Transcanada Pipelines Ltd. v. National Energy Board, 2004 FCA 149

Date: 20040405

Docket: A-327-03

Citation: 2004 FCA 149

CORAM:        ROTHSTEIN J.A.

NOËL J.A.

SHARLOW J.A.       

BETWEEN:

TRANSCANADA PIPELINES LIMITED

                                                                                                                                            Appellant

                                                                           and

THE NATIONAL ENERGY BOARD, CANADIAN ASSOCIATION OF

PETROLEUM PRODUCERS, CENTRA GAS MANITOBA INC., CORAL ENERGY

CANADA INC., INDUSTRIAL GAS USERS ASSOCIATION, MIRANT

CANADA ENERGY MARKETING, LTD., and ONTARIO MINISTER OF ENERGY

                                                                                                                                      Respondents

                                        Heard at Toronto, Ontario, on February 16, 2004.

REASONS FOR JUDGMENT BY:                                                                         ROTHSTEIN J.A.

CONCURRED IN BY:                                                                                                       NOËL J.A.

                                                                                                                                  SHARLOW J.A.

Date: 20040405

Docket: A-327-03

Citation: 2004 FCA 149

CORAM:        ROTHSTEIN J.A.

NOËL J.A.

SHARLOW J.A.

BETWEEN:

TRANSCANADA PIPELINES LIMITED

                                                                                                                                            Appellant

                                                                           and

THE NATIONAL ENERGY BOARD, CANADIAN ASSOCIATION OF

PETROLEUM PRODUCERS, CENTRA GAS MANITOBA INC., CORAL ENERGY

CANADA INC., INDUSTRIAL GAS USERS ASSOCIATION, MIRANT

CANADA ENERGY MARKETING, LTD., and ONTARIO MINISTER OF ENERGY

                                                                                                                                      Respondents

                                                    REASONS FOR JUDGMENT

ROTHSTEIN J.A.

INTRODUCTION

[1]                This is an appeal from a February 2003 decision of the National Energy Board (RH-R-1-2002), pursuant to leave granted by this Court under section 22 of the National Energy Board Act, R.S.C. 1985, c. -7.

[2]                There are two issues in the appeal. The first is whether the National Energy Board ("Board") erred in taking customer or consumer interests into account in determining the rate of return on capital it would allow the appellant's Canadian Mainline natural gas transmission system ("the Mainline") to earn. The second is whether the Board erred by fettering its discretion by refusing to depart from an automatic adjustment mechanism it had used to establish the Mainline's rate of return on equity.

[3]                In order to understand the issues under appeal, it is first necessary to provide some background and the procedural history leading to the February 2003 decision.

BACKGROUND

[4]                The National Energy Board regulates interprovincial natural gas transmission pipelines. The Mainline is considered a Group 1 pipeline by the Board. Group 1 pipelines are major pipelines which are audited by the Board on a regular basis and whose operating results are continuously monitored by the Board.

[5]                The tolls charged for transporting natural gas on the Mainline are regulated by the Board on a cost of service basis. That means that for a future period, referred to as a "test" year, the Board, based on the evidence before it, estimates the costs to be incurred by the Mainline. The tolls which the Board allows the Mainline to charge its customers are designed to generate sufficient revenue to recover these approved costs while at the same time fairly allocating charges to users in relation to the costs and benefits of different services. Included in the cost of service, and indeed, the largest single component of the Mainline's costs, is the Mainline's cost of capital.

[6]                The cost of capital to a utility is equivalent to the aggregate return on investment investors require in order to keep their capital invested in the utility and to invest new capital in the utility. That return will be made in the form of interest on debt and dividends and capital appreciation on equity. Usually, that return is expressed as the rate of return investors require on their debt or equity investments.

[7]                The rate of return on debt is not usually controversial. It normally consists of the weighted average interest rate for the test year on the utility's outstanding long-term debt. On the other hand, the rate of return on equity is often the subject of controversy and of much debate by expert witnesses.

[8]                Unlike debt, where the interest rate payable is directly observable, the rate of return on equity cannot be accurately determined in advance. There are various methods experts use to estimate the rate of return on equity required by investors. The one adopted by the Board is an Equity Risk Premium methodology whereby the Board estimates a risk-free rate based on government bond rates and adds a risk premium to account for the risk associated with equity investment in a "benchmark" pipeline.

[9]                Once the separate rates of return on debt and equity are established, they are consolidated into a composite rate of return on capital, based on the relative amounts of debt and equity in the utility's capital structure. In order to account for varying levels of risk between pipelines, the Board constructs for each pipeline a capital structure, i.e. the relative portions of debt and equity capital needed to finance its prudently acquired assets plus its working capital, on the basis of expert evidence. The greater the risk attributed to each pipeline, the greater the required equity component of its capital structure. That is because bond investors, who are more risk averse than equity investors, will not lend funds to an enterprise unless there is sufficient equity capital invested in the enterprise to give them confidence that they will be able to recover their investment from the assets of the enterprise in the event of default.

[10]            For example, if the required rate of return on debt is 5%, the required rate of return on equity is 10% and the utility's capital structure, as determined by the Board, consists of 60% debt and 40% equity, the composite rate of return on capital would be 5% H 0.60 + 10% H 0.40 = 7%.

[11]            The composite rate of return on capital is then multiplied by a rate base which consists of the Board's determination, according to its accounting regulations, of the net book value of the utility's prudently acquired assets plus its working capital. Multiplying the rate of return required by investors by this rate base gives the total dollar amount of return required by investors. The product is equivalent to the utility's estimated cost of capital for the test year. That cost is added to all other costs to get the utility's total cost of service. The total is then allocated amongst the utility's customers.

[12]            Even though cost of capital may be more difficult to estimate than some other costs, it is a real cost that the utility must be able to recover through its revenues. If the Board does not permit the utility to recover its cost of capital, the utility will be unable to raise new capital or engage in refinancing as it will be unable to offer investors the same rate of return as other investments of similar risk. As well, existing shareholders will insist that retained earnings not be reinvested in the utility.

[13]            In the long run, unless a regulated enterprise is allowed to earn its cost of capital, both debt and equity, it will be unable to expand its operations or even maintain existing ones. Eventually, it will go out of business. This will harm not only its shareholders, but also the customers it will no longer be able to service. The impact on customers and ultimately consumers will be even more significant where there is insufficient competition in the market to provide adequate alternative service.

PROCEDURAL HISTORY

[14]            In 1994, the Board conducted a public hearing into the cost of capital of certain Group 1 pipelines including the Mainline. The purpose of the hearing was to fix the cost of capital for those pipelines for the period commencing January 1, 1995, and to establish, if possible, an automatic mechanism to adjust the rate of return on equity in the future in order to avoid the expense of litigating annual or biennial changes to the rate of return on equity.

[15]            As a result of that proceeding, the Board issued reasons for decision (RH-2-94) in March 1995 fixing the Mainline's return on equity for the 1995 test year at 12.25% based on a deemed capital structure of 70% debt and 30% equity. The Board's deemed capital structure did not provide for any explicit preferred share capital. Therefore, all references to equity refer to common equity.

[16]            The Board also established an adjustment mechanism by which the rate of return on equity would be adjusted on January 1 in 1996 and each subsequent calendar year. This mechanism was based upon the Equity Risk Premium methodology whereby:

1.          a risk free (Government of Canada) bond yield forecast would be forecasted for the forthcoming year;

2.         this bond yield forecast would be deducted from the bond yield forecast of the immediately preceding year;

3.         this difference would be multiplied by a factor of 0.75 to determine the adjustment to the rate of return on equity;

4.         the product derived in step 3 would be added to or deducted from the rate of return on equity determined by the Board for the preceding year;

5.         the sum resulting from step 4 would be rounded to the nearest 25 basis points (1/100th of a percent).

[17]            The Mainline's rate of return on equity was adjusted according to this formula in 1996 and subsequent years, although in 1997, the Board abandoned the rounding adjustment, i.e. step 5 above.

[18]            By 2001, the appellant had concluded that application of the formula was understating its required rate of return on capital. Therefore, the appellant applied, pursuant to subsection 21(1) of the National Energy Board Act, for "review and variance of the [1995 decision] to allow for the determination of a fair return for TransCanada for the years 2001 and 2002." Subsection 21(1) provides:

[19]            The appellant submitted that the Board should approve a new methodology for determining the Mainline's cost of capital - the After-Tax Weighted-Average Cost of Capital (ATWACC) methodology. Alternatively, if the ATWACC methodology was not accepted, the appellant submitted that the required rate of return on equity for the Mainline should be 12.5% for 2001 and 2002 and that based on its risk, the deemed equity component of the Mainline's capital structure should be increased to 40%.

[20]            As a result of the appellant's submissions, the Board conducted a hearing in February, March and April 2002. The issues at the hearing were:

1.             Is the Rate of Return on Common Equity (ROE) formula, established by the Board in its RH-2-94 Decision, still appropriate for determining TransCanada's ROE?

2.              Is the After Tax Weighted-Average Cost of Capital (ATWACC) methodology an appropriate regulatory approach to determining cost of capital?

3.              In the event the Board decides to adopt the ATWACC methodology, what is the appropriate ATWACC for TransCanada?

4.              In the event the Board declines to adopt the ATWACC methodology and it is determined that the ROE formula is no longer suitable:

a)             What would be an appropriate methodology for determining return on capital and capital structure for TransCanada?

b)             In applying the above-determined methodology, what would be an appropriate return on capital and capital structure for TransCanada?

5.              What is the appropriate effective date for changes to TransCanada's cost of capital? (RH-4-2001 at 4).

[21]            By reasons for decision (RH-4-2001) dated June 2002, the Board:

1 .         rejected the appellant's ATWACC proposal;

2.         determined that the rate of return on equity for the Mainline should continue to be based on the adjustment formula established in its 1995 decision; and

3.         increased the deemed equity component of the Mainline's capital structure from 30% to 33% to account for increased business risk.

[22]            By application to the Board dated September 16, 2002, the appellant applied for a review and variance of the 2002 decision. This application was also made pursuant to subsection 21(1).

[23]            Section 44 of the National Energy Board Rules of Practice and Procedure, 1995, SOR/95-208 sets out the requirements for a review application. Subsection 44(2) provides:

[24]            In its decision on the review & variance application (RH-R-1-2002), dated February 2003, the Board found that the appellant had not raised a doubt as to the correctness of its 2002 decision and dismissed the application for review and variance.

[25]            The appellant was granted leave to appeal the Board's 2003 decision to this Court.

ANALYSIS

1. Standard of Review and Approach to the Decision Being Appealed

[26]            In view of my conclusion that the appeal should be dismissed, it is not necessary to conduct an extensive standard of review analysis. Even on the most intrusive standard of review (correctness), it has not been demonstrated that the Board erred in law.

[27]            There is also a question of the extent to which the Court should consider the Board's 2002 decision, which itself was not appealed. Normally, the Court is to restrict itself to a consideration of the decision under appeal. However, when the question is whether the Board erred or came to an unreasonable or patently unreasonable result in finding in its 2003 decision that the appellant had not raised a doubt as to the correctness of the prior 2002 decision, it is necessary to have regard, at least to some extent, to that prior decision. Rather than becoming bogged down into the intricacies of the scope of the Court's review, I am satisfied, even on a unrestricted consideration of both the 2002 and 2003 decisions, that the Board made no error of law in either case.

2. Did the Board err in considering customer or consumer interests in determining

the Mainline's rate of return on capital?

[28]            As a preliminary point, the appellant drew a distinction between its customers and the ultimate consumers. For purposes of this decision, such a distinction is immaterial. The appellant's position is that the Mainline's return on capital should be determined solely from the perspective of the Mainline, without considering other interests, whether they be direct customers or ultimate consumers.

a) The Board is not required to adopt any specific methodology in

determining tolls.

[29]            The National Energy Board Act contains no provisions or directions which require the Board to determine a pipeline's rate of return on capital. The Act only requires that "all tolls be just and reasonable." Subsections 60(1) and section 62 provide:

[30]            The authority of the Board to determine just and reasonable tolls is not limited by any statutory directions. The broad authority of the Board was well articulated by Thurlow C.J. in British Columbia Hydro and Power Authority v. West Coast Transmission Company Ltd. et al., [1981] 2 F.C. 646 at 655-56 (C.A.):

There are no like provisions in part IV of the National Energy Board Act. Under it, tolls are to be just and reasonable and may be charged only as specified in a tariff that has been filed with the Board and is in effect. The Board is given authority in the broadest of terms to make orders with respect to all matters relating to them. Plainly, the Board has authority to make orders designed to ensure that the tolls to be charged by a pipeline company will be just and reasonable. But its power in that respect is not trammelled or fettered by statutory rules or directions as to how that function is to be carried out or how the purpose is to be achieved. In particular, there are no statutory directions that, in considering whether tolls that a pipeline company propose to charge are just and reasonable, the Board must adopt any particular accounting approach or device or that it must do so by determining cost of service and a rate base and fixing a fair return thereon.

[31]            The Board has adopted a cost of service method for determining the Mainline's tolls. Before this Court, counsel for a number of the respondents suggested different methodologies for determining just and reasonable tolls that would be open to the Board, such as:

1.          tolls based on agreements between pipelines and shippers;

2.          tolls based on charges of other pipelines;

3.          use of base year tolls adjusted for inflation;

4.         tolls based on mechanisms to encourage utilities towards greater efficiency.

As no particular methodology is required by the National Energy Board Act, the Board could have adopted a different methodology for determining just and reasonable tolls for the Mainline.

b) Having adopted a cost of service methodology, the costs determined by the Board must be just and reasonable to both the Mainline and its users.

[32]            In the case of the Mainline, the Board has adopted a cost of service methodology whereby the Mainline is to be compensated through tolls for its prudently incurred costs, including its cost of capital, and in particular, its cost of equity capital. Once it did so, it had to faithfully determine the Mainline's costs based on the evidence and its own sound judgment.

[33]            Cost of equity for a future year cannot be directly measured and therefore must be based on estimates. The Board must choose an estimate that allows the Mainline to earn what has been termed a "fair return." In [1929] S.C.R. 186">Northwestern Utilities Ltd. v. Edmonton (City), [1929] S.C.R. 186 at 192-93, the Supreme Court defined a fair return in the following terms:

The duty of the Board was to fix fair and reasonable rates; rates which, under the circumstances, would be fair to the consumer on the one hand, and which, on the other hand, would secure to the company a fair return for the capital invested. By a fair return is meant that the company will be allowed as large a return on the capital invested in its enterprise (which will be net to the company) as it would receive if it were investing the same amount in other securities possessing an attractiveness, stability and certainty equal to that of the company's enterprise.

Tolls which reflect a fair return on capital will be just and reasonable to both the Mainline and its users.

[34]            To put the matter another way, when the cost of service methodology is used to determine just and reasonable tolls, if the Board does not permit the Mainline to recover its costs because it has understated the Mainline's cost of equity capital, the Mainline will be unable to earn a fair return on equity. The tolls will therefore not be just and reasonable from the Mainline's point of view. On the other hand, the tolls must also be just and reasonable from the point of view of the Mainline's customers and the ultimate consumers who rely on service from the Mainline. Therefore, customers and consumers have an interest in ensuring that the Mainline's costs are not overstated. As respondents' counsel pointed out, there are numerous costing issues that may be subject to challenge. Questions may arise about, among other things, the allocation of costs between the Mainline and other divisions of the appellant; whether costs have been, or are being, prudently incurred; and whether the Mainline's compensation plans are reasonable. And, specific to this appeal, customers and consumers have an interest in ensuring that the Mainline's cost of equity is not overstated.

c) The Board did not improperly consider the impact on customers or

consumers of increasing tolls to reflect the appellant's costs.

[35]            In oral argument, the appellant conceded that it does not object to its customers having input into the Board's cost determinations and in particular, its cost of capital determination, provided the issues in dispute are restricted to the costs of the Mainline. However, the appellant does object to the Board taking the impact of tolls on customers and consumers into account in determining the Mainline's cost of equity capital. The appellant says that the required rate of return on equity must be determined solely on the basis of the Mainline's cost of equity capital. The impact of any resulting toll increases on customers or consumers is an irrelevant consideration in that determination. The appellant does concede that when the final tolls are being fixed, the impact on the customers and consumers may be relevant, but insists that it is irrelevant when determining the required return on equity.

[36]            I think that this argument is sound and in keeping with the decision of the Supreme Court in Northwestern Utilities. The cost of equity capital does not change because allowing the Mainline to recover it would cause an increase in tolls. Under the Board's Equity Risk Premium methodology, the cost of equity capital is driven by the Board's estimate of the risk-free interest rate and the degree of risk investors perceive in the "benchmark" pipeline. The higher the risk, the higher their required rate of return. The degree of risk specific to the Mainline is accounted for by adjustments to its deemed capital structure. Accordingly, the cost to the Mainline of providing that rate of return on the equity component of its deemed capital structure is unaffected by the impact of tolls on customers or consumers.

[37]            The appellant has not demonstrated that the Board took the impact on customers or consumers into account in making its determination of the Mainline's required rate of return on equity.

[38]            It is true that in its 2002 decision, the Board did state:

In respect of the appropriate balance of customer and investor interests, the Board notes that customer interest in rate of return matters relates most directly to the impact the approved return will have on tolls. The Board is of the view that the impact of the rate of return on tolls is a relevant factor in the determination of a fair return (RH-4-2001 at 12).

[39]            The appellant says it cannot tell if the Board took the impact on customers or consumers into account in making its determination of the Mainline's required rate of return on equity. There is certainly no indication in its 2002 reasons that the Board adjusted its estimate of the required rate of return on equity based upon the impact it would have on tolls. In fact, the Board simply applied the automatic adjustment formula adopted in its 1995 decision. That formula does not take into account the impact of tolls on customers or consumers.

[40]            It is also true that, in relation to an adjustment the Board made in the Mainline's deemed capital structure in its 2002 decision, the Board did state:

In light of the above, the Board is of the view that it would be appropriate to increase the Mainline's deemed common equity ratio from 30% to 33%. The Board notes that this increase will raise the Mainline's annual cost of service and tolls by approximately 2%. The Board has determined that the toll increase is warranted by the prospective business risk facing the Mainline and that it will not impose an undue burden on shippers (RH-4-2001 at 59).

[41]            As I understand the Board's reasons, in view of the Mainline's increased business risk, the equity component of its deemed capital structure was increased from 30% to 33%. Because the required rate of return on equity was greater than the required rate of return on debt, this increased the overall estimate of the Mainline's required rate of return on capital, resulting in a 2% increase in tolls.

[42]            While the Board observed that the increase would not be an undue burden on shippers, there is no suggestion that the increase in the equity component of the Mainline's deemed capital structure was in any way suppressed by considerations of its impact on customers or consumers. Nor, as I have said, is there any indication that the Board determined a required rate of return on equity for the Mainline and then adjusted it downward based on the impact it would have on tolls. In the absence of some indication in the Board's reasons, there is no basis for such an assumption.

d) The Board may adopt temporary measures to ameliorate "rate shock" so

long as the utility eventually recovers its costs.

[43]            I would add one further point. While I agree with the appellant that the impact on customers or consumers cannot be a factor in the determination of the cost of equity capital, any resulting increase in tolls may be a relevant factor for the Board to consider in determining the way in which a utility should recover its costs. It may be that an increase is so significant that it would lead to "rate shock" if implemented all at once and therefore should be phased in over time. It is quite proper for the Board to take such considerations into account, provided that there is, over a reasonable period of time, no economic loss to the utility in the process. In other words, the phased in tolls would have to compensate the utility for deferring recovery of its cost of capital. In the end, where a cost of service method is used, the utility must recover its costs over a reasonable period of time, regardless of any impact those costs may have on customers or consumers (see Hemlock Valley Electrical Services Ltd. v. British Columbia Utilities Commission et al., [1992] 12 B.C.A.C. 1 at 20-21 (C.A.)). In this case, however, there is no suggestion that the Board sought to phase in or otherwise understate the Mainline's cost of capital.

3. Did the Board fetter its discretion?

a) Appellant's arguments

[44]            The appellant's second alleged error of law is that the Board fettered its discretion. The appellant submits that the Board placed an inappropriate onus on the appellant to demonstrate that the cost of equity adjustment formula established by the Board in its 1995 decision, but not expressed in the National Energy Board Act or in any judicial authority, was to govern unless the appellant could persuade the Board otherwise.

[45]            In its factum, the appellant states that the high onus of reversal placed on it by the Board caused the Board to act "inconsistently with its obligations of impartiality as an administrative tribunal." Some of the respondents characterised this as an allegation of bias against the Board.

[46]            In oral argument, the appellant added that the Board wrongly discarded evidence of both the appellant and the respondents because the Board was not open to reviewing the adjustment formula.

b) The intended duration of the automatic adjustment mechanism.

[47]            In its 1995 decision, the Board was expressly addressing "what simplified procedure should be implemented to effect an annual adjustment to the rate of return applicable to pipelines between cost of capital proceedings" (RH-2-94 at 1). The Board explained its reasons for seeking an automatic adjustment mechanism in the following words:

In setting this matter down for hearing, it was the Board's intention to put in place means of improving the efficacy of the toll setting process for the year 1995 and beyond. The Board expressed the desire to avoid annual hearings on the cost of capital and was of the view that some automatic mechanism to adjust the return on common equity could be the most appropriate way to ensure that this return continued to be fair to all parties, while avoiding the expense of litigating annual or biennial changes in the rate of return. The Board therefore included as an issue in the RH-2-94 proceeding, the design and implementation of a predetermined adjustment mechanism to the rate of return on the common equity component. The Board's objective in this regard was to conduct detailed examinations of the pipelines' cost of capital only when significant changes had occurred in financial markets, business circumstances, or in general economic conditions (RH-2-94 at 1-2).

[48]            After an extensive hearing in which it considered the submissions of pipelines, shippers, governments and others, the Board established the automatic adjustment mechanism whereby the cost of equity capital would be determined. As to how long the automatic adjustment mechanism would remain in place, the Board stated:

The Board is not setting a limit on the life of the mechanism and it does not expect to reassess the rate of return on common equity in a formal hearing for at least three years. The Board has confidence that the adjustment mechanism adopted will provide an appropriate balance between the interests of pipeline company shareholders and those of shippers (RH-2-94 at 32).

[49]            In its 1995 decision, the Board also established a deemed capital structure for the Group 1 pipelines. As discussed above, the Mainline was deemed to have a capital structure made up of 70% debt and 30% equity. The Board expressed the view that its capital structure determination would endure for an extended period of years, but that the Board would be prepared to consider a re-assessment of capital structure if requested by a pipeline, its shippers or another interested party:

The Board also expects that the capital structure set in this hearing for each of the pipelines will endure for an extended period of years. The Board will be prepared to consider a reassessment of capital structures, likely on an individual basis, in the event of a significant change in business risk, in corporate structure or in corporate financial fundamentals. The Board does not favour routine reassessments of capital structure. For these reasons, the Board has not set out a specific date or any criteria for capital structure re-evaluation. Any reassessment of capital structure, for reasons such as those expressed above, must be at the request of the pipeline itself, its shippers or some other interested party. It would then be for the Board to assess the merits of such a request (RH-2-94 at 32).

[50]            The Board's Order TG/TO-1-95, which implemented the 1995 decision, set the Mainline's deemed capital structure and required that the Mainline's cost of equity capital for 1996 and subsequent years be determined through the application of the adjustment formula. The Order contained no time limit and therefore continues in force until reviewed or varied by the Board.

c) The appellant did bear the burden of showing that the automatic adjustment mechanism should no longer apply.

[51]            The Board applied its automatic adjustment mechanism annually until 2001 when the appellant brought its fair rate of return application, seeking a review and variance of the 1995 decision and the adoption of a new means of determining its cost of capital.

[52]            The appellant's position seems to be that when it brought its fair rate of return application in 2001, the Board was required to disregard entirely the automatic adjustment mechanism and start fresh - with a clean slate as it were - to determine the appropriate method by which to estimate the Mainline's cost of capital.

[53]            However, the adjustment formula was part of an order that continued to bind the appellant. Subsection 23(1) of the National Energy Board Act provides:

Section 22 allows for appeals to the Federal Court of Appeal while subsection 21(1) allows the Board to review, vary and rescind its decisions and orders. Neither the Board's 1995 decision nor the order implementing it were appealed. The adjustment formula therefore continued to apply until the appellant demonstrated to the Board that it should be replaced.

[54]            The hearing conducted by the Board on the appellant's fair return application was extensive. Written evidence was filed and the oral hearing proceeded for more than a month. The Board's 2002 decision was 64 pages long. The Board considered the appellant's ATWACC proposal and its alternative increased rate of return on equity proposal, reviewed the evidence of the witnesses and ultimately concluded that utilization of the automatic adjustment formula continued to yield a rate of return on equity that the Board considered to be appropriate for the Mainline.

[55]            However, the Board did, to some extent, accept the appellant's argument that the Mainline's business risk had increased. In order to take account of the increased risk, the Board increased the equity component of the Mainline's deemed capital structure from 30% to 33% so that the capital structure would be 33% equity and 67% debt.

[56]            I can detect no fettering of discretion or the placing of an improper onus on the appellant in the Board's reasons. In its 1995 decision, the Board stated that its automatic adjustment formula was to reflect a simplified procedure to determine annual adjustments to pipeline rates of return on common equity. It was therefore to continue indefinitely. When an affected party wishes to change the process, it has the onus to demonstrate that its proposal is preferable to the one which is the subject of a binding Board order. That is not an improper onus. Nor does it reflect a fettering of discretion by the Board. Most importantly, it does not give rise to any apprehension of impartiality or bias on the part of the Board.

[57]            In reviewing the 2002 decision, the Review and Variance Panel found in its 2003 decision that the onus was on the appellant to demonstrate that the automatic adjustment formula was no longer appropriate and that the appellant had failed to do so:

The Fair Return Application was, among other things, an application for review of the RH-2-94 Decision and related orders, pursuant to subsection 21(1) of the Act. The onus was on TransCanada to prove to the Board in RH-4-2001 that the RH-2-94 Formula was no longer appropriate for determining the Mainline's return on equity. Neither the intervenors nor the Board had the onus in the RH-4-2001 proceeding to justify the continued use of the Formula. The Formula was appropriate unless and until TransCanada persuaded the Board otherwise.

TransCanada failed to meet the burden and accordingly, the RH-2-94 Formula continued to apply. The Board was not required in the RH-4-2001 Decision to justify that the Formula was appropriate; that determination was made in the RH-2-94 proceeding (RH-R-1-2002 at 24).

I find no error on the part of the Board in that analysis or conclusion.

d) The Board did not disregard or ignore evidence.

[58]            As to the appellant's argument that the Board disregarded evidence, I agree that the Board did not adopt the evidence of any particular witness for or against the appellant. But that does not mean that the evidence was discarded or ignored. In cost of capital proceedings, the Board is entitled, on the basis of the evidence before it and the use of its own judgment, to choose a methodology for determining cost of capital and to estimate the cost of capital for a forthcoming year. Very often, the Board's estimate will not reflect the precise estimates of one side or the other or of one witness or another. Having regard to all the evidence, the Board will determine its own estimate. As long as that estimate is within the range of estimates put forward in the evidence and the Board demonstrates that it considered the estimates put forward, the Board cannot be said to have ignored evidence. Indeed, even if the Board's estimate is outside that range, if the Board shows that it considered the evidence submitted and provides adequate reasons for its opinion, the Board will not be found to have ignored evidence.

[59]            In this case, the estimates in the evidence of the required rate of return on equity ranged from 8.28% to 12.50%. The Board's reasons indicate that it considered the estimates put forward. Using its automatic adjustment formula, the Board calculated that the required rate of return on equity for the Mainline would be 9.61% in 2001 and 9.53% in 2002. I cannot see that the Board disregarded or ignored evidence in deciding to continue to utilize the automatic adjustment formula to determine the required rate of return on equity for the Mainline.

CONCLUSION

[60]            I would dismiss this appeal with costs.

                                                                             "Marshall Rothstein"               

                                                                                                      J.A.

"I agree

Marc Noël J.A."

"I agree

K. Sharlow J.A."

                          FEDERAL COURT OF APPEAL

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                  A-327-03

STYLE OF CAUSE: TRANSCANADA PIPELINES LTD

               and

THE NATIONAL ENERGY BOARD ET AL.

PLACE OF HEARING:                                 Toronto, Ontario

DATE OF HEARING:                                   February 16 , 2004

REASONS FOR JUDGMENT:                    ROTHSTEIN J.A.

CONCURRED IN BY:                                  NOËL J.A.

SHARLOW J.A.

DATED:                     April 5, 2004

APPEARANCES:

Mr. Alan J. Lenczner

Ms. Risa M. Kirshblum

Ms. Wendy Moreland For the Appellant

Ms. Margery Fowke    For the Respondent, National Energy Board

Mr. John J. Marshall Q.C.                               

Mr. Don Davies           For the Respondent, Canadian Association of Petroleum Producers

Mr. Alan Mark            For the Respondent, Coral Energy Inc.

Mr. Peter C.P. Thompson Q.C.

Mr. Vincent J. DeRose                                     For the Respondent, Industrial Gas Users Association

Mr. Keith F. Miller       For the Respondent, Mirant Energy Marketing Canada Inc.

Mr. John Turcnin         

Ms. Sara Blake            For the Respondent, Ontario Minister of Energy

SOLICITORS OF RECORD:

Lenczner Slaght Royce

Toronto, Ontario                    For the Appellant

McLeod Dixon LLP              

Calgary, Alberta                     For the Respondent, Canadian Association of Petroleum Producers

Burnet, Duckworth & Palmer LLP

Calgary, Alberta                     For the Respondent, Mirant Energy Marketing Canada Inc.

Ontario Ministry of the Attorney General

Toronto Ontario                     For the Respondent, Ontario Minister of Energy

National Energy Board

Calgary, Alberta                     For the Respondent, National Energy Board

Ogilvy Renault

Toronto, Ontario                    For the Respondent, Coral Energy Inc.

Manitoba Hydro Law Department

Winnipeg, Manitoba               For the Respondent Centra Gas Manitoba Inc.

Borden Ladner Gervais LLP

Ottawa, Ontario                     For the Respondent Industrial Gas Users Association