Project Description, Justification, and Economics, July,, Volume, page. Revised Tariff Sheets Amended Tolls Effective January, 00. October, 00. page.

53 Attachment: Business Risk Profiles Page of Capital Efficiency Incentives (see Dr. Kolbe Evidence in Appendix for full discussion) The base ROE of % could be adjusted +/- % depending on whether actual capital costs were less than or exceeded estimated capital costs. The adjustment was linear so that the ROE would increase or decrease inversely with increases or decreases in the actual capital costs relative to the estimated capital costs. At completion of construction, the actual capital costs exceeded the estimated capital costs resulting in a -basis-point reduction in ROE (i.e. ROE.%). This downward adjustment in ROE is more than offset by earnings on a larger rate base. Operating In its first toll filing for a full calendar year (00), Alliance had a rate base of $. billion. Based on a 0% common equity and an.% ROE, the equity return was $.0 million. If capital expenditures had been on target, the rate base would have been about $0. billion lower at $. billion, and the ROE would have been.00%, resulting in a return on equity of about $. million. Therefore, Alliance improved its overall earnings by exceeding its capital cost estimate Recently constructed single line system with single unit mainline stations. Demand charges payable during force majeure. Long-Term Risks Revenue and Market Cost Alliance faces the following market risks: That competing pipelines will be built into the markets that it serves, That it will lose markets to existing competitors, That it will lose markets to competing fuels, and That expected demand growth fails to materialize. The U.S. Midwest market is served by a number of competing pipelines. However, the Midwest market is large and gas can be dispersed from this market to other markets. Supply WCSB supply risk has increased as recognized by the NEB in Decisions RH--00 and RH -00 Phase II. However, Alliance s capacity represents only a small portion of WCSB supply, and Alliance is connected to growing supply area in Northwest Alberta and Northeast B.C. Contracts Alliance was initially contracted for years, with years now remaining. The U.S. portion of Alliance also has an incentive for contract renewals which will likely influence renewals on the Canadian portion. Alliance accepted capacity/default risk, as its Toll Principles state that it will calculate tolls by using its capacity as the billing determinants for the Primary Term. Shipper default has occurred with Calpine. In the case of Calpine, Alliance has been able to remarket the available capacity through short-term contracts, the most recent having a three-year term running from 00 to 00. This risk is mitigated by financial assurances and shipper creditworthiness. Alliance Tariff, p. 0, Article. Alliance presentation Shipper Task Force Policy Group, May, 00.

54 Attachment: Business Risk Profiles Page of Alliance Pipeline Limited Partnership (Canadian Entity) reports that it requires some $,,000 in letters of credit whose creditworthiness do not meet Alliance s standard. Typically these equal year of demand charges on the Alliance system. The credit quality of Alliance s shippers is not likely to diminish due to assignment since in order to assign capacity, a new Alliance shipper must meet credit requirements, and the assignment must be approved by Alliance and Alliance s lenders. Of the firm transportation capacity, % of the volume contracted does not have investment grade rating and has financial assurances that cover less than one year s demand charges. Alliance s tariff states that it can request a letter of credit valued up to months worth of demand charges. Therefore, if a shipper were to default, Alliance may have months to re-contract capacity before experiencing any financial impact from the default. Alliances recent ability to remarket the 0 MMcf/d Calpine capacity for a three-year term confirms the ability of Alliance to resell turned back capacity. Deferred Tax Liability The Canadian portion of Alliance is on the flow-through method of tax recovery. 0 Depreciation Alliance had approximately 0% of gross plant left to recover at the end of 00. Operating Regulatory After expiry of its contracts, Alliance will be exposed to regulatory decisions that deal with the issue of long-term cost recovery. Subject to Canadian and U.S. environmental and pipeline integrity/safety policy and regulation. Alliance Financial Statements June 0, 00. Alliance Toll Principles, Article. Alliance Pipeline Limited Partnership, Management s Discussion & Analysis, Year Ended December, 00, page 0. Alliance Pipeline Limited Partnership, Transportation Tariff, General Terms and Conditions, Article 0. 0 Alliance Toll Principles, Article. Alliance Pipelines Ltd. Letter to the National Energy Board regarding Revised Tariff Sheets Amended Toll Effective January, 00, October, 00, Attachment D.

55 Attachment: Business Risk Profiles Page of Enbridge Mainline Profile System Description Competitive Position Contract Profile Rate of Return on Equity Common Equity Ratio The Enbridge Mainline has the capacity to transport approximately million bpd. It delivers oil, refined products and NGLs from Western Canada to markets in Eastern Canada and the U.S. In 00, it transported ~% of total western Canadian crude oil production and provides about % of Canada s crude oil export capacity. Enbridge is undertaking a number of projects including the Southern Access Expansion (00,000 bpd), Alberta Clipper (0,000 bpd), the Spearhead Pipeline Extension Phase I (0,000 bpd), and the Line Extension (0,000 bpd). Enbridge faces pipe-on-pipe competition from Terasen (both Trans Mountain and Express). TransCanada s Keystone Project is also a potential competitor. Enbridge serves larger markets and offers competitive tolls and shorter transit times. No long-term contracts. Each month it accepts nominations for the following month. Enbridge s ROE is not specified under the terms of its 00 Incentive Toll Settlement. The Dominion Bond Rating Service (DBRS) reports that Enbridge s actual ROE in 00 was.%. Enbridge s last approved return on equity was.% in Decision RH--. An ROE equal to the NEB Formula return plus bps was approved for Enbridge s Alberta Clipper and Line Extension projects. Enbridge s common equity ratio is not specified under the terms of its 00 Incentive Toll Settlement. DBRS reports that Enbridge s actual equity ratio in 00 was %. Enbridge s last approved equity ratio was % in Decision RH--. The Alberta Clipper and Line Extension will have a % equity ratio. Short-Term Risks Revenue Enbridge s 00 Incentive Toll Settlement ( ITS ), which extends to the end of 00, provides volume risk protection. Enbridge does face some volume risk on its SEP II expansion, but is guaranteed an ROE of.% if utilization is less than 0%, and a maximum ROE of % if there is 00% capacity utilization. Otherwise, SEP II follows a cost of service tariff structure. With the new Southern Access Mainline expansion, Enbridge is protected against volume risk and capital cost overruns among other downside risks as part of the Enbridge/Lakehead Tariff Agreement. Cost Operating Costs Under its ITS Enbridge is exposed to variation in about % of its costs, with % of its cost of service covered by deferral accounts. Enbridge keeps all earnings below a threshold level, and shares half of all earnings in excess of the threshold level. Enbridge has taken additional cost risk by guaranteeing a certain level of savings in power costs each year of the settlement. Enbridge has also accepted some cost risk associated with its Terrace expansion. Capital cost, cost of equity, cost of debt and property taxes are at risk within certain ranges, other costs such as income tax are at risk for the project. The settlement includes incentives tied to the level of service. These are defined in the categories of quality, predictability, reliability, flexibility and miscellaneous. These incentives have a maximum penalty of $0 million, growing to 0 million over the term of the settlement, with no cap on the potential bonus to the Enbridge Mainline if it performs well. Dominion Bond Rating Service Limited, Rating Report on Enbridge Pipelines Inc. September, 00, page Incentive Toll Principles, page Incentive Toll Principles, Appendix, Terrace Toll Settlement Statement of Principles, Schedule G.

56 Attachment: Business Risk Profiles Page 0 of Construction Cost The Enbridge Mainline faces the risk that facility costs are found to be imprudent and disallowed. Long-Term Risks Revenue and Market Cost The Enbridge Mainline serves markets that are large and growing. Enbridge delivers to Enbridge Energy Partners, which delivers primarily to the U.S. Midwest and Eastern Canada. Access to increased market is not supply-constrained but earning growth is driven by expansion opportunities. Enbridge is currently extending its market access further south through its recent 0% purchase of the Cushing to Chicago Pipeline, its purchase of the Ozark Pipeline from Wood River to Cushing, and the construction of the Southern Access Extension, Southern Lights and Line Extension. It will also increase its crude oil capacity through the Alberta Clipper pipeline. Refineries in these market areas are investing in projects that increase the capacity to refine heavy oil, increasing their dependence on oil sands production. Further, the forecast increase in oil sands production is expected to push crude oil sourced from the Gulf Coast out of these markets, and pipelines that transported competing crude to the Midwest are being reversed to carry oil sands production to other markets, reducing the capacity to transport competing crude into Midwest markets. As a result, the Enbridge Mainline has low competitive risk. The Enbridge Mainline faces pipe-on-pipe competition from TMPL and Express. TransCanada s Keystone Project and other future projects are also potential competitors. Supply The Enbridge Mainline faces minimal supply risk as discussed in Section.. Contracts As an oil pipeline, the Enbridge Mainline does not have long-term contracts with shippers. It accepts nominations from shippers on a monthly basis. Deferred Tax Liability The Enbridge Mainline has a deferred tax liability of $ million as of December, 00. Depreciation The Enbridge Mainline reporting does not allow the calculation of the percentage of gross plant remaining to be depreciated. Operating Regulatory The Enbridge Mainline s supply outlook provides some protection from regulatory decisions that deal with the issue of long-term cost recovery. Subject to Canadian and U.S. environmental and pipeline integrity/safety policy and regulation. There is complexity in batching a wide variety of commodities through an oil pipeline. However, there is no evidence that Enbridge earnings have been impacted as a result. Direct exposure to climate change policy is less for a system with electric drive pump stations than for gas fired compressor stations. Enbridge News Releases, July, 00 and December, 00. Enbridge Pipelines Inc., Consolidated Financial Statements, December, 00, on the assumption that the total amount of deferred tax is associated by the Enbridge Mainline.

57 Attachment: Business Risk Profiles Page of Alberta Clipper Profile System Description Competitive Position Contract Profile Rate of Return on Equity Common Equity Ratio Enbridge s Alberta Clipper ( AB Clipper ) will be a,0-km-long oil pipe from Hardisty to Superior. It will have an initial capacity of 0,000 bpd, and an expansion capability of 00,000 bpd. It has an estimated capital cost for Canadian facilities of $.0 billion. It is expected to be in service by July, 00. As an integrated part of the Enbridge Mainline, AB Clipper faces pipe-on-pipe competition from TMPL and Express. It will serve larger markets and offers competitive tolls and transit times. It also faces competition from the proposed Keystone project. Enbridge and CAPP agreed on a -year settlement. The AB Clipper project will have an ROE equal to the NEB Formula return plus bps. The commercial settlement stipulates a % equity ratio. Short-Term Risks Revenue The AB Clipper project faces no revenue risk for the term of the -year settlement. Cost Operating Costs AB Clipper will be subject to the next Enbridge Mainline incentive settlement to be negotiated for 00. It is likely the settlement will be similar to the current one, with exposure to short-term cost risk but not revenue risk. Capital Incentives (see Dr. Kolbe Evidence in Appendix for full discussion) Rate base of the project is separated into two components: non-controllable capital costs; and controllable capital costs. The non-controllable capital cost component to be placed in rate base will include all actual non-controllable capital costs incurred. The controllable capital cost component to be placed in rate base will be: equal to; less than; or greater than the actual total controllable capital costs incurred. This will turn on whether actual total capital costs incurred are: equal to the estimated controllable capital costs in which case the controllable capital cost component of rate base will equal the actual total capital costs incurred; greater than the estimated controllable capital costs in which case the controllable capital cost component of rate base will be less than the actual total capital costs incurred but greater than the estimated controllable capital costs; and less than the estimated controllable capital costs in which case the controllable capital cost component of rate base will be greater than the actual total capital costs incurred but less than the estimated controllable capital costs. Both shippers and carrier share the risk and reward of actual controllable capital costs. In-service Date and Initial Target Capacity Provisions As stipulated in the commercial agreement, a deduction from rate base will take place if there is a delay in construction and/or in-service target dates. For each day of in-service delay not related to an Unavoidable Event or a Regulatory Delay, AB Clipper will face a $0,000 reduction in rate base. A 00-day delay would reduce the effective ROE by basis points. Alberta Clipper Canada Settlement, June, 00. Alberta Clipper Canada Settlement, June, 00.

58 Attachment: Business Risk Profiles Page of Additionally, There will be a rate base reduction if actual capacity is below its target until target capacity is reached. Assuming AB Clipper s target capacity is 0,000 bpd and on test, there is a capacity shortfall of 0,000 bpd, AB Clipper would have an % reduction in rate base until it could increase capacity up to the target number. If this event were to continue for year, there would be a -basis-point reduction in effective ROE. Long-Term Risks Revenue and Market Cost The AB Clipper project will be integrated with the Enbridge Mainline, which serves markets that are large and growing. Enbridge delivers to Enbridge Energy Partners, which delivers primarily to the U.S. Midwest and Eastern Canada. Access to increased market is not supply constrained, but earning growth is driven by expansion opportunities. Enbridge is extending its market further south with Spearhead Pipeline Expansion and the Southern Access Mainline Expansion and Extension Project. Refineries in this market area are investing in projects that increase the capacity to refine heavy oil, increasing their dependence on oil sands production. Further, the forecast increase in oil sands production is expected to push crude oil sourced from the Gulf Coast out of these markets, and pipelines that transported competing crude to the Midwest are being reversed to carry oil sands production to other markets, reducing the capacity to transport competing crude into Midwest markets. As a result, AB Clipper has low competitive risk. As part of the integrated Enbridge Mainline, AB Clipper faces pipe-on-pipe competition from TMPL and Express. TransCanada s Keystone Project and other future projects are also potential competitors. Supply AB Clipper faces minimal supply risk as discussed in Section. of Appendix. Contracts Enbridge and CAPP arrived at a -year commercial settlement, although AB Clipper shippers will contract on a monthly basis. Depreciation As stipulated in the AB Clipper Settlement, depreciation for items that are Long Lived Assets will be in accordance with NEB s approved depreciation rates, based on an initial expected economic life of 0 years ( /% per annum). Operating Regulatory Enbridge System s supply outlook provides some protection from regulatory decisions that deal with the issue of long-term cost recovery. Subject to Canadian and U.S. environmental and pipeline integrity/safety policy and regulation. There is complexity in batching a wide variety of commodities through an oil pipeline. However, there is no evidence that Enbridge earnings have been impacted as a result. Exposure to climate change policy is lesser for a system with electric drive pump stations than for a system with gas fired compressor stations.

59 Attachment: Business Risk Profiles Page of Line Extension Profile System Description Competitive Position Contract Profile Rate of Return on Equity Common Equity Ratio Enbridge s Line Extension Project involves the construction of km of -inch pipe segments that will connect existing -inch pipe segments between Edmonton and Hardisty. The project has a forecast capital cost of $00 million. The capacity of Line will be 0,000 bpd. As an integrated part of the Enbridge Mainline, the Line Extension faces pipe-on-pipe competition from TMPL and Express. It will serve larger markets and offers competitive tolls and transit times. It also faces competition from the proposed Keystone project. Enbridge and CAPP agreed on a -year settlement. The Line Extension will have an ROE equal to the NEB Formula return plus bps. The commercial settlement stipulates a % equity ratio. 0 Short-Term Risks Revenue The Line Extension project faces no revenue risk for the term of the -year settlement Cost Operating Costs Line Extension will be subject to the next Enbridge Mainline incentive settlement to be negotiated for 00. It is likely the settlement will be similar to the current one, with exposure to short term cost risk but not revenue risk. Capital Incentives (see Dr. Kolbe Evidence in Appendix for full discussion) Rate base of the project is separated into two components: non-controllable capital costs; and controllable capital costs. The non-controllable capital cost component to be placed in rate base will include all actual non-controllable capital costs incurred. The controllable capital cost component to be placed in rate base will be: equal to; less than; or greater than the actual total controllable capital costs incurred. This will turn on whether actual total capital costs incurred are: equal to the estimated controllable capital costs in which case the controllable capital cost component of rate base will equal the actual total capital costs incurred; greater than the estimated controllable capital costs in which case the controllable capital cost component of rate base will be less than the actual total capital costs incurred but greater than the estimated controllable capital costs; and less than the estimated controllable capital costs in which case the controllable capital cost component of rate base will be greater than the actual total capital costs incurred but less than the estimated controllable capital costs. Both shippers and carrier share the risk and reward of actual controllable capital costs. In-Service Date Provisions As stipulated in the commercial agreement, a deduction from rate base will take place if there is a delay in construction and/or in-service target dates. For each day of in-service delay not related to an Unavoidable Event or a Regulatory Delay, Line Extension will face a $,000 reduction in rate base. A 00-day delay would reduce the effective ROE by basis points. Line Extension Settlement, June, Line Extension Settlement, June, 00.

60 Attachment: Business Risk Profiles Page of Line Extension does not have an Initial Capacity Verification Process and so does not face risk in this area. Long-Term Risks Revenue and Market Cost The Line Extension Project will be integrated with the Enbridge Mainline, which serves markets that are large and growing. Enbridge delivers to Enbridge Energy Partners, which delivers primarily to the U.S. Midwest and Eastern Canada. Access to increased market is not supply constrained, but earning growth is driven by expansion opportunities. Enbridge is extending its market further south with Spearhead Pipeline Expansion and the Southern Access Mainline Expansion and Extension Project. Refineries in this market area are investing in projects that increase the capacity to refine heavy oil, increasing their dependence on oil sands production.. Further, the forecast increase in oil sands production is expected to push crude oil sourced from the Gulf Coast out of these markets, and pipelines that transported competing crude to the Midwest are being reversed to carry oil sands production to other markets, reducing the capacity to transport competing crude into Midwest markets. As a result, the Line Extension has low competitive risk. As part of the integrated Enbridge Mainline, Line Extension faces pipe-on-pipe competition from TMPL and Express. TransCanada s Keystone Project and other future projects are also potential competitors. Supply Line Extension faces minimal supply risk as discussed in Section. of Appendix. Contracts Enbridge and CAPP arrived at a -year commercial settlement, although Line Extension shippers will contract on a monthly basis. Depreciation Depreciation for items that are Long Lived Assets will be in accordance with NEB s approved depreciation rates, based on an initial expected economic life of 0 years ( /% per annum). Operating Regulatory Enbridge System s supply outlook provides some protection from regulatory decisions that deal with the issue of long-term cost recovery. Subject to Canadian and U.S. environmental and pipeline integrity/safety policy and regulation. There is complexity in batching a wide variety of commodities through an oil pipeline. However, there is no evidence that Enbridge earnings have been impacted as a result. Exposure to climate change policy is lesser for a system with electric drive pump stations than for a system with gas fired compressor stations.

61 Attachment: Business Risk Profiles Page of Trans Mountain Pipe Line ( TMPL ) Profile System Description Competitive Position The TMPL pipeline system transports batches of crude oil, petroleum, and refined products from Edmonton, Alberta to marketing terminals and refineries in the interior and West Coast of British Columbia and Washington. The pipeline is 0 km long and has a current capacity of,000 bpd. A base throughput level of 0,000 bpd is used to calculate tolls subject to an Incentive Toll Settlement ( ITS ) effective for the years TMPL is the only pipeline system transporting crude oil and petroleum products from Alberta and north-eastern B.C. to the West Coast. However, there is competition with other modes of transportation into the West Coast such as marine transport, rail, and trucking. Throughput on TMPL should be high as increasing oil sands supply will ensure high load factors. Shipper netbacks are lower for the Pacific Northwest region than they are for the U.S. Midwest and Rocky Mountains. This makes pipelines such as Enbridge and Express more attractive to shippers than TMPL. This is mitigated by the forecast of increasing oil sands supplies. Contract Profile Rate of Return on Common Equity Common Equity Ratio TMPL also faces competition from the proposed Keystone project. No long-term contracts. Each month it accepts nominations for the following month. TMPL s ROE as specified under the terms of its ITS Settlement is 0.%. As explained in the evidence of Dr. Kolbe (Appendix ), a -basis-point downward adjustment can be applied to TMPL s ROE to reflect the lock-in of ROE, relative to accepting the NEB ROE Formula. TMPL s common equity ratio was set at % under the Incentive Toll Settlement. Short-Term Risks Revenue In accordance with the ITS, TMPL s revenue sharing incentive will apply when throughput exceeds.% of Design. In that event, % of the revenue will go to TMPL and the remaining % to the shippers. A Capacity Penalty occurs during months of apportionment if actual throughput is less than 0% of Design. The penalty measured monthly is $0K per % shortfall to a maximum of $00K per month. If capacity drops below 0% of Design but there is not apportionment, Application for 00 Incentive Toll Settlement - NEB File # T , page 0. DBRS Credit Rating Report, Terasen (Trans Mountain) Inc., Report date: August 0, 00, page.

62 Attachment: Business Risk Profiles Page of Cost the revenue shortfall is flowed through to the following year. TMPL s ITS leaves it at risk for cost increases in all categories other than power, NEB cost recovery and petroleum loss allowance. TMPL has only 0% of its cost of service covered by deferral accounts. Capital Incentives (see Dr. Kolbe Evidence in Appendix for full discussion) TMPL has negotiated a mechanism for its two projects, Pump Station Expansion and Anchor Loop whereby an adjustment will be made to TMPL s rate base if the expansion projects come in over or under budget. TMPL has not yet provided the P0, P, P0 forecasts so sensitivities cannot be run. Initial Target Capacity Provision Operating TMPL will also be subject to a capacity verification process on its expansion projects. Details have not been provided. It is important to note that this only applies to a small portion of TMPL s total rate base. There is complexity in batching a wide variety of commodities through a single line, and there is potential for contamination on a daily basis. However, TMPL is protected from costs related to this by a deferral account. Long-Term Risks Revenue and Cost Market TMPL delivers to a fairly captive market in B.C., but competes with Alaskan crude for the Washington market. However Alaska crude supplies are forecast to decline, increasing the opportunity for TMPL in this market. Crude production is also forecast to decline in California, providing further opportunity for TMPL in that market. California is also forecast to require additional refined product imports which could potentially be supplied through TMPL. TMPL faces pipe-on-pipe competition from the Enbridge Mainline and its expansions and Express. TransCanada s Keystone Project and other future projects are also potential competitors. In 00, deliveries averaged,00 bpd. Of those deliveries,.% was light crude oil,.% was refined volumes, and.% accounted for heavy oil. TMPL s competitive risk is increased by its lower netbacks than the Enbridge system and its reliance on Edmonton refineries. TMPL s competitive risk is offset by the forecast of increasing oil sands supplies. There are plans to twin the TMPL system to transport growing oil sands production. In October 00 the NEB approved the Anchor Loop project, which will be completed in 00 and will further increase capacity to 00,000 bpd. On May, 00 Kinder Morgan Canada announced the start of a binding open season for its TMX- project which will add Incentive Toll Settlement for the Trans Mountain Pipeline System 00 00, October 00, page. Trans Mountain Inc., 00 Annual Report. No updated reports available. Rival bid challenges Enbridge: Terasen predicts major battle to line up support for billion-dollar oilsands pipeline, National Post, October, 00. Kinder Morgan Canada, News Release October, 00.

63 Attachment: Business Risk Profiles Page of 00,000 bpd of capacity to the TMPL pipeline system bringing the pipeline s total capacity to approximately 00,000 bpd by 0. Supply TMPL faces minimal supply risk as discussed in Section. of Appendix. TMPL competes mainly with the Enbridge and Express pipeline systems to export crude oil and products from Alberta. Contracts TMPL does not have any long-term transportation contracts with shippers. It accepts nominations from shippers on a monthly basis. Deferred Tax Liability At December 00, TMPL had a deferred tax liability of $,0,000. Depreciation TMPL had % of gross plant left to recover at the end of 00. Operating Regulatory TMPL has a degree of protection from regulatory risk through its use of long-term toll settlements. Its strong supply outlook provides some protection from regulatory decisions that deal with the issue of long-term cost recovery. Subject to Canadian environmental and pipeline integrity/safety policy and regulation. Exposure to climate change policy is less for a system with electric drive pump stations than for gas fired compressor stations. Kinder Morgan Canada, News Release November 0, 00. Trans Mountain Inc. 00 Annual Report. No updated reports available. Trans Mountain Inc. 00 Annual Report. No updated reports available.

64 Attachment: Business Risk Profiles Page of Southern Lights Profile System Description Competitive Position Contract Profile Rate of Return on Equity Common Equity Ratio Enbridge s Southern Lights Project will transport light hydrocarbons from the Chicago area to Alberta s oil sands. To this effect, Line will be reversed to transport Diluent from Clearbrook, Minnesota to Edmonton and a new 0 km 0-inch pipeline will be constructed from Chicago to Clearbrook. Further modifications will be made to increase the capacity of Line between Edmonton and Superior and a new 0 km 0-inch light sour crude oil pipeline will be constructed from Cromer, Manitoba to Clearbrook. Southern Lights will face no pipe-on-pipe competition. The application package, which CAPP supported, 0 includes a - year ship-or-pay commitment assumed by the Committed Shippers. Southern Lights has negotiated a base % ROE, locked in for years. The base ROE is subject to adjustment of +/- % based on a capital efficiency incentive which is premised on whether actual capital costs are less than or exceed estimated capital costs. As explained in Dr. Kolbe s evidence (Appendix ), a -basis-point downward adjustment can be applied to the ROE of Southern Lights to reflect the -year lock-in of ROE, relative to accepting the NEB ROE Formula. The applied-for equity ratio for Southern Lights is 0%. Short-Term Risks Revenue Southern Lights faces no revenue risk. At the end of each year, Southern Lights calculates a Total Adjusted Differential which captures variances in costs and revenues and carries them forward to the next year s tolls. Cost Carrier Incentive Carrier obtains % of revenue generated, subject to a credit adjustment for committed shippers, from uncommitted tolls (which are two times committed tolls). This incentive is over and above any ROE earned by the carrier. Operating Costs Southern Lights faces no cost risk. At the end of each year, Southern Lights calculates a Total Adjusted Differential which captures variances in costs and revenues and carries them forward to the next year s tolls. Capital Efficiency Incentives and Capital Contributions (see Dr. Kolbe Evidence in Appendix for full discussion) The base ROE of % can be adjusted +/- % depending on whether actual capital costs are less than or exceed estimated capital costs. The adjustment is linear so that ROE will be increased or decreased inversely with increases or decreases in the actual capital costs relative to the estimated capital costs. Any downward adjustment in ROE would be either fully or in part offset by earnings on a larger rate base. Shippers have a no cause termination right that if exercised obligates them to pay their 0 Enbridge IR Response to NEB IR.. OH--00. Southern Lights project applications by Enbridge Southern Lights GP inc. on behalf of Enbridge Southern Lights LP and Enbridge Pipelines Inc.

65 Attachment: Business Risk Profiles Page of Long-Term Risks Revenue and Cost aggregate share of capital development costs to date (subject to defined caps). Such payments are applied against the project capital costs if the project proceeds. If the project does not proceed, carrier retains the termination payments. Development Risk Shippers have the right to terminate their contract without penalty if: September 00 cost estimate is greater than % above the May 0, 00 estimate There is a delay in commencement of construction beyond December, 00 outside of a force majeure event. There is a delay in in-service date beyond December, 00 outside a force majeure event Other shippers exercise termination rights to the point where committed contract volumes fall below,000 bpd on the in-service date or,000 bpd months after the in-service date, then a shipper has Secondary Termination Rights and can terminate its contract If the project does not proceed, the incurred development costs will be to the account of equity investors and would be offset in part by any capital contributions by shippers who exercised their no cause termination right. Depreciation The economic life of the project is planned to be years. After the initial -year term, 0% of the capital invested will be recovered. In the event of carrier force majeure, shippers are relieved of their payment obligation and the Transportation Service Agreement ( TSA ) is extended for an equivalent period of time. If the event is longer than months, the committed shippers are relieved of their TSA obligations without penalty. Market & Supply Supply risk is low as there is ample supply from U.S. Midwest refineries and from recycled diluent. Market risk is low as the supply of oil produced from the oil sands is forecast to be robust for several years as discussed in Section. of Appendix. Diluent is required to ship this production to market. Contracts Enbridge and CAPP arrived at a -year commercial settlement with -year contracts underpinning the project. Depreciation Enbridge proposed the use of an escalating depreciation rate from.% in Year to.0% in Year. This will result in the recovery of 0% of capital cost over the initial -year term of the contracts. Operating Regulatory The Southern Lights project depends directly on supply from the oil sands. The oil sands supply outlook provides some protection from regulatory decisions that deal with the issue of long-term cost recovery. Subject to Canadian and U.S. environmental and pipeline integrity/safety policy and regulation. Exposure to climate change policy is lesser for a system with electric drive pump stations than for a system with gas fired compressor stations.

66 Attachment: Business Risk Profiles Page 0 of TransCanada Mainline Profile System Description The Mainline consists of approximately, km of pipeline system, with an average throughput of. Bcf/d in 00. The Mainline transports natural gas from the Alberta border east to various delivery points in Canada and at the United States border. Competitive The Mainline has relatively high transportation costs out of the WCSB. Position Contract Profile Contracted capacity as of November, 00: Long Haul,,0 GJ/d Western Haul, GJ/d Eastern Short Haul,0,0 GJ/d Rate of Return The NEB Formula ROE for 00 is.% and for 00.%. on Common Equity Common Equity 0% as agreed to in 00-0 Mainline Settlement. Ratio Short-Term Risks Revenue Revenue variances have been subject to deferral account treatment, with scrutiny of deferral account balances in a subsequent regulatory proceeding. Cost Operating Costs All costs with the exception of OM&A are subject to deferral account treatment, with scrutiny of deferral accounts balances at a subsequent regulatory proceeding. TransCanada has 0% of its cost of service covered by deferral accounts. Operating Construction Cost The TransCanada Mainline faces the risk that facility costs are found to be imprudent and disallowed. Mature system with looping and multi-unit compressor stations in most segments. Excess capacity in some sections at some times of the year. Tariff provision for demand charge credit in force majeure situations, mitigated by business interruption insurance. Long-Term Risks Revenue and Market Cost The Mainline faces the following market risks: That competing pipelines will be built into the markets that it serves, That it will lose markets to existing competitors, That it will lose markets to competing fuels, That expected demand growth fails to materialize, and That the introduction of new infrastructure results in a shift from long-haul to short-haul transportation. The Vector pipeline commenced service into the Ontario market in 000 and expanded its capacity to.0 Bcf/d in 00. It further expanded long haul capacity by approximately MMcf/d and capacity from Washington 0 storage to Dawn by 00 MMcf/d as of November 00. There has been a large shift from long-haul to short-haul deliveries on the Mainline since the completion of the Alliance and Vector pipelines. Alliance and Vector

67 Attachment: Business Risk Profiles Page of compete for supply of Western Canadian gas going into eastern Canada and north-eastern United States. Tolls for delivery off of the TransCanada Mainline system have been driven upward as a consequence, affecting the competitiveness of Western Canadian gas. The U.S. Midwest and U.S. Northeast markets are served by a number of competing pipelines. There is also significant fuel switching potential in the U.S. Northeast. Supply WCSB supply risk has increased as recognized by the NEB in Decisions RH--00 and RH -00 Phase II. WCSB supply capability has decreased since the RH--00 Phase II Decision as shown in the current flow forecast. Recent factors include: Higher supply cost; Reduced potential for shallow drilling prospects; No increase in activity in high potential drilling areas due to high risks; Unconventional supply estimates are lower; Mackenzie pipeline has been delayed; Higher Canadian currency resulting in lower revenues for producers; Uncertainty and costs introduced by government decisions on income trusts and royalty structure; The growing demand for gas in Western Canada will decrease the amount of gas available for export. The Mainline will experience a larger proportion of any decrease in supply available for export. Contracts The Mainline s supply and market risks are heightened by its contract profile. Deferred Tax Liability As of December, 00 the Mainline deferred tax liability is $ million that will increase future tolls subsequent to crossover (i.e., when depreciation exceeds CCA). Depreciation The Mainline had approximately % of gross plant left to recover at the end of 00. Operating Regulatory The Mainline has a relatively weak competitive position out of the WCSB. This increases the risk that contracts will not be renewed, and exposes the Mainline to regulatory decisions that deal with the issue of long-term cost recovery. In addition, regulation may not be able to shield the Mainline from the fact that the market will not be receptive to tolls that allow the full recovery of capital invested. Subject to Canadian environmental and pipeline integrity/safety policy and regulation.

68 Attachment: Business Risk Profiles Page of Foothills System Profile System Description Competitive Position Contract Profile Rate of Return on Common Equity Common Equity Ratio The Foothills System consists of, km that carries natural gas for export from central Alberta to the U.S. border to serve markets in the U.S. Midwest, Pacific Northwest, California and Nevada. Annual deliveries of natural gas on the Foothills System totalled. Bcf/d in 00. The Western leg of the Foothills System runs from Caroline, Alberta along the foothills of the Rocky Mountains through the Crowsnest Pass to Kingsgate, B.C., connecting with Gas Transmission Northwest in Idaho. The Eastern Leg of the Foothills System runs from Caroline, Alberta south-easterly across Alberta and Saskatchewan to the Canada/U.S. border through Monchy, Saskatchewan connecting with Northern Border Pipeline Company in Montana. Faces increased competition from Rockies supplies in California and the Midwest The NEB Formula ROE for 00 is.% and for 00.%. % as per Equity Ratio Agreement signed in 00. Short-Term Risks Revenue Foothills has no exposure to revenue risk Cost Operating Costs The Foothills System has flow-through treatment of all costs with the exception of G&A. 0% of its cost of service is covered by deferral accounts. Operating Construction Cost Foothills faces the risk that facility costs are found to be imprudent and disallowed. Long-Term Risks Revenue and Market Cost The Foothills System faces the following market risks: That competing pipelines will be built into the markets that it serves, That it will lose markets to existing competitors, That it will lose markets to competing fuels, and That expected demand growth fails to materialize. New capacity has been built into the California market in recent years, principally on the Kern River system to deliver Rocky Mountain gas. A competitive threat to the Foothills System is the potential for a reduced amount of GTN capacity available to the System due to increased Rocky Mountain gas being received onto the GTN system at Stanfield, Oregon. Rocky Mountain gas supply is expected to increase Foothills 00 Rates and Amendments to Tariff Phase I, Attachment. December, 00.

69 Attachment: Business Risk Profiles Page of by Bcf/d in the next ten years. Increased Rockies production will increase competitive pressures. LNG is also a competitive threat in the California and Pacific Northwest markets. Potential projects connecting more WCSB gas to the growing Pacific Northwest market are opportunities for the Foothills System. Supply WCSB supply risk has increased as recognized by the NEB in Decisions RH--00 and RH -00 Phase II. WCSB supply capability has decreased since the RH--00 Phase II Decision as shown in the current flow forecast. Recent factors include: Higher supply cost; Reduced potential for shallow drilling prospects; No increase in activity in high potential drilling areas due to high risks; Unconventional supply estimates are lower; Mackenzie pipeline has been delayed; Higher Canadian currency resulting in lower revenues for producers; Uncertainty and costs introduced by government decisions on income trusts and royalty structure; The growing demand for gas in Western Canada will decrease the amount of gas available for export. Contracts The average weighted contract term is approximately. years for Zone (British Columbia),. years for Zone (Saskatchewan) and year for Zone and (Alberta) Deferred Tax Liability As of December, 00 deferred tax liability is $. million that will increase future tolls. Depreciation Foothills has approximately % of gross plant left to recover at the end of 00. Operating Regulatory Foothills has a relatively weak competitive position out of the WCSB. This increases the risk that contracts will not be renewed, and exposes Foothills to regulatory decisions that deal with the issue of long-term cost recovery. In addition, regulation may not be able to shield Foothills from the fact that the market will not be receptive to tolls that allow the full recovery of capital invested. Subject to Canadian environmental and pipeline integrity/safety policy and regulation.