TransCanada Corp. lost its appeal of the National Energy Board’s (NEB) “Fair Return” decision (RH-R-1-2002), which turned a deaf ear to the pipeline’s concerns about competition and an inadequate rate of return given its market risks.

However, TransCanada said it was pleased with the court’s clarification of one key determinant in assessing the company’s rate of return. The court’s decision also will have no impact on the company’s reported earnings for 2001, 2002, or 2003.

“TransCanada is disappointed the court dismissed our appeal. We would have appreciated an opportunity to revisit the Fair Return decision with the NEB,” said CEO Hal Kvisle. “We are encouraged the court accepted our argument that consumer interests should not be a factor in the determination of a fair return. We believe this is an important clarification that will be relevant in future regulatory proceedings.”

TransCanada had argued that the NEB’s rate of return formula, which has been in place since 1995, incorrectly ties a regulated return on equity to long-term Canadian bond rates. TransCanada said the resulting return on capital does not fully account for the pipeline company’s business risks.

The company vowed to continue to pursue a fair return in its 2004 tolls and tariff application for its Canadian mainline, which has suffered from declining long-term firm capacity agreements due to competition from other pipelines, such as Alliance and Vector. In its 2004 toll application, TransCanada is asking the NEB to approve an 11% return on a 40% deemed common equity.

In June 2001, TransCanada filed its original Fair Return application with the NEB, seeking approval of an after tax weighted average cost of capital of 7.5%, which was equivalent to a rate of return on common equity of 12.5% on deemed common equity of 40%. But in June 2002, the NEB rejected TransCanada’s formula. As a result, TransCanada earned a return on common equity for the Canadian mainline of 9.61% for 2001 and 9.53% for 2002. The NEB increased the mainline’s deemed common equity ratio from 30% to 33%.

TransCanada subsequently requested the NEB review and vary its RH-4-2001 decision. In February 2003, the NEB issued RH-R-1-2002 decision denying TransCanada’s request for a review and variance of the Fair Return decision. And in March 2003, TransCanada filed its appeal (see Daily GPI, Aug. 1, 2003; Feb. 21, 2003, Sept. 18, 2002).

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