Michael Gorman’s Responses to Régie’s Request Information No.1
on the application to change the rates of the Gaz Metro Commercial Partnership
MODIFICATIONS PROPOSED TO RATES DM AND D4
10.
Reference:
Item C-1-8, ACIG–7, document 1, response 30.
Preamble:
“Gaz Métro is a company that enjoys a very favorable regulatory environment involving the use
of a multitude of accounts of deferred charges or differential accounts that give it a high level of
security. The accounts listed below are particularly found in this regard:
. The Green Fund;
. The share of the Agency;
. The PGEÉ;
. Temperature;
. Interest rates;
. Commercial programs;
. The costs of stakeholders;
. The charges of the Energy Administration."
Questions:
10.1
Referring to the list of deferred costs accounts mentioned in the preamble, please indicate
whether you have examined the existence and extent of such accounts in American
regulated companies.
Response:
Mr. Gorman has reviewed the regulatory mechanisms, deferral accounts, and tracking
mechanisms for the U.S. gas LDCs included in Gaz Métro witness Dr. Vilbert’s proxy group.
Based on that review, Mr. Gorman concluded that those companies’ regulatory mechanisms do
not provide the same degree of earnings and cash flow protections available to Gaz Métro that are
produced through the deferred charges, and rate mechanisms described above. Mr. Gorman
believes that these regulatory mechanisms stabilize Gaz Métro’s cash flows and earnings to a
greater extent than regulatory mechanisms provide to the U.S. LDCs. This stabilization to Gaz
Métro’s earnings and cash flows lowers its business risk in relationship to the U.S. LDCs.
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10.2
Please indicate, where appropriate, if the differences between U.S. companies and Gaz
Métro concerning the deferred costs accounts should be taken into account in the
comparative analysis of the risk of Gaz Métro. Please comment.
Response:
Yes. To the extent regulatory mechanisms reduce Gaz Métro’s business risk, then that lower risk
should be considered in the development of an appropriate return on equity, appropriate capital
structure weights of equity and debt, and the overall rate of return used to set rates. For example,
to the extent Gaz Métro has regulatory mechanisms which lower its business risk in comparison
to U.S. LDCs, then it would be appropriate for Gaz Métro to increase its financial risk via an
increased total debt ratio and lower common equity ratio, in order to maintain a total investment
risk (combination of business and financial risk) that is typical for low risk regulated utility
operations. Mr. Gorman believes that the regulatory mechanisms previously supporting Gaz
Métro’s rate structure accomplished this objective.
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