Filing Manual – Guide P – Tolls and Tariffs (sections 225 to 240 of CER Act)

Table of Contents

1. Level of Detail
2. Definitions
3. Goal
4. P.1 Cost of Service
   1. Filing Requirements
   2. Guidance
      1. Major Cost Category Information
      2. Abandonment Funding
      3. Foreign Currency
      4. Transactions Involving an Affiliate
5. P.2 Rate Base
   1. Filing Requirements
   2. Guidance
6. P.3 Financial Statements
   1. Filing Requirements
   2. Guidance
7. P.4 Cost of Capital
   1. Filing Requirements
8. P.5 Tolls and Tariffs
   1. Filing Requirements
   2. Guidance
9. P.6 Regulation of the Traffic, Tolls and Tariffs of Group 2 Companies
   1. Tolls and Tariffs
   2. Accounting Requirements and Financial Reporting
10. P.7 Abandonment Costs
    1. Filing Requirements

This guide addresses:

• cost of service;
• rate base;
• financial statements;
• cost of capital; and
• tolls and tariffs.

Level of Detail

The information required for these applications will generally vary with the complexity of the issues and the degree of change from previously approved applications. Some factors to consider in determining the amount of information to provide include:

• the proposed toll design methodology;
• the number of shippers on the system;
• the level of market power held by the applicant, including its affiliates; and
• the size of the toll increase or decrease.

Definitions

In general, the accounting terminology used in this portion of the manual is defined in either the GPUAR or the OPUAR, as appropriate.

Goal

The tolls and tariffs application includes a discussion of the following points:

• the revenue requirement that the applicant is seeking to recover in its tolls and how the revenue requirement is determined;
• the applied-for toll design and tolls, including evidence that the tolls are just and reasonable and not unjustly discriminatory; and
• any revisions to the applicant’s tariff.

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P.1 Cost of Service

Filing Requirements

1. Describe the steps that were taken with interested parties to discuss issues and to attempt to reach a negotiated settlement.

2. Provide a summary schedule of the total cost of service (i.e., total revenue requirement), showing booked amounts for the base year, and projected amounts for the current year and test year, as well as year-to-year changes for the following cost components:

• operating, maintenance and administrative expenses;
• transmission by others;
• depreciation and amortization of plant;
• income taxes;
• taxes other than income taxes;
• miscellaneous revenues;
• return on rate base;
• deferred items; and
• other items.

3. Provide an analysis of each cost component of the cost of service listed above, showing, by major cost category:

• the total booked amounts for the base year;
• the current year projection; and
• the test year projection.

Provide explanations for significant year-to-year increases or decreases.

Where costs result from an allocation between regulated and non-regulated business entities, the analysis must include:

• the gross costs;
• the costs allocated to each of the regulated entities;
• the total costs allocated to the non-regulated entities;
• a description of the cost allocation methodology; and
• an explanation of the appropriateness of the allocation methodology.

4. For any deferral account, provide schedules showing the derivation and monthly accumulation of balances and the calculation of any carrying charges, indicating which amounts are actual and which are estimated.

5. Provide a schedule reconciling the additions to the plant accounts with additions to income tax Capital Cost Allowances for the base, current and test years.

6. Provide a schedule detailing the changes in the deferred tax balance for the base, current and test years.

7. Provide the estimated total cost to abandon, as well as the Collection Period over which revenue will be accumulated (see Chapter 7 – Referenced Documents – Abandonment Funding and Planning, for related guidance).

Guidance

Major Cost Category Information

Provide information for major cost categories at a sufficient level of detail to allow intervenors to assess the reasonableness of the costs. The CER expects the application to include at least the following:

• For municipal taxes, provide a schedule comparing base, current and test year amounts by province, breaking down variances into amounts due to changes in:
  • mill rates;
  • reassessments; and
  • facility additions.
• For income tax, provide schedules for the income tax provisions of each of the base, current and test years, with cross-references to supporting schedules as applicable, showing:
  • the derivation of the utility income after tax;
  • the carrying charges on deferrals;
  • the effective income tax rate;
  • the Capital Cost Allowances;
  • the disallowable expenses;
  • the interest portion of the allowance for funds used during construction (AFUDC);
  • the utility capital and non-capital losses carried forward;
  • the Large Corporation Tax; and
  • other significant items.
• For salaries and wages, provide cost schedules for the base, current and test years, with explanations of changes from year to year, detailing the following:
  • general salary increases;
  • merit increases;
  • promotions and progressions;
  • management incentive compensation;
  • severance payments;
  • staffing levels (full time equivalents, if appropriate);
  • any allocation methodology; and
  • other relevant factors.

Support the cost schedules with schedules showing the number of permanent and temporary employees (or full time equivalents) for each period.

For oil pipelines, provide:

• schedules of fuel and power costs, for the base, current and test years, that illustrate the derivation of the energy requirements and corresponding costs; and
• a schedule showing the derivation of a five-year historical oil loss or gain as a percentage of receipts of oil or other products transported through the pipeline system.

Abandonment Funding

See Chapter 7 – Referenced Documents – Abandonment Funding and Planning for documents that describe the requirements for pipeline abandonment cost estimates, set-aside and collection mechanisms and other CER direction regarding abandonment funding.

Foreign Currency

Where a transaction occurred in a foreign currency, include a description of the method used to derive the exchange rate that was applied.

Transactions Involving an Affiliate

Where contracted services are either from or to an affiliate, provide the details of the transactions, including evidence that the cost of the contracted services is reasonable.

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P.2 Rate Base

Filing Requirements

1. Provide detailed schedules for rate base with supporting assumptions and calculations, where applicable, for the following:

• monthly additions, retirements and month-ending balances for the base year, current year and test year by plant account;
• cash working capital; and
• average amounts and month-end balances for the base year, current year and test year for all other items included in rate base.

Guidance

Include complete documentation of the investment in the pipeline on which a return is expected, and verification that rate base additions and retirements were authorized by the Commission. Such evidence usually includes:

• the method used to determine the average amounts of the rate base (i.e., either the 13-point or 24-point method);
• a schedule showing additions to the plant accounts between the end of the base year and the end of the test year, broken down by project and referring to the applicable CER order number approving the project (including the section 214 Streamlining Order);

Break down forecasted amounts by plant account and only include costs for approved projects in the rate base. Information should include:

• explanations for amounts booked in the plant accounts that will not be used in pipeline operations during the test year, including the rationale for keeping these items in rate base or deleting them from rate base;
• a variance analysis showing, for each project, the amount proposed to be added to rate base compared to the original cost estimate provided to the CER in any application filed pursuant to Part III of the CER Act;
• an explanation of variances exceeding either $100,000 or 10 percent, whichever is greater;
• retirements from the plant accounts broken down by CER order number, if applicable;
• for AFUDC and overhead, the rate and method of calculation used for projects transferred to Plant in Service between the end of the base year and the end of the test year;
• for cash working capital, a time lag analysis for the base year if a change is proposed from the most recent Commission-approved average number of days between operating expense payment dates and revenue receipt dates; and
• a list of depreciation rates by major account groups applied in the test year, together with a justification for any proposed changes from the most recent Commission-approved rates.

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P.3 Financial Statements

Filing Requirements

1. Provide the current annual report to shareholders for the regulated entity. If the regulated entity is part of a larger corporate structure, also provide the current corporate annual report to shareholders.

2. Provide the financial statements for the base year for the regulated entity, segmented from published financial statements if the regulated entity is part of a larger corporate structure, and provide, where necessary:

• an explanation of the major assumptions used to prepare the financial statements of the regulated entity; and
• a statement regarding the consistency of application of accounting principles to the regulated entity.

Guidance

The annual report and financial statements should:

• identify similarities and differences between the financial policies applied to the regulated entity and those applied to the corporation;
• identify possible instances of cross-subsidization;
• provide an understanding of the policies of the corporation; and
• assist in testing the reasonableness of the operating results for the regulated activities.

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P.4 Cost of Capital

Filing Requirements

1. Invested Capital: The application shall describe the applicant’s sources of capital, including outstanding balances for each class of capital on a yearly basis, invested in the system’s rate base and plant under construction for the past five years and the year(s) covered by the application. The application shall also describe all relevant attributes for each class and issuance of capital, including, but not limited to:

• cost;
• covenants;
• embedded options, including call, put, or convertibility features;
• seniority; and
• voting/ non-voting features.

2. Methodology/Techniques/Methods/Models: The application shall include a description of the methodology used to estimate cost of capital and overall return, as well as all the techniques/methods/models within it, including:

• justification for the methodology and techniques/methods/models chosen;
• description of, and justification for, underlying assumptions and principles;
• implications of using the methodology and techniques/methods/models; and
• description of alternative methodologies and techniques/methods/models considered or utilized, and how and why these alternatives were or were not incorporated in the analysis.

3. Data Supporting Methodology: The application shall include a rationale for the specifically chosen data used in the estimation of cost of capital. This may include, but is not limited to:

• forecasts;
• bond yields;
• risk-free rate;
• market returns and prices;
• market risk premiums; and
• growth rates.

4. Debt Costs: The application shall include a description of, and justification for, the proposed treatment of debt costs as part of the return on rate base. The application shall also describe in detail, with supporting schedules, how debt costs to be recovered during the year(s) covered by the application were calculated.

5. Business Risk: The application shall include a detailed assessment of the applicant’s business risks including market, supply, competitive, operating, and regulatory risks.

6. Financial Risk: The application shall include a description of, and justification for, how the applicant has considered financial risk in estimating cost of capital, and in establishing the applied-for rate of return and capital structure (if applicable). The application should also describe alternative ways of considering financial risk and how and why these alternatives were or were not incorporated.

7. Regulated Assets: The application shall include a high-level assessment of how the cost of capital for the facilities subject to the application is impacted by other assets and liabilities of the applicant or of the applicant’s parent company^Footnote 30(if applicable), taking the stand-alone principle into account. The application shall include the following:

• a high-level schedule reconciling the balance sheet of the facilities subject to the application with the consolidated balance sheet of the applicant or applicant’s parent company;
• an explanation of this reconciliation, detailing the allocation of equity and debt; and
• an interpretation of the impact of this information on the applicant’s cost of capital and access to capital markets.

8. Comparable Companies or Assets: When comparable companies or assets are relied upon to estimate cost of capital, the application shall contain a discussion of business risks including market, supply, competitive, operating, and regulatory risks faced by these individual comparable companies or assets, and a description of any adjustment(s) made or considered to optimize comparability. More specifically, the application shall include:

• justification for the selection of comparable companies used in the analysis;
• description of comparables’ business structure and legal structure and related impact on cost of capital estimations;
• justification for the relative weight assigned to the results of each comparable company or asset;
• discussion of the business risk faced by comparable companies or assets, including discussion of unregulated business activities; and
• discussion of the financial risk faced by comparable companies or assets.

9. Data from Other Countries: Where an application utilizes financial data from countries other than Canada, the application shall include an assessment of the resulting impacts of using this data as opposed to data from Canada, including, but not limited to, impacts from any differences in tax regimes, currencies, securities exchanges, regulatory risk or systematic risks. The application should also assess whether and how adjustments should be made to the data from these other countries.

10. Financial Statements: The application shall include the applicant’s most recent audited financial statements and notes, or, if not available, those of the applicant’s parent company.

11. Credit Rating: The application shall include the applicant’s two most recent credit rating reports issued from each recognized rating agency, including those issued by DBRS, Moody’s, Standard & Poor’s, and Fitch. If not available for the applicant, the application shall include those reports of the applicant’s parent company.

12. Historical Returns and Capital Structure: The application shall include a description and summary schedule (where appropriate), for the past five years, of:

• the applicant’s actual balances for each class of capital, and resulting actual capital structures;
• actual returns;
• assumptions used to determine these actual returns;
• allowed return(s) and deemed capital structure(s);
• explanations of any variances between allowed and actual returns; and
• explanations of any variances between deemed and actual capital structure(s).

13. Capital Issuances: The application shall include a description, for the past five years, of any debt, equity, and other capital issuances, their net/gross proceeds, and description of their use.

14. Summary Schedule: The application shall include a summary schedule for the year(s) covered by the application, showing the requested rates of return for each class of capital (if applicable), deemed capital structure (if applicable) and derivation of the return on rate base.

15. Fair Return Standard: The application shall explicitly demonstrate how the applied-for total return on capital meets all requirements of the fair return standard by describing the extent to which the applied-for return:

• is comparable to the return available from the application of the invested capital to other enterprises of like risk (the comparable investment requirement);
• enables the financial integrity of the regulated enterprise to be maintained (the financial integrity requirement); and
• permits incremental capital to be attracted to the enterprise on reasonable terms and conditions (the capital attraction requirement).

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P.5 Tolls and Tariffs

Filing Requirements

1. Provide a concise description of the regulated pipeline system and operations, including a system map showing any toll zones or delivery areas.

2. Describe the applied-for toll design and explain any changes in the toll design from that previously approved by the Commission, including:

• a description of the classes or types of services offered;
• the method used to allocate costs to major pipeline functions and to classify costs between fixed and variable costs;
• details of the cost allocation units used to derive the proposed test year tolls;
• the method used to allocate costs to toll zones or areas, customers and classes or types of service, and the details and bases for such allocations; and
• for oil pipelines, supporting information and calculations to illustrate the determination of toll differentials for each product type or charges for special services.

3. Provide a comparative schedule of test year revenues for each class or type of service under the existing and the proposed tolls.

4. Describe requested tariff revisions together with the rationale for the revisions with schedules comparing the proposed changes to existing tariff sheets.

Guidance

Include sufficient information to allow the Commission to assess whether the proposed tolls are just and reasonable and not unjustly discriminatory. The application should also include evidence that the proposed tolls are designed to recover the requested revenue requirement, including funding required for abandonment.

For a pipeline company with a complex toll design, include sufficient information to fully explain the toll design for the test year, with a focus on changes from that previously approved by the Commission. Provide detailed information and schedules to explain:

• the allocation units used in the toll design, including contract and throughput volumes for each customer and class of service where appropriate; and
• the methods used to allocate costs to various customers, toll zones and delivery areas.

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P.6 Regulation of the Traffic, Tolls and Tariffs of Group 2 Companies

Any pipeline company regulated by the CER which is not a Group 1 company is considered to be a Group 2 company. The following companies are designated as Group 1 companies:

Group 1 Companies

Group 1 Companies
Natural Gas	Oil and Products
Alliance Pipeline Ltd.	Enbridge Pipelines Inc.
Foothills Pipe Lines Ltd.	Enbridge Pipelines (NW) Inc.
Gazoduc Trans Québec & Maritimes Inc.	Kinder Morgan Cochin ULC
Maritimes & Northeast Pipeline Management Ltd.	Trans Mountain Pipeline ULC
NOVA Gas Transmission Ltd.	Trans-Northern Pipelines Inc.
TransCanada PipeLines Limited	TransCanada Keystone Pipeline GP Ltd.
Westcoast Energy Inc.

All other pipeline companies regulated by the CER are Group 2 companies for traffic, tolls, tariff and financial regulation.

Tolls and Tariffs

The financial regulation of Group 2 companies is normally carried out on a complaint basis, with a consequent reduction in financial reporting requirements.

Group 2 companies are not normally required to provide the detailed information to support a tariff filing required of Group 1 companies. The CER regulates the traffic, tolls and tariffs of Group 2 companies on a complaint basis. Group 2 companies are required to include in their tariffs the following explanatory note:

The tolls of the Company are regulated by the CER on a complaint basis. The Company is required to make copies of tariffs and supporting financial information readily available to interested persons. Persons who cannot resolve traffic, toll and tariff issues with the Company may file a complaint with the CER. In the absence of a complaint, the CER does not normally undertake a detailed examination of the Company’s tolls.

It is the responsibility of a Group 2 company to provide its shippers and interested parties with sufficient information to enable them to determine whether a complaint is warranted. Upon receipt of a written complaint, an application under sections 225 to 240 of the CER Act or on its own initiative, the Commission may decide to examine a toll and to make the toll interim, pending completion of this examination. In this circumstance, the Commission may request additional information including some or all of the information required of Group 1 companies as specified in sections P.1 through P.5 in Guide P.

Accounting Requirements and Financial Reporting

Group 2 companies are not required to keep their books of account pursuant to the code of accounts prescribed in the G/OPUAR. The G/OPUAR require that Group 2 companies maintain separate books of account in Canada in a manner consistent with generally accepted accounting principles and file audited financial statements within 120 days after the end of each fiscal year. Such statements should provide details of revenue and costs associated with the regulated pipeline. Where a Group 2 company operates a joint venture pipeline, it is required to disclose in its audited financial statements its beneficial share of revenue and costs associated with the regulated pipeline and to file a gross operating statement for the joint venture pipeline indicating whether, and if so by whom, this statement has been audited.

In some instances, the Commission has granted relief from the requirement to file financial statements. These instances have primarily concerned small shipper-owned pipelines with no direct dealings with third parties. A Group 2 company may apply for similar relief explaining the particular circumstances which would justify an exemption from this requirement.

The Commission has exempted Group 2 companies from the Toll Information Regulations. The Commission does not require Group 2 companies to provide periodic financial information, such as quarterly surveillance reports, for the purpose of monitoring the financial performance of these companies. As circumstances dictate, the CER may perform an audit of the company’s records.

Whether they charge tolls or not, Group 2 companies are required to report to the CER on funding for abandonment. See Chapter 7 – Referenced Documents – Abandonment Funding and Planning for future guidance on details of pipe location, abandonment plans and cost estimates, as well as Collection Period.

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P.7 Abandonment Costs

As of 1 January 2015 CER-regulated pipeline companies must have a mechanism in place that will provide adequate funds to pay for pipeline abandonment. Pipeline companies must establish a trust or provide a letter of credit issued by a bank listed in Schedule I of the Bank Act, or a surety bond supplied by a surety company regulated by the Office of Superintendent of Finance Institutions. A model trust agreement, letter of credit and surety bond can be found in the MH-001-2013 Reasons for Decision [Filing A60676].

Filing Requirements

1. A company’s application should include any changes related to abandonment funding. Provide a discussion and justification of these changes, including any changes related to the total cost estimated for abandonment, the manner which the funds will be set-aside, and how the funds are to be collected, including the pace of collecting funds.

Companies are encouraged to consult Chapter 7 Referenced Documents, Abandonment Funding and Planning, to learn more about the principles, estimation methods, filing formats and other expectations regarding funding abandonment.

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