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 10 SEPTEMBRE 2009
VOLUME 6 - SOIRÉE
ODETTE GAGNON et MARC BEEBE
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
10 septembre 2009
- 4 TABLE DES MATIERES
PAGE
LISTE DES PIÈCES . . . . . . . . . . . . . . .
5
PREUVE DE L'ACIG - taux de rendement
MICHAEL GORMAN
LAURENCE BOOTH
MURRAY NEWTON
JEAN-BENOÎT TRAHAN
EXAMINATION BY ME GUY SARAULT
____________
. . . . . . . .
7
R-3690-2009
10 septembre 2009
- 5 LISTE DES PIÈCES
PAGE
C-1.22 :
(ACIG-5, Doc.1.1) Présentation de la
preuve sur le risque de Gaz Métro
10
C-1.23 :
(ACIG-5, Doc.1.2) Extrait du dossier
Senneville (R-3681-2008) . . . .
11
C-1.24 :
(ACIG-7, Doc.1.1) Présentation Power
Point de monsieur Michael Gorman
11
C-1.25 :
(ACIG-6, Doc.1.1) Présentation Power
Point du docteur Laurence Booth .
11
D 1 19 :
Calculation in Dr. Kolbe's second
presentation of B 66 at page 4. .
____________
162
R-3690-2009
10 septembre 2009
- 6 L'AN DEUX MILLE NEUF, ce dixième (10e) jour du mois
de septembre :
PREUVE DE L'ACIG - taux de rendement
19 h
LE PRÉSIDENT :
Reprise de l'audience. Nous en sommes maintenant à
entendre la preuve du panel de l'ACIG.
Me GUY SARAULT :
Oui. For everyone's benefit, I'll speak in
English.
The witnesses on this panel are from, going
from left to right, a Mr. Michael Gorman, expert
witness on cost of capital.
Then Mr. Laurence Booth, who is also an
expert witness on cost of capital.
Then there is a Mr. Murray Newton, who is
the current president of the Industrial Gas Users
Association.
And then to the extreme right, Jean Benoit
Trahan, who is an analyst who will testify on risk
issues.
So I think the witnesses should be sworn in
and we'll go through their evidence.
R-3690-2009
10 septembre 2009
PREUVE ACIG
- 7 -
MICHAEL GORMAN (Sworn in) business address,
St Louis, Missouri, United States.
LAURENCE BOOTH (Sworn in) Professor of Finance at
the University of Toronto.
MURRAY NEWTON (Sworn in) business address 99
Metcalf Street in Ottawa, Suite 1201.
JEAN-BENOÎT TRAHAN (under the same oath).
EXAMINATION BY ME GUY SARAULT:
Before we proceed to your respective presentations,
I would like to file, confirm the filing of the
evidence that we have already transmitted to the
Régie in writing.
I will begin with you, Mr. Newton.
Q. [1] We have filed as Exhibit ACIG, for IGUA, ACIG
4, document 1, your written evidence, and this was
completed by an Exhibit ACIG 4, document 2, which
is your response to the Régie's information request
number 1.
Do you recognize that these documents were
prepared under -- by yourself or under your
supervision?
R-3690-2009
10 septembre 2009
- 8 -
PANEL IGUA
Examination
Me Guy Sarault
MR. NEWTON
A. Yes.
Q. [2] Yes. And do you have any corrections to bring
to your written evidence?
A. No.
Q. [3] No.
And you adopt these documents as your
written evidence in this case?
A. I do.
Q. [4] You do.
Second, Mr. Jean Benoit Trahan. We
have already filed your evidence respecting rates
DM and D4, so right now what we have is ACIG 5,
document 1, constituant votre preuve écrite sur le
risque, laquelle est complétée par la pièce ACIG-5,
Document 3, réponse de Jean-Benoît Trahan à la
demande de renseignements numéro 1 de la Régie;
ACIG-5, Document 4, réponse de Jean-Benoît Trahan
pour l'ACIG à la demande de renseignements numéro 1
de Gaz Métro; et après ça, ACIG-5, Document 5,
réponse de Jean-Benoît Trahan à la demande de
renseignements du docteur Paul Carpenter. Tous ces
documents ont été préparés sous votre supervision,
sous votre contrôle?
M. JEAN-BENOÎT TRAHAN :
R. Oui.
Q. [5] Vous les adoptez comme votre preuve écrite dans
R-3690-2009
10 septembre 2009
- 9 -
PANEL IGUA
Examination
Me Guy Sarault
le présent dossier?
R. Oui.
Q. [6] Now, I will now come to you, Dr. Booth.
We have filed as Exhibit IGUA 6, document 1, your
written evidence, which is completed by IGUA 6,
document 2, 2.1, 3, 4, 4.1, 5, and 5.1 and 6 -document 6, 6.1, which are all responses to
information requests and attachments thereto.
So
all of these documents were prepared under your
control and supervision?
MR. BOOTH
A. They were.
Q. [7] And you adopt them as your written evidence in
this case?
A. I do.
Q. [8] And now you -A. I have one correction.
Q. [9] Yes. Sorry.
A. This is in appendix B, page 4, line 3, where 13.39
percent should be 12.39 percent.
That's the only
material correction.
ME GUY SARAULT
Thank you.
Q. [10] Now, Mr. Gorman, we have filed as Exhibit IGUA
7, document 1, your written evidence in this case,
R-3690-2009
10 septembre 2009
- 10 -
PANEL IGUA
Examination
Me Guy Sarault
which is completed by ACIG -- IGUA 7, document 2,
2.1, 3, 4, 4.1 and 5, which are all responses by
yourself to information requests and attachments
thereto.
All of these documents were prepared
under your control and supervision?
MR. ENGEN
A. Yes.
Q. [11] And you adopt them as your written evidence in
this case?
A. I do.
Q. [12] Okay. And also, I would like maybe just to get
through the written portion, I have a Power Point
presentation, maybe we should distribute them right
away, not waste time with that afterwards.
So I will, as -Comme pièce ACIG-5, Document 1.1, qui va être la
pièce de la Régie C-1.22. J'ai la présentation de
monsieur Jean-Benoît Trahan sur le risque.
C-1.22 :
(ACIG-5, Doc.1.1) Présentation de la
preuve sur le risque de Gaz Métro.
Maintenant, comme pièce C-1.23, également ACIG-5,
Document 1.2, c'est un extrait du dossier
Senneville (R-3681-2008) qui va faire partie de la
R-3690-2009
10 septembre 2009
- 11 -
PANEL IGUA
Examination
Me Guy Sarault
présentation de monsieur Trahan.
C-1.23 :
(ACIG-5, Doc.1.2) Extrait du dossier
Senneville (R-3681-2008).
Maintenant, comme pièce C-1.24, également ACIG-7,
Document 1.1, c'est la présentation Power Point de
monsieur Michael Gorman.
C-1.24 :
(ACIG-7, Doc.1.1) Présentation Power
Point de monsieur Michael Gorman.
Et comme pièce ACIG-6, Document 1.1, également
pièce de la Régie C-1.25, présentation Power Point
du docteur Laurence Booth.
C-1.25 :
(ACIG-6, Doc.1.1) Présentation Power
Point du docteur Laurence Booth.
Évidemment, il va y avoir aussi, pendant la
présentation du docteur Booth, on va revenir avec
la pièce C-1.19, qui est son calcul que nous avions
discuté lors de mon contre-interrogatoire du panel
de Gaz Métropolitain. Alors, on va revenir avec ça
pour compléter la preuve.
R-3690-2009
10 septembre 2009
- 12 -
PANEL IGUA
Examination
Me Guy Sarault
Me VINCENT REGNAULT :
Juste un petit commentaire, en fait plus une
question. Je me demandais, le document ACIG-5, 1.2,
qui est l'extrait du dossier Senneville, je me
demandais quel était le lien. Je pense qu'on n'a
jamais vu ça dans le dossier. Puis, évidemment,
l'expression qui me vient à l'esprit, c'est que
« ce qui est bon pour pitou est bon pour minou ».
Les nouveaux documents à ce stade-ci, généralement,
c'est des choses qu'on essaie d'éviter. Alors, je
me demandais, la pièce, quelle était son utilité ou
son lien, est-ce qu'on l'avait déjà vue avant?
Me GUY SARAULT :
Pouvez-vous attendre la présentation de monsieur
Trahan, puis il pourra en expliquer la nature et le
rôle ici? À ce moment-là, vous pourrez réserver
votre droit de faire une objection, le cas échéant.
Me VINCENT REGNAULT :
On va fonctionner de cette façon-là.
LE PRÉSIDENT :
Très bien.
Me GUY SARAULT :
Alors, l'ordre dans lequel on va présenter...
LE PRÉSIDENT :
Pour le nombre de copies, vous mentionniez qu'il y
R-3690-2009
10 septembre 2009
- 13 -
PANEL IGUA
Examination
Me Guy Sarault
avait des...
Me VINCENT REGNAULT :
Plus pour permettre à mes experts d'en avoir chacun
un et... Cinq de plus, ce serait bien,
effectivement.
LE PRÉSIDENT :
Cinq de plus.
DISCUSSION HORS ENREGISTREMENT
LE PRÉSIDENT :
Donc, la Régie va tenter d'avoir les copies
disponibles.
Me VINCENT REGNAULT :
Merci.
LE PRÉSIDENT :
Dès que la greffière reviendra peut-être on pourra
recommencer, mais on va attendre qu'elle soit là.
Même si les copies ne sont pas là on va commencer.
On va attendre madame la greffière. Alors, Maître
Sarault, on m'indique qu'on peut commencer quand
même.
Me GUY SARAULT :
Oui.
LE PRÉSIDENT :
On va tenter d'avancer.
R-3690-2009
10 septembre 2009
- 14 -
PANEL IGUA
Examination
Me Guy Sarault
Me GUY SARAULT :
O.K.
The order in which we will present our evidence
will be first an opening statement by Mr. Murray
Newton, president of IG
A.
He will be followed by Mr. Trahan's presentation
on risk.
And will be followed by Mr. Michael Gorman
who will, in turn, finish with Mr. Booth.
Alors, Mr. Newton, your opening statement.
MR. NEWTON:
Well, good evening, Mr. President and
Commissioners.
The Industrial Gas Users Associations
appreciates having the opportunity to present our
views to the Régie in regard to Gaz Métro's 2010
rate application.
As discussed in our direct evidence, many
IGUA member companies operate energy intensive
operations in the province of Québec.
Industrials use natural gas as a fuel or as
a feedstock and so they rely on Gaz Métro's
regulated gas distribution facilities for the
physical delivery of their gas supplies to their
plant locations.
R-3690-2009
10 septembre 2009
- 15 -
PANEL IGUA
Examination
Me Guy Sarault
For industrials, Gaz Métro's regulated gas
distribution rates comprise a significant component
of their total landed gas supply cost. That is why
industrials have always paid close attention to the
regulated rates and underlying costs that underpin
those rates.
Those regulated costs and rates have been
steadily rising over recent years and so these
matters are now even more important for
industrials.
While the price of the gas commodity has
declined in recent months, the regulated portion of
the total delivered cost continues to increase.
The current poor state of the economy and
its impact on our members operations further
increases IGUA's focus on these matters.
However, one point needs to be made very
clear.
Although the rate impact of Gaz Métro's
ATWACC proposal has clearly caught our attention,
that is not why IGUA is opposed to it.
Industrial gas users oppose the application
for higher cost of capital because it's excessive,
it's unnecessary and it violates the fair return
standard.
This is the third year in a row Gaz Métro
R-3690-2009
10 septembre 2009
- 16 -
PANEL IGUA
Examination
Me Guy Sarault
has come before you seeking a higher regulated
return.
Therefore, in order to brings some
discipline to Gaz Métro's management, we ask that
as part of your decision making process in this
proceeding, the Régie put Gaz Métro on notice that
the prudence of its internal and external
regulatory costs associated with the preparation
and execution of any future cost of capital
application, together with the recovery of those
costs in rates, be closely -- will be closely
examined by the Régie in any future proceeding
initiated by Gaz Métro.
My members have also asked me to respond to
some comments made last week by Ms Brochu about
IGUA in her opening remarks to you.
As you know, IGUA has been an active and
responsible intervener before the Régie for many
years.
We have many times actively investigated
and sometimes actively opposed various rate and
tariff initiatives proposed by Gaz Métro.
It should, therefore, come as no surprise
that industrials have concerns about the current
application.
Ms Brochu's bizarre comments about
non Québec IGUA members controlling IGUA's cost of
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 17 -
capital agenda are offensive and they're
ill informed, they're misinformed.
Industrials understand that an important
part of Ms Brochu's job is to maximize the
financial returns for her shareholders.
We respect
that.
IGUA's role is to protect the interests of
its gas user members, member companies, by ensuring
they don't have to pay unnecessarily high rates
that are caused by excessive returns.
As explained in our pre filed written
evidence, as president of IGUA, I report to and I'm
accountable to IGUA's board of directors.
Excluding me there are 12 directors
representing 12 separate IGUA member companies who
sit on our board of directors.
Nine of those 12
directors work for companies who have industrial
operations in Québec.
The chairman of IGUA is Benoit Gratton with
Cascades.
The chair of IGUA's Québec committee is
Yves Séguin, with Domtar.
Both Messrs. Gratton and Séguin were in
attendance in the hearing room last week when
Ms. Brochu made her comments about IGUA.
R-3690-2009
10 septembre 2009
- 18 -
PANEL IGUA
Examination
Me Guy Sarault
They were disappointed to hear the chief
executive of Gaz Métro suggest that IGUA is
controlled by non Québec interests. You know, I
really want to underline that, they were very
disappointed to hear that kind of a comment.
Also, it's worth noting that most, if not
all, of the specific individuals from IGUA's member
companies who volunteer their valuable time on IGUA
committees and our board of directors, they are all
responsible within their respective companies for
managing their natural gas procurement.
Therefore, they're the very customers that
Ms. Brochure tells you are so important to Gaz
Métro.
Clearly, IGUA represents the interests of
its current industrial members.
Our positions on cost of capital are likely
also supported by other industrial gas users who
are not today members of IG
A. In addition, as you have already heard, many of Gaz
Métro's smaller volume residential and commercial
customers may also share IGUA's concerns about Gaz
Métro's cost of capital proposals.
The subject of cost of capital is extremely
complex and technical.
As you can appreciate from
R-3690-2009
10 septembre 2009
- 19 -
PANEL IGUA
Examination
Me Guy Sarault
the voluminous amounts of materials that you have
been bombarded with in this proceeding, some
consumers may lack the technical expertise or
financial capability to sort through these
materials or even hire their own financial experts
to help them respond to the mountains of materials
generated by the utility lobby.
Therefore, gas consumers, including
industrials, rely on you, the Régie, as public
servants, to continue to oversee Gaz Métro's
proposals and to continue to provide fair returns
for Gaz Métro's shareholders, while at the same
time ensuring, you're ensuring, you are not
awarding excessive returns to a monopoly business
that is largely insulated from business risk.
Thank you.
ME GUY SARAULT:
Q. [13] So this completes your presentation,
Mr. Newton?
A. It does.
Q. [14] So we are now turning to Mr. Jean Benoit
Trahan, who, I believe, has a Power Point
presentation filed as C 1 22.
Q. [15] Alors, Monsieur Trahan, nous vous écoutons.
R-3690-2009
10 septembre 2009
- 20 -
PANEL IGUA
Examination
Me Guy Sarault
M. JEAN-BENOîT TRAHAN :
R. Alors bonsoir. Donc ma présentation sera bien
entendu sur le risque de Gaz Métro. Je vais la
décliner en six points. Tout d'abord, on va parler
du risque relié au type de réglementation qui est
utilisée, l'évolution de la clientèle de Gaz Métro,
en troisième lieu l'évaluation du risque relié au
volume et aux revenus, en quatrième lieu
l'évaluation de la croissance de la base tarifaire.
En cinquième point, nous allons conclure sur le
risque de Gaz Métro. Et finalement, en sixième
point, certains commentaires sur les comparables
proposés par The Brattle Group.
Donc, tout d'abord le risque relié au type
de réglementation utilisée. Le docteur Carpenter a
décliné les types de réglementations sous trois
types d'une certaines manière, soit la
réglementation traditionnelle avec un compte
d'écart de fin d'année, réglementation
traditionnelle sans compte d'écart et la
réglementation incitative.
Il a souvent fait la comparaison de Gaz
Métro avec une réglementation traditionnelle avec
compte d'écart de fin d'année et, quant à nous,
c'est un type de réglementation qui est peu
R-3690-2009
10 septembre 2009
- 21 -
PANEL IGUA
Examination
Me Guy Sarault
utilisée, et lorsqu'elle est utilisée elle est
souvent utilisée dans des situations particulières.
La réglementation traditionnelle sans
compte d'écart c'est plus souvent utilisé, c'est
même normal, entre guillemets, dans le métier.
C'était la réglementation qui était utilisée par
Gaz Métro avant mil neuf cent quatre-vingt-dix-neuf
(1999) et c'est souvent une réglementation qui va
précéder la mise en place d'un mécanisme incitatif.
La réglementation incitative, comme vous le
savez, c'est de plus en plus utilisé, et le défi de
la réglementation incitative c'est la capacité à
s'adapter à un environnement qui est en évolution,
donc la capacité de mettre en place un modèle de
mécanisme incitatif qui permet de s'adapter à un
environnement qui évolue.
Donc, qu'en est-il du mécanisme incitatif
de Gaz Métro? C'est un mécanisme incitatif qui est
maintenant à maturité. Si on se compare en quatrevingt-dix-neuf (99), deux mille (2000), deux mille
quatre (2004), deux mille sept (2007), c'est un
mécanisme qui aujourd'hui a subi deux
renégociations depuis. Il y a une troisième
renégociation qui est en cours. Le mécanisme a été
fonctionnel jusqu'à aujourd'hui et il a démontré sa
R-3690-2009
10 septembre 2009
- 22 -
PANEL IGUA
Examination
Me Guy Sarault
capacité d'adaptation.
Des exemples de capacité d'adaptation c'est
bien entendu le mécanisme permettant de s'adapter à
la baisse tendancielle des volumes PMD. C'est
l'intégration d'une baisse du facteur X pour
prendre en compte la baisse des volumes des clients
VGE. Lors de la deuxième mouture du mécanisme ça a
été plutôt le contraire où on avait augmenté le
facteur X pour prendre en compte d'autres
phénomènes. Donc, il a démontré une capacité de
s'adapter dans le temps et cet élément-là, quant à
nous, est très important et démontre la maturité du
mécanisme en tant que tel.
Les résultats c'est un élément très
important pour évaluer la bonne performance d'un
mécanisme incitatif. Il n'y a pas eu d'année sans
atteindre le rendement de base. Je pense que c'est
quand même un fait assez important. Mais l'autre
élément qui est bien intéressant à noter c'est que
la bonification est plus importante sur le
mécanisme incitatif en moyenne que sous la
réglementation d'avant deux mille (2000). Cet
élément-là est également intéressant à retenir.
Cette capacité-là de dégager une
bonification découle de trois, aujourd'hui de trois
R-3690-2009
10 septembre 2009
- 23 -
PANEL IGUA
Examination
Me Guy Sarault
possibilités, soit la bonification découlant du
PGEÉ, la bonification découlant de l'optimisation
des outils de transport et d'entreposage et,
finalement, la bonification découlant du potentiel
de gains de productivité ou de trop-perçus au
niveau de la distribution.
Alors ce qu'il faut retenir c'est que ces
trois éléments-là sont maintenant indépendants, ce
qui fait qu'on peut se retrouver dans une situation
où on n'atteint pas notre rendement de base, par
exemple en distribution, mais qu'on va chercher des
bonifications au niveau du PGEÉ ou encore au niveau
des outils de transport et d'entreposage, et
finaliser notre année avec un taux de rendement
supérieur au taux de rendement de base malgré un
déficit au niveau de la distribution.
Donc, quels sont les avantages et
désavantages de ce mécanisme? Il y a un avantage,
il y a trois, quatre avantages marqués. Le premier
c'est le tarif plus élevé offrant une protection de
rendement de base. Lorsqu'il y a un gain de
productivité en début d'année, le tarif est fixé à
un tarif supérieur à ce qu'il aurait été fixé sous
une réglementation traditionnelle. Cet élément-là
fait que, s'il y a une réduction de volume prévue,
R-3690-2009
10 septembre 2009
- 24 -
PANEL IGUA
Examination
Me Guy Sarault
réelle par rapport au volume prévu, il y a une
certaine protection qui est offerte ici.
Alors cette protection-là a été utile en
deux mille un-deux mille cinq (2001-2005). On
croyait qu'elle aurait été utile en deux mille neuf
(2009), mais suite aux commentaires soumis par
monsieur Despars en début de dossier, on comprend
qu'en deux mille neuf (2009) ça n'aura pas été
utile. Malgré tout, cette protection-là a permis de
protéger le rendement de base en deux mille un
(2001) et deux mille cinq (2005).
Il y a également un deuxième point qui est
très important, c'est la protection contre les
pertes de rendement. Il y a seulement cinquante
pour cent (50 %) qui est à la charge de
l'actionnaire. Ça s'approche finalement d'une
réglementation traditionnelle avec un compte
d'écart. C'est quand même intéressant. On essaie de
comparer puis on se dit bon finalement c'est peutêtre égal à un mécanisme, une tarification
traditionnelle, voyons, une réglementation
traditionnelle. Mais ici on s'aperçoit qu'il y a
une protection supplémentaire qu'il n'y a pas sous
la réglementation traditionnelle. Donc, il y a un
cinquante pour cent (50 %) qui serait à la charge
R-3690-2009
10 septembre 2009
- 25 -
PANEL IGUA
Examination
Me Guy Sarault
de l'actionnaire, l'autre cinquante pour cent
(50 %) devient une dette, une dette à combler via
les différents procédés usuels, c'est-à-dire des
gains de productivité futurs ou encore des tropperçus de fin d'année.
Le revenu plafond qui est, si jamais il est
inférieur au revenu requis, bien entendu on utilise
le revenu requis. Je pense que c'est quelque chose
que vous savez très bien. Et finalement, la dette à
être remboursée aux clients est au maximum
supportée à cinquante pour cent (50 %) par les
actionnaires.
Les désavantage, bien c'est lié au
phénomène de dette. Seule obligation de remise des
gains de productivité futurs ou des trop-perçus
lorsqu'il y a un manque à gagner de fin d'année ou
la création de dette en début d'année.
Et finalement, cet élément-là, bien qu'il
est théoriquement intéressant, n'a pas d'incidence
sur le rendement dans la mesure où on n'arrive pas
à la fin du mécanisme. L'élément le plus
désavantageux d'une certaine manière c'est
l'exposition des actionnaires en fin de mécanisme,
s'il y a toujours existence d'une dette. Ce maximum
d'exposition-là est de soixante-cinq (65) points de
R-3690-2009
10 septembre 2009
- 26 -
PANEL IGUA
Examination
Me Guy Sarault
base pendant une durée de trois ans. Ou environ
soixante-cinq (65) points de base.
En conclusion, quant à nous il y a une
réduction du risque par rapport à la réglementation
traditionnelle sauf sur un élément, soit la dette
de fin du mécanisme. La Régie avait reconnu cet
élément-là qu'il n'y avait pas de risque accru de
manière significative en deux mille sept (2007)
dans la D-2007-116.
Quant à nous, on vous apporte aujourd'hui
des preuves additionnelles qui démontrent qu'en
réalité le risque est moindre, notamment l'ampleur
des bonifications, la protection du rendement de
base, la possibilité d'atteindre une bonification
selon les trois options que nous avons déclinées
et, finalement, la capacité adaptative du mécanisme
qui a été démontrée.
Le deuxième point maintenant que je vous
amène, c'est l'évolution de la clientèle de Gaz
Métro. C'est intéressant que l'évolution de la
clientèle n'a pas été un élément qui a été retenu
de la part du docteur Carpenter.
C'est impressionnant, hein! Quand on
regarde ces graphiques-là, on voit une lente
décroissance jusqu'en quatre-vingt-dix-neuf (99) et
R-3690-2009
10 septembre 2009
- 27 -
PANEL IGUA
Examination
Me Guy Sarault
depuis quatre-vingt-dix-neuf (99), on voit une
croissance marquée au niveau de la clientèle
résidentielle. C'est un retour marqué ça, c'est un
retour réussi qui découle des efforts de Gaz Métro
dans le marché résidentiel via une campagne
marketing et tout ce qui est venu avec.
Ce qui est le plus intéressant également à
retenir de cet élément-là, c'est le graphique
suivant. C'est que ce retour dans le marché
résidentiel s'est fait dans une situation où la
situation concurrentielle du gaz naturel était
défavorable face à l'électricité.
Gaz Métro est partie d'une part de marché
en quatre-vingt-dix-huit (98), quatre-vingt-dixneuf (99) de trois pour cent (3 %) dans la grande
région métropolitaine de Montréal pour la nouvelle
construction. On tourne aujourd'hui à plus de
vingt-cinq pour cent (25 %). C'est majeur comme
modification. On passe d'un joueur négligeable à un
joueur important dans le marché de la nouvelle
construction. C'est important.
Dans les autres marchés, il y a une bonne
pénétration qui se continue dans le marché des
petits volumes, principalement du PME et du
commercial. La raison pour laquelle, d'une certaine
R-3690-2009
10 septembre 2009
- 28 -
PANEL IGUA
Examination
Me Guy Sarault
manière, on ne retrouve pas ça dans les autres
marchés, c'est qu'il y a une saturation. Ces autres
marchés-là ont été largement développés au cours
des années précédant deux mille (2000), notamment
via les extensions de réseaux multiples qu'on a
vues là pour aller au Lac Saint-Jean, pour aller à
Mont-Tremblant, et caetera.
Donc, on a cherché à développer un marché
des plus grands volumes. Et aujourd'hui, ces
volumes-là sont dans un marché où on a une
saturation. On n'est pas capable d'aller en
chercher nécessairement de nouveaux, difficilement.
On entendait, au niveau du tarif 4, il n'y a pas eu
de nouveau client depuis plusieurs années. Il y a
eu des ajouts de volumes et pas de nouveau client.
Et il y a une certaine décroissance là du marché
des grands volumes au niveau des entreprises qui
ferment ou encore de l'efficacité énergétique.
Au niveau du futur, ce qu'on croit, quant à
nous, c'est qu'il y a une consolidation de la
présence dans le marché résidentiel et du petit
volume qui va continuer chez Gaz Métro. Le
potentiel est là, il n'y a pas de raison que ça
casse d'une journée à l'autre.
Il y a l'opportunité également de nouvelles
R-3690-2009
10 septembre 2009
- 29 -
PANEL IGUA
Examination
Me Guy Sarault
clientèles qui proviennent... qui pourraient
provenir de la production de gaz au Québec. Il y a
également la situation concurrentielle qui est
largement améliorée comparativement à deux mille
sept (2007).
La baisse du prix du gaz, les prix du
pétrole relativement élevés, la hausse continue des
tarifs de distribution d'électricité, lorsqu'on
regarde deux mille neuf (2009), ça a un impact. En
deux mille neuf (2009), on croyait avoir un déficit
au niveau de la distribution. La baisse du prix du
gaz a permis le retour de la clientèle dans le gaz
d'appoint de concurrence et ça a l'effet qu'on
connaît, c'est-à-dire qu'il y aura bonification de
rendement pour l'année deux mille neuf (2009).
Maintenant, passons à l'évolution des
volumes et des revenus. Docteur Carpenter a basé
une bonne partie de son analyse sur la décroissance
du volume moyen de la clientèle au D1. Quant à moi,
cette analyse-là, elle est trop limitée. Elle n'a
pas pris en compte, d'une part, la corrélation
qu'il y a entre la décroissance du volume et la
croissance du nombre de clients résidentiels. Elle
n'a pas pris en compte le nouveau mixte clientèle
qui, notamment par exemple en deux mille cinq
R-3690-2009
10 septembre 2009
- 30 -
PANEL IGUA
Examination
Me Guy Sarault
(2005), avait jusqu'à quarante-neuf pour cent
(49 %) de nouveaux clients qui étaient des clients
périphériques, donc à consommation modeste si on
compare à un client ordinaire.
Elle n'a pas tenu compte non plus de
l'effet de saturation au niveau des grands tarif 1
et également des modalités entourant le tarif DM.
Comme vous avez entendu hier, au niveau du tarif
DM, tout nouveau client de soixante-quinze mille
mètres cubes (75 000 m(3)) qui voulait devenir
membre, pas membre, mais plutôt client chez Gaz
Métro avait l'opportunité d'aller au tarif DM avec
un rabais de trente et un pour cent (31 %) par
rapport à la situation au tarif 1.
Conséquemment, au cours des dernières
années, les grands clients ont eu tendance à aller
vers le tarif DM plutôt que le tarif 1, affectant,
encore une fois, la baisse par client.
L'autre élément, c'est qu'au niveau du
tarif DM, il y avait une possibilité, pour
quelqu'un qui était au tarif 1, d'aller au tarif DM
seulement s'il doublait sa consommation. Ce qui
veut dire que les clients qui étaient au tarif 1
comparativement aux années précédentes et qui
grossissaient, disparaissaient du tarif 1, alors
R-3690-2009
10 septembre 2009
- 31 -
PANEL IGUA
Examination
Me Guy Sarault
que les clients qui réduisaient leur consommation
restaient au tarif 1. Donc, quand on met tous ces
éléments-là en contexte, il faut prendre l'analyse
primaire de ce graphique-là avec beaucoup beaucoup
de... en tout cas, beaucoup de réflexion disons.
On ne nie pas, par ailleurs, l'effet de
l'efficacité énergétique. L'efficacité énergétique
est venue de deux éléments. Elle est venue
notamment, l'efficacité énergétique, chez les
clients directement qui possédaient leur équipement
actuellement, soit par des réductions de
consommation via des éléments comportementaux ou
encore un changement de portes et fenêtres, et
caetera, mais également par un autre phénomène qui
est le rehaussement de l'efficacité des nouveaux
équipements.
Les clients de Gaz Métro, plusieurs
arrivent à la fin de la vie utile de leurs
équipements et doivent renouveler leurs
équipements. Et on passe d'un équipement qui était,
dans les soixante (60 %) à soixante-dix (70 %),
quatre-vingts (80 %) maximum en fait d'efficacité,
aujourd'hui avec des modèles qui sont à quatrevingt-dix (90 %), quatre-vingt-quinze (95 %),
quatre-vingt-treize pour cent (93 %). Donc,
R-3690-2009
10 septembre 2009
- 32 -
PANEL IGUA
Examination
Me Guy Sarault
automatiquement il y a un gain qui se fait. Et ce
gain-là n'est pas déplorable, bien au contraire. Ça
ne fait qu'améliorer la situation concurrentielle
de Gaz Métro envers les autres sources d'énergie.
L'autre élément qui est très intéressant,
c'est le quasi-passage sous silence de l'évolution
du tarif DM. C'est intéressant parce qu'ici, ce
qu'on voit, c'est une corrélation très similaire
avec la situation du tarif D1 où lorsqu'il y a eu
une croissance du nombre de clients, on s'est
retrouvé avec une décroissance du volume. Cette
décroissance du volume s'est faite jusqu'en deux
mille trois (2003). Donc, décroissance qui s'est
faite dans la période avant hausse de prix, avant
volatilité du prix. Et depuis deux mille quatre
(2004), stabilité du nombre de clients, stabilité
au niveau des volumes.
C'est intéressant de prendre ça en
parallèle parce qu'on se fait dire qu'il y a une
fuite de clients, il y a une fuite de volume, et
quand on analyse correctement, on s'aperçoit que ce
n'est peut-être pas si clair que ça.
Au niveau du D5, la fuite, elle se tarit.
Il y a eu un choc, il y a eu un choc de prix en
deux mille un (2001), deux mille deux (2002).
R-3690-2009
10 septembre 2009
- 33 -
PANEL IGUA
Examination
Me Guy Sarault
L'effet a été radical, tous les clients qui
pouvaient se sauver l'ont fait, tous les clients
qui pouvaient utiliser une autre source d'énergie,
le bunker, l'ont fait.
Depuis ce temps-là, il y a une certaine
stabilité au niveau du tarif D5 au niveau des
volumes. Et aujourd'hui, il n'y a plus vraiment
d'avantage économique de se convertir. Les clients
qui sont déjà passés à l'huile, qui ont des
équipements à l'huile, vont continuer à jouer le
jeu d'une certaine manière, mais le client qui est
resté au tarif 5, au cours des dernières années,
avec les prix qu'on a connus, avec l'écart
favorable du bunker, et qui n'a pas jugé bon de
faire les investissements pour changer de source
d'énergie, il est difficile de croire
qu'aujourd'hui il va retrouver des avantages
économiques de faire ce choix-là.
Un changement de source d'énergie pour un
industriel, c'est beaucoup de dollars. C'est des
millions de dollars dans bien des cas. Donc, c'est
des investissements qui sont importants et qui
doivent assurer un avantage économique dans le
temps. Donc, ils doivent s'assurer d'aller chercher
un rendement sur cet investissement-là.
R-3690-2009
10 septembre 2009
- 34 -
PANEL IGUA
Examination
Me Guy Sarault
Aujourd'hui, les conditions ne démontrent plus que,
ça, c'est possible.
Et l'autre élément qu'il faut tenir en
compte, c'est que pour ces gens-là qui devraient
faire des investissements, tous les risques qui
tournent autour des CO2, des... tout ce qui tourne
autour des éléments environnementaux amènent ces
clients-là à être aussi également un peu plus
réticents à aller dans ce sens-là. Donc, quant à
nous, il y a une certaine... bref, la fuite se
tarit à cet égard-là.
Au niveau du D4, bien, le D4, il suit
l'évolution économique du Québec. Il suit également
l'évolution du secteur manufacturier québécois. Et,
ça, on ne peut pas se le cacher, ça a été frappé au
cours des dernières années. Il y a une réduction du
volume qui ramène celui-ci à un niveau équivalant à
celui de deux mille un (2001), deux mille trois
(2003) cette année.
L'ampleur du volume de consommation est
maintenant en bonne partie liée également à la
consommation de TCE qui représente jusqu'à quinze
pour cent (15 %) du volume de Gaz Métro au complet.
Maintenant, lorsqu'on fait le lien volumesrevenus c'est intéressant de découvrir quelque
R-3690-2009
10 septembre 2009
- 35 -
PANEL IGUA
Examination
Me Guy Sarault
chose. Les volumes de Gaz Métro au niveau de
l'industriel représentent jusqu'à quarante pour
cent (40 %) de volumes à l'heure actuelle. Ont
représenté un peu plus que ça précédemment. Mais
ils ne représentent que vingt pour cent (20 %) au
niveau des revenus. Alors lorsqu'on regarde le
risque de Gaz Métro, c'est un risque non pas de
quarante pour cent (40 %) mais un risque de vingt
pour cent (20 %) qu'il faut évaluer.
Il y a une réduction de la part des clients
VGE depuis quatre-vingt-dix-neuf (99) à
aujourd'hui. Donc, lorsqu'on se positionne
aujourd'hui et on regarde le futur, on est dans une
situation où techniquement si on suit la logique,
le fait d'avoir plus d'industriel rend l'entreprise
plus à risque, le fait d'en avoir moins devrait
normalement tendre vers une réduction du risque.
C'est normal.
Comme j'ai dit tantôt le marché est saturé.
Il y a une croissance de marché au marché
résidentiel et au petit commercial et également une
modernisation qui se fait au niveau des
installations industrielles qui amène des réduction
de volumes pour le même extrant. Et finalement, il
y a des impacts marqués au niveau de l'effondrement
R-3690-2009
10 septembre 2009
- 36 -
PANEL IGUA
Examination
Me Guy Sarault
du marché des pâtes et papiers. Et on pourrait
ajouter également l'utilisation de sources
d'énergie alternatives lorsque possible.
Dans le Rapport Ind Eco c'était très
intéressant parce qu'on parle également de cette
réduction du volume par client. Gaz Métro n'est pas
le seul. Tous les distributeurs canadiens, et de ce
que je comprends du Rapport Ind Eco, américains ou
à peu près subissent un peu le même problème.
C'est-à-dire que l'efficacité énergétique amène une
réduction de volume chez les clients.
Mais ce qui est intéressant dans le Rapport
Ind Eco, et c'est le positionnement que je vous
soumets, c'est que ce n'est pas grave. D'une part,
une réduction de volume pour le même extrant amène
simplement une situation compétitive meilleure pour
le client, donc le client paie moins au bout de la
ligne. Mais également pour le distributeur de son
côté, dans la mesure où on est capable de s'adapter
à la situation, il n'y en a pas de risque. Le
client il ne disparaît pas.
Le risque pour Gaz Métro c'était si la
clientèle résidentielle disparaissait comme avant
quatre-vingt-dix-neuf (99), là à ce moment-là on se
retrouve avec des équipements qui ne sont plus
R-3690-2009
10 septembre 2009
- 37 -
PANEL IGUA
Examination
Me Guy Sarault
utilisés. Mais qu'un équipement soit un peu moins
utilisé parce qu'il y a de l'efficacité
énergétique, ce n'est pas grave si on est capable
de faire le pas suivant, c'est-à-dire adapter la
situation.
Comment on adapte la situation? Soit
haussant le tarif de manière générale, soit en
haussant la partie fixe du tarif. Et c'est
exactement ce qu'on a fait au Québec. On l'a fait
dans le secteur résidentiel en haussant
l'obligation quotidienne. On l'a fait en demandant
une redevance des coûts de branchement pour les
nouveaux clients. On le fait avec une hausse
continue de la partie fixe du tarif VGE depuis la
mise en place du mécanisme incitatif. On le fait
avec la portion fixe de TCE suite à la décision de
fermer temporairement, donc suite à une décision de
la Régie. On voit ici le support du régulateur au
niveau de la problématique de la réduction de
volumes.
Pour le futur la portion clientèle
résidentielle et petit commercial devrait continuer
de croître en relation avec le succès de ce
développement et la non-saturation de ce marché
réduisant ainsi le risque de Gaz Métro dans le
R-3690-2009
10 septembre 2009
- 38 -
PANEL IGUA
Examination
Me Guy Sarault
temps.
Continuité dans l'adaptation tarifaire afin
de la rendre, de rendre la portion fixe de tous les
paliers plus importante. On remarque cette année
les demandes au niveau du tarif DM et D4. Vous
connaissez mes représentations à cet égard, mais
n'empêche que le vent souffle d'une certaine
manière d'un côté. Il y a également les hausses
résidentielles sur quatre ans. Au cours des
prochaines années, l'obligation quotidienne du
résidentiel va continuer à croître, donc ce qui va
continuer à réduire le risque de Gaz Métro à cet
égard-là.
Ça fait qu'on a vu les volumes, on a vu les
revenus. Il faut passer maintenant aux coûts. La
base tarifaire s'est stabilisée en relation avec
quoi? Un décroissance des investissements majeurs
pour relier les grands clients en région éloignée.
Vous savez quand on part un tuyau de Trois-Rivières
et qu'on le monte au Saguenay-Lac-Saint-Jean c'est
un petit peu plus lourd comme investissement que
brancher deux (2000) trois mille (3000) clients
résidentiels.
Croissance développement résidentiel et
petit commercial c'est un marché intéressant
R-3690-2009
10 septembre 2009
- 39 -
PANEL IGUA
Examination
Me Guy Sarault
puisqu'il utilise ce réseau qui a été développé au
cours des années précédentes. Donc ce qu'on est en
train de faire finalement c'est de rajouter des
portions marginales au réseau principal, des
portions marginales qui n'auraient jamais été
possibles auparavant et qui, aujourd'hui,
bénéficient de cette étendue de réseau qui s'est
fait avant deux mille (2000).
Ainsi, la base tarifaire associée à l'ajout
de clients est en croissance en relation avec une
tarification qui se transforme vers une portion
fixe plus importante pour prendre en compte leurs
nouvelles réalités de consommation. Le déplacement
d'allocation de coûts entre les classes tarifaires
en relation avec une place plus importante de la
classe résidentielle en nombre a également son
effet. Ça fait qu'il va venir jouer un peu sur les
besoins de tarification.
Lorsqu'on regarde la base tarifaire en
dollars constants ou en dollars non constants, par
client on voit quelque chose d'intéressant. D'une
part, en dollars constants il y a une certaine
stabilité malgré la croissance du développement
résidentiel. Et en dollars courants c'est une
réduction au cours des dernières années qui s'est
R-3690-2009
10 septembre 2009
- 40 -
PANEL IGUA
Examination
Me Guy Sarault
faite. Le tout en lien avec, bien entendu,
l'augmentation du nombre de clients.
Pour le futur les travaux d'entretien et de
pérennité restent modestes. Et là j'aurai peutêtre, Maître Regnault, votre objection. Seuls deux
projets relativement majeurs ont été identifiés par
Gaz Métro à ce jour en attendant un diagnostic
complet. Je vous amènerais donc à la pièce que je
vous ai soumise, et cette pièce découle des
commentaires entendus de la part de madame Sophie
Brochu en début de dossier. Et cette pièce-là ne
reprend que des extraits du dossier de Senneville.
Me GUY SARAULT :
Alors pour fins d'identification il s'agit de la
pièce ACIG-5, Document 1.2, également pièce RégieC-1.23.
M. JEAN-BENOîT TRAHAN :
Donc il n'y a aucune analyse, aucun calcul, ce ne
sont que des éléments qui ont été pris dans cette
preuve. On remarquera quelque chose d'intéressant.
Dans cette preuve il y avait, ça découlait pour
deux projets en réalité, et l'ACIG s'interrogeait
sur l'ampleur des coûts liés à la pérennité du
réseau. On avait fait un calcul grossier tel
qu'indiqué en considérant qu'il y avait cent
R-3690-2009
10 septembre 2009
- 41 -
PANEL IGUA
Examination
Me Guy Sarault
cinquante kilomètres (150 km), ça pourrait coûter
deux cent six millions (206 M$), ça pouvait
représenter dix pour cent (10 %) de la base
tarifaire. On était inquiet. Gaz Métro nous a
enlevé cette inquiétude. Le dernier passage du
deuxième paragraphe si on veut, après les trois
petits points :
Pour le moment il n'y a pas d'autres
projets semblables identifiés.
Et allait même plus loin :
Une présentation à la Régie serait
dans ces circonstances prématurée.
Donc bref, on a deux projets. Deux projets qui, au
total, sont inférieurs à dix millions de dollars
(10 M$). L'ampleur du réseau d'avant mil neuf cent
soixante (1960) c'est cinquante kilomètres (150 km)
sur neuf mille neuf cent trente-huit kilomètres
(9938 km). En fait d'ampleur c'est relativement
limité. L'évaluation des coûts c'est quatre virgule
cinq millions (4,5 M$) au lieu de six point cinq
(6,5 M$) ou plus pour ce projet-là. Donc, c'est-àdire que la réhabilitation coûte moins cher que le
fait de faire. Donc, lorsqu'on prend en
considération que cet équipement-là a duré pendant
quarante (40), cinquante (50) ans, et qu'il va
R-3690-2009
10 septembre 2009
- 42 -
PANEL IGUA
Examination
Me Guy Sarault
durer encore quarante (40), cinquante (50) ans,
dépenser ce montant-là n'est pas un élément qui
vraiment vient modifier complètement les
investissements de Gaz Métro pour les prochaines
années.
Un autre élément qui est intéressant pour
le futur. Gaz Métro a trouvé des solutions pour
réduire ses coûts de branchement pour la clientèle
résidentielle. Ce qui devrait être bénéfique sur le
ratio dollar par client de la base tarifaire.
Il y a un phénomène d'apprentissage.
Lorsqu'on est revenu dans le développement
résidentiel en quatre-vingt-dix-neuf (99), Gaz
Métro a fait des erreurs. Les volumes n'étaient pas
les volumes escomptés. Les coûts étaient plus
grands que prévus. Il y a eu des erreurs qui se
sont faites.
Aujourd'hui, il y a du développement qui
s'est fait et, le phénomène d'apprentissage ayant
fait son oeuvre, Gaz Métro aujourd'hui est moins à
risque de retomber dans cette situation-là pour les
prochaines années. Gaz Métro peut également
profiter d'un réseau étendu à la grandeur du Québec
là, tel que je vous l'ai souligné.
Donc, en conclusion, Gaz Métro se retrouve,
R-3690-2009
10 septembre 2009
- 43 -
PANEL IGUA
Examination
Me Guy Sarault
quant à nous, devant une situation enviable. La
réduction importante du prix de la molécule qui
améliore de manière importante sa situation
concurrentielle est intéressante. Malgré qu'elle a
réussi à développer son secteur résidentiel au
cours des dernières années dans une situation où
elle était en position défavorable au niveau
compétitif, elle se retrouve aujourd'hui vers une
situation concurrentielle favorable.
Une diversification de la clientèle et de
ses revenus, ça s'est fait, ça devrait continuer à
se faire. Une clientèle industrielle qui est en
évolution, affectée par la crise des pâtes et
papiers, affectée par la crise économique.
Vous savez, ça ne peut pas toujours
continuer dans le même sens. Le Québec possède une
base industrielle qui est quand même solide, qui
est diversifiée. Elle possède également... Gaz
Métro possède également une base de clientèles qui
aujourd'hui répond à la baisse du prix du gaz
naturel et qui revient, notamment dans le gaz
d'appoint de concurrence et au tarif 5, en force et
qui permet donc de contrer, en partie, d'autres
éléments.
Et c'est important ici de noter
R-3690-2009
10 septembre 2009
- 44 -
PANEL IGUA
Examination
Me Guy Sarault
l'engagement qui a été demandé par l'ACIG et qui a
été répondu par Gaz Métro. Cette année, Gaz Métro
prévoit dix-sept pour cent (17 %) de moins de
volumes pour la clientèle industrielle. Un virgule
neuf pour cent (1,9 %) de moins pour la clientèle
petit et moyen débits. C'est huit fois l'écart
entre les deux.
Au niveau du revenu, au niveau du PMD,
c'est dix point neuf millions (10.9 M$), près de
onze millions de dollars (11 M$) de pertes de
revenus. Et pour l'industriel, l'équivalent du dixsept pour cent (17 %), c'est un peu moins de huit
millions (8 M$). Vous savez, lorsqu'on parle de
volumes et on parle de revenus, ce n'est pas la
même chose. Il faut faire très attention de faire
le pas entre les deux.
Il y a également les opportunités
d'affaires nouvelles pour Gaz Métro, notamment...
pas notamment, mais principalement, desservir les
clients producteurs du Québec. C'est une situation
nouvelle. Il y a un goût des Québécois pour le gaz
naturel et les équipements efficaces.
Remémorez-vous avant deux mille (2000),
rentrez dans n'importe quel magasin, chez Maison
Éthier ou n'importe où et essayez de trouver des
R-3690-2009
10 septembre 2009
- 45 -
PANEL IGUA
Examination
Me Guy Sarault
belles machines au gaz comme on en retrouve
aujourd'hui. Ce n'était pas la situation, ça a
évolué. Le Québécois aujourd'hui aime le gaz
naturel.
Un mécanisme incitatif offrant des
bonifications supérieures à une réglementation
traditionnelle, une protection additionnelle tout
en démontrant sa capacité à s'adapter. Une
tarification qui permet de suivre l'évolution de la
consommation de la clientèle. C'est, quant à nous,
une situation qui, si le risque n'est pas inférieur
à deux mille sept (2007) et ne peut pas être plus
que celui qui existait en deux mille sept (2007).
Maintenant, rapidement au niveau des
comparables proposés par The Brattle Group. Quant à
nous, l'évaluation des situations des entreprises
n'était pas suffisamment effectuée. La Régie ne
devrait pas retenir ces nouveaux comparables sans
une preuve plus établie de leur comparabilité
concernant le risque respectif notamment sur les
sujets suivants : la nature des ententes
contractuelles et de la tarification pour leur
clientèle respective; la présence de compte de
stabilisation tarifaire, la température, les
intérêts. Il y en a d'autres également, il y a
R-3690-2009
10 septembre 2009
- 46 -
PANEL IGUA
Examination
Me Guy Sarault
d'autres comptes de stabilisation tarifaire ou,
enfin, des comptes d'écart. Hein! Les frais des
intervenants qui sont relancés l'année d'après, les
frais de la Régie, il y a un paquet de comptes
comme ça. Il faut prendre ces choses-là en
considération.
La présence de nouvelles opportunités
d'affaires, c'est tous des éléments qui n'ont pas
été étudiés. La durée entre chaque dossier
tarifaire et la présence de programmes commerciaux
pour combattre les problèmes de... avec les
énergies de concurrence.
Donc, ceci termine ma présentation.
J'aurais cependant quelques petits commentaires sur
la présentation faite par le docteur Carpenter.
Si vous prenez le document à la page...
Me GUY SARAULT :
Q. [16] Alors, pour les fins de référence, Monsieur
Trahan, vous faites ici référence à la présentation
Power Point du docteur Carpenter qui était Gaz
Métro-7, Document 24, également pièce de la Régie
B-61.
R. J'imagine que vous avez raison.
Q. [17] O.K. Mais, la présentation en cours
d'audience, on s'entend?
R-3690-2009
10 septembre 2009
- 47 -
PANEL IGUA
Examination
Me Guy Sarault
R. Tout à fait. Tout à fait.
Q. [18] Merci.
R. À la page 12, la note :
Assumes electricity consumption for a
domestic customer to be 1000 kWh per
month. Excludes taxes.
Mille kilowatts (1 000 kW) par mois, c'est trente
kilowatts (30 kW) par jour, ce n'est pas du
chauffage. Donc, cette comparaison-là aurait dû
démontrer un prix d'électricité supérieur à la
ligne que vous retrouvez dans ce tableau.
À la page 18, on fait une comparaison des
« Gaz Métro's Industrial Load Compared to Dr.
Vilbert's Pure Play U.S. LDC Sub Sample », donc le
volume. Et on présente ça pour deux mille sept
(2007).
Si on prend le volume de Gaz Métro pour
deux mille neuf (2009), deux mille dix (2010), on
est à quarante pour cent (40 %), ce qui ramènerait
Gaz Métro à être inférieure à Northwest, Southwest
et Piedmont et pratiquement à l'équivalence de AGL
Ressources, en supposant qu'ils ont conservé le
même niveau dans leur cas à eux.
Finalement, j'aurais un dernier commentaire
qui découle de la présentation, mais qui n'est pas
R-3690-2009
10 septembre 2009
- 48 -
PANEL IGUA
Examination
Me Guy Sarault
associé à un acétate. C'est une question qui a été
posée au docteur Carpenter concernant l'effet du
PIB sur Gaz Métro.
L'effet du PIB sur Gaz Métro est un élément
important qui affecte, bien entendu, les
industriels, mais qui affecte également tous les
autres clients. Alors, docteur Carpenter n'était
pas capable d'indiquer si nécessairement le fait
d'avoir un PIB supérieur pour les prochaines
années, par rapport à ce qui était prévu, donc de
passer de moins deux pour cent (-2 %) à plus deux
pour cent (+2 %) était pour avoir une incidence sur
les volumes et donc sur les revenus de Gaz Métro.
Je vous indiquerai que le modèle de
prévisions de Gaz Métro, au niveau du petit et
moyen débits, l'élément central, c'est le PIB.
Donc, l'incidence, elle est directe pour cette
clientèle-là.
Pour ce qui est de la grande entreprise,
bien, bien entendu, étant donné que le bassin est
diversifié, à moins d'une situation excessivement
particulière où seuls tous les autres secteurs,
sauf la grande industrie subiraient une hausse du
PIB, il est bien entendu qu'ils vont également
suivre la route.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 49 -
Alors, ceci complète mes commentaires.
Me GUY SARAULT :
Alors, merci, Monsieur Trahan
Now, I believe that
we must turn to you, Mr. Gorman.
MR. GORMAN
Thank you very much.
Mr. President, Commissioners, thank
you for having me here tonight.
In my testimony, I go through various
responses to the Brattle Group witnesses, proposed
ATWACC methodology.
Benoit, up to the next slide, please?
In general, my testimony describes why the
ATWACC suffers from material empirical deficiencies
and should be rejected.
I show that the ATWACC introduces
significantly more cost of service volatility and
rate instability to utility rate setting.
This cost of service instability will be
detrimental to both the customers and investors.
Traditional methods of setting the utility
rate of return have resulted in significant
investment and fairly compensated investors and
have maintained utilities' financial integrity.
The ATWACC, I believe, does not comply with
R-3690-2009
10 septembre 2009
- 50 -
PANEL IGUA
Examination
Me Guy Sarault
the Quebec regulatory standards and Régie's
rules
for rate fixing and modifications.
I also responded, Dr. Carpenter's
conclusion that Gaz Métro has greater business risk
than U.S. local distribution, gas distribution
companies, and that his conclusions contradict
findings by Standard & Poor's, DBRS and Scotia
Capital that Gaz Métro has low business risk and
not uniquely high business risk.
Next slide, please?
ATWACC empirical deficiencies include the
following
There's no proof that the financial risk measured
by market participants is based on market value
capital structures.
I don't dispute that there is academic
literature measuring it this way but what is
important is measuring market risk consistent with
how market participants measure that risk and
determine Gaz Métro's and other utilities' cost of
capital.
Dr. Vilbert incorrectly estimated the
ATWACC for his US LDC camp sample because he did
not use US LDC's actual income tax rate.
ATWACC does not produce reliable results,
R-3690-2009
10 septembre 2009
- 51 -
PANEL IGUA
Examination
Me Guy Sarault
and the ATWACC is driven by a market to book ratio
variation on the capital structure component
balances.
The market to book ratio is based on stock
prices which even Dr. Kolbe acknowledges is not
widely understood and can produce unreliable
results.
Next slide, please.
Financial risk. ATWACC is based on the
premise that financial risk is derived for the
market value capital structure weights.
Virtually all credit and equity analysts
reports measure financial risk based on book value
capital structure data.
I have listed some of the documents Gaz
Métro has provided, and I would encourage the
Commissioners to review those documents for an
assessment of information that describes the
financial risk of Gaz Métro and the other utility
companies outlined in those reports.
Financial risk, as assessed by most market
participants, is an issue that deals with whether
or not the utility will be able to meet its
contractual or at least its firm obligation to make
debt service payments on its debt and meet its
R-3690-2009
10 septembre 2009
- 52 -
PANEL IGUA
Examination
Me Guy Sarault
other firm commitments in financial obligations.
Now, meeting the debt service obligations
of a debt is -- entails both meeting the stated
interest rate of that debt and fully repaying the
principal of that date.
It is not simply stated based on the
interest rate of the debt, as Dr. Kolbe implies in
certain adjustments he makes to his ATWACC.
And the financial risk of an enterprise is
also critical in evaluating whether or not the
operating earnings and cash flows are adequate to
service that debt.
In the event they are not, the enterprise
is subject to go in default of that debt, and that
can mean significant losses and risk to the equity
holders.
It is not simply an issue of whether or not
those equity holders can sell their equity position
in the marketplace and pay off debt obligations.
It's also important to determine whether or
not the ongoing operations of the enterprise
produce earnings and cash flow capable of servicing
that debt and those other fixed financial
obligations.
The ATWACC in the tax rate, income tax
R-3690-2009
10 septembre 2009
- 53 -
PANEL IGUA
Examination
Me Guy Sarault
rate. In estimating his ATWACC for Gaz Métro, Dr.
Vilbert used Gaz Métro's income tax rate for his
US LDC sample group.
Now, that was a flaw.
Why was it a flaw?
Because the ATWACC was estimated from a group of
comparable risk companies.
So in order to determine from that sample
group whether or not you're estimating an
appropriate ATWACC for Gaz Métro, you must properly
estimate the ATWACC for that, those sample
companies, by using a proxy income tax rate rather
than each company's actual income tax rate.
You're not accurately estimating each of
those company's ATWACCs. That's
important. Particularly with US LDCs, because those
companies have income tax rates that are higher
than the 30.2 percent income tax rate Dr. Vilbert
used in arriving at that sample group's ATWACC.
U.S. companies have income tax rates based
on their state obligations and the federal income
tax requirement.
The federal income tax rate is 35 percent.
State income tax rates range depending on the state
you're in but, generally, can be anywhere from 0
percent in some jurisdictions up to more than 5
R-3690-2009
10 septembre 2009
- 54 -
PANEL IGUA
Examination
Me Guy Sarault
percent in other jurisdictions.
It' not uncommon for a US LDC to have a 40
percent composite state and federal income tax
rate.
By understating the income tax rate, he is
overstating the ATWACC for the US LDCs. By
overstating the ATWACC of that sample group, he is
overstating an ATWACC for Gaz Métro.
Dr. Kolbe's adjustments to his ATWACC are
not reliable and should not be adopted.
He made two adjustments after reviewing Dr.
Vilbert's ATWACC studies and concluding that an
appropriate ATWACC for that group -- for Gaz Métro
from that group, should be a round 7.5 percent.
He
added 25 basis points to that to arrive at his 7.75
percent ATWACC recommendation.
His first adjustment was to adjust for the
difference between the market interest rate used in
the ATWACC calculation and the imbedded interest
rate for Gaz Métro.
He allegedly did that in order to properly
reflect Gaz Métro's debt interest expense in the
revenue requirement calculation.
Well, that adjustment is flawed. And the
reason it is flawed is because in order to properly
R-3690-2009
10 septembre 2009
- 55 -
PANEL IGUA
Examination
Me Guy Sarault
estimate Gaz Métro's debt interest expense, one
must apply the imbedded debt interest rate to the
balance of debt supporting Gaz Métro's debt
obligation.
Interest expense is not simply its interest
rate, it's the product of debt balance times
interest rate to produce debt interest expense.
The only way you can accurately estimate
Gaz Métro's debt interest expense is to use its
book value debt in the capital structure, apply the
imbedded debt interest rate to it, and that will
produce a reasonable estimate of debt, Gaz Métro's
actual debt interest expense for producing rates.
Dr. Kolbe also proposed a floatation cost
adjustment to its ATWACC rate of return, and I
believe that should be rejected.
A floatation cost adjustment to return on
equity is normally applied when the return on
equity is applied to a book value capital
structure.
The reason it's applied is because in a
common stock floatation, an investor will pay the
market price for the security but the utility will
get the market price less the floatation cost,
which it will record in it's book value of common
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 56 equity.
So there will be a difference between the
book value the utility records and the market value
of stock the investor pays.
The return on equity
adjustment will compensate for that difference
between book value and market value.
Because the ATWACC is based on market
value, a floatation cost adjustment is redundant
with a market value ATWACC; it should not be
applied twice. Once to a market value common equity
ratio and a second to the return applied to that
market value, equity ratio.
In my testimony, I also had a second
argument for why a floatation cost adjustment
should be not -- should not be approved -- and that
is -- was based on my understanding at that time
that Dr. Kolbe derived the common stock floatation
cost by using a proxy sample of utility floatation
expenses to derive a generic four and a half
percent floatation expense.
In his presentation last week, Dr. Kolbe
said I was in error on that, that that calculation
was based on Gaz Métro actual floatation expenses.
I went back and reviewed his testimony and
his work papers and it's still not crystal clear to
R-3690-2009
10 septembre 2009
- 57 -
PANEL IGUA
Examination
Me Guy Sarault
me that that's what he did, but I will accept his
explanation and I will withdraw that second
complaint about adding a floatation cost adjustment
to the ATWACC.
But my primary argument is that a
floatation cost adjustment to an ATWACC should not
be made because an ATWACC is based on market value
capital structures.
I also go through why an ATWACC is not
reliable.
The ATWACC would be developed in each rate
case, based on an updated market valuation of the
capital component cost. The capital structure cost
in all -- all of these are components which go into
determining the overall rate of return for a
utility.
Virtually every aspect of the overall rate
of return will be in the market in every rate case,
and the resulting rate of return measured from that
rate of return will fluctuate significantly from
rate case to rate case.
In contrast, the traditional method of
developing an overall rate of return is to use the
book value capital structures and the imbedded
senior security cost of debt and preferred
R-3690-2009
10 septembre 2009
- 58 -
PANEL IGUA
Examination
Me Guy Sarault
equity. Only the return on equity is in the market
in each rate case.
Traditional method of developing and
overall rate of return will stabilize rate setting
because it will stabilize the development of an
overall rate of return.
Also, an ATWACC will not meet the standard
of competitive rates and financial integrity.
Next slide.
On this I have -- I developed a
hypothetical example to help illustrate those
points.
In this hypothetical example, I assumed in
year one that a utility went to the market to
initially capitalize itself, and by doing so it
issued $100 of common equity and a $100 of variable
rate debt.
At the time it initially issued that, the
book value of that capital equaled the market value
of that capital.
And at that time the weighted cost in the
ATWACC for the traditional book value overall rate
of return in ATWACC and the market value ATWACC
produced the same numbers as shown on line 3, under
column 5.
R-3690-2009
10 septembre 2009
- 59 -
PANEL IGUA
Examination
Me Guy Sarault
In both cases the ATWACC would be 7.45
percent in this hypothetical example.
Now, let's assume in the next year that the
market value of the common stock went from a book
value, market to book ratio of 1 up to a market to
book ratio of 1.5.
And that example, common stock prices
increase which would, should correlate to a
decrease in the required return on that common
stock.
Because this hypothetical example is based
on the assumption of variable rate debt, the debt
will not, value will not move, just the interest
rate will be re stated based on market capital
cost.
As shown here, while the common equity
required return was assumed to go down from 10
percent to 9.75, and the variable rate debt dropped
from 7 percent down to 6.75, the book value ATWACC
dropped from 7.45 down to 7.25 -- 24 percent.
However, under the market structure ATWACC,
shown on line 6 through 8, under column 10, while
the cost of equity went down and the cost of debt
went down, the market value of common equity went
up, and the result was as the ATWACC went up even
R-3690-2009
10 septembre 2009
- 60 -
PANEL IGUA
Examination
Me Guy Sarault
though market capital cost were going down.
Consequently, in this example, the ATWACC
produced the exact opposite of what would be a
reasonable result. That is with declining capital
cost, the overall rate of return would
decline. Instead, with the ATWACC, you're exposed
to an increasing ATWACC in the face of declining
capital cost.
Consequently, I believe the ATWACC will, in
certain markets, produce an unreasonable result.
Now, let's assume in the second year that
the market changed dramatically, and then instead
of the market price exceeding book value, instead
market prices stock dropped dramatically, and now
the market to book ratio is less than 1, it's a
factor of 0.75.
Under the ATWACC, and in this example, with
dropping security prices, the cost of capital is
increasing.
Under the book value capital structure
under columns -- under lines 1 through 3, columns
11 through 15, I show that the cost of capital for
the utility increases to correspond with an
increase in capital.
On line 6 through 8, under column 15, under
R-3690-2009
10 septembre 2009
- 61 -
PANEL IGUA
Examination
Me Guy Sarault
the market value ATWACC, the rate of return
increases, not as much as it would under
traditional rate making, but this ATWACC also
raises concerns with the reliability of the
ATWACC.
And under this example, the issue and
concern is whether or not the ATWACC would produce
a return which provides adequate earnings coverage
of debt obligations, and which would support the
financial integrity of the utility.
Under traditional method, as shown on line
4, the earnings coverage ratio, and this is simply
the weighted earnings rate of return divided by the
weighted variable rate debt would drop under the
first two years about 1.43 to 1.44, down to 1.36.
The coverage is weaker but it's still
reasonably strong and did not drop that
significantly.
However, as shown under -- on line 9, that
same earnings interest coverage ratio moves quite
significantly under the ATWACC rate of return,
moving from 1.43 initially up to 2.17, when capital
costs were decreasing and the ATWACC was producing
a higher rate of return, down to a very thin
earnings coverage ratio of just about 1 times if
R-3690-2009
10 septembre 2009
- 62 -
PANEL IGUA
Examination
Me Guy Sarault
market to book ratios would fall below 1.
I conclude from this that the ATWACC will
in some markets produce a return which is
unreasonably high, and in other markets may produce
a return which will not support the financial
integrity of the utility.
The ATWACC is, in effect, based on the
market to book ratio adjustment to capital
component balances.
If your review Dr. Vilbert's tables where
he derives the market value capital structure
weights in relationship to book value capital
structure weights, you'll see that he actually
calculates the market to book ratio adjustment on
that -- those tables, and that correlates to a
common equity balance of book value and the common
equity balance of market value.
That's important because this market to
book ratio is driven largely by changes in stock
prices.
In this market to book ratio concept that
is driven by changes into stock -- by stock prices
is not new.
There have been other versions of it
in the past.
Dr. Kolbe advocated at one point in his
R-3690-2009
10 septembre 2009
- 63 -
PANEL IGUA
Examination
Me Guy Sarault
career for a market to book ratio adjustment to the
return on equity.
More recently he no longer advocates that
adjustment. And the reason he does is because he is
not confident in the ability to completely
understand changes in stock market prices.
I agree
with that.
Stock market prices are -- can be quite
volatile, can have significant impacts on market to
book ratio relationships, can have significant
impact on the measurement of a market value capital
structure.
That volatility and that basic parameter,
that is not widely understood, should not be the
key factor which determines the ATWACC or the
overall rate of return for setting rates.
Rate instability. I believe the ATWACC will
be subject to significantly more volatility than
the rate of return would be measured under
traditional methodologies.
Again, the ATWACC will put the entire
return in the market and every rate case as
proposed by Dr. Vilbert and Dr. Kolbe in their
testimony.
Traditional rate of return methodologies,
R-3690-2009
10 septembre 2009
- 64 -
PANEL IGUA
Examination
Me Guy Sarault
in significant contrasts, provide a hedge. The
volatile market valuation and market capital cost
changes.
That hedge is important in stabilizing
utilities cost structure and decreasing the risk,
business risk of setting utility rates.
More volatile cost structure is bad for
both rate payors and it's bad for investors.
An ATWACC volatility can be detrimental to
investor because it will make predicting future
earnings and cash flows more uncertain, as you
don't know what the ATWACC is going to be in the
next rate case; it may or may not properly
correlate in to the contractual obligations of that
utility to meet its financial obligations, both
debt and other liabilities.
If the rate of return and rate setting do
not provide stable and predictable earnings and
cash flows to cover those financial obligations,
then the credit rating of the utility could erode
and it's operating risk can increase dramatically.
And just as significantly, that instability
in the cost structure for the utility can create
rate instability for retail customers.
Retail customers need the stability of
R-3690-2009
10 septembre 2009
- 65 -
PANEL IGUA
Examination
Me Guy Sarault
rates and other hedging instruments just like many
investors look for in stabilizing their risk and
managing their risk exposures to commodities and
other capital components or other operating
expenses which can be based on very volatile
inputs.
In my testimony, I illustrate just how much
variation there can be in development of the
overall rate of return by using -- by observing
some of Dr. Vilbert's testimony.
I showed on this slide, I replicate Dr.
Vilbert's table MJV 4. On this table he develops
common equity ratios for both his DCF studies and
his capital asset pricing model studies.
In his DCF study, he relies on a one year
snapshot. And In that one year, shown under column
1, this proxy group of Canadian utilities would
apply a common equity ratio of around 49 percent.
But if that snapshot common equity ratio
would have been developed, say, in calendar year
2006, it might have produced a common equity ratio
of around 56 percent.
Whether or not the return on equity would
decline enough to offset that increase in capital
structure cost to correspond to that increased
R-3690-2009
10 septembre 2009
- 66 -
PANEL IGUA
Examination
Me Guy Sarault
common equity ratio is highly uncertain,
particularly based on the DCF methodologies, and
particularly the risk positioning methodologies
which tie to bond values and risk premiums, and
don't specifically look at market valuation of
common stock in estimating a return on equity.
Traditional rate of return methodologies
have supported utility plant investments and
financial integrity and have fairly compensated
investors.
I reach this conclusion by observing in Dr.
Carpenter's testimony that Gaz Métro's rate base
has grown by 29 percent since 1999. It's a pretty
strong growth rate for over 9 years.
I would note that that's a growth in rate
base, so the capital investments Gaz Métro has been
making needs to not only cover depreciation
reductions to rate base but also capital
investments that exceed depreciation recoveries in
order to increase the value of it's rate base.
So this reflects significant capital
investments in the rate base over the last 9 years,
which is certainly not an indication that they were
not able to attract capital or did not have the
interest in investing in the utility
R-3690-2009
10 septembre 2009
- 67 -
PANEL IGUA
Examination
Me Guy Sarault
infrastructure.
But I also observed that the credit rating
for Gaz Métro, most Canadian utilities are very
strong comparable to those of US LDCs which are
awarded higher returns on equity and thicker common
equity components.
Invest -- Gaz Métro's invest -- has an
investment great bond rating from Standard & Poor's
and DBRS and Scotia Capital, all very strong bond
ratings.
On Canadian and -- from the stock
perspective, that gives a general indication of
whether or not -- the bond rating gives a general
indication of whether or not financial integrity is
being preserved, but what about the fair
compensation standard?
I generally gauge this by comparing utility
market valuation of equity units and equity stock
in relationship to US LDCs. I did this by
comparison of several valuation factors, including
market to book ratio, price to earnings ratio,
price to cashflow ratios.
I also looked at some dividend metrics to
determine whether or not the authorized returns on
equity and actual achieved earnings by these
R-3690-2009
10 septembre 2009
- 68 -
PANEL IGUA
Examination
Me Guy Sarault
companies are supporting their dividends and the
value they offer investors, and whether or not they
can do so while retaining a comparable percentage
of earnings in the company to generate additional
growth for future earnings and dividends for those
investments.
And I also look at whether or not the
dividend in relationship to book value can
generally be supported in authorized returns on
equity.
I did that by looking at what I call a
dividend to book ratio, since -- what return on
equity is necessary to just pay the dividends.
The next page, I show these market
valuation factors.
And on this, over the last,
over the period 2004 through 2008, the market to
book ratio for Canadian utilities is generally
competitive with that of U.S. gas LDCs and U.S.
pure play LDC sample group.
The price to earnings ratio, another -well, the market to book ratio, by the way, is one
indication of whether or not the utility can go to
the market and sell stock without diluting the
value of it's existing shareholders.
I believe Mr. Despars said earlier, today I
R-3690-2009
10 septembre 2009
- 69 -
PANEL IGUA
Examination
Me Guy Sarault
believe it was, that Gaz Métro has been reluctant
to go to the market because he's concerned about
selling stock that might dilute the value of
existing shareholders.
What that means is, if the market price of
the stock is not at least equal to book value, then
you will reduce the average book value per share by
selling additional stock.
A market to book ratio is an indication
that the utilities can go to the market, sell
additional stock without diluting the value of
existing shareholders.
Price to earnings ratio is also a parameter
which gives a relative valuation of the stock in
relationship to the earnings of the company. And
again, Canadian utilities have fairly positive or
strong valuation factors in relationship to US LDC
companies.
Price to cash flaw ratios, again for
Canadian companies, is comparable to that of
US LDCs. This indicates, I believe, that Canadian
utility companies' stock performance has been
comparable to that of US LDCs and has provided
comparable stock compensation to Canadian
investors.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 70 -
On the next page I show what the dividend
metrics are.
And again, the dividend yield
component is an indication of how the market prices
the stock for that dividend.
The dividend yield
for Canadian utilities is reasonably comparable to
that of US LDCs.
The dividend pay out ratio is an indication
of whether or not the utility again can retain
enough earnings, after paying its dividend, to
generate future growth, and grow earnings, and grow
dividend payments into the future.
So that the higher payout ratio, the
lower
the amount of earnings that are sustained in the
company, and the lower the growth opportunity for
that company would be.
Payroll ratios for Canadian utilities
reasonably comparable to those of US LDCs, that
indicates that their growth outlooks are reasonably
comparable.
The last dividend metric block is the
dividend to book value that gives an indication of
what return on equity the utility would have to
earn just to pay its dividend.
And again, the Canadian utilities dividends
appear to be about as expensive as U.S. utility
R-3690-2009
10 septembre 2009
- 71 -
PANEL IGUA
Examination
Me Guy Sarault
dividend payments, which is an indication that the
authorized returns on equity for Canadian utilities
can be supported based on -- based on recent
history.
I next go over what I believe to be a
critical flaw in the ATWACC, and that is whether or
not the ATWACC complies with the Québec regulatory
standards.
I've gone through these standards in terms
of their proposed rate modifications and adjustment
requirements, and commented on whether or not I
think that ATWACC meets those standards. I believe
it does not.
The standards, in particular, which I
believe are important are that, are the following
Ensure the financial ratios are maintained; ensure
that the rates and other conditions for the
provision of service are fair and reasonable; the
value -- the fair value of assets of electric power
carrier or a natural gas distributor are based on
original cost less depreciation.
And importantly, particularly from a
customer standpoint, is that the rates should be no
higher than necessary in order to fully recover the
reasonable and prudent expenses.
R-3690-2009
10 septembre 2009
- 72 Financial ratios.
PANEL IGUA
Examination
Me Guy Sarault
Book value capital
structure has important financial ratios for
setting rates.
Book value capital structure will have a
target or a stated common equity ratio of total
capital.
That financial ratio is critical to ensure
that the utility manages its capital structure in a
way that helps support competitive rates while
still maintain it's financial integrity.
The appropriate capital structure weights
can be reviewed by credit analyst reports and other
independent, if there are any, assessments of the
credit standing of the utility and that utility's
access to capital.
Many credit rating agencies publish
benchmarks. They publish median ratios.
All of
them can be used to help gauge what a book value
capital structure should look like in order to
support an investment grade credit outlook.
They also show what earnings and cashflow
coverages of financial obligation should be in
order to support investment grade credit ratings.
All of that information is important to
determine whether or not the financial ratios used
R-3690-2009
10 septembre 2009
- 73 -
PANEL IGUA
Examination
Me Guy Sarault
to set rates are reasonable and consistent with
maintaining financial integrity and keeping rates
competitive.
The ATWACC, in significant contrast, will
be based on capital structure rates driven by the
marketplace, by that stock price which is not well
understood.
Management would not be able to control its
stock prices; it would not be able to control the
common equity ratios that is developed from stock
prices.
Consequently, I don't believe the ATWACC
will meet the financial ratios standards or even
the financial integrity standards of the Régie
rules.
Also, the Régie rules state that the fair
value of assets must be based on the original cost
rate base less depreciation.
Now, I need to explain this a little bit
because I believe Dr. Kolbe misunderstood this
concern of mine.
He argued that I claimed that the ATWACC
produced a market value rate base rather than
complying with the requirement to set rates based
on original cost less depreciation.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 74 That is not my argument.
And it's
important to distinguish that.
The Régie rules state that the rate base
should be based on original cost less depreciation
in setting rate modifications and rate
adjustments.
Rate modifications and rate adjustments are
based on revenue requirement, not directly to rate
base.
So how do you get from rate base to Revenue
requirement?
Well, you start with the rate base,
you apply a rate of return to it, and that gives
you the revenue requirement which should be
considered the rate modifications and rate
adjustments.
So how does the requirement to set the
revenue requirement related to rate base? How does
that distinguish the ATWACC from the traditional
method of developing the overall rate of return?
And that occurs quite simply because the
original cost of the rate base is tied to the book
value debt the utility used to fund investments in
the rate base.
It's the dollar amount of debt and the
interest rate the utility has to meet.
R-3690-2009
10 septembre 2009
- 75 -
PANEL IGUA
Examination
Me Guy Sarault
Now, the utility has a financial obligation
to not only pay the interest rate on its debt but
also has a financial obligation to repay the
principal amount of that debt.
So its original cost in making investments
in utility plant and investments are tied to its
book value, balance of debt, and its interest rate
on that book value debt. Its not based on a market
valuation of the debt or the market valuation of
common stock.
And actually, the market valuation of the
utilities' debt is based on the intrinsic value
that is created by the utility complying with the
financial parameters of its debt obligations.
If the utility pays interest expenses, it
pays its debt principal amount, then those
commitments from the utility can be translated into
the marketplace and one investor could buy that
debt instrument from another investor and pay
something different than face value for the
debt. They'll pay the market value of those
cashflows under that debt instrument in the
marketplace at that point in time.
But very importantly, that secondary market
transaction between those two investors does not
R-3690-2009
10 septembre 2009
- 76 -
PANEL IGUA
Examination
Me Guy Sarault
change Gaz Metro's financial obligations to meet
the debt interest payment and debt principal
payment on its contractual obligations as are
recorded on its books and records.
So I believe that the ATWACC simply
produces a rate of return which is far too high.
When you re adjust the ATWACC down to a
return on book value common equity, if the original
cost of the rate base is funded by a stated amount
of debt, then the remainder is funded by common -some form of equity.
If you take the ATWACC and you break it
into the return on that amount of equity that's
supporting the original cost of rate base, you get
a return on equity that's far higher than what's
available on other similar risk investments. It's
unreasonable.
Gaz Metro's business risk.
Dr. Carpenter
concluded, as I understand his testimony, that Gaz
Métro has unique business risk which distinguishes
and makes it more risky than that of US LDCs.
I believe his conclusions are not
consistent with similar findings, or it's not
similar on the business risk of Gaz Métro by what I
believe to be more independent sources and which
R-3690-2009
10 septembre 2009
- 77 -
PANEL IGUA
Examination
Me Guy Sarault
make their opinions available to the marketplace.
Standard & Poor's, for example, with
regards to the Régie, is supportive of regulatory
body.
They regard the performance based regulation
here in Québec to be positive regulatory standards
which allows the utility to earn more than its
authorized return on equity.
DBRS also considers Gaz Métro to have low
risk distribution utility aspiration, supportive
regulations and strong operating cashflows.
Scotia Capital stated that the regulation
in Québec provides reasonable assurance of full
recovery of prudently incurred capital and
operating cost.
Those standards are not consistent with
uniquely high business risk and certainly
contradict Dr. Carpenter's findings that Gaz Métro
has higher business risk than the US LDCs.
Concerning those unique business risks, Dr.
Carpenter went through three factors which he
asserts justifies his conclusion.
I won't go into the residential rate strong
competition from electricity and oil and large
industrial load because others on this panel have
gone into that in a lot more detail than I have,
R-3690-2009
10 septembre 2009
- 78 -
PANEL IGUA
Examination
Me Guy Sarault
but I will point out that these factors are not
simply observed by Dr. Carpenter, they're also
observed my market participants, in particular the
credit rating agencies that I just went through.
They all are aware of the industrial
concentration, the competition with electricity,
and the need for Gaz Métro to be a competitive
supplier, otherwise price sensitive customers will
look for alternatives source of energy.
They reviewed that, and all of those -those were considerations that led them to conclude
that Gaz Métro has low business risk.
On his attachment B, Dr. Carpenter
identified certain regulatory mechanisms which he
believed also support his conclusion that Gaz Métro
has higher business risk than US LDC companies, and
he identified certain companies that have
decoupling mechanisms, whether normalization
mechanisms and gas cost adjustment clauses.
I'm familiar with most of those utility
companies and have, in fact, participated in rate
proceedings on many of those companies.
The regulatory standards for those
companies is not comparable to the regulatory
standards here in Québec.
I find that those
R-3690-2009
10 septembre 2009
- 79 -
PANEL IGUA
Examination
Me Guy Sarault
companies have greater operating risk than does Gaz
Métro.
Specifically, some of the decoupling
mechanisms don't have reconciliation factors, they
simply adjust rates going forward.
Not all of the companies have weather
normalization factors.
All the companies have gas cost adjustment
factors but there are instances where if the
utilities gas procurement cost or hedging programs
come into question and they're at risk for not
fully recovering some of those costs.
Also, Dr. Carpenter acknowledged that U.S.
companies' actual earnings are not as stable and
are more volatile in the actual earnings,
accounting earnings of Canadian utilities.
I believe that that is a significant
observation in determining whether or not the
standards under which Canadian utilities operate
imposed more or less risk than the protocols and
regulations under which US LDC companies operates.
More stable earnings; it's not the only
factor but it's an important factor in assessing
business risk.
And the mere fact that earnings are more
R-3690-2009
10 septembre 2009
- 80 -
PANEL IGUA
Examination
Me Guy Sarault
stable for Canadian utilities is a strong
indication that their business risks are lower.
I agree with Dr. Carpenter that a full
review of business risk also entails a review of
forward looking considerations, but I disagree with
him that accounting returns are not important in
determining whether or not those risks are material
and informing expectations of what those risks
might be like going into the future.
And I would also point out that Dr.
Carpenter's position on that contradicts an
analysis performed by Dr. Vilbert in support of his
return on equity findings in this case.
Specifically, Dr. Carpenter argued that
accounting returnings, historical accounting
earning are not irrelevant in supporting
assessments of future business risk, because the
future may not be like the past.
I disagree with that because I think
historical earnings are one indication to help
gauge what future expectations might be.
Now, the reason I believe that testimony
contradicts Dr. Vilbert's testimony, is because Dr.
Vilbert relied on historical actual achieved
returns on Canadian stocks in relationship to
R-3690-2009
10 septembre 2009
- 81 -
PANEL IGUA
Examination
Me Guy Sarault
actual achieved returns on Canadian bonds to derive
a market risk premium based on historical
accounting returns, and he used that historical
derived market risk premium to form expectations on
future market risk premiums.
So the use of historical information to
derive expectations for future events is important.
There may be reasons why you think future
perfor -- past performance will not be repeated
into the future, but that's a different assessment
than concluding, as I understood Dr. Carpenter,
that historical earned returns are not helpful in
assessing the difference in business risk between
Canadian utilities and U.S. utilities.
That concludes my presentation.
ME GUY SARAULT
Thank you, Mr. Gorman.
Q. [19] In addition to your presentation you have
additional comments to formulate at this stage on
the evidence presented at this hearing by Gaz
Métro's experts?
A. I kind of worked in some of my comments in that
overall assessment.
Q. [20] Okay.
A. I do have one comment on a table offered by Dr.
R-3690-2009
10 septembre 2009
- 82 -
PANEL IGUA
Examination
Me Guy Sarault
Kolbe in his presentation; it's on page 6.
Q. [21] Which presentation? There is two presentations
by Dr. Kolbe?
A. This would be in his second presentation.
Q. [22] Okay, in the second presentation.
A. Page 6 of his second presentation.
Q. [23] That would be B66, and on the second
presentation. B66, what page did you say?
A. Page 6.
It's titled "Nor does use of market
weights automatically produce a market based rate
base."
Q. [24] H'mm, h'mm?
A. In this example, I believe that there was a
misunderstanding between the concern I had and Dr.
Kolbe's response.
Again, I did not and have not asserted
that use of an ATWACC would result in
converting the original cost rate base to a
market value rate base.
Rather, I believe it's inconsistent with
the Régie's rules on rate modifications and
adjustments because it does not properly consider
the original cost of a utility plant, which would
require an assessment of the amount of debt and the
interest rate on that debt that was used to fund
R-3690-2009
10 septembre 2009
- 83 -
PANEL IGUA
Examination
Me Guy Sarault
the original plant investment.
But rather, I believe this example,
although it doesn't directly respond to my
argument, I think still does not support Dr.
Kolbe's contention that the ATWACC will produce a
reasonable -- a comparable rate of return to
traditional rate making.
And the concern I have with this example
relates to line, the line marked "cost of equity"
under the column "market" and under "book".
On those lines he has different returns on
equity for the ATWACC based on market value common
equity ratio and the common equity for book value
common equity ratio.
This does not compare the ATWACC rate of
return to a traditional rate of return, because a
traditional rate of return would not set the return
on equity based on the return on equity that is
equivalent to the ATWACC.
So it simply does not support his whole
presentation here because it is based on a
fundamental flaw, and that flaw is that he did not
compare the revenue derived -- the revue
requirement on rate base derived using the ATWACC
methodology to the revenue requirement that would
R-3690-2009
10 septembre 2009
- 84 -
PANEL IGUA
Examination
Me Guy Sarault
be derived from traditional rate of return applied
to original cost rate base.
If he would have done that, he would have
shown that the ATWACC produces a much higher
revenue requirement for rate base.
I have one other general comment that -- I
apologize. I mean this deals with Dr. Kolbe's
apartment building analogy that shows that it's
market value that establishes financial risk.
And that also gives me some concern, is
that the general premise of that is that if the
landlord or the office or that the apartment
building chose to divest that apartment building
because, as he couldn't meet the debt service
obligations, then that landlord would be exposed to
the risk of whether or not he could actually sell
that apartment building in the market and achieve
the estimated market value of that.
In the event that apartment building was
illiquid, no buyers in the market existed, then the
owner of that apartment building would only have
the lease cashflows available to support that debt
obligation; and in the event those lease cashflows
didn't meet the debt service obligation of that
apartment building, that loan would default
R-3690-2009
10 septembre 2009
- 85 -
PANEL IGUA
Examination
Me Guy Sarault
irrespective of whether or not Dr. Kolbe estimates
the market value of that apartment building be
significantly in excess of the underlying debt
obligations of the apartment building.
So it's not only a comparison of the market
value of the asset in relationship to the debt
obligations of that asset, but in the event the
market doesn't, is not available to liquidate the
asset, then the only recourse the owner of the
asset has to service its debt obligations are the
cashflows in the enterprise.
So the cashflows and -- the book value
cashflows to support the book value debt
obligations are important considerations in
determining the financial risk of an
enterprise. Thank you.
ME GUY SARAULT
Thank you, Mr. Gorman.
And now I believe that we are ready to turn
to Dr. Booth.
LE PRÉSIDENT :
Maître Sarault, nous allons prendre une pause de
quinze (15) minutes pour permettre aussi à notre
sténographe de pouvoir respirer un peu. Et par la
suite nous serons de retour pour entendre le
R-3690-2009
10 septembre 2009
- 86 -
PANEL IGUA
Examination
Me Guy Sarault
docteur Booth et compléter l'audition de la preuve.
PAUSE
LE PRÉSIDENT :
Alors reprise de l'audience. Maître Sarault.
Me GUY SARAULT :
Merci, Monsieur le Président.
Alors, We are now at Dr. Booth's turn for your
presentation. So without waiting any further at
this time.
MR. BOOTH
Mr. President, members of the Régie, I hope -- I
call for your indulgence so I can stand when I
talk. It seems that I can't make a presentation
without being on my feet.
Okay. The key issues before the Régie, I
look at it from the point of view of three critical
issues
The first one is Gaz Métro's business risk.
Two years ago when I was here, Gaz Métro
argued that it's business risk had increased and
the Régie increased its allowed rate of return
based upon that increase in business risk.
So contrary to Dr. Carpenter, I feel that
the major issue here is what's happened since 2007
in terms of Gaz Métro's business risk. So I will
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 87 talk briefly about that.
Jean Benoit has taken the lead on looking
at the business risk but I looked at it, as well.
The second issue is the question of what's
happened over the last year?
We know, we all know that we've been
through a very serious financial crisis, so what's
been the impact of this financial crisis over the
last year?
In particular, the company argues it's no
longer legitimate to base the fair rate of return
on the long Canada bond yield.
So I'm going to
look at that.
A key question is what, how do you
interpret A bond yields, the spreads between A and
long term Canada bond yields and Gaz Métro's
borrowing cost, and have, in fact, there been any
problems in Canadian utilities access in capital
over the last year during, probably what I would
regard as the worst financial crisis for the last
60 or 70 years.
And then the final question is
What are the implications, if any, of the NEB's TQM
decision and the role of ATWACC?
And here my colleague to the right,
R-3690-2009
10 septembre 2009
- 88 -
PANEL IGUA
Examination
Me Guy Sarault
Mr. Gorman, has already talked about ATWACC, but
I've got some comments on ATWACC, as well.
So, first of all, in terms of business
risk, these sorts of hearings tend to be a little
bit adversarial and they emphasize the differences
rather than the agreements, but Dr. Carpenter and I
have agreed consistently on how do we look at risk.
And in terms of risk free utility, you're
really looking at the return of capital and the
return on capital.
The return on capital is the rate of
return; what rate of return are you making on the
money you've invested in the, in the business?
And that's basically short run, how do you
look at the return on capital?
And then the long run is what's the return
of capital?
How likely is it that the investment
in the utility is actually going to be returned to
the people that provided the capital?
So both Dr. Carpenter and I look at that as
long run and short run.
Short run, we were really looking at the
return on capital, and long run we're looking at
the returned of capital, the future viability of
the utility.
R-3690-2009
10 septembre 2009
- 89 -
PANEL IGUA
Examination
Me Guy Sarault
And for that, we're looking at the
viability of the natural gas market in Québec.
We can't get away from the Transcanada
decision. There's -- the Transcanada main line
decision in TQM.
So, I'll be talking about exactly what the
NEB said in terms of TQM, and the way in which it
looked at the Transcanada main line, and what there
is to learn from the TQM decision.
Benoit?
So first of all, short run.
I've been
sitting in on utility rate hearings as a witness
now since 1985, so I hate to say it but that's 24
years, and over 24 years I've persistently heard
utility witnesses saying how risky utilities are.
Not only how risky are they but how the
risk has increased since the previous rate hearing.
Now why that's important, is there actually
is no evidence of any risk being suffered by any
Canadian utility over those last 24 years.
So I heard some people talk about the past
to predict towards the future, but I'm looking to
see somewhere where a Canadian utility has been
harmed in a material way as a result of either
regulation or it's underlying operations.
R-3690-2009
10 septembre 2009
- 90 -
PANEL IGUA
Examination
Me Guy Sarault
How do we assess this risk? The utility is
awarded an allowed rate of return and the question
is can it earn that allowed rate of return?
And this is the record for Gaz Métro.
And
we can see the allowed rate of return, the movement
on the part of the Régie to allow incentive
regulation, and the performance of Gaz Métro
relative to both its allowed and its incentive.
Now, what jumps out for Gaz Métro, as it
jumps out for every other utility in Canada, is
they consistently earn their allowed rate of
return.
And when you actually look at the -sometimes when there's a problem, it's nothing to
do with their operations. It's to do with some sort
of merger, acquisition, some sort of non utility
related costs that the utility has been asked to
bear as a result of a merger or acquisition such as
Foothills, as part of the Transcanada system.
So here, when we look at Gaz Métro, we all
recognize that Gaz Métro has significant
risks. I've persistently said for at least the last
10 years that I regard Pacific Northern Gas as the
riskiest utility in Canada, and I place Gaz Métro
as higher risk than either Union, Terrasson Gas,
R-3690-2009
10 septembre 2009
- 91 -
PANEL IGUA
Examination
Me Guy Sarault
Atco Gas or Enbridge Gas Distribution.
This Régie has recognized that both in the
amount of protection that it's allowed Gaz Métro,
and in terms of the much higher deemed common
equity ratio.
So we've heard a lot about financial risk
offsetting business risk.
As far as I am aware, every utility in
Canada -- every regulator in Canada is aware of
that, and they've gone out of their way to offset
differences in business risk by differences in
financial risk, as predecessors of this particular
panel have done for Gaz Métro.
So Gaz Métro's 46 percent common equity,
Union has 36, Enbridge has 36, Terrasson Gas has
35, Atco has 37. It has much -- as a result, Gaz
Métro has much more thicker common equity ratio
than does its peer group in the gas utility
business in Canada.
So we recognize that Gaz Métro's
riskier. That's a long run risk. Short run risk, we
have yet to see any material risk damaging Gaz
Métro or any of the other peer group in Canada.
Jean Benoit?
Now, John Benoit has taken the lead in
R-3690-2009
10 septembre 2009
- 92 -
PANEL IGUA
Examination
Me Guy Sarault
looking at the regulatory breakdown and the
composition of the revenues for Gaz Métro.
Every time I look at a gas utility, the
utility witnesses come in and they talk about
volume risk, and they talk about the volumes that
go to the utility for the industrial class, how
risky the volumes are.
Volumes really don't matter very much.
What matters is the revenues derived from different
rate groups.
And just to emphasize that, Pacific
Northern Gas had 70 percent of its volumes tied up
with Methanex.
Methanex closed its doors, they rebalanced
the rates. P & G is still in serious trouble. But
the risk was nowhere as great as if you just looked
at the simple volumes.
What matters is the revenues from
particular great classes.
Here we look at the revenue breakdown for
Gaz Métro. A sort of a slight increase in the
revenues coming from the residential group;
significant increase over long periods of time
coming from commercial; and a gradual decrease in
the revenues coming from the industrial group.
R-3690-2009
10 septembre 2009
- 93 -
PANEL IGUA
Examination
Me Guy Sarault
So my colleague to the left represents the
industrial group, but the fact is, in terms of the
risk of the Gaz Metro, the decrease in the
importance relative to the rest of the revenues
gained from commercial and from residential.
When we look -- John Benoit?
When we look at the particular groups, this
is the long run; how risky are these particular
groups? How competitive is natural gas?
And here, I'm really just looking at the
fact of, since 2007, we know the natural gas is not
as competitive in any market in Québec as it is,
say, in Alberta or Ontario.
But when you look at this, this is the
relative cost compared to electricity users. It's
not as competitive for the bulk of people using
space heating in Québec. We know that the
penetration in Quebec is only 20 percent for new
homes whereas in Ontario it's closer to 90 to 100
percent.
But the fact is, there has been no
significant change in this over the last two
years. This is a risk that the Régie has recognized
two years ago; it's a risk that's been there for a
long period of time. There's simply no substantial
R-3690-2009
10 septembre 2009
- 94 -
PANEL IGUA
Examination
Me Guy Sarault
change over the last two years.
When we look at the industrials, here we're
looking at fuel oil and its competitiveness with
natural gas.
Here we see that four or five year
ago was probably the peak lack of competitiveness
for Gaz Métro.
The last few years it looks as if their
competitive position has increased. I'm not going
to place any great weight on that, but the fact is
it's difficult to say that the competitive
situation has become more serious. I don't think
there's any substantive basis for that.
Jean Benoit?
Now why is that? It's because the price of
natural oil has come down and the price of natural
gas has come down even more.
When we were here two years ago, it was
that bulge in both the blue and the pink when the
prices of natural gas and oil were peeking and
everyone was worried about commodity prices and the
increase in the price of natural gas, in
particular.
Since then they've come down
significantly. Every day we read the newspaper
about the problems in natural gas.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 95 -
Just for information purposes, when I was
reading the newspaper this morning -- and a lot of
what we talk about is in the newspaper, "In glut
EnCana's big find untapped.
Third biggest
reservoir of natural gas in North America. Shell
deposits in the Horn River in British
Columbia. Good chance that EnCana would just shut
those deposits in because the price of natural gas
is so low and shipping it to market is just not
competitive."
So we've seen a significant change in the
natural gas market over the last couple of
years. Natural gas is being shuttered because the
prices are so low. That's bad for the
shippers. It's good for the people who use natural
gas because it's becoming more competitive.
And
it's likely to remain more competitive in the
medium term relative to other alternative fuel
sources.
So that's my general position in terms of
Gaz Métro.
Natural gas remains a preferred fuel
source. Its energy is relatively clean.
The price
is relatively low. There's an abundance of natural
gas in North America. And there's no long term
R-3690-2009
10 septembre 2009
- 96 -
PANEL IGUA
Examination
Me Guy Sarault
supply problems for -- to feed the Québec market.
Now, this brings us to the role of TQM and
its recent decision by the National Energy Board in
March of this year.
I was involved in both the TQM decision and
I provided testimony before the Alberta Utilities
Commission when NGTO was going to be before the
AUC, before NGTO got approval to seek federal
jurisdiction and then pulled out of the hearing.
This is the information that's actually
critical to understand how the NEB looked at TQM.
This is NGTO's throughput forecast, that the top
represents the BCF a day coming out of western
Canada. So the overall of the western Canadian's
sedimentary base is forecast to be providing about
11 BCF a day.
So overall, western Canada, it's still
producing at a rate that we would expect.
The big change has been this huge
intra Alberta demand.
The Oil Sands, all the
development of northeast Alberta is sucking natural
gas out of export markets to serve the development
of Alberta and to serve the Oil Sands.
So that's a taken huge chunk of NGTOs, the
western Canadian production, and it's taking out,
R-3690-2009
10 septembre 2009
- 97 -
PANEL IGUA
Examination
Me Guy Sarault
leaving less for the export pipelines out of
western Canada.
That means -- Jean Benoit -- that when we
look at the Transcanada main line, this is what I
did before the NEB for the TQM decision, I
initialized -- and this is Transcanada's forecast,
not mine -- this is initialized to 2002, and it's
the main line's forecast. And if you're the main
line, you look at this and say "Wow! This is just
going down and down and down and down and down."
Now, I don't happen to agree with all of
this.
This happens to be a worst case. Transcanada
is assuming that the main line is the swing
pipeline out of western Canada.
But the main line, however you look at it,
so much of the natural gas in Alberta has been
diverted within Alberta, so the main line is going
to suffer a significant drop in load.
Now, that's going to result in rebalancing
of the revenues, and it's going to result in
potentially significant total increases on the toll
out of western Canada.
In contrast, this is the base, the high,
and the low load of TQM.
Now, what jumps out to you immediately is
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 98 they are not the main line.
So before the NEB, I
argued that the TQM basically can now be decoupled
from the Transcanada main line.
And the major reason for that is the TQM,
through Gaz Metro, is sourcing more and more of its
supplies out of the Dorin (phonetic) hub, out of
southwestern Ontario.
The NEB didn't accept that argument. The
NEB basically said "TQM is integrated into the
Transcanada main line."
TQM only has six employees. Almost all of
it's services are outsourced to, basically, Gaz
Métro and the main line.
And not only that, their tolls on TQM are
just folded into the main line tolls as
transportation by others.
So the NEB basically said "We don't agree
with this. TQM's integrated into the main line,
it's got the same risk as the main line." And they
gave it an ATWACC. They said that the business risk
had increased, which if you believe that it's
integrated into the main line, it has increased.
If you believe it's the same as the main
line, then you should say it should get the same
common equity ratio as the main line.
R-3690-2009
10 septembre 2009
- 99 -
PANEL IGUA
Examination
Me Guy Sarault
So I would look at the TQM decision and say
"A good chunk of that decision is simply saying TQM
is integrated into the main line. The main line
gets 40 percent common equity. We're going to
increase the common equity ratio for TQM from 30 to
40 percent."
So a big chunk of the ATWACC decision of
6.4 percent for TQM simply recognized the fact that
NEB felt it was integrated with the main line.
I don't happen to agree with that. And I
think in the long run there could be the potential
for decoupling TQM from the main line.
Or, other things can happen in terms of the
Horn River supplies or the Mackenzie Valley
supplies or the Alaskan pipeline supplies that can
fill the main line.
But that is what worries the National
Energy Board. That's what's essentially behind the
decision for TQM. None of that affects Gaz Metro.
Now, when we look at the financial
situation, the fact is the U.S. has been in a
recession for at least 18 months. The U.S. has been
in a very serious position for the last 18 months.
Canada, we're immune from this. In fact,
I'll be honest, I thought the U.S. hit bottom when
R-3690-2009
10 septembre 2009
- 100 -
PANEL IGUA
Examination
Me Guy Sarault
they bailed out Bear Stearns, March 2008.
Canada, last year around this time, the TSX
hit record highs. The Canadian dollars was above
par. We were being supported by the demand for
commodities around the world.
There was no indication the Canadian
economy had any serious problems whatsoever.
The bank of Canada had started to think
about the possibility of a slowdown in the
markets. But really, nothing was really in any bad
shape in Canada until the U.S. government made a
disastrous decision, and that's the Lehman Brothers
bailout -- rather the lack of a Lehman Brothers
bailout.
We all know now that when Bear Stearns went
bankrupt, the Federal Reserve engineered a bailout,
the equity holders lost almost all of their value,
but every debt contract that Bear Stearns signed
was taken over by J.P. Morgan Chase. So it didn't
cause any domino effect with other financial
institutions that it dealt with.
That was the basic mistake in Lehman
Brothers. They allowed Lehman Brothers to go
bankrupt. As soon as that happened, every single
person with a contract with Lehman Brothers started
R-3690-2009
10 septembre 2009
- 101 -
PANEL IGUA
Examination
Me Guy Sarault
looking and saying "Is this contract going to be
fulfilled?"
And unfortunately, through the credit
default swap market, Lehman Brothers was connected
with just about every major bank around the world.
Within 24 hours -- I say it's the Lehman
Brothers virus, it went airborne, every single bank
around the world started to worry about its
financial health and its integrity.
What do you do if you worry that you're
going to become the next Lehman Brothers?
And within the next week Washington Mutual
went bankrupt, it was taken over by FDIC and sold
to J.P. Morgan Chase. Why? Because it lost 16
billion dollars in cash in the space of three days
as people pulled money out of Washington Mutual.
Over the weekend, Wachovia was taken over
by Wells Fargo.
Every bank was worried about a domino
effect in terms of the world financial system.
What do you do when you face that if you're
a bank? You hoard cash. You don't want to be next
Washington Mutual, you don't want to be the next
Wachovia, you don't want to be the next National
City, you don't want to be the next Bear Stearns,
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 102 -
you don't want to be the next Lehman Brothers.
There's a whole history of American banks
that got into very serious trouble. Every single
American bank wanted to avoid that.
Hoard cash, stop making loans in order to
preserve cash. Sell off anything that can be sold
that you don't actually need.
And when that happens, what that really
means is you sell debts, you sell bonds, because
you don't want to have exposure to those bonds, you
want to generate cash.
Here it's important that in the debt
markets, they're not like equity markets. Debt
markets are trading in what we call a dealer
market.
When you want to buy or sell debt, you go
to investment dealer, you go to a bank, and you say
"I want to buy 5 million dollars worth of this
company's bonds; the bank holds it in inventory,
sells it for you.
If you want to sell it, you sell it to the
bank, you go through a dealer.
When the dealers
are the banks, and the dealers want to raise cash
and they're selling everything, they don't hold
inventory.
All of a sudden the bond market, huge
R-3690-2009
10 septembre 2009
- 103 -
PANEL IGUA
Examination
Me Guy Sarault
chunks of it ceased trading, ceased liquidity;
liquidity collapsed and you couldn't do principal
trading. It was basically back to agency trading.
Somebody called up a bank and they were
saying "We're trying to arrange a
contract." "Okay. 24 hours to find somebody else to
do the other side of the trade."
That's what we mean by liquidity.
We used to say liquidity, we know when it's
not there because the dealers don't answer the
phone.
Now, they simply don't respond to e mails
and electronic orders.
We know that that happened last fall. We
know it because we can see all of the spreads. We
can see the spreads on all of the financial
instruments.
How did this affect us?
When Lehman went
bankrupt and everybody in the world was afraid that
the U.S. financial system was in melt down and it
was going to trigger events throughout Europe,
throughout the world, even the Canadian banks had
trouble raising money.
This is the short term credit spreads.
These are the commercial paper market cost over the
R-3690-2009
10 septembre 2009
- 104 -
PANEL IGUA
Examination
Me Guy Sarault
government of Canada treasury bill rate. The Bank
is accepting rates over the T bill rate, so the
bank's acceptance rate is the rate that the prime
banks in Canada borrow money at short term in the
money market.
Typically, these are 10, 20 basis points
over treasury bills.
When we were here last year, we already
saw the problems emerging with the collapse of the
asset backed commercial paper market, we saw
spreads jumping to 50, 60 basis points. But it
doesn't take a genius to look at that and say
"Well, look, November -- September 24th, those
spreads jumped from 70 to 150 to 200 to almost 300
basis points.
The Canadian banks were having a tough time
raising capital; people weren't willing to lend to
them. And we now know the Canadian banks are
absolutely rock solid; there's absolutely nothing
wrong with any of the Canadian banks. But this was
panic, this was sheer panic in the capital
markets. Nobody was willing to deal with the major
banks around the world, because if you can't tell
whether Lehman's going to fall or Washington was
going to fall, who knows about a CIBC or a Bank of
R-3690-2009
10 septembre 2009
- 105 -
PANEL IGUA
Examination
Me Guy Sarault
Montreal.
Herculean efforts by the central banks have
been occurring primarily from September through
March of this year.
That invoked measures that
haven't been used since the 1930s.
The United States, if you take a list of
all of the things the Federal Reserve has done and
what the United States government has done, they've
got like 20 or 30 programs; guarantee this;
guarantee this; throw money at this; throw money at
this. They are taking amazing efforts in order to
bolster the U.S. financial system.
Has it worked? Well, one quick glance at
that, we see that basically by the beginning of
this year, the Canadian markets are basically back
to normal.
Spreads of the BA rates, we're back to
about 10 basis points, but they are lower than they
were last year when we were talking about these
liquidity problems and these spread problems.
Right now, the Canadian banks can access
capital of traditional spreads of 5, 10 basis
points, or 15 basis points over the treasury bill
rate.
But right now, with the T bill rate at 26
R-3690-2009
10 septembre 2009
- 106 -
PANEL IGUA
Examination
Me Guy Sarault
basis points, we're talking about 40 basis
points
for the banks to raise capital. By anyone's
definition, that's cheap money.
Commercial paper, the top credits in
Canada, the top companies, they are the only ones
that can access the commercial paper market,
they're borrowing money now at basically 50 basis
points. Again, incredibly cheap money.
So the argument that the cost of capital
has gone up, simply not true. In the short term
paper market, the cost of capital has never been
cheaper.
The market, these problems, I've been
saying repeatedly that we've had two recessions.
We had the one recession in the United
States caused by the sub prime problems. We were
going to miss that problem, the same as in the
early 2000s, we missed the Internet bubble
problem.
The U.S. had a recession, we in Canada
didn't. And I thought we were going to miss this
recession until Lehman Brothers.
Lehman Brothers was the second recession.
You cannot destroy your banking system. You cannot
destroy your banks without seriously hampering the
economy.
R-3690-2009
10 septembre 2009
- 107 -
PANEL IGUA
Examination
Me Guy Sarault
That's the lesson we realized from the
1930s. That's what we were looking at in September
and October of last year, the complete collapse of
the U.S. banking system. Nobody knew which bank was
going to survive.
When you can't raise debts because the
banks aren't willing to lend, you have a severe
credit crunch, you can't survive as an economy.
And the stock market reacted in swift
order.
I wrote a paper on this; Rotman put out a
book.
Basically, at the end of October, beginning
of November, just -- we thought the crisis was
passed.
We were wrong.
This, I put together October the 24th. At
that time the U.S. stock market was down 40 percent
year to date.
From a U.S. perspective, the Canadian
market was off 50 percent; the U.K. 50 percent;
Spain 50 percent; Hong Kong 58 percent. These are
staggering sums of money.
When your take these losses and then on top
you look at the U.S. housing market which is now
off 40 percent, the loss of wealth in the United
R-3690-2009
10 septembre 2009
- 108 -
PANEL IGUA
Examination
Me Guy Sarault
States, absolutely staggering sums of money.
And if you don't think these staggering
losses are going to affect the economy, then
nothing is going to affect it. Huge loss of wealth
in the United States.
And this doesn't even include the problems
in the pension industry, which is backed by these
same securities.
So if people in the United States started
worrying about the stock market losses, their
pension losses, their housing losses, it's hardly
surprising they pulled in their -- their spending,
they retrenched in order to survive, the same as
companies.
So this is the second shoe that people have
been talking about, the real economy.
Even if we solved the problems in the
financial markets and the banks, which basically
have been solved now, we're now suffering the after
effects, the effects in the real economy.
So we saw a short sharp recession in
Canada, fourth quarter of 2008, and we're now
pulling out of this.
When we look at the impact -- well, when we
look at the impact on interest rates, it's very
R-3690-2009
10 septembre 2009
- 109 important to get a sense of history.
PANEL IGUA
Examination
Me Guy Sarault
You can't
look at the last five years, or even the last 10
years, you have to look at over several business
cycles to get an idea of what's normal and what's
been happening.
This is the pattern of yields -- now, I
made a mistake here, I should have put out the
double A yield as well as the A yield, because -for reasons that I'll come to -- but here we are
with a drop in the yields over time.
Now, a lot has been played on the role of
the long term Canada yield and spreads. Here we are
in a very serious recession we had in the early
nineties when we were adjusting to free trade with
America, as well as having a normal cyclical
slowdown. What happens? Long Canada rate goes down,
triple B rates go up. That's normal, that's what
happens in a recession.
And similarly in a slowdown here in the
late nineties, long Canada rate goes down, triple B
rate goes up.
And here we see again, in this recession
even more dramatic, long Canada rates going down
and A and triple B rates going up.
What's remarkable about what happened last
R-3690-2009
10 septembre 2009
- 110 -
PANEL IGUA
Examination
Me Guy Sarault
year is not the triple B rate, it's the single A
rate.
Usually the single A rate and the double A
rate behaves like the long Canada rate.
Last fall the single A rate went up and
behaved more like a triple B bond, and my mistake
was not to put out the double A yields because the
double A yields are exactly the same.
Why was that happening? Because the banks
and everything else was selling everybody to
generate cash; didn't matter what it was, they
wanted to generate cash, they didn't want to become
the next Washington or the next Wachovia.
So that's what was driving up all of these
spreads, an urgent need to generate cash in the
stock market by the U.S. banks.
Now, the question is
Can you still base a fair ROE out of this long
Canada yield?
And we've heard arguments from the
utilities, "Oh no, you can't do that because
there's not enough long Canada bonds, and as a
result the yields went down."
I'm sorry, but that's absolute nonsense.
There was no significant change in the supply of
R-3690-2009
10 septembre 2009
- 111 -
PANEL IGUA
Examination
Me Guy Sarault
long Canada bonds last fall.
There's been a long line decline in the
long Canada bonds because we've been good in
Canada. We've got good responsible government,
we've had ten years of surpluses, and the overall
supply of long Canada bonds has gone down relative
to the size of the economy.
But, the bank of Canada has taken amazing
efforts to maintain liquidity in the benchmark
bonds by basically selling benchmark bonds, so as
more goes out, they're in the market and buying
back the off bench marker, or what we call the
off the run bonds, specifically to make sure that
these bonds continue to reflect investor
expectations.
So, this is not a supply effect in the
Government of Canada bond market, you don't have a
supply effect over a couple weeks in the fall.
People were definitely buying long Canada
bonds in the end of -- during this period
September, October last year.
But they weren't buying all long Canada
bonds. This is a real return bond.
Over the same period the real return bond
the year it went up, which means the people were
R-3690-2009
10 septembre 2009
- 112 -
PANEL IGUA
Examination
Me Guy Sarault
selling the real return bond and buying the long
Canada nominal bond.
Now, this raises an important question of
whether this is actually a flight to quality.
Now if it's a flight to quality and you're
worried about generating cash to survive, you don't
invest in 30 year bonds, you invest in cash and
treasury bills.
Last fall the U.S. treasury bill yield went
negative because so many people wanted to rush into
T bills.
This is not a flight to quality.
The long
Canada real return bond yield has gone up. People
were selling it, they weren't rushing into long
Canada real return bonds.
The nominal bond, the price went down -sorry, the price went up, the yield went down. The
reason for that is this
This is what the Bank of Canada basically looks at,
we call it the break even inflation rate. It's the
difference between the nominal bond and the real
bond.
So you buy the nominal bond, you take the
inflation risk, because if inflation turns out to
be a lot more than you thought, your real value of
R-3690-2009
10 septembre 2009
- 113 -
PANEL IGUA
Examination
Me Guy Sarault
your investment goes down.
The real return bond, the government takes
the inflation risk. You're completely protected
from inflation.
So we had real problems here in the
nineties when they started introducing this because
nobody believed the Government of Canada, we still
had deficit problems.
But once we moved into surplus, the
interesting thing is the break even inflation rate
basically hovers around 2 percent, a little bit
more, which is exactly the Government of Canada and
the Bank of Canada's inflation target:
1 to 3 percent range, target of 2 percent.
So what happens here? This was last fall;
this is the spread collapse. Why did it
collapse? Because we had serious problems last fall
in terms of what we thought was going to happen to
the economy.
Before the Alberta Utilities Commission in
June, I said that as economists we make a huge
distinction between uncertainty and risk.
Risk is a situation where, to paraphrase my
son, "Been there, done that. Got the T shirt."
We know what the risk is. We've been
R-3690-2009
10 septembre 2009
- 114 -
PANEL IGUA
Examination
Me Guy Sarault
there. We know how to model it. We know what a
recession looks like. We know what a boom looks
like.
A situation of uncertainty is the exact
opposite. "Haven't been there. Haven't done
that. Haven't got the T shirt, no idea what is
going to happen."
Last fall we were in a situation where we
were seriously thinking about a Great Depression
II. People were seriously talking about significant
deflation.
If you really think there's going to be
deflation, what do you do? You buy the long Canada
nominal bond, because if you pick up a bond at a 4
percent yield, and inflation turns out to be 0, or
minus 1, that looks to be a pretty good investment.
So this collapse here in the break even
inflation rate, reflects the very serious problems
we had last year. People were buying long Canada
bonds because they thought they were into
deflation, the rate of inflation was going to drop
dramatically, and we possibly could have a Great
Depression II.
As those problems receded, we've seen the
break even inflation go up. But right now, the Bank
R-3690-2009
10 septembre 2009
- 115 -
PANEL IGUA
Examination
Me Guy Sarault
of Canada is forecasting that we're going to
recover, we're going get back to 2 percent
inflation by about 2010, and a break even inflation
rate, basically, is reflecting that.
So is there anything here that looks
peculiar? And the answer to that is no.
Now, in terms of the areas
where I
disagree with Dr. Vilbert, one of them is he adds 1
percent to the spread to the risk free rate because
he said it doesn't reflect risk free rate.
And he looks at that, and he says "Well,
there's a beta of .25; if you go back over long
periods of time, the beta on bonds is -- he used
conservatively .25.
I've been before you, I've been before
every Commission in Canada, there's huge
risk attached to government bonds back here
in the eighties and nineties, because
interest rate risk dominated the capital
markets, because we were trying to get
inflation under control, and interest rates
were all over the place.
So, back in the nineties into the early
2000s, the beta on the long Canada bond, the beta
on the U.S. government bond wasn't just .25, it was
R-3690-2009
10 septembre 2009
- 116 -
PANEL IGUA
Examination
Me Guy Sarault
up .5, .6.
Is that a good reflection of what happens
now? The answer to that is no.
The beta on the bonds basically is almost
0.
And, in fact, it's exactly what you think.
Who's made money over the last
year? Unfortunately not me, I'm totally in the
equity market, but people in the bond market have
made a lot of money.
So what's the beta? Their prices have gone
up, equity prices have gone down, negative betas.
So you can't look back at this evidence and
say "Well, because we had betas of positive, very
significant betas 5, 10, 15 years ago as estimated
by others including myself, that somehow this
indicates you can take these betas and add
something to the risk free rate. Not true.
So, in conclusion, I'd like to, in this
part, I would say very definitely we only had one
long term expected rate of return on the capital
market that is absolutely objective; that is the
yield on the long Canada bond.
We know exactly, if we buy a long Canada
bond, the stream of coupons and the payment we get
back at par, we know exactly what our rate of
R-3690-2009
10 septembre 2009
- 117 -
PANEL IGUA
Examination
Me Guy Sarault
return is.
That's why it's the basis of all of the
risk adjustment models in Canada. It's the basis of
almost every model that I look at in terms of
estimating rates of return.
The real yield increased last fall, so
there's no rush to quality in long term Canada
bonds, generally, otherwise you would have seen it
in the real return bond, as well.
What caused the drop in the long Canada
bond yield? Certainly it's because people bought
it. Why did they buy it? Because we're afraid of
deflation and a collapse in the economy, and they
were looking at a real rate of return.
Right now, I think the Bank of Canada is
absolutely correct.
Before the Alberta Utilities Commission, I
filed testimony in March, and I say "We're going to
come out of this recession in the third
quarter. The Canadian economy is much stronger than
the U.S. economy, and we'll have strong growth by
the end of the year."
The Bank of Canada backed off of that
because it wasn't what the -- most of the
forecasters in Canada were saying.
R-3690-2009
10 septembre 2009
- 118 -
PANEL IGUA
Examination
Me Guy Sarault
It's now gone back to that forecast.
We know two weeks ago that the people came out and
said "We're out of recession. We know that the third
quarter of this year in Canada we're going has
growth. Fourth quarter we're going to have more
growth. Next year we're going to have strong growth."
So there's no question that we're out of
the recession. It may not be as strong as we think
or we would like, but we're through the worst and
things are getting better.
I forecast in the long Canada bonds yields
would go up. Why? Because as the amount comes back,
the demand for capital comes back and, as a result,
interest rates go up.
I forecast in 4 and a half to
4.75
percent. Currently the yields are at 4
percent. World Bank and most forecasters are
forecasting the same thing, as is the Bank of
Canada.
Rush to quality, just to sort of emphasize
this, you rush to liquidity, investors, small
investors rush to cash; they sell their mutual
funds and they put it in cash, big investors put
their money in T bills. They don't put their money
in 30 year government bonds.
R-3690-2009
10 septembre 2009
- 119 -
PANEL IGUA
Examination
Me Guy Sarault
And right now that's reflective of the
level of T bill yields.
As I said, they were negative in the United
States, and currently we've got basically a 25, 26
basis points yields in Canada.
This brings us to the spreads. One thing
you have to realize is that every business cycle
looks basically the same.
There's always little
bits of differences here and there, but we have a
regular business cycle
Booms follow recessions, recessions follow booms.
What happens in a recession? Firms go
bankrupt in recession.
How do you know what firm's going to go
bankrupt? You don't.
So, basically, the spreads on default risky
bonds go up.
So this is the spreads on the triple B.
And you can see the exaggerated effect
during the business cycle.
So when we look and say ""Well, what's
normal?" you don't say "What's normal compared to
average?" Because we know business cycles, things
fluctuate.
So the question is not what's normal
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 120 -
relative to average, the question is what's normal
to the fact that we're in a recession or we're just
pulling out of recession and we're just getting
growth.
You have to think about what's normal to
where we are in the business cycle.
We are not in
a boom, we are not at the top of the business
cycle, we're just pulling out of possibly the worst
recession that we've seen for a very long time
period. We have to judge normal relative to that
standard.
So what we've got here is the triple B
spreads we know are way more volatile.
The remarkable thing has been this
volatility in the A spread.
And as I said, I could put up the double
As; the double As are exactly the same.
So what's remarkable of that, the problems
of last fall, was it affected everything.
It
wasn't selective; it wasn't somebody saying "This
firm's risk has gone up so I'm going to sell these
bonds and force up the yields," everything was
sold.
And everything was sold because of the panic
generated from the failure of Lehman and the
problems in the U.S. financial system.
R-3690-2009
10 septembre 2009
- 121 -
PANEL IGUA
Examination
Me Guy Sarault
How does this affect Gaz Métro?
Well, we still have relatively high
spreads. I'm not coming around and saying there's
no problems in the financial markets. We're
recovering.
Gaz Métro spreads, this is what was
provided by Gaz Métro, or Bank of Montreal.
The yield at this time was 5.5 percent; the
spread's 167 basis points, that's higher than I
would expect at this stage in the business cycle. I
would expect it more to be like 130, 140 basis
point.
So there's no question the spreads soon
will be high. They're probably 30 basis points
higher than they should be, based upon where we are
in the business cycle.
But when we look at this, Gaz Métro's
borrowing cost 5.5 percent. Its imbedded cost of
debt, I think, was 6.61 percent.
Cost of capital unambiguously
increased? Absolutely not. It's 1 percent lower
than Gaz Métro's imbedded cost of debt.
It's also unambiguously lower than the cost
of debt that Dr. Vilbert has in his ATWACC.
So we've seen about 110 basis points drop
R-3690-2009
10 septembre 2009
- 122 -
PANEL IGUA
Examination
Me Guy Sarault
in the cost of debt since Dr. Vilbert put his
ATWACC together.
With a 30 percent tax rate, that means his
after tax cost of debt is about 77 basis points
lower.
His ATWACC should be lower by that 77 basis
points weighted by what's happened to the cost of
equity, which is what I will get to.
But absolutely no question, the drop in the
cost of borrowing since the time Dr. Vilbert put
his testimony together means the ATWACC is
significantly lower now, even using his estimation
technics in the rates that he's using.
So where are we? This is the volatility
index. In my appendix E and F, I look at the long
run history going back to 1922 and 1924.
Generally, the stock market volatility, the
standard deviation of the returns is about 20
percent.
We've been through a period when it was
relatively low.
We went through a period last year
when it was a storm, nobody knew what was going to
happen.
VIX up there in the -- this is essentially
the implied volatility that comes from looking at
the money call options on the TSX 60, the biggest
R-3690-2009
10 septembre 2009
- 123 -
PANEL IGUA
Examination
Me Guy Sarault
60 firms in Canada.
So there's actually no question, last year,
huge volatility. People didn't know what was going
to happen.
Is that the state now? Well, no, it
isn't. We're now getting back to normal.
We're not
quite back to the 20 percent which is the typical
average over the last 60, 70 years.
We were getting very, very close to
it. We're back to a situation where there's
uncertainty in the markets. And, as I said before,
"Been there. Done that. Got the T shirt." We know
where we are. We're in a recession. We're just
coming out. We're into recovery; we know exactly
what's going on.
So the forecast test yield? What can we
say? And it's important to hear, we do look to some
extent, driving, looking at the rearview mirror; we
look at the past as indicative of the future. But
we're concerned about the test year, next year,
2010.
Absolutely no question, 2010 will be better
than 2009, which will be better than the second
half of 2008.
And VIX volatility of the Canadian market
R-3690-2009
10 septembre 2009
- 124 -
PANEL IGUA
Examination
Me Guy Sarault
has declined precipitously, we're back almost to
normal.
The TSX is up 40 percent since it's March
lows. We've been bouncing around 11,000 for the
last couple of weeks.
A spreads are now close to their nominal
cyclical levels. And I say "close to", I still
think they're a little bit high, but they're not so
high that you say "The sky is falling." The sky is
no longer falling.
The economy is recovering. There's no
question we're out of recession. We're not in a
strong economic growth but we're into recovery
stage in the business cycle.
So the next question
How has this affected the equity cost, given the
fact that we know where we are in the business
cycle?
I tell my students "If you're falling
asleep in a finance class and I ask you a question,
wake up, the first answer is "Time value of money."
If I look totally befuddled, I say the
second answer? They say "Fine." "Risk value of
money."
And if you're still totally confused, the
R-3690-2009
10 septembre 2009
- 125 -
PANEL IGUA
Examination
Me Guy Sarault
third answer in finance is "Tax value of money."
If you can understand time value of money,
risk value of money, tax value of money, you can
understand 99 percent of finance.
That's why we use motives based upon the
time value, the risk value, and the tax value of
money, because that is the bulk of finance.
So when we look at the capital asset
pricing model, why is it so successful? It's
because it handles two of what I call the iron laws
of finance.
We start out with the time value of money;
what is the long run risk free rate? That's the
long term Government Canada bond rate. That's about
4 percent at the moment. I think it's going to be 4
and a half percent over the test year.
What's the risk value of money?
We can
look back over the last 70 to 75 years. We had a
really bad situation last year but it's nowhere
close to what they had in 1930, 1931 and 1932.
It
was worse than we had or the Americans had with the
collapse of the internet bundle in 2000 and
2001. It's about the same as what we had in 1937.
It's probably worse than we had in the 1962
recession.
R-3690-2009
10 septembre 2009
- 126 -
PANEL IGUA
Examination
Me Guy Sarault
But the point is, we have been there. We've
been through periods where the stock market has
collapsed. We've been through periods when the
market's been recovered. And that's all reflected
in our long run risk premium data, the returns that
were earned in the recovery, the losses that were
made when the stock market collapsed.
So we look at the market risk premium and
we say "Well, the record of the last 78 years, what
is it?" and I'll get to that in a minute, that's
the market risk premium.
And then you look at how risky individual
securities are.
We use betas, we use relative risk
assessment, but I don't think there's one person in
this room that doesn't believe that Gaz Métro is a
low risk utility, and it's much lower than the
stock market as a whole.
So we all know we have to lower the
estimate of the cost of capital from that for the
market as a whole.
The question is how much?
Now, this is the capital asset pricing
model.
Dr. Vilbert uses what he calls the
empirical capital asset pricing model because he
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 127 says it doesn't hold.
The NEB specifically rejected Dr. Gilbert's
(sic) empirical capital asset pricing model, partly
because for regulatory process we don't use the
Treasury bill rate as the risk free rate.
When this was tested, and this was all the
rage in the 1960s and 1970s, we used as the risk
free rate the treasury bill rate.
That's a risk
free rate for a short run horizon.
The short -- the short run rate of return
is less than the long run rate on the long Canada
bond.
So I asked Dr. Vilbert "Can you provide us
with an estimate that the cost of capital, using
your empirical capital asset pricing model,
consistent with the way that this model was
estimated and tested and used by you to justify its
existence?"
That means you used the treasury bill yield
as the risk free rate.
And as I just told you, the Canada Treasury
bills yield is 25 basis points.
So he said "No, this is nonsense," which is
true. I think it's nonsense, as well.
We all think that empirical capital asset
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 128 -
pricing model or these tests using risk free rates
is nonsense, which is why nobody uses it.
But you cannot use an empirical capital
asset pricing model and say
"This is justified because of these tests" and then
turn around and say "Well, these tests are
nonsense."
If these tests are nonsense and they give
nonsense results, you don't use it.
And the National Energy Board said "We
don't use it.
We're using the long Canada bond
yields for the risk free rate, and we're not going
to put any weight on empirical capital asset
pricing model."
What do people use?
People don't use the
empirical capital asset pricing model. In fact,
it's not even up there.
The Graham and Harvey, two professors at
Duke University surveyed major institutions and
asked what do they use to estimate the cost of
capital?
Overwhelmingly they use the capital asset
pricing model.
Seventy odd percent of them used
the capital asset pricing model.
What else do they use? They use long run
R-3690-2009
10 septembre 2009
- 129 -
PANEL IGUA
Examination
Me Guy Sarault
arithmetic returns, which is what I'll get to.
And
then they used the multi beta model.
Now, what is a multi beta model? Dr.
Chrétien presented a multi beta -- one version of a
multi beta model last year. I use a multi beta
model, a two factor model.
It just means to say you take into account
others sources of risk.
What are those other sources of risk?
Nobody knows. Nobody knows what the factors
are in the Fama French model. They used market to
book.
And I noted yesterday in the answer to what
does Fama French use, the answer was book. They
didn't say book to market or market to book, and I
wondered "Why on earth didn't they say market to
book?" And I've given reason for why they didn't
say market to book.
But the Fama French model one and the risk
factor is a market to book ratio, or the inverse,
the book to market ratio.
The other is size, the other is the
market.
We also use liquidity. We use momentum.
I've got a paper, it's under review at the moment,
R-3690-2009
10 septembre 2009
- 130 -
PANEL IGUA
Examination
Me Guy Sarault
it uses productivity factors, because I think
productivity and technology is related to a lot of
these underlying factors.
So the problem with the multi beta is
there's no consensus on what model there is, or
whether or not it's robust.
And they're way down there with all the
dividend discount model.
And as far -- I've asked utility witnesses
"Can you point to a hearing or a decision where
they place any weight on the dividend discount
model?
No regulator in Canada, apart from the
BCUC, has place any weight on a discounted cashflow
model for at least 10 years.
And the BCUC, legitimately, in 2005, said
"We place some weight on this. We think this is
interesting."
But the dividend discount model is way down
there in terms of reliance by people making
decisions.
Overwhelmingly is the Cap M.
Now, the market risk premium, if you
believe that history repeats itself -- I personally
don't, I think the history is a great guide, it
constrains our judgement but, we, as people, behave
R-3690-2009
10 septembre 2009
- 131 -
PANEL IGUA
Examination
Me Guy Sarault
like our parents and our grandparents, but history
is never going to repeat itself exactly.
But if we look at the long run returns in
the U.S. and Canada, the U.S. equities, 11.66;
Canada 11.1; Treasury 6.05 in the United States;
long Canada, 6.56; long run risk premium is 4 and a
half in Canada; 5.6 in the United States.
U.S. has higher risk premiums than in
Canada, everybody believes that. The risk premiums
have come down, everybody believes that, as well.
When you look at that, people say "Why is
it that risk premiums are higher in the United
States?
Well, I think the answer to that is
Where did the Great Depression come from?
Answer
The United States.
Where did the current crisis come from?
Answer
The United States.
The U.S. is a very competitive
economy. They're a lot more aggressive than us and
most economies around the world, and they're a
riskier economy than ours.
their financial markets.
And that's reflected in
R-3690-2009
10 septembre 2009
- 132 -
PANEL IGUA
Examination
Me Guy Sarault
So when you look at returns in the U.S.,
the volatility down there, the standard deviation
returns in the equity market is higher than it is
in Canada. Not hugely higher; 20.5 compared to
18.9, but it is higher. The U.S. has had more
shocks to its financial system than were suffered
in Canada.
The other thing is that the U.S. is a
Reserve currency, Canada isn't?
Now, U.S. may not be the worlds Reserve
currency in the next to 5 to 6 years because their
deficit is running at 13 percent of GDP and nobody
knows when they're going to stop having 13 percent
GDP as a deficit.
Basically, 1.3 trillion dollars a year for
the next five or six years.
China's already indicated that they've
warned the United States they may start moving
reserves out of United States into Europe.
But at the moment, the U.S. is still the
reserve currency. It's long term interest rates are
depressed as a result because they're buying from
major foreign investors.
So the historic record is 4 and a half to
5.6 percent.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 133 -
I don't put any weight on historic
estimates. I think they're a guide to judgment in
terms of what is a band of reasonableness.
And 4
to 5 percent is a band of reasonableness.
Now, what's important is what people think
is the market risk premium.
This was a survey done
by Fernandez IES in Spain.
It was done in January of this year, right
in the middle of the financial crisis.
So this isn't something done two or three
years ago with stale dated research that was done
when the markets were good, this was done eight
month ago, January this year when every professor
had lost money in the stock market the same as
every other investor around the world.
So were they coloured by that? Well, I'm
sure they were.
What are the results? When you look at the
U.S
A.
U.K., Canada, Australia? These are what professors
of finance think is the market risk premium.
Now, we've got some crazy peoples as
professors, the same as there's a bit crazy people
everywhere.
So you look at the distribution, and
you can sort of see some people who've got really
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 134 -
quite weird views on what the market risk premium
is.
When we look at these, we look at
medians. What is the typical? What is the middle
guy? Because he's not the guy at the extreme with
really large values for the market risk premiums,
or really low. Median. Typical guy.
Typical guy in the United States thinks the
market risk premium is 6 percent.
Up until last
year, that, in fact, was the historic evidence for
the market risk premium in the U.S., 6 percent.
The collapse in the U.S. equity market has
brought that estimate to come down, as I've
indicated. But 6 percent is a sort of number I know
my colleagues use in the United States.
Typical number in Europe
Five percent.
Typical number in Canada:
5.1 percent.
Typical number in Australia
6 percent.
Typical number other
7 percent, and that's India, that's Iran, that's
Bangladesh. There's a whole series of -- one or two
professors that answered this survey, so they are
R-3690-2009
10 septembre 2009
- 135 -
PANEL IGUA
Examination
Me Guy Sarault
the other.
What I'd like to emphasize, I am not a
low ball witness in terms of a fair rate of
return. I'm right exactly bang smack in the middle
of my colleagues in Canada.
When we look at the distribution of the
market risk premium in Canada, we do have some
people down here at 2 percent.
If IGUA comes to me and says "Well, can you
tell us this guy with a 2 percent market risk
premium? We want to hire him." I'd have to say
"Sorry, I don't know who he is."
And I don't think
that's a reasonable estimate of the market risk
premium.
I'm there at 5 percent, so I'm in the
survey there at 5 percent.
If you look at it and randomly talk to
somebody in Canada, they'd either get someone like
me at 5 percent or they could get somebody at 6
percent.
Now there's someone out there at 8
percent.
So if Gaz Métro comes to me and says "can
you provide me with the telephone number and
address of the finance professor with an 8 percent
market risk premium?" I say "You don't need him,
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 136 you've got Dr. Vilbert."
Dr. Vilbert's at 7.75 percent. The high end
of the market risk premium in Canada is 8 percent.
So if you're looking at what's reasonable,
I am right there in the middle. Dr. Vilbert is not
right there in the middle.
He's off the -- well,
not quite off the scale but he's right at the top
of the scale.
So this hearing, since this survey came
out, I've added a margin for error. I use 5 percent
and I've said "Well, I could be wrong here, one of
my colleague used 6 percent."
6 percent and a beta of .5 is 50 basis
points. So I've split the difference and added a
margin of error, taking into account that I could
be wrong. I think it's 5 percent, but just as
likely, some of my colleagues would come up with 6
percent, I don't think it's 7 percent or 3 percent,
I think these guys are out on their tail.
Relative risk.
Risk varies. Risk varies
with the economy. All we're doing is estimating
statistically in relationship between a security
return and a market return.
Utility risk was about .4 or 5, up to .6
before the 2000 stock market crash.
R-3690-2009
10 septembre 2009
- 137 -
PANEL IGUA
Examination
Me Guy Sarault
Now, I used to start out investment
seminars like an Alcoholics Anonymous, sort of,
like, "Who's bought Nortel? Come on, admit it, you
bought Nortel," to loosen everything up.
Everybody in this room knows what happened
to Nortel. It's currently 1 1/2 cents a share. It's
collapsed in price. We've really lost money on
Nortel.
Nortel drove the Canadian market.
Nortel and JDS Uniphase were 35 to 40
percent of the market cap of the Canadian
market. So when that collapsed, and utilities
didn't collapse, guess what? They're betas were
estimated with negative or basically very low
because they were stable, Nortel JDS Uniphase
brought down the Canadian market.
Once that period runs out of the sample
period, the betas came up to where you would
expect.
Where you would expect, until we got this
commodity bubble.
Now we're getting a similar effect with
energy stocks. Energy stocks are being driven
because of high commodity prices to place a
significant weight in the Canadian market.
But the estimate, if you look at the actual
major utilities in Canada, the recent estimates of
R-3690-2009
10 septembre 2009
- 138 -
PANEL IGUA
Examination
Me Guy Sarault
.3, .4, again, am I an overall estimator in terms
of betas? No, I use .45 to .55. I think .5 is a
reasonable long run estimate. I discount what's
happened in the stock market over the last year,
and, in fact, what happened with the Nortel bubble.
So I'm using a higher beta estimate because
I think it's a better estimate going forward, and
I'm using a higher market risk premium than is
historically observed. And not only that, I'm
weighting it higher, taking into account the views
of my peers and my colleagues.
So, what's happened over the last year?
So had the utilities had a problem accessing
capital?
This is off Yahoo. This isn't rocket
science. Every one of us can go to Yahoo.com and we
can put in a price of a stock and they draw these
nice little graphs, so you can do a value line,
compare the price to what's happening for other
stocks.
GSP, Goldman Sachs says Standard & Poor's,
that's the TSE, so you can put in the TSE, find
what's happening with the TSE. So
I just thought I would put in the TSE against the
major utilities, so that's a mirror.
R-3690-2009
10 septembre 2009
- 139 -
PANEL IGUA
Examination
Me Guy Sarault
Gaz Métro said "Can you do this for
March?" Well, why March?
Well, you look at this,
and March, that was the low in the market where
there's been a recovery"
Answer is "I can't do that, Yahoo doesn't
allow me to do that. All you can do is plug in a
stock in Yahoo and then they pop out these graphs."
Why did I do this? Because over the last
year, we want to know what's happened to
utilities? Are they risky? Do investors look at
them and say "These are risky stocks. I don't want
to invest in them."
Answer to that is clearly no.
In mirror, basically, Nova Scotia Power
basically had almost no change in its stock price
up until the early July, and then it lost a little
bit, whereas the overall Canadian market was at its
worst, it was off 42 percent.
That's risk.
When you lose 42 percent and you invest in
utility stock, at tops you use 8 percent, that's
low risk.
I wish I'd put all of my money into utility
stocks a year ago. I didn't, and I'm not going to
do it in the future, but if you had done it, you
wouldn't have suffered the losses the rest of the
R-3690-2009
10 septembre 2009
- 140 -
PANEL IGUA
Examination
Me Guy Sarault
stock market suffered.
So that's the mirror. Is this typical?
This is Fortis.
Again, Fortis stock price barely
budged. It went down a little bit but, basically, by
the end of the year Fortis and -- was, again, pretty
close to where it was at the beginning of the year.
Here we have Canadian Utilities. Canadian
utilities has got a lot of power
Atco Power, the Formaco (phonetic) Power, is part
of Canadian Utilities.
And there had been problems
in the power sector which generates problems in the
overall utilities index.
And we see there that the Canadian
Utilities was, basically, nothing much happened
until March, and it's clearly got a little bit more
risk than the other two utilities.
But again, it's basically lost 10, 12
percent, and it's not as risky as the overall
market index.
And here, of course, Gaz Métro.
I looked
at the testimony of Dr. Vilbert and Dr. Kolbe and I
say "Where's Gaz Métro? Where's Gaz Métro?"
Gaz Métro's publicly traded. Gaz Métro
limited partnership. We can look to see how the
market values Gaz Métro.
R-3690-2009
10 septembre 2009
- 141 -
PANEL IGUA
Examination
Me Guy Sarault
And those are the Gaz Métro units; where
were they at the end the year? Exactly where they
were at the start of the year.
So is Gaz Métro risky?
No indication the
stock market looks at the Gaz Métro and sees any
significant risk in Gaz Métro.
Stock price, basically, where it was at the
beginning of the year, despite the horrendous
problems we've had with the TSX.
The other two utilities, Transcanada,
probably Canada's biggest utility, huge investments
in the United States, they've been borrowing
billions of dollars, raising billions of dollars of
capital to move into the U.S. electricity market
and also some pipelines.
Transcanada, clearly you look at that and
you say "Well, Transcanada has behaved somewhat
similar to the overall market. Not as risky as the
market as a whole because it's still got core
utility operations, but it clearly has some risk.
And then finally, my favourite P & G., I've
persistently said P & G is the riskiest utility in
Canada. Stock market agrees. It's behaved very
similar to the overall market, although, again, not
quite as bad.
R-3690-2009
10 septembre 2009
- 142 -
PANEL IGUA
Examination
Me Guy Sarault
So you look at all of that and you say
"Well, is the sky falling on the utilities?"
Absolutely no evidence whatsoever that the
utilities are suffering any problems.
Do they have market risk? Yes, they do.
If they didn't have market risk, I wouldn't be
using a beta of .5.
But the evidence from this is probably I'm
overestimating the risk of Gaz Metro and treating
it a bit more like P & G and a little bit more like
Transcanada or Canadian Utilities.
But overall, a beta of .5 for utilities
from the record over the last year is very
conservative.
We know that utilities are a safe
harbour. We know. In fact, we know from the annual
report of Gaz Métro, the brochure said between
September the 1st and November the 19th, the data
results were released, the TSX Index fell 38.3
percent; Gaz Métro's unit was down 13.1 percent,
proof it is playing the safe haven expected of it.
Gaz Métro is a safe haven. It's a low risk
stock, the market says that, the president of -the CEO of the company says that.
Not only that, there was data in the
R-3690-2009
10 septembre 2009
- 143 -
PANEL IGUA
Examination
Me Guy Sarault
evidence in terms of the performance of the S&P. I
asked, let's see what's happened to Gaz Métro over
the same period.
1998 the S&P drops 3 percent, Gaz Métro
goes up 8 percent.
'98 to 2000, the S&P goes up 113 percent,
Gaz Métro goes down 1 percent.
September -- October 2002 to 2008, the
market goes up 165 percent, Gaz Métro 27 percent.
June 18th, '08, to November 20th, the
market drops 49 percent, Gaz Métro drops 6
percent.
June 18, '08, to March '09, the market's
off 15 percent, Gaz Métro's off 10 percent.
That's what we mean by lower risk
low volatility. It's not as risky as the stock
market as a whole. It's got market risk but it's a
law beta stock, it is low risk.
So in terms of a fare ROE, I'm using the
unit of 4.5 percent, long term risk free rate; I
see no reason to add any rider to that. It's the
only expected rate of return in a capital market
that is unambiguous.
Market risk premium of 5 percent, higher
than the market risk premium earned in Canada over
R-3690-2009
10 septembre 2009
- 144 -
PANEL IGUA
Examination
Me Guy Sarault
the last 74 years.
Typically, what people use when they do
valuations, typical of the median finance professor
in Canada.
Beta of .5, actually higher than the
experienced beta of Gaz Metro over the last year.
Real estimate, 7 percent. I add 50 basis
points for issue costs. And I've started adding a
margin of error adding 25 basis points because I
could be wrong on the market risk premium.
Enough of my colleagues thinks it's 6
percent that I think that a margin of error, taking
into account their estimates as reasonable.
None of this is controversial. None of this
is anything any different from what you would get
from any professor of finance in Canada.
Now, the last thing I'll talk about is
ATWACC.
My colleague has talked about ATWACC, after
tax weighted average costs of capital.
The equity cost we estimate in a capital
market, multiplied by the equity market value,
divided by the total value of the fund, plus the
after tax debt costs, times the debt value divided
by the total value of the fund.
R-3690-2009
10 septembre 2009
- 145 -
PANEL IGUA
Examination
Me Guy Sarault
The critical thing is we use market values
for debt and equity.
Now, this is where we get into the market
to book ratio.
And I have to say, I was listening to the
presentations by the utility witnesses, and
particularly Mr. Engel going on saying market to
book's a myth, and I thought "Why on earned is
this?"
ATWACC depends upon market to book. Market
to book is totally in ATWACC.
Market to book is in ATWACC because if you
use book value weights, you're going to have
different weights in the capital structure.
If the market value of the stock goes up,
and you've got a market to book above 1, you place
more weight on the equity cost.
So this is all driven by the market to book
ratio of the sample, and the market to book ratio
of the utility.
So it's difficult for me to think about
this and hear, "Well, market to book isn't
relevant" when ATWACC is totally based upon market
to book ratios.
Dr. Kolbe assumes the ATWACC is
R-3690-2009
10 septembre 2009
- 146 -
PANEL IGUA
Examination
Me Guy Sarault
constant. There's no evidence to that, but that's
what he assumes.
He, basically, estimates the market value
ATWACC, and then says "Well, suppose you use this
for a utility, we're going to take that ATWACC and
we're going to apply it to the book value weights."
So instead of the equity, we say market to
book of two, you will apply it to the book value,
which means you're going to place less weight on
the equity.
So if you look at the equation and you put
less weight on the equity, the only way you can end
up with the same ATWACC is by increasing return on
equity.
That is all Dr. Kolbe is doing. He's
estimating the ATWACC using market value weights,
saying that these market values mean something,
when, in fact, elsewhere he says "market values
don't mean anything in the market to book
ratio." But he's saying the market values mean
something in the equity value, estimating the
equity the cost.
And as I showed, Dr. Vilbert's equity cost
are high but they're not ridiculously high. I've
seen estimates from utility witnesses way higher
R-3690-2009
10 septembre 2009
- 147 -
PANEL IGUA
Examination
Me Guy Sarault
than his, but his equity cost estimates aren't that
high, but it's when you apply the book value
weights, you're forced to increase the return on
equity in the ATWACC, and I'll explain that a
little bit more.
Now, the thing about this is, when I first
read this, what Dr. Kolbe was doing twelve years
ago, I thought "Well, this is genius. This reverses
everything we know about finance."
Normally, if you look at a utility, and
you've got a high rate of return and a required
return falls, market prices go up, and everyone
looks at that and says "Well, obviously you have to
lower the return on equity."
The beauty of ATWACC is that's exactly the
opposite. By placing a high weight on the equity
cost and then calculating the ATWACC and applying
it to book value, you get a high return on equity.
Now, why that's important is because here
we have Dr. Kolbe's book -- and he's smiling, so
let the Court Reporter say he's smiling -but it's his book.
And if you look at this book, it's got
market to book ratios all the way through it. It
was written at a time when market to book ratios
R-3690-2009
10 septembre 2009
- 148 -
PANEL IGUA
Examination
Me Guy Sarault
were less than 1.
The signal in the market to book ratio is
less than 1, is you have to increase the return on
equity.
Now, the beauty of ATWACC is the exact
opposite. Where market to book ratio is above 1,
what do you have to do? You have to increase the
return on equity.
So, market to book ratio's master when the
market to book ratio is less than 1, and as a
result you have to increase the return on
equity. You go to an ATWACC, you get exactly the
opposite.
So regardless of what happens to the market
to book ratio, Dr. Kolbe's got a method for saying
the return on equity has to go up.
It either has to go up if the market to
book's less than 1, or you switch to ATWACC and you
say it has to go up if the market to book's above
1.
Now, what did the NEB decide in the TQM
decision? This is their table 6.1.
I saw Dr. Vilbert's assessment saying that
my estimates were unreasonably low. NEB didn't
agree. The NEB came out and looked at Dr. Vilbert's
R-3690-2009
10 septembre 2009
- 149 -
PANEL IGUA
Examination
Me Guy Sarault
estimates and said his estimate of the cost of
equity is 7.4 percent. So there's a little star
next to that saying "As computed by the board."
The board didn't pay any attention to his
empirical capital asset pricing model. They looked
at his Cap M estimates, they came up with 7.4
percent.
What was my recommendation? 7.75 percent,
higher than Dr. Vilbert.
So if my estimates are unreasonably low,
Dr. Vilbert's were lower than mine in the TQM
decision.
So this is what the NEB said, 7.4 percent
Canadian samples; 7.4 percent master limited
partnerships; 9.2 gas LDCs. Dr. Booth's
recommendation, 7.75 percent; that included my 50
bases points cushion; it included issue costs.
And as the Transcanada -- as the TQM
decision comes out, the all in ATWACC includes
issue costs.
My estimates that they used include issue
costs. So that's what the NEB did.
Since then, Dr. Vilbert has increased the
market risk premium by 2 percent, which is now low
by 1 percent, but his evidence is based upon 2
R-3690-2009
10 septembre 2009
- 150 -
PANEL IGUA
Examination
Me Guy Sarault
percent; and he's added a spread adjustment to a
long Canada yield.
Before the Alberta Utilities Commission,
before NGTO withdrew, Dr. Vilbert produced this
ATWACC based upon Cap M beta 6.3 percent, a little
bit less than what the National Energy Board
awarded TQM, a 6.4 percent.
He's now got 7.2 percent. How did he get
that 7.2 percent? Well, you can see the highlighted
numbers. He's bumped up his market risk premium by
2 percent to get 7.75 percent.
As I said, there's only two professors in
Canada who are higher than that at 8 percent.
To be fair to Dr. Vilbert, he's now lowered
that by 1 percent.
And the add on to the risk free
rate, an extra 1 percent.
So that's what's at stake here. The
relevance of the long Canada bond yield where you
can add 1 percent to that.
And what's happened to the market risk
premium?
Now, since this evidence was put together,
Dr. Vilbert has lowered his market risk premium by
1 percent. He's using adjusted betas, as indicated
there, adjust -- Bloomberg adjusted betas.
R-3690-2009
10 septembre 2009
- 151 -
PANEL IGUA
Examination
Me Guy Sarault
The National Energy Board rejected
that. They said there's no evidence that
betas in Canada moved towards 1. They used
unadjusted betas.
But regardless, if he used a beta of .65 -.65 times a 1 percent drop in his market risk
premium, lowers the equity cost by 65 basis points.
The equity cost is off by 65 basis points;
the debt cost is off by 70, 75 basis points.
His ATWACC, relative to this 7.2 percent is
off by at least 65 to 70 basis points, based upon
Dr. Vilbert's own admission in terms of the drop in
the market risk premium. And the evidence that
produced about a drop in the cost of debt for Gaz
Métro.
So this was 7.2 percent. His own estimates
would be 6.5, 6.6 percent, I think that's
excessive.
I think the ATWACC, using his method for
calculating ATWACC is much lower than that down at
5.85.9 percent.
Dr. Kolbe takes 7.25 and adds 25 basis
points for a higher risk.
This is relying upon Dr. Carpenter's
testimony. I, personally, don't see any change in
R-3690-2009
10 septembre 2009
- 152 -
PANEL IGUA
Examination
Me Guy Sarault
Gaz Metro's risk over the last two years. In fact,
if anything, it's probably gone down.
He adds 10 basis points for imbedded cost
of debt. And I understand that's now down to 6
basis points, but he adds for the imbedded cost of
debt, and he adds for issue cost.
National Energy Board specifically said the
ATWACC is all inclusive.
My estimates included as part of their
ATWACC estimates included issue costs.
They specifically said "This is a market
cost. You take the market cost of debt, we make no
adjustment for imbedded cost of debt."
If you go to the National Energy Board, 6.4
percent, you end up with 8.88 percent for Gaz
Metro. 20 basis points higher than the what seems
to be the formula forecast for next year, and lower
than it was two years ago when we went through this
procedure.
So this is the technics that they use.
I agree 100 percent with my colleague to the
right.
The problem with ATWACC, is this imbedded cost
of debt and the tax rates.
If it had come before the Alberta Utilities
Commission, I would have said "You're going to have
R-3690-2009
10 septembre 2009
- 153 -
PANEL IGUA
Examination
Me Guy Sarault
real problems with ATWACC because you're dealing
with 9 or 10 utilities; every one of them has a
different imbedded cost of debt; every one of them
could have a different tax rate; and every one of
them, if you award an ATWACC across all of the
utilities, every one of them will end up with a
different return on equity, even though they're
over, the risk is exactly the same.
So ATWACC has a real problem in applying
it's multiple utilities with different imbedded
costs of debt. It also has real problems applying
in a mechanical way every year as an adjustment
mechanism.
I love coming to Montreal, it's a great
city, but I don't particularly want to be here next
year, hearing rate of return testimony all over
again.
I'm a 100 percent supporter in the
adjustment mechanism. There's more important things
for the Régie to do than listen to me and talk
about cost to capital, or Dr. Kolbe, or Dr.
Vilbert, year in, year out.
I've been 100 percent supporter in the
adjustment mechanism since the time that BCUC put
it in 1993. I continue to support it.
R-3690-2009
10 septembre 2009
- 154 -
PANEL IGUA
Examination
Me Guy Sarault
ATWACC has real problems in terms of an
adjustment mechanism.
Traditional methodologies, 7.75 percent
means 12.39 percent return on equity on the 38.5
percent deemed common equity.
Dr.Vilbert's estimates have shown Cap M
estimates really aren't that much different from
mine. So how did he go from estimates from mine to
12.39 percent?
leverage.
And the answer to that is
Dr. Kolbe assumes the ATWACC is
constant.
We saw with the exhibit that Dr. Morin -that our counsel introduced on Dr. Morin, even Dr.
Morin, who has presented testimony on behalf of Gaz
Métro, doesn't believe that the ATWACC is
constant.
If you check the exhibit, the chapter he
gave as to U shape cost to capital. If you read a
little bit further, he says, "This is the dominant
view in finance," that there's a U shape cost to
capital.
There's no dominant view in finance that
the cost of capital is constant.
In fact, not only is that not the view of
academics, but in my appendix H, at about page 12,
R-3690-2009
10 septembre 2009
- 155 -
PANEL IGUA
Examination
Me Guy Sarault
I've got a survey result done by Deutsche Bank -not done by academics, done by Deutsche Bank -- 85
percent of North American companies believe that
they have a target cost to capital.
If they didn't believe they had a target
cost to capital, they would have said, "We don't
have a target, we don't care. Cost to capital is
whatever it is, it doesn't matter."
Eighty five percent said they had a cost to
capital, which means they think they've got a
minimum -- sorry, target capital structure, which
means they think they've got a minimum cost of
capital.
So what Dr. Kolbe is arguing certainly
isn't the dominant view in terms of academic
finance, and it's totally not the dominant view in
terms of professionals who actually choose capital
structures for corporations.
So, this sort of repeats what I've been
talking about, except there's a few typos here, but
market to book ratio is a key for all of this.
If you believe market prices don't matter
and the market's too volatile, then it means you
can't use market to book ratios as a test, and it
also means you can't use market to book ratios in
R-3690-2009
10 septembre 2009
- 156 -
PANEL IGUA
Examination
Me Guy Sarault
ATWACC.
As I've said, the critical thing about
ATWACC is it gives you exactly the opposite results
from common sense.
If the relative risk goes down, the
required return goes down and market prices go up,
and ATWACC puts a bigger price on the equity costs,
and as a result, generates a higher return on
equity.
What did the NEB say about this? And this
is critical for what the NEB said compared to what
the Alberta board said.
The Alberta board said, "The board
considers the beta and the cost of equity do not
change the extent necessary for an ATWACC to
determine from market capitalization rates to
remain constant when applied to the book
capitalization for pure regulated utility."
The increase required for the cost of
equity to achieve a constant ATWACC would be
excessive and violate the fair return standard.
And as I've said in my opening remarks, the
Alberta board said they'd be derelict in their
exercise of their resp -- statutory
responsibilities to accept ATWACC. And the
R-3690-2009
10 septembre 2009
- 157 -
PANEL IGUA
Examination
Me Guy Sarault
important thing is to accept ATWACC, and the
assumption of a constant weighted average cost to
capital, because that's what gets the leverage
adjustments and the change in the return of -- on
equity.
The NEB did not say the after tax weighted
average cost of capital is constant. They did not
support Dr. Kolbe and Dr. Vilbert and say, "These
leverage adjustments to the Alberta board said
they'd be derelict to accept or acceptable."
All that the NEB said was, "We think a 6.4
percent ATWACC is reasonable."
And is 6.4
reasonable, you read the NEB decision and the
footnote they've got, this is consistent with 9. -I think it's actually 9.75 percent return on equity
on 40 percent common.
Forty percent common, I can understand,
it's the mainline's common equity ratio. I don't
agree with a bump up of one percent in terms of the
allowed rate of return for the TQM, but I can
understand why the mainline did it, why the NEB did
it, and I can understand why the NEB specifically
referred to this in a footnote to explain why they
were doing the ATWACC.
It's very important to understand the NEB
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 158 -
did not say, "We agree with a constant weighted
average cost to capital; we agree with leverage
adjustments; we disagree with the Alberta board."
All they did was -- said, "We think this
ATWACC is reasonable. In fact, if you read the
decision, it comes out of thin air.
So, of course, the ATWACC can give a fair
result.
If this Régie decides the ATWACC is five
percent, then you could end up with a fair ROE for
Gaz Métro or five and a half percent, you can come
up with a number for ATWACC that's fair, that's not
the issue.
What's the issue is, can you do what Dr.
Kolbe does, is assume the ATWACC's constant, go
from market value to ATWACC, do this leverage
adjustment and bump up the ROE by three to four
percent?
It was rejected by the Alberta board, it's
been rejected by just about everybody in the United
States.
Finally, financing.
Do Canadian utilities,
have Canadian utilities had any problems raising
capital? The answer to that is absolutely no.
I show, in the my testimony, Transcanada
raised equity, Transcanada raised debt, Enbridge
R-3690-2009
10 septembre 2009
- 159 -
PANEL IGUA
Examination
Me Guy Sarault
raised capital, Fortis raised capital. Most of the
Canadian utilities increased their dividends.
There's no indication that any Canadian company,
any Canadian utility has had problems raising
capital.
What they have done, is what we'd normally
recommend in a scenario like this. They issue
shorter term capital. You don't go out and raise
30 year debt when the spreads are high, you go and
raise five year debt, and then in five years time,
you refinance when the, when the rates go down.
Newfoundland Power just got upgraded two
points by Moody's and -- that should be, it has an
ROE formula, not an RTOE formula, but they're on a
formula method, Moody's just upgraded them two
notches just a couple of weeks ago, I'm not aware
of any Canadian utilities that had problems
accessing capital.
No dividend cuts of any size that I can see
from any Canadian utilities, unlike the United
States where the banks in the U.S. have all cut
their dividends.
Canada, they're relatively solid.
Just a couple of weeks ago, Alta Gas looks
to have sold itself through an income fund. I've
R-3690-2009
10 septembre 2009
- 160 -
PANEL IGUA
Examination
Me Guy Sarault
said just been sold, what I should say it's just
been a takeover offer, basically, 45 percent
premium to the market price.
So in, in that they say, "Well, these are
really stable cash flows, exactly what we want to
invest in.
So 45 percent premium to the market price
sounds pretty good to me."
Canadian utilities remain financially sound
with no market access problems. There's absolutely
no indication the Régie's ROE formula is unfair or
unreasonable, causing financial problems for any -either for Gaz Métro or for any of the formulas in
existence causing any access problems for any
Canadian utility.
Thank you.
ME GUY SARAULT
Thank you, Dr. Booth.
Q. [25] In addition to your presentation, you will
recall that during my cross examination of Gaz
Métro's experts, I tried to confront them with a
calculation of the impact on Gaz Métro's implied
return on equity.
Of the adjustments proposed by Dr. Vilbert
and Dr. Kolbe between the TQM's decision for an
ATWACC of 6.4 percent and Gaz Métro's proposal in
R-3690-2009
10 septembre 2009
- 161 -
PANEL IGUA
Examination
Me Guy Sarault
the current case, now as the starting point we have
a calculation which was found in Exhibit Gaz
Métro's 7, document 12.3, which was supplied in
response to question 1.4 by yourself to Dr. Engen.
We also have a similar calculation in Dr.
Kolbe's second presentation of B 66 at page 4,
where he explains how he can easily translate the
ATWACC approach to a traditional framework, and you
see here how the calculation is made to go from an
ATWACC of 7.75 percent, recommended initially by
Doctors Kolbe and Vilbert in this case, bringing us
to an implied return on equity for Gaz Métro of
12.39 percent based on the current capital
structure of 38 percent, 38.5 percent equity
thickness.
Now, this calculation was filed as
exhibit -- identified, rather, as Exhibit C 1 19, I
would now like to file it and I would like you to
explain your calculation, how you proceeded to go
from an implied ROE for Gaz Métro of 8.88 percent,
which corresponds to the NEB's decision for an
ATWACC of 6.4 TQM, leading to 12.39 percent implied
return on equity proposed for Gaz Métro in this
case?
R-3690-2009
10 septembre 2009
- 162 D 1 19 :
PANEL IGUA
Examination
Me Guy Sarault
Calculation in Dr. Kolbe's second
presentation of B 66 at page 4.
A. Yes.
Mr. Sarault, you remember that actually you
generated this because you talked about
cross examination and you e mailed me and said,
"Well, there's a purpose of cross, can we talk
about exactly how they get to their estimates and
exactly what each adjustment is worth?
And I said, "Well, I think I can do that. I
think there's an answer that I can use and I can do
some work and I can send you some information."
So I sent you several calculations and
spreadsheets ,and then you came out with this
exhibit to present to, to the panel.
ME GUY SARAULT
A simpler reflection of all the -A. Much simpler and much shorter than I would have
done.
So, what this is, is essentially we've got
the -- the top part is just the answer prepared by,
I assume, Dr. Kolbe where you've got a TQM ATWACC
of 6.4, and then you've got the implied ROE of
8.88.
And its got, what they did here, its got,
you take the 6.4 percent ATWACC, you, essentially,
R-3690-2009
10 septembre 2009
- 163 -
PANEL IGUA
Examination
Me Guy Sarault
subtract out the imbedded debt cost, you subtract
out the preferred, and then you divide by the
equity ratio.
So that's two times four is the after tax
4.8 percent interest cost times four, which is a 54
percent debt ratio, and then you subtract three
times five, which is the preferred 5.22 percent,
times the 7.5 percent deemed preferred share
component.
So that, basically, takes out the debt and
the preferred component in the ATWACC. And the only
thing that's left, as I said in my introductory
remarks, is the gulf from the ATWACC, based upon
market value as to book value, you then substitute
or you try to calculate the return on equity.
So you divide by the book value equity
ratio, which is divided by 6, 38.5 percent.
So this is Dr. Kolbe's calculation.
And I went through and I calculated, if you
didn't add the issue costs, or what are the issues
costs add, so that's the, the number there is 15,
16 basis points adds 40 basis points to the ROE.
If you ignore the 10 basis points for the
imbedded cost of debt, well, that's worth 26 basis
points for the ROE.
R-3690-2009
10 septembre 2009
- 164 -
PANEL IGUA
Examination
Me Guy Sarault
And if you don't believe that there's a 25
basis points increase in the ATWACC for business
risk, that's worth 78 basis points.
So working back 12.38 knocks down to 11.99
without the, the issue cost, down to 11.73 without
the imbedded debt costs, and then you knock off 78
basis points down to 10.95 based upon the 7.25
percent ATWACC that Dr. Vilbert estimated.
And then Mr. Sarault said, "Well, what
about other adjustments?" And I said, "Well, let's
suppose you don't believe the two percent market
risk premium," and, as I said, Dr. Vilbert's now
down to one percent market risk premium, then you
have to reduce the utility and risk premium.
So if you knock off two percent for the
market risk premium, and you unadjust the betas
because the National Energy Board and no one else
in Canada has accepted adjusted betas, then you
take .65 as the beta adjustment, you unadjust to
get the true beta, which is about .48, and that
means the equity cost in the ATWACC drops by 2.3
percent. So that drops down to 5.94 percent.
So that's, basically, Dr. Vilbert's ATWACC
without adjusted betas, without the 2 percent
market risk premium.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 165 -
It's still Dr. Vilbert's estimate with the
one percent add on for the risk free rate, and I
could have knocked that off but Mr. Sarault didn't
ask me for that.
So, but if I knock that one percent off, it
would be even lower.
So, if you've got an ATWACC of 5.94, what
does it mean for TQM's ROE, it comes down to 7.68
percent.
And as I mention and my colleague mentions,
this is the problem with ATWACC.
If you put in
some of these numbers, you can get return on
equities that are unfair. And in this case, this
number is 7.68 percent. It's seven basis points
lower than my recommendation.
If you knocked off
one percent for the R -- the forecast risk free
rate, it would be even lower.
And why is it lower, is because the
imbedded cost of debt and the preferred share are
very similar and far higher than the ATWACC.
So you're basically forcing everything to
equal the ATWACC, and with a fixed cost for the
preferred and the debt, it's all being felt in the
return on equity.
So I suggested to Mr. Sarault, I said, "I
R-3690-2009
10 septembre 2009
- 166 -
PANEL IGUA
Examination
Me Guy Sarault
can do these calculations but it's not my model.
Why don't you put it to them and say, "Look these
are the estimates, can you accept them, subject to
check, or can you go ahead and check the estimates
and provide them if they're wrong?"
So if I've taken what Dr. Kolbe's done and
made a mistake, I'm happy to admit that, this is
what I've tried to do, following exactly what he's
done in this information request.
Just as a method for going through it and
saying, "Well, if you undo all of the add ons, the
add ons for issue costs, the add ns for the
imbedded cost of debt, the add on for the increase
in business risk, the add on for the market risk
premium, the add on for the adjusted betas.
I haven't taken out the add on for the one
percent to the risk free rate, but if you check
that add on, as well, and you got back to the
actual estimates, the estimates from the capital
market, you'd end up with an ROE for Gaz Métro way
down there at six, seven percent.
Q. [26] Okay. Thank you for this explanation.
In addition to this comment, in particular,
do you have other comments on the presentations
made by Gaz Métro's --
R-3690-2009
10 septembre 2009
- 167 -
PANEL IGUA
Examination
Me Guy Sarault
A. It's a little sticky, so all of the presentations,
do you really want to be here until midnight?
Q. [27] Well, could we stick to the salient features?
A. I think I've actually covered most of the salient
features, but I would say in terms of Mr. Engen,
that he talked about bank debt pricing, I totally
agree with him.
The spreads on bank pricing have gone up.
I've got a mortgage prime minus 80 basis points.
Prime's now 2.25, my mortgage is costing me 1.45
percent.
Banks can't make any money on my mortgage
at 1.45 percent.
So what's happened is, the spreads have
gone up because the actual level of interest rates
have come down, and that's affected all of bank
pricing.
What's the implication of that for the ROE?
It escapes me. So I agree with him on that.
He looks at utility yields, I agree with
most of the things on the yields, except for the
fact that he hasn't got the latest yields, and the
latest spreads have certainly come down.
I really took exception to his overhead
number 6 where he talks about liquidity and he
said, "Observers make comment but without
R-3690-2009
10 septembre 2009
- 168 -
PANEL IGUA
Examination
Me Guy Sarault
knowledge."
But again, knowledge, you need the data. I
asked for the data, he wouldn't provide it.
Why,
because their proprietary.
So, if you don't provide us with the data,
how can we do the analysis to make an assessment?
All we can do on the outside is look at
what's happening, look at the newspaper reports,
talk to people in the industry and I'm totally
convinced that a huge amount of the problem last
year was caused by the U.S. banks and caused by the
credit crisis. That generated, we know it generated
huge liquidity in areas of the bond market.
If he doesn't provide us with the data,
then we can't do very much beyond those external
comments.
External valuation and some comments and
other things that he's done, but if you go to the
conclusions, recap all forms of capital more
expensive, absolutely incorrect. All forms of
capital are not more expensive.
We know that the cost of debt has gone
down. It's less than the imbedded cost of debt for
Gaz Métro. We know that the commercial paper rate
has gone down. Spreads did go up but now they're
R-3690-2009
10 septembre 2009
- 169 -
PANEL IGUA
Examination
Me Guy Sarault
coming down. So it's not true that all forms of
capital have gone up.
Asset market required returns, 10 percent
at low end.
Well, that's, that's fine, they do. I
know that people are looking at this.
Always said
it'd work for the Ontario Teachers Pension Plan two
years ago, they would love to buy more real return
bonds because they've got real return indexed
pensions and they want to buy real return bonds.
They'd be very happy to lock on a three to
four percent real return.
Most of the problems
with the unfunded pension would go away with that.
So they'd love to get 10 percent, I'd love
to get 10 percent, we'd all love to get 10 percent,
but that doesn't mean to say they're not willing to
make investments on less than 10 percent.
Globalization, foreign opportunities
relevant? Of course they're relevant.
Half my
portfolio is in U.S., U.S. stock. You'd be crazy
not to look at foreign markets. It doesn't mean to
say that the rates of return on foreign investments
are a yardstick for domestic investments.
Global investment diversification lowers
risk, lowers risk and, as a result, lowers the
required rate of return.
R-3690-2009
10 septembre 2009
- 170 -
PANEL IGUA
Examination
Me Guy Sarault
But what we're concerned about here is,
what rates of return do investors require?
Globalization, diversification lowers risk.
Price to book value is still a myth. That's
totally baffling to me. I've never seen an
investment report that didn't look at price to
books.
And, as I mentioned, the whole of Dr.
Kolbe's evidence, the ATWACC is based upon price to
books.
The whole, a big chunk of this text book
was based upon price to books.
And I heard Dr -- Mr. Engen say, "Well,
it's important for banks because it affects their
returns." It directly affects the utility returns.
So the utilities are regulated on a book value
bases.
Of all of the sectors of the economy, price
to book is most important for utilities because the
book values determine the levels of profits, so I
just found that remark mystifying.
In terms of the evidence of Dr. Vilbert, I
think, I've already mentioned enough that in terms
of the market risk premium, he's in the extreme
term of the distribution of professional judgment
on that.
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 171 -
In terms of the one percent for the risk
free rate, I've mentioned that there's no
justification for that at all.
And he continues to
use in his presentation spreads relative to
averages, that's not the right thing to do. You
look at spreads relative to where we are in the
business cycle.
I've got some words for Dr. Carpenter, as
well.
This final comment, "How has the business
risk landscape for Gaz Métro changed since 1999,"
that's not the yardstick.
This Régie considered Gaz Métro two years
ago and increased the risk premium
accordingly." The yardstick is how has it changed
over the last two years, and I fail to see any
significant change in that business risk over the
last two years.
So that's the major comment I have against
Dr. Carpenter.
Dr. Kolbe, what can I say about Dr. Kolbe.
I would stick to the summary of conclusions for Dr.
Kolbe. "A half century of research shows there's no
magic in financial leverage." Absolutely nothing
could be more wrong than that statement.
"I've been teaching corporate financing for
R-3690-2009
10 septembre 2009
- 172 -
PANEL IGUA
Examination
Me Guy Sarault
20 -- hold on, 28 years. That includes the
theoretical literature, includes the practical
literature, it looks at how to determine a capital
structure for a corporation consistent with his
business risk."
There is no magic in financial leverage
or
financial financing of corporations. Corporations
wouldn't have target capital structures. Investment
bankers wouldn't make a lot of money advising
corporations of what to do, and I wouldn't have a
course to teach. So I just find that remark just
totally incorrect.
Even Dr. Morin, and I've testified against
Dr. Morin for 12 or 13 years before the CRTC, even
Dr. Morin admits that there's a U shape cost to
capital, which means there's a target capital
structure, there's a minimum weighted average cost
to capital.
"ATWACC depends on the business risk of the
industry." Of course it does.
That's what every
regulator in Canada has looked at. They've looked
at the business risk of the electric utilities, gas
utilities, pipelines.
They've specifically set the financial risk
to offset the business risk, which is why I look at
R-3690-2009
10 septembre 2009
- 173 -
PANEL IGUA
Examination
Me Guy Sarault
utilities in Canada and I'll look at them and say,
"Well, if the regulators had done their job right,
and they're awarding an allowed rate of return,
that's exactly the same, of course, all of these
the utilities, the overall risk is the same.
So regulators have done what we expect to
see those of the corporations to do, which is
adjust the financial risk to capital structure to
reflect the underlying business risk of the firm.
Slide 4, "After 50 years I still cannot say
how to pick best debt ratio."
Sorry, absolutely
incorrect.
I've spent half my academic life teaching
cases, advising students how to pick capital
structures, that's what investment bankers do and
that's totally incorrect.
And I know, if you look at Dr. Morin's
textbook, he says, "The dominant view in finance is
that there's a U shape cost to capital," and I
would emphasize that, "dominant view in
finance." The dominant view in finance practice, 85
percent of CEOs, CFOs believe there's an optimal
capital structure.
What you, as the Régie, have to do, is
think about what is the dominant view here? What is
R-3690-2009
10 septembre 2009
PANEL IGUA
Examination
Me Guy Sarault
- 174 -
reasonable, what is conventional, what is normal
and what is not?
What is not normal, is to say that the cost
to capital is constant.
Thank you.
ME GUY SARAULT:
Well, thank you, Dr. Booth.
I believe that this
completes our evidence in chief. It's 25 to 11,
it's been a long day.
ME VINCENT REGNAULT
Shall I begin my cross examination for an hour?
ME GUY SARAULT:
So I believe we'll see each other again tomorrow at
around 10 to resume on the great subject, the rate
of return.
LE PRÉSIDENT :
La Régie remercie tous les participants et témoins
pour la présentation à cette heure aussi tardive.
Et nous allons reprendre demain neuf heures (9 h)
pour la preuve de l'Union des consommateurs, et à
dix heures (10 h) pour l'interrogatoire des témoins
du présent panel. Donc la Régie suspend la séance à
demain matin.
AJOURNEMENT
_______________________
R-3690-2009
10 septembre 2009
- 175 -
PANEL IGUA
Examination
Me Guy Sarault
Nous, soussignés, ODETTE GAGNON et MARC
BEEBE, sténographes officiels dûment autorisés à
pratiquer avec la méthode sténotypie 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 :
____________________
____________________
ODETTE GAGNON
Sténographe officielle
MARC BEEBE
Sténographe officiel