Originally published in Blakes Bulletin on Energy – Regulatory – May 2006
Centra Transmission Holdings Inc. (CTHI) operates the Canadian portion of a natural gas pipeline that runs from the TransCanada system at Spruce, Manitoba, through Minnesota, back into Canada near Rainy River, Ontario, and then into Minnesota again at International Falls.
The Canadian portion of CTHI is regulated by the National Energy Board as a "Group 2" pipeline, which is to say that the Board requires only that the pipeline file its tariff and annual financial statements with the Board. Other than this minimal regulation, the Board leaves it to the Group 2 pipelines’ shippers to complain if they disagree with some aspect of the operation of the pipelines.
When CTHI could not reach agreement with its shippers on the inclusion of various cost increases in its rates, CTHI made a tolls application to the Board. Demonstrating considerable flexibility, the Board began by inviting CTHI and its shippers to find a resolution to the issues through preliminary written information requests.
When that failed to resolve matters, the Board conducted a public hearing, again adapting to the practicalities of the situation by conducting the evidentiary and information request portion of the hearing in writing, and the argument by way of oral submissions made by teleconference. The result from a procedural point of view was a thorough but very prompt and cost-effective hearing. Centra, its shippers and their legal counsel were able to make their respective cases from cities scattered across the continent, literally without leaving their desks.
From a substantive point of view, the Board’s decision reflected the unique characteristics of CTHI, which has a small number of shippers, the largest contracted volumes for which are to customers in volatile resource sectors. CTHI also faces service outage risks and pipeline repair and maintenance costs related to the age of much of its pipeline. Accordingly, while the 2006 return on equity for Group 1 pipelines under the Board’s jurisdiction is 8.88%, the Board found that a return on equity of 12.5%, with a deemed equity ration of 40%, was appropriate for CTHI.
The Board also allowed the various cost increases sought by CTHI, with an exception that serves as a reminder to utilities to keep their bookkeeping aligned with their regulatory authorizations. CTHI had proposed to bring forward, in its company-supplied fuel deferral account, certain costs of fuel used for line heating. The Board denied this recovery, observing that the deferral account in question, established a decade earlier, was described as being for compressor fuel, with no mention of other fuel uses. Fortunately the amount in question was relatively minor, but it is a cautionary tale for all utilities, because the Board would have to make the same ruling with respect to any amount and regardless of the potential impact on the utility. To allow recovery of a past cost without a properly established deferral account would amount to retroactive rate-making.
In this relatively rare instance of a public hearing respecting the tolls of a Group 2 pipeline, the Board showed considerable flexibility in arriving at practical, efficient procedures and substantive rulings tailored to the particulars of the applicant. It should be encouraging for Group 2 pipelines to see that the Board will adapt to meet the circumstances of that utility group on (what is hoped to be) the few occasions that they come before the Board in a public hearing.
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