The National Energy Board (NEB) has dismissed TransCanada PipeLines request for a review of the board’s June 2002 decision on the pipelines 2002 Fair Return Application (RH-4-2001). In its order, the NEB sharply lowered the pipeline company’s proposed toll increase and requested rate of return. Last week’s decision comes as the latest chapter in what has been a two-year dispute.

While noting that TransCanada in its application obviously disagreed with the board regarding the evidence that should be considered, the weight to be given that evidence and the conclusions reached, the NEB said, “Disagreement does not indicate that a doubt has been raised as to the correctness of the RH-4-2001 decision.”

The board added that it “has the authority to determine the weight to be given to certain factors and what evidence to place more or less weight on. The setting of tolls requires a combination of reliance on quantitative methodologies and the use of informed judgment. It will always be a matter of opinion, and potentially dispute, as to what the range of reasonable tolls may be and where on that range a specific toll may be found.”

In response to the dismissal, TransCanada CEO Hal Kvisle, said, “We are disappointed with the NEB’s decision. We are currently reviewing the decision and evaluating our options.

“In our opinion, the RH-4-2001 decision does not recognize the long-term business risks of our Canadian Mainline, nor does it recognize the unattractive returns earned by Canadian regulated pipelines relative to those available in the broader North American marketplace,” said Kvisle. “We have concerns about the long-term implications of a financial return that discourages investment in existing Canadian gas transmission systems.”

TransCanada filed for the review on Sept. 16, 2002, arguing that the board erred when it breached a legal obligation to apply a fair return standard, as defined by TransCanada (see NGI, Sept. 23, 2002). The company also claimed that the NEB:

The back-and-forth battle started in June 2001 when TransCanada applied for the determination of a return for its Mainline for 2001 and 2002. TransCanada sought approval of an ATWACC of 7.5%, adjusted in each of 2001 and 2002 for the difference between the market cost of debt and the embedded cost of debt of the company. In addition, TransCanada asked that if the board declined to adopt the proposed ATWACC methodology, it was seeking approval of a rate of return on common equity of 12.5% on a deemed common equity component of 40%.

By dismissing the application, the NEB held to its original 2002 decision. Under the RH-4-2001 decision, the board declined to adopt the ATWACC methodology proposed by TransCanada and concluded that the results generated by the 1994/95 Cost of Capital Hearing formula continued to be appropriate for the mainline. As a result, the NEB approved a rate of return on common equity for the mainline of 9.61% for 2001 and 9.53% for 2002. The board also concluded that the level of “business risk” facing the mainline had increased since 1994 and decided that it would be appropriate to increase the mainline’s deemed common equity ratio from 30-33%, effective Jan. 1, 2001.

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