Canadian oil and gas shippers, squeezed by fallen energy prices, insist they do not need further financial pain. Subtle changes in pipeline return-on-equity rules spell billions of dollars in cost increases when high financial policy is translated into shipping tolls, warns the Canadian Association of Petroleum Producers.

“Of course, regulated companies have been lobbying for higher returns as interest rates have fallen and that is their job for their shareholders,” CAPP says. “But it is the job of the regulator to ignore such lobbying. The role of regulation is to be a surrogate for competition. Competition constrains profitability and disciplines the ability to increase prices.”

Oil and gas producers urge the NEB to set a fairness standard that says pipeline creditors and investors should be no more immune to financial risk than counterparts who put money into other parts of the energy industry. “Maximization of shareholder wealth is not an objective of regulation. Maintenance of shareholder wealth is also not a regulatory objective,” CAPP says.

“The adoption of a formula approach to ROE with periodic reviews of capital structure as warranted by material changes in circumstances has provided great certainty and predictability of returns,” CAPP says. “It has facilitated many settlements and agreements. It has also reduced the number and cost of capital hearings. These represent enormous gains in regulatory efficiency.”

The NEB is being asked to use a highly touted Canadian advantage – more regulated and conservative money markets than in the U.S. – in the pipeline case. “Financial markets are not fully integrated and this is highlighted in the collapse of U.S. banks with massive bailouts while the Government of Canada has not needed to follow suit,” CAPP points out. “During the last few years, TransCanada has raised billions of dollars of both long-term debt and common equity capital in some of the most difficult financial markets experienced in its history.”

CAPP’s allies in defending the status quo include an arm of the Alberta Utilities Commission, the Office of the Utilities Consumer Advocate. The NEB’s formula “offers a mechanism that is predictable and has the potential to be even-handed in its treatment of both shareholders and ratepayers while economizing on regulatory costs,” says the provincial agency.

But TransCanada says the formula “has become an artificial and unnecessary barrier to the efficient and effective determination of a fair return given the significant changes in financial markets, business circumstances and general economic conditions.” Rejecting shipper claims that the NEB standard sets a helpful benchmark for all concerned with oil and gas transportation, the pipeline giant says, “Current circumstances are such that parties should be left to negotiate cost of capital settlements.”

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