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Canada Reforms Pipeline Revenue Rule

Canadian pipelines have won a months-long battle to overturn a 15-year-old restriction on a key ingredient in their regulated profits and tolls. The National Energy Board (NEB), describing the old rule's relevance today as doubtful, scrapped its formula for determining rates of return on the equity portion of the gas and oil transporters' capital structures.

In a brief decision by letter that followed barrages of written submissions on both sides of the issue, the NEB dropped the old standard without calling public hearings. The board said "15 years is a significant passage of time in the context of financial regulation. Since 1994 there have been considerable changes in financial and economic circumstances."

But possibly the biggest change has been in the way Canadian pipelines and shippers alike conduct themselves. Prior to creation of a common standard for all the major gas and oil transporters following a lengthy hearing in 1994, "litigated rate cases were the norm," the NEB said. "Since that time, negotiated settlements have become common practice."

With the uniform standard gone, the NEB said it will rely on pipelines and shippers to continue their new habit of negotiated financial settlements. The industry also got a warning that it is on probation and the old regime can be revived if there is a return to costly, time-consuming duels before regulatory agencies and the courts.

The NEB said its review of the 1994 policy's performance was unable to determine whether its establishment of a target return rate for all pipelines helped or hindered negotiated settlements. The absence of the target is expected to answer that question. The NEB warned that its "decision not to pursue a multi-pipeline approach does not preclude the board from doing so at a future date."

The 1994 formula made pipeline returns track interest rates on long-term Canadian government bonds. Supporters of the regime maintained that the NEB policy doubled as a model for provincial agencies regulating pipeline and power transmission services under their jurisdiction.

For 2009 the formula generated a cut in allowed pipeline rates of return to 8.57% from 8.71% last year. The calculation had two steps. The NEB forecast the government bond interest rate for the year ahead. Then the allowed return rate was adjusted, up or down, by 75% of the anticipated change from the previous year.

Not the least of the problems undermining further use of the formula was the virtual disappearance of interest payments on government bonds as central banks responded to the global credit crisis since mid-2008. Although Canada did not have to bail out its conservative, regulated chartered banks because they largely stayed out of the high-risk lending that overtook their U.S. and European counterparts, the nation's interest rates followed the international pattern. The latest issue of Canada Savings Bonds, announced last week, carries an interest rate of just four-tenths of 1%.

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