Société en commandite Gaz Métro
Cause tarifaire 2008, R-3630-2007
RÉPONSE DE GAZ MÉTRO À UNE DEMANDE DE RENSEIGNEMENTS
Origine :
Demande de renseignements no 1 en date du 7 juin 2007
Demandeur :
Association des consommateurs industriels de gaz
Référence :
Dr. Paul Carpenter’s Evidence
Préambule :
With reference to Dr. Carpenter’s discussion of Gaz Metro’s business risk on page 14.
Questions :
8.1.
a) Is it Dr. Carpenters view that PBR increases or decreases Gaz Métro’s risk?
b) Please indicate whether Gaz Metro has failed to earn its allowed ROE at any time
while operating under PBR and by how much.
c) Dr. Chrétien reduces Gaz Metros’ risk premium due to the ability of Gaz Metro to
earn an above average ROE due to PBR. This implies that PBR reduces Gas
Metros’ risk does Dr. Carpenter agree with this assessment and can he provide
extracts from any recent Canadian testimony where he has discussed the impact of
PBR on a regulated utility’s business risk.
Réponses :
8.1.a) See Dr. Carpenter’s testimony at page 27, line 10 to page 28, line 29.
8.1.b) See response to Gaz Métro-7, document 9.6.a).
8.1.c) As described in the testimony cited in response to a), Dr. Carpenter’s view is that Gaz
Métro’s Performance Incentive Mechanism can be expected to increase its business risk
relative to the traditional models of cost of service regulation employed for other utilities
in North America but that recent changes to the Mechanism would directionally lower its
risk. Dr. Carpenter understands Prof. Chrétien’s testimony to be recommending a
reduction of 50 basis points in Gaz Métro’s positioning on the basis of Gaz Métro’s view
that its PBR mechanism gives it the opportunity to increase its authorized base rate of
return. Dr. Carpenter would not recommend such a reduction in Gaz Métro’s positioning
on the basis of business risk.
Original : 2007.06.19
Révisé : 2007.08.03
Gaz Métro – 7, Document 9.8
Page 1 de 6
Société en commandite Gaz Métro
Cause tarifaire 2008, R-3630-2007
WRITTEN EVIDENCE
OF
PAUL R. CARPENTER
FOR
ENBRIDGE GAS DISTRIBUTION INC.
The Brattle Group
44 Brattle Street
Cambridge, Massachusetts 02138
617.864.7900
August 2006
Original : 2007.08.03
Gaz Métro - 7, Document 9.8
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Société en commandite Gaz Métro
Cause tarifaire 2008, R-3630-2007
WRITTEN EVIDENCE OF
PAUL R. CARPENTER
1
coordination between the needs of the electricity market and the requirements it places on
2
gas infrastructure, there is risk nonetheless. Board Staff puts it this way in its report:
3
4
5
6
7
8
9
10
11
12
A central planning function exists in the electricity market primarily
through the IESO and OPA, while no provincial agency exists in the
natural gas market. Board staff are not advocating a central planning
function in the gas market, but information exchanges could be valuable to
stakeholders. This Review is the first step in understanding the
implications of new gas-fired power generators for the province’s natural
gas infrastructure. However, Board staff realize that there is great
uncertainty with respect to future infrastructure requirements, and
periodic updates might be required.7
13
The Staff’s report points out that “many stakeholders raised concerns regarding the risks
14
associated with underutilized capacity from overbuilding and/or stranded assets.” Board
15
Staff indicated that these issues would be dealt with on a case-by-case basis.8
16
17
Q32. What do you conclude about the uncertainty of gas-fired power generation demand
18
19
for the Company’s business risk?
A32.
While growth in the demand for gas to supply power generation in Ontario is an
20
opportunity for the Company, it is one that creates uncertainty as to the amount, timing,
21
investment requirements, and cost recovery. Moreover, it is an opportunity for the
22
Company that may face substantial competition, as reflected in the bypass application of
23
GEC and the Board’s regulatory policy to use that competition to pick the winners. As
24
the Board Staff stated in its report cited above, there is no central planning function for
25
gas infrastructure in Ontario. This set of business risks did not exist at this level of scale
26
or uncertainty in 1993.
27
28
29
30
D.
7
8
HEIGHTENED REGULATORY UNCERTAINTY ASSOCIATED WITH THE
COMPANY’S DISTRIBUTION BUSINESS
Ibid., pages 27-28, emphasis added.
Ibid., page 25.
Original : 2007.08.03
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Société en commandite Gaz Métro
Cause tarifaire 2008, R-3630-2007
WRITTEN EVIDENCE OF
PAUL R. CARPENTER
1
Q33. You described changes in the Company’s market risk due to dramatic changes in
2
commodity prices. Are there any indications that this market risk may well increase
3
in the future in ways that would be of concern to investors in the Company’s equity?
4
A33.
Yes.
There is substantial uncertainty associated with the future regulation of the
5
Company’s gas distribution business, as recognized by the Board in its Natural Gas
6
Forum process. This uncertainty enhances the market risk that the Company faces.
7
8
Q34. What is the nature of this future uncertainty?
9
A34.
As part of its Natural Gas Forum process, the Board determined that it will begin a
10
process to establish a firm gas rate regulation framework. The Board has articulated its
11
goals for a rate regulation framework as follows:
12
13
14
15
16
17
18
19
20
21
22
23
The Board believes that a multi-year incentive regulation (IR) plan can be
developed that will meet its criteria for an effective ratemaking framework:
sustainable gains in efficiency, appropriate quality of service and an attractive
investment environment. A properly designed plan will ensure downward
pressure on rates by encouraging new levels of efficiency in Ontario’s gas utilities
– to the benefit of customers and shareholders. By implementing a multi-year IR
framework, the Board also intends to provide the regulatory stability needed for
investment in Ontario. The Board will establish the key parameters that will
underpin the IR framework to ensure that its criteria are met and that all
stakeholders have the same expectations of the plan.9
The Board envisions a series of generic and utility specific proceedings that together will
24
establish a firm framework for gas rate regulation. The Board described this series of
25
proceedings as follows:10
26
27
•
Annual Adjustment Mechanism – “The Board will hold a generic hearing to
28
determine the appropriate base for setting the annual adjustment mechanism. The
29
Board expects that once the generic methodology is determined, its application to
30
each utility may result in different specific adjustments.”
•
31
32
Rebasing – “Each IR plan must begin with a robust set of cost-based rates, based on a
thorough and transparent review. The Board’s view is that a thorough cost-of-service
9
“Natural Gas Regulation in Ontario: A Renewed Policy Framework,” Report on the Ontario Energy Board
Natural Gas Forum, page 22.
10 Ibid., pages 23-36.
Original : 2007.08.03
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Gaz Métro - 7, Document 9.8
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Société en commandite Gaz Métro
Cause tarifaire 2008, R-3630-2007
WRITTEN EVIDENCE OF
PAUL R. CARPENTER
1
rebasing must occur at the end of each IR’s plan’s term before a new plan is put in
2
place.
3
rebasing, efficiency improvements will be revealed and their benefits passed on to
4
customers through base rates for the next period. The Board will determine the base
5
rates through a hearing for each utility.”
6
•
Rebasing is an important consumer protection feature.
Through robust
The Term of the Plan - “The Board expects that the term of IR plans will be between
7
three and five years. The Board’s view is that three years represents the minimum
8
term that may be expected to give rise to productivity increases, and its preference is
9
for a term of five years. The Board is reluctant to approve a term greater than five
10
years at this time, give the importance of ensuring that productivity gains are passed
11
on to customers in subsequent periods. The term of the plan will be determined in the
12
generic hearing on the annual adjustment mechanism.”
13
•
Service Quality Monitoring – “The Board will develop the service quality framework,
14
and will undertake a consultation to finalize the measures, standards and reporting
15
mechanism.
16
framework.”
17
•
The Board expects to use its rule making tools to implement this
Financial Reporting – “The Board will consult with stakeholders and modify the Gas
18
Reporting and Record Keeping Requirements (RRRs) as necessary to meet the
19
requirements for financial reporting in the new ratemaking framework. While the
20
Board intends to conduct this consultation and modify the RRRs before the
21
development of the first IR plan, it expects that the RRRs may be further refined in
22
the context of specific IR plan development.”
23
•
Data Filing Guidelines – “The Board will undertake a review of the gas utility data
24
filing guidelines for rate hearing processes, and then develop a set of draft filing
25
guidelines, which it will distribute for consultation. Wherever possible, the Board
26
will seek to develop consistent guidelines for Union and Enbridge, and will consider
27
issues such as electronic filings.”
28
•
The Role of Alternative Dispute Resolution – “The Board is mindful of the concerns
29
stakeholders have expressed and the efforts they have made to propose improvements
30
to the ADR process. The Board will not decide at this time the precise structure of
Original : 2007.08.03
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Société en commandite Gaz Métro
Cause tarifaire 2008, R-3630-2007
WRITTEN EVIDENCE OF
PAUL R. CARPENTER
1
the ADR process. The Board has already undertaken a review of the ADR process,
2
and it will consider the submissions made through the Natural Gas Forum before
3
releasing its conclusions in the ADR review. The Board expects that the ADR
4
process will evolve further in the process leading up to the first IR applications.”
5
6
The resolution of all of these issues by the Board will determine the extent to which the
7
future market risk faced by the Company and its shareholders will increase over and
8
above current market risk. Current uncertainty regarding the ultimate resolution of these
9
issues exposes the Company and its shareholders to an additional regulatory risk.
10
11
Q35. What do you conclude with respect to the Company’s business risk as it relates to its
12
13
equity thickness and cost of capital?
A35.
Since the last time the Board examined the Company’s business risk as it relates to its
14
deemed equity thickness there have been significant changes in the market in which the
15
Company operates. The Company’s business risk today is higher than it was in 1993 due
16
to fundamental changes and increased uncertainty in gas and oil commodity markets and
17
the potential for bypass of its distribution facilities. Substantial uncertainty as to the
18
effect of the Ontario Government’s new gas-fired electricity generation initiatives on
19
required natural gas infrastructure in the province may place potentially new and large
20
financing requirements on the Company with uncertain outcomes. Finally, investors in
21
the Company’s equity will also recognize that there is significant uncertainty as to the
22
regulatory model that will apply to the Company in the future, as reflected in the issues
23
before the Board in its Natural Gas Forum process. For all of these reasons I conclude
24
that an increase in the Company’s equity thickness is warranted.
25
26
Q36. Does this complete your written evidence?
27
A36.
Yes, it does.
Original : 2007.08.03
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