A-66-80 (A-625-79)
A-67-80 (A-285-78)
A-68-80 (A-665-78)
British Columbia Hydro and Power Authority
(Appellant)
v.
Westcoast Transmission Company Limited, Brit-
ish Columbia Petroleum Corporation, Inland
Natural Gas Co. Ltd., Peace River Transmission
Company Limited, Canadian Petroleum Associa
tion, Amoco Canada Petroleum Company Ltd.,
Dome Petroleum Limited, Mobil Oil Canada,
Ltd., Pan-Alberta Gas Ltd., PanCanadian
Petroleum Limited, Shell Canada Resources Lim
ited, Canada Cement Lafarge Ltd., Cominco Ltd.,
Consumers Glass Company, Limited, Domglas
Ltd., Council of Forest Industries of British
Columbia, Dow Chemical of Canada, Limited,
Hiram Walker & Sons Ltd., Independent
Petroleum Association of Canada, Union of Brit-
ish Columbia Indian Chiefs, Foothills Pipe Lines
(South Yukon) Ltd., Foothills Pipe Lines (Yukon)
Ltd., TransCanada PipeLines Limited, Alberta
Petroleum Marketing Commission, Attorney Gen
eral of British Columbia, Greater Kamloops
Chamber of Commerce, and Fort Nelson Gas Lim
ited (Respondents)
Court of Appeal, Thurlow C.J., Pratte and Urie
JJ.. —Vancouver, October 7, 8, 9, 10, 14, 15, 16
and 17, 1980; Ottawa, January 19, 1981.
Judicial review — Applications to review and set aside three
decisions of the National Energy Board — Also, appeals under
s. 18 of the National Energy Board Act attacking said deci
sions — Decisions made on application by Westcoast Trans
mission Co. Ltd. for an order giving effect to tolls for gas sold
by Westcoast — First decision requiring Westcoast to adopt
normalization method of accounting for taxes and to provide
for "catch-up" of deferred taxes in its cost of service —
Second decision upholding normalization but rescinding
requirement in respect of "catch-up" — Third decision deal
ing with inter alia rate of return and rate base — Final
decision and order of Board to the effect that tolls proposed by
Westcoast are just and reasonable — Whether Board erred in
law and whether its order should be set aside with respect to
items such as normalization, rate of return, rate base,
depreciation, looping and interested party status National
Energy Board Act, R.S.C. 1970, c. N-6, as amended, ss. 2, 11,
17(1), 18, 50, 51, 52, 53, 54, 61 — Federal Court Act, R.S.C.
1970 (2nd Supp.), c. 10, ss. 28, 29 Sale of Goods Act,
R.S.B.C. 1979, c. 3 7 0, s. 23(6).
These are appeals under section 18 of the National Energy
Board Act (the Act) and applications for judicial review
against decisions of the National Energy Board dated May
1978, November 1978 and September 1979. The three deci
sions were all made on an application by Westcoast Transmis
sion Co. Ltd. for an order under sections 50 and 53 of the Act
giving effect to tolls which Westcoast proposed to charge for
gas produced in British Columbia and sold to its B.C. and
export customers, and disallowing any tolls and tariffs then in
effect which were inconsistent with the new tolls and tariffs.
These joint proceedings were heard along with appeals and
applications for judicial review attacking all or some of the said
decisions and commenced by Cominco Ltd. et al., by British
Columbia Petroleum Corporation (BCPC) and by Westcoast.
The May 1978 decision (Phase I decision) required Westcoast
to change to the normalized method of accounting for corpo
rate income taxes when the new rates came into effect and to
provide for "catch-up" of deferred income taxes in its cost of
service. The November 1978 decision (review decision) made
pursuant to section 17(1) of the Act upheld the Phase I
decision regarding normalization but rescinded the requirement
respecting "catch-up" of deferred taxes. In its September 1979
final decision the Board dealt with inter alia rate base and rate
of return and held that the tolls proposed by Westcoast were
just and reasonable and based its order thereon. The parties
argue with respect to the items set out below that the Board
erred in law and consequently, that its final order should be set
aside.
(1) Normalization: Appellants submit that the normalization
method is inappropriate and that its use would work injustice to
present day utility customers. They further submit that the
Board's finding that crossover will occur in 1983 or 1984, or
earlier, is an erroneous finding of fact and that they should
have been afforded an opportunity to offer evidence regarding
the denial of Westcoast's looping application that the review
panel took into account.
(2) Rate of return: Appellants argue that the rate of return
was based on a consideration of risk that included the risk
involved in the unregulated operations of Westcoast subsidiar
ies and that the ratio adopted as a fair return on common
equity and the equity ratio were too high.
(3) Rate base: British Columbia Hydro argues that by its
decision respecting rate base, the Board left it to Westcoast to
increase the rate base by whatever it expends for construction,
thus denying the users any right to review these expenditures
and that it included in rate base amounts not used nor useful to
provide service to utility customers. BCPC argues that the
Board's decision to permit Westcoast to include as an element
of working capital its investment in line pack gas is contrary to
section 52 of the Act, as it permits Westcoast to earn a return
where no proper investment has been made.
(4) Depreciation: BCPC argues that the Board's decision to
allow Westcoast to accelerate depreciation now, discriminates
against current customers and fails to take into account the
matching principle of costs and revenues, while considering the
level of depreciation at some future time, an irrelevant
consideration.
(5) Looping: BCPC argues that the inclusion of the cost of
service chargeable to BCPC of certain costs pertaining to the
looping of a section of the main transmission line results in
unjust unreasonable tolls.
(6) Interested party status: It was submitted on behalf of
Cominco Ltd. et al. that the Board erred in law in not including
them in its final order, among the parties who were accorded
"interested party status" in matters related to Westcoast's tolls
subsequent to the hearing.
Held, the appeals and applications for judicial review are
dismissed.
(1) Normalization: The question whether the normalization
method is appropriate and whether it should be followed by
Westcoast and whether its use amounts to injustice are not
questions of law or of jurisdiction. It is wrong for the Court to
attempt to treat the accounting principles involved in that
method as if they were principles of law and to attempt to deal
with them as such. While the paragraph of the review decision
dealing with the occurrence of crossover is inaccurate and
wrong, it does not follow that the Board's decision is based on a
finding that "crossover", in the defined sense, will occur some
time in 1983 or 1984. It is based on the finding that it will
occur: this is clear from the title of the chapter: "The Likeli
hood of Crossover and the Need for Consistency" and from the
final paragraph of that chapter. With respect to the looping
application, until the final decision was given and the formal
order made, it was at all times open to the appellants to raise
the matter before the Board, if it was considered to be of any
significance.
(2) Rate of return: It was clearly within the jurisdiction of
the Board to express an opinion of what would be a reasonable
rate in respect of operations which are to be carried on in the
future. It is not the function of this Court to reweigh the
evidence and substitute its own opinion for that of the Board.
Nor is there any reason to think that the Board was unaware of
any applicable legal principle or that it misapplied any appli
cable legal principle.
(3) Rate base: With respect to B.C. Hydro's objections:
Nothing in the National Energy Board Act requires the Board
to fix a rate base in any particular way or to approve the
amount of every item to be added to the rate base before it is so
added. The fact that the method in this case includes provision
for the addition to the rate base of additional capital expendi
tures even if not subject to prior scrutiny and approval of the
Board, does not amount to an error of law. The test of the
present use or usefulness of the items may be used. But there is
no rule of law that such a test must be used or followed or that
it is the only principle that can be applied. Pursuant to
clause 16 of the contract under which BCPC supplies gas to
Westcoast, the latter is required to pay for all the gas by the
25th of the month following the calendar month during which
it was delivered to Westcoast. Furthermore, under clause 9 of
the contract, the gas which Westcoast agrees to purchase is
ascertained and appropriated to the contract when it is received
into the Westcoast system and under section 23(6) of the Sale
of Goods Act title to the gas passes to Westcoast. Westcoast
thus has an investment in its line pack gas which may be
properly included in its rate base.
(4) Depreciation: It was plainly open to the Board to require
that the depreciation to be charged be related to the use that
could be expected to be made of the pipeline during the
remainder of its expected life. In reaching that conclusion, the
interests of present and future customers are plainly relevant.
The "matching principle" is not offended by depreciation
charges being based on the anticipated use today in relation to
anticipated use in some foreseeable future period.
(5) Looping: Plainly, the B.C. gas shares the benefit from the
availability of the increased transmission capacity resulting
from the looping and from' not being obliged to share the
former transmission capacity with the Alberta gas. Thus it is
not contrary for the Board to treat the costs of the whole
section as referable to the whole of the gas transmitted through
it.
(6) Interested party status: There is nothing in the final order
which prevents the parties in question from applying to the
Board for recognition as interested parties for the purposes of
Schedule A to the final order. In any event, their right to apply
to the Board for relief is quite a different right from a right to
require the Board to confer on them "interested party" status
under its order.
Northwestern Utilities Ltd. v. The City of Edmonton
[1979] 1 S.C.R. 684, referred to. Trans Mountain Pipe
Line Co. Ltd. v. National Energy Board [1979] 2 F.C.
118, referred to. Canadian Pacific Railway Co. v. The
Board of Trade of the City of Regina (1912) 45 S.C.R.
321, referred to. Consumers' Association of Canada v.
The Hydro-Electric Power Commission of Ontario [No.
1] [1974] 1 F.C. 453, referred to. Canadian Pacific Rail
way Company v. Toronto Transportation Commission
[1930] A.C. 686, distinguished. Re Consumers' Gas Co.
and Public Utilities Board (1971) 18 D.L.R. (3d) 749,
distinguished.
APPLICATIONS for judicial review and appeals
under s. 18 of the National Energy Board Act.
COUNSEL:
Y. A. George Hynna for appellants British
Columbia Hydro and Power Authority and
Cominco Ltd. et al.
K. C. Mackenzie for respondent Attorney
General of British Columbia.
P. G. Griffin for National Energy Board.
John McAlpine, Q.C. for respondent West-
coast Transmission Company Limited.
John W. Lutes for respondents Foothills Pipe
Lines (South Yukon) Ltd. et al.
J. J. L. Hunter and D. G. Sanderson for
respondent British Columbia Petroleum Cor
poration.
SOLICITORS:
Gowling & Henderson, Ottawa, for appellants
British Columbia Hydro and Power Authority
and Cominco Ltd. et al.
Guild, Yule, Schmitt, Lane, Sullivan &
Finch, Vancouver, for respondent Attorney
General of British Columbia.
P. G. Griffin, Ottawa, for National Energy
Board.
McAlpine, Roberts & Poulus, Vancouver, for
respondent Westcoast Transmission Company
Limited.
Shrum, Liddle & Hebenton, Vancouver, for
respondents Foothills Pipe Lines (South
Yukon) Ltd. et al.
David & Company, Vancouver, for respond
ent British Columbia Petroleum Corporation.
The following are the reasons for judgment
rendered in English by
THURLOW C.J.: These are appeals under section
18 of the National Energy Board Act, R.S.C.
1970, c. N-6, as amended and applications under
section 28 of the Federal Court Act, R.S.C. 1970
(2nd Supp.), c. 10 against decisions of the Nation
al Energy Board dated May 1978, November 1978
and September 1979. By orders of this Court,
dated February 25, 1980, the appeal and the sec
tion 28 application with respect to each decision
were joined and it was directed that the joint
proceedings be heard together and along with
appeals and section 28 applications which attacked
all or some of the same three decisions and which
had been commenced by Cominco Ltd., Consum
ers Glass Company, Limited, Domglas Ltd. and
Hiram Walker & Sons Ltd., by British Columbia
Petroleum Corporation and by Westcoast Trans
mission Company Limited, for all of which pro
ceedings a single case was to be prepared.
At the hearing, for the sake of convenience, the
Court heard argument first with respect to all the
proceedings except those brought by Westcoast
Transmission Company Limited and deferred the
argument of those brought by that company until
the argument of the others had been completed.
The three decisions of the National Energy
Board were all made on an application made by
Westcoast Transmission Company Limited for an
order or orders under sections 50 and 53 of the
National Energy Board Act giving effect to the
tolls which Westcoast proposed in the application
to charge for gas produced in British Columbia
and sold by Westcoast to its B.C. and export
customers and disallowing any tolls and tariffs
then in effect which were inconsistent with the
proposed new tolls and tariffs.
Westcoast owns and operates a pipeline system
for the collection, processing and transportation of
natural gas which originates at various points in
British Columbia, Alberta, the Northwest Territo
ries and the Yukon. The pipeline system passes
through British Columbia to the south and south
west to serve the Vancouver market area and
connects at the international boundary at Hunt-
ingdon, British Columbia to Northwest Pipeline
Corporation to allow for the export of natural gas
to the U.S. The gas, after entering Westcoast's
pipeline system, is moved to a plant where it is
processed. It is then transmitted to and sold to
customers. Westcoast also has substantial invest
ments in subsidiaries which are not pipeline com
panies and whose operations are not subject to
regulation under Part IV of the National Energy
Board Act.
The appellant, British Columbia Hydro and
Power Authority (hereinafter referred to as B.C.
Hydro), is one of the principal customers of West-
coast's pipeline operation. It purchases large quan
tities of natural gas which it distributes to residen
tial, commercial and industrial customers in
British Columbia, including the appellants,
Cominco Ltd., Consumers Glass Company, Lim
ited, Domglas Ltd., and Hiram Walker & Sons
Ltd.
The appellant, British Columbia Petroleum Cor
poration (hereinafter referred to as BCPC), is a
British Columbia Crown corporation which pur
chases natural gas produced in British Columbia
from the producers and sells it to Westcoast at a
price which is computed by a formula and which is
adversely affected by some of the elements includ
ed by the Board in the computation of the cost of
service and rate base which the Board directed
Westcoast to use.
The Westcoast application used a cost of ser
vice, rate base—rate of return approach to the
derivation of the proposed rates and tolls. Under
this approach, the forecasted total revenue from
rates and tolls is intended to equal the forecasted
cost of service, including a return on the rate base.
In its decision of May 1978, the Board, after a
hearing, dealt with the issues of the income tax
and depreciation components of Westcoast's cost
of service. The decision fixed the rates of deprecia
tion to be used when the new tolls came into effect,
required Westcoast to change over to the normal
ized method of accounting for corporate income
taxes at the point in time when the new rates came
into effect and to include normalized taxes in the
cost of service for rate design purposes and further
required Westcoast to provide for "catch-up" of
deferred income taxes in its cost of service.
The Board's decision of November 1978 was
made on a review, under subsection 17(1) of the
National Energy Board Act, of the May 1978
decision, basically on the same material as that on
which the May 1978 decision was made. In its
decision, the Board, after some thirty-four pages of
reasons, concluded that it would be appropriate, in
seeking to achieve just and reasonable tolls to be
charged by Westcoast, to permit Westcoast to
change to the normalized method of income tax
accounting and to recover normalized income
taxes on a current basis in its cost of service and in
that respect did not vary the earlier decision. It
did, however, vary the decision by rescinding the
requirement that Westcoast provide for "catch-
up" and recover past deferred taxes in its cost of
service.
In its third decision, that of September 1979, the
Board, following a further hearing, in lengthy
reasons dealt with the remaining issues arising on
Westcoast's application, including those relating to
the rate base and rate of return, and embodied its
conclusions in a formal order number TG-5-79 to
come into effect on November 1, 1979. The deci
sion states that the order is to be made under
section 50 of the National Energy Board Act but
the order itself purports to be made pursuant to
sections 11 and 50 of the Act. In the second last
paragraph of the reasons, it is stated that:
It is the Board's view that tolls determined in the manner
described in these Reasons for Decision and regulated in the
manner provided by the Board's method of regulation pre
scribed in Order No. TG-5-79, will result in tolls being charged
by Westcoast which are just and reasonable.
The Board's authority with respect to the tolls of
pipeline companies engaged in the interprovincial
or international transmission of natural gas is pro
vided for in Part IV of the National Energy Board
Act, sections 50 to 54 of which are as follows:
50. The Board may make orders with respect to all matters
relating to traffic, tolls or tariffs.
51. (1) A company shall not charge any tolls except tolls
specified in a tariff that has been filed with the Board and is in
effect.
(2) Where the gas transmitted by a company through its
pipeline is the property of the company, the company shall file
with the Board, upon the making thereof, true copies of all the
contracts it may make for the sale of gas and amendments from
time to time made thereto, and the true copies so filed shall be
deemed, for the purposes of this Part, to constitute a tariff
pursuant to subsection (1).
51.1 Where a company files a tariff with the Board and the
company proposes to charge a toll referred to in paragraph (b)
of the definition "toll" in section 2, the Board may establish the
day on which the tariff is to come into effect and the company
shall not commence to charge such toll before that day.
52. All tolls shall be just and reasonable, and shall always,
under substantially similar circumstances and conditions with
respect to all traffic of the same description carried over the
same route, be charged equally to all persons at the same rate.
53. The Board may disallow any tariff or any portion thereof
that it considers to be contrary to any of the provisions of this
Act or to any order of the Board, and may require a company,
within a prescribed time, to substitute a tariff satisfactory to
the Board in lieu thereof, or may prescribe other tariffs in lieu
of the tariff or portion thereof so disallowed.
54. The Board may suspend any tariff or any portion thereof
before or after the tariff goes into effect.
The word "toll" is defined in section 2, as
follows:
2....
"toll" includes
(a) any toll, rate, charge or allowance charged or made for
the shipment, transportation, transmission, care, handling or
delivery of hydrocarbons, or for storage or demurrage or the
like, and
(b) any toll, rate, charge or allowance charged or made for
the provision of a pipeline when the pipeline is available and
ready to provide for the transmission of oil or gas.
Neither the word "rate" nor the word "tariff" is
defined. In my view, "rate", as used in the statute,
refers to a toll or levy that is measured by a rate
applied to some variable such as quantity or dis
tance and "tariff" refers to a list of tolls or rates.
Section 61 further provides that:
61. Where the gas transmitted by a company through its
pipeline is the property of the company, the differential be
tween the cost to the company of the gas at the point where it
enters its pipeline and the amount for which the gas is sold by
the company shall, for the purposes of this Part, be deemed to
be a toll charged by the company to the purchaser for the
transmission thereof.
It will be observed that the system imposed by
this legislation is one in which, initially, tolls for
the transportation of gas may be set by the pipe
line company itself subject to the requirement of
section 51 that its tariff or tariffs of tolls be filed
with the Board. But by section 50 the Board is
given power, in unrestricted terms, to make orders
with respect to all matters relating to traffic, tolls
or tariffs and under section 53 it may disallow any
tariff or portion thereof for any reason referred to
in the section and may require a company to
substitute a tariff satisfactory to the Board or
prescribe other tariffs in lieu of the tariff or por-
tion thereof disallowed. The reconciliation of the
unrestricted power given by section 50 with the
restricted and more specific powers given by sec
tion 53 could be a problem but no question has
been raised in these proceedings as to the authority
of the Board to entertain Westcoast's application
and to regulate or fix just and reasonable tolls to
be charged by that company. What was argued by
all parties attacking the decisions was that in
various respects, to be mentioned later in these
reasons, the Board in reaching its conclusions
erred in law or failed to observe a principle of
natural justice or otherwise abdicated or lost its
jurisdiction with the result that its conclusion that
the tolls to be charged pursuant to its order TG-5-
79 will be just and reasonable is erroneous in law
and the order based thereon should be set aside.
In considering these objections it must, in my
view, be borne in mind that the regulatory system
established by Part IV of the National Energy
Board Act differs markedly from that considered
by the Supreme Court in Northwestern Utilities
Limited v. The City of Edmonton', where, as
appears from the judgment of Estey J., there were
specific statutory directions to the Public Utilities
Board contained in The Gas Utilities Act. Estey J.
says at pages 689-690:
The Board is by the latter statute directed to "fix just and
reasonable ... rates, ... tolls or charges ..." which shall be
imposed by the Company and other gas utilities and in connec
tion therewith shall establish such depreciation and other
accounting procedures as well as "standards, classifications
[and] regulations ..." for the service of the community by the
gas utilities (s. 27, The Gas Utilities Act). In the establishment
of these rates and charges, the Board is directed by s. 28 of the
statute to "determine a rate base" and to "fix a fair return
thereon". The Board then estimates the total operating
expenses incurred in operating the utility for the period in
question. The total of these two quantities is the `total revenue
requirement' of the utility during a defined period. A rate or
tariff of rates is then struck which in a defined prospective
period will produce the total revenue requirement.
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 author
ity in the broadest of terms to make orders with
1 [1979] 1 S.C.R. 684.
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 func
tion 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 proposes 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.
In Trans Mountain Pipe Line Co. Ltd. v. Na
tional Energy Board 2 , Pratte J., with whom the
other members of the Court agreed, described the
function of the Board and of this Court on an
appeal from the Board's decision as follows:
Under sections 50 and following of the Act, the Board's duty
was to determine the tolls which, in the circumstances, it
considered to be "just and reasonable".
Whether or not tolls are just and reasonable is clearly a
question of opinion which, under the Act, must be answered by
the Board and not by the Court. The meaning of the words
"just and reasonable" in section 52 is obviously a question of
law, but that question is very easily resolved since those words
are not used in any special technical sense and cannot be said to
be obscure and need interpretation. What makes difficulty is
the method to be used by the Board and the factors to be
considered by it in assessing the justness and reasonableness of
tolls. The statute is silent on these questions. In my view, they
must be left to the discretion of the Board which possesses in
that field an expertise that judges do not normally have. If, as it
has clearly done in this case, the Board addresses its mind to
the right question, namely, the justness and reasonableness of
the tolls, and does not base its decision on clearly irrelevant
considerations, it does not commit an error of law merely
because it assesses the justness and reasonableness of the tolls
in a manner different from that which the Court would have
adopted.
This view of the respective functions of the
Board and the Court is, I think, supported by the
judgments of the Supreme Court of Canada in
The Canadian Pacific Railway Company v. The
2 [ 1979] 2 F.C. 118 at p. 121.
Board of Trade of the City of Regina', Canadian
National Railways Company v. The Bell Tele
phone Company of Canada", Union Gas Company
of Canada Limited v. Sydenham Gas and
Petroleum Company Limited', Memorial Gardens
Association (Canada) Limited v. Colwood Ceme
tery Company 6 , and in the three Northwestern
Utilities Limited v. The City of Edmonton'
appeals, including that of 1979. In it Estey J.,
speaking for the Court said at page 703:
In any case the administrative mechanics to be adopted in the
discharge of the function mandated by The Gas Utilities Act
are exclusively within the power of the Board. We need not
here deal with the question of arbitrariness in the discharge of
administrative functions for there is no evidence on the record
before this Court raising any such issue. This Court is con
cerned only with the issue as to whether the Board in the
performance of its duties under the statute has exceeded the
power and authority given to it by the Legislature.
and at pages 707-708:
The Appellate Division of the Supreme Court of Alberta,
after coming to the same result, vacated the Board's order and
referred the matter to the Board for further consideration and
determination pursuant to s. 64 of The Public Utilities Board
Act. In doing so, it is evident from the reasons for judgment of
the said Court that the Court properly viewed its appellate
jurisdiction under s. 64 of The Public Utilities Board Act as a
limited one. It is not for a court to usurp the statutory
responsibilities entrusted to the Board, except in so far as
judicial review is expressly allowed under the Act. It is, of
course, otherwise where the administrative tribunal oversteps
its statutory authority or fails to perform its functions as
directed by the statute. Questions as to how and when operat
ing expenses are to be measured and recovered through pre
scribed rates are, subject to the limits imposed by the Act itself,
for the Board to decide, and the procedures for such decisions if
made within the confines of the statute are administrative
matters which are better left to the Board to determine (vide
City of Edmonton v. Northwestern Utilities Limited [[19611
S.C.R. 392], per Locke J. at p. 406).
In Consumers' Association of Canada v. The
Hydro-Electric Power Commission of Ontario
[No. 1)8, Jackett C.J., on an application for leave
to appeal under section 18 of the National Energy
Board Act, outlined the scope of the review which
the Court may make under that provision as fol-
3 (1912) 45 S.C.R. 321.
4 [1939] S.C.R. 308.
5 [1957] S.C.R. 185.
6 [1958] S.C.R. 353.
[1929] S.C.R. 186. [1961] S.C.R. 392. [1979] 1 S.C.R.
684.
8 [1974] 1 F.C. 453.
lows [at pages 457-458]:
Section 83(b) calls for a determination by the Board as to
whether the price to be charged is "just and reasonable" in
relation to the public interest. Generally speaking, as it seems
to me, where Parliament leaves it to a tribunal to decide "fair
and reasonable" or "just and reasonable" rates or prices or
public convenience and necessity, the tribunal has a discretion
to decide in what manner it will obtain information and the
Courts have no right to review the Board's opinion based on the
facts established before it. See Northwestern Utilities Ltd. v.
The City of Edmonton ([1929] S.C.R. 186), Union Gas Com
pany of Canada, Limited v. Sydenham Gas and Petroleum
Company, Limited ([1957] S.C.R. 185) and Memorial Gar
dens Association (Canada) Limited v. Colwood Cemetery
Company ([1958] S.C.R. 353). Furthermore, where a tribunal
adopts a rule of practice to guide it in the exercise of its
statutory functions, the question whether it properly appreci
ates its own rule cannot be a question of law. Nor "can the
question whether in a given case the Board has properly
appreciated the facts for the purpose of applying the rule be
such a question. This is so because ... there is no statutory rule
and there is no rule of law that prescribes the considerations by
which the Board is to be governed in exercising its administra
tive discretion ...". See Bell Telephone Co. v. Canadian Na
tional Railways ((1939) 50 C.R.T.C. 10) per Duff C.J.C.
(giving the judgment of the Supreme Court of Canada) at page
21. As it seems to me, before this application can be granted,
the Court must be able to see a specific question of law or
jurisdiction the answer to which may lead to the setting aside of
the decision or order attacked. That may be a question as to
whether the decision or order was made by the Board in
disregard of a statutory provision or other rule of law. It may
be that the decision or order was based on a finding of fact that
cannot be sustained having regard to the Board's statutory
mandate. It may fall in some other area that does not occur to
me. In any event, as already indicated, I fail to recognize any
such specific question of law in the paragraph of the applicants'
supporting submissions set out above.
Counsel for the appellant relied on the judgment
in the 1979 Northwestern Utilities case but it
appears to me that the point decided in that case
was a very narrow one turning on the interpreta
tion of a statutory provision for which there is
nothing comparable in the National Energy Board
Act. It seems to me to be a case in which the
question of law was one of the kind which Jackett
C.J. referred to as "a question as to whether the
decision or order was made by the Board in disre
gard of a statutory provision" and I see nothing in
the judgment which lends support for any of the
submissions put forward on behalf of the
appellant.
I turn now to the objections raised by the
appellants.
NORMALIZATION OF INCOME TAXES
Up to the time of the application to the Board,
Westcoast in computing its cost of service had
dealt with the incidence of income taxes on what
was referred to as a "flow-through" basis. Under
it, there is included, in the cost of service, the
income taxes actually paid or incurred. Because in
the early part of the life of a capital asset, capital
cost allowances in respect of the asset calculated
on a declining balance basis, that may be claimed
as deductions in computing income for tax pur
poses are likely to be greater than depreciation
calculated on a straight-line basis and based on the
expected life of the asset, income taxes payable in
such years are lower by the amount of tax that
would otherwise be payable in respect of the dif
ference. In later years, the situation is reversed and
it becomes necessary to pay higher income taxes
because the capital cost allowances that may be
claimed are less than normal depreciation. When
this occurs, the customers of later years of a
regulated utility will be obliged to pay higher rates
to produce for the utility revenues sufficient to pay
the higher income taxes.
The point in time at which capital cost allow
ances that may be claimed in respect of the capital
assets used in the operation equal normal deprecia
tion on the assets is referred to as "crossover" or as
the crossover point. As I understand it, the point is
the same whether a flow-through accounting
system of dealing with income taxes or a normali
zation system is followed. But the point when
crossover might otherwise occur for a company
may be delayed or deferred by reason of the
acquisition by the company from time to time of
new capital assets on which the higher capital cost
allowances that may be claimed in respect of them
will more than offset the decrease in capital cost
allowances that may be claimed in respect of older
capital assets.
Under the accounting device known as "normal-
ization" or "normalized taxes", the company in
the early years of the life of a capital asset, besides
providing for taxes actually payable, transfers to a
reserve the difference between such taxes and the
taxes that it would have had to pay, had capital
cost allowances been claimed as a deduction in
computing income for tax purposes only to the
extent of normal depreciation. The reserve is then
available to help pay the increased income taxes to
be paid in years following crossover.
In the foregoing, I may have imprecisely and
inaccurately described and unduly simplified the
concepts, but the description will, I hope, be suffi
cient for the immediate purpose of explaining the
objections taken by the appellants to the direction
of the Board to Westcoast to change from the
flow-through system to normalization at the time
when the new rates come into effect.
It will be recalled that the Phase I decision also
directed Westcoast to provide for "catch-up" of
"deferred" taxes by including in its cost of service
amounts in respect of the difference between
actual taxes for previous years and what would
have been necessary to provide the reserve for
"deferred taxes" but that that direction was
rescinded by the review decision. The review deci
sion, however, upheld the Phase I decision direct
ing Westcoast to change to the normalized system
with respect to the future and that direction was
carried into effect in the final decision and in the
order TG-5-79.
The appellants' first submission was that nor
malization of taxes is an accountant's device, that
it is an artificial concept which is unrelated to the
service to be provided and is wrong in principle,
that it includes as an expense what is not an
expense, that is to say, what counsel referred to as
"phantom" 9 taxes, that such amounts are not
necessarily incurred to give service to the utility
9 Compare Public Systems v. Federal Energy Regulatory
Commission 606 F.2d. 973 (1979) at p. 976.
customers of the period in which the tolls are to be
paid and that such taxes may never have to be paid
because crossover may never be reached. This
submission was supported by counsel for BCPC as
well as by counsel for Cominco Ltd. et al. On
behalf of Cominco Ltd. et al., it was further
objected that as the reserve created by the normal
ization system is a sum available for use by West-
coast, the utility customers are being obliged, by
the use of the normalization method, to provide
capital either to finance the non-utility operations
of Westcoast or to finance the acquisition of fur
ther utility assets, the depreciation of which will
thereafter be an element of Westcoast's cost of
service and an extra charge on the users of the
utility service.
In my opinion, whether or not the normalization
method of accounting for income taxes or some
variation of it was appropriate for use by West-
coast in arriving at just and reasonable tolls to be
charged for its service, whether or not such a
method should be followed by Westcoast and
whether or not the use of such a method would
work injustice to present day utility customers
were all qùestions of fact which it was within the
jurisdiction of the Board to decide. They are not
questions of law or of jurisdiction and it would, in
my view, be wrong for the Court to attempt to
treat the accounting principles involved in the
normalization method as if they were principles of
law and to attempt to deal with them as such. I
would, accordingly, reject these submissions of the
appellants in their entirety.
Two further objections put forward on behalf of
the same appellants were based on the following
passage from the review decision:
2. The Likelihood of Crossover and the Need for Consistency
In the 1977 Interprovincial decision, the Board considered as
a factor in its decision on whether to permit the recovery of
normalized income taxes in Interprovincial's cost of service, the
likelihood of crossover. The Board concluded in that case that
the likelihood of crossover was not sufficiently uncertain to
suggest the use of the flow-through method (Interprovincial
Pipe Line Limited, Phase II, December 1977, page 4-37).
The Board has noted the difference between the Interprovin-
cial case and that of Westcoast. In the Interprovincial case, the
Company has been accounting for income taxes on the normal
ized basis since its inception, and the issue facing the Board
was whether the Company should continue on the normalized
basis. On the other hand, Westcoast has used the flow-through
method of tax accounting since 1957 and now seeks to change
to the normalized method.
Westcoast provided its projection of capital additions to its
utility plant for the years 1978 to 1988. For the years 1978 and
1979, the Company shows substantial capital additions in the
amount of $309,439,000. In 1980, capital additions are forecast
at $66,291,000. Thereafter, Westcoast forecasts capital invest
ments in utility plant from 1981 to 1988 of some $20 million to
$40 million per year, primarily in gathering and compressor
facilities. The Company considers this forecast to be "fairly
accurate" for the period ending in 1988. There are no capital
additions forecast in the period after 1988.
On the flow-through basis of income tax accounting, the
Company forecasts that it will pay income taxes of some $25
million in 1983 and $49 million in 1984, with continuing
increases in each year in the period to 1995. It thus appears
that, on the flow-through basis, the Company would reach
crossover—that is, the point when capital cost allowances avail
able for tax purposes no longer exceed booked depreciation—
sometime in 1983 or 1984. If Westcoast were to change over
now to the normalized method of tax accounting, it would
reach crossover at some time earlier than 1983.
Several Intervenors questioned the capital development plans
of Westcoast as being unduly conservative and short-term in
nature. Reference was made to the evidence of Westcoast's
policy witness, who indicated his expectation that the Company
would continue to grow and be dynamic, and would have gas to
deliver through its existing system for more than 26 years.
The Board has noted that included in Westcoast's capital
expansion forecast for 1978 and 1979 is its proposal for the
construction of mainline looping, having a capital cost of some
$80,578,000. Since the forecast was prepared, the Company's
application for a certificate under Part III of the NEB Act for
the mainline looping was denied by the Board (Westcoast
Transmission Company Limited, June 1978), with the result
that the capital forecast for 1978 and 1979 would be reduced to
some $228,861,000. The effect of this reduction in the forecast
capital expenditures would be to advance the date of crossover
regardless of whether the Company is on the flow-through or
normalized method of tax accounting.
The Board appreciates that any forecast of future capital
expansion is subject to doubt, and that a forecast going beyond
ten years is probably highly speculative. The Board accepts
Westcoast's estimate of gathering plant additions for the next
ten years as not being unreasonable, although it is aware that
the level of expenditure will depend upon the size and location
of any new natural gas discoveries, and economic conditions at
the time. As a result, the Board concludes that the occurrence
of crossover is not sufficiently uncertain to warrant the con
tinued use of the flow-through method of tax accounting for
Westcoast.
The first of the two objections focussed on the
fourth paragraph of this excerpt. It had not been
given in evidence nor had it been contended by
Westcoast or by anyone else that the crossover
point in the sense I have endeavoured to describe,
and as defined in the paragraph itself, would occur
before 1989-90. The submission was that because
of what is stated in the paragraph, the Board's
decision is not supported by the evidence and that
it is based on an erroneous finding of fact made in
a perverse or capricious manner or without regard
for the material before it.
I do not agree with the submission. While the
author of the paragraph refers to "crossover" and
defines it accurately, I think it is apparent from
the confusion in what he says that he is using
"crossover" in some different sense from that
which he defines. The crossover point, at least as it
was explained by counsel and as I have understood
it, does not depend on whether the income tax
accounting is on a flow-through or a normalized
basis. Perhaps the author was thinking of crossover
as the time when substantial amounts of income
tax would be payable by Westcoast but it is un
necessary to speculate on what he meant. It may
be accepted that what is said in the paragraph is
inaccurate and wrong in its reference to crossover.
But it does not follow that it is erroneous in its
findings, whatever they may be, with respect to
"crossover" in some other sense. Nor does it follow
that the decision of the Board is based on a finding
that "crossover", in the defined sense, will occur
sometime in 1983 or 1984.
The decision is expressed in the following terms
at page 2-35:
DECISION
On the basis of the above considerations, it is the Board's
view that it would be appropriate, in seeking to achieve just and
reasonable tolls to be charged by Westcoast, to permit the
Company to change to the normalized method of income tax
accounting and to recover normalized income taxes on a cur
rent basis in its cost of service. In this respect, the Board would
not vary the Phase I Decision.
In the preceding pages, the Board had discussed
many aspects of the proposed change including the
recommendation of the accounting profession,
Westcoast's need for the additional money, the
likelihood of crossover and the need for consisten
cy, intergenerational equity and the additional
burden likely to fall on future customers by con
tinuing the flow-through method and by reason of
the anticipated termination in 1990 of Westcoast's
export licence, the ability of the customers to pay
the increases resulting from the change to normali
zation, and the timeliness of the change and the
risk of future collectibility of income tax having
regard to eight or more points of consideration
discussed in the decision. The impugned para
graph, as I view it, is merely a part of the discus
sion leading to the Board's conclusion that cross
over, in the accepted sense, will occur, and while
the paragraph is inaccurate and confusing, and
erroneous as well if the word crossover is indeed
used in the defined sense, though I think it is not,
the finding with respect to crossover on which the
decision, as I interpret it, is based is not that
crossover will occur in 1983 or 1984 or earlier but
that it will occur. That, as it seems to me, is
apparent both from the title of the chapter, i.e.,
"The Likelihood of Crossover and the Need for
Consistency" and from the final paragraph of the
chapter which, for convenience, I repeat:
The Board appreciates that any forecast of future capital
expansion is subject to doubt, and that a forecast going beyond
ten years is probably highly speculative. The Board accepts
Westcoast's estimate of gathering plant additions for the next
ten years as not being unreasonable, although it is aware that
the level of expenditure will depend upon the size and location
of any new natural gas discoveries, and economic conditions at
the time. As a result, the Board concludes that the occurrence
of crossover is not sufficiently uncertain to warrant the con
tinued use of the flow-through method of tax accounting for
Westcoast.
In my opinion, therefore, the appellants' objec
tion on this ground should not be sustained. But I
do not think I should part with the matter without
observing, (1) that the Phase I decision, which in
this respect the review decision confirmed, was not
based on what is in the impugned paragraph with
respect to crossover and, (2) that none of the
appellants sought a review of it under section 17 of
the National Energy Board Act even though there
was an opportunity for some ten months to do so
from the time the review decision was issued until
the September 1979 decision.
The second objection based on the excerpt I
have cited from the review decision was that the
review panel breached the principles of natural
justice by considering the fact, which had occurred
and had been made known to the parties after the
Phase I decision, that an application by Westcoast
for approval of an expenditure of some $80,000,-
000 on looping of its main line had been denied by
the Board. It was said that since the review panel
had turned down requests by the appellants, or
some of them, for leave to adduce additional evi
dence to supplement the record of the Phase I
hearing and had decided to review the Phase I
decision solely on the basis of the record of that
hearing, natural justice required that before taking
into account the additional fact of the denial of
Westcoast's looping application, the parties should
have been afforded an opportunity to offer evi
dence and make representations to counter the
effect of accelerating the probable time of cross
over which might be implied from the denial of the
application.
In considering this submission, it is necessary to
bear in mind that the Board had decided in the
Phase I decision that the change to normalization
should be made, that that decision had been
reached long before the application for approval of
the $80,000,000 looping expenditure, which had
been included in Westcoast's projected capital ex
penditures, was denied, and that the appellants
had been made aware of the denial some two
weeks before the oral public hearing of their
applications for review of the Phase I decision. No
application was made either before or at that
hearing for leave to adduce evidence respecting the
effect of the denial of the looping application. In
its memorandum dealing with the application for
review, the Board said:
Certain of the applicants in the July 26 hearing requested
that the Board consider conducting a rehearing, with additional
evidence on certain aspects of the issues dealt with in Phase I of
the Westcoast Rate Hearing. It does not appear to the Board
that this additional evidence relates to matters arising subse
quent to the original Phase I hearing held in February and
March 1978. The Board has thus concluded that the applica
tions for a rehearing with additional evidence should be
dismissed.
As a result, the Board will conduct the review, pursuant to
subsection 17(1) of the National Energy Board Act based on
the record of the original Phase I hearing and the submissions
made at the hearing of July 26, 1978. For these reasons, the
Board does not consider it advisable to conduct any further
public hearings on the review of the Phase I Decision.
This may have led the appellants to think that
the tendency or effect of the denial of the looping
application to accelerate crossover would not be
considered by the review panel even though it was
known to the Board and to the parties and even
though its relevance to the question of crossover is
obvious. Had there been no subsequent proceed
ings before the Board and no further opportunity
to raise the matter with the Board or the review
panel, the objection might have been serious
enough to warrant setting aside the decision and
referring the matter back for reconsideration and
redetermination after giving the appellants an op
portunity to be heard as to the effect of the denial
of the looping application on the likelihood or
acceleration of crossover.
But that was not the end of the matter. In my
opinion, neither the Phase I decision nor the review
decision was final in the sense that it could not be
reconsidered and altered by the Board, if neces
sary. They were, in my view, no more than expres
sions of opinion on particular issues on which a
conclusion would be required for the purpose of
dealing with Westcoast's application as a whole. It
is noteworthy that the Rules and Procedures estab
lished by order PO-2-RH-2-77 of February 6,
1978, which provided for the hearing of the
application in three phases, directed only that the
hearing and argument on Phase I issues should be
conducted before the hearings and arguments on
subsequent phases. They did not direct that the
particular issues to be heard in Phase I should be
finally decided before proceeding with the hearing
of Phase II issues. Had that been directed, it might
have been arguable that the decision determined
those issues and the rights of the parties in respect
to them and that they could not be reopened
before the Board except on a review under subsec
tion 17(1). It is also noticeable that there was no
formal order made on the matters dealt with in the
Phase I decision. Moreover, while there was a
formal order directing a public hearing of the
applications for review of the Phase I decision, no
formal order was made following that hearing or
following the review itself. In particular, the result
of the review decision was not embodied in an
order purporting to determine the issues con
sidered and the rights of the parties in respect
thereto. Since what was before the Board for
determination was not a series or group of issues,
but an application for an order fixing or determin
ing just and reasonable tolls, it seems to me that
until the final decision on that application was
given and order TG-5-79 was made it was at all
times open to the appellants to call to the attention
of the Board, if it was considered to be of any
significance, that the review panel had gone
beyond its own definition of the record on which
the review was to be made and had taken into
account a fact not included in that record without
affording the appellants an opportunity to be
heard with respect to that fact, and to ask for an
opportunity to be heard with respect to it. As no
such request appears to have been made in the
ten-month period between December 1978 when
the review decision was published and September
1979, when the final decision was made and order
TG-5-79 was issued, a period in which the parties
had ample opportunity to raise the matter, there is,
in my view, no reason to believe that the appellants
were denied an opportunity to be heard on the
subject prior to the final decision.
In my view, to set aside the result of the very
lengthy proceedings before the Board on a ground
that the appellants, with ample opportunity to do
so, did not treat as being of sufficient importance
to raise before the Board, would be to bring about
a result that would be little short of grotesque.
True, B.C. Hydro forthwith brought an applica
tion under section 28 of the Federal Court Act for
a review of the Board's review decision but that
application was not prosecuted with dispatch and
in any case it did not prevent B.C. Hydro or any
other of the appellants from raising the objection
before the Board.
In my opinion, therefore, the appellants were
not denied natural justice and their objection
should not be sustained.
RATE OF RETURN
The appellants' second attack was on the rate of
return, as determined by the Board, to be earned
on Westcoast's investment in the pipeline opera
tion. The Board's finding, as to the appropriate
rate of return, is found in the following portion of
the final decision:
RATE OF RETURN BEFORE TAXES ON RATE BASE
Based on the applied-for capital structure and the Board's
findings on the cost of debt, preferred shares and common
equity and the appropriate rate for applying normalized income
taxes, the Board finds that the allowable Rate of Return before
Taxes on Rate Base is 16.94 percent. One-twelfth of this
amount, namely 1.4117 percent is the rate to be applied to the
allowable rate base (net of Deferred Income Taxes) each
month in order to determine the dollar value of the Return
before Taxes on Rate Base to be included in the allowable cost
of service.
The derivation of the allowable Rate of Return before Taxes
on Rate Base is as follows:
Cost
Corn-
Amount Ratio Cost ponent
$000 % % %
Long Term Debt 474,088 55.38 8.63 4.78
Preferred Shares 40,000 4.67 8.77 .41
Common Equity 342,011 39.95 14.25 5.69
856,099 100.00
Rate of Return after
Taxes on Rate Base 10.88
Normalized Income
Taxes (99.32% of the
cost of preferred shares
& common equity) 6.06
Rate of Return before
Taxes on Rate Base 16.94
The appellants' attack was threefold: First, it
was said that the rate of return was based on a
consideration of risk that included the risk
involved in the unregulated operations of West-
coast subsidiaries. Second, it was argued that the
14.25 figure adopted as a fair return on common
equity was too high having regard to a figure of 14
which had been set for TransCanada Pipelines
Limited and that on a market approach it should
not have been higher than 12.4 to 12.9. Third, it
was submitted that the 39.95 equity ratio was too
high for the appellant, that is to say, as I under
stood the submission, that because a higher debt
capital ratio and a correspondingly lower equity
capital ratio would produce a possible benefit to
Westcoast in lower income taxes which benefit
could be passed on to Westcoast's customers in
lower tolls, the rate of return should be based on
what the Board would consider an appropriate
ratio for Westcoast, regardless of the existing
situation.
In my opinion, none of these submissions should
be sustained. It is apparent from the decision that
the Board gave careful consideration to the risk
both of the regulated activity and of Westcoast's
operations as a whole and concluded that it was
not significantly different from that of two other
named pipeline companies both of whose opera
tions presumably had, to the knowledge of the
Board, some features in common and some not
precisely the same as those of Westcoast's opera
tion. The Board also discussed and considered
several approaches to the question of an appropri
ate rate of return as well as the varying conten
tions of Westcoast and of the intervenors as to
what would be appropriate and then considered as
well the ratio of equity to debt capital as proposed
by Westcoast and found it to be on the high side
but nevertheless acceptable.
Thereafter, the Board concluded as follows:
Having carefully weighed all of the evidence the Board
concludes that a 14.25 percent rate of return on common
equity, in relation to the applied for capital structure, is fair
and reasonable for the test period.
In my view, what the Board is here expressing is
not a finding of an existing fact but an opinion of
what would be a reasonable rate in respect of
operations which are to be carried on in the
future'. In my opinion, it was clearly within the
jurisdiction of the Board to formulate such an
opinion and it is not the function of this Court to
reweigh the evidence and substitute its own opin
ion for that of the Board. Nor is there, in my view,
any reason to think that the Board erred in law,
that it was unaware of any applicable legal princi
ple or that it misapplied or failed to apply any
appropriate legal principle in reaching its opinion.
Three subsidiary points submitted were (1), that
in adopting Westcoast's ratio of common equity
capital to debt capital, the Board erred in not
excluding both debt and equity of subsidiary com
panies rather than their debt alone, (2), that after
concluding that the equity ratio was at the upper
limit of what would be appropriate and after fixing
a 14.25% rate of return on such capital, the Board
abdicated its jurisdiction by encouraging West-
coast to change its capitalization by increasing the
debt portion and thus increase the return on the
10 Union Gas Company of Canada Limited v. Sydenham Gas
and Petroleum Company Limited and Memorial Gardens
Association (Canada) Limited v. Colwood Cemetery Company
(supra).
equity portion and, (3), that the Board erred in
fixing a "before taxes" rate of return rather than
an "after taxes" rate of return.
In my view, there is no substance in these points.
With respect to the first, the capital structure as
applied for by Westcoast and as approved by the
Board treats Westcoast's investment in subsidiar
ies as having been financed by Westcoast's own
debt, preferred shares and common equity in the
same proportions as its investment in its utility
operation. The common equity, figure of 342,011
shown in the passage I have cited earlier from the
decision, as I understand it, includes Westcoast's
issued capital and retained earnings plus West-
coast's share of the retained earnings of the sub
sidiaries. The figure thus represents the equity of
Westcoast and it is that together with the pre
ferred share capital and Westcoast's debt which
makes up the total capital of Westcoast that is
regarded as invested proportionately in the utility
and the subsidiary companies. I can see no error of
law in the Board having adopted this method of
calculation and apportionment of Westcoast's
capital investments between the utility operation
and the subsidiaries and so far from thinking the
method erroneous, I think that to include the debts
of subsidiaries would not be in accord with the
principle of the apportionment and would lead to
an incorrect result.
On the second point, there is, in my opinion, no
abdication of the jurisdiction of the Board involved
in its finding with respect to the common equity
ratio or in its encouragement of Westcoast to
change it by steps that would result in advantage
to Westcoast. Nor is there error of law involved in
the Board having fixed a "before taxes" rate of
return rather than an "after taxes" rate of return.
RATE BASE
The Board's decision on rate base was attacked
by B.C. Hydro and by BCPC. On behalf of B.C.
Hydro, it was submitted, first, that the Board
abdicated its jurisdiction to fix the rate base by
including in its decision and order a provision that
the rate base at December 31, 1978, as determined
by the Board, would be increased by "subsequent
capital expenditures on construction approved by
the Board under Part III of the National Energy
Board Act which have been recorded in the plant
account set out in Schedule 'D' to the National
Energy Board Gas Pipe Line Uniform Accounting
Regulations". It was said that this left it to West-
coast to increase the rate base by whatever it
expends for construction and that the users were
not given any right to review the expenditures that
might be added to the rate base under this
provision.
No authority was cited for the view that this
amounted to an error of law on the part of the
Board or to an abdication of its jurisdiction and I
am of the opinion that it cannot be so regarded.
Nothing in the National Energy Board Act
requires the Board to fix a rate base or -to fix a rate
base by any particular method. What the statute
provides is that tolls are to be just and reasonable
and that the Board may make orders with respect
to all matters relating to the tolls. It also provides
that the Board may disallow any tariff or portion
thereof that it considers to be contrary to the Act
or to an order of the Board and to require the
substitution of other tariffs in lieu thereof. That
power would obviously be exercisable whenever the
Board considered a tariff to be contrary to the Act
in that the tolls listed in it were not just and
reasonable.
In the present situation, the rate base to be
included, in the method which the Board con
sidered to be appropriate for the regulation of
Westcoast's tolls, is no doubt "a matter relating to
tolls" in respect of which the Board may make
orders under section 50 but, as I read it, the
statute does not require the Board to fix a rate
base in any particular way or to approve the
amount of every item to be added to the rate base
before it is so added. In the system for establishing
Westcoast's tolls, adopted by the Board, the
manner in which the rate base is to be calculated
from month to month, as I see it, was a matter for
the Board to decide". The fact that the method
includes provision for the addition to the rate base
of additional capital expenditures even if not sub
ject to prior scrutiny and approval of the Board,
does not in my opinion, amount to error of law or
abdication of jurisdiction on the part of the Board.
Moreover, it does not follow that the adoption of
such a method results in tolls that are not just and
reasonable.
Other objections on behalf of B.C. Hydro were
that the order permitted the inclusion in rate base
of amounts in respect of the cost of (1), plant that
is not useful to serve customers in that it is not yet
in use or had become obsolete, (2), items acquired
for use in the construction of pipeline but not yet
put to use for that purpose, and (3), retired and
abandoned plant. The basis of these objections, as
I understood it, was that the amounts should not
be included because they are not used or useful to
provide service to utility customers and that it is
unjust to them and unreasonable to include such
items in the rate base upon which tolls that such
customers must pay are to be fixed.
The question of what items should be included
in a rate base is one for the judgment of the Board.
In reaching that judgment, the Board is without
doubt entitled to use as a guide, if it sees fit, the
test of the present use or usefulness of the items
sought to be included in providing utility service.
But there is no rule of law that such a test must be
used or followed or that it is the only principle that
can be applied. Nor does it follow that the use of
" Compare City of Edmonton v. Northwestern Utilities
Limited [1961] S.C.R. 392, per Locke J. at page 406:
With great respect, however, the proposed order would be
made in an attempt to ensure that the utility should from
year to year be enabled to realize, as nearly as may be, the
fair return mentioned in that subsection and to comply with
the Board's duty to permit this to be done. How this should
be accomplished, when the prospective outlay for gas pur
chases was impossible to determine in advance with reason
able certainty, was an administrative matter for the Board to
determine, in my opinion. This, it would appear, it proposed
to do in a practical manner which would, in its judgment, be
fair alike to the utility and the consumer.
other principles in determining a rate base will
result in tolls that are not just and reasonable.
There is accordingly, in my opinion, no basis for
regarding these objections as raising questions of
law or jurisdiction on which the Court should or
might properly intervene ' 2 .
The attack on rate base mounted by BCPC was
directed at the decision of the Board to permit
Westcoast to include as an element of working
capital Westcoast's investment in line pack gas,
that is to say, gas that is in the Westcoast system.
It was said that the decision is based on a misinter
pretation of the contract under which BCPC sup
plies gas to Westcoast and is contrary to section 52
of the National Energy Board Act because it
permits Westcoast to earn a return where no
proper investment has been made, and therefore,
the tolls cannot be just and reasonable.
The contract provided as follows in clauses 9,
10, 11 and 16:
9. Sale of Gas: The Corporation agrees to sell to Westcoast and
Westcoast agrees to purchase from the Corporation, those
volumes of natural gas required by Westcoast to meet the
maximum contractual obligations as presently defined and
undertaken in the sales agreements identified in Schedule B
hereto. For this purpose the gas available pursuant to the
Contracts is committed to Westcoast. To the extent that the
volumes of natural, gas required by Westcoast to meet the
maximum contractual obligations in its said sales agreements
with its British Columbia customers and as presently licensed
for export to its United States customer cannot be supplied by
gas available pursuant to the Contracts, the Corporation will
acquire gas to supplement such volumes and will commit the
same to Westcoast but nothing contained herein shall obligate
the Corporation to supply gas to make up any shortfall occur
ring in the supply from the Beaver River and Pointed Mountain
fields as a result of the conditions presently claimed to consti
tute a force majeure in those fields.
10. Gathering, Processing and By-Products: Westcoast will
gather and process the volumes of natural gas purchased by the
12 See Northwestern Utilities, Limited v. The City of
Edmonton 11929] S.C.R. 186, where Lamont J. said at page
196:
The items which should be included in the rate base cannot,
in my opinion, be considered a question of jurisdiction or of
law.
Corporation to enable it to meet its commitments to Westcoast
pursuant to paragraph 9 hereof. The Corporation will sell all
by-products extracted from such gas to Westcoast at no cost
and Westcoast will credit its cost of service with all revenues
received or receivable from the sale of by-products; provided
that the Corporation may terminate its sale to Westcoast of any
such by-product on or after the date on which Westcoast's
existing agreements for sale of such by-product terminate
without prejudice to the Corporation's right to call upon West-
coast to continue to gather and process such gas.
11. Price for Gas: The price of natural gas purchased from the
Corporation by Westcoast pursuant hereto shall be an amount
of money equal to the gross revenue received by Westcoast on
the resale thereof less the total cost of service of its utility
system operation (determined in accordance with paragraph 12
hereof) for the month such resale takes place.
16. Payment for Gas: Westcoast will pay the Corporation for
all gas purchased by it from the Corporation at the rates herein
set out within twenty-five (25) days after the end of the
calendar month during which such gas was delivered to
Westcoast.
On November 1, 1973, when the contract came
into effect, Westcoast, as I understand it, had an
investment in line pack gas amounting to some
$320,000. Westcoast owned that gas. It represent
ed Westcoast's inventory of gas at that time. That
gas would have been delivered to customers on and
after November 1, 1973, while new gas supplied by
BCPC tinder the contract came into the system to
replace it. Under clause 16, Westcoast became
liable to pay for the new gas by the 25th of the
following month.
The accounting system employed by Westcoast
to deal with line pack gas, as explained by the
witness, Williams, and as I understand it, is to add
to its cost of service for each month the value of
the line pack that it had on hand at the beginning
of that month and which would have passed out of
the pipeline system to customers in the first days
of that month, and to deduct from the total cost of
service the value of line pack on hand at the end of
that month. In the period since November 1, 1973,
as the price of gas and the volume of line pack
increased, the value of the line pack increased. At
the end of 1978, it amounted to some $4,462,000.
In its decision, the Board found:
The Board recognizes that the Applicant had an investment
in line pack at the inception of the BCPC Agreement and has
purchased line pack to meet its contractual obligations under
clause 9 of that Agreement. It also notes that there is an
allowance for working capital in the agreement and that no
transportation agreement exists between the Applicant and the
BCPC for the carriage of gas.
Having considered the evidence and argument, the Board
accepts the inclusion in working capital of an allowance for
Line Pack Gas. The current method used by Westcoast is also
acceptable to the Board. The Applicant should continue the
practice of crediting or debiting cost of service with any gains
or losses in the value of Line Pack Gas caused by the monthly
revaluation process.
Having regard to what is in clause 9 of the
agreement, the first sentence of this excerpt would,
I think, be more easily understood if it read:
The Board recognizes that the applicant had an investment
in line pack at the inception of the BCPC agreement and has
purchased line pack under clause 9 of that agreement to meet
its contractual obligations.
So read, in my opinion, the Board's finding is
consistent with what is being done pursuant to the
contract, and, in my view, what is being done by
Westcoast is consistent both with Westcoast's
ownership of the line pack on hand on November
1, 1973 and of that line pack gas which has since
replaced it and with what is required by the terms
of the contract, in particular, clause 16. Under
that clause, what is to be paid for on the 25th of
each month is the gas delivered to Westcoast in
the previous month and that plainly includes the
line pack gas on hand at the end of that month. As
I see it, the line pack gas on hand at the end of the
month is paid for by the deduction of its value
from the cost of service. The disappearance of that
gas in the following month is part of the cost of
service in that month and the value of the gas so
disappearing is properly added to the cost of ser
vice in that month.
Counsel for BCPC argued that Westcoast was
not obliged by the contract to purchase line pack,
that all it was ever required to pay for was gas sold
to customers, that the risk of loss of gas while in
the Westcoast system was borne by BCPC, that
under the Sale of Goods Act the gas sold to
Westcoast is not ascertained until the gas is deliv
ered to Westcoast's customers, that the contract
does not provide for sale of line pack gas by BCPC
to Westcoast and that title to the gas while in the
Westcoast system is in BCPC.
I do not think any of these arguments, even if
correct, can prevail against the effect of the con
tractual requirement of clause 16 that Westcoast
pay for all the gas by the 25th of the month
following the calendar month during which it was
delivered to Westcoast. Even if the contract does
not specifically provide for the purchase by West-
coast of line pack gas, obviously it was necessary
for Westcoast to have gas in its pipeline in order to
operate the system and in the nature of the opera
tion it was necessary to take delivery of gas some
days before it could be sold to Westcoast custom
ers. Further, whether or not, under the contract
the risk of loss of gas while in the pipeline rests on
BCPC, which, as I see it, is true only in a sense, it
seems to me to be clear that the gas which West-
coast agrees to purchase under clause 9 of the
contract is ascertained and appropriated to the
contract when it is received into the Westcoast
system and that under subsection 23(6) of the Sale
of Goods Act 13 title to the gas passes to Westcoast
at that time.
In his submission that title to line pack gas does
not pass to Westcoast when the gas is received into
its system, counsel for BCPC stressed the fact that
clause 10 provides that BCPC will sell to West-
coast all by-products extracted from the gas gath
ered by Westcoast. The clause appears to me to be
intended to establish a basis for accounting for
receipts from the sale by Westcoast of the
by-products. It specifically provides that West-
coast's receipts from the sale of by-products are to
be credited to the cost of service and thus to
BCPC. It does not purport to deal with or fix the
time of sale or of the passing of title to the
13 R.S.B.C. 1979, c. 370:
23....
(6) Where there is a contract for the sale of unascer-
tained or future goods by description, and goods of that
description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the
assent of the buyer, or by the buyer with the assent of the
seller, the property in the goods thereupon passes to the
buyer. The assent may be express or implied, and may be
given either before or after the appropriation is made.
by-products. But even if its effect is to fix the time
of their extraction as the time of sale and transfer
of title to them, it does not appear to me to follow
that the title to the gas from which the
by-products are recovered does not pass to West-
coast under the contract at the time of the recep
tion of the gas into the Westcoast system.
The view that title to the gas passes to West-
coast at the time of its reception into the pipeline
system, appears to me to gain support from the
fact that under the contract gas entering the West-
coast system is neither processed nor transported
for a fee or toll to be paid by BCPC, and from the
fact that Westcoast does not act as a carrier for
BCPC. Moreover, it is not inconsistent with the
fact that the gas need not be paid for until the
25th of the month following its delivery to
Westcoast.
Accordingly, and particularly in view of what is
required by clause 16, I can see no error of law or
otherwise in the Board's conclusion that Westcoast
has an investment in its line pack gas and that it is
proper to include that investment in Westcoast's
rate base. The method of computing it is, I think,
an administrative matter for the Board to deter
mine and there was, in my view, no error of law
involved in its having approved the method fol
lowed by Westcoast. Once that position is reached,
it seems to me that the second branch of BCPC's
submission, based as it is on the contention that no
proper investment in line pack gas had been made
by Westcoast and that therefore the rates and tolls
could not be just and reasonable, must also fail.
DEPRECIATION
The principal issue with respect to the Board's
decision on the subject of depreciation was put
forward by BCPC in its memorandum of argu
ment as:
Whether the Board erred in its Final Decision insofar as it
allowed Westcoast to accelerate depreciation now so that it
could charge less depreciation at a future date, in that:
(i) such a decision unjustly discriminates against current
customers; and
(ii) the decision was based upon an irrelevant consideration,
and failed to take into account a relevant consideration.
The irrelevant consideration referred to was the
level of depreciation at some future time; the
relevant consideration was the matching principle
of costs and revenues.
The Westcoast pipeline system is used to serve
both export and B.C. customers. At the time of the
hearing, design capacity was used to the extent of
approximately 60%, to serve the export customer,
and 40% to serve B.C. customers. Westcoast's
licence to continue exporting gas was not, however,
indefinite and the Board considered that it was not
reasonable to assume that the existing licence
would be renewed. The Board found:
With the expiration of Licence GL-41 on 31 October 1989, it
is reasonable to assume that, at that time, there will be a
substantial reduction in the pipeline throughput, but continuing
growth in the domestic market will gradually use up more and
more of the excess capacity. In these circumstances, the Board
believes that it would be appropriate to correlate depreciation
costs with pipeline utilization over the remaining service life of
the asset. If more depreciation is charged currently when
Westcoast's pipeline capacity is fully used, then less deprecia
tion will be required to be charged after the expiration of
Licence No. GL-41, when the capacity used is expected to be
substantially less.
The Board has approved straight-line depreciation rates for
transmission plant based on an estimated service life for each
class of transmission plant and on the Applicant's forecast of a
high level of pipeline use during the remaining life of Licence
No. GL-41, followed by a drop in use and then continued
increase as domestic markets grow. Based on all of the evidence
adduced the Board finds that the rates of depreciation for
Westcoast's main transmission plant to be used when new tolls
come into effect should be 3.33 percent for Mains (NEB
Account Numbers 461 to 465) and 5.0 percent for Compressors
(NEB Account Numbers 466 and 467).
While the Board in this passage refers to the
fact that if more depreciation is charged currently
when Westcoast's pipeline capacity is fully used,
less depreciation will be required later, and counsel
for BCPC focussed on this part of the passage, I
do not think it indicates that the Board was per
mitting unjust discrimination against present day
customers to the advantage of future customers.
What the Board appears to me to be saying is that
in view of the expiry date of the export licence, it
believes that it would be appropriate to correlate
depreciation with pipeline use over its remaining
life and that as it was to be expected that use
would decline sharply with the termination of the
export licence more depreciation should be
charged in the period of full use prior to the
expiration of the export licence so that following
its expiry, the remaining customers would not be
required to bear depreciation charges dispropor
tionate to the use then being made of the pipeline.
In my view, this was eminently a matter for the
Board.
I see in its finding no unjust discrimination
against present day customers in favour of future
customers and I think it was plainly open to the
Board to take into account in fixing depreciation
rates the use that could be expected to be made of
the pipeline during the remainder of its expected
life and to require that the depreciation to be
charged be related to the use that could be expect
ed to be made of it during different periods in the
remainder of its life. In reaching the conclusion
that depreciation should be correlated to expected
use, the interests of present and future customers
are plainly relevant and it does not appear to me to
be unjust to the present day customer to require
him to contribute to depreciation based on the
extent of the use being made of the pipeline
capacity.
Counsel relied on what was referred to as the
"matching principle" under which, as I understand
it, the tolls to be charged to present day customers
must not exceed the present day costs of providing
the service, but I do not think that the principle,
even if it could be considered to be a principle of
law, is offended by depreciation charges being
based on the anticipated use to be made of the
asset to serve the present day customers in relation
to anticipated use of the assets in some foreseeable
future period.
It was also submitted on behalf of Cominco Ltd.
et al. that the Board erred in law in ordering or
permitting Westcoast to increase the rates of
depreciation in respect of the so-called Beaver
River/Pointed Mountain Line. It was said that
prior to the Phase I decision, Westcoast depreciat
ed the various plant components of this portion of
its system at rates of 3.0% per annum and that in
permitting an increase to 6.0% or 7.0% the Board
erred in law as that would indicate that the re
maining life of the assets was 14 to 16 years while
the evidence was that the expected life was much
longer and well in excess of 20 years.
I find no merit in this position. There was
evidence that the gas reserves available for trans
mission in this part of the system at the end of the
year 1976 amounted to 222.8 Bcf giving an
estimated 5.7 years supply at the production rate
achieved in 1976. Other evidence suggested the
reserves were 369 Bcf at that time. There was also
evidence of a contract made in 1978 under which
Westcoast might acquire some 316 Bcf of addi
tional gas which might serve to increase the pro
jected period of 5.7 years in which the system
might be expected to continue to be useful. There
is, in my view, no reason to believe that the Board
was not aware of this evidence and of its implica
tions for the future use of the system. It was for
the Board to assess those implications and their
extent and importance as well as the reliability of
the inferences to be drawn from such evidence and
it was for the Board to decide what effect should
be given to it in its estimate of what would be
appropriate depreciation rates for the assets in
question. In my opinion, no error of law or juris
diction was involved in its estimate.
LOOPING
This item refers to the allocation made by the
Board of cost of service charges between BCPC,
which supplies all the B.C. gas to Westcoast, and
the Alberta, Yukon and Northwest Territories
producers. All of the gas supplied by the Alberta,
Yukon and Northwest Territories producers is
considered to be exported to the U.S. along with a
considerable portion of that produced in B.C.
The issue raised by BCPC is concerned with the
costs pertaining to the looping of a section of the
main transmission system for the purpose of
increasing the carrying capacity of the line in
order to carry gas which Westcoast had arranged
to purchase from Alberta producers. The evidence
indicates that the line without the loop was cap
able of carrying all the B.C. gas to be carried. In
practice, however, B.C. gas as well as other gas, is
carried by the loop.
The issue is stated as follows in BCPC's memo
randum of argument:
The Board in its Final Decision erred in law insofar as it
permitted Westcoast to include in the cost of service chargeable
to B.C.P.C. a portion of:
(a) the depreciation in respect of,
(b) the return on capital invested in, and
(c) the operating and maintenance expense of
the Fort St. John loop because such a toll:
(a) cannot be just and reasonable and is, therefore, contrary
to Section 52 of the National Energy Board Act, and
(b) constitutes unjust discrimination, contrary to Section 55
of the National Energy Board Act.
In considering this objection, it is necessary to
bear in mind that it is not the function of the
Court to substitute views of its own for those of the
Board but to consider whether what the Board has
done is justified on the evidence and not contrary
to law. As I view it, what the Board had to
consider was a proper basis for allocation of costs
between B.C. and other gas in a section of the
main transmission line. There may be a number of
bases for doing this, any one of which might be
more or less appropriate. But for reasons which
were discussed in the decision, the Board, as I
understand it, adopted a method proposed by
Westcoast in which it rolled in all the costs of each
of the sections of the line, and allocated them on a
basis which takes into account inter alia the extent
of use of the section of the system in the transmis
sion of B.C. and other gas. With respect to the
particular issue, it is well to remember that the
looping in question is in a main transmission sec
tion of the system, not in a gathering section.
I can see no reason to think that it is contrary to
law or that it results in injustice or unjust discrimi
nation for the Board to treat the costs of the whole
section as referable to the whole of the gas trans
mitted through it. Plainly, the B.C. gas shares the
benefit from the availability of the increased trans
mission capacity resulting from the looping and
from not being obliged to share the former trans
mission capacity with the Alberta gas. It appears
to me that having regard to the Westcoast utility
undertaking as a whole and to the function and
authority of the Board, there can be no priority
right for BCPC to the use of the older portion of
the section for the transmission of its gas over
Alberta gas. If it were so, there would be
discrimination.
In my opinion, therefore, this objection as well
fails.
INTERESTED PARTY STATUS
Cominco Ltd. et al. were parties who, pursuant
to Board order RH-2-77, intervened in the pro
ceedings before the Board on Westcoast's applica
tion. The order provided inter alia for the publica
tion of notice of the hearing of the application and
that "any person" intending to oppose the applica
tion should file with the Secretary of the Board
copies of a written statement containing his reply
or submission. These parties were recognized as
intervenors and participated in the proceedings.
However, in the final order TG-5-79, they were
not included among the parties who were accorded
"interested party status" in matters related to tolls
subsequent to the hearing called by order RH-2-
77. On their behalf, it was submitted that the
Board erred in law and misconceived or exceeded
its jurisdiction in denying them status as interested
parties in matters related to Westcoast's tolls sub
sequent to the hearing.
The part of order TG-5-79 in question is para
graph 1 which declares that:
1. Pursuant to sections 11 and 50 of the National Energy Board
Act, the Board's method of regulating the tolls to be charged
and received by Westcoast and the tariff to be filed by West-
coast in accordance with this Order, shall be as set forth in
Schedule A attached to and forming part of this Order.
Schedule A outlines a method for regulating the
tolls of Westcoast on a monthly basis and confers
on "interested parties" certain rights to receive
and obtain information and to file with the Board
representations with respect to Westcoast's budget.
Paragraph 2 provides:
Interested Parties
2. The Attorney General of British ,Columbia, the British
Columbia Petroleum Corporation ("BCPC"), groups represent
ing out-of-province producers, and the customers of Westcoast
will be granted interested party status in all matters related to
tolls subsequent to the hearing called by the Board's Order No.
RH-2-77.
It is to be observed that while this definition
does not include Cominco Ltd. et al. among those
to whom interested party status is granted, such
status has not necessarily been denied to them. As
it seems to me, there is nothing in the order which
prevents them from applying to the Board for
recognition as interested parties for the purposes of
Schedule A to order TG-5-79.
Next, the only proceeding before the Court
which Cominco Ltd. et al. have brought against
the final decision, which incorporates order TG-5-
79, is an application under section 28 of the Fed
eral Court Act. As there is provision in section 18
of the National Energy Board Act for an appeal
from such an order on a question of law or juris
diction, in my opinion, section 29 14 of the Federal
Court Act applies to prevent a review of the order
under section 28 on grounds of error of law or
jurisdiction as put forward on behalf of these
parties.
14 29. Notwithstanding sections 18 and 28, where provision is
expressly made by an Act of the Parliament of Canada for an
appeal as such to the Court, to the Supreme Court, to the
Governor in Council or to the Treasury Board from a decision
or order of a federal board, commission or other tribunal made
by or in the course of proceedings before that board, commis
sion or tribunal, that decision or order is not, to the extent that
it may be so appealed, subject to review or to be restrained,
prohibited, removed, set aside or otherwise dealt with, except to
the extent and in the manner provided for in that Act.
That, in my view, is sufficient to dispose of the
objection but, in any event, I am of the opinion
that it is not sustainable. Counsel referred to some
observations of Lord Macmillan in Canadian
Pacific Railway Company v. Toronto Transporta
tion Commission 15 , on the meaning of persons
"interested or affected by such order" in section 39
of the Railway Act and to the judgment of. the
Appellate Division of the Supreme Court of Alber-
ta in Re Consumers' Gas Co. and Public Utilities
Board 16 , on the meaning of "interested party" in
section 30 of the Alberta Gas Trunk Line Com
pany Act, but in my view, these cases have no
application to the present situation and afford no
support for counsel's submission. Here there is no
statutory wording to be interpreted and we were
not referred to, nor have I found, any applicable
rule of procedure which would confer on Cominco
Ltd. et al. or on anyone, the right to status as
interested parties under the Board's order. These
parties have, no doubt, an interest, albeit a more
indirect one than that of the parties to whom
interested party status was expressly accorded, and
they may have a right from time to time to com
plain and to apply to the Board for relief against
what they may regard as unjust or unreasonable
tolls charged by Westcoast but that, in my view, is
quite a different right from a right to require the
Board to confer on them "interested party" status
under its order.
The objection accordingly fails.
For the foregoing reasons, in my opinion, the
appeals and the applications under section 28 of
the Federal Court Act brought by the appellant
British Columbia Hydro and Power Authority and
those brought by British Columbia Petroleum Cor
poration, on files A-71-80(A-70-80), A-72-80(A-
623-79) and A-73-80(A-292-78) and by Cominco
Ltd., Consumers Glass Company, Limited, Dom -
glas Ltd. and Hiram Walker & Sons Ltd. on files
A-75-80 and A-626-79 fail and should be
dismissed.
* * *
PRATTE J. concurred.
* * *
URIE J. concurred.
'5 [1930] A.C. 686 at p. 697.
16 (1971) 18 D.L.R. (3d) 749 at p. 760.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.