Pipeline Tolls and Tariffs: A Compendium of Terms

The following provides a general explanation of the terms and expressions commonly used in the course of hearings under Part IV of the National Energy Board Act concerning tolls and tariff matters and in Reasons for Decision documents. The objective is to promote a better understanding of the National Energy Board's proceedings by the public. Accordingly, certain explanations have been deliberately simplified. They neither replace nor interpret terms defined in the Act or regulations.

Terms Are Listed Alphabetically

Allowance for Funds Used During Construction (AFUDC)

The cost of funds used during the period of construction when a utility undertakes to construct its own facilities. The amount of the allowance is included in the total capitalized cost of the asset and is depreciated over the life of the asset after it is placed in service. AFUDC is similar to "Interest During Construction" for unregulated industries except that in determining AFUDC, the cost of equity capital is normally taken into account.

Amortization

A systematic writing-off of an amount over a period of time.

ATWACC

After-Tax Weighted-Average Cost of Capital. The after-tax weighted average of the required returns for each source of capital (i.e. common equity, debt, preferred equity).

ATWACC Methodology

A method for determining the appropriate return, based on the premise that the overall return should be the key element in determining a fair rate of return and should be comparable to the overall after-tax return of other companies of similar risk.

Average Service Life (ASL) Depreciation

A group method of depreciation whereby the rate of annual depreciation is based on the average service life or average remaining service life of the group. This rate is applied to the surviving balances of the asset group's costs.

Backhaul

A "paper transport" of natural gas by displacement against the flow on a single pipeline so that the natural gas is notionally delivered upstream of the point at which it enters the system.

Base Year or Base Period

A historical period (usually 12 consecutive months), for which actual data is available. It is used as the starting point in determining tolls for the future test year. (See Test Year)

Basis Point

One-hundredth of a percentage point. It is used in reference to interest rates or rates of return on equity.

Beta or Beta Factor

A measure of the systematic risk of a security. It estimates the extent to which a stock's price fluctuates more or less than the market portfolio. A stock with a beta greater than one fluctuates more than the market average and is therefore considered to be of higher risk and may generate a higher return than the market average.

Billing Determinants

Calculated values used in toll design to allocate a pipeline company's revenue requirement between tollpayers. Billing determinants generally account for both volume and distance.

Bond

A debt security issued by a borrower that obligates the issuer to make specified payments to the holder over an established period.

Bond Rating

A quality rating assigned by credit rating agencies as an indication of creditworthiness.

Book Value

The amount at which an item appears in the books of account and financial statements.

Business Risk

The risk attributed to the nature of a particular business activity (as distinct from financial risk). For pipelines, it typically includes supply, market, regulatory, competitive and operating risks.

Capital

The total funds invested in a company by lenders (debt capital) and by owners (equity capital).

Capital Asset Pricing Model (CAPM)

A method used to estimate the cost of equity capital by comparing the return and risk characteristics of an individual company's shares to the average for all shares in the market. (See Comparable Earnings Test, Discounted Cash Flow Test and Equity Risk Premium)

Capital Attraction Standard

One of the Fair Return standards which requires that the return of a regulated utility permit incremental capital to be attracted to the enterprise on reasonable terms and conditions. (See Comparable Investment Standard, Fair Return Standard and Financial Integrity Standard)

Capital Cost Allowance (CCA)

An income tax deduction allowed for certain fixed assets used in operating a business. CCA is similar in nature to depreciation used for accounting purposes; however, the rates allowed are prescribed by income tax regulations and are not intended to reflect an asset's useful service life.

Capital Structure

The way in which a business is financed. It is generally expressed as a percentage breakdown of the types of capital employed. For example, a utility could have a capital structure of 50% debt, 15% preferred shares and 35% common equity.

Capitalization

Capital structure expressed in dollar amounts.

Capitalized Overhead or Cost of Overhead During Construction

The amount of a company's overhead expenditures allocated to the cost of acquisition or construction of an asset. The total cost of the asset, including capitalized overhead and AFUDC, is depreciated over the asset's life.

Cash Working Capital

The amount of cash needed to allow for the time lag between the payment of ongoing operating expenses and the collection of corresponding revenues. (See Lead-Lag Study and Working Capital).

Commodity Charge

A charge applied only to quantities actually transported. Under a Straight Fixed Variable Toll Design it includes only the variable costs of a pipeline. (See Demand Charge and Straight Fixed Variable Toll Design)

Common Carrier

A pipeline company that is obligated to ship all product offered to it for transmission, without contract and usually by monthly nominations. In the event that capacity is not available to meet all requests, services are prorated amongst users. (See Contract Carrier)

Common Equity

The book value of a company's common shares outstanding including retained earnings or net of accumulated deficits.

Common Equity Ratio

The ratio of the common equity to the total capital of a company.

Comparable Earnings Test

A method used to estimate the cost of equity capital by comparing the returns earned by companies with similar investment risk to that of the regulated utility's operations. (See Capital Asset Pricing Model, Discounted Cash Flow Model, and Equity Risk Premium)

Comparable Investment Standard

One of the Fair Return standards which requires that the return of a regulated utility be comparable to the return available from the application of the invested capital to other enterprises of like risk. (See Capital Attraction Standard, Fair Return Standard and Financial Integrity Standard)

Competitive Risk

The business risk that results from competition for customers at both the supply and market ends of a pipeline system.

Compliance Audit

An audit undertaken to determine whether a company is complying with legal or contractual provisions relating to its accounts, or with rules, regulations, and prescribed procedures. In the case of a company regulated by the Board, a compliance audit would primarily include the examination of the company's accounts to ascertain whether the company is complying with the Uniform Accounting Regulations and any orders issued by the Board.

Contract Carrier

A pipeline company that provides transportation for remuneration to customers who have contracted for the service over a specific period. (See Common Carrier)

Contract Demand

Quantity of natural gas specified in a firm service agreement that a pipeline is obligated to be able to deliver on any day at a delivery point or delivery area.

Cost of Preferred Equity Capital

The effective yield on a company's preferred shares.

Cost of Service

The total cost of providing service, including operating and maintenance expenses, depreciation, amortization, taxes, and return on rate base. Generally, the cost of service of a pipeline is the same as its revenue requirement. (See Revenue Requirement)

Cross-subsidization

The provision of financial support to a company's non-regulated operations by its regulated operations, or vice versa, or between two regulated subsidiaries.

Daily Contract Quantity (DCQ)

The maximum amount of energy per day that a customer can move under its transportation contract with a pipeline.

Debenture

A long-term corporate debt obligation that is not secured by any specific asset of the company, but rather is based on the company's general creditworthiness.

Deemed Capital Structure

A notional capital structure used for toll-making purposes that may differ from a company's actual capital structure.

Deferral Account

For regulatory purposes, generally, a type of account used to record revenues and expenses held in abeyance for future disposition by a regulator.

Deferred Income Taxes

The amount by which income taxes determined on the basis of accounting income exceeds income taxes payable. In a utility, this amount results primarily when capital cost allowance used in calculating taxable income is larger than corresponding depreciation used in calculating accounting income. Deferred income taxes are carried on the balance sheet of a company as a non-current liability. (See Normalized Income Taxes, Flow-through Income Taxes, and Capital Cost Allowance)

Delivery Area

A geographic area within a toll zone that is comprised of multiple delivery points where shippers receive delivery of their natural gas.

Delivery Point

The point specified in a service agreement where a pipeline delivers gas to or for the account of a shipper.

Demand Charge

A monthly charge which covers the fixed costs of a pipeline under a Straight Fixed Variable Toll Design. The demand charge is based on the daily contracted quantity and is payable regardless of quantities transported. (See Straight Fixed Variable Toll Design)

Depreciation

A non-cash expense charged against earnings to write off the cost of an asset during its estimated useful life.

Dilution of Equity

The reduction in book value per share caused by the issuance of additional shares at less than the book value per share of existing shares.

Discounted Cash Flow (DCF) Model

A method used for estimating the cost of common equity based on the expected dividend yield of the company's shares and the expected future dividend growth rate. (See Capital Asset Pricing Model, Comparable Earnings Testand Equity Risk Premium)

Embedded Cost of Debt

The weighted-average historical cost of long-term debt outstanding.

Equity Capital

The total of preferred and common equity. (See Common Equity and Preferred Equity)

Equity Risk Premium of Common Shares

The spread reflecting the difference in risk associated with holding common equity as opposed to debt or preferred shares. The cost of common equity capital is usually greater than the cost of debt or preferred shares.

Equity Risk Premium (ERP) Model

Family of methods used for estimating the cost of common equity which includes the Capital Asset Pricing Model. It is based on the premise that an investment in common equity carries greater risk than an investment in either debt or preferred shares and, therefore, requires a higher return, or premium, over that required for bonds or preferred shares. (See Capital Asset Pricing Model, Comparable Earnings Test and Discounted Cash Flow Test)

Extraordinary Retirement

A retirement of a depreciable asset that results from circumstances not foreseen when determining the asset's service life for depreciation purposes.

Fair Return Standard

A three-part standard comprised of the comparable investment, financial integrity and capital attraction standards.

FFO Interest Coverage

Funds from Operations (FFO) over gross interest incurred before subtracting capitalized interest and interest income. (See Funds from Operationsand Interest Coverage Ratio)

FFO to Total Debt Ratio

Funds from Operations (FFO) over long-term debt (including amount for operating lease debt equivalent) plus current maturities, commercial paper and other short-term borrowings.

Financial Integrity Standard

One of the Fair Return standards that requires that the return of a regulated utility enable the financial integrity of the regulated enterprise to be maintained. (See Capital Attraction Standard, Comparable Investment Standard and Fair Return Standard)

Financial Leverage

The proportion of debt in relation to equity in a utility's capital structure. The higher the long-term debt, the greater the financial leverage. Shareholders benefit from financial leverage to the extent that return on the borrowed money exceeds the interest costs and that shares rise in market value. Leverage also means required interest and principal payments and thus, ultimately, the risk of default (higher financial risk).

Financial Risk

The risk inherent in a company's capital structure. Financial risk increases as the proportion of debt increases in relation to shareholders' equity.

Firm Transportation (FT) Service

A firm (non-interruptible) gas transportation service which provides for the delivery of gas up to a specific maximum daily quantity. The shipper must pay a monthly demand charge regardless of the quantities transported and a commodity charge for the quantities actually transported. (See Demand Charge and Commodity Charge)

Fixed Assets

Assets such as land, building, equipment, and machinery which are acquired for use in the operation of a business and are not intended for resale.

Fixed Costs

Costs that remain, at least in the short run, relatively constant and do not vary with throughput. Examples are interest expense, depreciation charges, and property taxes. (See Variable Costs)

Fixed Toll

A toll which does not vary with changes in throughput or expense variances. Fixed tolls are usually based on forecasts of costs and throughput for a test year. (See Variable Cost-of-Service Toll)

Flow-Through Income Tax Methodology

A method of estimating income taxes payable for a period based on taxable income as opposed to accounting income.

Focussed Audit

An audit restricted to a particular management function or operation. (See Management Audit)

Full-time Equivalent (FTE)

The equivalent of one full-time employee position in terms of the number of hours worked during a year. An FTE can be made up of allocations from different employee positions.

Funds From Operations (FFO)

Net income from continuing operations plus depreciation, amortization, deferred income taxes and non-cash items, and interest expense. (See FFO Interest Coverage)

Gross Plant

The original cost of fixed assets before deducting accumulated depreciation. (See Net Plant)

Group 1 Company

In general, Group 1 companies are those with more extensive systems and as such are subject to a greater degree of regulatory oversight than Group 2 companies.

Group 2 Company

Group 2 companies tend to be smaller, have fewer shippers and are subject to a lighter degree of regulatory oversight since they are regulated on a complaints basis.

Incentive Regulation

Alternatives or modification to cost of service regulation where a utility's profit is at least partly dependent on efficiency gains.

Incremental Tolls

Tolls resulting from a toll design methodology that assigns capital and operating costs of new facilities to their own cost pool, separate from the costs of the existing facilities. Tolls are designed so existing shippers pay a toll reflecting the cost of service associated with existing facilities; "new" shippers pay a toll reflecting the cost of service associated with new facilities.

Incremental Transportation Cost

The variable cost of transporting an additional unit of throughput. (See Fixed Costs and Variable Costs)

Interest Coverage Ratio

The number of times that net income for a given year, before interest expense and income taxes, covers the annual interest expense. This ratio is one measure of the creditworthiness of a company.

Intergenerational Inequity

Inequity occurring when a generation of customers does not pay, at the expense of another generation, its fair share of the costs incurred by the utility in providing service.

Interim Toll Order

An order authorizing a company to charge specified tolls until a final order is made. At the discretion of the Board, revised tolls may be made applicable from the date the interim tolls became effective. In such case, any difference between the final and interim tolls during that interim period are refunded to, or recovered from, shippers.

Light-handed Regulation

Regulatory approval of tolls resulting from arm's length negotiations, rather than calculated on a cost of service basis, and subject to challenge only under a complaint proceeding.

Interruptible Transportation Service (IT)

A gas transportation service provided as capacity is available. The shipper only pays a toll for the quantities actually transported.

Investment risk

The total of a company's business risk and financial risk. (See Business Risk and Financial Risk)

Laterals

Pipelines that tie into a trunk line, generally part of either a gathering or distribution system. (See Trunk Lines)

Lead-Lag Study

A study used to estimate an appropriate cash working capital allowance for inclusion in rate base. The studies estimate the average number of days between payment of ongoing operating expenses and the collection of corresponding revenues. (See Cash Working Capital)

Load Factor

Generally, the ratio of the average contract quantity to the maximum quantity available to be contracted for the same period, usually expressed over a year and as a percentage. (See Utilization Rate)

Management Audit

An audit to assess the economy, efficiency, and effectiveness of management functions and operations.

Market-to-Book Ratio

The ratio of the market price of a common share to its book value.

Market Risk

The business risk that stems from the overall size of the market and the market share that a pipeline is able to capture.

Material Surplus to Security

Items included in material and supplies inventory that are in excess of normal requirements for maintenance or the continuous operation of a pipeline.

Modified Fixed Variable (MFV) Toll Design

A toll design similar to Straight Fixed Variable with the exception that certain fixed costs, for example return on equity and associated income taxes, are shifted from the demand toll to the commodity toll. (See Straight Fixed Variable Toll Design)

Negative Salvage Value

The amount by which the cost of removing an asset from service exceeds the salvage proceeds.

Negotiated Settlement

An agreement between a pipeline company and interested persons concerning issues related to the company's revenue requirement, tolls, tariffs, and operational matters. In discussions leading to such an agreement, interested persons have a fair opportunity to participate and have their interests recognized and appropriately reflected. In situations where the parties are able to settle all outstanding issues and the Board is satisfied that there are no public interest considerations that extend beyond the immediate concerns of the negotiating parties and that the settlement results in just and reasonable tolls and does not contradict the National Energy Board Act, the need for a formal hearing process before the Board would normally be eliminated.

Netback

The effective price to the producer of natural gas, based on the downstream market price less any charges for delivering the gas to market.

Net Plant

Gross plant less associated accumulated depreciation. (See Gross Plant or Plant in Service)

Net Proceeds

Proceeds from the disposition of an asset or from the issue of securities after deducting the related expenses.

Nomination

A precise listing of the quantities of energy to be transported under a contract during a specified time period which a shipper provides to the pipeline.

Normalized Income Taxes

An estimate of income taxes based on accounting income. The estimate may vary from the income taxes payable because certain revenues and expenses are recognized for account at different times than they are for tax purposes. (See Deferred Income Taxes, Flow-through Income Taxes, and Capital Cost Allowance)

Open Season

A process in which a pipeline company offers either existing or new capacity to the market and receives bids for that capacity from market participants.

Operating Risk

The risk to the income-earning capability that arises from technical and operational factors.

Part IV of the NEB Act

The Part of the National Energy Board Act dealing with all matters relating to traffic, tolls, and tariffs of oil and gas pipelines under the Board's jurisdiction.

Plant Account

An account listed in either Schedule IV of the Gas Pipeline Uniform Accounting Regulations or Schedule II of the Oil Pipeline Uniform Accounting Regulations, as appropriate.

Plant in Service

The costs of fixed assets that are used in the provision of utility service. (See Rate Base)

Postage Stamp Rate

For pipelines, a toll that is charged per unit transported regardless of the distance travelled and the points of origin and destination.

Preferred Equity

The book value of preferred shares outstanding.

Price-Earnings (P/E) Ratio

The market price of a company's common shares divided by its earnings per share.

Pro Forma

Describes a presentation of data, typically financial statements, where the data reflects the world on an "as if' basis; for example, financial statements that are adjusted to reflect a projected transaction. Can also be a sample such as a pro forma contract.

Rate Base

The amount of investment on which a return is authorized to be earned. It typically includes net plant in service plus an allowance for working capital.

Receipt Point

The point specified in a service agreement where gas is delivered to the pipeline by or for the account of a shipper.

Regulatory Risk

The risk to the income-earning capability of the assets that arises due to the method of regulation of the company.

Return on Rate Base

The return which a regulated company earns on its approved rate base.

Revenue Requirement

The total cost of providing service, including operating and maintenance expenses, depreciation, amortization, taxes, and return on rate base. (See Cost of Service)

ROE Formula or RH-2-94 Formula

Formula to establish the rate of return on common equity for certain NEB-regulated pipelines, established in the RH-2-94 Proceeding, as amended to eliminate rounding.

Rolled-in Tolls

Tolls resulting from a toll design methodology in which the capital and operating costs of new facilities are added to those of the existing facilities; i.e. there is one cost pool for all facilities. Tolls are designed to recover the annual cost of providing service. All shippers who receive the same service pay the same toll. Tolls only vary according to such factors as volumes and distance.

Sinking Fund

The money that must be regularly set aside according to the terms of a long-term debt or preferred share issue, in order to redeem part of the issue prior to or at maturity.

Stand-Alone Tolls

Tolls that would be paid by only those shippers utilizing specific facilities or assets that are physically distinguishable from the existing facilities. They would be based on a revenue requirement independent of that calculated for the rest of the system. (See Incremental Tolls and Rolled-in Tolls)

Straight Fixed Variable (SFV) Toll Design

A toll design whereby all fixed costs are assigned to the demand toll and all variable costs are assigned to the commodity toll. (See Modified Fixed Variable Toll Design)

Supply Risk

The risk that the physical availability of supply could affect a pipeline's income-earning capability.

Take-or-Pay

A contract provision whereby a purchaser agrees to pay for a specified volume of a petroleum product during a period whether or not the contract deliveries are taken.

Tariff

The terms and conditions under which the service of a pipeline are offered or provided, including the tolls, the rules and regulations, and the practices relating to specific services.

Terminalling

The receiving, storing, and transferring necessary for the receipt or delivery of oil in a pipeline system.

Test Year or Test Period

The twelve-month operating period selected to evaluate the cost of service and the adequacy of the tolls in effect or being sought.

Toll

The price charged by a pipeline company for transportation and other services.

Toll Levelling

Ratemaking techniques used to defer costs traditionally recovered through tolls in the early years of a pipeline's life, to later years in order to level out tolls over time. Can also refer to the shifting of tolls within a shorter time period, for example, to gradually phase in a significant toll increase. (See Intergenerational Inequity)

Tolls Task Force

A joint industry task force initiated by certain pipeline companies. It is generally comprised of representatives of the pipeline company and, potentially, a wide cross-section of the industry including representatives of the producing, marketing, brokering, provincial governments, local distribution, and industrial end-user sectors with an interest in the services provided on that pipeline. The objective is to foster lines of direct communication, possibly leading to negotiated settlements of some issues outside the Board's adjudicative process.

Traffic

The commodity being transported and the activity of transportation and other associated dealings with that commodity.

Trunk Lines

The main transportation lines of a pipeline system. (See Laterals)

Uniform Account Regulations (UAR)

The accounting regulations made by the NEB for companies under its jurisdiction. There are separate Uniform Accounting Regulations for gas and oil pipelines.

Utilization Rate

System throughput divided by pipeline design capacity.

Variable Costs

Costs that vary with throughput, such as compressor fuel costs for gas pipelines and power costs for oil pipelines. (See Fixed Costs)

Variable Cost-of-Service Toll

A toll which varies from month to month to reflect actual costs and throughput. Rules prescribed by the regulator specify which costs can be recovered, the accounting principles to be followed in determining the costs, the rate of return allowed on the investment in rate base, depreciation rates, and other parameters. (See Fixed Toll)

Working Capital

For regulatory purposes, capital employed by the utility to finance its ongoing operations, in addition to the investment in Plant in Service. An allowance for working capital is included in the rate base and consists of items such as cash working capital and materials and supplies inventory. (See Cash Working Capital)

Write Off

The elimination of the recorded amount of an asset or liability for reasons other than the occurrence of a transaction.

13-Point Average or 13-Month Average

An average determined by aggregating the balance at the opening of a year and the balances at the end of each month of the year and dividing by thirteen.

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