DECISION
QUEBEC
RÉGIE DE L’ÉNERGIE
D-2004-196
R-3529-2004
September 24, 2004
PRESENT:
Jean-Noël Vallière B.Sc. (Econ.)
Anita Côté-Verhaaf, M.Sc. (Econ.)
Francine Roy, MBA
Commissioners
Gaz Métropolitain Limited Partnership (GMLP)
Applicant
and
Intervenors whose names appear on the next page
Request to change GMLP’s tariffs, effective October 1, 2004
D-2004-196, R-3529-2004, 2004 09 24
11
3.3 REQUEST TO RENEW AUTOMATIC ADJUSTMENT MECHANISM OF
RATE OF RETURN AND CAPITAL STRUCTURE
3.3.1 GMLP’s Evidence
Automatic Adjustment Mechanism for Rate of Return
GMLP is asking the Régie to renew, for a period of three years, until the 2006-2007 rate
year inclusively, the automatic adjustment mechanism for the rate of return on
shareholders’ common equity as well as the capital structure.
GMLP acknowledges that the performance incentive mechanism in force since 2000 has
generated a higher rate of return than the base rate of return established under the
automatic adjustment mechanism. GMLP submits that it is important to dissociate the
base rate of return established using the automatic adjustment mechanism from the
incentive return obtained using the performance incentive mechanism. The base rate
represents a rate of return to be allowed by the Régie to meet the various factors listed
below. The performance incentive mechanism compensates GMLP for performance that
is superior to the performance expected in the traditional regulatory method. In GMLP’s
view, combining the result of the performance incentive mechanism with the automatic
rate of return adjustment formula would amount to asking it to cease its development
activities and productivity improvements9.
In this case, GMLP does not intend to justify the formula. That has already been done in
case R-3397-98 and in Decision D-99-11. In that decision, the Régie approved an
automatic adjustment mechanism for the rate of return based on variations in risk-free
bond rates taking the following factors into account:
•
•
•
•
•
the Partnership’s financial context and business risk;
the economy in general;
long-term interest rates and bond yields;
methods of estimating the rate of return presented by the experts and regulatory
context in neighbouring jurisdictions;
maintaining the Partnership’s financial integrity.
GMLP’s approach is to come back to different items on which that decision is based, to
look at how they have evolved since 1999 and to show that, overall, they have not
changed significantly. Consequently, the formula can be described as still reasonable
today.
Capital Structure
9
Shorthand notes (SN), Volume 1, pages 50 and 51.
GMLP wants to renew its capital structure. To support its request, GMLP refers to
Decision D-96-31 of the Régie du gaz naturel, in particular the following passages:
In the Régie’s opinion, an enterprise’s capital structure cannot be changed
frequently or suddenly because it could create financial instability that could
worry investors.
(…) unless there are exceptional circumstances that would justify it, the structure
the Régie considers optimal, and that respects the principles that guided it in its
decision, i.e. to ensure the lowest cost of capital possible over the long term and
to maintain the distributor’s financial health, will not be brought into question
every year10.
According to the distributor, the evidence submitted in support of the request to renew
the automatic adjustment formula for the rate of return is transposable to the request to
maintain the capital structure. As there has been no exceptional circumstance since 1999
that would justify bringing the capital structure into question, the conclusion is similar.
3.3.2 ACIG’s Position
Only the ACIG commented on GMLP’s proposal. Although the intervenor does not
totally share all of the distributor’s evidence in its request, it considers for the time being
that it is not useful to analyze this issue any further given the fact the distributor is not
proposing to change the present formula11.
3.4 RÉGIE’S OPINION
On application of performance incentive mechanism
The Régie notes that, in the opinion of the Task Force participants, the exhibits submitted
by GMLP respect the performance incentive mechanism approved in Decision D-200451 and, consequently, permits the Régie to set GMLP’s tariffs, effective October 1,
200412. While the SÉ/AQLPA had reserved its rights to make representations on Exhibit
GMLP-9, Documents 2 and 913, it does not question the level of required revenue.
The Régie notes that the agreement submitted by the Task Force is consistent with the
performance incentive mechanism and approves it.
10
Decision D-96-31, Case R-3351-96, October 9, 1996, page 67.
ACIG’s written submission, pages 6 and 7.
12
Task Force Report, Exhibit GMLP-1, Documents 3 and 4.
13
The follow-up reports and financials schedules of the Global Energy Efficiency Plan (GEEP) and the
Polluting Energies Displacement Account (PEDA).
11
On request to renew automatic adjustment mechanism for rate of return and capital
structure
The Régie considers that overall there has been no significant change in the factors
retained in Decision 99-11, in particular those dealing with the economic, business and
financial contexts. Consequently, it approves GMLP’s request to renew the automatic
rate of return adjustment mechanism for a period of three years, i.e. until the 2006-2007
rate year inclusively and to maintain the capital structure.