A-81-80 (A-80-80)
A-726-79
Westcoast Transmission Company Limited
(Applicant)
v.
British Columbia Hydro and Power Authority,
British 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 National Energy Board — Application to
review and set aside parts of the final decision and order of the
Board establishing tolls for gas sold by applicant — Applica
tion to review and set aside Board's refusal to review same
Also appeal under s. 18 of the National Energy Board Act
attacking said parts of decision — Board requiring applicant
to use income tax deductible expenses incurred by it in connec
tion with its non-jurisdictional investments to lower tolls
payable by its jurisdictional utility customers — Whether
Board exceeded its jurisdiction — Whether Board took into
account irrelevant considerations — National Energy Board
Act, R.S.C. 1970, c. N-16, as amended, s. 18 — Federal Court
Act, R.S.C. 1970 (2nd Supp.), c. 10, ss. 28, 29.
These proceedings attack parts of the final decision and order
of the National Energy Board on the application of Westcoast
Transmission Co. Ltd. for orders establishing tolls for gas sold
by Westcoast to British Columbia and export customers. They
consist of an appeal under section 18 of the National Energy
Board Act and an application to review and set aside said parts
of the final decision and order. Westcoast attacks the Board's
decision on the "Tax Benefit" and "Deferred Income Tax"
issues. It argues (1) that the Board exceeded its jurisdiction in
requiring it to use income tax deductible expenses incurred by
it in connection with its non-jurisdictional investments to lower
tolls payable by its jurisdictional utility customers and (2) that
the Board took into account irrelevant considerations in stipu
lating such a requirement. The other proceeding is an applica
tion to review and set aside the Board's decision refusing
Westcoast's application for a review by the Board of the same
parts of the final decision and order.
Held, the appeal and the applications for judicial review are
dismissed. As the utility has at least contributed or played a
role in the origin of the tax benefit, that role and its extent were
relevant considerations to be taken into account by the Board in
determining the income tax component to be included in West-
coast's cost of service. There is no error of law in the Board
having taken the so-called tax benefit into account or in its
conclusion that in the circumstances, it should be shared equal
ly between the utility and the shareholders by permitting but
half of it to be included in Westcoast's cost of service. The
Board did not purport to regulate the non-utility operations of
Westcoast and did not do so. It merely exercised its jurisdiction
with respect to pipeline tolls. The so-called tax benefit is neither
an asset nor a fact: it is a mere calculation. The same applies to
the deferred income tax: it is a mere concept of which West-
coast had no legal right to require recognition and which the
Board was under no legal obligation to recognize in reaching its
conclusion as to the basis for arriving at just and reasonable
tolls. With respect to the second application for judicial review,
since section 18 of the National Energy Board Act provides for
an appeal to this Court from the Board's decision on West-
coast's application for a review and that in consequence, the
jurisdiction which this Court might otherwise have under sec
tion 28 of the Federal Court Act is ousted by section 29 of that
Act, the second application is dismissed.
APPLICATIONS for judicial review and appeal
under section 18 of the National Energy Board
Act.
COUNSEL:
John McAlpine, Q.C. for applicant Westcoast
Transmission Company Limited.
Y. A. George Hynna for respondents 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 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:
McAlpine, Roberts & Poulus, Vancouver, for
applicant Westcoast Transmission Company
Limited.
Gowling & Henderson, Ottawa, for respond
ents British Columbia Hydro and Power Au
thority 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.
Shrum, Liddle & Hebenton, Vancouver, for
respondents Foothills Pipe Lines (South
Yukon) Ltd. et al.
Davis & Company, Vancouver, for respondent
British Columbia Petroleum Corporation.
The following are the reasons for judgment
rendered in English by
THURLOW C.J.: These proceedings were heard
following the hearing of proceedings brought by
British Columbia Hydro and Power Authority, by
British Columbia Petroleum Corporation and by
Cominco Ltd., Consumers Glass Company, Lim
ited, Domglas Ltd. and Hiram Walker & Sons
Ltd., against the decision and order No. TG-5-79
of the National Energy Board on the application
of Westcoast Transmission Company Limited for
orders establishing the tolls it might charge for gas
produced in British Columbia and sold by West-
coast to its B.C. and export customers, and disal
lowing any tolls and tariffs then in effect which
were inconsistent with the proposed new tolls and
tariffs.
The present proceedings were heard on the same
case material. They consist of an appeal under
section 18 of the National Energy Board Act,
R.S.C. 1970, c. N-6, as amended against parts of
the final decision and order of the Board on the
application and an application under section 28 of
the Federal Court Act, R.S.C. 1970 (2nd Supp.),
c. 10 to review and set aside the same portions of
the decision and order. By order of this Court,
these two proceedings have been combined. In
them, Westcoast attacked the decision on two
points which, for the moment, I shall refer to as
(1) the "Tax Benefit" issue and (2) the "Deferred
Income Tax" issue. The other points raised in
Westcoast's memorandum of argument were
abandoned.
The other proceeding is an application under
section 28 of the Federal Court Act to review and
set aside the decision ,of the Board made in Decem-
ber 1979 refusing Westcoast's application for a
review by the Board of the same parts of the final
decision and order. As it appears to me that there
is provision in section 18 of the National Energy
Board Act for an appeal to this Court from the
Board's decision on Westcoast's application for a
review and that in consequence, the jurisdiction
which this Court might otherwise have under sec
tion 28 of the Federal Court Act is ousted by
section 29 of that Act, I am of the opinion that the
Court is without jurisdiction to entertain the sec
tion 28 application and that it should be dismissed.
The general facts relating to the parties and the
application to the Board, as well as what I con
ceive to be the relevant law, are set out in the
reasons for judgment on the several proceedings
brought by B.C. Hydro and other appellants and
need not be repeated.
With respect to both the "Tax Benefit" issue
and the "Deferred Income Tax" issue, the submis
sions on behalf of Westcoast were (1) that the
Board exceeded its jurisdiction in requiring West-
coast to use income tax deductible expenses
incurred by it in connection with its non-jurisdic
tional investments to lower tolls payable by its
jurisdictional utility customers and (2) that the
Board erred in law by taking into account irrele
vant considerations when it required Westcoast to
use income tax deductible expenses incurred by it
in connection with its non-jurisdictional invest-
ments to lower tolls payable by its jurisdictional
utility customers.
The "TAX BENEFIT" issue
In its application to the Board, Westcoast
sought approval for changing from a "flow-
through" method of including income taxes in its
cost of service to a "normalization" method. In
this method, a company whose capital cost allow
ances claimed as deductions under the Income Tax
Act exceed normal depreciation on its capital
assets, transfers to a reserve an amount represent
ing the difference between what it pays in income
taxes and what it estimates it would have to pay if
capital cost allowances under the Income Tax Act
were claimed only to the extent of normal
depreciation. In theory, the reserve is then avail
able to pay the higher taxes to be paid in later
years when normal depreciation exceeds the capi
tal cost allowances that may be claimed.
In the case of Westcoast, which, besides carry
ing on a gas pipeline operation which is subject to
regulation under Part IV of the National Energy
Board Act, has investments in subsidiary compa
nies, whose operations are not subject to such
regulation, the adoption of a normalization method
involves the problem of an appropriate apportion
ment or attribution of the effects between the
regulated and the unregulated operations.
One of the items involved in the computation of
the taxable income of a corporation is the interest
on its debt that may be deducted from its revenue.
As a deduction, it serves to reduce the taxes to be
paid.
Westcoast has a large funded debt which, in
Westcoast's computations, is regarded or treated
as having been incurred for the construction of its
pipeline system and for the acquisition of its
investments in unregulated subsidiaries in the
same proportions as its total investments in the
system and in the subsidiaries. When, therefore, it
becomes necessary to calculate income taxes on a
normalized basis to be included in the cost of
service of the regulated operation, a question arises
as to whether the benefit of the deduction of
interest in respect of debt regarded as having been
incurred to acquire investments in unregulated
subsidiaries can be permitted to accrue to the
regulated activity so as to decrease the taxes which
the regulated activity might have to bear if it were
the sole operation of Westcoast and Westcoast had
not invested in subsidiaries. For the test year, the
amount involved as estimated "tax benefit", as
calculated by the Board, was some $4,899,852.
The Board dealt with this subject in the follow
ing passage from its decision:
Also to be taken into account is the fact that by assuming the
same capital structure for Westcoast's pipeline business, subject
to NEB jurisdiction, as that for the corporation as a whole,
some of the debt of Westcoast is assumed to be used to finance
the investment in equity in non-jurisdictional activities, e.g.,
Westcoast Petroleum. However, as Westcoast's witnesses
indicated, all of the interest incurred by the corporation is
applied against its taxable income and since dividends from
equity investments in other corporations do not attract income
tax, the total interest and other expenses incurred can, in effect,
be applied against the utility income.
The result of this situation would appear to be that the
effective tax rate for the corporation as a whole is lower than it
would be if Westcoast's pipeline activities, subject to the
Board's jurisdiction, were contained in a corporation solely for
that purpose. In other words, there appears to be a net "tax
benefit" from combining different activities in the same corpo
ration. In order to provide appropriate incentives to Westcoast,
it appears to the Board that these benefits should be shared
equally by the regulated business and by the company's stock
holders. The Board's calculation of such net benefits are con
tained in Appendix VI to these Reasons for Decision.
In my view, there is no substance in the submis
sion that in this the Board exceeded its jurisdiction
by extending it over the non-regulated operations
of Westcoast. What the Board was doing was
exercising its jurisdiction to deal with the tolls that
might be charged by Westcoast in its pipeline
operation and, as it appears to me, nothing in what
the Board did amounted to or even purported to be
an exercise of jurisdiction over the non-regulated
operations of Westcoast.
Moreover, in my opinion, it was plainly relevant,
in seeking to arrive at just and reasonable tolls by
the method proposed by Westcoast and approved
by the Board, to take into account in determining
the extent to which income tax on a normalized
basis should be permitted to be included in the cost
of service, both the so-called tax benefit and what
it was and the source of it. It is neither an asset
nor a fact. It is a mere calculation resulting from
an assumption as to the proportion of corporate
debt invested in subsidiaries which indicates that
the estimated tax of Westcoast would, as a result
of that assumption, be less than if, which is not the
case, Westcoast had not invested in the subsidiar
ies and had only its pipeline operation. Further, if,
on the facts, it can be said that tax benefit results
from Westcoast having invested borrowings in sub
sidiaries, it can with equal or greater force be said
that since the investments produced no revenue to
Westcoast from which the interest in question
could be deducted, the tax benefit would not arise
or accrue at all to Westcoast without the existence
of utility revenue from which the interest is
deductible. The point is put succinctly in the
memorandum of the Attorney General of British
Columbia in his submission that there was evi
dence that "the non-jurisdictional tax losses
depended for their value on the jurisdictional
income". Moreover, as pointed out by counsel for
the Attorney General of British Columbia, West-
coast's borrowings of capital funds are on the
credit of the company as a whole and put the
whole company at risk. As the risks of loss
involved in the non-utility investments are not
necessarily the same or so small as those attaching
to the utility operations it is not possible to say
that the non-utility investments do not benefit
from the use of the utility and its value as security
for the company's debt. For the same reason, as
the company has borrowed to invest in non-utili
ties, the capacity of the pipeline system to serve as
security for utility construction is to some extent
impaired. It is, therefore, impossible and unrealis
tic to attempt to treat the utility operation and the
non-utility investments as if they were in all
respects mutually exclusive compartments that are
entirely independent of one another.
It seems to me to follow that as the utility has at
least contributed or played a role in the origin of
the tax benefit, that role and its extent were
relevant considerations to be taken into account by
the Board in determining the income tax compo
nent to be included in Westcoast's cost of service. I
can see no error of law in the Board having taken
the so-called tax benefit into account or in its
conclusion that in the circumstances it should be
shared equally between the utility and the share
holders by permitting but half of it to be included
in Westcoast's cost of service.
The "DEFERRED INCOME TAXES" issue
This item is concerned with Westcoast's rate
base and refers to funds recovered in the cost of
service on account of deferred tax liability.
With respect to it, the Phase I decision of the
Board contained the following:
Should Westcoast be allowed to earn a Return on the Funds
retained by the use of Normalized instead of Flow-through
Taxes
The evidence is clear that the equity shareholders do not
provide these funds and should not therefore be expected to
earn a return on them. It would appear, therefore, that these
funds (equivalent to the deferred tax liability) should be
deducted from the rate base in order to identify the amount of
capital provided by debt investors and equity shareholders.
In the final decision, the Board, after referring
to the Phase I decision and citing the last sentence
of the foregoing passage, proceeded:
Deferred income taxes are derived by deducting from nor
malized income taxes the "taxes payable".
The Board has made significant changes to Westcoast's
method of calculating normalized income taxes as outlined in
Chapter 4 and Appendix VI. Westcoast is to use the Board's
method of calculating normalized income taxes for the purpose
of arriving at Deferred Income Taxes to be deducted from rate
base.
The taxes payable by Westcoast on a flow-through basis
should be in conformity with the way Westcoast files its annual
income tax return with the taxation authorities. The Board
understands that there is no significant taxable income appli
cable to the non-utility operations of Westcoast and, therefore,
the total taxes payable should be applied to utility operations in
arriving at Deferred Income Taxes as a deduction from rate
base.
Since it is in Westcoast's interest to reduce as
much as possible the extent of the deduction from
rate base, the complaint, as I understand it, is not
that the whole of the taxes actually paid are to be
applied to the utility operation in arriving at the
amount of deferred income taxes to be applied as a
deduction from rate base. Rather, Westcoast's
complaint is that an even larger amount, calculat
ed as the amount of income taxes that would be
payable if only the interest on the portion of
Westcoast's debt assumed to be invested in the
utility by itself, were deducted in the computation
of Westcoast's income, should be applied. This
would increase the amount to be regarded as taxes
paid and in consequence reduce the amount to be
deducted from rate base as deferred income taxes.
The case, in short, is that the benefit of less income
taxes to be paid by reason of Westcoast investment
in subsidiaries must be taken into account and
must be attributed to such investments and not to
the utility.
In my view, the contention is based on the same
assumption as the contention in respect of shared
tax benefits and it fails for the like reasons. In its
decision, the Board did not purport to regulate the
non-utility operations of Westcoast and did not do
so. It merely exercised its jurisdiction with respect
to Westcoast's pipeline tolls. Further, what the
appellant bases its contention on is not a fact or a
right of Westcoast or its shareholders but a mere
concept of which, as I see it, Westcoast had no
legal right to require recognition and which the
Board was under no legal obligation to recognize
in reaching its conclusion as to the basis for arriv
ing at just and reasonable tolls for Westcoast's
pipeline system.
I would dismiss the appeal and the applications
under section 28 of the Federal Court Act.
* * *
PRATTE J.: I agree.
* * *
URIE J.: I agree.
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.