RÉGIE DE L'ÉNERGIE
DEMANDE DE MODIFIER LES TARIFS DE
SOCIÉTÉ EN COMMANDITE GAZ MÉTRO
À COMPTER DU 1er OCTOBRE 2009
DOSSIER : R-3690-2009
RÉGISSEURS :
M. RICHARD CARRIER, président
M. GILLES BOULIANNE
M. JEAN-FRANÇOIS VIAU
AUDIENCE DU 12 SEPTEMBRE 2009
VOLUME 8
MARC BEEBE et CLAUDE MORIN
Sténographes officiels
COMPARUTIONS
Me LOUIS LEGAULT
Me AMÉLIE CARDINAL
procureurs de la Régie;
REQUÉRANTE :
Me VINCENT REGNAULT
Me HUGO SIGOUIN-PLASSE
procureurs de Société en commandite Gaz Métro (GM);
INTERVENANTS :
Me GUY SARAULT
procureur de Association des consommateurs
industriels du gaz (ACIG);
Me ANDRÉ TURMEL
procureur de Fédération canadienne de l'entreprise
indépendante (FCEI);
Me GENEVIÈVE PAQUET
procureure de Groupe de recherche appliquée en
macroécologie (GRAME);
Me STÉPHANIE LUSSIER
procureure de Option consommateurs (OC);
Me ANNIE GARIEPY
procureure de Regroupement national des conseils
régionaux de l'environnement du Québec (RNCREQ);
Me FRANKLIN S. GERTLER
procureur de Regroupement des organismes
environnementaux en énergie (ROEÉ);
Me DOMINIQUE NEUMAN
procureur de Stratégies énergétiques et Association
québécoise de lutte contre la pollution
atmosphérique (SÉ/AQLPA);
Me JOHN HURLEY
procureur de TransCanada Energy Ltd (TCE);
Me HÉLÈNE SICARD
procureure de Union des consommateurs (UC);
Me STEVE CADRIN
procureur de Union des municipalités du Québec
(UMQ).
R-3690-2009
12 septembre 2009
- 4 TABLE DES MATIERES
PAGE
LISTE DES ENGAGEMENTS . . . . . . . . . . . .
LISTE DES PIÈCES . . . . . . . . . . . . . . .
5
6
CONTRE-PREUVE DE GAZ MÉTRO
PAUL R. CARPENTER,
PIERRE DESPARS,
AARON M. ENGEN,
A. LAWRENCE KOLBE,
MICHAEL J. VILBERT
INTERROGÉS PAR Me VINCENT REGNAULT . . . . . .
CONTRE-INTERROGÉS PAR Me GUY SARAULT . . . . .
____________
12
131
R-3690-2009
12 septembre 2009
- 5 LISTE DES PIÈCES
PAGE
B-90 :
(En liasse) Tableaux. Standard &
Poor's/TSX Index Relative Performance
- Source : Yahoo.com . . . . . .
10
B-91 :
(En liasse) Feuilles « Value Line »
11
B-92 :
Principles of Corporate Finance .
11
B-93 :
Réponse du docteur Kolbe à une demande
de renseignements dans le cadre du
dossier de TQM . . . . . . . . .
11
C-1.26 :
Extrait du site web de Gaz Métro sur
la situation concurrentielle du Gaz
naturel par rapport à l'électricité. . . . . . . . . . . . . . .
138
____________
R-3690-2009
12 septembre 2009
- 6 L'AN DEUX MILLE NEUF, ce douzième (12e) jour du
mois de septembre :
CONTRE-PREUVE DE GAZ MÉTRO
LE PRÉSIDENT :
Reprise de l'audience. Madame la Greffière.
LA GREFFIÈRE :
Protocole d'ouverture. Audience du douze (12)
septembre deux mille neuf (2009), dossier R-36902009. Demande de modifier les tarifs de Société en
commandite Gaz Métro à compter du premier (1er)
octobre deux mille neuf (2009). Poursuite de
l'audience.
LE PRÉSIDENT :
Bonjour à toutes et à tous. Donc, nous en sommes à
la contre-preuve. Maître Regnault.
Me VINCENT REGNAULT :
Oui. Bon matin, Monsieur le Président, Messieurs
les Régisseurs. Comme vous disiez ce matin, au
menu, au programme, la contre-preuve de Gaz Métro à
l'égard du taux de rendement. Pour votre
information, de la façon dont nous suggérons de
procéder est un peu la suivante. En fait, on
voudrait fonctionner un peu de la même façon que
l'on fonctionne lorsqu'on présente la preuve en
chef, c'est-à-dire qu'il va y avoir... La soirée
R-3690-2009
12 septembre 2009
CONTRE-PREUVE
Gaz Métro
- 7 -
hier nous a permis de rassembler beaucoup les
idées, d'organiser une présentation qui va être
faite de façon, dans le même ordre qu'une
présentation qui a été faite jeudi, il y a déjà une
dizaine de jours.
C'est-à-dire que monsieur Engen va
commencer par revenir sur quelques points qui ont
été soulevés en preuve par l'ACIG; ensuite, le
docteur Kolbe a quelques points également; le
docteur Carpenter; le docteur Vilbert; et pour
revenir au docteur Kolbe; et finir rapidement avec
monsieur Despars sur quelques points, toujours
évidemment qui ont été soulevés dans le cadre de la
preuve en défense.
Pour les fins de la contre-preuve, j'ai
remis à la greffière et à mes confrères quatre
documents auxquels les témoins du panel vont
référer au cours de leur témoignage. Je proposais
pour éviter de les interrompre durant leur
présentation de leur donner une cote immédiatement,
et ils seront au dossier, puis les témoins pourront
expliquer l'utilité qu'ils y voient. Si ça convient
à tout le monde, on pourra fonctionner de cette
façon-là.
LE PRÉSIDENT :
R-3690-2009
12 septembre 2009
CONTRE-PREUVE
Gaz Métro
- 8 -
Allons-y.
Me VINCENT REGNAULT :
Peut-être donner des cotes.
Me GUY SARAULT :
Écoutez, je pense qu'avant de donner des cotes à
des nouvelles pièces pour les verser en preuve, il
faudrait savoir si elles sont admissibles ou non
dans le cadre d'une contre-preuve. Je voudrais bien
signaler à mon confrère que la contre-preuve a pour
but évidemment d'adresser des éléments nouveaux qui
ont été mis en lumière par la preuve des
intervenants et non pas pour répéter ou pour
consolider une preuve principale qui aurait dû être
présentée en chef. Alors, je pense que j'aimerais
mieux y aller à la pièce avec chacun des documents.
Et pour mesurer leur admissibilité avant de leur
attribuer une cote.
LE PRÉSIDENT :
Maître Regnault.
Me VINCENT REGNAULT :
Merci. Je suis très au fait de la nature de la
preuve que j'ai le droit de faire dans le cadre
d'une contre-preuve. De toute façon, la dernière
chose que je voudrais faire en ce samedi matin,
c'est perdre le temps de la Régie et de l'ensemble
R-3690-2009
12 septembre 2009
CONTRE-PREUVE
Gaz Métro
- 9 -
des participants ici ce matin. Alors, je vous
assure évidemment que ces preuves-là sont liées à
des éléments qui font partie ou qui vont permettre
de répondre à des arguments qui ont été soulevés
par l'ACIG dans le cadre de sa preuve. Je pense
que, pour la bonne marche de l'audience, il y
aurait lieu que ces pièces-là soient cotées
immédiatement pour permettre aux témoins de faire
leur présentation sans être interrompus.
LE PRÉSIDENT :
Un instant s'il vous plaît. Peut-être pour procéder
ce matin, peut-être la Régie va permettre que les
cotes soient données aux documents. La Régie
réserve les droits par contre, document par
document, lorsqu'ils seront abordés au besoin,
Maître Sarault, si vous avez des représentations à
faire, la Régie les écoutera.
Me VINCENT REGNAULT :
Donc, les tableaux qui commencent avec la première
page « Emera versus Standard & Poor's/TSX Index
Relative Performance - Source : Yahoo.com », B-90.
B-90 :
(En liasse) Tableaux. Standard & Poor's/TSX
Index Relative Performance - Source :
Yahoo.com.
R-3690-2009
12 septembre 2009
CONTRE-PREUVE
Gaz Métro
- 10 -
Le second document qui est constitué en liasse de
feuilles provenant de « Value Line », B-91.
B-91 :
(En liasse) Feuilles « Value Line ».
Le troisième document qui est un extrait d'un
ouvrage de doctrine « Principles of Corporate
Finance » de Brealey, Myers et Allen, B-92.
B-92 :
Principles of Corporate Finance.
Et le dernier élément qui est la réponse à une
demande de renseignements dans le cadre du dossier
de TQM, réponse du docteur Kolbe, B-93.
B-93 :
Réponse du docteur Kolbe à une demande de
renseignements dans le cadre du dossier de
TQM.
Est-ce que vous réassermentez les témoins
puisqu'ils ont été libérés de leur serment?
LE PRÉSIDENT :
Sous le même serment.
________________
L'AN DEUX MILLE NEUF (2009), le douzième (12e) jour
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 11 Me Vincent Regnault
de septembre, ONT COMPARU :
PAUL R. CARPENTER,
PIERRE DESPARS,
AARON M. ENGEN,
A. LAWRENCE KOLBE,
MICHAEL J. VILBERT,
LESQUELS témoignent sous la affirmation solennelle,
INTERROGÉS PAR Me VINCENT REGNAULT :
Q. [1] M. Le Président, I will leave the peril to Mr.
Engen to begin with. Merci.
MR. ENGEN:
Thank you, Mr. Regnault.
Given the length of the proceedings and the
fact that we've taken the unusual step of meeting
on a Saturday morning, I will limit myself this
morning to four points of rebuttal regarding
evidence presented yesterday by Doctors Booth and
Gorman.
I'd like to start, first of all, with
discussing what I called the price to book myth.
In his presentation, Dr. Booth said that he
was mystified at why I said in my presentation the
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 12 Me Vincent Regnault
price to book value is a myth, since, as he said,
it's used in ATWACC and it's used in setting
returns on regulated assets.
Dr. Kolbe, in a moment or two, will comment
on ATWACC and price to book value.
But that aside, in making his comments, Dr.
Booth mischaracterizes my discussion of the misuse
of price to book value in the context of this and
other hearings.
The price to book myth relates to the use
of common share price to book values and asset -pardon me, the use of common share price to book
values and asset acquisition price to book values
to evaluate investor expected returns on
investments in regulated assets, and has nothing to
do about ATWACC or rate base.
This inappropriate mischaracterization was
designed to put my views at odds with those of my
colleagues on this panel, and this is not the
case.
Moreover, even I, as a mere banker,
recognizes that book value is used in setting
returns on regulated assets.
So, using book value to set such returns in
no way relates to the incorrect use of price to
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 13 Me Vincent Regnault
book value to evaluate investor expected returns.
As such, it is entirely consistent with the
positions taken by my colleagues on this panel to
provide evidence that price to book value has been
and will remain a myth in the context of evaluating
investor expected returns on common equity and on
acquisition transactions.
The second point I'd like to discuss, was
the point raised yesterday regarding Gaz Métro bond
spreads relative to those of other Canadian
utilities.
In cross examination yesterday of Doctors
Booth and Gorman, Mr. Legault asked them, as he
asked me, to consider in the chart in Gaz Métro 7,
document 12.8, page 6 of 8 -- and by now I think
we're all well familiar with that chart -- as he
did with me, Mr. Legault asked whether the
difference between Gaz Métro's 10 year spreads and
the average spread for the Canadian utility group
indicated that Gaz Métro had lower risk than other
members of the sector.
You may recall that I said that there are
too many factors involved to draw such a
conclusion.
Doctors Booth and Gorman, on the other
hand, both indicated that it did.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 14 Me Vincent Regnault
In arriving at their conclusions, Doctors
Booth and Gorman ignored two key factors that
positively affect Gaz Metro's bond spreads relative
to those of other Canadian utilities.
First, Gaz Métro's bonds were attractive
investments to Canadian investors; and the tendency
is for investors to hold them once they acquire
them.
With more demand and supply for Gaz Metro
bonds, the prices are higher than for other more
easily acquired bonds, pushing Gaz Métro's spreads
inside those of other utility company spreads.
I discussed this concept when I provided
the Board with my summary of evidence at the
beginning of this hearing regarding illiquidity and
liquidity in Canadian bonds.
The second point,
Gaz Metro bonds are
structurally different than bonds issued by other
Canadian utilities.
How are they different?
In two ways:
Number 1, they are secured bonds, whereas bonds
issued by other Canadian utilities are not.
Second, under its trust deed, Gaz Métro
cannot increase its interests in non regulated
activities above 10 percent of its total
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 15 Me Vincent Regnault
non consolidated activities.
In other words, the covenant pattern around
Gaz Métro's bonds are very different.
That is,
they are materially stronger than those of other
Canadian utilities.
More details regarding the covenant pattern
for Gas Metro's bonds can be found in note 12 A,
the limited partnership's 2008 financial
statements.
Those two key factors help explain the
difference between Gaz Métro spreads and those of
other Canadian utilities.
One cannot simply arrive at the conclusion
that the difference in spreads accounts for -- as
accounted for by differences in business risk.
The second point I'd like to touch on -- or
the third point, rather, relates to money market
comments made by Dr. Booth.
He said in his presentation that the
Canadian money market is now back to normal.
Indeed, he provided a chart showing how CP, that is
commercial paper, pricing has improved
significantly since July of 2008.
Because Dr. Booth's chart has such a short
time frame, one cannot tell how current commercial
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 16 Me Vincent Regnault
paper pricing compares over the longer term.
Commercial paper, while improved, remains
materially more expensive than historically.
Canadian utilities would expect to pay in
the order of 40 basis points on one month
commercial paper, which is still roughly 10 basis
points higher than normal.
And I think of that in quotations, I'm not
even sure what normal is these days. That's 33
percent higher than the longer term average of 30
basis points.
But, even ignoring a continuing increase in
pricing, the all in cost to commercial paper
issuers is significantly higher than in the past.
That an increase is missed by Dr. Booth
because he ignores the infrastructure required to
implement a commercial paper program.
All commercial paper programs are supported
with commercial paper backup bank credit
facilities.
Without commercial paper back up
facilities, there are no commercial paper programs.
And as I illustrated during our
presentation, bank credit is substantially
expensive today than a year ago.
more
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 17 Me Vincent Regnault
Commercial paper backup facilities tend to
be one year plus a day credit facilities.
Because commercial paper backup facilities
are rarely, if ever, and we, as bankers, hope they
are never drawn on, the only relevant pricing
increases would be up front fees, which as I
indicate during my presentation, have risen from
nothing to 50 or 60 basis points.
And undrawn spreads also were applicable,
which have risen five fold from 10 basis points to
now 50 basis points.
So while the commercial paper program
market is functioning much better than during the
crisis, commercial paper pricing remains higher,
and the all in cost, including the required
supporting bank facilities, is much higher.
This adds a fourth source of capital for
utility corporations, which is more expensive today
than previously.
As outlined during my presentation, bank
debt, bonds, preferred shares and, as I discuss
now, commercial paper are all now more expensive
than they have been historically.
It's unreasonable to think that all other
sources of capital for corporations are more
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 18 Me Vincent Regnault
expensive and not so, too, is common equity.
The last point I would like to touch on
involves charts.
During his presentation, Dr.
Booth stated that I did not provide updated yield
spreads to the Régie.
I was under oath when Mr. Sarault asked me
when my graphs had been last updated.
As I
indicated then, they were updated early last
week. The latest reasonable time they could have
been updated.
I updated those charts, as I was
concerned about providing the Régie with misleading
evidence.
After Dr. Booth's comments, I examined the
charts he provided in his presentation and noted
that they were all two months old.
The date of
those charts were as of July 10th, 2009.
Given the recent performance in the
marketplace, these charts over state the
performance of utility stocks relative to the S&P,
TSX composite index over the past year.
In addition, during his presentation, Dr.
Booth noted that he obtained the information from
Yahoo, and that he was unable to provide updated
charts from March 9th, as was requested in an
information request.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 19 Me Vincent Regnault
Since Yahoo controls all the parameters,
except which stocks to compare, I note that Dr.
Booth made a similar comment in his written reply
to the same information request.
I was curious about the remark and so
yesterday went to the web and checked out Yahoo's
stock reporting service.
It was the first time I had ever looked at
the website, as I have access to Thompson 1 and
Bloomberg at work, at home and when I travel. I
have never had need to consider Yahoo.
In about half an hour, I was able to
prepare the charts requested in the information
request using the same service Dr. Booth used to
prepare his charts.
I prepared those charts yesterday for the
Régie and found, of course, why one might be
reluctant to produce those charts.
They tell a every different story of the
relative performance of utilities in the S&P, TSX
since March 9th of this year.
They show that while the utilities can be
good relative to the index in a falling market, the
reverse is true in a rising market.
I've prepare those for you and we can run
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 20 Me Vincent Regnault
through then very quickly. We also can even put
them up on the screen.
I obtained the data for each one of the
companies referred to by Dr. Booth.
The first one
I have is Amera, relative to the S&P, TSX index, to
say contrary to, to the comments made by Dr. Booth,
we're unable to control the parameters.
I've circled down here the dates, in the
lower right hand corner of the top chart. The date
in here is from March 9th to yesterday, September
10th.
During that period Amera has gained roughly
10 percent, while the S&P, TSX is up roughly 48
percent.
In each case, the red line in the chart you
see above us here is the S&P, TSX, the blue line is
the utility.
And then below that, in the chart for
fairness, as well, I've indicated the performance
of both the S&P, TSX and the relevant utility over
the full one year period leading up to today.
Over that period for Amera, they are down 6
percent while the S&P, TSX is down 11 percent.
Switching to Fortis, since March 9th Fortis
is up 15 percent, S&P, TSX up 48 percent.
Over the
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 21 Me Vincent Regnault
last 12 months Fortis is flat at 0 percent, S&P,
TSX down 11 percent.
For Gaz Métro, it performed well at 25
percent since March 9th, while the S&P, TSX is up
48 percent.
Over last 12 months, Gaz Métro is up
approximately 2 percent while the index is down
11.
Transcanada, having come through some heavy
financing activity over the past 18 months, up 32
percent, index up 48 over the last 12 months, minus
15 for Transcanada, S&P, TSX minus 11.
P&G, a particularly interesting note, I
know Dr. Booth has referred to it, it's one of his
favorite utilities for a number of reasons, as he's
discussed, his regulatory oversight, P&G since
March 9th has actually out performed the index by 1
percent.
I will note that the jump in the share
price, beginning in early May, this was a result of
the market's understanding of some significant
improvements around Kitimat, LNG, and the prospect
of the construction of the Pacific, Northern Gas -pardon me, the Pacific Trails Pipeline, these are
two very large opportunities in the market, I
believe may happen for, for PNG, neither of which,
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 22 Me Vincent Regnault
incidentally, will be subject to formula ROEs.
Over the past 12 months PNG up 10 percent while the
index is down 11.
Again, that growth performance is largely
due to Kitimat, LNG and Pacific Trails Pipeline.
And then lastly, since March 9th, I look at
CU. Again, the last of the six companies that Dr.
Booth referred to.
Canadian utilities is down 8 percent, while
S&P, TSX is up 48 percent.
The performance is much
the same. Over the last 12 months for CU at minus
14, with the index at minus 11.
All of these companies but P&G have
under performed the index over the six -- over the
last six months.
It's important we make sure that when we
discuss these matters, we have things that are
current.
As I say here, contrary to what was told us
earlier, the data is and was available as of March
9th, 2009.
Thank you.
ME VINCENT REGNAULT:
Dr. Kolbe?
MR. KOLBE:
All right. I am next and I'm going to divide my
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 23 Me Vincent Regnault
comments essentially the same way I did the first
time. That this set will be primarily on the basic
ATWACC principles. The remaining set will be on
implementation issues and the details of some of
the criticisms that have been heard.
I really wasn't going to mention this in
the hearing, but since Dr. Booth's comments
yesterday, I think I should say that I actually
spent a part of my childhood, I remember it, in
Canada. I was here from ages 8 to 14.
I was
inculcated in the culture at that time, to the
extent that's relevant.
I've been testifying in Canada longer than
Dr. Booth has.
My first appearance was in Nova
Scotia in 1984, 25 years ago, where I appeared on
behalf of the board, and the board was my client,
as it was again the following year.
I've also testified in Newfoundland on
behalf of customer groups, and once in Labrador on
behalf of a customer.
So I've -- I've -- I am, I am, at least to
the extent culture matters, I feel I'm culturally
attuned to Canada.
Not as much as someone who
lives here, but neither am I someone who has never
been here before.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 24 Me Vincent Regnault
Perhaps on a more serious note, I will say
that, in general, Dr. Booth does not respond to the
economic merits of my ATWACC presentation.
Instead, he responds to combinations of
appeals to authority, especially in the first
regulatory decision, to my knowledge, and
apparently to his, and according to the information
request, he answered, and to be handed down to, on
the issue of ATWACC -- the one in 1999 in Alberta,
which he quotes so often.
He also responds by assertion and by
mis stating my evidence, saying I say things that I
don't say. In fact, if I were saying what he says
I'm saying, I'd disagree with me, too. I'm not
saying what he says I am.
And, perhaps most fundamental with respect
to the principles, he suggests that Dr. Vilbert and
I are the only ones in some large group. I don't
know if it's the whole world or just in the
regulatory community, to say that the ATWACC is
flat and that is simply not true.
The mis statement of my testimony in this
regard is evident in his comment that even Dr.
Morin disagrees with me because Dr. Morin believes
in a U shaped ATWACC cure.
So do I.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 25 Me Vincent Regnault
You can see that by looking at Figure 5 of
my written evidence, which was part of my first
presentation last week, which shows
U shaped cost
curves, weighted average cost curves for four
different industries, only one of which had no
U shape.
It just went straight up, that was a high
risk industry.
I certainly believed the utilities and said
so. That the after tax weighted average cost to
capital has a U shape.
The question is: What is the exact shape of
the U? Its not is it a U, it's what does it look
like?
I say the U is wide and flat at the
bottom.
If there were a narrow weighted average
cost to -- sorry, if there were a narrow optimal
after tax weighted average cost to capital, the
U shape curve would look more like a V.
Now, there'd be a really narrow range at
which the -- which everyone would be driven by
competition to minimize the cost to capital, and
you don't see that in the world, as explained in
detail in my written evidence I won't repeat all
those points, but papers, including papers by Dr.
Booth himself show that, that companies do not
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 26 Me Vincent Regnault
behave as though the after tax weighted average
cost to capital curve were shaped like V.
They
behave as though it's wide and flat.
Nor is it the case that I invented the idea
that there is no magic in financial leverage.
In fact, the first time the phrase was
used, it was in a somewhat simpler form. Simply
there is no magic in leverage. I'm the one who
added the modifier financials, just for clarity,
and it was used in my hearing, and I believe in
written evidence in a long ago proceeding by
Professor Stewart C. Myers of MIT.
Professor Myers is one of the world's
leading experts on capital structure.
I think most
people would agree with that.
For example, when the Nobel Prize was
awarded to Professor Merton Miller for, in large
part, for Professor Miller's work on capital
structure, Professor Myers was the person selected
to write the review article of Professor Miller's
contributions to economics.
Also, Dr. Morin agrees with me, and we can
see that if we look at the handout that was given
by IGUA, handout C 120, which is the excerpt from
New Regulatory Finance by Roger
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 27 Me Vincent Regnault
A. Morin, Ph.D., and I am going to ask people to look,
to look at this just with me briefly. I know it
will take a bit of time but I think it's worth
doing.
If you just look at the first, about the
6th page in, Chapter 16, is the average cost to
capital in this book and that's what's been
reproduced here.
And you can see from the subtitles on this
page, that there's a whole series of discussions of
factors discussed in -- by Dr. Morin in this, in
this text. And if you, if you were to flip through
it, you'd find different U shaped average cost to
capital curve drawn.
ME GUY SARAULT:
What note are you talking about?
A. No, I'm talking about the table of contents.
Q. [2] Table of contents, okay.
A. Chapter 16, they're headers, book versus market
value, the affect of capital structure on cost of
capital, this is page viii, page 8 in Roman
Numerals, and it -- and I'm saying then if you were
to flip
through the text itself, which was
provided, you'll see various U shaped average cost
to capital curves drawn to illustrate various
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 28 Me Vincent Regnault
points.
I would just call attention to one of these
for the moment because it relates to
something
that will come up later on and I don't want there
to be confusion.
If you turn with me to page 458 of that
excerpt, Figure 16 3, you'll see a line there, it's
a straight line called: The Relationship Between
The Cost of Equity and Leverage, which is a
straight line and if you recall my presentation, I
had a line for cost of equity that was curving
upward.
The difference is in the scale on the
bottom. If you look at the bottom of Figure 16
dash -- point 3, you'll see it's debt ratio B/S,
bonds over stocks. I had B over B plus S.
That is,
my ratio was equity to value. This is equity to -or sorry, debt to equity.
I was debt to value.
And so the shape is different because you have a
different thing every now and then.
So this is, this is not inconsistent with
my curve. I wanted to call attention to that.
So, Dr. Morin discusses many factors in
here, many of which you will find discussed in my
appendix C and in my evidence.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 29 Me Vincent Regnault
And if you go to the very last page, page
471, to the very last paragraph, Dr. Morin says and
I will read it: "To summarize, in theory" -ME VINCENT REGNAULT:
Where are you at, Dr. -A. I'm at the paragraph of the last page of the
Chapter, page 471, right before references.
"To summarize, in theory, there exists an
optimal capital structure, i.e. one that minimizes
the WACC."
And by WACC here we're talking the same
thing as my after tax data average cost to capital.
I made the point that textbooks typically use this
term, but it's also used in rate regulation with a
different meaning, so we call it ATWACC, or rate
regulation for clarity, but it's the same concept
going on.
"Financing the assets with a blend of debt
in equity can lower the overall WACC because debt
is less expensive than equity, owing to it's tax
advantage and lower risk.
However, too much debt will increase the
WACC, as the risk associated debt without -- will
outweigh its benefits.
In practice, there exists a range of
capital structures over which the average cost of
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 30 Me Vincent Regnault
capital does not change materially.
Within this range, an increase in the debt
ratio will result in an increase in both the cost
of debt and the cost of equity with the overall
cost of capital will not change measurably."
That is exactly my evidence. That is
exactly what I've been telling you.
There's another example that I have for you
to prove that neither Dr. Morin nor I are the only
people to do this, and this is a handout that was
labelled, I believe, B 92, with the
heading: "Principles of Corporate Finance, by
Richard
A. Brealey, Stewart C. Myers and Franklin Allen.
This is the leading graduate textbook on
finance on the planet. It's available in 10
languages, or 11 if you count the fact that there
are separate translations in Portuguese, with
Brazilian and Portugal.
If you -- I start with the table of
contents again. If you turn to the third page in,
which is Roman xvii, at the bottom, you'll see part
five, "Payout Policy and Capital Structure" at the
upper left.
And you'll see there are three chapters
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 31 Me Vincent Regnault
devoted directly to capital structures; 18, 19 and
20, "Financing and Valuation."
So this textbook takes 3 chapters to teach
things, all of the various theories of capital
structures, all of the various techniques that have
been developed over the course of 50 years of
research for people to analyze capital structure,
including, by the way, the adjusted present value
technique that Dr. Booth mentioned Professor Myers
invented.
Of course it's true, it's one of the
techniques taught. But that doesn't mean that
because Professor Myers invented it, he believes
that there's magic in leverage. In fact, I've
already told you he does not.
And I can, I can further confirm that for
you if we turn to, to the next page, which is in
the upper left labelled, "page 550."
This is a very last part of the third
chapter on -- in the text called, "Your questions
answered.
And if we turn to the next page -- I'm
sorry, turn two pages on, to the very last thing in
the last chapter on capital structure, at the very
end before the summary: "Question: Are taxes really
R-3690-2009
12 septembre 2009
that important?
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 32 Me Vincent Regnault
Do financial managers really
fine tune the debt to minimize WACC?
"Answer: As we saw in Chapter 19, financing
decisions reflect many forces beyond taxes,
including costs of financial distress, differences
in information, and incentives for managers." These
are all things I've talked about.
"There may not be a sharply defined optimal
capital structure.
Therefore most financial
managers don't fine tune their company's debt
ratios, and they don't rebalance financing to keep
debt ratios strictly constant. In effect they
assume that a plot of WACC," again that's the
ATWACC, "for different debt ratios is "flat" over a
reasonable range of moderate leverage."
So this is a book to train financial
managers, and they tell you, financial managers
behave as though the WACC is flat. That's
consistent with the research that I cite in my
evidence, and it's further evidence we aren't the
only ones to have this view.
Lastly -- sorry, my computer has died
here.
Dr. Booth made a point of telling you that
the TQM in the -- that the NEB in the TQM decision
does not say that the ATWACC is flat.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 33 Me Vincent Regnault
That is true, they do not use those
words. They had already said it in 2004.
As quoted
in my evidence, in decision RH 2 2004, phase 2 at
page 55, the NEB says and I quote: "The board
accepts that over a certain range the ATWACC curve
may be flat or virtually flat."
And then the decision goes on to
say: "However, they have reservations about the
evidence Dr. Vilbert and I presented in that
proceeding in deciding whether to -- that were
sufficient to keep them from acting on that finding
in 2004."
And a great deal of our work in the TQM
proceeding, was to provide answers to those
questions and I have repeated those answers for you
here in my appendix E, so that you have the benefit
of all the information that the NEB had to answer
the questions they raised in 2004.
So now let's turn to what the TQM decision
does say, This is from RH 1 2008, page 78 and again
I quote: "In the board's opinion an ATWACC"
--
ME VINCENT REGNAULT:
Just a second, Dr. Kolbe.
LE PRÉSIDENT:
Voulez vous préciser à quelle page exactement vous
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 34 Me Vincent Regnault
êtes dans le document.
ME VINCENT REGNAULT:
Could you repeat Mr. Kolbe -- Dr. Kolbe, where you
are in the TQM's decision?
DR. KOLBE:
A. I'm now going to -- I am now going to quote, not
from the document in front of you, unless you have
in front of you the TQM decision? If you do, it's
RH 1 2008 on page 78.
And I have the decision now on my screen,
it's the paragraph right in the middle of the
page: "In the board's opinion an ATWACC methodology
enables comparison of aggregate returns on an equal
footing between companies of comparable risk by
substantially neutralizing the effect of financial
risk attributable to different capital structures.
Consequently, this methodology better
utilizes financial market information.
Further, it produces a single number which
aligns with the manner that many businesses assess
capital projects.
Again, that is exactly what I've been
saying. So there they may not use the words "the
ATWACC is flat" in this decision, although they did
in 2004, but their statement of the principles is
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 35 Me Vincent Regnault
exactly consistent with the statements that I have
been, have been making.
Lastly, Mr. Gorman, in his written
evidence, makes the point that perhaps the
regulatory bodies around the world that I say use
ATWACC were not -- don't really do the same thing
we do in Canada or, perhaps, there's some
difference.
I was asked in cross examination where I
said that I had trouble with language in some of
the, in reviewing some of the decisions from some
countries, whether that included Australia, New
Zealand and the United Kingdom, and I responded
no.
There is an information request project in
process in this proceeding as there have -- are in
others in Canada, and had they had these questions,
they could have asked.
The NEB had those questions and did ask.
And what's been marked as Exhibit B 93 before the
hearing is my response when the NEB did ask.
And the NEB, as you can see, asked a very
detailed series of questions on this very point
running from parts A through G, and I
responded to
the best of my ability in this, in this document.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 36 Me Vincent Regnault
And I'm certainly not going to review it
here. It's there, it's part of the record in the
National Energy Board's TQM proceeding. But the
bottom line answer is that, to the best of my
knowledge, the implementation of the ATWACC and the
fundamental regulatory framework around the world,
although there are certainly differences, is
entirely consistent with the principles I have
recommended here.
And it is in no way inconsistent to take
note of the fact that around the world they use the
ATWACC in deciding whether or not you should use it
here.
And that, that completes this part of my
presentation. This is on the most fundamental
point: Does the ATWACC have their principle, or do
other people use it, as I say they should.
I think, is it Dr. Carpenter who goes
next?
DR. CARPENTER:
A. Yes.
good.
Thank you.
Good morning. That would be
So, again we switch gears a bit and talk
about business risk.
Let me begin my rebuttal presentation by
talking about Mr. Gorman's evidence on business
R-3690-2009
12 septembre 2009
risk.
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 37 Me Vincent Regnault
And I think its useful to bring up his
initial presentation, and if we turn to page 17,
we'll find his conclusions.
So -- sorry.
So, Mr.
Gorman, as I understand it, did not present his own
business -ME GUY SARAULT:
Excuse me, I don't have it yet.
A. Oh, I'm sorry.
ME GUY SARAULT:
Okay. Thank you.
A. So, as I understand it, Mr. Gorman did not present
his own business risk analysis. Instead, he was
asked to interpret what he referred to as the
market's view of Gaz Métro's risk as expressed by
credit rating agency reports and analyst reports,
and he cites three; Standard & Poor's, DBRS and
Scotia Capital. And he summarizes what he takes
from those reports on page 17.
While sitting in the hearing room the last
few days, I had the occasion to look at these
reports more carefully, and I think it's quite
instructive to do so.
And what I'd like to do is begin with DBRS,
which is, you can turn it up, is Gaz Métro 7,
document 9.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 38 Me Vincent Regnault
LE PRÉSIDENT:
Est ce que tout le monde est prêt? Oui.
ME VINCENT REGNAULT:
Okay.
LE PRESIDENT:
Oui.
A. So, if you look at the first page of the DBRS
analysis, you'll see an item called "rating
considerations" in the middle.
And you see on the
left DBRS list, "strengths" and on the right DBRS
list, "challenges."
The first three strengths that DBRS listed
are the three items that Mr. Gorman has summarized
on page 17 of his presentation.
Those are low risk gas distribution
activities providing financial stability; strong
operating cash flow finances; capital expenditures
and distributions and supportive regulatory
environments.
What Mr. Gorman didn't tell us about was
the column entitled "challenges."
When I think of business risk, I think of
challenges and the five challenges that DBRS lists
are earnings sensitivity to interest rates through
approved ROEs; cash flow sensitivity to weather and
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 39 Me Vincent Regnault
economic cycles.
So DBRS is recognizing the systematic
elements of Gaz Met's cash flow sensitivity;
limited organic growth in gas distribution
activities. You'll recall we talked about the low
penetration rate in residential.
Relative pricing of competitive energy
services, that's competition with electricity and
fuel oil, and operational risks.
And if you have the time to look further in
the document, you will find on page 3 the DBRS, in
fact, goes into some detail on each of those
elements in a way in which I think is fully
supportive of the analysis that I made with respect
to Gaz Métro's business risk.
Now, if you could turn to the next
document, which is Standard & Poor's, that's Gaz
Métro 7, document 10, so it should follow right
behind.
Here Mr. Gorman has selected two citations,
two passages from this report.
The first one:
"Supportive regulation underpins the gas
distribution business' dominant market position and
provides operational consistency."
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 40 Me Vincent Regnault
You'll find that as the first sentence of
the last paragraph of the second -- of the first -of the second page of that document.
And then the other passage he selects is
"GMLP benefits from a performance based regulatory
arrangement with incentives on some operations."
And you will find that passage a few sentences down
in the same paragraph.
What he fails to report is the analysis
that S&P provides later on page three, for
example. It's worth reading the entire document but
this paragraph on page three, the second to the
last paragraph, and let me just read it: Despite
its monopolistic like
position in Québec, GMLP
must contend with low natural gas market
penetration in the province's energy market.
The penetration is materially lower than
the national average, according to our estimates,
due to the highly competitive electricity rates.
Consequently, the partnership has a low
penetration rate in the residential energy market,
which undermines profitability due to high margins
in this segment.
In addition, the company has a large
industrial customer base that faces economic
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 41 Me Vincent Regnault
fluctuations and results in less predictable cash
flows. Québec's economy is somewhat cyclical we
believe, given its significant manufacturing base.
GMLP's key subsidiaries listed as expected
performance in fiscal 2008, and are mostly
regulated entities with robust market positions."
Again, acknowledging that they are
regulated utilities, but that they face business
risk in the same way that I discuss business risk
in my evidence.
And finally, let's turn to the Scotia
Capital documents, which is document Gaz Métro 7,
document 11, annex 1.
So it's an annex to the
document. You'll see it's a four page document
called "Credit Analysis."
And actually, if you read this document,
there's not a lot of discussion here about business
risk.
What's interesting about it is that there's
a lot of discussion about the adequacy of the
formula.
So looking at the first page, what
Mr. Gorman extracts for purposes of his
presentation is what he has here, "Generally timely
commodity price recapturing customer rates and
reasonable assurance of full recovery and prudently
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 42 Me Vincent Regnault
incurred capital and operating cost."
Of course, that's not a completed
sentence. If you look at the first paragraph under
"Québec distribution," if you read the entire
sentence, what Scotia Capital says is:
"In line with most Canadian utility regulation, we
have historically viewed the Régie as benign for
credit quality, thanks to the generally timely
commodity price recapture and customer rates and
the reasonable assurance of full recovery and
prudently incurred capital and operating costs."
Then they go on: "Taking this strong
assurance of cost recovery into account, we have,
in the past, used Canadian deemed leverage levels
as manageable and allowed ROEs as thin but more of
an issue for equity holders than creditors."
This is a credit report. This not an equity
analyst report.
"In the past two years, however, and
especially in 2009, we have come to view the
formulaic ROE adjustments, common and Canadian
regulation as producing inadequate returns from an
equity perspective and a material concern from a
creditor standpoint, as well."
Then they go on, the third paragraph:
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 43 Me Vincent Regnault
"We anticipate," then they talk about, in the
second paragraph, Gaz Metro's last rate case before
you, and then they say:
"We anticipate that GCM will take the cue of the
Régie and introduce even more expert evidence in
its next rate application.
There is clearly no shortage of such
evidence in the capital markets today.
Perhaps the
NEB's pending decision in the TQM rate case
discussed below will offer insight into the
possible outcome of the next GCM rate case."
So this was before the TQM rate case had
been decided by the NEB.
If you go down to the very bottom of the
page, under "Trans Québec and Maritimes Pipeline,"
the last sentence that starts, the second line up,
"We are cautiously optimistic that the NEB will
award the requested 40 percent equity
capitalization and vary its formulaic approach to
ROEs in TQM's case based on what we view was
convincing evidence in the rate application and the
obvious facts on the grounds that today's cost of
equity for such assets is much higher than the NEBs
allowed ROEs of 4.84 -- 8.46 percent in 2007, 8.71
percent in 2008 and 8.57 percent for 2009."
And
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 44 Me Vincent Regnault
they talk about when the decision would be
expected.
So, in contrast to Dr. Booth being
surprised by the TQM decision, here's an
example
of a credit analyst who actually was anticipating
that the NEB may modify its formulaic approach
because of its view that formula was broken.
So, what, then, does it mean when a credit
rating organization says that gas distribution is a
low risk enterprise?
Well, the relevant question is: Low
relative to what?
And what they're looking at is
low relative to the market as a whole, other
businesses which they happen to give credit ratings
to.
That's not a surprise.
Right?
Utilities
are low risk. The question is a relative one.
All
the experts, I think, in the room here today, will
acknowledge that local distribution companies'
equity betas are less than one. On that basis, they
are low risk.
But that does not mean they don't have
business risk.
In other words, I think all of the experts
in the room here today will agree that local
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 45 Me Vincent Regnault
distribution company betas are greater than 0,
they're not risk free.
So the question is: Where in the range are
they? Where does Gaz Métro fall in the range, and
how should that affect your view of the performance
of the formula and the relationship of Gaz Métro to
the sample that Dr. Vilbert uses?
And in fact, the beta estimates that the
experts are using in this room actually don't vary
that much. We're talking about .5, .6, there seems
to be a reasonable consensus.
What I've attempted to do in my evidence,
is to step back and attempt to position Gaz Métro
with respect to the industry as a whole and the
sample benchmarks that Dr. Vilbert uses.
In my opinion, what Mr. Gorman has
provided, by what I think is a fairly selective
review of this credit rating agency material is not
particularly helpful on that question.
So now let me turn to Dr. Booth and
interestingly, despite my American bias, Dr. Booth
and I seem to have reached some common ground on
the business risk issue, at least as I perceive it
from his, from his presentation.
And by the way, I will say that I don't
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 46 Me Vincent Regnault
have the benefit of having grown up in Saskatchewan
like Larry, Larry did, Dr. Kolbe. But I did grow up
Minnesota, which, as states go, is about as close
to Canada as you can get.
My siblings still have accents that are
very similar. We produced the best hockey players
in the United States.
In the United States.
And
most of the people in Minnesota know what curling
is all about.
So, on that basis, I think I'm culturally
qualified.
So what is the common ground between Dr.
Booth and myself on business risk?
Well, I think we're in agreement that
there's an important conceptual distinction to make
between fundamental risk and variability risk, what
is sometimes called long term risk and short term
risk and Dr. Booth referred to that in his
presentation.
He also appears to agree that Gaz Métro is
positioned as a relatively high risk local
distribution company relative to its Canadian peers
due to competition with electricity and Gaz Métro's
industrial load.
His complaint seems to be that nothing has
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 47 Me Vincent Regnault
really changed since two years ago, and so whatever
business risk factors had evolved by that time have
been fully taken into account by the Régie.
I don't disagree with that.
But my view is
that the last two years of data, which I've updated
in the current presentation, reinforced the prior
opinions, and in some respects they strengthen it,
particularly with respect to electricity
competition, as we now see that the Hydro Québec
surpluses are greater than they were two years
ago.
You may remember, there was a debate two
years ago about whether Bécancourt Power Plant
would come back, and it was put to me that it was
just a temporary outage and that it would be back.
And I said, "Well, there's a lot of
uncertainty in that."
Well, if you look at the
updated Hydro Quebec business plan that the
gentleman from the environmental group put to me in
cross examination, you'll see that for the
foreseeable future, Hydro Québec is now saying that
Bécancourt will be shut down.
So, again, another example of the
realization of uncertainty.
So, I said there was -
- this is some basis of agreement with Dr. Booth.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 48 Me Vincent Regnault
In my opinion, at that point then he falls
off the reservation. And where does he fall off the
reservation?
It's when he says that Canadian
regulation provides full protection to Gaz Métro
due to quote, "constant rate hearings."
And he
repeats that frequently. That the fact that Gaz
Métro is able to come back before the regulator
year after year diminishes, if not eliminates, his
risk, its risk.
Now, he doesn't reconcile that with a .5
beta entity and he doesn't factor in the long run,
short run fundamental versus variability risk
distinction that he claimed to agree with me
about.
And in that respect, I think it's
instructive, once again, to look at what the NEB
said in the TQM decision with respect to the
distinction between these two types of business
risk.
And, again, I would point you to page 46 of
the decision, and this is also in my evidence,
footnote 7 of page 8 of my evidence.
And let me
just read it: "On the question of the appropriate
weights for short term versus long term risk" --
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 49 Me Vincent Regnault
ME GUY SARAULT:
What paragraph are you? Okay.
The first one,
sorry.
ME GUY SARAULT:
Sorry.
I was looking for the first page.
DR. CARPENTER:
Okay
A. So on page 46 of -M. PIERRE DESPARS :
R. À la page 8 du témoignage de monsieur Carpenter,
page 47 de la décision en anglais. Excusez, page 46
de la décision en anglais. C'est plus simple de le
retrouver sur... à la page 8 du témoignage du
professeur.
LE PRÉSIDENT:
Page 8
du témoignage de M. Carpenter.
DR. CARPENTER:
A. So, just to read this quickly: "On the question of
the appropriate weights for short versus long term
risk, the board is of the view that because of the
more limited ability of regulators to respond to
the realization of long term risks, there is a
sense in this aspect that they are more important
than short term risks.
Long term risks are more structural,
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 50 Me Vincent Regnault
therefore they denote more fundamental factors and
trends in the evolution of the overall risk
landscape of a company, while short term risks tend
to be even more cyclical or individual events.
So, in this case the NEB is recognizing
that even though there may be annual rate cases,
there may be circumstances in which the NEB or a
regulator would not be able to respond effectively
to the realization of the particular long term
risks.
And so I think that's important to take
into account. It has implications that a comparison
between Canadian and U.S. regulation, by which I'll
come to in a minute.
First, before doing that, I just want to
briefly talk about Mr. Trahan's evidence.
Mr. Trahan does not employ, what I would
call, a traditional business risk analysis in his
testimony.
Instead he makes a series of observations
about aspects of Gaz Met's business, which he
believes offset any long term risks due to
competition of electricity or vulnerable industrial
load.
For example, he points to the opportunity
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 51 Me Vincent Regnault
to add residential customers to offset declines in
use per customer.
In my opening remarks I talked about how
that wouldn't fully account, given the data, for
the decline in use per customer that Gaz Métro has
experienced in the last 10 years.
Second, he talks about the loss of
industrial load historically, and customers, and
that that creates an opportunity for Gaz Métro to
gain them back.
To me, that's a bit of a perverse resolve,
right?
If industrial demand is growing in Mr.
Trahan's world, well that's good, that's risk
reducing.
If industrial demand has fallen, well,
that's good too because there will be opportunity
to win them back.
I don't think we can have it both ways.
Remember, at the very beginning of my
presentation I said that, last week or the week
before, I said there was a distinction between
expectation and uncertainty with respect to
evaluating risk.
Risk is about uncertainty, it's not about
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 52 Me Vincent Regnault
expectation.
You can have all fine expectations in the
world about the ability too grow your business,
capture economies of scale, but if there's
uncertainty in your ability to do that, that's
business risk.
Finally, Mr. Trahan talks about revenue
stability as offsetting the volume risk that I
talked about.
And let me just say a couple of things
about revenue stability.
Revenue stability is the function, it's the
function of the ability of Gaz Met in view of
improving it's rate to always be able to increase
rates to manage the risk of demand reduction.
And so, in that sense it's part of this
short term variability issue is there's some point
at which ultimately in the long run you won't be
able to raise rates sufficiently to manage that
risk.
He points to industrial customers having
long term contracts. That's true.
They typically
are three to five year contracts. They have
staggering remaining durations, so every year
there's a certain number of those contracts the
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 53 Me Vincent Regnault
that fall off.
Very different contractual structure than a
gas pipeline like Transcanada or others that may
have 5, 10, 15 year contracts underpinning their
capacity.
Now, not all of the revenues are recover in
fixed charges, as I indicated last week, yet the
vast majority of costs are fixed and thus there is
an exposure between cost incurrence, particularly
if you have to add assets in order to add customers
and revenues.
And finally, we talked about, in my
evidence, performance incentive mechanisms create
an explicit exposure to volume variation that is
not fully recovered by the exogenous factors.
So let me move on to my final topic, which
is the US LDC comparisons.
With respect to fundamental risk, the first
thing I talked about was the fact that US LDCs are
in the same fundamental business.
There's a North American gas
market. There's no difference in the underlying
business structure.
The framework of the regulatory systems are
the same: Original cost rate making rate of return
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 54 Me Vincent Regnault
approach.
That was not disputed. I didn't hear
anybody dispute that there are no distinctions on
those terms. The difference of opinion seems to be
with respect to how much variability risk is there
in the U.S. system, and is that revealed if we were
to look at achieved versus allowed returns
historically.
When we look at allowed returns, there's
clearly been a gap between returns awarded in the
U.S. and the returns produced by the formula.
What explains the gap?
One theory that has been put to us is that
the US LDCs are much riskier; that explain the gap,
and that somehow that could be illustrated by
looking at historical achieved returns. And I got
a series of cross examination exhibits in which 10
Ks were put in front of me with various
calculations of earned returns to attempt to
suggest that somehow US LDCs were not earning their
allowed return or were fundamentally risky as a
result.
It turns out that we do have a data source
at the holding company level that Dr. Vilbert
relies on in his analysis that does report, as I
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 55 Me Vincent Regnault
said, at the holding company level, earned returns
on common equity. And that is the Value Line
source.
And we have an exhibit that was marked as
B91, which is the set of Value Line pages for each
of the companies in Dr. Vilbert's select samples.
If you have that in front of you, so if you
look, for example, at AGL Resources, which very
first one, in the table of data, the third line up
from the bottom, you'll see over on the right
"Return on common equity," so it's providing data,
by year, return on common equity. And you can see,
for example, under year 2007, 12.7 percent return;
2008, 12.0 percent return, and looking back.
And so you can look at each of these and
judge both the level and the year to year stability
of these earned returns.
Now of course this is at the holding
company level so we can't compare them directly to
the allowed returns because there's a number of
subsidiaries of each of these holding companies
that have their own allowed returns.
But it is
sort of instructive to look at.
And just page through them; some of them
are lower than others.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 56 Me Vincent Regnault
By the way, they also report return on
total capital, which is two line above that.
You'll see for AGL Resources, that was in
the range of 7.9 to 8 percent in the last three
years.
Atmos Energy is the next.
There the return
on common equity is in the 8 to 10 percent range.
Atmos apparently has a pending rate case,
you'll see that in the notes.
This is, by the way, illustrative of the
point I was making the other day that if a US LDC
has returns, earned returns that are below its
allowed returns, it certainly has the option of
going in for a rate case.
If it has returns that are above its
allowed returns, it doesn't have to go in for a
rate case.
So, if that's the optionality of the
system, you would exact on average that earned
returns would be greater than allowed returns under
such a scheme.
We have data for the Cleve
(phonetic). Looks like they range from common
equity, the last few years, 10 percent to 12 and a
half percent.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 57 Me Vincent Regnault
New Jersey Resources on the next page,
common equity returns ranging from 15 percent to 10
percent for the last few years.
Nicor, on the next page, returns averaging
13 percent to 14 percent in the last few years.
NiSource, a bit lower performance: 9
percent to 6 percent in the last few years.
So there is variability in the U.S. system,
something I've fully acknowledged.
North West Natural Gas return on common
equity, roughly in the 10 to 12 percent range in
the last few years.
Piedmont return on common equity, roughly
in the 11 to 12 percent range.
South Jersey, in the 12 to 16 percent range
in the last few years.
Southwest Gas, interestingly, relatively
low returns: 6 to 9 percent in the last few
years. And if you read the notes on the bottom,
they're going in for a rate case.
Vectren: 12 to 9 percent in the last few
years.
And WGL Holdings, the very last one: 10 to
12 percent per year.
So, in my opinion, again, I don't put a lot
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 58 Me Vincent Regnault
of stock in historical accounting returns as a
measure of forward looking risk, but if the
argument was "We can't use LDC -- US LDC
comparators because they are tremendously risky and
they don't earn their allowed returns and therefore
the allowed returns are irrelevant.
I think this data puts that issue to bed,
it seems to me.
And with that, I've concluded my rebuttal.
DR. VILBERT:
Good morning. And thank you.
And not to be left out of the connections
to Canada, my last name is, after all, Vilbert in
English but "Vilber" in French. (laughter)
And my ancestors, I'm told by the family
lore, came down the Mississippi River from Canada
and settled in St Louis, Missouri some years ago.
So, to turn to the Value Line sheets that
you had out a moment ago, and I want to point out a
couple of things. And this is in response to Mr.
Gorman who focuses on book value accounting
information as the source of financial risk and
information for investors.
I would say that Value Line is probably the
prominent publication that investors, certainly
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 59 Me Vincent Regnault
small investors look at when they consider whether
to invest in a company, and starting with AGL
Resources, and I'll go through this very quickly,
starting at the very top, the very first
information that you see is its recent price,
followed by a price earnings ratio of 10.2;
relative price ratio of 1, which is just a measure
of how it's doing relative to other companies; and
a dividend yield, which of course is relationship
of dividends to its market price.
If you come over to the left, right below
the name, you'll see three ratings: Timeliness,
safety, and technical.
Those are all measures of how the stock
price is likely to do relative to other companies
in the sample or in this survey.
Below that you'll see a graph, and in that
graph you'll see a dotted line and a, kind of a
bunch vertical lines, and then a solid line.
Value Line gets its name from that solid
line. That solid line is Value Line's estimate of
the market value of the stock.
And you can you see, it's compared to the
current market price, and that gives you -- which
is those little vertical notches there on that
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 60 Me Vincent Regnault
graph right below the solid line, and that just
tells you what Value Line thinks this stock is
worth relative to its current price.
And, in fact, you can kind of see that, to
the left, right below those three numbers you see
projections for 2011 to 2013, and it tells you at a
high price, the low price it's forecasting, and the
annual total returns that you would expect to get
over the period of when this was published, up to
period of 2011 to 2013.
Now, it does report book value information
down below but it doesn't do anything with that
information, it just simply reports that
information.
And if you look down further in the box,
where it talks about the words discussing this
thing, it talks about share prices.
Investors are concerned with market prices,
they don't concern themselves with book value. In
fact, most investors, if you asked them what the
book value is, I assert that they won't be able to
tell you, but they will be able to tell you what
the market values are.
So I won't go any further with that, but
credit rating reports do focus on book value
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 61 Me Vincent Regnault
information but that's because they're worried
about bond holders not about equity holders.
Turning now to the remainder of my remarks
will be focused primarily on my estimates of the
overall cost of capital and the weighted average
cost to capital.
I would -- I think it's fair to say that
Dr. Booth doesn't agree with everything I do, and - I guess that's not surprising, but I would like
to give you my reasons for what I did.
First of all, I'll start with the
individual parameters of the capital asset pricing
model.
Recall, I used, for the risk free rates,
starting with the risk free rates, I used the
hundred basis point adder to the consensus forecast
long term forecast of long Canadian government
bonds. And when I added 100 basis points to it, I
got 4.3 percent.
Dr. Booth was gracious enough not to
criticize me too strenuously about that particular
adjustment, however, he uses a number of 4.5
percent, which until yesterday I was mystified
where he got that number. And as far as I can
understand it, it's a forecast of 4 percent plus
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 62 Me Vincent Regnault
his assertion that it will be higher than that
going forward, so he gets 4.5. They basically added
50 basis point to another number.
So my number 4.3 is less than his at 4.5,
and I got mine by adding 100 basis points.
Moving to the market risk premium.
My base
level market risk premium is 5.75. I've been using
a number like that in Canada for the last few times
I've testified. I was as low as 5 and a quarter for
awhile, and as high as 6 when I first
testified. But lately it's been 5.75.
Now, the market risk premium is a
forward looking concept and it probably very varies
with market conditions.
I don't believe the time I was doing my
analysis that market conditions were normal.
They
were, in fact, according to Dr. Booth himself says,
the worst economic conditions in the last 70
years.
I had to do something with that piece of
information when I was estimating the cost of
capital. And I, I think conservatively added 200
basis points to the cost of capital, to the market
risk premium.
Dr. Booth, as far as I can tell, made no
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 63 Me Vincent Regnault
modification to his market risk premium, and as
evidence to support that, he provided a survey by
Pablo Fernandez, which was attached to his response
to a data request that came from Dr. Kolbe and me,
IR 18.1.
And that survey was sent out by e mail to
a number of professors in the January/February 2009
time period.
And Dr. Booth uses it, I'm assuming, to say
"And see, financial professors, finance professors,
economic professors, didn't forecast a big increase
in the market risk premium."
But, if you read the question that was
asked in that e mail it, says, and I quote, "I
asked about the MRP that we professors used to
calculate the required return on equity in 2008,
2007, and previous years."
Now, in my view, that question is subject
to a lot of interpretation, different
interpretations.
And, in fact, if you read the survey, you
will see that that is exactly how it was
interpreted by the professors who got this.
In fact, the professors were asked to
provide support for how they got their MRP that
they reported, and most of them said they relied on
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 64 Me Vincent Regnault
textbooks and academic articles.
And those textbooks, I will tell you, were
not written during the economic crisis, they were
written before it, so they could not possibly
reflect economic conditions affecting the MRP at
the time of the period that I was doing my
analysis.
As I said, Dr. Booth, as far as I can tell,
if you look at his cost to capital estimates over
time, and in this particular case it's 7.75
percent, that has -- you would not be able to tell
that anything different happened last year than the
year before or the year before that. I mean his
numbers vary almost not at all.
And he got, by the way, to 7.75 by making a
series of adjustments.
The first adjustment he made was this 50
basis points for the risk free rate.
He made a 25 basis point adjustment for the
slight possibility that he could be wrong about his
market risk premium and it could be as high as 6
percent, so he added 25 basis point and another 50
for floatation, which gives you 125.
If you subtract that from 7.75, your answer
is 6 and a half, which is less than the time he was
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 65 Me Vincent Regnault
doing his analysis, as the yield on a utility bond
A rated utility bond.
So that should tell you that something is
wrong.
If your cost of equity estimate is less
than the cost of an A rated investment grade debt,
something is wrong.
No, in fairness, his conclusion was 7.75,
which is higher than an A rated utility debt, but
he only got there by making some adjustments.
Turning quickly to Mr. Gorman for a couple
of things that he said about the way I calculate
the ATWACC, he notes that I report market to book
value ratio in my spreadsheets.
Now, I don't use the market to book ratio
in any way in the calculations that I perform to do
the ATWACC. The only reason those numbers are there
is a check, an internal check in the spreadsheets
to ensure that the data they we're using for the
number of shares outstanding and the market price
are consistent so that when a company has a stock
split, that we have what's -- that the stock price
will change with the stock split so that we have
the proper price and number of shares
outstanding. And that is the purpose of that
calculation. It has nothing to do -- I don't use
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 66 Me Vincent Regnault
that number in any other way. it's simply within
the spreadsheet.
Secondly, in his presentation yesterday,
Mr. Gorman said that Dr. Carpenter's testimony and
mine are in contrast, or are in conflict with
regard to the relevance of accounting based rates
of return.
Dr. Carpenter says it's not relevant, and
Mr. Gorman says that I use it -- and I think he
mentioned the historical MRP calculations that I
do.
But in any case, whatever reason he thinks
I'm using it, as far as I am aware, there is no use
made of accounting rates of return in my
analysis. Not any.
So there's some kind of an error in his
information of my testimony. And in any case,
there's not conflict with Dr. Carpenter.
Turning next to betas.
I use adjusted
betas for the Canadian sample but I do not use them
for the gas LDC sample.
So, why do I do that? Well, it's not
because I believe that the regulated utilities
betas will migrate to one. I don't believe
that. That's not the reason.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 67 Me Vincent Regnault
The reason is because companies that are
regulated on the basis of original cost rate base
have greater sensitivity to interest rate changes
than other companies.
I'll give you a brief, very brief, given
that it's Saturday, theory about that: And that is
that when the capital asset pricing model was
derived, the market that we proxy with the TSX, the
market in theory is all assets, including bonds,
but also real estate, art, everything that has
value, what -- as part of the theory of the capital
asset pricing model.
Traditionally we use indexes that are -consist entirely of stocks, but if you do an index,
an augmented index, including bonds, what you
discover is that the utility bond betas increase
much more than the betas of other standard
companies, non regulated companies. And so it's
that sensitivity to interest rates that causes me
to adjust betas.
I would note, however, that Dr. Booth had a
graph of the betas of the Canadian utility sample,
and what you looked at, if you remember from a
couple days ago, the graph
starts out around .5,
and goes a little bit, and then plummets down below
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 68 Me Vincent Regnault
0; it goes negative for awhile, which nobody in the
room, I don't think, believes is a relevant risk of
utility stocks, and then started to recover, until
we have the financial crisis, and now they're
stating to go back down.
I believe that those lower current betas
are not representative of the real underlying risk
of the utilities today but I did not try to correct
for that.
By the way, just as a side note, I actually
calculated the betas that I used very time, but I
do adjust them, but I actually calculate them,
whereas as far as I can tell, Dr. Booth has used a
beta estimate of .45 to .55 in every proceeding
I've ever been in with him. And as far as I can
tell, this comes from magic, because I don't know
how he gets there.
The numbers never change, it's always the
same. And, in fact, we asked him a data request on
one point: "How did you get your number?" And he
said it was based upon his long experience as a
student of regulated utilities.
Another issue is bond betas. Quickly, if
you look again at that chart about bond betas that
Dr. Booth provided you, what you see is it varies
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 69 Me Vincent Regnault
dramatically. It goes from as low as minus .2 to as
high as almost .8 which, by the way .8 is far in
excess of the betas that Dr. Booth would recommend
for the utilities, and I'm using .25 beta for
A rated utilities, which is a very conservative
number because had I used a lower number, my market
risk premium would have had to have been higher to
recognize the yield that you were observing on
A rated utilities.
By the way, also, really Myers and Allan
report estimates for financial -- for Betas for
blue chip stocks of one -- .1 to .3, so my number
is right, consistent with that.
Turning now to the empirical capital asset
pricing model.
Again, according Dr. Booth that other than
Dr. Morin and myself, we are the Lone Rangers in
the E CAPM world and nobody else does this or even
thought about it, I guess.
But first of all, let's talk about why I do
the E CAPM.
Every single test of which I'm aware of,
the capital asset pricing model has had the same
result.
And that result is that the intercept is
too low and the slope is too steep. And so the
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 70 Me Vincent Regnault
correction to that is to increase the intercept and
decrease the slope, to match what you observe
empirically.
Dr. Booth notes, and I agree with him that
when you -- the tests were made on short term risk
free rates, and that when you use long connect
Canada bond yields, or long bond yields in general,
you have the effect of increasing the intercept.
How much do you increase it on average
relative to Treasury bills? On average the
difference between long Canada's and treasury bills
is about 100 to 125 basis points. But the tests of
the model said that the increase needed to be in
the range of 5 percent.
Now, it varied from test to test; some were
less, some were more. Interest rates were different
in those days, but the point is that if, musing
long Canada bonds, or long bond yields, solved the
problems with the CAPM, you wouldn't have had
Professor Chrétien come in last year and present
the Fama French model to you.
The impetus for the Fama French model was
the fact that the capital asset pricing model was
failing to provide accurate estimates of the cost
of capital because the intercept was too high and
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 71 Me Vincent Regnault
the slope was too low.
So, Fama French came in with the
Fama French model, and others have tried to modify
the CAPM to take care of this problem.
But if the answer was simple, like "We're
just going to use long term bond yields," academics
would have figured this out and would have used
long term bond yields to solve all the
problems. They didn't do that.
And by the way, the first time that I'm
aware of, this idea is a paper by Professor Robert
Litzenberger, Krishnan Ramaswami, and Howard Sosin.
They suggested adjustment for the E CAPM in a paper
that's entitled "On the CAPM approach to the
estimation of a public utilities cost of equity
capital." And this was published in the Journal of
Finance in 1980. And these were well respected
finance professors. And Journal of Finance is the
leading, or arguably one of the two leading
journals in finance.
So, I believe, as was questioned yesterday,
that, yes, it's improvement to use the long Canada,
but it's not quite enough.
And when I use
long term bond yields I reduce the adjustment I
make to the intercept in recognition that bond
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 72 Me Vincent Regnault
yields on long Canada's are more than bond yield on
short term Treasuries.
Finally -- and you don't need to turn this
up, but in Booth's -- my response to Dr. Booth, I
an IR 6.3, and in there I performed a calculation,
as specified by Dr. Booth, and that specification
was to estimate the capital asset pricing model
using the current Treasury bill yield, which was
about 20 basis points, unadjusted Canadian betas,
and my market risk premium, and he asked me to
comment on it, and I said those estimates were
nonsense. And the reason they were nonsense was
because they were less than the cost of debt.
However he implied by -- that I said that the E
CAPM was nonsense with that result, and that is not at
all what that IR says. If you read it, it has nothing
to do with that.
Finally, with regard to the parameters, the
tax rate. Yes, I use Gaz Métro's tax rate in
calculation of the ATWACC.
And if you look in text books, that's the
way it's always done, you use the tax rate of the
entity to which you're estimating the overall cost
of capital.
And by the way, when I estimated the ATWACC
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 73 Me Vincent Regnault
for the U.S. gas LDC sample, I did not use capital
market data from the U.S., I used Canadian capital
market data.
So it's already a lower ATWACC
because of that than they would have had in the
U.S.
But, if you wanted to do what Mr. Gorman
recommends to use the individual tax rates of the
sample companies, you could have done that, but if
you do that, the correct way to do what he's
recommending is that for each company you calculate
the ATWACC for that company, using that specific
company's tax rate, and then figure out what the
ROE would be at Gaz Métro's capital structure, 46
or 38 and a half, and that ROE average is the
number that you should use for the ATWACC for Gaz
Métro.
Had I done that long winded calculation, I
would have had a higher ROE than we estimated using
the methodologies that I used.
Now, I can show you that if you ever want
to get bored on another Saturday, we can go do
that.
Finally, the Dupont method, I'd like to put
a stake into this one too. The Dupont method is
exactly what Dr. Booth and I said it was; it's a
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 74 Me Vincent Regnault
way of a company to analyze its internal
operations. You look at all these different ratios
that Dr. Booth laid out and you focus on internal
cost structures and efficiencies, and you're
looking over time to try to make this as efficient
as possible.
It has nothing to do with cost of capital.
I have never seen a witness submit Dupont
method to estimate the cost of capital in all the
times I've been testifying.
I asked Dr. Kolbe if he had ever seen it
used and he said he didn't even know what it was.
So the Dupont method is not a method to
estimate the cost of capital nor is it a method to
do valuation. It is exactly what Dr. Booth and I
said it was.
Finally, and I'll try to wrap this up
quickly since I'm getting that signal from my
attorney that I'm taking too long, is the update to
the estimates.
ME GUY SARAULT:
I'm not your attorney. (LAUGHTER)
(OFF RECORD).
A. The update.
Yes, Dr. Kolbe and I updated it, as
Dr. Booth said in his testimony that we would
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 75 Me Vincent Regnault
likely do. And as I already noted to you, I would
reduce my market risk premium by 100 basis points
because I think things are better than they were at
the time I did it. And as I said, market risk
premium is a function of condition.
However, to believe that even though, even
if market condition go back to what is ever defined
as normal, I don't believe that it's credible to
believe that investors will quickly forget the fact
that they lost anywhere from 40 to 50 percent or
more of their portfolio that they have been working
on saving over their lifetimes and lost that in
less than a year. To believe that they're going to
-- their taste for risk is going to be the same as
it was before that, it defies credibility in my
view.
Plus, they don't have as much money to play
with now that they have lost.
So I believe that
the market risk premium will likely be higher for
quite awhile.
But in any case, I use 100 basis points
higher, so that means that my market risk premium
is 6.75 instead of 7.75.
The current interest rate, risk free rate
is -- I didn't even get to 4.5, I'm only at 4.25,
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 76 Me Vincent Regnault
no higher. The reason is because although
government of Canada bond yields are higher, the
spread I add to it now is only 15 basis points,
recognizing that the spreads have declined.
The result, the Canadian sample is now at
six and a half percent, and the numbers vary from
about 6.4 to 6.8, based upon the same analysis I
had done before.
ME GUY SARAULT:
6 and a half, ROE?
A. 6 and an half ATWACC.
ME GUY SARAULT:
Okay.
A. That's 6.5.
percent.
The gas LDC is 6 and three quarters
And that, those numbers for the various
CAPM and E CAPM range from 6.4 to 6 -- or 7.0.
And Dr. Kolbe, which I'll hand the
microphone over to now, will explain these results
further, how it affects Gaz Metro.
And thank you for your patience with my
long presentation.
11 h 04
Me VINCENT REGNAULT :
Monsieur le Président, il est rendu maintenant onze
heures moins vingt (11 h 40), ça fait environ une
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 77 Me Vincent Regnault
heure et demie (1 h 30) que nous siégeons, si vous
le souhaitez on pourrait prendre une courte pause.
On en a environ encore pour une demi-heure je vous
dirais avec Docteur Kolbe, peut-être une quinzaine
de minutes avec monsieur Despars, puis ça va être
terminé.
LE PRÉSIDENT :
Nous allons prendre une pause de quinze minutes et
revenir pour la suite.
Me VINCENT REGNAULT :
Merci.
PAUSE
LE PRÉSIDENT :
Alors nous reprenons l'audience. Maître Regnault.
Me VINCENT REGNAULT :
Effectivement alors je vais céder la parole au
Docteur Kolbe. Go ahead Doctor Kolbe.
DR. KOLBE:
I think Dr. Vilbert had one correction he wanted to
make, I'll just -ME VINCENT REGNAULT:
You're right.
DR. VILBERT:
Actually, it's two quick corrections.
First, I think I said that Dr. Booth used
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 78 Me Vincent Regnault
7.75 as his MRP and that's not right. His cost of
equity estimate is 7.75. His MRP is 5 percent.
And I also misspoke when I was describing
the E CAPM, at least once I guess. The E CAPM
increases the slope, increases the intercept and
decreases the slope. I apologize for that
misstatement.
DR. KOLBE:
A. Okay.
This is the second part of my presentation.
And I'm going to start with finishing the
discussion of the revised value for the ATWACC that
we put on in our presentation last week in
explaining where that came from.
But before I do that, I'm going to say a
word in defence of Dr. Vilbert. His adjustments
test made to cost to capital last March when we
were doing this in preparing this evidence have
been criticized by IGUA in various ways,
interpretation of the yield is 2 percentage points
too high and the rest.
But the need for these adjustments was the
crisis. We were estimating the cost of capital in
the midst of it.
March was one of the worst months
of the crisis, by some measures.
And Dr. Vilbert
bit the bullet and decided to estimate the price of
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 79 Me Vincent Regnault
capital in the midst of that.
Dr. Booth said he was glad that he ignored
the issue, but Dr. Vilbert did not have that
luxury.
I have heard Professor Myers -- the same
Stewart Myers I spoke of before -- say more than
once that it takes a brave person to estimate the
cost of capital in public.
And the reason he says that is because it's
always subject to criticism. There are always some
people who say "Well, your market risk premium's
too high or too low. Your intercept is too high or
too low.
You've used the wrong model."
ME GUY SARAULT:
Could you speak up, please.
A. I'm sorry. "You used the wrong model."
It was particularly brave, in the same
sense, to estimate the cost of capital in the midst
of this crisis and to try to put numbers on what it
meant in a systematic and careful and internally
consistent way. And Dr. Vilbert did that.
It's always easy, even in normal times, to
sit on the sidelines and say "You did it wrong."
It's particularly easy now, but Dr. Vilbert
did not have luxury of siting on the sidelines and
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 80 Me Vincent Regnault
criticizing other's decisions, he had to do it. And
I think -- I think he deserves thanks for that
rather than condemnation.
Now, the updates.
Dr. Vilbert told us that
the current estimate of -- for the Canadian sample
is 6 and a half percent, and for the gas LDC sample
was 6 and three quarters percent. It's my job to
turn those numbers into a current estimate for Gaz
Métro.
I believe the LDC sample is the better
measure of the two. And I believe that Gaz Métro is
higher risk than that sample.
However, for purposes of the update, I
simply averaged the two estimates of the ATWACC for
the two samples. I averaged 6 and a half and 6 and
3/4s to get 6 and 5/8ths, 6.625.
And I added the same 25 basis point to that
for Gaz Métro's higher risk, based on Dr.
Carpenter's evidence and my previous analysis to
get 6 and 7/8ths, 6.875, as my number for the
market cost of ATWACC for Gaz Métro.
Then we have to do the adjustments.
For issuance costs, it was 16 basis points,
it went down to 14. And the reason is because the
level of that depends on the ATWACC; that's the
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 81 Me Vincent Regnault
rate at which you compensate the issuance costs, in
my view.
So, because the ATWACC's a little lower, so
to is the adjustment a little lower, 14 basis
points instead of 16.
A big part of the reason the ATWACCS came
down is that corporate interest rates are down from
where they were before, which means there's a
bigger difference between market and imbedded
interest rates than there was at the time we
estimated the cost of capital in March.
And you will recall from the presentation
last week, that with the updated measure of Gaz
Métro's imbedded debt costs, the old adjustment for
imbedded interest rates was 6 basis points. That
now is 49 basis points, because corporate interest
rates have fallen so fast, which is one of the
reasons that Dr. Vilbert has changed his parameters
as he updates his cost of capital estimates.
So if you add 6.87, the cost of capital,
plus 0.14, the issuance cost adjustment, plus 0.49,
which is the imbedded debt cost adjustment, you get
7.50, which is the number I reported last week as
our updated estimate of the overall adjusted cost
of capital, for Gaz Métro in this proceeding.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 82 Me Vincent Regnault
And so that's the basis of that number.
I'll just note now that the 49 basis points
for the old adjustments of either 10 originally or
6, after the revision to the imbedded interest
costs, basis points, contrary to what Mr. Gorman
says, does in fact exactly provide compensation for
imbedded, the actual imbedded debt costs.
Mr. Gorman seems to be under the mistaken
belief that I applied this adjustment to the market
debt ratio. That is not correct.
If you look at the table, and which I do
have, which, as I recall, is on page 53 of my
evidence, which I think is Gaz Métro's 7 15, you'll
see that the numbers I used to apply that, and
those numbers are straight out of Gaz Métro's book
capital structure presentation. And so the interest
rate adjustment exactly compensates for that at
some point. I don't know if he wants to do it now
or later.
Mr. Despars is going to -- is going to
demonstrate that and walk you though it. Do you
want to do it now or later?
Later. He'll do it later.
But there's no game being played. And I
showed that also in my presentation last week that
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 83 Me Vincent Regnault
you get exactly the same cost of equity with the
market and the imbedded interest rate when you use
the imbedded interest rate adjustment I did.
So, there's no, there's no funny stuff
going on here. We're just adjusting for the
difference between market and imbedded interest
costs.
I'll also note at the same time that this
adjustment takes care of a lot of the instability
problems that we heard witness express concerns
about.
Recall that the NEB did not make such an
adjustment for TQM.
But the reason they did not do it was at
least in part because TQM's debt was all due to
expire within two years; there wasn't a need for a
transition.
And I testified there, and I've testified
here, that when you're changing a policy like this,
you shouldn't create winners and losers on
decisions that were made under the old rules
because that can create extra uncertainty and also
be unfair, just in the ordinary English sense of
the word "unfair".
And those winners and losers would vary
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 84 Me Vincent Regnault
from debt issue to debt issue, and from company to
company; sometimes customer win, sometimes lose;
sometimes the investors would win, sometimes lose.
So, in my view, the debt adjustment for the
existing debt, all of which was issued under the
old rules, because the old rules are still in
place, you haven't changed the rules, you haven't
said "We're going to regulate on the ATWACC," this
adjustment is mandatory in this proceeding, in my
opinion. And it has the additional benefit of
addressing one of the big questions that I heard
the IGUA panel express concern about yesterday and
in the presentations earlier.
Okay?
Turning to other issues.
Another area of
confusion in Dr. Booths and Mr. Gorman's evidence
is the distinction between the use of the market to
book test for deciding whether utilities returns
are accurate.
ME GUY SARAULT:
Excuse me, I can barely hear you.
A. I've very sorry, I'm right next to the mike. I'll
try to speak more loudly
The distinction between the use of the
market to book ratio for the purpose of testing
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 85 Me Vincent Regnault
where the utility expects to earn its cost of
capital and the use of market value weights to
calculate the ATWACC.
First, as Dr. Vilbert said, Mr. Gorman and
possibly Dr. Booth, what Dr. Booth said I wasn't
100 percent sure he was making the same claim but
he seemed to be, it's just wrong that the market to
book ratio has anything do with the calculation of
the ATWACC.
The ATWACC is calculated with market value,
in textbooks and by us, and by regulatory bodies
elsewhere.
The -- it is true that the market value
weights are a component to the market book ratio,
they're the denominator of the market to you book
ratio on the equity side, but that's sort of like
saying ice cream consumption is high and drownings
are high and saying that somehow therefore that
means that ice cream drownings. They are related
facts but it isn't a component on the ATWACC
calculation in any way.
Second, in my appendix E, I have a detailed
discussion of how it is I came to believe that the
market to book test, which at one point was an
absolutely standard belief that this was a reliable
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 86 Me Vincent Regnault
signal under certain very special conditions. This
is not a fact -- in fact, a reliable signal under
any conditions.
And, you know, Dr. Booth brought
out my textbook which was written before the first
of the events that taught me this is wrong, which
was the October stock market crash of 1987.
I will say that at the time I did this,
when market to book ratios were less then when one
of my clients were utilities commissions, not
companies, and so they would not be advantaged by
my taking the view that the market to book test was
valid at the time, for whatever that might be
worth.
But that aside, the market to book test
requires you to believe that you really understand
the formula that determines stock prices, and at
least under these Ideal conditions.
It is unsupportable in a modern world to
believe that we understand perfectly the formula
that determines stock prices. We've had the crash
of 87; we've had the tech bubble; we've had the
latest financial meltdown. It is plain that market
prices are not driven by forces that we can write
an equation down for and interpret.
But you have to believe you can do that to
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 87 Me Vincent Regnault
rely on the market to book test.
And indeed, Dr. Booth the other night said
that a high market to book ratio, which is
something he said before, that the high market to
book ratio should in fact signal that returns are
coming down and you should expect utility
commissions to start moving towards a lower return
on equity.
In my appendix, which I will not turn up
because of time, there's a graph that shows what
you have to believe about the cost of equity for
that statement to be true, for it to be true, that
investors when they buy a stock, at a market to
book of 2, believe that the regulatory commission
is about to lower the rate of return, so the market
to book will be 1.
Is they expect that to happen anytime soon,
then their estimate of the cost of equity is
negative, because when the utility commission does,
that there's a minus 100 percent rate of return on
the initial purchase price of the stock.
Even if you go out many years before the
regulators finally catch up to this, the rate is at
of below government bond rates, or barely above
them if you've gone far enough.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 88 Me Vincent Regnault
And there's plenty of evidence that
regulatory commissions do not wait decades to catch
on to the fact that interest rates have changed,
particularly not in Canada but even in United
States you don't see, you don't see rates of return
that we saw in the early eighties still in place
today.
But you have too believe that that sort of
thing is going on to believe that the market to
book ratio is valid.
So, how can I say that we don't understand
it and yet it's okay to use it to calculate the
ATWACC?
The answer is because you don't have to
understand why the price of a house has fallen to
know that a person who has a mortgage of 80 percent
of the starting value those house is in more
trouble than a person who had a mortgage of 20
percent on the starting value of a house.
Right?
The market price, whatever drives it will
determine the financial risk that the equity holder
faces.
Right?
If an equity holder has a market debt
equity ratio that is high, that person is bearing
more risk when the value of the underlying assets
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 89 Me Vincent Regnault
fall than someone who has a market debt equity
ratio that is low.
And in some ways, if you think prices are
behaving in a way that you can't explain, that just
makes it worse, right?
If you don't know why things are going to
fall and you can't fundamentally predict whether or
not things are just going to go up or down, then
debt is even riskier than if you have some sense of
what the fundamental value is and you believe you
understand what determines stock prices.
So, financial risk is driven in the market
by fluctuations in market values relative to
leverage.
When you measure the beta, it embodies that
financial risk and it doesn't matter what is
determining the market price change, you get it out
when you measure the beta.
That's the process by
which you estimate the cost to capital.
I'll just say also that Dr. Booth's own
investments illustrate the principle. We heard him
say yesterday that he had bought bank stocks on
margin, that is he borrowed money to buy stocks
which he leverages his investments, and if -relative to just buying bank stocks alone; and if
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 90 Me Vincent Regnault
the stocks do well, he expects to get a higher rate
of return than he would otherwise get because he's
borrowed money, and he only has to pay the interest
on the money and he gets to keep the extra profit
from the increase in the value of the bank stock,
which is the underlying asset, the equivalent of
the condo in my example.
Conversely if the price of the stock falls,
he has a higher negative expected rate of return
than he would if he just bought the stock itself.
You effectively mortgage the stock in the
same way that we mortgaged the condo. And in the
same way, he has higher risk and has to have a
higher expected rate of return as compensation.
The difference is that Dr. Booth wants you
to take data on the risk of the company from the
market which reflects the actual market value
capital structure and apply it to a capital
structure with a very different and particular
higher level of leverage.
This would be akin to his borrowing money
to buy stock but only getting to keep the return as
if -- as if -- rate of return as if he had bought
the stock itself.
If he had -- if he had taken the risk but
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 91 Me Vincent Regnault
not been compensated for it, it would be
unreasonable for Dr. Booth to accept such a deal if
a broker offered it to him.
And I would put it to you that it is
unreasonable for Dr. Booth to submit that Gaz Métro
should have the same effect being done by failing
to adjust for the difference in financial risk
between the stock market sample of the company as
estimated and the capital structure that Gaz Métro
had which would have produced, measurement errors
aside, a much higher estimate of the cost of equity
had those companies' capital structures been at the
level Gaz Metro is using to set its revue
requirements.
So Dr. Booth is advocating for Gaz Metro
something that he would be foolish to accept for
himself on his own margin account.
More generally, Dr. Booth's appendix B has
a long series of criticisms of my ATWACC
principles, and my testimony on this.
And he has -- he has put forth and said
there have been modifications but he has put forth
essentially the same set of arguments in a number
of past proceedings. And in all of those
proceedings until now, I have had the opportunity
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 92 Me Vincent Regnault
for a written reply.
And in past proceedings I have made a
written reply which in detail sets forth my
objections to Dr. Booth's criticism, some of which
are based on the same kind of misstatement he made
here, which is that I'm advocating an ATWACC that
is flat over the whole range, in contrast to
Professor -- or Dr. Morin who says the cost of
capital is U shaped, he says at various times I
rely on a 1958 model, when in fact, the whole
thrust of my appendix C is to review the last 50
years of research in doing this.
The problem here, I don't have a
rebuttal. And it's sort of -- it's hard to know
what to do because he puts it forth the same
argument, I put forth the same response, but
nothing changes. So in TQM proceedings there were
two rounds of interrogatories there rather than
one, and my rebuttal consisted -- my direct part of
my rebuttal consisted only of replies to those
interrogatories, comments based on replies to those
interrogatories.
And instead of doing a rebuttal to Dr.
Booth's appendix B, or the equivalent in other
testimony, I just filed copies of his past
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 93 Me Vincent Regnault
testimony, my past testimony in reply, and provided
a table that provided a guide to the past arguments
and my reply to them, and to the point where in the
TQM testimony you could find the same argument made
again.
In this proceeding, I asked Dr. Booth an
interrogatory to -- on this topic, and among other
things, it provided an updated copy of that table,
updated to include the cross references to his
appendix B in this evidence, one part of which is a
numerical example that he brought out into the
front of his evidence with changes in some of the
numbers but not the basic logic, and asked him to
confirm that the cross references were the same.
I also supplied as attachments, because in
TQM he indicated he didn't keep copies of my past
testimony, copies of my TQM rebuttal, and of the
appendix to the TQM rebuttal which consists of all
his past testimony.
Those are attachments to the
interrogatories, so that the Régie has the benefit
of access to this entire set of information in
documents filed in this case.
The IR is my IR number 26 to Dr. Booth. I
believe the page reference on that is ASIG 6,
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 94 Me Vincent Regnault
document 6, doc 6 --or page 25 of 49.
Now I get that page reference from the
Word version of the files, not the printout, and
it's conceivable that the printouts came in a
different printer and page 25 of 49 is wrong, but
it's a response to interrogatory 26.
And by doing it this way, I give Dr. Booth
an opportunity to make comments in reply on what I
say, which he has done, some of which he has
repeated in the hearing room today -- or not today,
yesterday and the evening before, and I will talk
about those in a minute. But basically you have as
a result of these attachments, should you -- should
some argument of Dr. Booth's appendix B strike you
as valid in a legitimate criticism, I urge you to
go to these documents, which is a table provided
inside as reference, and you while find my response
to it, so don't have to do did it live in this
hearing.
Okay?
So let's talk about some of the things he
says in response there and also in the hearing
room.
One thing he says is he cites survey
evidence saying that most companies have target
debt ratios, and as a result that proves I'm wrong
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 95 Me Vincent Regnault
about their not being an optimal capital
structure. I heard him say that -ME GUY SARAULT:
Sorry, Dr. Kolbe. I'm not sure if I followed well,
but the witness seems to be simply summarizing and
repeating evidence that was filed in as a rebuttal
to Dr. Booth's criticism of that ATWACC principles
that can be found in appendix B.
If that's the case, I think it's sufficient
for all of us just to read that. It was already on
the record.
This is not new stuff that was brought
by our oral evidence at the hearing, and I think it
would be sufficient for this morning's purposes
just to refer to this document and move on to
something else.
11 h 29
Me VINCENT REGNAULT :
Je pense que si on avait écouté attentivement la
dernière phrase qu'a dite le docteur Kolbe, il a
parlé du témoignage du docteur Booth, où le docteur
Booth disait « most companies have target debt
ratio » et c'est à ce point-là qu'il voulait
répondre dans le cadre de sa contre-preuve, de la
contre-preuve. Et je pense que ça répond tout à
fait aux critères qui veulent que, en contre-
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 96 Me Vincent Regnault
preuve, on réponde à la preuve qui a été faite en
défense. Alors, je pense que la question devrait
être... ou ce que le docteur Kolbe a à dire devrait
être permis.
LE PRÉSIDENT :
Un moment. Alors, la Régie va permettre la réponse,
mais en demandant quand même à ce que les réponses,
à l'intérieur de la contre-preuve, s'adressent aux
éléments nouveaux qui ont été amenés dans le
témoignage du docteur Booth à l'audience même et
non pas dans l'ensemble des documents déposés en
preuve dans le cadre des réponses aux demandes de
renseignements écrites. Donc, tout ce qui était
dans la preuve écrite est déjà pris en compte, a
été pris en compte lors des témoignages des témoins
principaux par des témoins... des principaux
témoignages, donc des réponses aux éléments
amenés... aux éléments nouveaux amenés lors de
l'audience par le docteur Booth.
Me VINCENT REGNAULT :
Je pense que... je suis d'accord avec vous. Je
pense que c'est à ça que se sont limités les
témoins ici aujourd'hui. Comme j'ai dit d'entrée de
jeu, je pense que ce n'est pas l'intention de
personne de perdre le temps de la Régie. Merci.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 97 Me Vincent Regnault
DR. KOLBE:
And I'm sorry if I wasn't clear, that was my intent
in going forward.
One of the things we did hear, I can't
remembers if it was yesterday or the day before,
was that there's a survey in which a lot of
companies, the majority of companies say they have
target debt ratios, and this was asserted by Dr.
Booth to be proof that there must be an optimal
capital structure, the ATWACC must not be flat.
But that does not logically follow at all.
The question is, you can have target debt
ratio the way you can have policies to improve
quality; you can have a million policies in the
company.
The question is how eager are you, how
important is it to you to achieve that target debt
ratio? Is that something that's just sort of out
there: Yes, on average this is what we want to end
at," or is this something where you move heaven and
earth to achieve it?
And the answer is plainly that people do
not move heaven and earth to achieve their target
debt ratios.
There is -- I cite various articles in
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 98 Me Vincent Regnault
appendix C to the effect that one quote that I may
be getting it not exactly right, but something like
"if these companies did have target debt ratios,
they were not much interested in getting there."
There is the body of literature that says,
that you see wide range of capital structures
across firms within the same industry, often within
the most profitable firm having the least debt,
even though they would have the most advantage to
gain from the tax shield on debt by leveraging up
more.
Dr. Booth himself published a paper with
that finding, of looking across developing nations;
other people have looked at developed nations. It's
a widespread finding.
We've already heard that Gas Metro would
like to issue equity to move towards a target debt
ratio based on the Régie's own policies, and is not
doing so because they think it's not a good time to
issue equity.
If this were really a big deal, this were a
first order determining of the value of a firm,
people would be a lot more interested in hitting
the target debt ratios.
Moreover, there may be reasons people --
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 99 Me Vincent Regnault
there are theories that say "People time the market
when they choose securities," so if they thing
their stock is undervalued, they'd want to issue
debt because they don't want to -- they don't want
to sell stock at less than what they think it is
valued for.
On the other hand, if they think it's
overvalued based on their private information, be
it from being more close to the market, they may
want to sell stock right away because "Let's get it
in before the market finds out how little it is
really worth."
They're unlikely to disclose that last
motivation in a survey. Among other things, they're
subject to shareholder suits, if people, if they
say they might be doing such a thing.
So there are a million reasons people use
for capital structure. And the mere existence of a
stated target debt ratio tells you nothing about
whether there is an optimal capital structure.
Similarly,he indicated that investment
bankers get rich, and why would investment bankers
get rich if there weren't a lot of value of the
leverage?
Well, there are two responses to that: One
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 100 Me Vincent Regnault
is, certainly there is some value to leverage,
right? Zero debt, it is the optimal capital
structure only for really high risk, high growth
firms. Most firms should use some debt.
So there's value to using debt to get out
to the middle of the range, or somewhere within the
range.
So of course there's value to debt.
And I'm not saying the ATWACC is flat
across the entire middle range -- across the entire
range, only within the middle range.
And second, investment bankers perform
valuable services. In the interest of time I won't
tell you a story about a conversation I was in at
Goldman Sachs when they were trying to decide how
to place debt, but they were trying to save 25
basis points on a 300 million dollar debt issue,
and that's worth money.
They also have access to institutional
markets, so there are transaction costs to
accessing the market, and some of those transaction
costs, and there are fees investment bankers get.
They are performing a service, but that
doesn't tell you that the ATWACC is not flat in the
middle range, it just tells you it's not flat
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 101 Me Vincent Regnault
everywhere.
Turning to Mr. Gorman. He talked about
financial risk at some length, citing comments in
documents and so forth, and he even went so far as
to modify my housing example with a financial risk
that might occur if you -- if you were not to have
enough money to service the debt from the rental
payments you got on the condo.
Well, of course, he's free to measure
financial risk and to define it any way he wants,
but that's not what I have in mind, and not what
I'm talking about.
The financial risk I'm talking about is the
impact on the very variability of equity that comes
when you add debt.
It's not because you might default,
although of course that is a cost, it's because if
you have a 20 percent mortgage and housing prices
go up and down 10 percent, your equity goes up and
down 12 and a half percent, as I showed, and if you
have an 80 percent mortgage, your equity goes up
and down 50 percent.
Right?
That financial risk, as I'm talking about
it, as is pretty standard in cost of capital, cost
of equity discussions, in my experience it is the
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 102 Me Vincent Regnault
extra risk equity bears that drives up the cost of
equity in the pattern I showed you in the graph
last week where I showed a cost of equity, and then
an overall cost of capital, and then a cost of
equity that increased at an ever increasing rate,
that curve that had an increasingly upward slope as
a function of the debt to value ratio.
Financial risk is what makes that cost of
equity goes up.
Right?
And Mr. Gorman's discussion on a different
definition of financial risk really had nothing to
say about my discussion of financial risk.
Similarly, Dr. Booth at one point said that
the only reason the cost of equity goes up when
we're making our leverage adjustment for the
difference between a market value capital structure
and a regulatory capital structure is because we
assume the ATWACC is flat.
That is flatly wrong. That is incorrect.
If you recall my curve, the ATWACC was not
flat, it was curved. And the cost of equity kept
going up at an ever increasing rate.
Even if the cost of capital, the overall
cost of capital declined at the maximum possible
rate due to tax advantages with no other losses to
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 103 Me Vincent Regnault
debt all the way to 100 percent debt, that is
instead of being U shaped, the ATWACC was just a
downward sloping line, the cost of equity would
still go up at an ever increasing rate as you added
debt.
So it's not the assumption that the ATWACC
is flat in the middle range that made this happen,
it's true with any ATWACC that's internally
consistent.
There's also been discussion by Mr. Gorman
that management and regulators would lose control
of the capital structure if you used the ATWACC.
And that statement also is wrong because
they can't lose -- they either still have it or
they can't lose what they never had.
No one has control over market value
capital structure, right?
That's true. That's true whether you
regulate on ATWACC or whether you regulate on
traditional systems.
Anyone has as much control as they can
have, given business conditions, over book value
capital structure.
And that's true whether you regulate on
ATWACC or whether you regulate in traditional
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 104 Me Vincent Regnault
ways.
There's no restrictions because your
regulating it on ATWACC and what you do with your
book value capital structure.
The entire industrial world makes decisions
based on ATWACC, and has control over there book
value capital structures to exactly the same degree
as anyone else, that is as long as things don't get
so bad that they end up in default, they can -- and
they stay out of financial distress, they can make
financing decisions as they will.
So that comment is wrong in one way or the
other.
You can't lose control over what you never
had, market value capital structure.
And use of market value capital structure
in no way affects the level of control you have
over book value capital structure.
Dr. Booth also suggests that if the Régie
picks a capital structure, ATWACC becomes useless,
that's not true.
It still helps you consistently
interpolate between the financial risk you see.
In the sample companies, in the financial
risk associated with the capital structure of the
companies in question, it does what the NEB says it
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 105 Me Vincent Regnault
does, it permits you to compare risk, adjusting for
differences in capital structure automatically of
the sample companies in market to better get a
handle on the business risk of the enterprise in
question.
So, it has uses even if you pick a book
capital structure.
Another point that Mr. Gorman made was that
the floatation cost allowance double counts and is
inconsistent with ATWACC. That's wrong.
His argument, I guess, is that when you use
market values, you don't need to worry about
floatation costs. But that's incorrect because the
floatation costs do not end up in market values
either, they end up in the pockets of investment
bankers and advisors, for example.
So floatation costs are real costs.
My evidence explains that they are real
costs to unregulated companies just as much as
regulated companies, and describes how in a
standard business evaluation those costs are
recovered. And I don't have a page reference but it
is in my evidence, I won't repeat that discussion
here, but I'll just say that the comment that it is
double counting is flatly incorrect.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 106 Me Vincent Regnault
I have already said it does calculate
actual interest expense. We'll show that in a
minute.
Turning to a different topic.
says the formula is now fine.
Dr. Booth
It used to be fine
and thanks to the fact that we're well on the way
to recovery, he says it's fine again.
I would submit that is wrong. The formula
is plainly broken.
Part of his reason, for example, for the
explanation of low government account of bond
yields is that deflation hit. You can't imagine
worse news for stocks than deflation.
So that's further evidence that the risk
premium on stocks is up.
He says basically that you make an
adjustment if you happen to have a regulatory
hearing at the moment of the crisis, right? If you
have
regulatory hearing at the right moment, you
adjust the formula, otherwise you ignore it.
Well, with that kind of policy, even if the
formula is exactly right in normal times, which I
certainly don't believe it is now, is bad public
policy, because on average companies will expect to
earn less than their cost to capital.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 107 Me Vincent Regnault
Think of what's said.
If times are normal,
you get the formula. If times are bad you get
formula but it's less than the cost of capital,
unless you happen to win the lottery and have a
rate hearing going on right at the time times are
bad, so people have to bite the bullet and deal
with it.
Now, that can't possibly be right.
And it
can't be right if the cost of equity went down in
the middle of this crisis, which is what the
formula said, when every other source capital was
going up.
So the formula has been proven to be
broken, I would submit, and the policy of "you only
fix it if you're in the middle of the crisis -ME GUY SARAULT:
Je m'excuse, M. Le President. I'm sorry, Mr. Kolbe
-- Dr. Kolbe, I think that the evidence you're
presenting is a total repetition of what you've
already said in your evidence in chief about the
formula being broken.
I'm listening carefully and I'm not hearing
anything new whatsoever.
11 h 44
We are in rebuttal.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 108 Me Vincent Regnault
Me VINCENT REGNAULT :
Je pense, Maître Sarault, que la Régie se chargera
de rappeler à qui elle veut bien que nous sommes en
contre-preuve.
Ceci étant dit, le docteur Kolbe cherche à
répliquer à des commentaires, réponses qui ont été
données par le docteur Booth hier quant à la
validité ou au résultat que donnait la formule. Et
je pense qu'on ne peut pas plus être que cela dans
la contre-preuve. Alors, je pense que docteur Booth
(sic) devrait être autorisé à compléter sa réponse.
Il passera à un autre point, j'en suis certain,
très rapidement.
LE PRÉSIDENT :
Un instant.
DISCUSSION HORS ENREGISTREMENT
LE PRÉSIDENT :
Ici, la Régie considère que la question qui est
discutée est au coeur, oui, des débats, mais elle
était déjà dans la preuve écrite, la preuve du
docteur Kolbe, des témoins sur l'objet, a été
entendue. La Régie est d'accord qu'il s'agit un peu
d'une répétition des mêmes points de vue. Donc,
elle demanderait de passer au point suivant.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 109 Me Vincent Regnault
DR. KOLBE:
Of course.
I'm almost done, everyone will be happy to
hear.
(Laughter)
Another thing, the question is: Is the
crisis over so that we don't need to worry about
adjusting the cost of capital?
Dr. Booth talked extensively about the
improving economic signs and how things are, you
know, well on the way to being back to normal.
He talked also at one point about the fact
that these things come along very so often, and as
generations of inventors -ME GUY SARAULT:
I'm sorry once again. I mean in your evidence
in chief you did present lengthy testimony
explaining that the recovery did not mean that we
were out of the woods.
Our witnesses presented evidence on the
same subject. You know, there 's nothing new. Once
again, you're repeating yourself.
Me VINCENT REGNAULT :
Je pense qu'il a été question hier de façon assez
longue, et jeudi soir, longue, de l'état de
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 110 Me Vincent Regnault
l'économie, de l'évolution vers où nous nous
dirigions. Et rappelons-nous que la preuve de Gaz
Métro a été déposée en mai, qu'il y a eu ensuite
évidemment deux mois qui se sont déroulés avant que
la preuve de l'ACIG soit déposée. Donc une
évolution, une autre évolution depuis que la preuve
a été déposée.
Or, je pense que la moindre des... Je pense
que, à ce stade-ci, là, docteur Kolbe a presque
terminé sa réplique. Je pense qu'il est d'intérêt
pour la Régie d'entendre ce que le docteur Kolbe
pourrait avoir à dire suite aux choses qui ont été
ajoutées par le docteur Booth hier lors de son,
soit de son contre-interrogatoire hier, soit lors
de son témoignage en chef jeudi.
LE PRÉSIDENT :
Maître Sarault.
Me GUY SARAULT :
C'est tellement vrai, et on dit qu'il y avait eu
une amélioration depuis leur témoignage du mois de
mars ou mai de cette année, tout dépendant des
témoins qui ont apporté des ajustements pour
refléter cette amélioration-là, ajustements qui
avaient été répétés encore ce matin. Il n'y a
absolument rien de neuf là-dedans.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 111 Me Vincent Regnault
LE PRÉSIDENT :
Évidemment, la ligne est mince entre répliquer à
des propos qui ont été amenés à l'audience et ce
qui était déjà dans la preuve écrite ou dans le
témoignage principal. Ici, la Régie va permettre au
docteur Kolbe de compléter ses propos de façon
succincte en respectant un peu les grands
alignements que la Régie a demandés de suivre.
DR. KOLBE:
A. The only point I was going to make was in response
to Dr. Booth's comment that the people who invest
are between 45 and 65. Since I'm almost 65 I'm
hopping actually to be investing longer than that
myself, but be that as it may, and that these
things get forgotten, but we haven't had a new
generation of investors since March, right?
I was 62 in March and I'm 63 now, but I'm
still in the same generation of investors, and so
the notion that things turn over after awhile then
the crisis goes away may be true in many years but
it's not true now.
Finally, and my last point -- and I will
wait for applause at this point if people want to
give it -- is in response to Mr. Gorman, who said
that my presentation slides showing that there were
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 112 Me Vincent Regnault
no games being played with the calculation of the
ATWACC, and that in particular we were not
recommending a market rate of return -- a rate of
return that would give a market rate of return on a
market value rate base, he said it was flawed,
because it omitted a column, which he said, as I
understand it, if you recall it had a 9 percent
cost of equity and the market value capital
structure, which I applied to -- to apply to a book
value rate base, I raised to 11.5 in order to get
the same ATWACC on the book value rate base as is
required on the market.
And I showed that you'd
get $7 either way, not 10.50 which is what you
would get with a market value return.
And he says
"Wait, you're still wrong because it's $7, it's too
high."
That also is wrong.
It is incorrect to
take that 9 percent estimated from a market value
capital structure of 60/40 and apply it without
adjustment to a 40/60 book value capital
structure. And the reason you know it's incorrect
is because you do not get the main ATWACC at that
case, right?
It is flatly wrong to do what Dr. Booth
would never accept in his own portfolio, which is
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 113 Me Vincent Regnault
to bear the risk of buying on margin without the
reward of buying on margin, yet, that is the effect
of Mr. Gorman's statement that I should have shown
a 9 percent return on the -- on the book value
instead of the 11.5.
And that does finish my statement.
ME VINCENT REGNAULT:
Thank you, Dr. Kolbe. Monsieur Despars pour
terminer.
M. PIERRE DESPARS :
Bonjour, Monsieur le président, Messieurs les
régisseurs. Je vais être bref. Je veux juste
apporter quelques points. Dans un premier temps, un
point de clarification, on a parlé c'est quoi la
requête de Gaz Métro, je veux juste faire le point
exactement qu'est-ce que Gaz Métro a demandé. On
l'a bien lu, vous l'avez bien lu, Monsieur le
président, en identifiant les points de requête. Je
vais faire les points spécifiques sur les
témoignages, dans les témoignages qui donnent les
options ou les opportunités. Je comprends que d'un
point de vue technique on va modifier la requête,
mais dans un premier temps c'est l'exercice que je
vais faire. Par la suite je vais compléter en
démontrant sans l'ombre d'un doute que toutes les
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 114 Me Vincent Regnault
données qu'on utilise pour établir le revenu requis
chez Gaz Métro sont toutes des années qui sont
fonction du coût historique et que je qualifierais
là de « Booked Capitals Structure » ou de base de
tarification. Donc la valeur, la structure de
capital au livre et la base de tarification au
livre, en aucun cas on utilise des données de
marché pour établir le revenu requis.
Par la suite je vais juste adresser
quelques points très brefs à des commentaires qui
ont été apportés par Monsieur Trahan, Maître
Sarault et Monsieur Newton pour compléter ma
présentation.
Donc dans un premier temps ce que je
voudrais c'est puis on l'a fait en français et en
anglais, je suis surpris qu'il y ait une confusion.
Gaz Métro a demandé un ATWACC de sept point
soixante-quinze (7.75) avec toute combinaison
possible de structure de capital entre trente-huit
et demi (38.5) ou quarante-six point cinq (46.5) en
identifiant clairement à la Régie qu'une structure
à trente-huit point cinq (38.5) qui est la
structure présumée actuelle générerait un taux de
rendement de douze point trente-neuf (12.39) et
qu'avec une structure de capital de quarante-six
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 115 Me Vincent Regnault
pour cent (46 %) d'équité avec l'option d'éliminer
là ce qui est théorique chez nous, que sont les
actions privilégiées présumées, on avait un taux de
onze point vingt-deux pour cent (11.22 %) et ça
vous le retrouvez en anglais à la pièce Gaz Métro 7
- Document 15 et qui est la conclusion, en fait qui
fait partie de la preuve du Docteur Kolbe où je
vais le citer :
Finally as noted earlier, Gaz Metro
also requested me to identify the
required rate of return on equity for
2010 at the actual 46 percent equity
ratio and at 38.5 percent debt equity
ratio using a hypothetical 7. 5
percent of preferred stock.
O.K. Et on continue en décrivant exactement quels
sont ces taux de rendement-là. Le paragraphe
suivant dit:
Should the Régie decide instead to set
a return on equity via another
means...
O.K. Parce que l'ATWACC est utilisé pour établir le
taux de rendement et éliminer les imperfections
reliées au groupe de comparaison quant à la
structure de capital. Donc
:
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 116 Me Vincent Regnault
Should the Régie decide instead to set
a return on equity via another means
and implement my recommendation by
stating the deemed equity ratio, the
appropriate deemed equity ratio will
be the one that produced 7.75 percent
a modified ATWACC at the rate of
return on equity used by the Régie.
C'est exactement ce qu'on a dans notre preuve,
o.k., au document GM-7 - Document 11, page 3 de 17
où on dit puis je suis aux lignes 25 à 27, en fait
c'est le paragraphe au complet où on dit en
français :
Afin de remédier à cette situation,
Gaz Métro demande à la Régie de la
soustraire à l'application de la
formule et de lui octroyer un taux de
rendement juste et raisonnable qui se
traduit par un coût en capital moyen
pondéré après impôt, ou after-tax
weighted average cost of capital
(ATWACC) de 7,75 %, soit l'équivalent
d'un taux de rendement de 11,22 % sur
une structure de capital de 54 % de
dette et de 46 % d'équité d'avoir
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 117 Me Vincent Regnault
propre. Toute autre combinaison de
structure de capital et de taux de
rendement sur l'avoir propre qui
générerait le même ATWACC serait
considérée juste et raisonnable pour
Gaz Métro, tel que plus amplement
détaillé à la section 3 de la preuve.
Je ne prendrai pas toute la section 4 de la preuve,
mais à la page 17 de Gaz Métro 7 - Document 11,
qu'on présente ici, on retrouve les deux options,
o.k., donc qui est fait mention que ce soit une
structure avec cinquante-quatre pour cent (54 %) de
dette, sept point cinq pour cent (7.5 %) d'équité,
trente-huit point cinq pour cent (38,5 %), excusez,
sept point cinq pour cent (7.5 %) d'actions
privilégiées, trente-huit et demi pour cent
(38.5 %) d'avoirs propres et on retrouve le douze
trente-neuf (12.39) qui donne un total de sept
point soixante-quinze pour cent (7.75 %) d'ATWACC
et on a le même exercice ici avec cinquante-quatre
pour cent (54 %) de dettes, quarante-six pour cent
(46 %). Je pense que je vais me lever ça va aller
mieux. Quarante-six pour cent (46 %) d'équité pour
un total, avec un taux de rendement de onze point
vingt-deux pour cent (11.22 %) et un ATWACC de sept
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 118 Me Vincent Regnault
point soixante-quinze (7.75).
Et toute notre dossier est basé sur
l'approche de la structure de capital actuel qui
est une structure avec cinquante-quatre pour cent
(54 %) de dettes, soixante-sept point cinq pour
cent (67l.5 %) d'équité privilégiée et trente-huit
point cinq pour cent (38.5 %) d'avoirs propre. Ce
qui est important de regarder ici aussi c'est le
taux qu'on retrouve en dettes, c'est le taux réel
de Gaz Métro, o.k., traduit en anglais « Embedded
cost of debt », o.k. de six point quatre-vingt-sept
pour cent (6.87 %) et le douze point trente-neuf
(12.39) en fait qui est le résultat de
l'application de la méthode ATWACC sur une
structure de capital avec trente-huit point cinq
pour cent (38.5 %) d'équité.
O.K. Next one. Ici je vous amène à la Gaz
Métro 7 - Document 2. Gaz Métro 7 - Document 2,
c'est quoi? C'est notre structure de capital, telle
qu'on la connaît aux livres de Gaz Métro et j'ai
été contre-interrogé sur cet élément-là.
À la colonne 3 on retrouve la valeur aux
livres de notre structure de capital, on a pour un
point huit milliard de dollars (1.8 G$). À la
colonne 4 on retrouve la répartition de la dette et
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 119 Me Vincent Regnault
de l'équité. Donc on a cinquante-quatre pour cent
(54 %) de dettes, sept point cinq pour cent (7.5 %)
d'avoirs privilégiés et trente-huit point cinq pour
cent (38.5 %) d'avoirs ordinaires. Les taux qu'on
utilise sont les taux de six point huit pour cent
(6.8 %). Je vais être obligé de mettre mes
lunettes. De six point huit pour cent (6.8 %) pour
le taux réel de la dette, de l'ensemble de la dette
de Gaz Métro, cinq point vingt-deux pour cent
(5.22 %) pour les actions privilégiées et le douze
point trente-neuf pour cent (12.39 %) pour les
actions privilégiées, qui nous donne appliqué sur
la structure de capital réel de Gaz Métro au total
un point huit milliard (1.8 G), un coût en capital
qui va permettre de déterminer le bénéfice
d'exploitation autorisé.
Disons que ce coût en capital là est un
coût, o.k., de huit point quatre-vingt-sept pour
cent (8.87 %), ici on a deux données à retenir qui
sont importantes, un point huit milliard (1.8 G) de
structure de capital et huit point quatre-vingtsept pour cent (8,87 %) de taux de rendement
pondéré qui est ici, qui est un taux de rendement
qui combine les éléments après impôt et avant
impôt. Next.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 120 Me Vincent Regnault
11 h 59
Ici, je vous amène- on ne le voit pas sur
l'acétate parce qu'il y a beaucoup de chiffres là,
je vais juste vous montrer deux chiffres à ce
niveau-ci- c'est Gaz Métro-6, Document 2.
Gaz Métro-6, Document 2, c'est la base de
tarification de Gaz Métro, la base de tarification
qui est fonction du coût historique, donc du coût
d'acquisition moins les amortissements et donc la
valeur aux livres des actifs de Gaz Métro. Ça n'a
rien à voir avec la valeur marchande et c'est
vraiment les données historiques de Gaz Métro.
On constate qu'on a une base de
tarification de un point huit milliards de dollars
(1.8 G$). Je vous rappelle que la structure de
capital qu'on utilise aux livres est de un point
huit milliard de dollars (1.8 G$). On applique le
taux de rendement sur... en fait, de la structure
de capital qu'on vient de calculer à la page
précédente, basée sur les données historiques ou le
« book capital structure » de huit point quatrevingt-sept pour cent (8.87 %). Et ça nous donne le
bénéfice d'exploitation permissible.
Ça, c'est le bénéfice d'exploitation qu'on
va entrer dans notre coût de service et qui va
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 121 Me Vincent Regnault
permettre de compenser les frais financiers réels
et le rendement à l'actionnaire. Next, please.
La dernière « slide », en fait, ce qui est
la pièce Gaz Métro-8, Document 2. O.K. Could you
come back just a second? O.K. Je veux attirer votre
attention sur ce montant. O.K. On sait que c'est la
base de tarification aux livres, multipliée par le
coût de la structure de capital aux livres qui nous
donne le revenu permissible. Ce revenu permissiblelà est de cent cinquante-huit millions de dollars
(158 M$), O.K., ce qu'on retrouve... mais c'est
petit pour tout le monde là, mais à la SCGM-6,
Document 2, c'est cent cinquante-huit millions de
dollars (158 M$).
Le bénéfice permissible, après ça, on
l'intègre dans notre coût de service. O.K. Coût de
service qui nous permet de déterminer nos tarifs
pour...
Me VINCENT REGNAULT :
Q. [3] Quelle pièce est-ce?
R. Cette pièce est la pièce Gaz Métro-8, Document 2,
O.K., qui est le calcul du coût de service global
de Gaz Métro et qui reflète l'ensemble des
composantes de Gaz Métro. À la ligne 12, O.K., on
voit « Rendement sur la base de tarification » et
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 122 Me Vincent Regnault
on dissèque, parce que c'est un petit peu compliqué
chez nous, toutes les composantes des services qui
sont offerts, mais on regarde le total de
l'application du coût de service, en fait, de la
base de tarification multipliée par notre taux de
la structure de capital, les deux composantes étant
aux livres, est de cent cinquante-huit millions de
dollars (158 M$).
Ce cent cinquante-huit millions de dollarslà (158 M$) est intégré avec l'ensemble de nos
éléments de coût de service pour donner le coût de
service total qui est utilisé pour établir les
tarifs. Donc, en aucun temps, dans le calcul qui
est effectué pour déterminer le coût de service de
Gaz Métro, on utilise des données de marché, on
utilise la base de tarification aux coûts
historiques et on utilise la structure de capital
de Gaz Métro aux livres de Gaz Métro. Je n'ai plus
besoin de pointeur, je vais m'asseoir.
Quelques brefs points que je voudrais faire
à ce moment-ci. Quand j'écoutais hier la
présentation de monsieur Trahan, ça me donnait
l'impression que la vie était belle chez Gaz Métro
et que tout allait bien et tout allait pour le
mieux; que parce qu'on perdait des clients
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 123 Me Vincent Regnault
industriels, ça nous avantageait et que la
stratégie que Gaz Métro avait mise en place, de
développer le marché résidentiel, compenserait ou
était un élément qui atténuait beaucoup le risque
d'affaires de Gaz Métro.
À l'intérieur du dossier, on va juste
reprendre les grands éléments et on ne fera pas un
exercice de se promener là à chacun des endroits,
mais juste pour vous dire qu'on a neuf BCF de
livraison au résidentiel et on a cent cinquante
mille (150 000) clients. Ça génère à peu près
soixante-dix millions (70 M$) de revenus.
On a quatre-vingt-dix (90) BCF de livraison
à la grande entreprise, clients industriels, on a à
peu près trois cents (300) très grands clients qui
génèrent des revenus de l'ordre de soixante-quinze
millions (75 M$). Donc, pour faire un calcul rapide
là, on a à peu près le même niveau de revenus qu'on
soit dans le résidentiel ou qu'on soit au secteur
résidentiel (sic), mais au résidentiel on a dix
(10) fois moins de volume qu'à l'industriel.
Si, comme on l'a déjà vu dans le passé, on
perdait plus de quarante (40) BCF, mettons prenons
l'exemple simple là la moitié, quarante-cinq (45)
BCF, combien de clients résidentiels ça prendrait
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 124 Me Vincent Regnault
pour remplacer quarante-cinq (45) BCF de gaz chez
Gaz Métro? On sait qu'on a... en fait, c'est
cinq... on a neuf BCF présentement, donc ce serait
cinq fois la clientèle actuelle de Gaz Métro. Cinq
fois la clientèle actuelle de Gaz Métro, c'est sept
cent cinquante mille (750 000) clients.
Sept cent cinquante mille (750 000)
clients, on a reçu des félicitations parce qu'on en
raccorde cinq mille (5 000) par année. À cinq mille
(5 000) par année, ça va nous prendre cent
cinquante (150) ans. Si on en met dix mille
(10 000), ça va prendre soixante-quinze (75) ans.
Et si on vous dit que j'exagère, prenons juste
l'exemple en le coupant de moitié à vingt-deux
point cinq (22.5) BCF. Ça va quand même prendre
soixante-quinze (75) ans.
Il faut prendre en considération aussi que
c'est sept cent cinquante mille (750 000) clients
ou trois cent soixante-quinze mille (375 000)
clients, il va y avoir un coût pour les desservir.
Il va y avoir des investissements majeurs à faire
dans nos infrastructures. Et d'autant plus que
c'est une clientèle qui est présentement
interfinancée. Donc, on va empirer le problème
d'interfinancement sur un horizon long terme.
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 125 Me Vincent Regnault
12 h 5
Pour compléter sur ce sujet-là, je l'ai dit
un peu en introduction, ce que j'entends, c'est que
Gaz Métro a fait des bonnes choses, a réduit son
risque d'affaires. Si on est dans une situation où
on a amélioré notre position, c'est parce qu'on a
fait des choses, on a travaillé fort. On a adressé
les problèmes opérationnels, on a adressé les
enjeux marketing, et puis on a aussi travaillé au
niveau financier. On a travaillé fort au niveau
financier. De me dire aujourd'hui, parce qu'on a
travaillé fort, ça mérite un taux de rendement plus
faible, j'ai bien de la misère.
Deux derniers points que je voudrais
apporter. Le premier, c'est la référence qui a été
faite au PIB. Je veux juste mettre les choses
claires. Dans le dossier tarifaire deux mille neuf
(2009), qui est la cause dans laquelle on vit
présentement, qui a été sur la base sur laquelle on
a fait nos prévisions de volume, on avait utilisé
deux point deux pour cent (2,2 %) de PIB.
Le PIB réel cette année, on le vit dans les
résultats. Le PIB projeté pour l'an prochain,
c'était un point trois pour cent (1,3 %). On va-tu
être à deux? On va-tu être à un? On va-tu être à un
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 126 Me Vincent Regnault
point sept? Je ne sais pas. Mais on ne part pas de
moins deux pour cent pour s'en aller à deux pour
cent (2 %). On est dans une situation où on avait
projeté une base de volume. Et l'an prochain, la
base qu'on a utilisée, c'est une croissance
économique de un point trois pour cent (1,3 %).
Le dernier point que je voudrais adresser.
Puis il est extrêmement important. C'est celui de
la lourdeur que le processus a pu amener. Ça fait
trois ans qu'on vient à la Régie pour demander une
modification de notre taux de rendement sur
l'équité. La première année, on a demandé une
modification à la formule par l'utilisation d'une
approche qui s'appelait Fama-French. Et on avait
démontré qu'il y avait une augmentation du risque
d'affaires. La Régie a ajusté pour le risque
d'affaires mais n'a pas retenu l'approche FamaFrench.
L'an dernier, on est venu sans témoin
expert démontrer qu'il y avait, il se passait
quelque chose dans le marché, on l'avait vu, et
qu'il fallait suspendre l'application de la
formule. Vous nous avez dit que ça prendrait des
témoins experts compte tenu de la complexité du
dossier. J'ai été surpris d'entendre hier que le
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 127 Me Vincent Regnault
témoin de l'ACIG, avec du recul, aurait aussi
suggéré de suspendre l'application de la formule
dans le contexte dans lequel on était.
On revient cette année, troisième année,
avec un panel de témoins experts de grande qualité,
avec une approche qui reflète les conditions de
marché pour établir le taux de rendement, pas pour
établir le revenu requis des tarifs, pour établir
le taux de rendement. Là, on sort le spectre que
pour le futur, ça va être bien compliqué. O.K.
Qu'est-ce qu'on va faire pour le futur.
On dit, touchez pas à ça, là, parce qu'on
ne sait pas, puis on ne veut pas revenir à tous les
ans faire la même chose. Moi, je suis prêt à
prendre l'offre que l'ACIG m'a faite. Vous décidez
sur un taux de rendement et dans les mois qui vont
suivre, dans les semaines qui vont suivre, je vais
m'asseoir avec l'ACIG, je vais m'asseoir avec tous
les intervenants et le personnel technique de la
Régie pour établir un mode de fonctionnement pour
simplifier les ajustements subséquents. Je ne sais
pas ce que ça va être, parce que je ne connais pas
le résultat de la décision.
Mais dans les jours et dans les semaines
qui vont suivre, je vais m'asseoir avec eux, on va
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 128 Me Vincent Regnault
travailler une solution, puis on va vous revenir
rapidement pour application dans la cause tarifaire
deux mille onze (2011). Ça complète mes remarques.
Me VINCENT REGNAULT :
Merci. Ça vient donc clore la contre-preuve de Gaz
Métro à l'égard du taux de rendement. Il y aura
lundi la fin de la preuve des intervenants sur les
autres sujets. Évidemment, Gaz Métro, si elle le
juge nécessaire, présentera une contre-preuve. Je
ne veux pas m'avancer sur cette question-là à ce
stade-ci.
Je ne sais pas si j'aurai l'occasion de
reprendre le micro, mais je voulais profiter de
l'occasion pour remercier les sténographes et les
gens de la traduction pour leur travail de grande
qualité et leur disponibilité lors des audiences,
le soir, aujourd'hui également. Et évidemment,
maintenant, bien, le panel est disponible si maître
Sarault souhaite poser des questions ou le
procureur de la Régie ou des membres de la Régie.
Merci.
LE PRÉSIDENT :
Merci, Maître Regnault. Maître Sarault.
Me GUY SARAULT :
Écoutez, il est évident que je vais avoir des
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 129 Me Vincent Regnault
questions pour le panel. J'en ai déjà pris note
dans mes notes personnelles. Cependant, je pense
qu'il y a des contraintes de temps que je voudrais
discuter immédiatement avec de mes personnes
ressources. Je pense que, certains d'entre eux ont
des horaires d'avion qui sont très serrés. Il se
pourrait que je doive précipiter mon contreinterrogatoire afin de pouvoir permettre à ce
qu'ils l'entendent. Si vous pouvez me donner genre
juste une minute ou deux pour m'assurer de la
disponibilité de mes gens, et ça se peut que je
commence plus rapidement.
LE PRÉSIDENT :
Nous allons prendre quelques minutes, et madame la
greffière pourra venir nous avertir dès que ce sera
disponible pour reprendre.
Me GUY SARAULT :
Merci.
SUSPENSION DE L'AUDIENCE
_________________
REPRISE DE L'AUDIENCE
LE PRÉSIDENT :
Alors Maître Sarault.
Me GUY SARAULT :
Merci, Monsieur le Président, Messieurs les
R-3690-2009
12 septembre 2009
PANEL 2 - GM - CONTRE-PREUVE
Interrogatoire
- 130 Me Vincent Regnault
Régisseurs. Alors, compte tenu que nous sommes
samedi matin, c'est de la contre-preuve, que vous
connaissez déjà notre position sur la quasi
totalité des enjeux, je n'avais pas besoin de
préparation outre mesure pour mes questions. Alors,
ça va être assez rapide. Ce qui va nous permettre
d'avoir un « late lunch » mais ça va être fini. Ça
va avoir ce gros avantage-là.
LE PRÉSIDENT :
Merci.
CONTRE-INTERROGÉS PAR Me GUY SARAULT :
Q. [4] Alors, the first question would be on exhibit
B90, giving us the relative performance of a number
of utilities versus the TSX updated information
filed by Mr. Engen.
A, would you agree with me that exactly as
Dr. Booth stated in his oral evidence, that this
shows that these utilities by and large are much
less volatile than the TSX?
MR. ENGEN
A. No.
Q. [5] You don't agree with that?
A. And the particular example ,let's have a look at
the last six months, this the issue that I have
with Dr. Booth in providing data that he provided
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 131 Me Guy Sarault
which, as I said, was stale dated by two months
after accusing me of not having updated my
information.
Depending on what time frame you pick, you
may have very different results.
And interestingly, even, as I point out,
you can see on the charts here because these are
just duplications of what's available on Yahoo. An
observer can choose any one of one day, five days,
one month, three months, six months, year to date,
one year, two years, five years, and maximum.
So, depending on what time frame you pick,
you may have less, you may have more volatility.
These don't say anything to me.
Q. [6] Okay. Well just taking the example of Gaz
Metropolitain, since March 9, 2009, its increase is
25 percent versus 48 percent for the TSX,
approximately half. So, if I used that as a proxy
for the beta of Gaz Métro in comparison to the TSX,
we would arrive at approximately 0.5 beta, would
that be accurate?
A. Perhaps I can ask Dr. Kolbe to respond to that
question. I'm not an expert on betas, although I do
suspect that Dr. Kolbe will make some comment about
trying to select a beta over a six month period.
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 132 Me Guy Sarault
Q. [7] No. I said using this. I mean you filed this as
being representative of the last six months; if I
take those last six months and I compare Gaz Métro
to the TSX, it's exactly half. So if I measure
volatility of Gaz Métro versus volatility of the
market as a whole during those last since six
months, it's half.
A. Well, again, Mr. Sarault, you talked about in
connection with determining a beta; I'm not an
expert in beta. I'll turn it over to Dr.
Kolbe. But, as I said, I suspect he'll have so
comments about trying to use six months of data to
establish betas.
Q. [8] Just an assumption for your updated data.
I have no question for you, Dr. Kolbe on
that.
A. Well, as I've indicated before, I'm not an expert
on beta, and I think that making that kind of
assumption is inappropriate, and I think that as a
panel, we've been entitled to respond to those
kinds of questions. I'm not an expert on betas.
Me VINCENT REGNAULT :
Un court commentaire, la beauté des panels c'est
que vous avez plusieurs personnes qui peuvent
répondre aux diverses interrogations. Maître
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 133 Me Guy Sarault
Sarault a proposé à monsieur Engen une question qui
associait à la fois la volatilité apparente du
cours de Gaz Metro par rapport au TSX, aux bêtas,
monsieur Engen explique qu'il n'est pas un expert
dans la détermination des bêtas, et je pense que
pour le bénéfice de la Régie il serait certainement
intéressant que la Régie entende une réponse à la
question de maître Sarault et que le docteur Kolbe
réponde s'il a quelque chose à ajouter.
ME GUY SARAULT:
Let me rephrase just to expedite this thing.
Q. [9] There is an assumption, it's a hypothetical
question...
Me VINCENT REGNAULT :
Excusez-moi, Maître Sarault. Maître Sarault, je
m'excuse, j'ai fait des commentaires, je présume
que la Régie va vouloir laisser ou pas répondre
monsieur Kolbe à la question que vous avez posée.
Me GUY SARAULT :
C'est parce que je suis prêt à reformuler pour
expédier la chose.
LE PRÉSIDENT :
Reformuler pour une question différente ou pour la
même question?
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 134 Me Guy Sarault
Me GUY SARAULT :
Je voudrais simplement, au docteur Kolbe,
puisqu'ils veulent insister pour qu'il parle, alors
on va lui permettre de parler.
Q. [10] Assuming -- it's a hypothetical question -that I use this data over the last six months to
measure Gaz Métro's volatility against the
volatility of the market as a whole, is it exact
that I arrive to half corresponding approximately
to a beta of 0.5?
MR. KOLBE:
A. Well, as I understand your procedure, you're taking
a six month observation, six months interval, and
saying "I have one observation."
Q. [11] Yes.
A. Last six months. That is -- that is not a standard
way of estimating beta.
You take data over shorter periods, you
take a lot more observations.
You have a data point, but I don't think
anyone would ever say that that data point is an
estimate of the beta of the stock.
Q. [12] Thank you.
Dr. Carpenter, in your comments about Dr.
Booth's evidence on business risk, you mentioned
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 135 Me Guy Sarault
that, you know, there were some developments over
the last two years; for example, the fact that
Transcanada's plant in Bécancourt was still closed
and would remain closed in the foreseeable future,
you did say that?
ME. CARPENTER
A. Yes.
Q. [13] But you are aware that at Gaz Métro's request
the rate currently paid by TCE, Transcanada, is -contains a very very important significant
component of fixed costs, and that as a result of
that, Gaz Métro's protected by the negative effects
of that closures?
A. Yes. I'm well aware of it. But the closure of the
plant does also signify the tremendous oversupply
of electricity which will have an impact on
electricity prices and the competition between gas
and electricity that I was referring to.
Q. [14] Speaking of the competition with electricity,
we had covered that in the publicity that I
produced during your evidence in chief, together
with Mr. Despars, and I believe we were told that
it was limited to the commercial sector.
I found another one, on Gaz Métro's
website, which I could distribute today.
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 136 Me Guy Sarault
Me VINCENT REGNAULT :
Je vais m'objecter à cette question-là ou à cette
ligne de questions-là, ça ne découle définitivement
pas de la contre-preuve qui a été faite ce matin,
là. Si maître Sarault voulait utiliser un document
pour contredire ou pour questionner sur la
compétitivité du gaz naturel par rapport à
l'électricité il pouvait très bien le faire dans le
cadre de son contre-interrogatoire il y a déjà de
cela une dizaine de jours.
ME GUY SARAULT:
The witness just told me 30 seconds ago that with
the closure of the Transcanada's plant just down
the line ,the impact it's going on the competition
from electricity, because there will be surplus -he just testified that right now.
Me VINCENT REGNAULT :
J'ai très bien entendu la question du docteur, la
réponse du docteur Carpenter. Je pense qu'on sort
clairement de qu'est-ce qui a été dit dans la
contre-preuve. Je suis désolé là, mais je suis en
désaccord avec Maître Sarrault.
LE PRÉSIDENT :
Un moment. La Régie va permettre la question en
demandant évidemment à maître Sarault la même
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 137 Me Guy Sarault
approche que nous avons demandée aux experts ce
matin, soit de suivre la règle. Il faut que ce soit
limité à des nouveaux propos qui ont été amenés en
contre-preuve et non pas des propos qui étaient
déjà dans la preuve écrite ou dans les témoignages
principaux.
Me GUY SARAULT :
Alors, ça va être rendu à quel numéro, Madame la
greffière? C-1.26, alors c'est un extrait du site
web de Gaz Métro sur la situation concurrentielle
du Gaz naturel par rapport à l'électricité.
C-1.26 :
Extrait du site web de Gaz Métro sur
la situation concurrentielle du Gaz
naturel par rapport à l'électricité.
Me VINCENT REGNAULT :
En avez-vous des copies?
Me GUY SARAULT :
Oui, oui, j'en ai un paquet de copies.
Me VINCENT REGNAULT :
L'avez-vous en anglais?
Me GUY SARAULT :
Non. Mais monsieur Despars va certainement pouvoir
l'expliquer et moi aussi au besoin à monsieur
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 138 Me Guy Sarault
Carpenter, puis on a aussi la traduction
simultanée. Alors ce que dit ce tableau, monsieur
Carpenter, voici un tableau qui présente en
pourcentage l'avantage en faveur du gaz naturel
dans différents secteurs d'affaires. Il est mis à
jour mensuellement de façon à ce que vous puissiez
suivre l'évolution de la situation concurrentielle.
Alors ça va de petits commerces en haut, en small
businesses to » en bas complètement diverses
grandes industries, grands édifices à bureaux à un
million (1 M) de mètres cubes de consommation
moyenne annuelle. Alors, est-ce qu'il n'est pas
exact, je vais adresser la question à vous monsieur
Despars et à monsieur Carpenter que ce tableau
d'avantages concurrentiels n'est pas limité au
secteur du petit commercial, mais qu'il couvre
également dans les deux dernières lignes, les deux
dernières catégories de la clientèle industrielle?
M. PIERRE DESPARS :
R. En fait, j'aurais tendance à répondre que c'est une
répétition d'une pièce qui m'a été déposée, qui est
présentée différemment parce que ça vise exactement
le marché commercial. Le marché commercial qu'on
nous a présenté, la publicité qu'on fait
présentement dans le marché commercial qui dit
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 139 Me Guy Sarault
qu'on a un avantage concurrentiel par rapport à
l'électricité régulière et par rapport au mazout et
donc ici ce sont toutes les composantes là du
secteur commercial qu'on veut refléter ici.
Me GUY SARAULT :
Ça va, alors le document parle de lui-même.
Q. [15] Next question will be about the document filed
as exhibit B91, the Value Line report.
Just to confirm my proper understanding,
you did say that this data was at the holding
company level in order to find out exactly what
we're talking about, would I be correct in
suggesting that we must read the information under
the heading "business," if I take AGL Resources,
for example, AGL Resources Inc. is a public utility
holding company, its distribution subsidiaries
include Atlanta Gas Light, etc, etc, and this is
where we find the information about the entity that
is the subject matter of this data.
ME. CARPENTER
A. Yes, that's correct. And if you look at appendix B
to my evidence, I have more detail for each of
these companies on what their underlying business
is.
Remember that these were selected to be as
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 140 Me Guy Sarault
pure a play as we can get with publicly traded
local distribution companies in the U.S., so they
do have some non local distribution company
activity involved its holding company data, but
it's there as pure a play as you can find in North
America.
Q. [16] Okay. So if I take the example of AGL
Resources, they have a list under the heading
"business: Deregulated subsidiaries," this would be
the list of companies that are not, you know, the
core of the pure play operations?
A. Yes. And if you look at appendix B, we have
statistics that break out the regulated versus
deregulated assets.
Q. [17] Okay. Good.
Now -- and you confirmed that these
achieved returns that we have here on a
consolidated basis cannot be compared to the
allowed returns that we have in your evidence? I
noted that.
A. Yes, because they're consolidated they're not one
to one comparable with the individuals tops on the
chart. And I said -Q. [18] Okay?
A. -- to try to do that, I think I said yesterday,
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 141 Me Guy Sarault
it's very difficult to come up with the data to do
that.
Q. [19] Now, I believe that it would be Dr. Vilbert
testified that there was market value information,
price/profit earnings ratio, so on, but there's
also book value information, and that would be the
actual figures we see in the document underneath
the chart?
DR. VILBERT
A. Yes, I believe I noted that when I was talking
about it.
Q. [20] Okay. This is all book value information,
correct?
A. Yes, it's accounting statement information yes.
Q. [21] Okay. Good.
Now, would I be correct in understanding
that there are projections based on book value in
the last columns of those charts?
A. Yes, the way this document is set up, if you look
at the to AGL Recourses, for example, and look in
the columns labelled 2008 and 2009, and what you'll
see, those are bold, anything bold is a projection.
Q. [22] So -A. And the reason that you have that is because at
this time when this came out, 2008 they didn't have
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 142 Me Guy Sarault
the final quarterly report.
Q. [23] So what -- but I'm correct in suggesting that
these projections in particular are based on book
value information?
A. Yes. And if you look up above, they have price
value information as well, projections, so, yes, it
is.
Q. [24] And at the right hand corner, bottom of the
document, we have some information as well, such as
"Company's financial strength" B plus plus." Would
it be correct to suggest that this assessment would
be based upon book value?
A. I don't know the metrics to do the financial
strength.
Q. [25] You can't answer that?
A. I can't answer that.
Q. [26] Okay.
Thank you.
During your testimony, Dr. Vilbert, as
completed by Dr. Kolbe, you presented an update to
your approach. I would like to limit my line of
questioning to the CAPM alone, return on equity
alone. I don't want to look into the update on the
ATWACC, that was clear enough, I understood that.
Returning to the CAPM, the traditional
CAPM, am I correct in understanding that your risk
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 143 Me Guy Sarault
free rate, including your adjustment for spreads
would now be of the order of 4.25?
DR. VILBERT
A. Yes.
Q. [27] Would I be correct in assuming that your
market risk premium would now be of the order of
6.75 percent with the reduction in your adjustment
to reflect current difficult market circumstances?
A. Yes, that's correct.
Q. [28] And the beta, would it would be correct to use
the adjusted beta of 0.51 that we find in exhibit
GM7, document 14.1, which is work paper number 1,
to MJV 10, revised to reflect the Régie's
information request Q 24.2?
A. That -Q. [29] That's an adjusted beta.
A. That's an adjusted beta for Gaz Métro alone.
Q. [30] Correct.
A. That is the adjusted beta for Gaz Métro alone.
Q. [31] Yes.
So if I use that information to derive a
CAPM reflecting your recent adjustments so that it
would be 4.25 for the risk free rate, plus 6.75,
multiplied by .51, right?
A. That would be the individual estimate for a single
company, yes.
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 144 Me Guy Sarault
Q. [32] Gaz Métro?
A. For Gaz Métro alone. And, as I said, we don't
estimate the cost of capital that away -Q. [33] I know.
A. -- because we need samples.
Q. [34] But if I limit my question to the CAPM alone,
as I stated in the introduction, that would be the
proper calculation?
A. Yes.
Q. [35] Thank you.
Obviously the beta for Gaz Métro, as
indicated in the exhibit I just quoted, is 0.51,
it's an adjusted beta by Bloomberg, it's indicated
on the document, isn't it correct that in it's
decision for TQM the NEB rejected the use of
adjusted betas?
A. Yes. They said that they needed more information
before accepting the necessity for an
adjustment. And I tried to explain in some detail
in my previous remarks that I believe an adjustment
is justified, as I said, for two reasons: 1, and
I'll only use one, was interest rate sensitivity,
but the other one was the fact that the current
betas are probably underestimated due to the
turmoil in the markets.
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 145 Me Guy Sarault
Q. [36] Okay. So -- but that was my only question as
to whether, you know, the use of adjusted betas was
rejected by the NEB?
A. They didn't accept the use of adjusted betas but
it's, I think it's too strong to say that they
rejected it. They said they needed more
information.
Q. [37] Okay. Well, I will refer the Régie, and the
decision speaks for itself.
For a summary of your presentation on
adjusted betas, we go to page 23; and for the
board's findings, it's at page 27, which both speak
for themselves.
If I were to replace Gaz Métro's adjusted
beta of .51 by a raw beta, what would be the
figure?
A. I could calculate it exactly if you want to take
the time.
It's probably down -- do you want me to
take the time to do the exact number? It's roughly
-Q. [38] Roughly?
A. -- 35.
Q. [39] 35? Okay.
A. And if you then do those calculations, what you
discover, if you -- particularly if you use
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 146 Me Guy Sarault
unadjusted betas, that you're going to end up with
an estimate cost of equity less than the cost of
debt.
Q. [40] I just wanted to have that information in
particular, and I will keep a secret the use I'm
going to make of it.
You also presented rebuttal evidence on the
empirical capital asset pricing model.
Is it correct to suggest that this approach
was also rejected by the NEB at page 27, first
paragraph of its decision for TQM?
A. Well, I'd like to pull it up because -Q. [41] Off memory?
A. Excuse me?
Q. [42] Off memory?
A. You're asking me to memorize it?
Q. [43] Well, was it accepted or rejected, that's all
I'm asking you?
A. They did not use the E CAPM, but the language was
similar to the adjusted beta, which is that they
were not convinced of the necessity, given the use
of -Q. [44] A long term risk free rate?
A. -- long term risk free rate, which is why I also
went through that process of describing why that's
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 147 Me Guy Sarault
still necessary, even though you are using the
long term risk free rate.
Q. [45] Okay.
Dr. Kolbe, now, for the revised value
of the ATWACC, you come to an average of 6.65
percent between the revised estimate for the
Canadian sample, which is at 6.5, and the U.S. gas
LDC sample, which now at 6.75, giving an average on
6.65, correct?
DR. KOLBE:
A. No, it's 6.625.
Q. [46] .625?
A. Yes.
5/8ths, which is .625.
Q. [47] Okay. Thank you. So I'm going to correct
that.
This is the starting point of the
adjustments that you propose for higher risk issue
costs and imbedded debt costs, correct?
A. That's correct.
Q. [48] This starting point of an ATWACC of 6.625, is
it correct to assume that it's based upon the
market value of the capital structure of the
proxies?
A. Yes.
Both Dr. Vilbert's sample values --
Q. [49] And this explains why it becomes necessary to
propose an adjustment for imbedded debt cost for
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 148 Me Guy Sarault
Gaz Metro, correct?
A. No. The use of market value capital structure here
has nothing to do with whether or not you propose
an imbedded debt cost adjustment.
Q. [50] Would it be correct to suggest that if at the
outset the capital structure was estimated on the
basis of the book value of debt, it would not be
necessary to have a further adjustment for imbedded
cost to debt which corresponds to book value of
debt?
A. No, that's absolutely incorrect.
Q. [51] Okay. Monsieur Despars, dans vos dernières
remarques, références au PIB, j'ai bien compris que
la base de vos prévisions pour l'année deux mille
neuf (2009) était fondée sur une croissance de deux
virgule deux pour cent (2,2 %) du produit national
brut?
M. PIERRE DESPARS :
R. Plutôt produit intérieur brut.
Q. [52] Produit intérieur brut du Canada?
R. Non, c'est PIB Québec qu'on utilise.
Q. [53] PIB Québec. Et, ça, ça se compare à combien
par rapport à la prévision équivalente du
« Consensus Forecast »?
R. Je n'en ai aucune espèce d'idée. Pour deux mille
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 149 Me Guy Sarault
neuf (2009)?
Q. [54] Oui.
R. En fait, habituellement, on utilise le « Consensus
Forecast » pour nous servir de guide pour faire la
prévision. Et les gens chez nous, les économistes
chez nous regardent les prévisions des différentes
institutions dont le « Consensus Forecast ». Je
n'ai pas le chiffre du « Consensus Forecast » du
mois de février deux mille huit (2008) en tête là.
Q. [55] C'est parce que lorsqu'on a eu notre
discussion pendant votre contre-interrogatoire sur
votre preuve en chef, je vous avais confronté au
« Consensus Forecast » du mois de mars deux mille
neuf (2009), du mois de juin deux mille neuf (2009)
et du mois d'août deux mille neuf (2009) qui sont
au dossier. Et dans tous ces cas-là, la prévision
de produit intérieur brut pour le Canada était à
moins approximativement deux.
R. Mais là, vous parlez... Là vous m'avez parlé de
deux choses. Vous m'avez parlé de celui qu'on a
utilisé l'an dernier et là vous me parlez de celui
qu'on a cette année. Non. Celui de cette année qui
était au dossier, qui était dans le dossier au
niveau du secteur des approvisionnements gaziers
parce qu'on doit utiliser des hypothèses de
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 150 Me Guy Sarault
produits intérieurs bruts sur trois ans, donc qui
reflétait les années deux mille dix (2010), deux
mille onze (2011), deux mille douze (2012), ce qui
a été utilisé était de un point trois pour cent
(1.3 %) et c'était... et c'était aussi la base qui
a été utilisée pour établir les prévisions
budgétaires.
Si vous me demandez en détail pourquoi les
économistes chez Gaz Métro ont retenu un point
trois pour cent (1.3 %) par rapport au « Consensus
Forecast » de l'époque, je ne suis pas en mesure de
vous répondre.
Q. [56] Donc, pour retenir l'essentiel de votre
témoignage, il peut arriver que pour les fins de
monter votre dossier tarifaire dans leurs
prévisions économiques, vos économistes s'écartent
des prévisions du « Consensus Forecast »?
R. En fait, je n'ai pas les prévisions du « Consensus
Forecast » des mois de janvier et février, moment
où on prépare les prévisions volumétriques là, les
prévisions de volumes. En fait, même le processus
commence en décembre de l'année précédente. Ça fait
que compte tenu que je n'ai pas ces « Consensus
Forecast-là », je ne peux pas conclure. Mais, c'est
clair qu'il y a un élément de jugement dans
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 151 Me Guy Sarault
l'établissement de ce PIB-là.
Q. [57] Merci. Ça complète mes questions.
M. MICHAEL J. VIBERT :
May I make one correction? I just calculated the
adjusted beta -- the non adjusted beta, it would be
.25 not .35.
LE PRÉSIDENT :
Merci, Maître Sarault. Maître Legault pour la
Régie.
Me LOUIS LEGAULT :
La Régie n'aura pas de question, Monsieur le
Président.
LE PRÉSIDENT :
Pas de question. Merci, Maître Legault. Alors, ça
complète l'audience pour ce matin. La Régie n'aura
pas de question pour les témoins suite à la
présentation de la contre-preuve. Donc, la Régie en
profite pour remercier tous les participants et
toutes les parties à la présente audience sur le
coût en capital de la demanderesse Gaz Métro.
Elle tient à remercier en particulier tous
les témoins, ainsi que leur procureur et tout le
personnel de support pour la grande disponibilité
dont tous ont su faire preuve en raison des
imprévus et des circonstances qui se sont produits
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 152 Me Guy Sarault
et qui ont amené des changements importants dans le
calendrier. Je pense, malgré tout, nous avons
réussi à mener à bien cette partie de l'audience et
la Régie vous en remercie.
Je tiens évidemment à remercier également
la grande disponibilité à la fois du personnel
technique de la Régie et du personnel au niveau des
sténographes et des traducteurs qui ont permis de
tenir ces débats de façon accélérée dans les
circonstances et la Régie les remercie pour leur
très grande disponibilité.
Donc, sur ce, la Régie va suspendre
l'audience jusqu'à lundi treize heures (13 h 00)
pour la suite de l'audition des preuves des
intervenants. Donc, l'audience est levée.
AJOURNEMENT DE L'AUDIENCE
______________________
R-3690-2009
12 septembre 2009
PANEL 2- GM - CONTRE-PREUVE
Contre-interrogatoire
- 153 Me Guy Sarault
Nous, soussignés, MARC BEEBE et CLAUDE
MORIN, sténographes officiels dûment autorisés à
pratiquer avec la méthode sténotypie et sténomasque
certifions sous notre serment d'office que les
pages ci-dessus sont et contiennent la
transcription exacte et fidèle de la preuve en
cette cause, le tout conformément à la Loi;
Et nous avons signé :
____________________
____________________
MARC BEEBE
Sténographe officiel
CLAUDE MORIN
Sténographe officiel