Digests

TransCanada Pipelines Ltd. v. Canada (National Energy Board)

A-327-03

2004 FCA 149, Rothstein J.A.

5/4/04

23 pp.

Appeal from decision of National Energy Board (Board) refusing to vary previous decision--Tolls charged for transporting natural gas regulated by Board on cost-of-service basis--Board estimates costs to be incurred--Tolls designed to generate sufficient revenue to recover approved costs, and to fairly allocate charges to users in relation to costs, benefits of services--Cost of capital included in cost of service--Cost of capital equivalent to aggregate rate of return on investment required by investors to keep capital invested in utility-- Return made in form of interest on debt, dividends, capital appreciation on equity--Rate of return on equity cannot be accurately determined in advance--Various methodologies employed--In 1994, Board conducted public hearing into cost of capital of certain Group 1 pipelines including appellant's Mainline--Purpose of hearing to fix cost of capital for those pipelines for period commencing January 1, 1995, and to establish, if possible, automatic mechanism to adjust rate of return on equity in future in order to avoid expense of litigating annual or biennial changes to rate of return on equity --Board fixing Mainline's return on equity for 1995 test year at 12.25% based on deemed capital structure of 70% debt and 30% equity--Board also established adjustment mechanism by which rate of return on equity would be adjusted on January 1, 1996 and each subsequent calendar year-- Mechanism based upon Equity Risk Premium methodology whereby Board estimates risk-free rate based on government bond rates and adds risk premium--By 2001, appellant had concluded application of formula understating required rate of return on capital--Therefore, appellant applied, pursuant to National Energy Board Act (Act), s. 21(1), for review and variance of 1995 decision to allow for determination of fair return for 2001, 2002--Appellant submitted Board should approve new methodology for determining Mainline's cost of capital, the after-tax weighted-average cost of capital (ATWACC) methodology--Alternatively, if ATWACC methodology not accepted, appellant submitted required rate of return on equity for Mainline should be 12.5% for 2001, 2002 and based on its risk, deemed equity component of Mainline's capital structure should be increased to 40%--Board rejected appellant's ATWACC proposal--On application for review and variance of 2002 decision, Board found appellant had not raised doubt as to correctness of 2002 decision and dismissed application-- Appellant granted leave to appeal Board's 2003 decision to this Court--(1) Whether Board erred in considering customer or consumer interests in determining Mainline's rate of return on capital--(a) Act not containing any provisions or directions requiring Board to determine pipeline's rate of return on capital--Act only requires all tolls be just and reasonable-- Authority of Board to determine just and reasonable tolls not limited by any statutory directions--Board adopted cost-of- service method for determining Mainline's tolls--(b) Under cost-of-service methodology Mainline to be compensated through tolls for its prudently incurred costs, including its cost of capital, and in particular, its cost of equity capital--Cost-of-equity for future year cannot be directly measured and therefore must be based on estimates--Board must choose estimate allowing Mainline to earn fair return--When cost-of-service methodology used to determine just and reasonable tolls, if Board not permitting Mainline to recover costs because understating Mainline's cost-of-equity capital, Mainline will be unable to earn fair return on equity--Tolls must also be just and reasonable from point of view of Mainline's customers and ultimate consumers relying on service from Mainline--Customers and consumers have interest in ensuring Mainline's cost of equity not overstated-- (c) Appellant saying required rate of return on equity must be determined solely on basis of Mainline's cost of equity capital and that impact of any resulting toll increases on customers or consumers irrelevant to determination of required return on equity--Degree of risk specific to Mainline accounted for by adjustments to its deemed capital structure --Appellant not demonstrating Board took impact on customers or consumers into account in making determination of Mainline's required rate of return on equity--(d) While impact on customers or consumers cannot be factor in determination of cost-of-equity capital, any resulting increase in tolls may be relevant factor for Board to consider in determining way in which utility should recover its costs--Phased-in tolls would have to compensate utility for deferring recovery of its cost of capital --Where cost-of- service method used, utility must recover its costs over reasonable period of time, regardless of any impact those costs may have on customers or consumers--No suggestion Board sought to phase in or otherwise understate Mainline's cost of capital--(2)(a) Appellant submitting Board placed inappropriate onus on appellant to demonstrate cost-of- equity adjustment formula established by Board in 1995 decision, but not expressed in Act or in any judicial authority, was to govern unless appellant could persuade Board otherwise--(b) As to intended duration of automatic adjustment mechanism, Order contained no time limit and therefore continues in force until reviewed or varied by Board --(c) Appellant submitting when it brought fair rate of return application in 2001, Board required to disregard entirely automatic adjustment mechanism and start fresh to determine appropriate method by which to estimate Mainline's cost of capital--But adjustment formula part of order that continued to bind appellant-- Neither Board's 1995 decision nor order implementing it appealed--Adjustment formula therefore continued to apply until appellant demonstrated to Board it should be replaced--No fettering of discretion or placing of improper onus on appellant--In 1995 decision, Board stated automatic adjustment formula to reflect simplified procedure to determine annual adjustments to pipeline rates of return on common equity--Therefore to continue indefinitely--Affected party wishing to change process must demonstrate its proposal preferable to one which is subject of binding Board order-- Not improper onus--(d) Board not disregarding evidence-- Having regard to all evidence, Board determines own estimate --As long as estimate within range of estimates put forward in evidence and Board demonstrated it considered estimates, impossible for Board to have ignored evidence--Appeal dismissed--National Energy Board Act, R.S.C., 1985, c. N-7, ss. 21(1) (as am. by S.C. 1990, c. 7, s. 10), 22 (as am. idem, s. 11).