D-99-11
R-3397-98
February 10, 1999
______________________________________________________
PRESENT:
André Dumais, B.Sc.A.
Catherine Rudel-Tessier, LL.M.
François Tanguay
Commissioners
Gaz Métropolitain and Company Limited Partnership
(GMCLP)
Applicant
and
Association des consommateurs industriels de gaz (ACIG)
Corporation Approvisionnement - Montréal, Santé et Services
sociaux (CAMSS)
Option consommateurs et Fédération nationale des associations
de consommateurs du Québec (FNACQ)
Groupe de recherche appliqué en macroéologie et Union pour
le développement durable (GRAME-UDD)
Regroupement national des Conseils régionaux de
l’environnement du Québec (RNCREQ)
Regroupement des organismes environnementaux en énergie
(ROEE)
Intervenors
Request to change GMCLP’s tariffs, effective October 1, 1998
D-99-11, R-3397-98, 1999 02 10
38
7. Rate of Return
GMCLP is asking the Régie to allow a rate of return on common share equity of
10.47%. The distributor is also requesting approval of a regulatory framework that
includes a formula for simplifying the annual establishment of the rate of return
on common shareholders’ equity.
There was also a third request concerning the approval of a new performance
incentive mechanism based on improvement of the distributor’s long-term
operating performance; however, this request was deferred to a subsequent phase,
the format and timetable of which remain to be determined. This topic will be
covered subsequently in this decision.
7.1 Business Risks
7.1.1 Evidence and Argumentation
As submitted by GMCLP57, the Partnership is exposed to various risks and, while
it wants to minimize and manage those risks, its compensation should take them
into account. It faces three main types of risks – business risk, financial risk and
regulatory risk.
In GMCLP’s view, its business risk will be greater for the current year and greater
than that of its peers. On the one hand, in terms of the application, the distributor
feels its competitive position will become increasingly difficult in relation to fuel
oil and more vulnerable because of its high concentration of industrial customers.
On the other hand, the upcoming renegotiation of a large number of expiring
transportation and storage contracts, while presenting opportunities, causes the
distributor certain concern. GMCLP considers its operating risks will not be
57
GMCLP-14, Document 1
different than the current year or substantially different than for other intervenors
in the industry.
The financial risks are of a different nature, the most important being interest and
foreign exchange fluctuations, and counterparty risk. GMCLP considers that, in
spite of the present crisis in Asia, the financial risk will be basically comparable to
the current year. Furthermore, it considers that most of the financial risks to which
it is exposed are similar to those faced by its competitors.
In terms of regulatory risk, which is consequent upon the uncertainty related to
recent regulatory changes, it considers it is slightly greater as the new Régie de
l’énergie brings with it certain uncertainty as to the continuity of treatments
allowed in the past.
When all is said and done, GMCLP feels that, in light of the various
aforementioned risks, its overall risk is greater than the current year, which is
already slightly greater than the overall risk for Ontario distributors, as
acknowledged by the Régie in Decision D-96-3158.
According to certain intervenors, the situation described by GMCLP paints too
sombre a picture of the distributor’s overall risk. The ACIG feels the business risk
is only marginally greater than for comparable businesses in Canada and that this
risk is totally offset by clearly more favourable regulatory treatment, long-term
contracts signed by most large industry customers, the diversification and increase
in the number of suppliers as well as by a higher than average capitalization ratio
for Canadian distributors. Accordingly, the ACIG does not share GMCLP’s
position and considers that a number of developments this year improve the
distributor’s risk profile. In terms of comparison with other Canadian distributors,
this intervenor suggests, based on studies submitted by its expert, that GMCLP’s
overall risk is totally comparable to that of Westcoast and BC Gas, and marginally
greater than the risk faced by Consumers Gas.
Basically similar positions are taken by Option Consommateurs
CAMSS and ROEE, reiterating the arguments to the effect that
regulatory tools approved by the Régie to protect and develop the
Quebec, and the non-regulatory mechanisms reduce or even
distributor’s risks.
and FNACQ,
the numerous
gas market in
eliminate the
7.1.2 Régie’s Opinion
In the Régie’s view, based on the various issues that affect the Partnership and
that may have repercussions on its financing strategy, the distributor’s business
risk for the coming year is at most the same as for the current year.
58
Decision D-96-31 rendered on October 9, 1996 (Case 3351-96)
Concerning business risk, in the Régie’s opinion the numerous regulatory or other
tools, such as long-term contracts, presently available to GMCLP as well as the
conservation of the dual-energy tariff flexibility program and the reactivation of
the flexibility program for Tariffs 1, 3 and M, approved in this decision, enable
GMCLP to act promptly and adequately when certain volumes might be
threatened. Moreover, the Régie considers that the approval of an additional
budget of $400,000 to review the supply portfolio should make it possible for
GMCLP to identify and optimize existing or future opportunities and thereby
contain the supply risk to at least a similar level as it faces at present.
The Régie agrees with the distributor’s positions that the operating and financial
risks are the same as the current year.
Irrespective of the changes, the Régie feels the regulatory risk will be basically
identical to the present year. The regulatory framework remains essentially
unchanged, with a rate structure that takes account of the distributor’s cost of
service and a framework adapted to the needs of the customers and the
Partnership. Furthermore, the decisions already rendered in the preceding sections
and in other decisions reflect the regulator’s continuing concern with the
distributor’s financial and operating health and confirm its desire, through its
approval of various automatic adjustment mechanisms, to lighten and simplify the
regulatory process. The Régie also wants to point out that, in its opinion, the
speed with which a number of decisions have been issued over the past few
months in the natural gas field, either for system extension requests or on other
matters, also considerably reduce some of the uncertainties that recent regulatory
changes might have generated. In terms of comparative risk, the Régie shares
GMCLP’s opinion that its risk is considerably greater than that of Ontario
distributors.
For the reasons stated, the Régie therefore feels the Partnership’s business risk,
based on the different risks mentioned, is also the same as for the current year.
7.2 Access to Capital
7.2.1 Evidence and Argumentation
According to GMCLP, the present capital structure enables it to minimize the
cost of capital. It feels it needs a credit rating of at least A59 to facilitate access to
capital markets and avoid restrictive periods. Considering its financial
requirements over the next few months, GMCLP therefore places great
importance on maintaining an acceptable rating and prudently suggests that the
interest coverage required by CBRS is still relatively higher than the average. As
the financial markets require interest coverage between 2.0X and 3.2X for an A
rating, GMCLP’s present 2.82X places it, in its view, at a normal enough level
with a slightly higher risk than its peers. In GMCLP’s view, if the Régie adopted
59
Shorthand notes of October 27, 1998, volume 4, page 56
the ACIG’s recommendation of an 8.25% rate of return, the ratio would fall to
2.5X60, i.e. at the low end of the A rating standards.
Contrary to GMCLP’s position, the ACIG feels the interest coverage ratio was
more in the order of 2.5X for 1993 to 1997 inclusively, and even 2.4X for 1994
and 1995, i.e. the same coverage ratio that would result from this intervenor’s
recommendation. The ACIG also points out that GMCLP’s ratings have been a
model of stability over the past few years and that, when considered overall, the
Company’s financial ratios largely justify an A-high rating61.
7.2.2 Régie’s Opinion
With a business risk that is slightly greater than for Ontario distributors, and
considering that CBRS has given most natural gas distributors and transporters in
Canada have an A rating, in the Régie’s opinion, GMCLP has to maintain a credit
rating between A and A-high in order to continue to have reasonable access to
capital markets and reduce its financial costs. This position had already been
clearly stated in Decision D-96-31.
It is therefore necessary to maintain a credit rating between A and A-high
because this rating has made it possible for GMCLP to significantly reduce its
financial costs and have greater access to financial markets.62
Based on the arguments heard, the Régie feels this means that an interest coverage
ratio around the average of the CBRS standards, i.e. between 2.0X and 3.2X,
should be sufficient to justify maintaining an A rating, especially if GMCLP
exceeds the CBRS’ standard criteria, e.g. amount of common equity, debt
weighting and cash versus total debt, continue to be met.
7.3 Risk-free Bond Rate
7.3.1 Evidence and Argumentation
As any regulatory system is forward-looking by nature, GMCLP advocates the
adoption of the average forecasts, for 3 and 12-month periods, in the Consensus
Forecasts63 to evaluate the rate of return of Canada 10-year bonds with the
addition of the spread between 10 and 30-year bonds.
Following the initial submission of GMCLP’s application using projected longterm rates of 6.02% based on the March 1998 edition, the distributor revised the
risk-free bond rate to 5.759% based on the August projections.
60
GMCLP-14, Document 1.23.
Shorthand notes of October 27, 1998, Volume 4, pages 168-170
62
Decision D-96-31 rendered on October 9, 1996, page 67
63
Shorthand notes of October 27, 1998, volume 4, pages 86, 199-204
61
The ACIG’s expert witness testified64 that he had not used the bond spot rate to
establish his rates between 5.75% and 6.25%, but that he had made certain
forecasts, taking into consideration a number of factors, including the spread
between Canada and U.S. long-term bonds.
7.3.2 Régie’s Opinion
While the rate case taken as a whole is forward-looking in nature, it nevertheless
remains important that the forecasts used be representative of reality.
Based on the testimony and the answers to questions asked, in the Régie’s
opinion, the Schedule in Exhibit GMCLP-15, Document 2.14 satisfactorily shows
that the use of Consensus Forecasts’ projections is justified. The differences
between forecast and actual rates for the past five rate cases were reasonable and
both positive and negative, depending on the years, thereby showing they can be
considered a representative approximation of reality.
The Régie therefore maintains the utilization of the most recent Consensus
Forecasts for determining, in the rate cases, the risk-free bond rate, considering in
addition that such use will facilitate the implementation of the indexing
mechanism. The Régie therefore notes, for the present rate case, a risk-free bond
rate of 5.759%.
7.4 Risk Premium
7.4.1 Evidence and Argumentation
As stated by GMCLP’s expert, there are four fundamental methods for
determining a fair and reasonable rate of return. Three of them rely on market
data, i.e. the Discounted Cash Flows (DCF) method, the Risk Premium method
and the Capital Asset Pricing Model (CAPM) method. The fourth method
involves using accounting data to estimate the income of comparable enterprises.
The two experts called by GMCLP and the ACIG respectively only used the Risk
Premium method and/or the CAPM method. However, GMCLP’s expert
established an average risk premium using three additional methods, i.e. the
CAPM empirical version, the History of U.S. Distributors and the Future for U.S.
Distributors.
On the initial basis of a market risk premium evaluated at 6.50% and an adjusted
beta of 0.65, a risk premium of 4.50%, including 30 points for issue costs, was
calculated. Considering the results of the three other sub-methods used by
64
Shorthand notes of October 28, 1998, volume 5, pages 32-33.
GMCLP’s expert, an average risk premium of 4.55% was initially submitted, and
then subsequently revised to 4.71%.
The ACIG’s expert only used the CAPM method and, based on different historical
studies, determined, on the basis of a market premium evaluated at 4.50% and a
gross beta of 0.50, a risk premium of 2.25% for GMCLP, plus 25 points for other
factors such as issue costs. The ACIG’s expert did not retain the CAPM empirical
version or the methods that treat risk premiums of U.S. companies. Thus,
according to the experts heard, the distributor’s average risk premium could be
between 2.50% and 4.71%.
The experts did not use the exact same historical studies to compare the behaviour
of the stock and long-term bond markets. Furthermore, they used two different
methods to calculate the average value of the reference market risk premium.
Similarly, these experts did not agree on the degree of volatility, or beta
coefficient, which should be taken into account.
GMCLP suggests the arithmetic average65 is the only appropriate factor to use for
evaluating the expected return of an investor in the future, based on present
conditions. The ACIG however, suggests that given the fact the rates of return
earned by regulated enterprises do not vary to any great extent, compared to the
market in general, it would be more appropriate to use the geometric average66.
To measure the behaviour of public utilities compared to the market in general,
GMCLP proposes using an adjusted beta of 0.65 on the premise that corporate
betas tend to move towards maturity or the average, i.e. 1.0.
According to their expert67, companies that have betas that vary from 1.0, due to
special portfolio policies, will tend to come closer to each other through their
dividend, debt and marketing policies. The ACIG’s expert concludes68 that the
securities of the Lowest Risk Utilities group are twice as less volatile than the
market in general, which equates to a gross beta in the order of 0.50. This
estimate is based on a sample of ten companies, including five telephone
companies.
In terms of the other factors, including issue costs, there were also diverging
opinions. GMCLP suggests these costs are in the order of 30 basis points, whereas
the ACIG claims they are 25 basis points.
7.4.2 Régie’s Opinion
65
Shorthand notes of October 27, 1998, Volume 4, pages 91-95.
ACIG-2, Document 1: Written evidence of William R. Waters, September 1998, Appendix VIII
67
Shorthand notes of October 27, 1998, Volume 4, pages 72-73.
68
ACIG-2, Document 1: Written evidence of William R. Waters, September 1998, page 40 and Schedule 8.
66
In rendering a decision on the reasonable rate of return to allow on Partners’
common equity in accordance with Section 49 of the Act, the Régie takes into
consideration, among other things, the following factors – the Partnership’s
financial context, its business risk, the economy in general, interest rates and the
return on long-term bonds, the rate of return estimation methods presented by the
experts, the regulatory context in neighbouring jurisdictions, and maintaining the
financial integrity of the Partnership.
While the estimate of a reasonable rate of return must be based on methods that
are objective or that the validity thereof has been sufficiently proven in practical
terms, the Régie is aware that the numerous assumptions made make the results
somewhat subjective.
In addition, although the Régie will establish estimates it has retained in this
section, the exercise and the results thereof have to be considered as a reflection
of the Panel’s assessment of the evidence submitted. In other circumstances and
based on the evidence submitted in other instances, the Régie may have to revise
these estimates. The Régie will indicate to what extent and in what form the
technical estimates used have to be used in establishing a reasonable rate.
To begin, the Régie notes that the implicit risk premium of 4.71% requested by
GMCLP in this case is the highest it has submitted to the Régie in the past seven
years.
The Régie therefore undertook its review of GMCLP’s application with a great
deal of care. As stated by the expert witnesses, the Régie is also of the opinion
that greater weighting of risk premium and CAPM-type methods is appropriate
for determining a fair and reasonable return.
While GMCLP had also used U.S. financial market data in its approach, the Régie
considers that Canadian data are more representative of capital markets and
taxation in Canada. However, it agrees that with the integration of international
financial markets, it might be reasonable to take account of U.S. data, albeit
giving them less weight.
In terms of the method to use for analyzing historical data, the Régie considers
that the geometric average is useful for evaluating the constant rate of return that
it would have been necessary to earn each year in order to obtain a given overall
return over a historical investment period.
To evaluate the expected overall market return for a projected year, in the Régie’s
opinion the arithmetic average is more appropriate because the objective is to
evaluate the average market risk premium and because actual returns earned on
the market are, by their very nature, uncertain. Consequently, the arithmetic
average of the historical returns is more suitable for evaluating the expected
overall market return for a projected year, because it evaluates the expected future
value, based on the breakdown of the realization probabilities of all returns.
The Régie therefore concludes that the arithmetic average is more appropriate for
establishing the market risk premium and the rate of return based on the risk
premium and CAPM methods.
Moreover, the Régie weighs the five methods submitted by GMCLP for
estimating the market risk premium using factors of 80% for the Canadian studies
and 20% for the U.S. studies. This weighting produces a market risk premium of
6.44%.
Based on the evidence submitted in the case, a majority of the recognized
investment houses, like Value Line69, Bloomberg and others, publish adjusted
betas as part of their market returns analyses.
However, this beta trend towards 1.0 is not as obvious for regulated sectors like
the distribution of natural gas. The ACIG’s evidence70 in effect makes it possible
to question the relevance of the unqualified use of the general adjusted betas
theory for regulated enterprises. If GMCLP’s beta cannot be measured directly,
the experts should use estimates based on either a sample of comparable
companies or general studies.
As the evidence in the case does not make it possible to directly evaluate
GMCLP’s beta, the Régie retains, in the application of the CAPM, a beta of 0.55,
which corresponds to the maximum limit of the ACIG expert’s witness, for the
regulated entities in question.
On the basis of a risk premium of 6.44% and a beta of 0.55, the CAPM estimate
of GMCLP’s risk premium is 3.54%. The Régie’s retention of the 30 basis points
adjustment to take account of issue costs and other factors (flotation costs)
produces a structural risk premium of 3.84%. This compares to the 3.4%
estimated by the Ontario Energy Board for Consumers Gas (EBRO 495) and the
3.0% estimated in March 1995 by the NEB (RH-2-94) for regulated pipeline
companies.
Adding the risk-free rate of 5.759%, i.e. the forecast return for Canada long-term
bonds by Consensus Forecasts, adjusted for a 30-year maturity, to this structural
risk premium of 3.84% produces a rate of return on equity for the shareholders of
GMCLP of 9.60% for the 1999 year.
8. Automatic Mechanism for Establishing Rate of Return
69
70
Value Line Investment Survey, GMCLP-15, Document 2.43
ACIG-2, Document 1, Written Evidence of William R. Waters, September 1998, Appendix V, Table 1.
8.1 Evidence and Argumentation
Based on the Régie’s desire to improve the regulatory process, GMCLP proposes
that the Régie adopt, for the next five years, an automatic adjustment formula for
the rate of return on shareholders’ common equity based on risk-free interest
rates, as measured by the average return on Canada long-term bonds. The
calculation of the target rate of return would be made in August each year and
would reflect the change in interest rates between the base year and the reference
year. In order to relate the rate of return to interest rates, a risk premium-based
formula is proposed.
To establish the base forecast for risk-free interest rates, GMCLP proposes using
the average of the forecasts established over 3 and 12-month periods for the longterm return on Canada 10-year bonds, published in Consensus Forecasts in
August each year and adding to this 10-year rate the spreads between 10 and 30year bonds for the preceding July.
According to the distributor, using the August Consensus Forecasts is justified by
the fact that it is the latest forecast available before the start of the rate year, i.e.
October 1. Moreover, using the Consensus Forecasts for the same month each
year (August) should make it possible to have a constant reference point year after
year. Use of the August forecast by GMCLP would enable it to take account of
the rates forecast at the end of the second month (November) and the eleventh
month (August) of the projected reference year, thereby generating average rate
forecasts almost perfectly centred on the reference year.
Based on his studies, GMCLP’s expert witness suggests there is a negative
relationship between the risk premium and interest rates71. His analyses lead him
to conclude that for a change of 100 basis points (1%) in government bond rates,
the risk premium changes by 25 basis points in the opposite direction, for a net
change of 75 basis points. In other words, GMCLP is suggesting that the elasticity
factor that should be used to adjust the risk premium is in the order of 75%.
In its request for approval and implementation of this automatic adjustment
mechanism for a period of five years, GMCLP acknowledges that, to protect
customers and investors, it is desirable to have a review process for the base
formula related to bond interest rate fluctuations. Accordingly, the distributor
suggests, if the risk-free rate deviates by 300 basis points from the reference point
of approximately 6.0% (March 1998), i.e. if the Canada long-term bond return
exceeds a range of 3% to 9%, that GMCLP can request changes to the formula for
setting the rate of return.
As for the proposed five-year period in Exhibit GMCLP-15, Document 2 for the
written questions72 and then at the hearings73, GMCLP’s expert witness stated
71
72
GMCLP-15, Document 2, Appendix B, pages 17-21.
GMCLP-15, Document 2.2.
that, although he wanted a long-enough period to allow the mechanism to
function, he would not disagree that the regulatory system be reviewed in three
years rather than five years.
None of the intervenors objected to introducing such an automatic adjustment
mechanism for the rate of return to reflect fluctuations in long-term interest rates.
However, the ACIG disagreed with the terms and conditions of the mechanism
and the market conditions that would justify holding new hearings to re-evaluate
GMCLP’s return.
Firstly, according to the ACIG’s expert, in the case of an automatic mechanism,
the Consensus Forecasts’ forecasts appear to him, when all is said and done, to be
of no value and he would even be satisfied with the use of the bond market spot
rate in the indexing mechanism74.
Moreover, with respect to the elasticity factor, the ACIG’s expert suggests there is
a historical relationship, at a certain bond rate, i.e. less than 10%, that investors in
public utilities accept smaller premiums to own shares rather than bonds. In his
opinion75 and analyses76, for any interest rate below 10%, there is no elasticity
factor; therefore, if Canada long-term bonds increase by 100 basis points, the rate
of return should be increased by 100 basis points.
According to the ACIG, a review of the adjustment mechanism should be justified
by changes in market parameters. This intervenor therefore suggests that the
automatic adjustment mechanism for the rate of return be reviewed in the event
long-term interest rates creep above 8% and stay at that level for a period of six
months. In this expert’s view, such an increase would then in all likelihood be the
result of a significant change in the economic environment in which the
distributor operates and would justify a review of the mechanism in place.
8.2 Régie’s Opinion
In Section 7.3 of this decision, the Régie stated that the use of the most recent
Consensus Forecasts’ forecast was appropriate for determining the risk-free bond
rate. GMCLP’s arguments in terms of its objectives appear valid to the Régie in
the sense that data taken from Consensus Forecasts are neutral, objective and
representative of the rates that, according to the forecasts prepared, should prevail
during the period the tariffs apply.
With respect to the use of the spot rate, the Régie considers that the evidence in
the case allows it to conclude that their use would significantly improve the
quality of the forecasts.
73
Shorthand notes of October 27, 1998, Volume 4, pages 255-256.
Shorthand notes of October 28, 1998, Volume 5, page 33.
75
Id., pages 48-50.
76
ACIG-2, Document 1, pages 28-31.
74
Accordingly therefore, the Régie approves, as the first item of the automatic
mechanism for establishing the rate of return, the use of Consensus Forecasts’
August forecasts of each year to determine the risk-free bond rate in accordance
with the methodology retained.
This rate will be established using the average of the two published forecasts of
the long-term Canada 10-year bond rates over future 3 and 12 month periods. The
average spread between the actual 10 and 30 year rates the preceding July will be
added to this rate. The spread is based on published bond rates.
While no method of estimating the cost of capital of regulated enterprises can
perfectly reproduce investors’ expectations, the Régie retains that the use of an
elasticity factor, reflecting a potential relationship between long-term bond rates
and the return expected by shareholders, remains the most widespread practice.
Such practice has the advantage of taking into account the fact that investors’
short-term expectations do no necessarily vary directly with the change in the
return on bonds. Moreover, the results using this approach should be neutral over
longer periods.
Accordingly, for the automatic mechanism for establishing the rate of return, the
Régie retains the use of an elasticity factor of 75% to adjust GMCLP’s rate of
return, the base level of the long-term interest rates being established at 5.76%.
The Régie also notes that, during the testimony, certain reservations about the use
of an automatic formula for periodically adjusting the rate of return were
expressed and that different parameters, for limiting or justifying possible
interventions before the Régie, were suggested. In the Régie’s opinion, such an
adjustment mechanism will effectively only be useful and valid if, while ensuring
the distributor maintains a healthy financial condition, the review rules and
circumstances are clear for all interested parties.
Thus, on the one hand, taking into consideration that the distributor has to be able
to react adequately to unfavourable economic and financial conditions that could
arise in the markets during the indexation period, and, on the other hand, that the
Régie wants to lighten the regulatory process, the Régie concludes that the present
adjustment mechanism for the rate of return will have to be reviewed and, if
necessary, adjusted, in the event Canada long-term bond interest rates rise above
8% for a consecutive six-month period.
Considering that this automatic mechanism for establishing the rate of return on
shareholders’ equity is fair and will simplify the process of determining this rate
and consequently reduce the related costs and time, the Régie approves, for an
initial period of three years, this new regulatory framework in accordance with the
aforementioned terms.
Accordingly, for the 1999-2000, 2000-2001 and 2001-2002 rate cases inclusively,
the rate of return on the common shareholders’ equity of GMCLP will be
determined, rounded to two decimal points, based on variations in risk-free bond
rates as published in August each year by Consensus Forecasts, adjusted for the
spread between the returns on 10 and 30 year bonds and an elasticity factor of
75%.
9. Capital Structure and Average and Prospective Cost of Capital
9.1 Evidence and Argumentation
Over the past few years, GMCLP has stated on numerous occasions that its
present capital structure was optimal in that it minimizes the cost of capital and
permits access to capital markets at a competitive cost. The distributor refers to
previous testimony and decisions, including D-96-31, to state that no exceptional
circumstance has occurred or is foreseen that would justify revising the historical
capital structure, which is composed of 38.5% common equity, preferred equity of
7.5% of total capitalization and 54% debt.
GMCLP therefore intends to maintain this “optimal” capital structure. The
distributor is therefore asking the Régie to allow, for the 1998-1999 year, an
average cost of capital of 9.07% as a rate of return on the rate base and to initially
approve a prospective cost of capital of 7.84% for evaluating planned investment
projects by GMCLP during that year.
None of the intervenors directly questioned this capital structure. However, the
ACIG pointed out that GMCLP has a higher than average financial structure
compared to other distributors in Canada, due to a greater proportion of equity and
lower proportion of debt. According to that intervenor, such a structure would
reduce the financial risks. GMCLP contests this position claiming the distributor’s
greater business risk resulted in a slightly higher equity level and not the opposite.
9.2 Régie’s Opinion
The Régie considers there are no exceptional circumstances that justify revising
GMCLP’s present capital structure and therefore maintains this structure that it
still considers optimal for the distributor’s sound financial health and to allow it
access to capital markets at a competitive cost.
Therefore, based on a financial structure of 38.5% common shares, 7.5% deemed
preferred shares and 54% debt and an authorized rate of return on shareholders’
equity of 9.60%, the Régie allows, for the 1998-1999 fiscal year, an average cost
of capital and a rate of return on the rate base of 8.74%.
Similarly, it approves for the same period a prospective cost of capital of 7.47%
for evaluating investment projects.