While the Bank of Canada says the worst shocks are over, the 2008 economic crash is still rippling through the petroleum industry from suppliers to buyers.

The global credit crisis ignited a duel over who should pay cost increases fueled by money market turmoil. The contest pits pipelines against their customers, oil and natural gas shippers all across energy markets.

After three months of preliminary fencing over whether there is a case worth hearing, the National Energy Board decided this summer to review a rate-making standard that has restrained pipeline profits and tolls with a conservative formula since 1994. The dispute set off a barrage of written submissions on keeping or scrapping the regime, or devising a replacement.

The duel centers on a method of making annual rulings on the costs of raising capital for pipelines without holding lengthy public hearings that previously plagued the industry. The system makes pipeline returns track interest rates on long-term Canadian government bonds. The NEB policy doubles 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 per cent from 8.71 per cent last year. The calculation has two steps. The NEB forecasts the government bond interest rate for the year ahead. Then the allowed return rate is adjusted, up or down, by 75 per cent of the anticipated change from the previous year.

The industry-wide battle follows a decision to make an exception for 2007 and ‘08 for one gas pipeline, TransCanada Corp.’s Trans Quebec & Maritimes, which convinced the NEB that the formula ignored special circumstances in its case. There have been other variations from the rule. But they were hard-won special allowances, made by using a technicality of adjusting pipeline debt-equity ratios. Changing levels of deemed ownership equity, as opposed to value attributed to borrowing, in corporate financial structures affects authorized revenue requirements that in turn determine transportation tolls.

The formula in general no longer satisfies traditional standards of fairness, the Canadian Energy Pipeline Association says. “Most notably, the resulting returns are not commensurate with the returns available for investments of similar risk and do not adequately compensate shareholders for existing or new infrastructure investments.”

Tightened money markets that emerged from the global credit crisis pose a risk of being squeezed that the pipelines want to pass on to their customers. Yields on long-term government bonds that drive the NEB formula dropped by tracking interest rate cuts which central banks, scrambling to counter the economic slump, gave to investor-owned financial institutions. But the lenders raised interest rates on commercial credit or limited its availability, to compensate for heightened recession-time risks of loan defaults.

The pipelines’ push to top up their treasuries is supported by the fixed income securities arm of Sun Life Financial, one of Canada’s largest money managers. “Unprecedented events in the economy and the financial markets over the past year have had an impact on the companies’ ability to raise financing and made the financing cost more expensive,” Sun Life says. “Declining equity valuations have made equity financing less attractive for most pipeline companies,” the investment firm says. “A liquidity squeeze and higher spread levels have made the cost of issuing new debt more expensive. Inability to find affordable capital may cause companies either to delay planned capital expenditure projects or to accept inadequate returns.”

Pages: 1 2

Related Posts

• No Related Posts