National Energy Board drops 1994 return on equity formula

CALGARY , Oct. 8 /CNW/ - The National Energy Board (NEB or Board) today released a decision stating that the Board's 1994 multi-pipeline return on equity formula, used to determine cost of capital for pipeline companies, is no longer in effect.

The Board started a review of its RH-2-94 decision on July 3 and after hearing from parties, found that 15 years is a significant passage of time in the context of financial regulation and that since 1994, there have been considerable changes in financial and economic circumstances. Therefore the Board stated that there is a doubt as to the ongoing correctness of the RH-2-94 Decision.

In 1994 the Board held its only ever multi-pipeline cost of capital hearing and determined appropriate debt-equity ratios for six companies based upon their business risks. The Board then approved a uniform rate of return on common equity, and established a formula which adjusts the rate of return on equity annually based upon changes in long-term Government of Canada bond rates.

Essentially, cost of capital is the return a pipeline company is allowed to earn on its investment in constructing a pipeline. Cost of capital is only set by the Board when a pipeline company and its shippers cannot agree on a rate of return.

Before 1994, rate cases were typically contested every year. Since then negotiated settlements have become common. Given the changed circumstances surrounding cost of capital decisions, the Board decided that it will no longer use a multi-pipeline approach. Instead, cost of capital will be determined by negotiations between pipeline companies and their shippers or by the NEB if a pipeline company files a cost of capital application.

Celebrating 50 years of regulatory leadership, the NEB is an independent federal agency that regulates several parts of Canada's energy industry. Its purpose is to promote safety and security, environmental protection, and efficient energy infrastructure and markets in the Canadian public interest, within the mandate set by Parliament in the regulation of pipelines, energy development and trade.

This news release and the Reasons for Decision are available on the Board's Internet site at www.neb-one.gc.ca under What's New!

For further information: Paul Lackhoff, Communications Officer, Email: [email protected], Telephone: [phone]; For a copy of the Decision: National Energy Board, Publications Ground Floor, 444 Seventh Avenue SW, Calgary, Alberta, T2P 0X8, Telephone: [phone], Telephone (toll free): 1-800-899-1265, Telecopier: [phone], Telecopier (toll free): 1-877-288-8803, E-mail: [email protected]