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 3 SEPTEMBRE 2009
VOLUME 2
JEAN LAROSE, CLAUDE MORIN, 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
Me OLIVIER CHAREST
procureurs 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
3 septembre 2009
- 4 TABLE DES MATIERES
PAGE
LISTE DES ENGAGEMENTS . . . . . . . . . . . .
LISTE DES PIÈCES . . . . . . . . . . . . . . .
PRÉLIMINAIRES . . . . . . . . . . . . . . . .
5
6
7
PAUL R. CARPENTER,
PIERRE DESPARS,
AARON M. ENGEN,
A. LAWRENCE KOLBE,
MICHAEL J. VILBERT
INTERROGÉS PAR Me VINCENT REGNAULT . . . . . .
CONTRE-INTERROGÉS PAR Me HÉLÈNE SICARD . . . .
CONTRE-INTERROGÉS PAR Me GUY SARAULT . . . . .
8
10
17
____________
R-3690-2009
3 septembre 2009
- 5 LISTE DES ENGAGEMENTS
U # 3 :
Provide the English version of the
question 19.1 provided to the
witnesses
. . . . . . . . . . .
____________
141
R-3690-2009
3 septembre 2009
- 6 LISTE DES PIÈCES
PAGE
EXHIBIT C 1 13:
An article published on August
31st on Gaz Métro's website.
100
EXHIBIT C 1 14:
Copy of the relevant
the decision dealing
with the proposal on
principles OF ATWAC.
EXHIBIT C 1 15:
Décision du Public Service
Commission of Wisconsin du 17
Janvier 2008. . . . . . . .
160
Decision before the Tennessee
Regulatory Authority, and it
seems to be dated January 13,
2009. . . . . . . . . . . .
160
EXHIBIT C 1 16:
portion of
specifically
the
. . . .
148
EXHIBIT C 1 17:
A decision of January 21st, 2009,
of the Public Utilities
Commission of Ohio. . . . .
162
EXHIBIT C 1 18:
A decision dated May 7, 2009, of
the California, of the Public
Utilities Commission of the State
of California. . . . . . . .
167
EXHIBIT C 1 19:
A document entitled "Dr. Booth's
calculation of the impact on Gas
Metro's implied return on equity
of the adjustments proposed by
Vilbert and Kolbe between TQM's
decision and Gas Metro's
proposal." . . . . . . . . .
176
EXHIBIT C 1 20:
Excerpt from Dr. Roger Morin's
book, New Regulatory Finance, the
2006 edition. . . . . . . .
206
____________
R-3690-2009
3 septembre 2009
- 7 L'AN DEUX MILLE NEUF, ce troisième (3e) jour du
mois de septembre :
PRÉLIMINAIRES
LE PRÉSIDENT :
Madame la Greffière.
LA GREFFIÈRE :
Protocole d'ouverture. Audience du trois (3)
septembre deux mille neuf (2009), dossier R-36902009. Demande de modifier les tarifs de Société en
commandite Gaz Métro à compter du premier (1er)
octobre deux mille neuf (2009). Poursuite de
l'audience.
LE PRÉSIDENT :
Maître Regnault, on vous écoute.
Me VINCENT REGNAULT :
Simplement très rapidement. Bonjour, Monsieur le
Président; bonjour, Messieurs les Régisseurs. Nous
avons constaté une petite erreur de frappe dans la
présentation qui a été produite sous la cote B-66.
C'est la B-66, oui, Gaz Métro-7, Document 25. Si
vous le permettez, je vais simplement poser deux
courtes questions à monsieur... au docteur Kolbe
afin de lui permettre de corriger sa présentation.
LE PRÉSIDENT :
Très bien.
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Interrogatoire
Me Vincent Regnault
L'AN DEUX MILLE NEUF (2009), le troisième (e) jour
de septembre, ONT COMPARU :
PAUL R. CARPENTER,
PIERRE DESPARS,
AARON M. ENGEN,
A. LAWRENCE KOLBE,
MICHAEL J. VILBERT,
LESQUELS témoignent sous la affirmation solennelle,
INTERROGÉS PAR Me VINCENT REGNAULT :
Q. [1] So Dr. Kolbe, do you have any corrections to
bring to your presentation that was filed as
Exhibit B 66?
Dr. A. LAWRENCE KOLBE :
A. Yes, I do.
Q. [2] Where?
A. Yes, I do. On page 9, I think we could
I don't
know if we could flash that up, but page 9. I don't
know if we could flash that up, flash that up on
the screen?
Q. [3] The second one
A. The second.
Q. [4]
Mr. Carpenter.
R-3690-2009
3 septembre 2009
PANEL 2 - GM
Interrogatoire
Me Vincent Regnault
- 9 A. At page 9.
On the last full line, the next last line,
there are two that I used for the imbedded interest
rates, and they both start with 7 and they should
both actually start with 6.
I'm sorry, they've
gotten mistyped; it's 6.866 and 6.767.
The numbers
were right in all the tables, it was just that in
typing in the line, for some unknown reason, the 7
got substituted for the 6.
Q. [5] So am I to understand that it does not change
the result of your calculations?
A. No, it has no effect on the tables or anything
else. It just was a typing error as the line was
put in.
ME VINCENT REGNAULT:
Thank you, Dr. Kolbe.
Donc, il y aura, hier, à la demande du procureur de
la Régie, nous allons transmettre au greffe de la
Régie les présentations en format électronique
« travaillable », entre guillemets. Et dans la
version électronique qui sera transmise donc à la
Régie, la correction aura été apportée.
LE PRÉSIDENT :
Très bien.
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Interrogatoire
Me Vincent Regnault
Me VINCENT REGNAULT :
Donc, c'est tout pour moi. Les témoins sont
disponibles pour le contre-interrogatoire.
LE PRÉSIDENT :
Merci. Donc, nous en sommes à l'étape des contreinterrogatoires. Maître Sicard, pour l'Union des
consommateurs.
CONTRE-INTERROGÉS PAR Me HÉLÈNE SICARD :
Bonjour, Monsieur le Président; bonjour, Messieurs.
Hélène Sicard pour l'Union des consommateurs.
Bonjour aux membres du panel.
Q. [6] Bonjour, Monsieur Despars. Mes questions
s'adressent principalement à vous. Et ce sont
quelques questions très générales. Je comprends de
la présentation de vos experts et de la vôtre, et
ce que vous nous avez dit en fin de journée hier,
que vous demandez une modification de méthode pour
calculer votre taux de rendement et que vous
demandez donc un taux de rendement de douze point
trente-neuf (12,39) pour l'année qui vient?
M. PIERRE DESPARS :
R. En fait, à la dernière page de la présentation
lorsqu'on transpose le ATWACC de sept point
soixante-quinze (7,75) et qu'on l'applique sur la
structure de capital présumée de Gaz Métro avec
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
trente-huit pour cent (38 %) d'équité, c'est douze
point trente-neuf pour cent (12,39 %).
Q. [7] Et je comprends que Gaz Métro admet que l'année
dernière a été une année économique très difficile.
D'ailleurs, vos témoins ont mentionné un peu ce que
tout le monde sait, il y a des gens qui ont perdu
leur emploi, il y a des gens qui ont perdu une
grosse partie de leurs épargnes et qui essaient de
se retrouver des emplois, qui doivent retourner
travailler. Les fonds de pension ont baissé de
presque trente-trois pour cent (33 %). Vous
admettez tout ça?
R. En fait, j'admets que la situation économique a été
difficile l'an dernier, qu'on a passé à travers une
crise économique, effectivement, et que, comme le
présentait monsieur Engen, entre autres, il y a eu
une reprise, mais reprise qui n'est pas confirmée.
Et les coûts de financement sont quand même
supérieurs à ce qu'ils étaient avant la crise.
Q. [8] Mais ces coûts sont encore bas?
R. Pardon?
Q. [9] Est-ce que ces coûts sont encore bas, par
exemple, par rapport aux années deux mille trois
(2003), deux mille quatre (2004) et deux mille cinq
(2005)?
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
R. Ils sont plus hauts que ce qu'ils étaient avant la
crise.
Q. [10] Est-ce que vous pouvez me dire si les années
deux mille trois (2003), deux mille quatre (2004),
deux mille cinq (2005) étaient des années où
l'économie allait bien?
R. Oui.
Q. [11] Maintenant, est-ce que vous vous souvenez du
taux de rendement que la Régie a accordé à Gaz
Métro et que vous avez réalisé dans ces années deux
mille trois (2003), deux mille quatre (2004) et
deux mille cinq (2005)?
R. On a, à une demande d'information, on a soumis la
réponse sur les taux de rendement historiques
autorisés. Il faudrait voir...
Q. [12] Si je vous réfère, là, et que ce sont les
décisions pour deux mille quatre (2004), D-2004-196
où le taux de rendement après bonification qui
avait été accordé était de onze point soixantequatre (11,64) pour les actionnaires ordinaires,
pour deux mille trois (2003)..
Me VINCENT REGNAULT :
Vous avez dit « après bonification »?
Me HÉLÈNE SICARD :
Oui.
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
Q. [13] Et pour deux mille trois (2003), avant
bonification, c'était neuf point quarante-cinq
(9,45). La bonification étant autour de un point
quatre-vingt-quinze (1,95). Et pour deux mille cinq
(2005), la décision D-2005-173, la bonification
était de point trente-huit (,38). Et votre taux
avec bonification donnait neuf point trente-trois
(9,33). Est-ce que ces chiffres-là vous
apparaissent... je ne dis pas exacts, exacts, mais
c'était dans ces mesures-là ce que vous avez eu
comme bonification?
R. Par coeur, je ne peux pas confirmer. Il faudrait
que je revois les tables et, entre autres, les
tableaux qu'on a présentés en réponse qui
reprenaient les décisions de la Régie et qui
statuaient sur chacun des éléments.
Me VINCENT REGNAULT :
À quelle réponse aux demandes de renseignements
vous faites référence?
Me HÉLÈNE SICARD :
Moi, je faisais référence aux anciennes décisions
de la Régie pour ces années-là. Mais mon confrère,
maître Sarault, me dit que...
Me VINCENT REGNAULT :
Vous avez le numéro de la pièce?
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
Me HÉLÈNE SICARD :
Gaz Métro-7, Document 13.3. Les taux pour deux
mille trois (2003), deux mille quatre (2004) et
deux mille cinq (2005) réalisés, autorisés étaient
de?
Me VINCENT REGNAULT :
Vous avez dit 11.3?
Me HÉLÈNE SICARD :
Gaz Métro-7, Document 13.2 à la page 5 de 6.
9 h 10
M. PIERRE DESPARS :
R. Là, je reconnais les chiffres.
Me HÉLÈNE SICARD :
Q. [14] Alors, si vous regardez ces chiffres pour ces
années deux mille trois (2003), deux mille quatre
(2004) et deux mille cinq (2005), êtes-vous
d'accord avec moi que les taux qui ont été
autorisés par la Régie comme étant justes et
raisonnables sont bien en dessous de ce que vous
demandez?
R. Effectivement.
Q. [15] Dans le contexte économique actuel...
R. Mais on demande... Excusez.
Q. [16] ... considérant que vous demandez cette année
un taux plus élevé que pour ces bonnes années au
R-3690-2009
3 septembre 2009
- 15 -
PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
niveau économique, comment est-ce que vous
justifiez ça face à vos clients et les
consommateurs de gaz qui vont devoir, à travers
leur tarif, assumer, dans le contexte économique
actuel là, une augmentation de votre taux de
rendement?
R. En fait, quand on prépare notre demande tarifaire et ce n'est pas la première fois qu'on demande une
révision du taux de rendement - on regarde quel est
le coût pour les capitaux de Gaz Métro et on
regarde les attentes du marché par rapport aux
capitaux qui sont investis dans l'entreprise. Et à
cet égard-là, il est clair que, au cours des
dernières années, on a vu une appréciation du coût
en capital, et notre demande reflète cette
appréciation du coût en capital.
Il est clair que l'impact - et il y a un
impact sur le coût de service de l'entreprise mais on doit aussi balancer l'intérêt des
investisseurs et se préoccuper de l'intérêt des
investisseurs lorsqu'on regarde le coût des
capitaux et notre capacité à attirer des capitaux.
Donc, dans ce contexte-là, oui, notre
demande est supérieure à ce que les... les taux qui
ont été autorisés dans les années précédentes, mais
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
je réitère qu'on est à la troisième demande et on
n'était pas nécessairement satisfait du taux de
rendement autorisé.
Q. [17] O.K. Monsieur Despars, encore une fois, vous
me parlez de vos investisseurs. Je vous parle, moi,
de vos clients et des consommateurs qui doivent
aussi être pris en considération. De quelle façon,
eux, sont-ils pris en considération pour avoir des
tarifs justes et équitables dans une demande où
vous demandez douze point trente-neuf (12.39 %) de
taux de rendement, dans une situation économique
comme celle qu'on connaît?
R. Mais, je viens de vous répondre. Quand on prépare
les tarifs, quand on prépare les conditions de
service, on pense à l'ensemble de notre clientèle
et on fait tous les efforts pour augmenter le
niveau des ventes. On fait tous les efforts pour
minimiser nos coûts d'opération. Et
malheureusement, cette année, on observe une baisse
des livraisons aux petits et moyens débits, une
baisse des livraisons à la grande entreprise, une
pression à la hausse sur nos coûts d'exploitation
et le coût des capitaux fait partie aussi des
facteurs qui viennent affecter notre coût de
service. Donc, la réponse, c'est on se préoccupe de
R-3690-2009
3 septembre 2009
- 17 -
PANEL 2 - GM
Contre-interrogatoire
Me Hélène Sicard
nos clients, oui. On fait tous les efforts pour
contrôler nos coûts, mais il faut aussi respecter
les contraintes de marchés. Et c'est ce qu'on
intègre à l'intérieur de notre dossier tarifaire.
Q. [18] Je vous remercie.
LE PRÉSIDENT :
Merci, Maître Sicard. Maître Sarault.
9 h 15
CONTRE-INTERROGÉS PAR Me GUY SARAULT :
Je vais m'assurer que mon cellulaire est bien
fermé.
LE PRÉSIDENT :
C'est la règle.
Me GUY SARAULT :
C'est toujours bien plate, en plein milieu d'un
contre-interrogatoire, d'entendre le téléphone
sonner.
M. PIERRE DESPARS :
R. J'ajouterais, chez Gaz Métro, quand ça se produit
dans une réunion, ça coûte cinq dollars (5 $) à
celui qui est le propriétaire du téléphone, qu'on
donne à une oeuvre de charité.
Q. [19] Ah! Oui. C'est une excellente règle, je vous
félicite parce que c'est excessivement ennuyant.
R. Oui.
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
Q. [20] Mes premières questions vont être pour
monsieur Despars.
LE PRÉSIDENT :
Peut-être, Maître Sarault, identifier le... vous
interrogez au nom de l'ACIG, mais je crois aussi au
nom d'un regroupement. Peut-être préciser le....
Me GUY SARAULT :
Q. [21] Oui. Excellente remarque, Monsieur le
Président. Alors, évidemment, comme vous le
savez... Maybe I should repeat this in English as a
matter of courtesy to our American friends.
I will cross examine you on rate of return,
cost of capital on behalf of IGUA, the Industrial
Gas Users Association, which is my regular
client. But in addition to that, we act on behalf
of all consumer associations represented in this
case. They've entrusted me to act on their behalf
on cost of capital issues, so the residential users
and the small commercial users, inter alia, are
part of this coalition, so to speak. All right.
Mes premières questions vont être dirigées
à vous, Monsieur Despars, un peu dans la foulée des
questions de maître Sicard. Vous avez
effectivement, en réponse à une question adressée
au docteur Carpenter, produit, comme pièce Gaz
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
Métro-7, Document 13.2, page 5, l'historique des
rendements autorisés et des rendements réalisés de
mil neuf cent quatre-vingt-dix (1990) à deux mille
neuf (2009) inclusivement.
Au moment de la confection de cette pièce
qui est datée du trente (30) juin deux mille neuf
(2009), on rapportait, pour l'année deux mille huit
(2008), un taux de rendement autorisé, incluant la
bonification, de l'ordre de neuf virgule cinquantedeux pour cent (9,52 %). Mais, pour ce qui est de
la colonne, la dernière colonne intitulée « Taux de
rendement réalisé », on a les lettres « ND »
présumément pour « non disponible ».
M. PIERRE DESPARS :
R. Oui. À ce moment-là, de mémoire, la décision de la
Régie dans le dossier de fermeture deux mille huit
(2008) n'était pas rendue.
Q. [22] Exact. Alors, vous parlez évidemment du
dossier du rapport annuel au trente (30) septembre
deux mille huit (2008), R-3680-2008, hum?
R. Oui.
Q. [23] Oui.
R. En fait, c'est le dossier de fermeture deux mille
huit (2008).
Q. [24] Exact. On appelait ça « fermeture »,
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
maintenant, on appelle ça « rapport annuel ».
R. Pas de problème avec le rapport annuel.
Pour moi,
le rapport annuel, c'est un autre document là,
mais...
Q. [25] Mais, la cause est effectivement intitulée
« rapport annuel ».
R. Oui, oui.
Q. [26] Alors, si je vous suggérais que le taux
effectivement réalisé pour l'exercice se terminant
le trente (30) septembre deux mille huit (2008)
serait de dix virgule quatre quatre cinq pour cent
(10,445 %), est-ce que c'est exact? Et je vais vous
donner le numéro de pièce précis parce que ça
pourrait être validé par la Régie. Un petit
instant. C'est une Gaz Métro-8. Excusez-moi là, je
l'avais photocopiée spécialement. Effectivement,
Gaz Métro-7, Document 1, page 3 de 3, colonne 5.
Alors, on a « Calcul du taux moyen du coût en
capital réalisé pour l'exercice terminé le 30
septembre 2008 », c'est le titre de la pièce. À la
ligne 10, on a « Avoir des actionnaires
ordinaires » et on a « Taux annuel » en colonne 5,
dix virgule quatre quatre cinq pour cent
(10,445 %).
R. En fait, vous faites référence, ce numéro de pièce-
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
là, c'est la référence dans le dossier de...
Q. [27] Exact, oui.
R. ... dans le rapport annuel deux mille huit (2008).
Q. [28] Dans le dossier R3680-2008.
R. Je vais prendre votre parole, je n'ai pas la pièce
en avant de moi là, mais je n'ai aucune... je n'ai
aucune indication que ce ne serait pas ça là.
Q. [29] O.K.
R. Il n'y a pas eu de révision de cette pièce, à ma
connaissance.
Me VINCENT REGNAULT :
Si vous me permettez, Maître Sarault, je peux
confirmer que c'était effectivement le... pour le
témoin, que c'était effectivement le taux de
rendement à ce moment-là.
Me GUY SARAULT :
Le chiffre.
Me VINCENT REGNAULT :
Oui.
Me GUY SARAULT :
Q. [30] C'est parce qu'il y a eu une pièce toute
récente qui a été déposée dans le présent dossier,
dans la série Gaz Métro-1, donc qui vient compléter
la présentation générale du dossier, notamment là,
je pense, le témoignage de madame Brochu. Je ne
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
sais pas si c'est un témoignage écrit qui a été
préparé par ou pour elle. Et dans cette pièce
additionnelle qui serait la pièce Document 1.1, on
faisait allusion à un taux de dix virgule trentesept (10,37 %). Et c'est ce qu'on avait retrouvé
aussi dans certains rapports d'agence de notation
de crédit, et caetera. Alors que, dans le dossier
officiel, de fermeture de livre deux mille huit
(2008), on parle plutôt de dix virgule quatre
quatre cinq (10,445 %).
M. PIERRE DESPARS :
R. Sans être certain, je pense et je suis pas mal
convaincu que le premier taux fait référence à ce
qui a été déposé par Gaz Métro. Et compte tenu
qu'il y a eu une dépense qui a été désallouée, on a
complété les pièces, on a refait les pièces en
fonction d'une dépense de deux point neuf millions
(2.9 M$) qui a été désallouée par la Régie, qui a
amené... et c'est la... on en parlait hier là,
c'est le deux point neuf millions (2.9 M$) reliés
au fonds de pension, donc qui a amené à revoir le
calcul de l'excédent de rendement. De ce deux point
neuf millions-là (2.9 M$), soixante-quinze pour
cent (75 %) va être remis aux clients dans la
présente cause tarifaire ou la subséquente et donc,
R-3690-2009
3 septembre 2009
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
ça a mené à une modification du trop-perçu à la
hausse de deux point neuf millions (2.9 M$), vingtcinq pour cent (25 %) en rendement additionnel qui
représente environ huit cent mille dollars
(800 000 $) et donc qui venait augmenter le taux de
rendement réalisé par Gaz Métro...
Q. [31] Par rapport...
R. ... pour l'exercice deux mille huit (2008). Donc,
c'est...
Q. [32] Donc, le bon chiffre, c'est dix virgule quatre
quatre cinq (10.445 %).
R. C'est suite à la décision de la Régie, c'est le
taux de rendement réalisé qui a été déposé au
dossier.
Q. [33] O.K. Simplement pour les fins du dossier, je
voudrais rappeler les causes de cet excédent de
rendement pour l'exercice deux mille huit (2008),
et je cite à partir de la pièce Gaz Métro-1,
Document 1 de la R3680-2008 :
Une augmentation de la marge
bénéficiaire brute de 15,5 M$, par
rapport aux prévisions du dossier
tarifaire 2008. Cette hausse est
répartie de la façon suivante entre
les différents services :
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Contre-interrogatoire
Me Guy Sarault
En ce qui a trait à la
distribution, il y a eu une
hausse des revenus
essentiellement attribuable à
l'augmentation, au service
interruptible, des ventes
régulières et à court terme,
partiellement réduite par la
baisse des consommations des
clients petit et moyen débits.
Donc, quand on parle de service interruptible, on
parle majoritairement de clients industriels,
n'est-ce pas?
R. Oui, tout à fait.
Q. [34] Donc, la consommation pour deux mille huit
(2008) de la clientèle industrielle a été plus
élevée que prévue pour cette année-là.
R. Oui.
Q. [35] Deuxièmement :
-
Par ailleurs, afin de combler la
hausse des volumes transportés,
des achats additionnels à Dawn
ont été contractés à des prix
inférieurs au tarif en vigueur de
TCPL, générant ainsi des
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Contre-interrogatoire
Me Guy Sarault
économies au niveau des coûts de
transport. Toujours dans le but
de combler la hausse des volumes
transportées, Gaz Métro a été en
mesure de réduire les cessions de
transport à perte.
Vous vous souvenez de cet élément-là?
R. Tout à fait, et ça dénote les efforts qui sont
réalisés par les gens aux approvisionnements
gaziers lorsqu'ils voient une opportunité pour
réduire les coûts. Ça ne tombe pas du ciel ces
choses-là là.
Q. [36] Non, non, non.
R. C'est beau.
Q. [37] Troisièmement :
-
Au niveau du service
d'équilibrage, la diminution des
coûts s'explique principalement
par la hausse des transactions
d'optimisation, laquelle a été
partiellement réduite par la
baisse des revenus d'équilibrage
associée au crédit octroyé aux
clients du service interruptible
en raison de leur consommation
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Contre-interrogatoire
Me Guy Sarault
supérieure à celle anticipée.
Vous vous souvenez de cet élément-là?
R. Oui, oui.
Q. [38] Oui. Donc, pour résumer l'année deux mille
huit (2008), est-ce qu'on pourrait dire que le
contexte économique était quand même assez
difficile à l'époque? Parce que vous aviez
anticipé, au début du dossier tarifaire, si je me
souviens bien, une baisse substantielle des
volumes?
R. Vous faites référence à l'année deux mille huit
(2008) ou à l'année deux mille neuf (2009)?
Q. [39] Deux mille sept (2007), deux mille huit
(2008).
R. Deux mille sept (2007), deux mille huit (2008).
Q. [40] Cette année-là qui s'est terminée...
R. Deux mille sept (2007), deux mille huit (2008) est
l'année qui est probablement la dernière année
complète de Gaz Métro dans la période avant la
crise. On avait commencé à voir une appréciation
des coûts de financement. Donc, le marché avait
anticipé une augmentation des coûts reliés aux
capitaux. Cependant, l'effet sur les volumes ne
s'était pas fait sentir aussi de manière aussi
importante qu'il l'a été pour les années deux mille
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Contre-interrogatoire
Me Guy Sarault
neuf (2009), donc on était... Compte tenu de la
date de fin d'année de Gaz Métro qui est un trente
(30) septembre, on ne peut pas dire que l'année
deux mille huit (2008) a été affectée par les
facteurs économiques ou la crise économique.
9 h 25
Q. [41] Est-ce qu'il n'est pas exact que lors de la
cause tarifaire 2007-2008, vous aviez néanmoins
anticipé des baisses de volume dans le secteur
industriel?
M. PIERRE DESPARS :
R. Oui, c'est possible.
Q. [42] Je reviens maintenant à la pièce Gaz Métro-7,
Document 13.2 dans le présent dossier, à l'année
deux mille neuf (2009) où on anticipe un taux de
rendement, incluant bonification de rendement, je
suis au niveau du temps autorisé de huit virgule
quatre-vingt-quatorze pour cent (8,94 %). Et au
chapitre du taux de rendement réalisé, on marque
« non disponible ». Cependant, sachant que cette
année financière va se terminer le trente (30)
septembre deux mille neuf (2009), donc dans un mois
maximum, et que nous sommes dans le onzième mois de
l'année, quelle serait votre meilleure prévision à
ce stade-ci au niveau du taux de rendement réalisé
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Contre-interrogatoire
Me Guy Sarault
par rapport au taux de rendement autorisé?
R. On est confiant à ce moment-ci, on est confiant de
réaliser le taux de rendement autorisé.
Contrairement à ce qui a été déposé dans la cause
lors, où on faisait une mise à jour d'un cinq sept,
la baisse soudaine où à l'intérieur duquel on
anticipait un déficit, donc de ne pas réaliser la
bonification de rendement et avoir un déficit, la
diminution importante du prix de la molécule au
cours des derniers mois et l'amélioration de la
position concurrentielle par rapport à très court
terme par rapport au mazout a permis aux gens des
ventes Grandes entreprises chez nous d'aller voir
les entreprises qui étaient encore en opération et
de contracter les ventes à très court terme, qui va
nous permettre cette année d'augmenter nos revenus,
améliorer nos marges brutes et de réaliser le
rendement autorisé.
Q. [43] Quand vous dites « de réaliser le rendement
autorisé », vous parlez du taux de rendement
incluant la bonification de rendement?
R. Incluant le point dix-huit pour cent (,18 %) qui
avait été anticipé en début d'année.
Q. [44] Et est-ce que vous anticipez aller au-delà de
ce rendement autorisé? Anticipez-vous un excédent
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Me Guy Sarault
si léger soit-il?
R. À ce moment-ci, on anticipe un excédent causé
justement par ces ventes qu'on a été en mesure de
réaliser à très court terme. Et, ça ici, on parle
de ventes qu'on réalise sur un horizon d'un mois et
qui est fonction de la position concurrentielle et
qui montre la volatilité associée à ces revenus-là
qu'on ne peut projeter en début d'année.
Q. [45] Et cette situation concurrentielle du gaz
naturel dont le prix a baissé de façon assez
remarquable au cours des derniers mois, est-ce que
vous anticipez qu'elle devrait se maintenir au
cours des prochaines semaines, des prochains mois
pour le début de l'année témoin deux mille neuf,
deux mille dix (2009-2010)?
R. Si on regarde les « forward price » pour la
molécule, les prix sont bas pour les prochains
mois. Mais quand on regarde sur un horizon d'un an,
deux ans, trois ans, quatre ans, on voit que les
prix sont beaucoup plus élevés que les prix court
terme. Donc, pour moi, aujourd'hui, c'est
extrêmement difficile de vous dire que les prix
sont bas et vont rester bas. Si je le savais, je
serais pas mal plus riche que, point. Donc, ça
serait de la spéculation de ma part. Ça fait qu'il
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Contre-interrogatoire
Me Guy Sarault
faut regarder vraiment les « forward » du marché
financier. Puis les « forward » indiquent que sur
un horizon de moyen..., un peu plus qu'un an, les
prix sont beaucoup plus élevés.
Q. [46] Mais on s'entend que, à tout le moins, les
premiers mois de l'année témoin deux mille neuf,
deux mille dix (2009-2010), cette situation
concurrentielle avantageuse va se maintenir?
R. En fait, ce que j'ai dit, c'est que si on regarde
le prochain mois et le mois suivant, oui. Mais estce que ça va se maintenir? Est-ce qu'il va y avoir
une flambée de prix comme on a déjà observée? Estce qu'il va y avoir d'autres ouragans? Est-ce qu'il
va y avoir des « spikes » de prix à l'hiver? Ça, je
n'ai aucune idée.
Q. [47] Si je vous demandais, Monsieur Despars, dans
quelle période vous situeriez la crise économique
que nous avons connue, qui a commencé avec une
crise financière majeure aux États-Unis et qui
s'est répandue dans les pays industrialisés,
incluant le Canada, mais peut-être avec un effet
moins marqué au Canada, seriez-vous d'accord si je
vous suggérais que ça a commencé, les effets
graves, au troisième quart de deux mille huit
(2008) et que ça a connu un sommet, un « peak »
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Contre-interrogatoire
Me Guy Sarault
comme on dit en anglais, à la fin de l'année deux
mille huit (2008), au mois de décembre deux mille
huit (2008), et que, avec l'arrivée de deux mille
neuf (2009), on a commencé à constater une
atténuation des effets de la crise, et on a connu
un creux des marchés boursiers au mois de mars deux
mille neuf (2009), mais que depuis on voit une
certaine remontée des marchés puis on commence à
anticiper une reprise économique notamment au
chapitre d'un retour à un produit intérieur brut
dans le positif?
R. Le premier élément de la réponse, je vous dirais
que par rapport à ce qu'on a observé dans les
marchés financiers, effectivement, on a
probablement un creux autour de la fin du mois de
mars deux mille neuf (2009). Il y a eu reprise. Il
y a eu amélioration au niveau des marchés
financiers. Et c'est ce que monsieur Engen a
présenté hier. Donc, les graphiques montraient
effectivement qu'il y avait eu diminution des coûts
de crédit. Mais de là à dire que la crise est
terminée et qu'il y a reprise, et que cette reprise
est soutenable dans le temps et sera soutenue, je
ne suis pas en mesure de répondre à cette question.
Q. [48] Mais on est d'accord tous les deux que l'année
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Contre-interrogatoire
Me Guy Sarault
témoin deux mille huit, deux mille neuf (2008-2009)
qui a commencé le premier (1er) octobre deux mille
huit (2008) et qui va se terminer le trente (30)
septembre deux mille neuf (2009), ça se trouve
vraiment être dans l'oeil de la tornade, comme on
dit, par rapport à l'année précédente ou à l'année
qui va suivre?
R. Pour nous, effectivement, l'année deux mille neuf
(2009), l'année témoin deux mille neuf (2009) a été
une année qui était, on peut dire, dans l'oeil de
la tornade, qui nous a amené à avoir des
diminutions de livraison dans tous les marchés, et
qui va... en fait, qui va être sauvée, on va le
dire comme ça, qui va être sauvée par le fait que,
dans les derniers mois de l'année, on a été en
mesure de réaliser des ventes court terme à cause
de l'amélioration de la position concurrentielle du
gaz naturel. N'eût été de cet élément-là, on aurait
été en situation de perte, de déficit sans
réalisation du rendement autorisé. Et donc, oui, il
y a un élément particulier qui permet cette année,
question contextuelle, de sauver l'année de Gaz
Métro.
Q. [49] C'est donc à dire pour résumer que, dans ce
qu'on a qualifié peut-être de pire crise économique
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Contre-interrogatoire
Me Guy Sarault
depuis la grande dépression, Gaz Métro encore une
fois est parvenue à réaliser, à même excéder
légèrement son rendement autorisé après
bonification, vous ne trouvez pas ça remarquable?
R. J'aimerais féliciter les gens chez nous qui se sont
retroussés les manches, qui ont réduit, qui ont
travaillé très fort pour réduire les coûts, qui ont
saisi toutes les opportunités pour aller maximiser
les ventes court terme.
9 h 35
Me GUY SARAULT :
Q. [50] Je regardais le « Consensus Forecast » qui a
été déposé avec le nouveau calcul de ce que
produirait la formule de calcul du taux de
rendement automatique avec le « Consensus
Forecast » du mois d'août deux mille neuf (2009).
Il s'agit de la pièce Gaz Métro-7, Document 11.9,
où vous nous dites que, en date du mois d'août, la
formule automatique produirait non pas le taux de
huit virgule dix-sept (8,17 %) qui état calculé au
moment du dépôt du dossier, mais bien plutôt un
taux de huit virgule soixante-quatre pour cent
(8,64 %). Et dans ce « Consensus Forecast », on
retrouve, à la page 3 de 5 de la pièce, les données
du Consensus Forecast pour le Canada au niveau du
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Contre-interrogatoire
Me Guy Sarault
produit intérieur brut.
Pour deux mille neuf (2009), on dit que
c'était une prévision, selon le Consensus, de moins
deux virgule trois pour cent (-2,3 %), donc une
récession, une croissance négative. Alors que pour
deux mille dix (2010), on anticipe une croissance
de deux virgule deux pour cent (2,2 %), ce qui
donne un différentiel de quatre virgule cinq pour
cent (4,5 %) par rapport à deux mille neuf (2009).
Dans ce contexte-là, seriez-vous d'accord
avec moi si je vous suggérais que pour l'année
témoin, deux mille neuf (2009), deux mille dix
(2010), on peut raisonnablement anticiper une
reprise économique au Canada, une reprise
d'activités industrielles qui pourrait influer sur
vos livraisons de gaz? Surtout sur le contexte
concurrentiel du gaz naturel, comme on a parlé
tantôt, s'avère favorable.
R. Si on regarde le Consensus Forecast, en fait, on
anticipe une croissance économique, notre dossier
tarifaire à la base - puis il faudrait que je
revoie les hypothèses - anticipait une croissance
économique. La croissance économique, de mémoire,
était inférieure à deux pour cent (2 %), mais
anticipait, cependant, une croissance économique.
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Contre-interrogatoire
Me Guy Sarault
Il faut bien comprendre ici que ce sont les
prévisions d'un groupe de banques que je ne mets
pas en cause. Je ne suis pas un économiste. Mais,
le point ici, c'est que notre dossier de base,
lorsqu'on a présenté notre requête tarifaire,
incluait une croissance économique et on verra ce
qui va se produire là.
Q. [51] Mais, toute chose étant égale par ailleurs,
sachant que l'année deux mille huit (2008), deux
mille neuf (2009) a été le pire, l'oeil de la
tornade, comme on a dit tantôt, on est d'accord
tous les deux que l'année deux mille neuf (2009),
deux mille dix (2010) ne peut qu'être mieux.
R. Et si elle est mieux, le premier dix-sept millions
de dollars (17 M$) va être remis entièrement à nos
clients. Et ça va nous faire plaisir de le faire.
Q. [52] Et ça va nous faire plaisir aussi de le
recevoir. Vous avez parlé beaucoup dans votre
preuve, évidemment, du besoin d'augmenter votre
taux de rendement pour rencontrer le coût plus
élevé du capital sur les marchés financiers depuis
quelques années. Ma question est la suivante : au
cours des deux, trois dernières années, est-ce que
Gaz Métro a connu des difficultés réelles
concrètes, avec exemple à l'appui, à lever du
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Contre-interrogatoire
Me Guy Sarault
capital pour financer des projets d'infrastructure
ou autres?
R. En fait, au cours des dernières années, on a été au
marché de la dette, on a été capable de lever de la
dette. Le coût a été supérieur à ce qu'on avait
observé dans le passé, principalement à l'automne
dernier, nettement supérieur. Au niveau de
l'équité, Gaz Métro a indiqué au marché depuis deux
ans qu'il devait aller au marché, en fait, même
depuis deux mille... c'est ça, depuis plus de deux
ans, aller au marché pour lever cent millions de
dollars (100 M$). Et depuis ce temps, on retarde
l'émission compte tenu de la valeur du titre et de
l'effet dilutif qu'elle aurait sur Gaz Métro, donc
ce qui crée ce qu'on appelle un « over hang » sur
la distribution. Et quand on pense aller au marché,
on peut aller au marché, il y a un coût à aller au
marché et on doit faire attention à ce coût-là.
Donc, oui, depuis deux ans, on retarde une émission
d'équité pour avoir un contexte plus favorable.
Q. [53] Oui. Ce n'est pas dû à une incapacité, c'est
une question d'aller chercher stratégiquement les
circonstances financières les plus favorables pour
lever des capitaux.
R. En fait, tout le monde a accès au marché des
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Contre-interrogatoire
Me Guy Sarault
capitaux, puis il y a un coût à aller au marché...
un coût à aller au marché des capitaux. De dire
qu'on ne peut pas aller au marché des capitaux,
c'est faire un faux débat sur le principe même d'un
coût raisonnable pour accéder au marché.
Q. [54] On a vu, en deux mille huit (2008), deux mille
neuf (2009), sur les marchés boursiers, des
histoires d'horreur, de stocks de compagnies qui
avaient bien performés pendant de nombreuses
années, notamment au niveau des institutions
financières, péricliter de façon grave. Pourriezvous nous parler de la performance réelle des
unités de Gaz Métro sur le marché boursier?
R. Gaz Métro a perdu - et je vais y aller de mémoire
là - le marché a perdu à peu près trente pour cent
(30 %). Gaz Métro a perdu à peu près la moitié de
ce que le marché a perdu dans le pire des
scénarios, ce qui reflète bien le fait qu'on a un
bêta de cinquante pour cent (50 %). Donc, Gaz Métro
étant un service public, un risque associé au
marché qui est moindre, donc on a perdu moins que
le marché et ce qui est reflété dans les analyses
lorsqu'on prépare les analyses de taux de
rendement.
Q. [55] Et est-ce qu'on pourrait dire la même chose de
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Contre-interrogatoire
Me Guy Sarault
la plupart des autres utilités publiques, comme on
dit en anglais, les entreprises monopolistiques de
distribution...
R. Je n'ai pas le détail...
Q. [56] ... d'énergie au Canada?
R. Je n'ai pas le détail de toutes les autres
entreprises de service public, mais si on présume
que, par définition, ils sont moins risqués que le
marché et qu'ils ont un bêta moindre que le marché,
leur performance devrait avoir moins souffert que
l'ensemble du marché.
Q. [57] O.K. Donc, quand je parle de Canadian
Utilities, Fortis et compagnies, ce serait dans les
mêmes zones?
R. Je ne le sais pas.
Q. [58] Vous ne le savez pas. I would now like to turn
to you, Dr. Carpenter, and most of my questions
will be on the basis of your written evidence filed
as Exhibit Gaz Métro 7, document 13.
And for
purposes, because it's not the first time we meet,
n'est ce pas?
I believe that you testified before
the Régie in May
well, in 2007, for
in the
context of the cost of capital issues. And at the
time there was another expert by the name of
Stéphane Chrétien, who had proposed a new
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Me Guy Sarault
methodology called the FAMA French approach, and
you have provided testimony on business risk, which
dealt with issues similar to those that are
addressed in your current testimony
A. That's correct.
Q. [59]
correct?
I have brought a copy of your testimony at
the time because I will refer to it as we go
along.
What exhibit number shall we give? It,
C 1 11. It's going to be filed as Exhibit C 1 11 in
the current proceeding.
EXHIBIT C 1 11:
A copy of Dr. Carpenter's prior
testimony.
Moi, j'en ai préparé quinze copies après
consultation avec la Régie et on m'avait dit que ça
devrait s'avérer suffisant.
Q. [60] And as we are in the process of filing
exhibits, I will also refer to the English version
of the Régie's decision
D-2007-116 of October 15th, 2007.
And the
Régie was kind enough to provide an English version
of the section dealing with rate of return, so this
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PANEL 2 - GM
Contre-interrogatoire
Me Guy Sarault
I suppose this will become
C 1 12 in the current proceeding.
EXHIBIT C 1 12:
The English version of the
Régie's decision D-2007-116 of
October 15th, 2007.
BY ME GUY SARAULT:
Q. [61] All right?
We have all of our tools?
At page 2 of your testimony in this case,
answer number 3, in lines 19 to 22, you state, and
I quote, "I've also been asked to provide evidence
on the comparability of business risk and allowed
returns on capital for Canadian and U.S. local
distribution companies, and to compare Gaz Métro's
business risk with the business risk of the LDCs
that make up Dr. Vilbert's strictly U.S. LDC
sample."
Can you tell us
and I think I ran in
these, in a similar difficulty 2 years ago, in
answer number 3 to your 2007 testimony, where you
basically stated the same thing about being asked
to make a comparison between the business risk and
allowed returns on capital with Canadian LDCs.
Where in your testimony exactly can we find
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Contre-interrogatoire
Me Guy Sarault
that comparison with Canadian LDCs as opposed to
U.S. LDCs?
Quite frankly, I read through it and I
haven't found it.
MR. CARPENTER:
A. Well, I think what I'm referring to there is the
evidence that I provided on the comparability of
the regulatory régimes between Canada and the U.S.
that would factor into your view as to the
relevance of the LDC sample that Dr. Vilbert is
using.
The problem is, as you mentioned yesterday,
we do not have a pure play sample of Canadian LDCs
that can be relied on.
Q. [62] So what you're telling us, in essence,
there's
you have not identified the local
distribution company in Canada to which Gaz Métro's
return or business risk could be compared to?
A. That is publicly traded as a pure play utility to
the same extent as we have for the U.S. LDCs.
Q. [63] So, if I would mention LDCs such as, for
example, Enbridge and Union in Ontario, Centre Gas,
Manitoba, or Carison in BC, you're telling us today
that those would not be adequate comparisons?
A. Yes. In the sense that their publicly traded stock
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Contre-interrogatoire
Me Guy Sarault
is not pure play local distribution company
business.
Enbridge is, for example, heavily
weighted towards oil pipeline operations gas
pipeline operations, that's the link of its natural
gas distribution business.
Q. [64] And are you telling us that by digging a
little more you would not have been able to obtain
information, either directly from those companies
or from their regulators, which would have enabled
you to isolate the financial results associated
with their monopolistic distribution activities as
opposed to the balance of their activities?
A. Well, you can find information about the
subsidiaries that are distribution companies, but
you will not find market valuation information
which would be necessary to perform the tests such
as Dr. Vilbert performs under the capitalizing
asset pricing model.
Q. [65] All right.
I will now go to page 3 of your testimony,
answer to question 4, you say, "I evaluate changes
in Gaz Métro's business risk since 1999 and 2004."
Isn't this exactly what you did two years
ago, as well
A. Not exactly, because we have 2 more years of
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information, so this is updated to reflect the
additional information.
I would say, as I said yesterday in my
opening presentation that, in my view,
understanding and
what's happened to business
risk since the formula is in place is important for
the Régie in making its determination as to whether
the formula of approach needs to be replaced.
So
that's what, when I referred to a de novo review,
business risk, that's what I'm talking about.
Just like capital markets change, gas
markets and business risk changes, and it's
important to evaluate those changes over the entire
period the formula has been in use.
Q. [66] H'mm, h'mm.
Do you remember, then, following your
evidence, and that of Dr. Chrétien, that in 2007,
the Régie, in its decision, granted an upward
adjustment of 25 to 35 basis points in Gaz Métro's
risk premium, versus the reference distributor, to
take into account its slightly higher business
risk, based upon the Régie's assessment of your
evidence?
A. Yes, I recall.
Q. [67] You remember that.
That was at item 4.1.6 of
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the section of the decision dealing with rate of
return.
And you find that in the English version
filed as Exhibit C 1 12 in this case.
Knowing that the Régie has already taken
into account, in that decision has taken into
account the evolution in Gaz Métro's business risk
from 1999 to the date of the decision, what is the
relevant
the relevance, excuse me, rather, in
the context of this testimony to go back once again
to 1999
A. Well, as I said, I think the relevance, becasuse as
I understand this adjustment that was made before,
it was on top of the reference distributor in the
context of an adjustment to the formula.
The formula is still in place, as I
understand it. The relevance of this testimony is
for the Régie to have a full appreciation of how
business risk has evolved over the tenure of the
formula such that if it replaces the formula, it
has evidence on which it can base a proper
adjustment for business risk.
It's the same purpose as existed before, if
the Régie decides to deviate from the formula
approach, in my opinion the Régie still needs to
make an adjustment for business risk just as it did
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before.
Q. [68] We will read together exactly what the Régie
wrote, and I believe it does make reference to the
evolution of the risk starting in 1999, and I quote
from Section 4.1.6 of the decision: "The Régie
finds the company's risk has increased since 1999
and is higher than that of a reference company," so
it was both.
"Based on the evidence in the record, the
Régie has determined that the higher risk warrants
an upward adjustment in comparison with the risk fo
premium of a reference distributor in the amount of
25 to 35 basis points."
Assuming that that decision was sound and
reasonable, and was a proper assessment of the
evolution in Gaz Métro's business risk from 1999 to
the date of the decision, why not, for purposes of
your testimony in this case, use 2007 as the
starting point of your analysis?
A. First of all, in business risk evaluations such as
this, which are inherently subjective
Q. [69] We both agree with that.
A.
qualitative, making these kinds of year to year
judgements about how the world has changed is very
difficult, particularly when we're talking about
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volatility.
And as you just discussed with Mr. Despars
a moment ago, volatility in gas prices over the
last 9 months has resulted in a situation now in
which gas is, the price of gas commodity is very
low, there are some very unusual circumstances
which explain this kind of boom/bust relationship.
What I'm suggesting here is that the Régie
take into account in the same way that it did the
last time that Gaz Métro's business risk is higher
than a reference distributor, and to the extent it
decides to deviate from the formula, whether it
uses ATWACC or some other methodology, will still
need to make an adjustment upward from the sample
companies in which that assessment is based, and
the change from 1999 is one indicated earlier.
Q. [70] But you have not attempted, in the context of
your evidence in this proceeding, to respect this
quantification that was made in 2007 and to bring
it up to date in 2009, you haven't tried that?
A. Well, I say within the precision of the kind of
analysis you can do in business risk, that would be
very difficult.
Q. [71] Okay.
A. And it's not necessary, in my opinion.
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Q. [72] I will turn to page 6, answer number 7. You
talk about the determinants of business risk and
the standards to establish a fair return, I read
that answer, and I would suggest to you that it is
identical, word for word, to answer number 6, lines
5 to 16 of your 2007 testimony, including the foot
notes number 4, 5 and 6, is that correct?
A. That's correct.
Q. [73] Thank you.
A. To a certain extent the evidence I'm providing
there is an up date to prior evidence. The
principles haven't changed, so I've repeated the
principles.
Q. [74] And as to lines 12 to 17, they are identical
to your answer number 6 of the 2007 testimony,
except that the reference to Dr. Chrétien's FAMA
French approach is now replaced by a reference to
Dr. Kolbe and Vilbert's methodology, is that
correct?
A. That's correct, yes.
Q. [75] You come to the same conclusion; you say at
lines 12 to 14, "Both business and financial risks
are accounted for in the methodology employed by
doctors Kolbe and Vilbert to estimate the cost of
capital for Gaz Métro." You said the same thing
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about the FAMA French approach two years ago.
Do you prefer one or the other? I mean, why
do we have the exact same conclusion about two
different methodologies
A. Well, a couple of things. First of all, the FAMA
French approach that Dr. Chrétien employed is an
alternative to the capital asset pricing model
approach that Dr. Vilbert is using.
It's a different way of estimating the cost
of equity. And, as such, it accounts for business
and financial risks if the financial leverage is
properly taken into account.
Dr. Kolbe and Dr. Vilbert used the ATWACC
methodology to appropriately account for financial
leverage.
As I recall, Dr. Chrétien also made a
leverage adjustment, though he just didn't do it in
the context of ATWACC.
Q. [76] H'mm, h'mm.
I'd like to turn now to your
answer number 9, at page 7, which is identical,
word for word, to your answer number 18 of your
2007 testimony.
You say, as outline 12, and I quote, "On
the one hand, rate regulation reduces a company's
business risk if it provides equity investors some
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assurance that a fair return on, and of capital,
will be earned over the lifetime of the firm's
assets."
Based upon the record of Gaz Métro, as
witnessed in the evidence I've covered with Mr.
Despars, since 1990, do you feel that based on that
record that investors may have some assurance that
the fair return authorized by the Régie will
actually be earned by the company?
It's a 20 year
record.
A. Well
Q. [77] Quite impressive, I may add.
A. This topic is raised in every cost of capital case
that I've been involved in, which is the
question: What is the relevance of the accounting
returns that a company has earned historically to
the business risk going forward of the company?
And I would suggest to you, and I suggested
in the past, that the accounting returns,
year to year, are a very poor measure of business
risk.
They do not reflect market valuation in the
same way that an equity investor will be
considering on a forward looking basis, whether his
investment in companies like Gaz Métro would be
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subject to future risk of under performance or
under recovery.
Having said that, it is clear that on an
accounting basis, and given the incentive
mechanisms structure, Gaz Métro has been able to
earn its authorized returns during that period.
That doesn't mean, again, that that
authorized return has necessarily been a fair
return, it just means that Gaz Métro has been able
to perform year to year on an accounting basis to
earn its authorized returns.
It's the kind of evidence that I've put
forward that I believe tells me more about what a
forward looking business risk is to an equity
investor who's concerned about the future market
performance of the stock of the company.
Q. [78] When
in your presentation
yesterday. Exhibit Gaz Métro 7, document 24, also
quoted as Régie's Exhibit B 61, you defined
business risk in two, with two sub definitions, if
I may. You say, and I quote, "For equity investor,
it is the uncertainty, uncertainty that his or her
full return on and of invested capital will be
achieved over the lifetime of the investment."
Looking at the record I just told you
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about, just at that, don't you think the investor
would find some form of re assurance that under the
Québec regulatory environment, Gaz Métro has been
able to achieve year after year, after year, its
authorized return, and even exceed it, thanks to
the incentive mechanism? Isn't that so? For over 20
years, we're not talking five years here.
A. And we're not also talking about 20 years in the
same economic conditions.
As I discussed, the last
10 years were a lot different than the first 10
years of that record.
Now, I will admit that the accounting
returns provide some indication that utilities are
lower risk than other business entities, and an
equity investor will take that into account.
Q. [79] He would.
A. And, indeed, the beta of
on utilities is
typically much lower than the beta of an
unregulated company.
On having said that, you still have to
evaluate on a forward looking basis whether or not
Gaz Métro is positioned similar to other utilities
or whether it's a more risky utility when you
evaluate its cost of capital, and that's what I'm
doing, and I'm looking on a forward looking basis.
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Again, historical accounting returns aren't
going to tell you much about forward looking risk,
particularly when the market environment is
changing.
Q. [80] Well, on a forward looking basis
I'm still
talking about the regulatory environment
isn't
it correct that investors may anticipate that, all
else being equal, Gaz Métro will continue to come
back to the Régie every year for a rate application
during which all the parameters of the financial
performance of the company will be analyzed and
adjusted, if need be, to prevent disastrous
situations such as has been the case over the last
20 years?
Isn't that some form of reassurance on
the forward looking basis?
A. Again, I would agree that there is some assurance,
reassurance because the company's regulated that
its risk will be lower than an unregulated
enterprise.
But I think equity investors would be
prudent to consider whether or not there are future
uncertainties with which the regulator can't fully
protect the utility, and we've seen examples of
that historically.
It can't be predicted necessarily but there
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are uncertainties which the regulator can
may
not always be able to protect the utility, and an
equity investor would be prudent to evaluate that.
Q. [81] Well, would you agree with me that this would
be a serious uncertainty, for example, if Gaz Métro
came to the Régie every five years for reassessment
of its rates, then there would be a period during
which, you know, it would have to manage itself, by
itself, all of those uncertainties.
But in Québec, isn't it true and it's been
true for the last 20 years, and in the foreseeable
future it's going to continue to be like that,
isn't it a reassurance for the investor that those
uncertainties can and will be managed on a yearly
basis by the Régie?
A. There are a couple of questions there, I'm not sure
exactly which one you want me to answer, but
Q. [82] The frequency of coming back every year for
the yearly rate change where all of the financial
parameters, the company's performance, its risk
exposure, everything is analyzed, and the
regulatory environment can be adjusted through
deferral accounts, adjustments to the incentive
mechanism, what have you, rates, the volumes
decline, you can adjust rates upward, the
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individual rates can be adjusted, all of that can
be done if you do it on a yearly basis, and if the
investor knows that the system calls for that
yearly review, isn't that a huge reassurance?
A. The yearly review does smooth year to year
performance.
Q. [83] So you agree?
A. But relative to a five year review, if you think
about the five year review typically that would
occur in the United States, during that period,
U.S. utilities tend to over perform because,
essentially, they have an option to come back.
If their costs go up and they need to go
back to the regulator, they can do that.
If their costs go down, they don't need to
go back to the regulator to get their rates
adjusted down, and they would profit in the
interim.
Actually, that scheme, I think, is probably
more favourable from an investor point of view than
the year to year peer cost of service approach.
Q. [84] Doesn't this contradict your statements about
regulatory lag in the United States being an
inconvenience?
A. No. In fact, I brought this up yesterday.
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Q. [85] Yes, you did.
A. One of the effects of regulatory lag, because it
has this option feature, is actually to increase
the expected return, earned return for utilities in
the United States that operate under that kind of
an incentive scheme, and you see that in the beta.
What I was saying about business risk
yesterday is that, in my opinion, the difference
between regulatory lag and year to year review
under a performance mechanisms doesn't
I don't
attach great weight to that when considering
whether or not a particular utility is relatively
more risky than another utility.
Q. [86] I would go to page 9, answer number 12.
Question was, "How were changes in business risk
under a formula approach to return on equity
traditionally accounted for by Canadian
regulators?"
Answer
by the way, this answer is
identical to your answer number 8 of your 2007
testimony, which was in response to the same
question.
Answer, and I quote, "Ever since various
Canadian regulators began to employ formulas for
the determination of allowed ROEs, the practice has
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been to adjust the deemed equity thickness for
perceived changes in business risk. Higher business
risk would imply that greater equity thickness
would be required."
In 2007, you add a second sentence, after
what I just read. Answer, number 8 at page 5 of
your 2007 testimony as of line 22, and I quote,
"This procedure was fine as long as the resulting
total return on assets continued to be fair and
reasonable."
But because the evaluation of business risk
is largely subjective, this procedure is not a
substitute for the more rigorous determination as
to whether the return on equity produced by the
formula in combination with the deemed equity
thickness is fair and reasonable. This
determination requires the kind of analysis
performed by Professor Chrétien in his evidence."
Why did you remove that sentence in your
answer number 12 to the same question in this
proceeding?
A. I actually didn't remove it.
You'll notice it in
the answer to the next question, question 13.
Q. [87] Okay.
A. What I did was, I inserted a question to clarify,
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perhaps make the exposition a bit better of what I
was referring to previously in answer 8.
Q. [88] Okay. So the
A. You will see it in answer 13, it's there.
Q. [89] Okay.
A. Again, these principles hadn't changed, so,
frankly, it would be surprising if I would consider
changing my testimony with respect to these issues.
Q. [90] But one thing that you do not mention here is
that contrary to this regular practise of adjusting
the capital structure or equity thickness, if you
prefer, to account in changes, to account changes
in business risk, what the Régie did in 2007 was to
grant an upward adjustment in the risk premium, it
did not touch the capital structure, correct?
A. That's correct.
Q. [91] And would you agree with me that in 2007, as
is still the case today, Gaz Métro's equity
thickness and its capital structure in relative
terms is higher to its equivalence in Canada, and I
mention here, Union, Enbridge as proxies in
Ontario, for example, who are deemed to have a
lower business risk for a number of reasons but who
have a lower equity thickness, higher financial
risk?
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A. Well, my recollection of Enbridge and Union is that
they're roughly around 36 percent sales.
Q. [92] 35.
A. 35 or 36. So they're, they're in the ball park of
being 38.6.
Q. [93] But they're lower?
A. Slightly lower.
Q. [94] Is it your opinion that the upward risk being
an adjustment authorized by the Régie in 2007 did
not produce a reasonable answer to the increase in
Gaz Métro's risk between 1999 and 2007?
A. Well, as I recall, in my prior testimony, I had
recommended a 50 basis point upward adjustment for
business risk. I think that's at the upper end of
Dr. Kolbe's recommendation here, he's using
something less.
But having said that, I acknowledge that
the Régie did recognize that Gaz Métro was in a
higher business risk position than the bench mark
distributors, and what I'm recommending here is
that that philosophy be carried forward if the
Régie decides to change from the formula approach
to a return.
Q. [95] Now, turning to page 10, answer 14, lines 9
this is line 17 to, 22 and I quote, "The market
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environment in which gas utilities operate in North
America has changed significantly since 1999,
reflecting a greater uncertainty in the supply of
the gas commodity, a greater uncertainty in the
extent and timing of growth in demand
This uncertainty is partly reflecting in
significantly higher gas commodity price levels and
volatility.
These changes have significant
implications for the need for an investment risk of
the gas, the utility infrastructure."
Isn't it correct that this is identical to
answer 12, lines 9 to 12 of your 2007 testimony?
A. Yes. Again, that observation, that principle
wouldn't have changed in the two, in the subsequent
two years.
Q. [96] Isn't it correct that in a decision, D 2007
116, that this factor, the volatility was
specifically taken into account by the Régie?
A. Yes. And I recommended it continue to be taken in.
Q. [97] And I quote, "The Régie also notes the
increased volatility of supply prices, which,
however, is partially offset by the use of
by products under a strategy of which the outlines
were previously approved by the regulators."
So this was taken into account.
So this
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testimony here, in terms of this issue in
particular, doesn't bring anything new to what was
already considered by the Régie two years ago,
correct?
A. Well, it's the same evidence, and recommending that
the Régie continue to take it into account going
forward.
Q. [98] At page 11 you talk, and you have a figure for
that of declining energy intensity of the Canadian
and Québec economies, and as of lines 5 to 13 at
page 11 and lines 1 to 3 of the following page 12,
you say, "These changes have been recognized in
Canada by the NEB in its summary of the feedback it
received in 2006 during its energy future projects
consultation sessions."
In this report on these sessions under "key
messages," the NEB writes "The new energy paradigm"
and so on.
This is, again, identical, word for word to
your answer number 12, page 9, lines 3 to 14 of
your 2007 testimony.
So, once again, for this issue, in
particular, there is actually nothing new that's
brought by your current testimony over and above
what was already considered by the Régie two years
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ago?
A. And, as I said, it's important to continue to
consider when evaluating the performance of the
formula as to whether these conditions have
changed.
Q. [99] Page 12, answer 15, "What is the evidence for
changes in natural gas commodity prices and price
volatility since 1999? "
Again, this answer number 15, is identical,
word for word, to answer number 13 of your 2007
testimony, including the tables at figure 2, with
the exception of the addition of the latest beta
for the year 2008 and 2009 which, by the way, show
a substantial reduction in future prices.
Figure
number 2, page 13.
A. Yes.
Q. [100] But this is identical. I mean, the conclusion
is exactly the same. All you have, perhaps, is the
latest beta which would show that the situation has
actually improved, that's all it shows, apart from
two years ago.
A. Sorry, is there a question?
Q. [101] Yes. Well, I'm suggesting to you that once
again this testimony here, pages 12 and 13, doesn't
add anything whatsoever that is new compared to
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what was considered 2 years ago, with the exception
of the latest beta which would, on the contrary,
show an improvement in the situation?
A. Well, the table has been updated. I would not
suggest that it shows an improvement in the
situation. If anything, it shows the volatility of
the situation.
And as I was discussing earlier, we've had
this boom and bust cycle going on with gas
commodity prices; I don't see any reason to believe
that that boom and bust cycle may not continue.
What's been happening is, we had a
at
the height of the financial crisis and the crash in
gas demand that coincided simultaneously with a
boom in production, particularly in the shale gas
in the United States, that produced an oversupply
of the commodity; every storage field in North
America is now pretty much full, and going into the
winter there's no place to put the gas.
The price
is declining rather rapidly.
But that sit
but drilling is now being
cut back. We could be in another situation 6, 12
months from now in which shortages start to
reappear and you start to see the price hiking
again.
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So I think the story from these figures is,
in part, increased level of prices and, in part,
and a significant part is the volatility of these
presses that's affecting the uncertainty in the
market.
Q. [102] Well, page 14, once again, at figure 3, you
show the NYMEX, Natural Gas, 36 months, average
future prices, which, by the way, is identical to
figure number 5 of your 2007 testimony, with the
exception of the latest beta, which, once again,
shows that the 36 months, three years ahead of us,
average future prices had declined significantly
over the last year, or so?
A. Actually, it would be interesting to look at the
comparison between those figures because in 2007 we
didn't, we didn't see the spike till
we experienced at the
to $12 that
beginning of 2008 from which
the decline you're talking about occurred.
So the 36 month forward prices are still in
the 5 to 6 dollar range which, again, is
significantly higher.
Q. [103] At the time you wrote?
A. At the time we wrote. Even today.
Q. [104] It's lower?
A. It's lower but not in the range of 2 to 3 dollars
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that we saw prior to 1999, prior to 2001.
Q. [105] What is your assessment of this situation as
of today for 36 month average future prices?
A. I haven't looked at today's strip but, again, my
longer run assessment is that this volatility is
going to continue for the reasons that I discussed.
We seem to be in a boom/bust cycle with respect to
the interactions of supply and demand for the
commodity.
Q. [106] But you would agree with me if I were to
suggest to you that vis à vis what's shown on your
figure 3, those future prices have continued to
decline between the time you wrote your testimony
and today?
A. Well, first they spiked and then they declined.
Q. [107] H'mm, h'mm. But they're continuing to
decline, that's what I'm suggesting to you?
A. They have declined since I wrote the testimony.
Q. [108] Thank you.
A. But, again, they are still higher than they were in
the prior era?
Q. [109] Knowing that these are 36 month future
prices, isn't it correct that companies like Gaz
Métro may use financial derivatives to stabilize
their commodity costs over the future and take
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advantage of this decline in future prices?
A. Companies like Gaz Métro can hedge.
Q. [110] They can hedge?
A. They can hedge.
Q. [111] So they could take advantage of the
situation, correct?
A. Well, when you say, "take advantage"
Q. [112] Yes.
A.
they could take a position. Whether or not after
the fact it ended up being a wise move or not would
depend on the movement of the prices. But parties
can hedge, companies like Gaz Métro can hedge.
Q. [113] But it's not a move that you would make when
its in a peak, right?
A. Well, in this market it's very difficult to know
what a peak is. After the fact we can look and say,
"Well, it would have been great to hedge during
that period."
Q. [114] H'mm, h'mm.
A. But looking forward, it's more difficult.
If I could predict that, I would be a rich
man.
Q. [115] Looking at your chart, we both agree that you
know there's been a significant decline, you
know. They say, "Buy on bad news and sell on good
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news," you agree with that?
A. As a philosophy. My portfolio, stock portfolio has
never reflected that for some reason.
Q. [116] Page 17 now.
LE PRÉSIDENT :
Est-ce que ça serait un bon temps pour prendre la
pause?
Me GUY SARAULT :
Oui, certainement.
LE PRÉSIDENT :
Donc, nous allons prendre une pause de vingt (20)
minutes et revenir à moins quart.
PAUSE
LE PRÉSIDENT :
Reprise de l'audience. Maître Sarault.
ME GUY SARAULT:
Thank you, Mr. Chairman, board members.
Q. [117] When we left off, Dr. Carpenter, I was going
to page 17 of your evidence in this case, answer
number 19, which I read carefully. it is identical
to answer 20 of your 2007 testimony with the
exception of the adjustments to the numbers that
you have introduced in order to reflect the 2009
forecast, but my question is as follows: Is
there
the wording of the answer is the same, so
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can I take for granted that your overall
conclusions are identical, that there is no change
vis à vis two years ago?
A. Well, this question and answer describes my
understanding of Gaz Métro's distribution business,
so it updates the figures, that's what it does.
There's no conclusions in this
question/answer, it's an updated review.
Q. [118] Don't you see a slight improvement in the
fact that commercial customers make up 34 percent
of customers vis à vis 28 percent two years ago?
Would that be on the positive side or on the
negative side?
A. Well, I think you have to look at the overall make
up
Q. [119] Yes?
A.
of the customers before you render a conclusion
about what's positive or negative.
These are percentages, so
Q. [120] Yes?
A.
the percentage of commercial customer throughput
could go up in part because the percentage of
industrial throughput went down.
Q. [121] Okay. Well, if we look at throughput as well
for commercial customers, it's now 34 percent
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versus 28 percent in terms of number of customers,
and 44 percent vis à vis 33 percent for throughput
by commercial customers, therefore 11 more percent;
is that a positive sign or a negative sign?
A. Again, I don't think you can judge this without
looking at the entire customer mix, so
Q. [122] Okay.
A.
percentage of throughput made up of commercial
throughput is up, but that's in part because the
percentage of throughput devoted to industrial
customers is down.
Q. [123] By four percent?
A. Four percent on a very large volume.
Q. [124] H'mm, h'mm.
Very large revenues?
A. Large revenues, as well.
Q. [125] Let's talk about revenues from the industrial
sector. You talk a lot about volumes but virtually
nowhere in your evidence do we see a reference to
the revenues associated with volume fluctuations,
plus or minus. Are you aware of the fact that a lot
of industrial customers do sign long term contracts
with a sizeable demand charge?
A. I'm aware that all Gaz Métro industrial customers
sign 3 to 5 year deals.
Q. [126] Yes?
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A. They're staggered, so every year some are reaching
the end of their contracts.
Q. [127] H'mm, h'mm.
A. And I'm aware that there are demand charges
associated with them.
Q. [128] So, if we take, for example, customer A,
industrial customer A, who has a five year
contract, and who no longer needs as much gas in
year two, isn't it correct that through the demand
charge, the revenues from that customer will be
secured for at least that portion for four more
years?
A. Yes. As long as that customer is still around and
able to perform under his contract, and that some
other factor doesn't affect
Q. [129] All else being equal.
A. Rarely is all else equal, but all else equal in
your statement.
Q. [130] That is the assumption of my question, all
else being equal, isn't it correct that the
revenues from that user are secured?
A. They're contractually secured, yes.
Q. [131] And would you agree with me that in terms of,
through influence on business risk, it is more
correct to look at revenue fluctuations rather than
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just volume fluctuations, which per se may not be
indicative of the true impact on revenues
A. Well
Q. [132]
all depending on the lengths of the
contracts, the demand charge, the rate structures
and so forth?
A. I think we need to be clear about this because gas
distribution companies are not like gas pipelines,
where pipeline capacity is underpinned by 15 to
20 year contracts.
So what we're talking about here is how
stable is the earning stream, the utility earning
stream that matters from a business risk point of
view, how stable is the earning stream
year to year?
Now, when I've done these comparisons, I've
considered, and in looking at the USL
distributor
as a bench mark, I've looked to see whether or not
their revenues have been encoupled from their
volumes.
One of the things I talked about yesterday
was that pretty much all of the LDCs in North
America have been experiencing this decline in
volume per customer situation, and the way the
regulators have been dealing with that have been
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through the encoupling mechanisms which attempt to
just separate recovery of costs of revenues from
volumes to some extent.
To the extent the utility has got more of
its revenues associated with take or pay
commitments or fixed charges, the less of a need
for encoupling mechanism, right?
So I've viewed this issue as to whether
there is fixed costs recovery, whether there are
take or pay demand charges, all associated with
whether or not the regulatory scheme is attempting
to mitigate the risk of volume declines by the
coupling rates from volumes.
That's been happening to all of the bench
marked utilities. And to the extent that Gas Met
has some protection on its industrial side for
short periods of time with long term contracts, it
would apply to Gas Met, as well.
But just to finish the point, I would also
point out that it's not 100 percent protection. As
I understand it, the demand charges are roughly 80
percent under those contracts.
M. PIERRE DESPARS :
R. Et en fait, ça dépend de l'obligation minimale
annuelle qui est enregistrée aux contrats.
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Dr. PAUL R. CARPENTER :
A.
Of course.
M. PIERRE DEPARS :
R. Et donc, en fait, le point est important. Ce sont
des contrats qui ont été signés. De la façon que ça
fonctionne, c'est des contrats de cinq ans. Et à la
fin du terme, à la fin de la troisième année, le
client a l'opportunité de rallonger une année de
contrat. Donc, effectivement, on a une période en
vertu des obligations minimales qui donnent un
escompte au client, un escompte qui est
significatif. On peut... Il y a une diminution de
la volatilité des revenus à court terme. Il reste
cependant, un, est-ce que le client est en
opération? Est-ce qu'il est solvable? Et,
troisièmement, après cette période contractuellelà, et on va le voir très bientôt, est-ce que ces
clients-là vont resigner pour une année
additionnelle ou vont resigner pour du cinq ans? Il
n'y a rien de moins sûr que ça à ce moment-ci.
Q. [133] But my question was, I would say,
simplistic. All I was asking is whether revenues
are a better indicator of risk than just volumes?
Dr. CARPENTER:
A. I think, I think they're both important but they're
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not the whole story. Its earnings that
Q. [134] Earnings are in dollars?
A. Earnings and
Q. [135] Earnings are in dollars, not cubic metres,
correct?
M. PIERRE DESPARS :
R. Oui, mais s'il n'y a pas de mètre cube, il n'y a
pas de revenu à long terme.
Q. [136] But we agree that earnings are in dollars,
and that fluctuations in certain volumes, all
depending on the contractual arrangements, the rate
structure, minimum annual obligation, demand
charge, all of that, may well be that on a
short term basis, three years, two years, those
revenues are largely secured, that's the answer to
my question?
Dr. CARPENTER:
A. Yes. And with respect to short term variability,
it's not just revenues that matter, right? Costs
matter as well.
Q. [137] H'mm, h'mm.
A. That's why I've said earnings.
But from a long term fundamental point of
view, I think volumes are hugely important for a
company whose assets are sunk, as I was talking
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about earlier.
Q. [138] H'mm, h'mm?
A. Because that's the base on which you will recover
your costs in the future. So if there's some
uncertainty as to the utilization of those sunk
assets, that's a huge signal as to your forward
looking business risk.
Q. [139] In the particular case of Gaz Métro, okay, so
volume fluctuations, do we agree that there are at
least two protections? A, there is the new volume
fluctuation protection integrated in the latest
modification, the incentive mechanism back in
2007? A, for fluctu
which protects partially for
fluctuations in small to medium sized client
volumes?
And B, the ultimate protection, which can
be addressed on a yearly basis at the Régie, if
volumes in a given category, or revenues in a given
category decline, it can increase unit rates to
cover the revenue deficiency, isn't that correct
A. That's correct.
This question presumes that in the
future, in the long run, you will always be able to
collect those revenues from customers and that
there won't be constraints on them, whether they're
regulatory constraints, market constraints,
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competitive constraints, that's what long run risk
is all about.
So your question presumes that the
regulator can always provide, by virtue of a rate
increase, protection for the utility.
And, again, I don't think it would be
prudent for equity investors to assume that that's
always going to be the case. And, in fact, they
don't, because we observe utility betas to be
something greater than zero, right?
If equity investors assume that this was a
riskless enterprise, which your question implies,
beta's would be zero.
Q. [140] But we both agree that in Gaz Métro's case,
if we look at their record over the last 20 years,
despite declines in industrial volumes, for
example, in the recent years, the company has
managed to achieve and even exceed its authorized
rate of return, so somewhere, somehow, there must
have been some mechanism to offset that phenomenon,
we both agree?
A. I agree that the company has earned its authorized
returns historically.
But, again, the question presumes that that
authorized return is adequate to compensate equity
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investors for the risk that they're bearing, and
our evidence is that that is not the case.
So merely to say that you earned returns
greater than an inadequate amount is not
necessarily comfort to equity investors.
It may be comfort to debt investor because,
then you can recover your debt obligations,
but not
but the equity market, however, comes
from the market, not from accounting based returns.
Q. [141] Coming back to this answer, that's how our
discussion started, we were at answer 19, all I'm
suggesting to you is that overall in the customer
mix, as we like to call it, that the overall mix
vis à vis two years ago is slightly improved in
that we have more residential users, more
commercial users and less industrial users?
There is, in relative terms, relative
terms, less reliance than there was on industrial
users, both in terms of number or customers and
throughput?
A. Yes. Or another way of putting that is, some of the
risk associated with the effects of economic
contraction by industrial demand has been visited
on Gaz Métro in the last two years.
That does not
mean that its over or that that risk doesn't
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continue to exist to the future.
Q. [142] Assuming, for purposes of my question, that
the consensus forecast for 2010 that I was
discussing with Mr. Despars earlier today is
correct, that instead of having a negative gross
domestic growth, you will have a positive GDP, all
else being equal, should that help to stimulate
consumption by industrial users?
A. Well, of course it depends on the sector in which
that growth is occurring.
So, if the growth is
occurring everywhere but in pulp and paper, I'm not
sure that's going to help Gaz Métro's industrial
load.
Q. [143] What about other industries, smelters,
whatever?
I mean
I mean, the GDP has to be
somewhere, and industries are a big contribution,
shouldn't they?
A. Well, as I said, it depends on the, on what the
composition of the GDP growth is.
So just to say that we have a consensus
forecast, there may be some growth but that's good
for Gaz Met, I don't think that's
that tells you
enough.
Q. [144] Are you telling me that its possible to go
from minus 2 in GDP to plus 2 in GDP without an
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improvement in industrial production, is that your
testimony?
A. I think it depends heavily on, on the industrial
sector, right?
It's manufacturing.
My understanding is that a lot of the
remaining load associated with Gaz Met's industrial
customers is in the pulp and paper area.
If
there's no recovery in housing, you know, that
could be a problem for the lumber industry.
I
think you need to be more specific.
Q. [145] All right.
Duly noted.
I'm going to page 18, lines 15 to 17.
I
think you deal with, here with certain
modifications brought the incentive mechanism in
2007, correct?
A. Yes.
Q. [146] Globally speaking, do you feel that the
adjustments that were introduced, including, for
example, the volume fluctuation, exogenous factor,
do you think that those are better protection or
lesser protection than the preceding mechanism?
A. I think directionlly they are increased protection,
again, in terms of the short term volume
fluctuation issue.
Q. [147] At page 19, lines 15 and 16, you state, and I
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quote, "If the revenue cap is less than Gaz Métro's
projected cost of service, then rates are set to
recover Gaz Métro's projected cost of service."
We both agree that this has been a feature
of Gaz Métro's incentive mechanism all along since
the beginning in the year 2000?
A. I believe it is true.
Q. [148] And would you agree with me that it is this
feature in particular that leads observers, such as
credit notation agencies, to qualify Gaz Métro's
particular incentive mechanism as being not a true
pure revenue cap but rather a hybrid between
traditional cost of service and the revenue cap?
A. Well, I think I actually may have used those terms
at some point, that business is not a pure CPI
minus X type scheme.
Q. [149] Correct.
A. But then few of them are, you know.
Many of them
that you've seen, whether it's Enbridge's or
Union's or other countries, they have exogenous
factors, sometimes they're called Z factors, that
are taken into account, deal with the specific
circumstances of the utility.
Many of them have sunsets, so they'll be
terminated after five years, and you will
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automatically go back to cost of service at that
point if the program isn't renewed. So they have
their sharing mechanism.
They all have
many of
them have sharing mechanisms.
Q. [150] I agree.
I'm talking about this particular
feature that is described at lines 15 and 16 of
page 19 of your evidence.
I'm asking you if this
feature, in particular, is such that it makes Gaz
Métro's incentive mechanism the hybrid and not a
pure revenue cap, and that this is additional
protection because when times are bad, as is
anticipated according to the projections we heard
yesterday, if times are
the forecast is not as,
is not sufficient, if the revenue cap is not
sufficient to cover cost of service, then we revert
back to cost of service, isn't that a huge
protection?
A. It does have the effect of moderating the
year to year fluctuations that you might get on
your, quote, unquote, "Pure incentive mechanism,"
so it tends to smooth things out.
I'd point out, though, that another feature
of this is that if there's a deficit going in, Gaz
Métro would have to pay back the deficit before it
would be allowed in future to accrue productivity,
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so that goes in the other direction, and I will
admit that
Q. [151] You consider that to be fair and
A. Sorry?
Q. [152] Do you consider that to be fair and
reasonable?
A. I don't render a judgement about the fairness or
reasonableness of the incentive mechanism. It's
it is what it is. From my point of view, it's one
that was obviously negotiated between Gaz Métro and
it's
and it's been under Régie.
Q. [153] Overall, I mean, you're
I think, a major
statement contained in your testimony is to the
effect that the incentive mechanism for Gaz Métro
is riskier than traditional cost of service
regulation has prevailed in the years preceding the
year 2000, is that a proper understanding of what
you said?
MR. CARPENTER:
A. Yes. It introduces short run variability in Gaz
Métro's earnings. And, in fact, it makes it look a
lot more like traditional U.S. LDCs with regulatory
lag.
Q. [154] If the incentive mechanism is so detrimental
to Gaz Métro's risk profile, how can you explain
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that they not only signed it at the very beginning
in the year 2000, but accepted to re negotiate the
mechanism twice and again signed on it? I mean, if
it's detrimental to their risk profile, why sign
it?
A. Well, as I said yesterday, risk is about
uncertainty, not about expectations.
So, they
would sign such a deal, take on additional risk if
there was a prospect of higher returns. An
incentive mechanism provides that.
So you'd have to divorce the question of
uncertainty, and risk as reflected in volatility or
in future capital cost recovery from the question
of expected returns under the incentive mechanism.
So there is the prospect here of an
increment in return relative to the authorized
return, that's the deal that the incentive
mechanism provides Gaz Mét if it performs in
certain ways.
But the mechanism also introduces
uncertainty in that performance, which is the other
side of the trade off.
Q. [155] Have you had a chance to read the credit
notation reports of DBRS and Standard & Poor's that
were filed as part of the evidence?
A. Yes, I have.
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Q. [156] The latest ones, I mean going back to the
spring of this year?
A. At one time I read all of those, yes.
Q. [157] Okay. Would you agree with me that they
generally describe Gaz Métro's regulatory
environment as supported, that they seem to be very
complimentary about the opportunity afforded by the
incentive mechanism for Gaz Métro to earn
additional earnings, surplus earnings over and
above its allowed return with no downside as,
because Gaz Métro can revert back to cost of
service if the revenue cap is not sufficient to
cover its cost of service? They're very
complimentary about that; is that because they
disagree with you?
A. Maybe your memory of them is different than mine
but that, your characterization sounds a lot more
elaborate than I recall them saying in those
reports.
I do recall the language about the support
of regulatory environment. You see that across
Canada, not just in Québec but elsewhere; you see
that in the U.S., so I'm sure that's a
differentiating factor.
Q. [158] Now, let's take Standard Poor's, page 5. Can
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- 84 I
ME VINCENT REGNEAULT:
Quelle pièce. S'il vous plait?
ME GUY SARAULT:
The exhibit number is Gaz Métro 7, document 10,
page 5.
Q. [159] You've got that in front of you?
A. The exhibits?
Q. [160] Or you're just about to have it in front of
you?
A. I'll get help.
Q. [161] "Strong business risk profile," middle of the
page. "Canadian regulatory framework had unique
features.
The Régie De L'Énergie in Québec and the
National Energy Board regulates J. Mise Canadian
operations.
The regulation for the Québec distribution
assets is similar compared with regulation in other
provinces.
Performance based regulation limits any
downside risk to a cost of service and rate of
return method." Is that positive or negative?
A. That's positive, but it's
again, it's, the trade
off is at the expense of some volatility, some
variabilities.
Q. [162] Next paragraph, "Unique to the regulatory
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environment in Québec, the distribution operations
have a formal over earnings sharing mechanism that
supports Gaz Métro's ability to generate incentive
earnings greater than the regulated base ROE."
Positive or negative?
A. Again, it's positive within the construct of an
incentive mechanism that, at the same time,
introduces volatility and variability.
Q. [163] Thank you.
A. This is the same sort of positive arrangement that,
in my opinion, regulatory lag in the United States
provides to U.S.
M. PIERRE DESPARS :
R. J'aimerais ajouter un élément. Je constate qu'au
paragraphe précédent où vous faisiez référence - je
vais le dire en français, oui - où vous faisiez
référence, ils ne font aucunement mention de la
possibilité, dans la situation, dans le contexte où
l'entreprise est en déficit, qu'elle se crée une...
appellera ça une dette ou on trouvera le terme là,
qu'elle se crée une dette envers les employés...
envers les employés... envers les clients qui
autrement, si on était en coût de service,
n'existerait pas. O.K.
Il est clair qu'aujourd'hui, Gaz Métro a à
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rembourser dix-sept millions de dollars (17 M$) à
ses clients avant de faire tout autre gain de
productivité et que, si on va au terme du mécanisme
incitatif, cinquante pour cent (50 %) de ce
montant-là va être absorber par les actionnaires de
Gaz Métro.
Cette provision-là est limitée à un point
cinq pour cent (1,5 %) de la base de tarification
et que si on était en coût de service pur, on
n'aurait pas cet élément de risque additionnel-là.
Me GUY SARAULT :
Q. [164] Mais on est d'accord, Monsieur Despars,
lorsqu'on lit Standard & Poor's qui donne la
perception d'une agence de notation de crédit qui
est réputée, je pense.
R. Tout à fait.
Q. [165] Que la perception, globalement parlant, sans
aller dans le fine print ou dans les détails, est
généralement très positive.
R. Je n'irai pas dans le fine print et dans tous les
détails, je veux juste vous ramener à la... à Gaz
Métro-7, Document 11, page 11 de 17 de mon
témoignage où on cite Standard & Poor's qui dit :
GMLP's high degree of exposure to
lower margin industrial customers and
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lower authorized rates of return
compared with that of several U.S.
peers hinders its financial
performance.
We consider GMLP's market position to
be weaker than that of other gas
distribution companies in Canada due
to a relatively higher concentration
of industrial based customers.
Bon. Ce n'est pas nous qui le disons là.
Q. [166] Hum, hum.
R.
Consequently, operating results tend
to be more vulnerable to throughput
changes because of price volatility of
natural gas and economic cycles.
Effectivement, ils peuvent mentionner qu'il y a des
éléments dans l'encadrement réglementaire qui nous
sont favorables, mais de là à dire que tout est
parfait chez Gaz Métro, il y a une limite là qu'il
ne faut pas franchir.
Q. [167] Est-ce qu'on ne pourrait pas faire le
raisonne-ment inverse? Que tout n'est pas
nécessairement négatif?
R. Quand on dit que Gaz Métro fluctue moins que le
marché et que c'est reflété dans son bêta, c'est
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que ça tient compte des éléments qui couvrent
l'ensemble de ses risques et incluant son risque
réglementaire.
Q. [168] Page 21, answer 21, the question is, "Is Gaz
Métro continuing to make capital investments in its
distribution business?" Your answer is essentially
the same, word for word, as your answer 23 of the
2007 testimony, except for the change in numbers in
order to reflect the 2009 forecast, but do you
agree with me that, once again, there is no change
in your overall conclusions in this respect
vis à vis two years ago?
MR. VILBERT:
A. It is definitely an update to that information from
two years ago.
Again, this information, is
what
I'm doing is I'm updating the evidence.
Q. [169] That's right.
But if the conclusions were to
be different, if the overall picture was to change,
not only would you have changed the numbers but you
would have also have changed the wording of your
answers, do you agree with me?
A. Not if the question and answer is providing an
informational background and update for the
evidence.
My conclusions are contained elsewhere.
They haven't
the conclusions are the same
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fundamentally, this question and answer is just an
update of information.
Q. [170] At page 21, still in answer number 22, lines
23 to 27, "Gaz Métro is also exposed to regulatory
risk related to its performance and
mechanism. Incentive regulation creates greater
expected short term variations in earnings than
does traditional cost of service regulation,
particularly where deferral accounts are used to
adjust for cost under or overrecovery."
Would you agree with me that Gaz Métro has
several deferral accounts, a great number?
A. Yes. I understand that they have some deferral
accounts, yes.
Q. [171] Weather normalization, interest rates,
over/underrecovery, stuff like that?
A. Well, there are exogenous factors in incentive
mechanisms that we've discussed.
Q. [172] Yes. Would you agree with me that some of
their peers in Canada such as, for example, Union
Gas and Enbridge in Ontario, who, to a large
extent, rely on large residential volumes of
customers, do not have weather normalization
defferal caps?
I think you had said yes to the same
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question two years ago, according to my notes
A. I'm happy to agree with it. My memory of Enbridge
and Union's situation now is, well, it's a bit less
hazy than it was then because I've just been
involved in the Enbridge incentive regulation
matter, but I'll agree with you.
M. PIERRE DESPARS :
R. Est-ce que je pourrais, je voudrais rajouter un
point sur cet élément-là. Quand on regarde la
normalisation de la température, on regarde un
élément spécifique, O.K., dire comment les
variations par rapport à la température sont prises
en considération. La normalisation de la
température utilisant une moyenne trente (30) ans
est une façon de neutraliser le risque de
température. Il y a une multitude d'autres façons
qui est utilisée dont la méthode de prévision de la
demande.
Donc, la méthode de prévision de la
demande, et je serais curieux d'entendre monsieur
Sarault parler de la méthode de prévision de la
demande chez Union et chez Consumers, si elle tient
compte des années plus récentes ou de la volatilité
qui a été observée amène une révision des degrésjour pour établir la prévision de la demande. Donc,
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une température plus chaude qui serait normalisée
dans le cas de Gaz Métro si on utilise une
température, une moyenne de trente (30) ans, serait
directement prise en considération dans le mode de
prévision de la demande dans les entreprises du
type Union and Consumers Gas.
Donc, il faut faire extrêmement attention.
Quand on amène le débat sur le sujet de certains
comptes de frais reportés, il faut regarder
l'encadrement réglementaire complet qui va du mode
de prévision de la demande à la fréquence des
révisions.
Q. [173] Si c'est comme ça chez Union, comme vous
dites, seriez-vous prêt séance tenante à nous dire
que Gaz Métro serait disposée à échanger son
système de compte de frais reportés pour la
normalisation de la température avec le système qui
prévaut chez Union, faire un « swap »?
R. Il faudrait réviser l'ensemble du mode
réglementaire. Est-ce que Union and Consumers ont
des dossiers de fin d'année? À l'époque, ils n'en
avaient pas. Et donc, est-ce que les clients
seraient prêts à ce que Gaz Métro conserve cent
pour cent du « up side »?
Q. [174] Si je comprends bien, on n'est pas en mesure
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de répondre oui aujourd'hui séance tenante?
R. J'attends votre réponse.
Q. [175] Ce n'est pas moi qui vais choisir, c'est à
vous de le proposer. C'est un vieux compte à ce que
je sache. Depuis que je suis ici à la Régie, même
quand s'appelait la Régie du gaz naturel, le compte
de normalisation de la température existait.
Page 23, question 26, talking about the
effect of changes in the level and volatility of
gas commodity prior to the Gaz Métro's business
risk, would you agree that your answer here is
almost identical, work for word, to answer number
30 of your 2007 testimony on the same subject,
except for minor adjustments to numbers reflecting
the evolution between 2007 and 2009, but the
wording of your answer in the conclusions are
essentially the same?
A. Again, these are updated figures and numbers that
reflect the current situation.
Q. [176] Yes, but we agree that your update in the
figures and in the numbers, talking about figure 5,
figure 6 and figure 7, which for all intents and
purposes are identical to the similar figures we
find in your testimony two years ago, lead to
identical conclusions on this aspect in particular,
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and that you have nothing new to report in terms of
conclusions?
A. Updated information does not change the underlying
story and conclusions.
Again, it's important to
take this into account, this is updated evidence.
Q. [177] Speaking again of the effect of changes in
the level and volatility of gas commodity prices on
Gaz Métro's business risk, would you agree with me
that this is far from being unique to Gaz Métro and
that all companies engaged in a similar business
face the same risk?
A. Broadly speaking, I think I agree with you, and
that's exactly what I'm trying to suggest to you,
is that this, this environment is affecting
business risks of all utilities in North America
for the reasons that I've described, and that Gaz
Métro has some unusual circumstances that, in my
opinion, put it at the upper end of the range of
business risk.
So part of what we're doing here is
positioning Gaz Métro with respect to the benchmark
sample.
Q. [178] That's, hence, my question. We both agree
that this aspect, in particular, not being unique
to Gaz Métro, does not, in itself, justify
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differentiation of treatment between Gaz Métro and
its peers?
A. No. But it may directly influence whether or not
you believe that beyond that adjustment the formula
mechanism is appropriate to continue in a world
that has changed dramatically from the time that
the formula was put in place.
As I said, some of this evidence goes to
the question of whether the formula is adequate to
track these changes.
Q. [179] All right.
Page 29, question 30, which is
new, "Has Gaz Métro continued to invest in its
distribution business since 1999?" The answer is
yes, and you provide a chart.
Would you agree with me that if Gaz Métro
would have significant difficulty in raising
capital in order to finance these investments, the
result might not be the same?
A. I'm sorry, you're asking me if Gaz Métro chose not
to make the investments?
Q. [180] If it was not
it didn't have access to
capital in order to finance these investments, it
just wouldn't be made.
So you're reporting here it
is continuing to invest in its distribution system,
so it has to find the money somewhere, do we agree?
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Contre-interrogatoire
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And I think, as Mr. Despars mentioned
earlier, Gaz Métro has gone to the debt market for
that purpose.
Q. [181] H'mm, h'mm.
A. Which tells you something about access to the debt
market. But the issue there is whether the terms
and conditions are reasonable, and that doesn't
tell you whether the cost of equity has increased
or decreased.
Q. [182] H'mm, h'mm?
A. Having said all that, this information is relevant
to business risk because what it says is that in
the face of declining utilization and declining
volumes, in the prospect of those uncertainties,
Gaz Métro is not in a position where it can just
let its assets depreciate and let its investors
simply ride out the remaining life of those assets.
It has to continue to put new assets at risk.
Q. [183] All right.
All I wanted to underscore was
that in order to make those investments, Gaz Métro
must continue to have access to capital, you know,
its investments strategy doesn't seem, according to
your own evidence, to have changed significantly
since 1999?
A. And the evidence is that Gaz Métro has had access
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to the debt market. And the question at hand,
however, is access to capital at reasonable terms
and conditions, and what the appropriate cost of
equity is.
Q. [184] H'mm, h'mm.
As of page 30, you talked about
the effects of increased competition with
electricity and fuel oil on Gaz Métro's business
risk.
First of all, with fuel oil here, again,
would you agree with me that competition between
natural gas and fuel oil is not unique to Gaz
Métro, that virtually all companies involved in
this business face the same problem?
A. Not with the same intensity.
So a company who has
a larger share of industrial load that has the
capability of switching fuels or of adopting one
fuel using equipment versus another, and that will
differ across the industry, Gaz Métro has a
relatively high industrial load with
relative to
the benchmark utilities that are in Dr. Vilbert's
sample.
Q. [185] Were you aware of the fact that Gaz Métro has
in its rate structure a
that there is a special
tariff called "gaz d'appoint concurance" in French?
A. Short term.
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Q. [186] If we try to translate, you know, it would be
like
A. Short term interruptable sales.
Q. [187] Exactly, short term interruptable to meet
competing fuels.
And then, you know the rate is
calculated, you know, in order to match competing
fuels.
Doesn't this offset this risk, in
particular, if offered to industrial users who are
interruptable?
And this is what allows, according to Mr.
Despars' testimony, this is what allowed, partly,
Gaz Métro to take advantage of the improvement in
natural gase's competitiveness in the year 2007 and
2008 and generate more sales, and which allowed it
to realize and even exceed its return for that year
in particular, isn't that a great feature
A. To me it's direct evidence of the fact that we have
competition between alternative fuels.
The fact
you have to introduce such a mechanism in order to
be
to compete is a signal of the competition.
Now, the question is, ultimately, in the
long run, who's going to win that competition? In
the short run, these things fluctuate, so right now
gas is in a relatively preferred position to fuel
oil because of just the dynamics of the way that
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the oil market and the gas market has de coupled,
and so, yes, great, Gaz Métro, in the short run can
try to take advantage of this and get some of those
customers back that its lost since 1994, but in the
long run that competition is going to play out
where other utilities, without big industrial bases
like Gaz Métro, don't face that risk at all.
Q. [188] But would you agree with me that when we
talked about Gaz Métro's relative risk in relation
to this aspect in particular, that we have to take
this particular feature into account which
contributes to offset risk?
A. It's a mechanism, a feature to compete, but it does
not eliminate the competition.
Q. [189] Does it offset the risk, that's my question?
A. It helps mitigate the risk.
Q. [190] Thank you.
A. But in the short run, not in the long run.
Q. [191] Now, at page 31, as of question 32
by the
way, I would just like to underscore the fact that
answer 31 at page 30 is almost identical, save for
a few minor adjustments, to answer 33 of your 2007
testimony.
Same goes for figure 12, which is identical
as figure 13 two years ago.
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Now, turning to page 31, question 32, "How
competitive is natural gas with electricity and oil
heating in Québec?"
Here, again, these answers are identical to
answers 44 and 45, as well as the figure at page 32
as what we had two years ago, however, on the
subject of how competitive natural gas is
competitive as electricity, I have an article
published on August 31st on Gaz Métro's website,
you might want to take a look at it.
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Me GUY SARAULT :
Moi, je vais m'en garder une. Maître Legault, on va
lui en donner une au moins. Excusez-moi, Maître
Legault.
Me PIERRE LEGAULT :
Ce n'est pas grave.
Me GUY SARAULT :
Ça, ça va être C-1.11... C-1.13, excusez-moi.
( So I'll translate it)
EXHIBIT C 1 13:
An article published on August
31st on Gaz Métro's website.
Q. [192] So I'll translate it to you because it's in
French. The title
by the way, this is published
on Gaz Métro's own website, so this is a
it's
recent and it comes from the horse's mouth, as we
say.
"Depuis 10 ans, le gaz naturel est moins cher
que l'électricité."
Since 10 years natural gas has
been cheaper than electricity.
Any comment?
A. I agree that, with respect to the current
situation, gas prices have declined such that in
particular sectors gas may be cheaper than
electricity.
Again, it's a function of this boom and
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bust cycle that I've been talking about.
Now
Q. [193] But you understand the words "Depuis 10 ans"?
That's for 10 years, it's not short term.
A. You have me at a competitive disadvantage in the
language.
Q. [194] But you have someone next to you who can
A. Mr. Despars.
Q. [195]
certainly explain what this is all
about. He's a francophone, speaks very good French
and English, and he's with Gaz Métro, and he
certainly knows about this paper.
A. And he informs me that this refers to the
commercial market.
Q. [196] Well, that's at least one of them.
A. Okay.
M. PIERRE DESPARS :
R. Je vais répondre. C'est le marché... c'est la
campagne de publicité qu'on a lancée la semaine
dernière.
Me GUY SARAULT :
Q. [197] Ce n'est pas de la fausse publicité.
R. Ce n'est pas du tout de la fausse publicité.
Q. [198] Bon.
R. Et je vais continuer. Cette publicité-là vise
spécifiquement le marché commercial, le marché
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commercial où on a un avantage compétitif par
rapport à l'électricité depuis les dix (10)
dernières années compte tenu du niveau
d'interfinancement qu'on a dans chacun des tarifs,
que ce soit chez Gaz Métro ou chez Hydro-Québec.
Cette comparaison-là est faite avec les tarifs
d'électricité chez Hydro-Québec au tarif régulier,
O.K., exclut spécifiquement le tarif hors point
dont on vous a parlé au cours des dernières années.
Donc, quelqu'un qui a une option sur le tarif hors
point vient changer complètement ces graphiques-là.
Les graphiques sont présentés ici, en fait,
ils sont présentés ici sur un horizon dix (10) ans
sur le marché commercial à tarif régulier. On ne
s'est jamais caché pour dire que c'est que le
marché dans lequel on est le plus compétitif. O.K.
Et on ne s'est pas caché non plus pour faire cette
campagne de publicité-là au moment où les décideurs
dans les commerces prennent leurs décisions.
Ce n'est pas parce qu'il y avait une
audience sur le taux de rendement qu'on ne fera pas
les meilleures choses qu'on a à faire pour aller
chercher le maximum de clients et qui est la
période du mois de septembre. C'est au mois de
septembre que ces gens-là décident majoritairement
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de leurs installations pour le chauffage.
Donc, dans ce créneau de marché-là,
effectivement, on a un avantage par rapport à
l'électricité. Et on le dit dans toutes nos
présentations depuis les dix (10) dernières années.
Et, ça, ça n'a pas changé.
LE PRÉSIDENT :
Q. [199] Et c'est une campagne... Monsieur Despars,
c'est une campagne en deux mille neuf (2009) ou
deux mille huit (2008)?
R. C'est deux mille neuf (2009). En fait, elle est
sortie la semaine dernière.
Me GUY SARAULT :
Q. [200] Le trente et un (31) août deux mille huit
(2008).
LE PRÉSIDENT :
C'est juste que la... Il y a peut-être une coquille
dans le...
Me GUY SARAULT :
Montréal, le trente et un (31) août deux mille huit
(2008).
M. PIERRE DESPARS :
R. Et ça va être la publicité qu'on a sorti où vous
avez vu les encarts où Gaz Métro est 10/0 versus
l'électricité dans le secteur commercial, et ça
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vise spécifiquement ce marché. Et c'est le marché
le plus payant pour Gaz Métro. Si on est capable
d'aller chercher des clients additionnels, bien, ça
va avoir un impact favorable sur tout le monde.
MR. CARPENTER:
A. So, if I could just add one thing on this, if you
put this to me, I think it's a bit remarkable that
a local gas distribution
company actually has to
enter into an advertising campaign to compete with
electricity.
That is a very unusual circumstance,
that; and in my mind it's an indication, again, of
the competition between these fuels that you just
don't see in other LDC environments.
ME GUY SARAULT:
Duly noted.
Q. [201] Page 33, answer 36, you talk about the fact
that the Heritage Pool of electricity filled 80
98 percent of the energy needs in 2005, and
that's
this is now reducing, and we have a
forecast of about 90 percent in the year 2014.
Would you agree with me that the relative
decline of Heritage Pool Resources was contributing
to increase the price of electricity in Québec
because the price of new supplies will be much more
expensive than the very low price of 279 cents per
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kilowatt hour that we have for historical supplies
included in the pool?
Actually, I think in your following answer
you talk about incremental supplies being priced as
high as 10 cents per kilowatt hour.
So, would you agree with me that that
factor, in itself, will contribute to make
electricity more expensive in relative terms?
A. Well, if you read through the
Q. [202] I did.
A.
answer of 37, I present the table to demonstrate
the impact of those incremental supplies at those
prices would be marginal.
Q. [203] I made a calculation of my own based upon
your figure 15 at page 35, the increase from 2004
to 2014 in supply prices is 279 to 349, which is a
7 cents hike,
.7 cent hike.
According to my calculation, if I divide
.7 cents by 279, that represents 25 percent over 10
years; do you agree with my calculation?
A. I don't disagree with the calculation, but
Q. [204] You don't?
A. I don't disagree with that calculation, but you
have to take into account the fact that there's is
a simple inflation going on, as well. These are
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- 106 nominal terms.
Q. [205] In addition, if I may, do you agree with me
that we're talking here only about the price for
the supply of electricity generation?
We're not talking about transport and
distribution, which are also part of the bill of
electricity users?
Are you aware of
in what direction those
rates are going to go as far as Hydro Québec's
strategic plan is concerned for the next few years?
A. Yes. I've read Hydro Québec's strategic plan.
Q. [206] Are they going to go up or down?
A. Well, they would go up, but the
based on this
effect. But the real issue is, what is the extent
of the surplus going forward?
And one of the things that has changed
significantly since I was here in 2007, is the size
of the Hydro Québec surplus.
And so you would expect that with a higher
surplus, that that would reduce the need for the
incremental supplies, would put a downward pressure
on prices.
So, you know, on balance, in my judgement,
electricity is still going to be extremely
competitive relative to natural gas in Québec.
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Q. [207] But what I'm suggesting to you is that in
relative terms, over the medium term horizon,
supply, transportation and distribution rates for
electricity will increase in Québec, and it will
increase significantly vis à vis what they were
some years ago.
So, what I'm telling you is that the
competitive advantage of electricity in certain
sectors will decline rather than increase, that's
what I'm suggesting to you
A. Well
Q. [208]
over the foreseable future; do you agree
or disagree?
A. I disagree to the extent that there will be a
continuing surplus of electricity if the economy
does not recover.
Distribution costs may go up. If we have
increased inflation, distribution costs for
electricity as well as gas may go up. It's the
relative price that's important.
And your question doesn't tell me, you
know, what the movements in the relative price is
going to be.
Q. [209] All right.
Moving to page 36.
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Me VINCENT REGNAULT :
Juste un instant, on va juste laisser les témoins
finir de se consulter. Il y avait, je pense, un
complément de réponse.
ME GUY SARAULT:
I'm sorry, I thought you were through, sorry.
A. I quess what I, in addition what I point you to is
figure 14 where we have the apples to apples, gas
versus electricty rate.
And in this figure you do
see the increases that are beginning to occur in
the Hydro Québec electricity rate.
Q. [210] H'mm, h'mm?
A. They have been sufficient to make up
insufficient to make up the gap, and that gap is
significantly higher than what we're talking about
with respect to this incremental supply.
Q. [211] Page 36, we go
Me VINCENT REGNAULT :
Maître Sarault, encore une fois, les témoins sont
en train de finaliser une consultation pour
probablement donner un complément de réponse.
Me GUY SARAULT :
Excusez-moi! Je pensais que, après le dernier
complément, on avait complémenter.
Q. [212] Go ahead.
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A. And Mr. Despars reminds me, as well, that in the
presentation yesterday I showed you the
I don't
remember exactly which figure it is, I showed you
the comparison of electricity rates in Montreal
relative to other LDCs in that, even in spite of
this, any increases that might occur with respect
to Hydro Québec, it's still at the very low end of
the spectrum with respect to other LDCs in other
regions.
ME GUY SARAULT:
Q. [213] Well, we know for a fact, according to Gaz
Métro's own promotional material, that this may be
true for the residential sector where electricity
and natural gas are used for home heating purposes,
but in, at least in the commercial sector, natural
gas seems to have a competitive edge.
A. Yes. The
I'm instructed that the advertising
campaign does indicate that for the commercial
sector, and, as I said, it's a sign that Gaz
Métro's attempting to compete for that load.
Q. [214] H'mm, h'mm.
Page 36, you talk about the
effect of Gaz Métro's performance
performance
incentive mechanism on its business risk, we've
talked about that extensively already.
Just to remind you, though, of a passage at
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answer 36, page 28, lines 8 to 16 of your 2007
testimony, and I quote, that you stated that "The
new exogenous factor," I'm talking about an
adjustment, this factor that was introduced in
2007, "for declining averages used by SML customers
would be expected to reduce Gaz Métro's business
risk, all else being equal, because they are likely
to reduce Gaz Métro's exposure to short term
earnings volatility."
You haven't changed your
opinion on this?
A. No. And I agreed with that when you asked me that
about an hour ago.
Q. [215] Okay.
Page 38, line 6 and 7, talking about
the exogenous volume factor introduced in 2007, you
say that "This factor only partially de couples
revenues from volumes. Gaz Métro is still exposed
to 10 percent of the volume risk."
Is it fair to assume that it is not exposed
to 90 percent of the volume risk
A. Yes, for this customer class. And they also have to
account for costs, as well, as I point out,
approximately 96 percent of the costs are fixed, so
there is some room for volume variability as a
result of this 10 percent.
Of course, this only applies to the, the
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small customer class. There is no volume protection
for the industrial class.
Q. [216] Thank you.
Page 39, answer 42, "Gaz Métro's
business risk compared to other Canadian, other gas
utilities in Canada and the United States," we know
already that there is no specific comparison
between Gaz Métro and other Canadian utilities,
correct?
A. That's correct. For the reasons that I stated
earlier, that there are no pure play LDCs.
However, I do provide evidence as to how
one should think about differences in business risk
between Canadian and U.S. LDCs as a result of the
market and regulatory environments on each side of
the border.
Q. [217] At page 40 you compare Gaz Métro's allowed
return compared to allowed return for U.S. LDCs. We
already have in the record not only Gaz Métro's
historical allowed returns since 1990, do we have
the
we also have their realized returns of Gaz
Métro, as we have seen.
Do we have the realized returns of those
U.S. proxies somewhere in your evidence? So much
paper, I couldn't find it.
A. I don't believe I provided realized returns.
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So
A. Because it, A, that data, I'm not aware of as being
readily available. But B, it's not, to me, again,
accounting returns are not as relevant as market
based, so this is providing an indication of the
comparison between what the regulatory litigated
results provide on both sides of the border.
Q. [219] Well, take the following assumption for
purposes of our discussion: If one or more of your
U.S. proxies has an allowed return, let's say, of
17 percent vis à vis the returns that have been
allowed for Gaz Métro, but that in reality year
after year doesn't realize 17 percent, it realizes
only 9 percent.
It's great to have an allowed returned of
17 percent but if in reality you end up with 9,
does that tell you something about the risk of that
proxy
A. One data point like that wouldn't tell you anything
about a risk.
There will be volatility in earned returns
under the U.S. model because of regulatory lag;
some will earn above their allowed returned, some
will earn below their allowed return.
My experience, by the way, is that they
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tend to earn, on average, more than their allowed
returns because of this optionality feature of the
regulatory lag that I was talking about.
Q. [220] But we have no evidence of that?
A. I'm just giving you my opinion as to that data.
As
I said, in my opinion that data is not very
relevant for evaluating business risk.
Q. [221] But assuming, for purposes of my question,
that a portion of it do under earn, what does that
tell you vis à vis your definition of business
risk?
"For equity investors it is the uncertainty
that his, her full return and of invested capital
will be achieved."
"Be achieved," do we agree that this is not
to "be allowed"?
It will be, in fact, realized,
isn't that important
A. What you've left out is, over the lifetime of the
investment, so historical data concerning over or
under earnings is ret
you have to evaluate that
in the context of the regulatory system that you
have.
And what I'm suggesting, is that under the
U.S. system, you see a lot more year to year
variability because of regulatory lag.
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Q. [222] It's volatile?
A. It's a short run volatility, and I fully
acknowledge that, and I discussed it in my
presentation yesterday.
But that does not give an issue of
long term fundamental structure risk, which is what
equity investors are concerned about.
Over the lifetime of their investment, are
they likely to earn a return on and of their
capital?
And part of that is, is the return that
they're earning fair relative to the cost of
capital?
And by looking at allowed returns in a
jurisdiction in which the regulatory scheme is,
from a long term basis, fundamentally the same,
where the business is identical, nearly identical,
and you see consistent patterns of allowed returns
greater than what the formula produces; it's
evidence, to me, that the formula is broken.
Q. [223] But, Dr. Carpenter, if you have short term
volatility with your U.S. proxies year after year
after year for 10 years, doesn't it becomes
long term?
A. Again, in some years it's going to be greater. Some
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years there'll be over earning, some years they'll
be under earning.
My impression, when you look at that data,
to the extent that it exists, my recollection is
that, on average, U.S. utilities tend to earn more
than their allowed returns.
Q. [224] But that data is not here?
A. It's not in this evidence but that's my impression
from that, from that data.
Q. [225] At page 42
ME VINCENT REGNEAULT:
Juste un instant.
ME GUY SARAULT:
I'm sorry.
Are we through?
A. H'mm, h'mm.
Q. [226] Page 42, question 45, "Given the differences
in the regulation of local distribution companies
between Canada and the U.S., why should the Régie
consider comparisons of allowed returns across the
two jurisdictions?"
And then you, you provide an
answer justifying the use of U.S. beta.
I would like to go back to the decision
rendered two years ago by the Régie, Exhibit
C 1 12, Section 4.1.10 of the decision.
Comparison of the ROEs authorized for
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regulated Canadian companies and their U.S.
counterparts was discussed at length at the
hearing.
Gaz Métro executives and IGUA, Industrial
Gas Users Association, officials alike informed the
Régie on the related issues for the industry as a
whole."
Third paragraph, "The Régie believes that
while it is clear that the ROEs as authorized in
the U.S. are higher, on average, than those granted
in Canada. The evidence does not support the
conclusion that the distributor is suffering any
harm or unfair treatment.
The applicant has not
demonstrated that the opportunities available on
the U.S. market are comparable, particularly in
terms of risk.
Dr. Chrétien's evidence shows that
the risk premium has been higher in the past for
U.S. portfolios than for Canadian portfolios.
At the same time, Dr. Carpenter's evidence
failed to establish conclusively that the company's
specific level of risk was comparable to that of
the U.S. firms used for comparative purposes.
Finally, the evidence does not allow to compare
overall differences between the two countries'
institutional economic and financial environments
and their impact on the resulting investment
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End of quotation.
What's so different in your evidence this
year
A. Well, I hope I've provided additional perspectives
as to why these are comparable.
I think I've tried to explain better the
distinction between fundamental risk and the
variability risk, and so
Q. [227] But we don't have information about the
realized return.
We don't have detailed information about
incentive mechanisms that those U.S. proxies may be
subjected to.
We don't have information about their rate
structures, which may over or under compensate for
volume fluctuations.
We don't have specific information about
the detail of their regulatory environment in terms
of deferral accounts.
There's many, many things that we don't
have, would you agree, about those U.S. proxies?
A. Have you looked at appendix B?
Q. [228] Yes, I looked at appendix B. And the
information, I'm suggesting to you, perhaps with
the exception of a weather normalization account in
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certain cases, that would be the one exception,
doesn't add very much, respectfully submitted, to
what we had in 2007. Yes, I did read it.
A. Is there a question?
Q. [229] Yes. I'm suggesting to you that it doesn't
add much?
A. Well, I disagree. I respectfully disagree.
Q. [230] Thank you.
Answer 49 at page 44, 45, "How does Gaz
Métro's business environment compare to other LDCs
in Canada and the U.S.?"
And in your last sentence, "Gaz Métro has
the largest industrial customer load and industrial
customer that is larger than the LDCs in Dr.
Vilbert's U.S. LDC samples."
This is the same answer as you gave in
2007. It was answer 39, page 29 of your testimony
two years ago. The only exception being that you
replaced Dr. Chrétien by Dr. Vilbert's samples.
Are you aware of the fact that Dr.
Vilbert's sample is almost identical to the
sub sample we have with Dr. Chrétien two years ago,
that they're the same companies
A. I'm not sure if they're identical for many of the
same companies.
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And if you recall, I was the one that
recommended the sample to Dr. Chrétien.
Q. [231] H'mm, h'mm?
A. So, in a sense, it was my sample, so it's not
surprising that my sample would have some overlap
with the sample that Dr. Vilbert has chosen in
consultation with me for this matter.
Q. [232] Well, are you the one to have recommended,
once again, these companies to Dr. Vilbert in this
case?
A. We
the companies were developed together in
consultation.
Dr. Vilbert provided the list of
pure plays, and I evaluated them along the lines
described in appendix B, and we agreed on the
sample on that basis.
Q. [233] I had a note on this, if I may, one second.
Yes, we have a list of Dr. Vilbert's
sub sample at page 54 of your evidence in this
proceeding.
This answer is 56 and figure 25 are almost
identical to answer 49 at page 38 of your 2007
evidence. The wording is the same, and the
sub sample in your figure 25 is almost identical to
Dr. Chrétien's sub sample in figure 20 of your 2007
evidence.
Chrétien had 9 U.S. LDCs, Dr. Vilbert
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Seven of those LDCs found on your
sub sample are exactly the same; those are WGL
Holdings; LacLady
how do you pronounce
it? LacLady Group?
A. LacLady Group.
Q. [234] LacLady Group; South Jersey Industries; AGL
Resources; Northwest Natural Gas; Southwest Gas
Corporation; Piedmont Natural Gas. All of those
were included in Dr. Chrétien's sub sample of 9
U.S. LDCs, so we're talking about virtually the
same sub samples from two years ago, we agree?
A. We agree. And we shouldn't be surprised. The pure
plays are the pure plays. They haven't changed that
much. They are still good benchmarks.
Q. [235] Going back to page 46, talking about natural
gas penetration in Québec, answer number 50.
This
is identical, word for word, to your answer 40 at
page 30 of your 2007 evidence, with exception of
the use of the 2006 data which was, which replaces
2004 date; it's the same conclusions, no change in
the wording.
A. Facts have been updated, yes.
Q. [236] At figure 19, page 47 is identical to figure
15 of your 2007 testimony, with the exception of
the updates on the data;, conclusions are the same;
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wording of your testimony on page 48 is the same as
two years ago, correct?
A. Its an update to the data.
Q. [237] But the conclusions, this is
the thrust of
your testimony of your opinion is identical, do we
agree?
A. Yes. Ultimately, we agree. This is updated, it's
updated testimony with respect to business risk and
comparison.
Q. [238] The same goes for Section 3 of page 53, Gaz
Métro's industrial customer load is the same as
answer 48 of your 2007 testimony with more recent
data with those conclusions, and the wording of the
testimony is identical, is that correct?
A. The data has been updated, yes.
Q. [239] The same for page 54, answer 56, 57,
identical, word for word, what we had two years
ago?
A. The conclusion has not changed.
ME GUY SARAULT:
Thank you. This will conclude my questions to Dr.
Carpenter.
I know that it is 10 minutes past 12, this
might be an appropriate moment to break for lunch
and come back?
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I will be briefer with the other experts. I
had met Dr. Carpenter before. There were some
comparative issues to be discussed but I expect to
be briefer with the others.
LE PRÉSIDENT :
Nous allons, oui, prendre la pause lunch. Combien
de temps vous estimez pour les autres témoins?
Me GUY SARAULT :
J'avais annoncé six heures au total. Je suis encore
dans mon temps. J'ai commencé à neuf heures et
demie (9 h 30). Il est midi et dix (12 h 10).
LE PRÉSIDENT :
Pas de problème. Mais pour planifier le reste de la
journée.
Me GUY SARAULT :
Je dirais minimum une couple d'heures disons, mais
ça devrait être pas mal complété après ça.
LE PRÉSIDENT :
Donc, nous allons prendre une pause jusqu'à treize
heures trente (13 h 30).
Me GUY SARAULT :
Treize heures trente (13 h 30). C'est bon.
SUSPENSION DE L'AUDIENCE
_________________
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REPRISE DE L'AUDIENCE
13 h 30
LE PRÉSIDENT :
Reprise de l'audience. Maître Sarault.
Me GUY SARAULT :
Merci, Monsieur le Président. Bonjour, Messieurs
les Régisseurs.
BY ME GUY SARAULT:
Q. [240] I would now like to turn my questioning to
Mr. Engen.
And I do not have that many questions;
it will be on your written evidence filed as GM 7,
document 12; and also on your presentation
yesterday, this GM 7, document 21, also Régie's
exhibit number B 60.
So you have that material in front of you,
Mr. Engen?
A. I do.
ME VINCENT REGNAULT:
Thank you.
ME GUY SARAULT:
Thank you.
BY ME GUY SARAULT:
Q. [241] At page 7 of your testimony, you provide an
outline of qualifications, and as of line 6 you
state, and I quote, "BMO Capital Markets and its
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predecessors have been providing financial and
capital market advice to Gaz Metro limited
partnership since the early 1980s."
Could you expand on the nature of the
financial and capital market advice that you
provided to Gaz Metro since the early
eighties? That's, by God, 29 years ago.
A. I can give you some general ideas on that, in the
context of what an investment banker would
ordinarily do for his client. I can't be specific
because I, on the other hand, have no relationship
with Gaz Metro. The first time I met them was
sometime ago when I was involved in TQM.
Q. [242] A general description will suffice?
A. I went on line, first of all, so that I have no
involvement itself. And my first involvement with
them is when I met them. It didn't seem that
particular.
So generically, what I would expect down
through the years is advising them on access to
access to capital, advise them on occasion when
they're interested in doing mergers and acquisition
transactions, but I'm not familiar with the
specifics because I've not been involved with the
company.
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Q. [243] But BMO Finance Capital Market would be
involved at public offerings, for example, stuff
like that, as an investment banker?
A. That's correct.
Q. [244] So who would be your main competitors for
that kind of services?
A. Well, again, as I've already said, it's because I
don't have specific contact or relationship or
coverage of the account, I can only tell you
generically who those people would be. It would be
the other, bold bracket, Canadian firms.
Q. [245] And CIBC, WOOD GUNDY, RBC, Capital
A. Well, you can put those bold brackets, yes, those
five bank owned firms.
Q. [246] The five bank owned firms?
A. Yes.
Q. [247] They're in competition with BMO Financial
Market, Capital Markets, rather, to provide
investment banking services to companies such as
Gas Metro?
A. All companies across the country and U.S., yes.
Q. [248] H'mm, h'mm.
And investment banking, is that
BMO Capital Markets main line of business?
A. That's a combination of investment banking, loan
products, other capital markets, hedging, foreign
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exchange, interest rates; it's a whole, a whole
grouping of investment products.
Q. [249] H'mm, h'mm.
And does BMO Capital Market
consider Gas Metro to be an important client?
A. Yes.
Q. [250] I'm now turning to your résumé that we find
as appendix A to your evidence.
You have that?
A. I don't but I'm sure I can remember what's there.
Q. [251] All right.
The third bullet "Recent capital
market transaction experience where BMO Capital
Markets played a sole or co bookrunner role,
includes Transcanada Corporation three equity
offerings between 2007 and 2008 totalling 4.15
billions, major transaction, you would agree?
A. That's what's written there, correct.
Q. [252] Canadian Western Bank, 105 millions
innovative tier 1 capital offerings, and 200
million subordinated debt offerings.
Duke Energy income fund, 108 million
follow up offering.
200 million Enbridge Income Fund IPO.
And have other transactions involving the
ATCO Group and Transcanada Pipelines.
Is it fair to assume that major clients of
BMO Capital Markets are actually companies related
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to the utility industry?
A. No. We have
Q. [253] These are related to utilities?
A. They are, but these are companies I work with. We
also have major relationships with oil and gas
companies; we have major relationships with
chemical producers; we have major relationships
that would be in the financial sector; we have
major relationships in all sectors of the
economy. These are some of the ones that I worked
with in the energy sector.
Q. [254] And Transcanada Pipelines, which is mentioned
here, we both agree that Transcanada Pipeline and
Gaz Metro are co shareholder of TQM, which was the
subject of the precedent referred to yesterday by
the company's witnesses?
A. They are co owners of TQM, yes.
Q. [255] And TQM is the hearing during which you did
testify on behalf of the utility for an assessment
of the procession by financial markets, as you do
in this case?
A. Correct.
Q. [256] You're a lawyer by background, Mr. Engen?
A. I practiced law for eight years at McCarthy
Tétrault, yes.
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Q. [257] And do you consider yourself totally neutral
and impartial when it comes to talking about Gaz
Métro?
ME VINCENT REGNAULT:
You know, I suspect your question
A. You know, I'm just like an attorney.
ME VINCENT REGNAULT:
Just a second Mr. Engen.
Je vais y aller en
français, ça va être plus facile, je pense. Je
pense que cette question-là n'a pas à être dirigée
à monsieur Engen. Si maître Sarault souhaite
argumenter quant à la neutralité ou l'impartialité
de monsieur Engen quant à son témoignage à titre
d'expert, il le fera et vous en serez les
décideurs. Je ne pense pas que la question a à être
posée à monsieur Engen, donc je m'objecte à cette
question-là.
ME GUY SARAULT:
Maybe I will rephrase.
BY ME GUY SARAULT:
Q. [258] We both agree that Gaz Metro, in your case in
particular, the utility industry is a major client
in which you had been involved in transactions, and
they were clients of yours?
A. The work that I do focuses on the energy
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infrastructure sector, correct.
Q. [259] Apart from the TQMK
A. It would be difficult, of course, to be here and
testify in front of you if I was an oil and gas
expert; it would be very difficult for me to give
you views about pipelines and returns.
Q. [260] H'mm, h'mm?
A. It would be very difficult equally for me to call
on my colleague Brad Hardy who works in our
financial institution sector and come and speak
here, so necessarily I think you have to have
someone with some background in the sector, so
that's the reason why they called on me to be here.
Q. [261] In your testimony, as of page 123, you talk
about the investment community views of the Régie
formula, in that portion of your testimony, which
covers a number of pages, you quote extensively a
Mrs. Karen Taylor, correct? At least five, six
quotes from Karen Taylor?
A. I do.
Q. [262] Who is Karen Taylor?
A. Karen Taylor was a research analyst with with BMO
Capital Markets until a little over a year ago.
Q. [263] And those comments that you reproduce in your
testimony were made when she was an employee of BMO
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Capital Markets, correct?
A. That's correct.
Q. [264] I would now like to turn to your presentation
yesterday; that's exhibit Gaz Metro 7, document 21,
also B 60.
At page
I'm looking for
number 4, if I may.
page 4, file
You have a graph showing the
bond spread wider generic
A.
And you say 30 year spread now at roughly 245
points, basis points; you see that?
A. I do.
Q. [265] Can you tell us what the word "now" refers to
in terms of date?
A. Well, I updated this last on Monday or Tuesday, so
it would be Monday or Tuesday's date, I have to
check when the final update was.
Q. [266] It would be August of this year?
A. This week.
Q. [267] This week?
A. Yes.
Q. [268] Okay.
Or at the very beginning of September,
so it could be end of August?
A. I'm sorry. I'm sorry.
That's right. Time passes
very quickly here, sorry.
The last day of August or the first day of
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September.
Q. [269] Okay. Good.
And since you're with a major financial
institution, what is your best outlook for future
months as to the evolution of these spreads
A. I'm interested that you ask me that question. I had
a conversation with the head of our debt capital
markets group not an hour and a half ago, actually,
just before the hearing started this morning to
talk about a couple things, and this point came up
as well.
And as you can see, the spread has not
returned to the averages that we saw for the 10
years leading up to the runup at the end
at the
end of the year or end of 2007.
Our view in our conversations with
institutional investors in particular is that these
spreads are going to stay higher than the long term
average for quite some time to come.
In discussing the issue with investors, our
understanding is that they are and have been
repricing risk.
We came through what we would characterize
for a period there of very low spreads through what
we called a credit bubble during that period of
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time in which investors largely either ignored,
didn't understand or just outright failed to do the
kind of risk analysis.
Our view is its a repricing the risk. It's
going to say this way for some time.
Investors' view is
feel the same way
and our view, we
is that we're not back to what
normal is, and I couldn't even tell you what normal
is these days.
Investors aren't going to forget the crash
that we've been through anytime soon.
This is
going to continue to affect them for sometime to
come.
Once burned, twice shy kind of thing.
For me, its reminiscent of when Transcanada
cut its dividend earlier this decade; I think it
was in 2000, 2001. And even today, the company has
a weaker valuations relative to some of its
competitors, and when asked why the reasons are,
we're often told by institutional investors "We
remember the dividend cut" and weren't happy about
it. And that affects what they're willing to pay.
We're looking at the same thing now, not a
dividend cut but massive wealth was lost in the
marketplace through this last year, both in the
bond market and in the equity market, investors
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aren't going to forget soon.
Q. [270] Does BMO Capital Markets publish an official
forecast for these kindss of spreads?
A. I know our economist publishes
I have to pull it
out. Our economist publishes outlooks but I can't
remember if the 10 year rate is on there or not, I
would have to have a look.
Q. [271] Would that information be available to you on
your website, if I looked?
A. I believe
I believe there is publicly available,
some material put together by economists that speak
to rates.
Q. [272] They do provide forcasts?
A. Yes, the economists do.
Q. [273] H'mm, h'mm.
And that's
you know, if it's
on your website, is that considered to be an
official publication of BMO Capital Markets?
A. It's a
well, it's a publication of our
economist, yes.
Q. [274] So, if I look on your website, I should
normally find it?
A. Well, I'm assuming because of the line of questions
you have, so maybe you might want to produce it, we
can then have a comment on it.
Q. [275] Perhaps I don't.
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I doubt you'd venture those
kinds of questions without knowing the
answers. That use to be what I understood the
practice.
Q. [276] What about the bond spreads on the utilities
at page 5?
A. What about them?
Q. [277] Yes.
I suppose if I asked you the same
question about what "now" means, it's again the
same
A. Yes, these were all made at the same point in time.
Q. [278] Okay.
A. I might add as well that the Régie asked a number
of questions with respect to updating various of
these charts which appear here.
Q. [279] Yes, I saw that.
A. Yes. And it's replicating the same thing over
again, yes.
Q. [280] Okay.
Same question about page 7, preferred
share spread higher, 400 basis points to over 700
basis points; is that as recent as August as well?
A. Yes.
Q. [281] Yes?
A. Well, again, it's more recent than just August;
this was updated earlier this week.
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Q. [282] So, for all these charts I'm talking about,
page 7, page 8, if I were to ask the same
questions, you'd come up with the same answers?
A. Yes.
Q. [283] So we're saving time here.
A. Yes. We wanted to, in light of coming here, I was
very concerned as we prepared these materials to
make sure that they were as current as they can
possibly be.
Now obviously I could update them
through to today after close business, but at some
point we have to cut it off.
Q. [284] Sure.
A. I was concerned about having the Commission seeing
dated information.
Q. [285] Does your
did the publications available
on your website provide also a forecast on general
economic indicators such as GDD, et cetera?
A. Yes. Most of that's available on the same
document I'm thinking of, and it's
the
I can find it
fairly quickly but it's available on a public
website, and on that web
on that, it's a single
page publication for both U.S. and Canadian
outlooks. It illustrates historical information
over the past numbers of years. It would include
overnight rates, five, ten year bond rates, GDP,
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CCPI.
Q. [286] And your most current forecast?
A. Yes, it gets updated regularly.
Q. [287] Thank you.
M. PIERRE DESPARS :
R. Maître Sarault, avez-vous terminé avec monsieur
Engen?
Me GUY SARAULT :
Oui.
M. PIERRE DESPARS :
R. Est-ce que je pourrais juste ajouter sur la
relation que Gaz Métro a avec BMO? Je voudrais
juste dire au banc que Gaz Métro fait affaire avec
toutes les banques canadiennes. O.K. Donc, pour
avoir un expert du marché financier, toutes les
banques canadiennes ont une relation d'affaires
avec Gaz Métro, que ce soit la TD, la CIBC, la RBC,
la Nationale, Desjardins, la Banque Laurentienne et
la Scotia, ce sont toutes des banques qui font soit
partie de notre syndicat bancaire ou qui
participent aux émissions d'équité et de dette de
Gaz Métro.
Me GUY SARAULT :
Q. [288] Je vous remercie d'apporter la précision.
Donc, lorsque l'on lit des commentaires émanant du
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milieu de l'investissement bancaire « banking
investment » de banques canadiennes, on doit tenir
pour acquis que ces institutions-là ont des
relations d'affaires clients avec Gaz Métro. C'est
ça?
R. En fait, toutes les banques canadiennes ont des
relations d'affaires avec Gaz Métro et même
certaines banques internationales. Il faut bien
comprendre que les règles de l'Autorité des marchés
financiers sont très précises sur le rôle des
analystes versus les institutions et les gens avec
lesquels on travaille. Donc, je ne peux pas
commenter sur la relation qu'il y a à l'intérieur
des institutions, mais je sais qu'il y a des règles
très précises qui doivent être tenues pour
maintenir l'indépendance de l'analyste par rapport
à la relation d'affaires qui est entretenue avec le
client.
Q. [289] Par ailleurs, puisqu'on en parle, nous avons
au dossier également non seulement des commentaires
des milieux financiers qui sont largement contenus
au témoignage de monsieur Engen, mais nous avons
également des rapports d'agences de notation de
crédit, comme Standard & Poor's et DBRS. D'ailleurs
qui ont été déposés au dossier comme partie
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intégrante de la preuve au tout début. Est-ce qu'il
n'est pas exact que, dans le cas de ces agences de
notation de crédit, il n'y a aucune relation
d'affaires entre elles et Gaz Métro?
R. C'est totalement faux. Parce que dans le cas des
agences de notation de crédit, ce sont nous qui
payons les agences de notation de crédit pour
qu'elles fassent l'évaluation du crédit de Gaz
Métro, alors que les rapports d'analystes qui sont
produits par les institutions financières sont
produits de leur propre chef, et on n'a aucun
pouvoir d'influence sur ces rapports qui sont
produits.
Q. [290] Est-ce que vous suggérez que les rapports des
agences de notation de crédit comme Standard &
Poor's et DBRS pourraient être biaisées en raison
du fait que vous payez pour le service d'évaluation
qui est fait de votre notation de crédit?
R. Ce n'est pas du tout ce que j'ai mentionné. Ce que
j'ai mentionné, c'est qu'on a une relation
d'affaires. La question était sur la relation
d'affaires. Quand je paie une entreprise pour
recevoir un service, ça s'appelle une relation
d'affaires. Je ne porte pas de jugement sur la
qualité du travail qui est fait.
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Q. [291] Mais ce n'est pas du « investment banking »,
c'est seulement un service d'évaluation? On
s'entend là-dessus?
R. Je n'ai jamais dit que c'était un service
d'« investment banking » qu'on allait chercher.
Q. [292] O.K. Contrairement à ce que vous allez
chercher de votre syndicat de banques, et caetera,
exact?
R. De toutes les banques canadiennes.
Q. [293] Merci.
LE PRÉSIDENT :
Q. [294] Et, Monsieur Despars, quand vous mentionnez
« syndicat bancaire », pouvez-vous expliquer
davantage en quoi cela consiste?
R. En fait, Gaz Métro a une facilité de crédit sur
lequel elle peut emprunter à court terme de quatre
cents millions de dollars (400 M$). Donc, ce n'est
pas une seule institution qui prête, qui avance ce
quatre cents millions-là (400 M$), c'est un
regroupement de banques. Et à l'intérieur du
syndicat bancaire, de mémoire, il y a sept banques
dont les principales canadiennes plus deux banques
étrangères.
Q. [295] Merci.
ME GUY SARAULT:
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Q. [296] I would now like to turn to Dr. Vilbert.
Dr. Vilbert, my first question is an answer
that was provided by Gaz Metro that we find at Gaz
Metro 7, document 11.4 in response to question 19.1
of the Régie.
MR. VILBERT:
I have 19.1 in my response in English but I don't
have the question in English.
The question I have
is in French.
Q. [297] The question is in French. Do you have an
English version of the question?
A. I have an English version of the response but I
don't have English version of the question.
Q. [298] Okay.
Well, can you
your lawyer tells me
that there is no English version of the question.
ME VINCENT REGNAULT:
No, I told you that we don't have the English
version with us.
ME GUY SARAULT:
Oh, you don't have it with you?
ME VINCENT REGNAULT:
There is an English version but we don't have it
with us.
U # 3 :
Provide the English version of the
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question 19.1 provided to the
witnesses
ME VINCENT REGNAULT:
I guess so.
ME GUY SARAULT: Yes?
ME VINCENT REGNAULT:
I will have
ME GUY SARAULT:
The undertaking
I don't know
les engagements
de Gaz Metro? Où serait-on dans les engagements de
Gaz Métro.
LA GREFFIÈRE :
Numéro 3.
ME GUY SARAULT:
Q. [299] And no one here
MR. KOLBE: I will
ME GUY SARAULT:
Oh, yes, I will read the question in French. We
have simultaneous translation.
MR. KOLBE:
And I can understand the question perhaps well
enough to read French well enough to understand the
answer perhaps.
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ME GUY SARAULT:
But I'll read it for the record if you don't mind.
MR. KOLBE:
Okay.
Q. [300] Alors, the question 19.1, from the Régie to
Gaz Métropolitain reads as follows, and I quote:
Veuillez fournir la liste des
entreprises de service public
(distributeur de gaz, d'électricité et
pipelinière) pour lesquelles The
Brattle Group, agissant comme témoin
expert, a suggéré à l'organisme
régulateur d'opter pour la méthode du
- on va l'appeler ATWACC aux fins de fixation du taux de
rendement au cours des cinq dernières
années. Cette liste devra fournir le
nom de l'entreprise de service public
demandeur, le nom de l'organisme
régulateur, son lieu de juridiction,
la date de la décision, ainsi qu'un
hyper texte menant à la version
électronique de la décision. Veuillez
indiquer quels organismes régulateurs
ont retenu le ATWACC comme
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méthodologie principale et lesquels ne
l'ont pas retenue.
All right? I think I was slow enough to allow an
adequate simultaneous translation.
MR. VILBERT:
Yes.
Q. [301] And in response to this, you say "While
testimony by Dr. Kolbe and Dr. Vilbert always
reflects the capital structure principles described
in Dr. Kolbe's evidence, clients only sometimes
sponsor requests to use the ATWACC itself as the
primary rate of return standard."
Can you tell us exactly what you mean here
to say what the purpose this nuance?
MR. VILBERT:
A. Sure.
This distinction that I'm drawing in the
response to this question is whether or not the
ATWACC as is specifically proposed to be the
methodology by which the rate of return is set and
the company is regulated, and that proposal goes to
the regulator to adopt the ATWACC.
The alternative, when I estimate the cause
of capital using the principles that I used in this
proceeding, I estimate the ATWACC every time I do
it for my sample companies, but frequently, and in
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most cases, particularly in the United
States, you are
the company has a specific
capital structure that they will file.
And they
want to know, the question that I'm asked
is: "Given our capital structure, our relatives
risk compared to your samples, your estimate to the
overall cost to capital, the ATWACC, what is the
appropriate rate of return on equity that's
consistent with your sample company and the
regulatory capital structure that they're filing in
your case."
Now, the ATWACC is always underlying my
recommendations, but it never becomes my
recommendation. My recommendation to the regulator
becomes "You should allow an ROE of whatever on the
capital structure which has so much percent in
equity."
That is the difference, the distinction I'm
drawing here.
So that in most of the cases, we don't go
forward and say, "Mr. Regulator
or Ms Regulator,
you should adopt the ATWACC as the primary method,"
which has the effect, then, of allowing the
regulator to say "Capital structure can be quite
different," and the overall rate of return required
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doesn't change.
Customers pay no diffrent rates but the
regulation is based on the ATWACC as opposed to ROE
in equity thickness.
Q. [302] Then you go on and state, "Within the last
five years, Dr. Kolbe and Dr. Vilbert have
recommended a document, the ATWACC as the direct
rate of return standard to the National Energy
Board on behalf of TransQuebec and Maritime," and
we know about that decision, obviously, "to the
Alberta Utilities Commission on behalf of Nova Gas
Transmission Limited, NGTL, in the 2009, January,
cost of capital proceeding, and to the Régie on
behalf of Gaz Métro in the current proceeding."
So those three instances, according to your
answer, would be the only forums in which ATWACC
would have been proposed as the direct rate of
return standard, am I to understand that?
MR. VILBERT:
Yes. To my, to my memory, that's the only times
we've done it in the last five years.
MR. KOLBE:
A. In the last five years.
But it was also in 2001 to
the National Energy Board on behalf of the
Transcanada Mainline, and in 1998, I believe, to
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the Alberta Energy and Utilities Board and
Transoil Utilities.
ME GUY SARAULT:
Okay.
Q. [303] Let's start with the National Energy Board in
2001.
What was the
what's proposed as the
direct rate of return standard
MR. KOLBE:
Yes.
Q. [304]
if I follow you?
And the
what was the
decision?
A. The decision was, the words I remember most
frequently are, I believe, "The board is not
persuaded." The decision was that the board was not
persuaded. We used the same principles again in
2004, although I think we formally recommended an
equity thickness or an ROE at 40 percent equity,
which was Tans Canada's choice for the Mainline.
And at that time, the board, as I discussed
in my appendix E, accepted the principles of the
ATWACC but had questions about the evidence.
So
that the TQM decision, which we attempted to answer
in the TQM decision, the TQM decision was really
the third time that the NEB had all these
principles' support and on the first one we
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recommended a direct ATWACC.
On the second one, we recommended the
principles but not a direct ATWACC.
On the third one we, we were sort of open
ended for TQM. We sent 11 on 40, as I recall, 40
percent on
and equity or an ATWACC of this,
however you want to do it.
Q. [305] Okay. So there were three instances for the
NEB, once in 2001 that was not successful.
You say in 2004 that you proposed the
principles but not the ATWACC itself.
What
distinction do you draw between proposing the
principles and not proposing the ATWACC?
A. The same one that Dr. Vilbert just drew.
We
Q. [306] Okay.
A. We did an analysis entirely on the ATWACC, but the
company chose not to request the ATWACC as the rate
of return standard but instead to let it structure
in a traditional format, not the same underlying
principles.
It's the company that decides what form to
request for the rate of return. What we do is
answer the question that's given in this forum,
what is the number?
Q. [307] The decision of the NEB in this second
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instance is RH 2004, rendered on April 2005, is it?
A. Yes, I believe so does.
It has phase 2 at the
end.
Q. [308] Yes.
A. Yes that's the one.
Q. [309] That's what it is.
Okay. I have a copy of the relevant portion
of the decision dealing specifically with the
proposal on the principles OF ATWAC. Je pense qu'on
est rendu à C.1.14.
EXHIBIT C 1 14:
Copy of the relevant portion of
the decision dealing specifically
with the proposal on the
principles OF ATWAC.
Q. [310] So this is the decision doctors Vilbert and
Kolbe?
A. Yes.
Q. [311] Thank you.
And this is the same decision as the one
you are referring to in appendix E of your
evidence, Dr. Kolbe. You said, you know, in which
you explained at the end of the last time that this
was a draft, the NEB raised a number concerns and
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here is how we dealt with them for purposes of TQM
and ultimately in this case?
A. Yes, it's the front part of appendix E of my
evidence.
Q. [312] Okay.
That's the one?
A. Yes, that is.
Q. [313] Okay.
So, at that point time we see that the
NEB did not seem to agree to the ATWACC principles
and for the concerns that are referred to in your
appendix E?
A. I don't think that's accurate.
I think the NEB
accepted the principles but did not agree that we
had met the evidentiary standard to permit not to
use those principles in that hearing.
Q. [314] And the reason as to why this decision in
particular is not mentioned in your answer to
question 19.1 is because in your opinion they had
not in that instance in particular recommended the
adoption of ATWACC as a direct rate of return
standard, is that it?
A. Yes, that's how we read the question. Perhaps the
translation led to some confusion or something, but
that's what we understood the question to want.
Q. [315] That okay, just trying to understand.
A. Yes. That's the reason, yes.
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Q. [316] Thank you.
You referred earlier to a 1998 application
before the Alberta Utilities Board, and I believe
that was a generic cost of capital hearing, would
that be accurate?
A. No. It was for Transoil Utilities.
Q. [317] It was a rate application?
A. It was a guideline. It was for rate of return at
least, I don't know.
Q. [318] Okay.
A. I don't know technically what it was for.
Q. [319] And Is that the one that led to the 1999
decision that's referred to in Dr. Booth's evidence
A. Yes.
Q. [320]
in which they said that the board would be
derelict itself?
A. He loves that quotation. At least he uses it very
often.
Q. [321] That's the decision.
A. That is the decision, yes.
Q. [322] And it's not in your answer because obviously
it goes back to 1999, it was not within the file
year period
A. That's correct.
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covered by the question.
Okay.
I have a number of other decisions which I
would like you perhaps to clarify for me as to what
could have been your role and what was proposed in
and decided by the regulator.
And most of these decisions are listed in
the evidence provided by Mr. Mike Gorman on behalf
of EG
A. The first one is a decision which seems to have
been rendered on January 17, 2008
no, actually
the oldest one, I'm sorry, is in Dr. Goreman's
evidence that's been attached physically to the
binder of material; it's an Arizona decision going
back to 2006, so within the five year period.
I think
dated
bear with me.
Its seems tou be
it is exhibit ACIG 7, document 4.1,
attachment 1.1.
And it seems to be a decision
dated July the 11th, 2006.
Can you go to that
decision?
A. I don't have it.
Q. [324] It's part of Michael Gorman evidence.
A. I don't have his evidence here.
If someone could
get it for me, I'd be happy to look at it.
LE PRÉSIDENT :
Maître Sarault, pourriez-vous répéter la référence
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exacte?
Me GUY SARAULT :
ACIG-7, Document 4.1, Attachment 1.1.
It's my only copy. I can lend it to you as
long as you
ME VINCENT REGNAULT:
We have it. I'm sorry, you have it on the computer
okay good.
A.
(SHOWN TO WITNESS)
We have it here on
screen.
we have it here on the
We can scroll through it, I think.
ME GUY SARAULT:
All right.
Q. [325] So do you remember this decision?
A. Yes. This is, I think this one where we both
testified.
Q. [326] Okay. And what do you remember about the
specific context in light of the Régie question
19.1?
MR. VILBERT:
A. I think that this a perfect illustration of the
source of what appears to be the confusion between
what you thought you were asking and what we
thought we were answering.
In this case, as I said, I used the ATWACC
method to estimate the overall cost of capital for
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the sample companies, and recommended the ROE based
upon the capital structure of
I think this was
for Arizona American water.
Underlying my calculations is the ATWACC
method, and that ATWACC method was investigated by
counsel for the consumer advocate and the staff.
And a lot of the questions were centered on
how I got to the ROE. I got given the estimates
that I used to capitalized pricing model in the DCF
method.
And so the question centered on when I
would answer them through the ATWACC approach, they
investigated the ATWACC approach, because I think
they decided not to accept my recommendation for
the ROE, they commented on the methodology.
Q. [327] At page 27 of the decision under the heading
"discussion", there sems to be the Board's
rationale in support of its decision.
At lines 13 to 19 it is said, and I quote,
"Both the "rukel" (phonetic) and staff used
long standing methodologies approvth by the
Commission to reach their estimates, the resulting
recommendations for ten percent and 10.4 percent
respectively, while the company is using a novel
and not widely recognized methodology to attain its
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12 percent cost of equity recommendation."
Is it accurate to suggest that the novel
methodology referred to here would be the ATWACC
A. Yes, but the novel aspect of it is not the ATWACC
methodology, the novel aspect of it is the fact
that it had not been presented to the Arizona
corporation it's a corporation Commission,
previously.
And in my experience
also Dr. Kolbe's experience
and I think its
that when you
present something new to a regulatory body the
first time, there's a certain amount of skepticism
that comes with that.
And in Arizona, the whole
proceedings, I think, lasted a total of three days,
and I just don't think that we were able to explain
it adequately enough to make them comfortable in
the time that was available to us to do so.
Something they were not familiar with, it
was not the standard methodology used by previous
witnesses that appeared before them.
And that's
reason they, in my opinion that they characterized
it as novel.
Q. [328] Okay.
MR. KOLBE:
A. I just to need to add to that. The NEB is another
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case in point in which the first two times they saw
it they said no; first, because they weren't
persuaded; second, because of evidentiary problems;
and the third time they accepted it.
My
the whole purpose my appendix E in
this proceeding is to try to provide the Régie with
that history so that hopefully they can take
advantage of the questions that have been raised
and dealt with in previous Commissions, and perhaps
short circuit the time it takes to adopt a new
idea.
MR. VILBERT:
A. And one more point, if you're reading the response
to my testimony and to Dr. Kolbe's testimony in
these various proceedings, if your, the first time
seeing this, you would be worried, I think, by the
allegations about all the things that the ATWACC
will do that we have tried to explain are not
valid, and given the time to explain it, carefully
and clearly, and respond to all the questions, we
have largely had a chance to eliminate all these
concerns.
Q. [329] Okay, but I, you know, I was just trying to
understand why this decision was not mentioned in
your response to question 19.1, and my
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understanding is that you did not consider it, and
in that case in particular you were actually
proposing ATWACC as the method?
MR. KOLBE:
A. Yes, that's what we understood the question to ask
for.
No, we didn't say that we always used
principles in response to a question of which we
always do.
Q. [330] H'mm, h'mm.
Okay. The next decision I would
like to refer you to is a decision dated January
17th, 2008, this time by the Public Service
Commission of Wisconsin.
You have the
again, I just took the
excerpts of the decision dealing with cost of
capital and ATWACC; you recognize this decision?MR.
VILBERT:
A. Yes.
Q. [331] Did you testify in the proceedings leading to
this decision?
A. Yes, this particular one was made without Dr.
Kolbe.
Q. [332] It was just you?
A. Yes.
Q. [333] Okay.
At page 71, in the middle of the page,
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because we don't have line numbers
it states,
and I quote, "The Applicant's financial witness
applied an after tax weighted average cost of
capital methodology in developing the Applicant's
recommended return."
Was that
were you the financial witness?
A. I was.
Q. [334] Okay.
And later on it states at the end of
the same paragraph "The Commission is not persuaded
that the ATWACC methodology should be used in
setting and authorized return for a regulated
utility."
A. And my comments with regard to the Arizona
decision, or similar to what happened here, this
was the first time that the Wisconsin Public
Service Commission had been introduced to the
ATWACC method; the same sort of response from
various intervener witnesses laying out the terrors
inherent to the ATWACC approach without the
adequate, I think, time to really explain it
fully.
And I regret that I'm not articulate enough
to explain it in a quickly, in a half hour whatever
cross examination period I had.
So the result turns out to be the
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same: Most regulators, the first time they see it,
have language similar to this; the Commission is
not persuaded. I was just not able to be articulate
enough to explain it to them to get them to adopt
it.
Q. [335] But I'll be candid with you, and I read the
two excerpts that I have just read to you. I was
under the impression that at least the Public
Service Commission of Wisconsin was under the
impression that you were, in fact, proposing ATWACC
as the method for setting the authorized returns,
which is what they seem to say in the second
sentence that I read.
A. In this particular case I recommended a return on
equity, and based upon their capital structure, as
I said, the underlying
Q. [336] So they misunderstood you?
A. Excuse me?
Q. [337] They misunderstood you?
MR. KOLBE:
A. I think you're misinterpreting what they're saying.
Q. [338] What, not convinced that the methodology
should be used in setting an authorized return for
a regulated utility.
A. No, I
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Q. [339] It does leave that impression, don't you
think?
MR. VILBERT:
A. No.
MR. KOLBE:
A. Well, I can't say what impression it leaves in your
eyes, but I can try
I don't think there's
inconsistency with the way we answered the
question. And the reason is we have been in
proceedings where we've recommended a switch to the
ATVACC rate of return standard.
This is one of
them.
We have been in proceedings where, as we
say in the response, we use all the same principles
but arrive at a different form of recommendation.
This was one of the latter.
And the fact that the principles are used,
I hope was clear from the response.
Had the goal been to say "Please provide
every decision where you have used ATWACC
principles to form your rate of return
recommendation," our response would have been
different.
Q. [340] I understood that.
MR. VILBERT:
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A. And then, if you look at my testimony in this case,
you while find that I recommend a return on
equity. And if you read that sentence, it says "The
applicant's financial witness applied an after tax
weighted cost
of capital in developing the
applicant's recommended return." And I recommended
a return on equity, not an ATWACC.
Q. [341] Okay.
So Madame la Greffiere, that will be
C 1 15, donc, décision du Public Service Commission
of Wisconsin du 17 Janvier 2008.
EXHIBIT C 1 15:
Décision du Public Service
Commission of Wisconsin du 17
Janvier 2008.
Q. [342] The next decision I would like to bring to
your attention is before the Tennessee Regulatory
Authority, and it seems to be dated January 13,
2009.
Ça va être C 1 16.
EXHIBIT C 1 16:
Decision before the Tennessee
Regulatory Authority, and it
seems to be dated January 13,
2009.
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Q. [343] Do you remember this decision in particular?
A. I testified in this proceeding.
Q. [344] Yes.
A. But I don't remember this part, I'm not sure I read
this particular decision lately.
Q. [345] Was ATWACC discussed in this proceeding in
particular?
A. Yes.
The scenario plays out pretty much the same
each time I do this.
Again, it was a proceeding in which the
capital structure was specify by the company, that
you can see in the decision, and I return on
equity, and the approach I used to get there was
the ATWACC approach.
Q. [346] Okay.
And again, it was not accepted by the
Commission?
A. Well, it wasn't accepted but the ROE recommended by
the staff was less than 7
ultimately less than 7
percent when you really calculated what they were
doing. And the Commission, the regulatory authority
rejected that and was much closer to my
recommendation than the staff's recommendation.
Q. [347] All right.
The next decision I would like to
bring to your attention is a decision of January
21st, 2009, of the Public Utilities Commission of
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Ohio, which I would propose to file as exhibit
C 1 17.
EXHIBIT C 1 17:
A decision of January 21st, 2009,
of the Public Utilities
Commission of Ohio.
Q. [348] You have the decision in front of you?
A. Yes, I do.
Q. [349] Do you recognize this decision?
A. Yes.
Q. [350] Did you testify in these proceedings?
A. Yes, I did.
Q. [351] At page 21, it is stated under heading
"return on equity" in the middle of the paragraph,
"Furthermore, First Energy
Applicant, I believe
which was the
recommended the after tax
weighted average cost of capital approach that is
unproven and admittedly never used by a state
Utility Commission," do you recall that?
A. I do.
Q. [352] H'mm, h'mm.
And once again, it is correct
that this approach was not retained by the
Commission?
A. Yes.
This particular decision was a major
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disappointment to me because I was invited by the
staff of the Public Service Commission of Ohio,
Public Utility Commission of Ohio, to give a
seminar on the ATWACC method. And I know at the end
of that proceeding, the seminar, that I had
convinced the two witnesses, the staff witnesses.
I am frustrated that they were unable to
convince the decision makers of the efficacy of
it.
And that's, that particular seminar lasted
a full day, and I was able to answer the staff's
questions I think completely.
And I will point out one last thing that
came positive out of that whole process: The
Ohio
a
this was for First Energy which is a
has
three distribution companies, electric
distribution companies, and they had different
capital structures, and they had relatively thin
amount of equity, and the Commission decided,
consistent with the ATWACC approach, to set, to
give them a deemed capital structure, and because
of that, they could give them all the same return
on equity, which is some of the principles
underlying the ATWACC approach.
I couldn't
and it had the effect of
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increasing the ROE for them. It could not get them
to go the whole way to get the ATWACC as an
approach, although I didn't recommend it as the way
to regulate, it came up in the proceeding, they
asked me about it extensively, and I described it,
but it was not part of the company's case to put
forward ATWACC.
Q. [353] Here again, you know, it may be me, but
reading the excerpts that I just read to you, I was
under the impression that you had in fact proposed
ATWACC as the methodology to be followed?
A. I proposed
Q. [354] That was perhaps a misunderstanding on my
part?
A. I proposed it to the staff.
ME VINCENT REGNAULT:
I'm sorry, Mr. Vilbert.
Me VINCENT REGNAULT :
Vous voyez, c'est le problème qu'on a lorsqu'on lit
des décisions. C'est qu'on ne voit pas ce qui a été
proposé exactement par les témoins qui témoignent
devant vous. Alors, c'est un exercice... Je me
questionne beaucoup depuis une dizaine de minutes
quant à l'utilité de l'exercice qui est fait
puisque, évidemment, de la même façon que vous
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écoutez les témoins experts ici, vous allez en
arriver à vos propres conclusions. Et parfois, les
conclusions qu'on peut lire, par exemple, dans les
décisions des divers régulateurs, bien, ne
reflètent pas exactement ce qui a été dit. Je pense
que la meilleure façon de refléter ce qui a été dit
par les témoins ou proposé par les témoins, c'est
de leur montrer la preuve qu'ils ont déposée. Et je
ne sais pas si l'ACIG a cette preuve-là, mais ce
n'est pas ça qu'on leur montre. Alors, j'ai
beaucoup d'interrogation sur l'utilité de la
démarche qui est faite à l'heure par mon collègue.
Me GUY SARAULT :
Écoutez, c'est simplement à la lumière de la
réponse qui a été donnée à la demande de
renseignements 19.1 de la Régie de permettre au
témoin de nous éclairer à l'égard de décisions où
il semble avoir témoigné et qui mentionne l'ATWACC
et ça lui permet justement, ça lui donne le
bénéfice de fournir des explications quant au
contexte et ce qu'il avait recommandé. Il s'en
souvient très bien. C'est tout récent. Ça remonte
au vingt et un (21) janvier deux mille neuf (2009).
Et je pense que le témoin répond très bien, nous
rappelle les circonstances, puis il explique ce qui
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est arrivé. Et je pense que ça nous éclaire tous et
chacun.
Me VINCENT REGNAULT :
C'est une belle façon de présenter les choses de la
part de mon collègue. Je ne pense pas que ce soit
le but qu'il poursuive, c'est-à-dire de permettre à
docteurs Vilbert et Kolbe de rectifier la situation. Je pense qu'il essaie plus de les contredire
ou de contredire, de les mettre en contradiction
avec la réponse qu'ils ont donnée à la Régie, qui,
soit dit en passant, pour moi, est tout à fait
claire et limpide et a été répondue de façon tout à
fait claire et limpide de la part des témoins.
Parce que lorsqu'on la lit, on leur demande... la
liste des entreprises de services publics pour
lesquelles elles ont suggérées à l'organisme
régulateur d'opter pour la méthode du ATWACC aux
fins de fixation du taux de rendement au cours des
cinq dernières années.
Et je pense que les docteurs Vilbert et
Kolbe vous ont clairement expliqué, et je pense que
ça répondait à la demande que, pour eux, cette
question-là, ce que ça voulait dire, c'est un
dossier où ils recommandaient un pourcentage
d'ATWACC sans spécifier nécessairement une
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structure de capital. Et ils ont répondu dans ce
sens-là. La question a été...
Me GUY SARAULT :
De toute façon, il m'en reste seulement une à
couvrir.
LE PRÉSIDENT :
Donc, la Régie permet les questions et les réponses
qui ont été données jusqu'à maintenant, je crois,
elles satisfont la Régie. Et si le témoin avait
besoin d'un complément de réponse pour vérifier ses
documents ou ses... la Régie n'aura pas d'objection
à ce que ce soit déposé par la suite. On peut
continuer.
ME GUY SARAULT:
Q. [355] So the last decision I would like to bring to
your attention, that I would propose to file as
C 1 18, I believe? C 1 18 is a decision dated May
7, 2009, of the California, of the Public Utilities
Commission of the State of California.
EXHIBIT C 1 18:
A decision dated May 7, 2009, of
the California, of the Public
Utilities Commission of the State
of California.
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Q. [356] So you have the decision in front of you? MR.
VILBERT:
A. Yes.
Q. [357] I would like to
you remember having
testified in the proceedings leading to this
decision?
A. Yes.
Q. [358] Did Dr. Kolbe testify as well?
A. No.
Q. [359] At page 23, we have an item 6.1.5 entitled
"After tax weighted average cost of capital."
And
the first sentence reads as follows, and I quote,
"California American introduced a new model into
the cost of capital discussion, the ATWACC, which
is a model used overseas in other regulatory
agencies but not within the United States." You
remember that?
A. I do.
Q. [360] Is that a correct statement by the
Commission?
A. To my knowledge, the ATWACC, as Dr. Kolbe and I
proposed, has not been adopted in the states, but
it is used widely around the rest of the world:
Austrilia, New Zealand, England, most of the EU
countries, Brazil.
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Q. [361] Later in page 23, after the description of
the formula, it is stated, and I quote, "California
American admits the formula and its use is not a
common practice in California, or anywhere else,"
or anywhere else, "where it it's witnessed Dr.
Vilbert has presented the model."
Is that a
correct statement?
A. Yes. And I
the decisions that you have put
before me are indication of the ATWACC acceptance,
the first time it's presented.
And to give you some context, in this
particular proceeding, this proceeding was unusual
in my experience in that there were three water
utilities coming for the California Public Utility
Commission.
Simultaneously, they had very different
capital structures, American Water I think was, if
my memory serves, 42 percent or something like
that, where the other two were well over 50
percent.
And the other two were actually asking for
a higher rate of return on equity. And so what I
did with the ATWACC method was to simply show them
that for a thousand dollars invested in these three
different utilities, if you don't consider the
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overall weighted average cost of capital, it
becomes much more expensive to get water service in
one of the districts than other districts, because
of the differences in capital structure. And
what
I was trying to get them to understand is that they
need to consider financial risk and so forth when
they make these kind of judgements, because
otherwise you have that result where if you're in
this district, for the same service, everything
identical, you're pay a quite different rate than
you would pay in California American Water's
district, and that was the purpose using ATWACC in
that illustration.
Q. [362] At page 24 of the same decision, it is
stated, and I quote, "The Commission has never
adopted a single preferred cost of capital model,
because no one model is perfect, and the results
produced by all models are highly susceptible to
various input assumptions.
Like the others, the
result of the ATWACC are also subject to the effect
of the comparison group or proxy group of
companies, so we will not adopt it as a preferred
model either.
Moreover, we have no current record
on the ATWACC's validity. And party is focused
primarily on the fact that it has not yet been
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For example, there is no
discussion of why overseas jurisdictions allegedly
rely on it and no thorough citations to their
decisions." Remember that?
A. I'm reading it with you, yes.
Q. [363] And in this case here, in this proceeding
before the Régie, could we have more detail about
the precedents in other jurisdictions overseas?
A. I think Dr. Kolbe responded to information request,
if I recall correctly, that had quite a bit of
detail about things overseas, or was that in
MR.
KOLBE:
A. That might have been in TQM. We weren't asked for
more detail than we gave. We have, there are
information requests, responses, other records in
Canada, including TK most recently, where that
detail was requested and we provided it.
And if you want, we could dig that out, I'm
sure, if it's still permitted, the company would be
happy to file that information request response
here or maybe the Régie could take note of it since
it was filed in another Canadian regulatory
proceeding.
Q. [364] At page 24 of the same decision here, i's
stated, and I quote, "The Commission did consider
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and declined to adopt ATWACC in a prior cost of
capital proceeding when PG and E proposed its use."
And it does provide the docket number, and the an
excerpt from the decision.
Were you a witness in that prior proceeding
before the California Public Utilities Commission?
MR. KOLBE:
A. I was a witness in that proceeding.
Q. [365] Was Dr. Vilbert?
A. I don't think so, no.
MR. VILBERT:
A. I was an associate at the time.
I worked on the
case but I wasn't the witness.
Q. [366] At page 25, after quoting from that prior
decision dating back to 1999, the Commission says,
and I quote, "We know that in 1999 the Commission
found the same problem that we find here.
ATWACC
tends tou result in a higher recommendation when
compared to the traditional models."
MR. KOLBE:
A. That's what they said.
We discussed the reason yesterday, of
course. The question is: Do you adjust properly for
financial risk or not?"
Q. [367] Just a side question, Dr. Kolbe, while we're
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talking about this. I would like to go to page 36
of your testimony.
A. Yes, I'm there.
Q. [368] Which is Gaz Metro 7, document 15.
At answer
43 to the question, "Before you leave this section,
please state whether the ATWACC as you define it
here has been used as the rate of return standard
in other regulatory applications?" Answer 43: "Yes,
of course. It has just be adopted by the NEB for
TQM. More generally it is widely used outside North
America in countries that privatized state owned
utilities and instituted rate regulation much later
than we did here for the advantage of access to the
modern financial literature.
To the best of my
knowledge, it is used at least in Australia,
Austria, Belgium, Finland, France, Ireland,
Luxembourg, Italy, the Netherlands, New Zealand,
Sweden and the United Kingdom."
And then you have a footnote 44, stating,
"My understanding, for many of these countries,
does not come from direct review of regulatory
documents due to language barriers."
I have a question for you: Do you feel
there's a language barrier between you and
Australia? United Kingdom?
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A. No.
Q. [369] Thank you.
A. Those were not the countries I had in mind in
writing the footnote.
Q. [370] I suppose not.
So this is the level of information we have
in this case about the overseas precedents
A. Well, there are other documents in which decisions,
there are other documents in which questions have
been asked about this, in which quotations from
deisions, citations and other things have been been
provided. All of that stuff is on the record in
Canadian regulatory proceedings.
If it is permissible, I'm sure the company
would be happy to dig it out and file it here.
Q. [371] Okay.
Me VINCENT REGNAULT :
J'ai une suggestion, Maître Sarault, en fait, et
pour la Régie, soit tout simplement, maître Sarault
demande au docteur Kolbe de s'engager à déposer
l'annexe à laquelle le docteur Kolbe a référé
lorsqu'il s'est fait questionner à ce sujet-là ou
j'aurai l'occasion de réinterroger le docteur Kolbe
sur les sujets dont maître Sarault a traité dans le
cadre de son contre-interrogatoire et je le ferai à
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ce moment-là. Alors, c'est, évidemment, à la
discrétion de la Régie, une ou l'autre des façons.
Me GUY SARAULT :
Je pense que maître Regnault est maître de sa
preuve. S'il croit que des éléments supplémentaires
doivent être apportés pour étayer la position de
son client à la lumière du contre-interrogatoire,
c'est pour ça que la contre-preuve existe.
LE PRÉSIDENT :
Donc, Maître Regnault, vous aurez l'opportunité
plus tard d'y revenir, au besoin.
ME GUY SARAULT:
Q. [372] I would now like to turn to the calculation
of the equivalent return on equity based upon the
more traditional methods corresponding to the
ATWACC ordered in by the NEB and the TQM case
leading up to what's being proposed in this case.
For this purpose, I have asked one of my
experts, Dr. Booth, to make a calculation and
propose it to you, which I am about to do right
now.
And that will be C 1 19; it's a document
entitled "Dr. Booth's calculation of the impact on
Gaz Metro's implied return on equity of the
adjustments proposed by Vilbert and Kolbe between
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TQM's decision and Gaz Metro's proposal."
EXHIBIT C 1 19:
Okay?
A document entitled "Dr. Booth's
calculation of the impact on Gas
Metro's implied return on equity
of the adjustments proposed by
Vilbert and Kolbe between TQM's
decision and Gas Metro's
proposal."
J'ai oublié de dire C.1.19.
Me VINCENT REGNAULT :
J'ai une suggestion à faire aux membres de la
Régie. Évidemment, on va prendre connaissance de ce
document-là qui a été préparé par le docteur Booth,
et ce que je propose, en fait, c'est qu'on prenne
une pause pour permettre durant la pause au témoin
d'en prendre connaissance et peut-être d'être un
peu mieux préparé pour répondre aux questions.
LE PRÉSIDENT :
Donc, nous pouvons prendre une pause de vingt (20)
minutes jusqu'à trois heures quinze (15 h 15).
Me GUY SARAULT :
Je n'ai pas d'objection.
PAUSE
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15 h 20
LE PRÉSIDENT :
Reprise de l'audience. Maître Regnault, vous
avez...
Me VINCENT REGNAULT :
Quelques petits commentaires à l'égard du document.
Évidemment, on a profité de la pause pour
l'examiner. Ce que je comprends à l'heure actuelle
de la part de mes gens, c'est qu'il y a certaines
choses qu'on ne comprend pas, certains calculs qui
ont été faits. Je comprends que ce document-là a
été préparé par le docteur Booth. Et ce que je
soumettrais bien respectueusement à la Régie, c'est
que si le docteur Booth, ou l'ACIG par
l'intermédiaire du docteur Booth avait souhaité
faire une quelconque démonstration quant à un
réajustement de l'ATWACC calculé par le docteur
Vilbert, cet ajustement-là aurait dû être fait dans
le cadre de sa preuve principale et déposé en temps
utile pour nous permettre de formuler des demandes
de renseignements au besoin et d'obtenir les
informations suffisantes pour pouvoir juger de
l'exactitude des calculs qui ont été faits.
Tout ça pour dire que je vous soumets que
ce document-là, en fait, qu'on tente d'introduire
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en preuve à l'heure actuelle, n'est ni plus ni
moins qu'une tentative de faire indirectement ce
qu'on ne peut faire directement, c'est-à-dire
déposer des nouveaux documents au dossier de la
cour dans le cadre de la preuve, de sa preuve
principale. Je suis certain que mon collègue,
maître Sarault, si mes témoins avaient souhaité
introduire une nouvelle preuve dans le cadre de
leur témoignage en chef, il aurait soulevé
certainement un enjeu à cet égard-là. Donc, je vais
m'objecter formellement à ce que ce document-là
soit utilisé pour poser des questions à mes
témoins, les docteurs Kolbe et Vilbert. Merci.
Me GUY SARAULT :
Premièrement, comme vous pouvez le voir, le point
de départ de ce document-là est un tableau qui a
été produit par Gaz Métro en réponse à une demande
de renseignements qui avait été adressée par le
docteur Booth à monsieur Engen, et on retrouve ça à
la pièce Gaz Métro-7, Document 12.3.
Alors, la première partie du document que
vous avez, la partie du haut explique la
méthodologie qui a été suivie par Gaz Métro et ses
experts pour transposer le ATWACC de six point
quarante pour cent (6,40 %) qui a été autorisé pour
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TQM dans la décision en question pour expliquer
que, basé sur les paramètres financiers de Gaz
Métro, ça représenterait un taux de rendement selon
les méthodes traditionnelles de l'ordre de huit
point quatre-vingt-huit pour cent (8,88 %).
Alors, dans la deuxième partie du tableau,
vous voyez que ces mêmes données constituent le
point de départ de l'analyse et que l'on part du
six point quarante (6,40 %), du ATWACC de TQM, pour
aboutir au sept point soixante-seize (7,76) lorsque
arrondi, sept point soixante-quinze (7,75), qui est
recommandé pour Gaz Métro dans le présent dossier.
Et pour faire ces calculs-là, le docteur
Booth, il pourra l'expliquer davantage en preuve
demain, a suivi exactement la même logique
mathématique et financière que celle qui est dans
la première partie du tableau et qui émane des
témoins experts de Gaz Métro. Et je pense qu'on a
affaire ici à des experts aguerris qui sont
parfaitement en mesure de valider si, oui ou non,
les calculs que l'on propose font du sens ou s'ils
n'en font pas.
Et je pense que c'est quelque chose qui est
tout à fait logique et pertinent, parce qu'on
demande à la Régie de passer d'une méthode
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traditionnelle de fixation du taux de rendement à
une méthode ATWACC sans nécessairement avoir devant
nous les étapes qui mènent à l'équivalent de douze
point trente-neuf pour cent (12,39 %) qui est
proposé comme ultime résultat du dossier. Ça, c'est
la première des choses.
La deuxième des choses... Donc, c'est une
interprétation, si vous voulez, qui nous mène de la
décision de l'Office national de l'énergie qui est
cruciale, qui est très importante, jusqu'à la
proposition qui est présentée au nom de Gaz Métro
dans le présent dossier.
La deuxième chose, écoutez, j'étais dans la
salle hier lorsque, entre autres, le docteur Kolbe
a présenté sa preuve, notamment la pièce Gaz
Métro-7, Document 25 (la B-66) dans laquelle on
retrouve plusieurs tableaux, calculs, et caetera
qui n'étaient pas au dossier dans la preuve
principale de Gaz Métro. Ça a été fait pour
compléter, expliquer et commenter les enjeux
pertinents au dossier. Et je n'ai pas formulé
d'objections.
On a même changé la recommandation de sept
virgule soixante-quinze pour cent (7,75 %) qu'elle
était à sept virgule cinquante pour cent (7,50 %)
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pour ensuite apprendre de la bouche de monsieur
Despars que, malgré cette analyse révisée de la
part des experts de Gaz Métro, que Gaz Métro
maintenait intégralement sa demande d'ATWACC de
sept virgule soixante-quinze pour cent (7,75 %)
pour des raisons que monsieur Despars a expliquées.
Tout ceci aurait pu être interprété comme
de la nouvelle preuve, je suppose. Je ne m'y suis
pas objecté. Pourquoi? Parce que ces preuves-là
sont pertinentes. Et c'est la première règle à
analyser aux enjeux qui sont discutés dans le
présent dossier. Et j'ajouterai dans le cas de ce
calcul en particulier qui peut facilement être
réfuté, contesté, complété, admis par les experts
de Gaz Métro, qui est très pertinent pour permettre
à la Régie de bien saisir les composantes qui nous
mènent vers ce fameux équivalent de douze virgule
trente-neuf pour cent (12,39 %) en termes de taux
de rendement sur l'équité.
Et d'ailleurs, si vous allez à la
présentation d'hier du docteur Kolbe, il dit bien à
l'acétate numéro 4 :
Can easily translate ATWACC approach
to traditional framework.
« Easily » à part ça, puis il nous propose un
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calcul dans l'acétate numéro 4. Et vous
reconnaîtrez là-dedans les mêmes paramètres
financiers que ceux qui sont contenus dans la
partie supérieure du calcul que nous proposons,
c'est-à-dire un « debt after-tax » un coût de dette
« after-tax » de quatre virgule quatre-vingts
(4,80), ce qui est exactement ce qui avait été
fourni dans la réponse à la demande de
renseignements qui fait l'objet du tableau dans la
partie supérieur de la page, et de cinq virgule
vingt-deux pour cent (5,22 %) pour le coût des
actions privilégiées.
Et les autres proportions que vous avez
dans notre partie supérieure du tableau, ce sont
les ratios de capitalisation de Gaz Métro qui sont
exactement les mêmes que ceux qu'on retrouve sous
la rubrique « Shell of Capital » dans le calcul du
docteur Kolbe qui nous dit que c'est facile à
faire.
Alors, on le propose le calcul, il peut y
avoir un débat entre experts. De dire que c'est
inadmissible en preuve alors que la pertinence est
on ne peut plus patente et importante,
j'ajouterais, pour les fins de la délibération de
la Régie et je pense que ce serait une lacune grave
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à notre droit de présenter une preuve pleine et
entière pour répondre notamment à ce qui a été
présenté hier par les témoins de Gaz Métro.
15 h 29
Alors, pour toutes ces raisons-là, je pense
que c'est tout à fait admissible en preuve et je
n'ai aucun doute quant à la capacité et l'expertise
des témoins experts de Gaz Métro pour nous produire
des commentaires là-dessus.
Me VINCENT REGNAULT :
Très rapidement. Je maintiens effectivement, je
maintiens, en fait, ce que j'ai dit, évidemment,
précédemment que quant au fait que ce que tente de
faire, ni plus ni moins, l'ACIG ici, c'est
d'introduire en preuve quelque chose de nouveau et
que ça n'a pas été fait correctement. Et je ne veux
pas être trop procédural là, mais je pense que
c'est important.
Maître Sarault fait un lien avec ce qui a
été présenté dans les tableaux des présentations
qui, entre vous et moi, ne sont absolument rien de
nouveau. Ce sont des explications quant aux
chiffres qui auraient très bien pu être fournies
dans le cadre des demandes de renseignements qui
ont été formulées, des nombreuses demandes de
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renseignements qui ont été formulées par l'ACIG.
Ceci étant dit, si, pour toutes sortes de
raisons, la Régie décidait d'accepter que les
témoins soient questionnés sur ce document-là, je
voudrais, à tout le moins, qu'il soit bien clair
que ces chiffres-là n'ont pas été d'aucune façon
vérifiés, qu'ils sont hypothétiques. On peut peutêtre poser l'hypothèse ou suggérer l'hypothèse aux
témoins de ces chiffres-là. Ils pourront répondre
au meilleur de leurs connaissances, mais c'est
évident que le docteur Booth devra, d'une façon ou
d'une autre, fournir l'ensemble des détails des
calculs qu'il a faits parce que quoi qu'en dise mon
collègue, pendant les vingt (20) minutes de la
pause, j'ai des gens dans la salle, qui sont pas
mal plus ferrés que moi en finances, qui ont tenté
de calculer la façon dont les ajustements ont pu
être faits sans être capable d'y arriver. Donc, il
faudra à ce moment-là qu'on ait les détails.
Et, évidemment, je n'ai pas besoin de le
dire, on aura la possibilité de contre-interroger
le docteur Booth à ce sujet-là après un délai
raisonnable pour en prendre connaissance et de
faire une contre-preuve au sujet de ce qu'il aura
donné comme explication.
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LE PRÉSIDENT :
Un instant, s'il vous plaît. Donc, ici, la Régie
constate qu'il s'agit de calculs du docteur Booth
sur des éléments qui sont déjà en preuve. Il n'y a
pas d'éléments nouveaux, ce n'est pas un nouveau
sujet abordé dans la preuve comme telle. Mais,
comme le docteur Booth est l'auteur de ces calculslà, il pourra très bien les présenter dans sa
preuve lorsqu'il sera entendu par la Régie. Et, à
ce moment-là, si Gaz Métro veut faire une contrepreuve sur le sujet, bien, il aura l'opportunité là
au moment de la contre-preuve. Donc, ce sera au
docteur Booth à présenter le tableau dans sa preuve
d'audience sur des éléments qui sont déjà en
discussion devant la Régie.
Me GUY SARAULT :
Alors, Monsieur le Président, effectivement,
docteur Booth sera ici pour expliquer les calculs
qui ont été effectués, tels qu'expliqués au
document. J'ose espérer que notre preuve pourra
être entendue demain. Dans l'intérim, cependant, je
demanderais - et c'est la raison pour laquelle je
l'ai divulgué en contre-interrogatoire - c'est
précisément pour permettre aux témoins de Gaz Métro
de se pencher sur les calculs et de procurer leur
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propre validation.
Alors, moi, je m'attends à ce qu'en contrepreuve j'aurai des commentaires là-dessus parce que
c'est mon droit de contre-interroger aussi les
témoins de Gaz Métro là-dessus. Alors, je tiens
pour acquis que ça va être considéré comme
admissible en preuve à la condition d'être produit
par le docteur Booth et que j'aurai l'occasion de
transquestionner les témoins de Gaz Métro quant à
la validité de ces calculs-là.
LE PRÉSIDENT :
Évidemment, comme je l'ai mentionné, le docteur
Booth aura l'opportunité de le présenter. S'il y a
une contre-preuve de Gaz Métro sur ce document-là,
vous pourrez le questionner. Et si Gaz Métro veut
questionner docteur Booth, il pourra le faire
également s'ils veulent contester les chiffres qui
sont présentés là. Et je crois qu'avec ça, ça
devrait permettre de clarifier les données devant
la Régie.
Me GUY SARAULT :
Oui, ça devrait parce que, effectivement, s'il n'y
a pas de contre-preuve là-dessus, ça va devenir une
preuve non contredite.
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LE PRÉSIDENT :
Sur ce...
Me VINCENT REGNAULT :
À moins que je contredise le docteur Booth en
contre-interrogatoire.
LE PRÉSIDENT :
Donc, sur ce, nous allons...
Me GUY SARAULT :
On verra.
LE PRÉSIDENT :
S'il vous plaît! Sur ce, nous allons reprendre
maintenant la suite du contre-interrogatoire.
Maître Sarault. La pièce sera cotée lorsqu'elle
sera déposée au nom de... comme preuve de l'ACIG à
ce moment-là.
Me GUY SARAULT :
Est-ce qu'on peut lui donner une cote.
LE PRÉSIDENT :
On pourrait coter tout de suite, oui.
Me GUY SARAULT :
... dans la transcription sténographique.
LE PRÉSIDENT :
Cotons-la puis le docteur Booth pourra la
présenter. Excellent.
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Me GUY SARAULT :
Alors, nous la cotons comme pièce C.1.19 pour
identification, sujet à sa production formelle
demain par le docteur Booth.
Je voudrais maintenant aller à la pièce Gaz
Métro-7, Document 11.2, qui a été produite en
réponse à la demande de renseignements 17.1
adressée par la Régie à Gaz Métro. Il y avait deux
volets à la question, à la question 17.1, on
demandait et je cite :
Veuillez préciser si Gaz Métro
souhaite se soustraire de
l'application de la formule
d'ajustement de façon permanente ou
seulement pour le présent dossier
tarifaire.
Réponse : on voulait s'en soustraire de façon
permanente. Et 17.2 :
Dans le cas où vous demandez
l'abolition de la formule
d'ajustement, veuillez préciser un ou
des modes de traitement réglementaire
du processus d'établissement du taux
de rendement qui pourrait être adopté
lors des dossiers tarifaires
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subséquents. Veuillez élaborer votre
réponse.
Et je cite la réponse :
Dans le dossier tarifaire deux mille
dix (2010), Gaz Métro et les experts
sont d'avis que l'ATWACC est le
meilleur indicateur financier pour
établir un taux de rendement juste et
raisonnable. Gaz Métro croit qu'il est
prématuré de fixer dès maintenant une
méthode d'ajustement du taux de
rendement pour les années futures. Gaz
Métro entend donc présenter, dans le
prochain dossier tarifaire, un taux de
rendement juste et raisonnable pour
approbation de la Régie.
ME GUY SARAULT:
Q. [373] You've heard the question and answer 17.2,
gentlemen?
MR. KOLBE::
A. With the translation, yes.
Q. [374] Thank you,
Can you elaborate, expand as to the nature
and extent of the evidence that would be required
next year and in subsequent years, assuming that
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the Régie would go along in principle with the
ATWACC approach, what would be the debate over the
continuation of this approach into subsequent
years?
Would we need to have, for example, new
evidence on the market value of the components of
the capital structure?
Would we need evidence as to the evolution
of the risk profile or rate of return awarded to
Dr. Vilbert's subsample of U.S. proxies?
Would we need evidence as to possible
changes in the tax rates of either the proxies or
of Gaz Metro?
Would we need further evidence to enlighten
us as to whether the adjustments proposed by Dr.
Kolbe in his evidence are still required? And so
forth.
MR. KOLBE:
There are lot of questions.
ME GUY SARAULT:
Q. [375] Yes, there are a lot questions but I want to
be enlightened as to what, you know, would
assuming, let's have the assumption that we go
along with the ATWACC model, what claim of tax
would be awaiting us, in each rate case based upon
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this assumption?
Me VINCENT REGNAULT :
Je vais, je veux faire un commentaire à ce stade-ci
parce que je comprends, évidemment, là où désire ou
souhaite aller le procureur de l'ACIG, et je
voudrais simplement pour peut-être tenter de sauver
un peu de temps vous dire que, quant à moi, c'est
totalement, il y a une absence totale de pertinence
quant à cette ligne de questions. Et la raison pour
laquelle c'est, quant à moi, totalement non
pertinent, pas que les questions de mon collègue
soient impertinentes, loin de là, c'est que la
Régie dans la Loi, dans l'article 49 de la Loi sur
la Régie de l'énergie, doit permettre un rendement
raisonnable sur la base de tarification.
Et ce rendement-là raisonnable en mil neuf
cent quatre-vingt-dix-neuf (1999), pour toutes
sortes de raisons, la Régie a décidé d'adopter une
formule qui permettait un ajustement automatique.
Mais cela n'a pas privé Gaz Métro de son droit de
demander à tous les ans, si elle le jugeait
nécessaire, d'obtenir ou de demander à la Régie par
une autre méthode qu'elle fixe un taux de rendement
raisonnable.
Et dans ce contexte-là, la lourdeur, quelle
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qu'elle soit, si lourdeur il y a, de la méthode
proposée par Gaz Métro pour fixer son taux de
rendement raisonnable, n'a quant à moi aucune
pertinence puisqu'elle permet de fixer le rendement
raisonnable. Je ne vois pas en quoi la lourdeur de
la chose ou de la méthode puisse empêcher la Régie
d'entendre ce genre de preuve par Gaz Métro.
Me GUY SARAULT :
Écoutez, Monsieur le Président, Messieurs les
Régisseurs, je pense que mon confrère est en train
de vous dire indirectement, mais poliment, que
votre demande de renseignements 17.2 n'était pas
pertinente. Je pense que l'allégement
réglementaire, que le processus réglementaire a été
une préoccupation au centre de l'action
réglementaire de la Régie pour plusieurs années. Ce
n'est pas un hasard si cette formule automatique
d'ajustement du taux de rendement a été adoptée en
mil neuf cent quatre-vingt-dix-neuf (1999).
Je pense que si vous relisez les décisions
de l'époque que l'allégement réglementaire était
considéré comme un avantage. Alors, évidemment, ça
peut devenir une considération aux fins de vos
délibérations quant à la question des conséquences
que pourrait comporter l'adoption de cette
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méthodologie sur non seulement la cause tarifaire
de cette année, mais sur le processus qui devra
être suivi au cours des années prochaines, savoir
un peu, comme on dit en Québécois, dans quoi on
s'embarque pour cette année et les prochaines
années.
Alors, à toutes fins pratiques ce que j'ai
demandé aux témoins de Gaz Métro est d'élaborer un
peu pour nous permettre d'en savoir plus long au
sujet de la réponse un peu laconique qui a été
donnée à votre demande de renseignements 17.2.
LE PRÉSIDENT :
Un instant s'il vous plaît. Donc, bien certainement
même dans le cadre où la Régie avait une formule en
place, le Distributeur a le droit en vertu de la
Loi de demander à la Régie, de justifier à la Régie
de faire un examen pour fixer un taux de rendement
raisonnable. C'est ce qu'on fait dans la présente
cause. Il y a diverses méthodes de proposées,
l'ATWACC ou une autre méthode basée sur le MÉAF.
Par contre, Gaz Métro demande également
l'abandon de la formule ou le rejet de la formule
et ça a des implications au niveau de l'allégement
réglementaire qui est en place depuis certaines
années. Et la question posée par maître Sarault est
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pertinente quant à certains volets d'une décision
qu'aura à prendre la Régie après avoir pris en
compte tous les points de vue qui seront présentés
devant elle et après avoir délibéré évidemment sur
la question. Ça ne préjuge en rien de la position
que pourrait prendre la Régie. Mais la Régie va
permettre la question de maître Sarault.
ME GUY SARAULT:
Q. [376] So I guess you are requested to answer the
question?
ME VINCENT REGNAULT:
Can you repeat it?
MR. KOLBE:
Yes, I'm tempted to ask to repeat it, but I won't.
The question actually is very similar to
what I got from the NEB and the TQ hearing,
the
TQM hearing
Q. [377] Was there an objection?
A. There was not.
And I suspect had the Régie argued and
asked that there wouldn't have been an objection
either, but that's speculation on my part.
I will say the following: I think everyone
is in danger of fooling themselves if they think
this is really a question about ATWACC versus
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return on equity.
Estimating the cost capital is hard;
business risk does change; financial market
conditions do change. And we've seen them change
dramatically in the very recent past.
It is my view stated to the Regie, and it's
stated to you again today, that while for a period
of convenience you may choose to index any rate of
return measure, return on equity, ATWACC, any
system you want, that should be done for a limited
period of time.
And it should be done in recognition of the
longer the period of time it happens, the greater
the danger you will drift off what the market has
done in the meantime.
And, of course, when you index only one
thing, then you only pick up changes in that one
thing. And the problems that have been talked about
with the formula where because of the fight to
quality, the formula went down just when the cost
of equity plainly were going through the roof and
reaching unprecedented levels, is an indication of
what can happen; in extreme one but nonetheless an
indication of what happens when you index to anyone
thing.
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So my recommendation for such matters is
that if you adopt a formula, you should do so for a
specified period of time, and at the end of taht
period of time you should plan to have a generic
full out look at your procedures without any
presumption that the formula you used up till now,
it's a starting point; just start over every so
often.
If you do that, once you establish a
procedure, you could adopt an ATWACC and say "We
are going to index an ATWACC in the following way
for the next two years, and then we're going to do
it again and decide if we want to keep the ATWACC,
if we want to keep the index, if you want to change
something.
I think you can save legitimately
regulatory resources absent a crisis right.
In the case of this crisis we just had,
obviously all bets are off.
But absent a crisis, I can save regulatory
resource reasonably with an indexing method.
Now, I have not been asked to develop an
indexing method for ATWACC.
It is conceivable that if the NEB goes ahead and
comes out with some generic proceeding which I don't
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know what the status is, I know they called for one,
but I haven't been updated on that, but I know that
right after the TQM hearing, they called for a review
of their procedures.
It's conceivable I will be asked to help
think about how to index an ATWACC.
That's not a question anyone has asked me,
and I'm very busy answering the questions I have
been asked.
But my recommendation would be to hold
a generic proceeding on the question of how to
index the ATWACC you adopted, as the NEB may be
preparing to do, and decide what procedures make
sense, have people simulate different procedures,
see how they work, have people debate back and
forth the merits of what the procedures are.
In the generic cost of capital hearing in
2003, I think, in Alberta, for example, I
recommended indexing to a corporate rather than a
government bond rate because, precisely because I
worried there would be times when the cost of
capital corporations would not be well represented
by the cost of capital to the government.
That would have presented, had that been
done with your formula, in these hearings, it would
have prevented some of the worst of the disconnect
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where the formula went down just as the cost of
equity was obviously going up.
So, that would be a proposal to consider in
such a
in such a matter.
I wouldn't
I think it is possible to
develop indexing systems and save resources, I
think there's a trade off between accuracy
duration of those indexing systems, and there has
to be a balancing of saving of resources between
hearings with misallocation of resources due to
getting the rat of return off the mark as time
passes.
But whatever you do out of this hearing, be
it ATWACC or some variation of your existing
formula, I would recommend that you consider
strongly putting a sunset on it so that you would
know for sure that you'd take a fresh look at
what's going on periodically.
I don't know if that's responsive or not
but I think it does address the question of burden.
Q. [378] I think it's responsive to certainly a
portion of my question.
What I had in mind more specifically is
that assuming that the principles of the ATWACC
approach are approved in this system, and Gas Metro
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having announced its intention to come back next
year, assuming that you want to continue with the
same basic principles, the same basic approach,
what I'd like to know, what elements included in
the application of the ATWACC would have to be
revisited to make sure that we have a sound
decision year after year?
A. Sure.
The short answer at the moment is most of
them, because these are, this number is estimated
in the midst of this crisis, right? And it doesn't
matter what method you use. If you use a formula
return on equity, and you want to get number right,
it has to take prices in account. The existing
formula plainly does not. The ATWACC had to take it
in to account.
Whatever you do, right now, is special
because right now is a special economic time.
So, the next time back, of course you will
want to take into account to see how far back we
are, hopefully, towards a normal period, and
hopefully we won't be back in the middle of a
crisis, and things won't have cycled back down
again.
Once you reach a point where you think you
have some level of stability in the financial
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markets, I would submit that doing an ATWACC is
actually simpler than doing
cost of equity
correctly, because to do a cost of equity
correctly, you have to do all the things we do for
the ATWACC, that is we have to look at the market
value capital structures of the sample companies in
order to understand what level of financial risk
you're seeing when you measure their cost of
equity.
And if you do the cost equity, you then
have to take the extra step of translating it into
a cost of equity at the regulatory capital
structure.
Whereas, if you do the ATWACC, you can stop
once you've calculated the ATWACCes and just look
at the relative risk.
So the ATWACC is simpler in principle than
the traditional method, if you do the traditional
method in a way that correctly recognizes the
implications of the financial risk you measure in
the market when you measure the cost of equity.
Q. [379] Okay. Thank you.
Dr.Vilbert, I would like to now turn to
page 2 of your testimony, answer A 5 outlining the
steps in your ATWACC analysis, all right?MR.
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VILBERT:
A. Yes.
Q. [380] You say "To estimate Gaz Metro's cost of
capital I analyzed two samples: Canadian regulated
utilities and U.S. gas local distribution
companies, gas LDC, the sub sample we were talking
about with Dr. Carpenter
A. Yes.
Q. [381]
correct?
Then you have for each of the benchmark
samples, I estimate the market value Capital
Structures, and market costs of debt, and preferred
stock of the sample companies, correct?
A. Yes.
Q. [382] So I understand that pursuant to your
approach, the components of the capital structure
are determined on the basis of market value versus
book value?
A. Yes. That's correct.
Q. [383] Is it correct that traditionally for
regulated utilities such as Gaz Métro, the capital
structure is traditionally estimated at book value?
A. The regulatory capital structure is a book value
capital structure, and that's the same capital
structure that the ATWACC would be applied to, so
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there is no difference between the ATWACC approach
and the traditional approach with regard to that
topic.
Q. [384] Then what is the purpose of your estimation
of the market value capital structures and market
costs of the debt and preferred stock of your
sample companies?
A. The purpose is to put the cost of equity estimates
that come from sample companies with different
capital structures on a common basis.
And in order to get to that point, I
calculate the overall cost of capital, which is a
weighted average of the cost of debt and the cost
of equity.
So two sample companies, one with the
capital structure of 55 percent equity and another
one with a capital structure of 40 percent equity
would cool it, and would likely have very different
estimates of the cost of equity.
And so if you simply average those two
things, you're getting a misrepresentation of the
overall cost of equity for these sample companies.
And so in order to compare them across the sample,
you need to get the overall weighted average cost
of capital, which is what the market value capital
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structures give me.
Once I have the ATWACC, that allows me to
compare every sample company on a consistent basis
and to calculate the average for the sample.
Q. [385] But if you'd compare them all on book value,
wouldn't it be equally consistent, but with the
exception being that it would be on book value
rather than market value?
A. But the principles of finance, every textbook I'm
aware of says that financial risk is a function of
the market value capital structures.
As Dr. Kolbe was explaining in his
presentation yesterday, the betas that are inherent
in the analysis of the capitalizing model, the risk
positioning model, the betas are a function of the
market value capital structures, the market rates
of return and you, doing it on a book value basis
is meaningless because the book values never
change, or hardly ever.
MR. KOLBE:
A. Could I just add a comment? You can think of it
this way: Every, every time you may get the cost of
equity, you measure something that has two kinds of
risk in it: The business risk of the enterprise and
the financial risk of the equity.
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And for reasons I explain, the financial
risk depends on the market value capital structure,
you know, remember the condo example, where your
condo changes in value and how hard your equity is
hit depends on how big your mortgage is.
So that if you are averaging cost of equity
directly, you're averaging perhaps, we hope,
homogeneous business risk, that's the goal of
trying to get a pure play sample.
The same business risk but widely differing levels
of financial risk.
So you're
you have a nice set
of apples over here but then you have fruit salad in
the level of financial risk, many different levels.
Estimating the WACC takes the weight
average cost of capital after tax, it takes it to
a just business risk. And then you can adjust to
the book level of financial risk, to market level
of financial risk, whatever it is, but you're
averaging just over the business risk levels, not
over the business risk plus financial risk.
Q. [386] But don't we agree that your samples that are
used as proxies for the analysis of Gaz Metro's
ATWACC, those proxies are regulated utilities,
correct?
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MR. VILBERT:
A. Yes.
Yes, they're all, they're selected to be, as
the Gaz LDC sample in particular, was selected to
be as pure play Gaz LDC companies as is possible to
arrive at, but their capital structures would
differ.
Q. [387] So despite the fact that those samples are
regulated utilities as opposed to private companies
in a free market, you nevertheless use market value
rather than the book value, which would be used by
their respective regulators to determine their
capital structure, correct?
A. Yes. And as Dr. Kolbe explained, that's because the
equity estimates you get from the models, whether
it's dividend valuation models or the cap M, the E
cap M is always a function of the market value
capital structures underlying the estimates.
That's just a fact.
Q. [388] And you say that financial literature is in
favour using market value capital structures?
A. It has an estimate of the financial risk, yes.
Q. [389] Do you know Dr. Roger Morin?
A. Dr. Morin, yes.
Roger Morin.
Q. [390] The other of this book that I'm holding in my
hand?
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A. I do.
Q. [391] New Regulatory Finance, 2006.
Do you realize
that Dr. Morin has been a witness before this board
for numerous years on behalf of Gaz Métro on top of
capital issues?
A. I didn't know that, no.
Q. [392] Now you know it.
talk about this.
I read his book, he does
So I would propose to file this
as Exhibit C 1 20, excerpt from Dr. Roger Morin's
book, New Regulatory Finance, the 2006 edition.
EXHIBIT C 1 20:
Excerpt from Dr. Roger Morin's
book, New Regulatory Finance, the
2006 edition.
Q. [393] And the excerpts are essentially the chapter
16.1 dealing with book or market value, and this is
in the chapter 16 that starts at page 449 under the
heading "Weighted Average Cost Of Capital."
And in the same chapter, Dr. Morin's
analysis goes on to comment, the ATWACC, of what it
is, to describe what it is in relation to the
before tax weighted average cost of capital.
A. Exhibit C-1-20.
Q. [394] You have the
you're
are you familiar
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with this book by Dr. Morin? I mean, I understand
that he testifies extensively in the United States
and he's well known for usually representing
utilities or acting on behalf of utilities and cost
of capital evidence, is that something that you're
familiar with?
MR. VILBERT:?
A. Yes, I know Dr. Morin.
And this chapter has come
up several times and, ultimately, if you read this
carefully, when you get to the end you'll
understand that he's recommending
exactly the same
thing that we recommend.
He does talk about book capital structure
weights but that's in the context of the regulatory
proceedings, which is exactly what we're doing.
But when you're measuring the cost of capital and
the markets and trying to figure out financial
risk, that's where you use market valuations.
Q. [395] Could you tell us, you've said that you've
heard several times about this chapter in
particular, could you expand as to the
circumstances in which you were called upon to
discuss this chapter?
A. Sure. Whenever testifying on the ATWACC as a method
of estimating the cost of capital, this chapter is
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usually, people know this book and they use this as
a reference and discuss it.
And, as I say, this chapter, if you read it
all the way through, he gets to exactly where we
are in our estimated cost of capital, there's no
difference. We say just say the exact same thing he
does on terms of adjusting for financial risk for
the book value capital structure for the
regulatory, regulating companies, that's exactly
what we're saying.
And in terms of talking about financial
risk, ultimately he talks about market values and
Modigliani theories and that sort of stuff, and
that's all based on market value capital
structures.
Q. [396] Well, let's take it slowly.
In the first
paragraph at page 451, second sentence, "The
traditional practice uses current market returns
and market values of the company's outstanding
securities to compute WACC," which is for weighted
average cost of capital by contract in the context
of rate making for regulated utilities.
It is almost universal practice to employ
the hybrid computation consisting of embedded cost
of that and a market base cost of equity, such as
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cap M, with costs of debt and equity both weighted
at their respective book values in the
determination of the WACC."
Do you agree that this is standard practice
of regulated utilities?
A. I'm sorry, I can't find the quote where you're
reading.
Q. [397] I'm reading page 451 under the heading 15.1
of "Book Versus Market Value."
A. Okay, sorry.
Yes, this is just the distinction between
the regulatory WACC and the textbook WACC that we
addressed
Q. [398] Correct.
A.
to use the term ATWACC to distinguish the two.
Q. [399] And what I'm suggesting to you, given the
fact that the sample of a proxy is by Dr. Vilbert
for purposes of his analysis, are all regulated
utilities, what I'm submitting to you that it is
contary to the standard practice to provide an
estimation of the respective capital structures
based upon market value as opposed to book value,
as described here by Dr. Morin.
Q. [400] That's what I'm dewscribing to you. He says
here, the traditional
the standard practice for
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regulated entities is to use book value?
MR. VILBERT:
A. We don't
I don't think there's anything Dr.
Kolbe or I have said that suggests that we do not
believe that the rate base ought to be set on book
value rate base.
Q. [401] I'm not talking about the rate base, I'm
talking about the capital stucture of your
samples. That's what you say in your evidence, that
we're talking about that. I am not talking about
the rate base.
MR. KOLBE:
A. It is, as a description of traditional practice,
what he says is correct.
The key question, for
present purposes, is how do you get the cost of
equity that you use with that in that formula when
you use book value weights, use book WACC.
What we do in the derivations you've seen,
is tell you how to get the cost of equity that goes
with the actual implications of the sample evidence
you're analyzing, that takes into account the
differences in financial risk between the beta you
measure, the cost of capital you measure, and what
that would have been at the book capital
structure.
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So there's no barrier, you know. I think
the title of my chart was something like "There's
no problems translating the ATWACC into a
traditional approach," which, by which I meant
traditional book weights, that's what I calculated
the 12.29
Q. [402] You're ahead of me.
A.
is exactly that.
Q. [403] You're ahead of me, but before you get there,
the samples used by Dr. Vilbert, who is upstream
from you in his analysis, his samples, Capital
Structures, are determined based on market values?
A. Yes.
Q. [404] This is my line of questioning. I'm not into
your further analysis or adjustments for Gaz
Metro's particular case, I'm upstream of that. Do
you follow me?
A. Well, I think so, but I don't understand how
that
how that affects what I just said, so I
guess maybe I don't follow you.
Q. [405] Well, I will just leave you on the conclusion
you can read this section 16.1 of Dr. Morin's book,
as well as I can, but at the end at page 453, after
putting forward the pros and cons of book value
versus market value for regulated utilities, he
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states, and I quote, "In summary, the use of book
quantities instead of the more economically correct
market quantities is not une reasonable for
purposes of setting fair and reasonable utility
rates."
And I suggest to you that the
determination of the capital structure is part of
that exercise.
MR. VILBERT:
A. I will tell you that I've had conversations with
Dr. Morin about this chapter, and I asked him what
he had in mind, and he has in mind exactly what we
are recommending.
If you read the rest of it, he talks about
the Miller Modigliani proposals, and those are all
based upon market value Capital Structure
information.
He is describing what we are describing for
application to a book value rate base, you take the
average weight average cost of capital, apply it to
the book value rate base; and as you change the
capital structure, you have to change the ROE in
recognition of differences in financial risk. That
is exactly what we're talking about.
MR. KOLBE:
A. Yes, you can read well.
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Q. [406] It speaks for itself.?
A. It does speak four itself.
Q. [407] Excuse me for a second.
Look, this could be a long and technical
debate; what I will suggest, I will ask my experts
to provide their own interpretation as to what they
believe should be standard practice in this
respect, and the Régie will have this great piece
of reading as a reference material and we'll see
what happens, is that okay?
MR. KOLBE:
A. Of course, you get to ask the question, we only
answer them.
ME GUY SARAULT: Thank you.
Q. [408] In your analysis, Dr. Vilbert, you seem to
use the same tax rate, Gaz Metro's tax rate for all
of your samples, is that a correct assumption?
I'm referring you more particularly to
table MJV 21, page 85 of 95 of the tables attached
to your evidence where we have the list of your sub
samples, and the tax rate that you use for all of
them is a tax rate of 30.2 percent, which
corresponds to your assessment of Gaz Métro's own
tax rate.
MR. VILBERT:
A. Yes, that's correct.
Q. [409] Is it correct that all, depending on the
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actual tax rate of all those companies in the sub
sample that the ultimate value of their ATWACC
could fluctuate up or down?
A. If your question is: Do all of the companies in my
sample have that same tax rate? The answer is no,
they do not.
The purpose of using the same tax rate for
all of the sample companies is because Dr. Kolbe
and I are estimating cost to capital for Gaz Metro,
and to make everything comparable for the sample we
need to use the after tax rate that would be
applicable to Gaz Metro to get its a appropriate
cost of capital.
Q. [410] But my question is the following: Isn't it
correct, all depending on the actual tax rate of
each of these companies, in reality, their
individual ATWACC could not be, would not be at the
same value, it could be more or it could be less?
A. If I were estimating the cost of capital for any of
the companies in my sample
Q. [411] On ATWACC basis?
A.
on ATWACC basis, that was
I was then
proceeding for my source or some other company, I
would use my source's tax rate. Because I'm in a
proceeding for Gaz Métro, the appropriate thing to
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do to make all of the sample evidence comparable,
is to use Gaz Metro's tax rate.
Q. [412] H'mm, h'mm.
But doesn't this pollute the
validity of your sample, because their respective
ATWACCs are used as the reference to which you
compare Gaz Metro for purposes
of arriving at your
recommendation, so if it's not representative of
their true actual situation on account of
differences in the tax rate, isn't it your
comparison
isn't your comparison polluted or,
for lack of a better word, at the very outset?
A. I don't think so because the
again, the
comparability is to Gaz Metro.
And if you think about how a regulated
utility actually sets its rates, it has an ROE,
that's after tax, to which it adds an allowance for
taxes, and that allowance for taxes is different
for every utility their estimating
Q. [413] Correct, hence my question.
A. But I'm estimating the after tax cost of equity, so
the tax rate that you get when you do the DCF or
the cap M is and after tax cost of equity. The
taxes are already gone when you get to that point.
So the only thing that I'm doing is to ensure that
the deductibility of interest expense is
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represented by the ATWACC is comparable to what it
would be for Gas Metro.
MR. KOLBE:
A. The pollution, if that was your word, if I recall
it correctly, would come if you used half a dozen
different tax rates for half a dozen group of
companies, so an unregulated company estimates the
weighted average cost of capital to do ad
investment decision, it doesn't go out and get the
tax rate for 15 different companies in its sample
and use that, it uses its tax rate. This the way
it's done, so you're sure that you're looking at
your own situation correctly, based on the market
data.
Q. [414] In closing on this issue, isn't it correct
that in the United States the Federal income tax
rate for a corporation is more around 35 percent?
A. Yes, that's correct.
Q. [415] And in addition to that Federal tax rate,
isn't it correct that there's also state tax which
may vary to anywhere between zero to 10 percent,
which could bring the global or overall taxation
from 30 to 40 percent?
A. It could, yes, it could raise it overall.
does.
Q. [416] Thank you.
And
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Now, Dr. Vilbert, you use a market risk
premium; we're talking about the risk premium at
the market as a whole of 5.75 percent which
corresponds to the estimate you had when you
appeared before the NEB for TQM, correct?
MR.
VILBERT:
A. Yes, in this
that's correct. In this proceeding
that's my base level MRP.
Q. [417] So it's the same thing as what you had done
for TQM, so based on historical data, on the market
risk premium of the market as a whole, correct?
A. No.
Not, not correct.
It is partly informed by
the realized historical rates of return but it's
also informed by other factors, including theory
work done by academics; also surveys of professors;
also there's a series owe work done by Ibidson and
Chan in the U.S., and they do the supply side.
And finally I consider the fact that the
MRP in the United States is generally considered to
be higher than Canada. And all those things
together give me the 5.75.
Q. [418] It's a mix of a lot of data
A. That's correct.
Q. [419]
right? And which can, you know, cover a
fairly long period in certain cases, I mean you
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know, there are compilations of historical market
risk which may go back some of them to the
early 20th century, correct?
A. Yes. In fact, I mentioned yesterday a publication
by the Professors Dinston March and Staunton; it is
the Global Investment Return Source Book or
something like that. And they have a 109 years of
data in that book as of 2008
2009.
Q. [420] And I remember when I, you know, had the
pleasure of cross examining Dr. Morin when he
appeared before the Régie on the subject to the
market risk premium, and he would always remind me
"Oh, Mr. Sarault." He has to realize that market
risk premium is, you know, a market phenomenon and
we cannot use an individual figure in a given year
to come to a hasty conclusion, we have to look at
the overall picture, hence why we have these
this data and the references going back to very far
in history.
A. Yes. The problem with the MRP, of course, is that
it's unobservable, variable, and we have to
estimate it somehow.
Q. [421] Now, in this case in particular, that result
of 5.75 percent that you had on the basis of that
data, you further add an adjustment of 2 percent to
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cp,e to 7.75 percent because of the particularly
difficult economic turmoil that we have known in
2008, 2009, correct?
A. Yes. It was an effort to deal with the financial
crisis and the effect on the cost of capital of
that financial crisis.
Q. [422] So, this would mean that a crisis that took
place in one year alone in itself justifies 2
percent out of a figure which was initially 5.75,
so we're close to your original estimate. If I put
2 percent on 5.75, I'm close to one third, and you
add one third on account of an event that took
place in one year.
If I may use a parallel, would it be
equally logical to base our assessment of the
market risk premium by taking 1929 alone and
seeking "Oh, we're going to make an adjustment
because it was a grade depression in 1929" how can
you justify giving so much important to one year
A. Keep in mind that the market risk premium is a
forward looking] estimate of the cost of capital by
investors.
I think it's universally acknowledged that
the cost of capital is higher as a result of the
financial crisis than it was before the financial
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The question is: How much higher? You have
to have some way of estimating that. And I
estimated and I used
by the way, I did
sensitivities with 100 basis point, 200 basis
points, and 300 basis points for the increase in
MRP because the events in the most recent year were
quite extraordinary. We had at one point in the
United States Treasury bill yealds that were
negative. People were fleeing to any kind of safe
security they could find. That tells me that
they're investor risk aversion , their taste for
being invested in anything risky had gone down such
that
or gone up rather, such that in order to
acquire equity investments you would have to offer
a much higher expected rate of return going forward
than you had in the past. That's the fact of the
situation we were in at the time I was estimating
my cost to capital.
Interest rates on A rated utility debts
were up almost 7 percent and higher for a
while. And if you don't do something to the cap M,
you end up with rates of returns on equity that are
less than the cost of debt, which is nonsense.
Q. [423] But my question was: You agree with me that
you're giving importance to one factor in one year
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which may already be behind us, isn't that correct,
Dr. Vilbert, that according to the consensus
forecast that we referred to during my
cross examination of Mr. Despars this morning,
according to them a lot of institutions, we go
between 2009 to 2007 from minus 2 GDP to plus 2
GDP, a difference of four percent.
A. Well, if you're asking me do I think and hope that
the worst of this crisis is behind us, I would
agree that I think that's true.
I think things are
better today than they were when I did my
evidence.
I don't believe that it's completely behind
us. And I believe personally that the increase in
investor risk aversion that came about because of
this crisis is not going to go away in a hurry.
And the reference I have for that is, as I
mentioned yesterday, I have friends who told me
that they were close to retirement at one point and
they no longer can retire because they don't
believe they have adequate funds in their
accounts.
They're not going to forget that anytime
soon, and they're not going to be investing in
stocks righe away.
We have data on money market funds. Money
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market funds have more money in them today than
they have had in a long time. People still have not
moved out of money market funds.
Give you another example: My parents and
others like them were afffected by the Great
Depression ; they still don't invest in stocks,
because they have never gotten over the Great
Depression.
I'm not saying it's that bad now, but I
don't think we have recovered to the point where
you can say that the kind of adjustment I made,
although probably less going forward, the kind of
adjustment I made is not necessary.
Q. [424] Talking about the Great Depression, isn't it
correct that today the Great Depression, if we look
at the statistical data which is typically used to
establish the market risk premium by the financial
literature, the Great Depression is just like a
couple of years in the pile of data that we have
about the equity risk premium?
A. I agree.
I'm simply saying that the impact of an
event like that lasts long after the event has
passed. And the impact on people's risk aversion or
willingness to invest in equity is going to last
past the time when the market starts to recover.
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Q. [425] Obviously, Dr. Vilbert, you realize, as I do,
that your assessment of the cost of capital is for
a test year that will begin on October 1st, 2009,
and end on September the 30th, 2010. That's what
we're talking about. We're talking about the future
year 2000 and 10ahead of us, not what took place in
2008 and 2009.
A. I understand.
When I did my analysis, I have to
take into consideration the data in front of me at
the time I do the analysis.
And that's what I
did. At the time I did my analysis, things looked
pretty grim. The market was falling rapidly; it was
down over 40 percent, both in Canada and the United
States; interest rates were sky high; things looked
very bad. I estimated as well as I could do at that
time based upon the conditions that I saw.
I think Dr. Booth, for example, as far as I
can tell, he almost completely ignored the economic
crisis as if it was not happening, that to me is
not credible. And, in fact, his cost of equity
estimation was only slightly higher than the cost
of debt.
I just don't see how that can possibly be
an accurate estimate.
Q. [426] When did you write your evidence, Dr.
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Vilbert?
A. I think the date was March time frame, something
like that.
Q. [427] March? We're now in August.
April, May,
June, July, August, five months.
Isn't correct that the outlook now, only
five months later, is significantly different
A. The outlook is certainly improved. As I said and
I'm glad of that, I think that's, you know, that's
great, I love that, but, all I'm saying to you is
that we're not out of the woods yet.
In fact, if you looked at what happened in
the United States market and the Canadian market in
the first two days of September, we were going back
the other way.
And there was articles in the
newspaper, anybody can read about whether or not
China's growth was going to body sustainable,
whether they're going to cut back on their support
for their economy? If that happens, are we going go
back down to where we were before?
I mean these are still concerns. I hope we
recover. I think things are better but to say, to
stand up and say at this point that we're out of
the woods completely, I think is not supportable.
Q. [428] And despite all of that, the term, the two
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percent adjustment in your market risk premium is
still there?
A. If I were doing it today, it wouldn't be that high.
Q. [429] How high would it be?
A. Well, I've done some preliminary work on that. I
would still be at least 100 basis points higher
than I was before.
Q. [430] It's already half?
A. It is.
But, as you
we just agreed, that you
have to base your evidence at the time you do the
analysis.
Today things look better. They could look
worse next week, next month, or they could look
better. I don't know that.
No one in the room
knows that.
Q. [431] All right.
Dr. Kolbe, last but not least.
MR. KOLBE:
A. Yes?
Q. [432] First of all, I
you know, my questions are
limited to essentially the three adjustments.
You
proposed over and above the ATWACC of 7.25 percent,
which is the result of Dr. Vilbert's
recommendation, in order to arrive at the final
ATWACC of 7.75?
A. Okay?
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Q. [433] The first of these adjustments is a quarter
of a point, accounting for Gaz Metro's higher risk
profile versus Dr. Vilbert's sub sample, correct?
A. Yes.
Q. [434] And am I correct in understanding that this
adjustment in particular is linked directly to Dr.
Carpenter's evidence as to the higher risk profile
of Gaz Metro vis à vis the sub sample?
A. Yes, certainly. And to my discussions with him
about it.
Q. [435] Good.
So we both agree that if by any chance
in its analysis of Dr. Carpenter's evidence, the
Régie comes to the conclusion that it is not
satisfied that Gaz Metro's risk profile is in fact
higher than those U.S. proxies, then that
adjustment must fall, we agree?
A. Well, yes.
Just to be clear, based on my own reading
of Dr. Carpenter's evidence and my own knowledge on
the underlying knowledge, of course I would
recommend against such a conclusion, that is I'm
not just passively relying on Dr. Carpenter
here. I've talked to him and believe that he's
right, Gaz Metro is risky. But if this, given your
assumption, yes, if it's not true, then the quarter
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percentage point goes away.
Q. [436] Thank you.
The second adjustment is the imbedded debt
cost adjustment which was formerly 10 basis point
in that ATWACC, which you now bring back to 06
basis point?
A. The 6 basis, with the updated value from imbedded
data.
Q. [437] That's right, based upon your presentation
yesterday
A. Yes.
Q. [438]
correct?
Isn't correct that a similar adjustment for
imbedded costs was proposed to the NEB in the TQM
case?
A. Yes. And every time we've ever done ATWACC, we have
followed traditional regulatory policy and done
imbedded debt.
Q. [439] For purposes of severity, Mr. Chairman, I
refer to section 7. 3 of NEB decision on pages 77
and subsequent, in which the Board deals
extensively with this approach, but in order to
expedite our discussion at this late time, would it
suffice to say that the NEB essentially ruled,
"Look, we're going for the pure ATWACC based on
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market value of the capital structure from the
components and therefore we feel that within the
purest approach to ATWACC, there shouldn't be an an
allowance for imbedded costs. If this is the
package deal, this is your ATWACC based on market
value, deal with it as you want but that's all you
get"?
A. Well, I think that as a little facile, with
respect.
There was considerable discussion; they
called members, company representatives back to the
panel consisting only of Dr Vilbert and myself to
talk about this. And the key feature that lay
behind a decision not to do anything about an
adjustment for imbedded debt was the fact that
TQM's debt was all going to be refunded within two
years. It was basically the imbedded debt problem
and the need for a transition to imbedded debt went
away almost immediately.
That was said several times during the
during the transcript and during the discussion, as
I recall.
And it certainly was important in the
company's comments that it was within, say, the
band of uncertainty that
I think the French was
the la marge de manoeuvre, is that right?
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Q. [440] Marge de manouvre.
A. Sorry.
Q. [441] Margin of manoeuvre.
A. Yes. Well, I apologize for my pronunciation.
Q. [442] I'm pretty much bad in both languages.
A. Well, that's the idea.
And that point was made exclusively, also
made exclusively was by company witnesses in that
hearing was a point that if you had a company in
different circumstances where there was a
substantial amount of debt, long life debt
outstanding that had been entered into under the
old rules, the company would not see it as a matter
of within the margin of manoeuvre, it would be
something of a much more fundamental problem, and
would have to be addressed with the transition
mechanism.
So regardless of what decision is
ultimately made here for new debt, it is entirely
consistent with the record in TQM to recognize the
need for an adjustment of imbedded debt during the
transition mechanism?
Q. [443] If I may trigger your memory, at page 77 of
the NEB decision, under "Submissions of TQM for
adjusting the imbedded cost of that," I quote, "In
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it's application, TQM asked that its allowed return
be adjusted for the difference between the market
cost of debt and the actual cost of TQM debt.
TQM
acknowledged that a pure ATWACC approach would be
based on the market value of each component and
would not adjust for the imbedded cost of debt.
Dr. Kolbe indicated that a pure ATWACC methodology
would be superior from an economic perspective to a
hybrid methodology that uses ATWACC and the
imbedded cost of that."
Remember having testified to that effect
before the NEB
A. Yes. And to other things as well.
To theabsolute requirement for an
adjustment for the imbedded cost of debt.
And I know in this proceeding I quote in my
evidence
quickly
I'm using my computer to find it
from part of the transcript that wasn't
in the hearing. Let me just see if I can find it
quickly.
Q. [444] Are you telling us that they misquoted you?
A. No, I'm saying that they did not, in the decision
write down every word that was said in the
transcript of the hearing on which they based their
evidence.
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Yes, I have a discussion of this.
I was
struggling, I guess on page 43 of my evidence, in
which I give reference to the parts of the
transcript where these issues were discussed.
And, of course, I don't think anything I've
said here is any different from what I said in the
TQM hearing.
Q. [445] I was about to suggest that.
A. An another point of vie, it's great when regulation
comes as close as it can to matching competition
for existing debt. In order to avoid windfall gains
and losses on
in changes from the old rules,
regulators should grandfather the existing debt or
other policies that would otherwise create needless
shifts between customers and investors that would
change issue to issue and Company to company, and
their opposing cons to doing what the NEB did that
I would submit everybody should consider before
saying that the NEB's procedure shoud be
necessarily adopted everywhere with regard to
market debt.
Q. [446] All right.
Then we come to your third
adjustment, which is for issuance costs.
A. Yes.
Q. [447] Issue or issuing the costs, whichever you
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prefer.
A. Yes.
And I'm probably responsible for the problem
because I probably use both back and forth.
Q. [448] They're both equally good, I suppose.
Hold on a second here.
Was an adjustment
for issue costs requested in the TQM proceeding
A. No. The NEB apparently has considered and rejected
the issue or issuance costs many times. I was told
early in my association with Transcanada, and the
company had just given up on trying to get
this. They thought it was a legitimate cost of
service, they thought they should get it but they
just didn't go after it anymore because they
considered it a waste of resources.
I don't know why the NEB does that. I think
it's wrong as a matter of principle, but that was
their decision and so I was not asked, nor was
anyone asked, to do another adjustment for issuance
costs in that proceeding.
Q. [449] And do you have any ATWACC precedent to bring
to our attention where such an adjustment would
have been discussed or considered or allowed?
A. Well, I don't think an ATWACC precedent is
necessary. Issuance costs are allowed many
places. I understand they're allowed in by the
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Régie; they're allowed in Alberta. It's routine to
allow issuance costs.
Typically what happens if there's a
there's some rule that's been adopted long ago, and
it gets used.
Here, I understand it was 30 basis points.
In Alberta it was 50 basis points.
And I got involved because, as I understand
it, the company in previous proceeding asked for an
increase and it was rejected on specific grounds,
and I was asked to analyse the issue.
Q. [450] Okay.
Yes, actually on this one in
particular, I refer you to page 6 of your main
testimony, lines 3 to 5, in which you state, and I
quote, "Finally in the 2009 rate case, the Régie
rejected the Gaz Metro request to increase the
allowance for the costs of issuing equities from 30
to 50 basis points in the allowed return on
equity." Correct?
A. Yes, with a footnote citation there at the bottom
of the page.
Q. [451] So the third adjustment comes from a specific
request made to you by Gaz Metro to revisit this
issue?
A. Yes.
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Q. [452] And are you aware of the circumstance and
context in which this had been proposed by Gaz
Metro in last year's rate case?
A. Well, I
not all them, certainly.
I looked at
some of the calculations that have been done then,
and I read
I haven't read it recently but I read
the discussion I cite here in the decision, but I
haven't made any extensive study beyond that.
Q. [453] And is it correct to suggest to you that this
was proposed last year by Gaz Metro as a separate
adjustment on a stand alone basis outside the
context on and overall determination of its cost of
capital?
A. Oh, you mean procedurally was this some
I have
no idea.
Q. [454] Was present
you don't
you were not
aware of that?
A. I have no idea.
Q. [455] Okay.
And just going back to the
I'm not
sure I fully understood your explanation as to the
NEBs policy on this issue.
A. Well, its secondhand information, and it's my
memory of a conversation I had many years ago.
Q. [456] H'mm, h'mm?
A. But, my memory, for good or four ill, is that the
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question of issuance costs was one where it was
believed by the people I talked to, and I can't any
longer remember whether it was counsel or the
the company witnesses
or
that the NEB just didn't
give issuance causeds in the allowed rate of
return, and there was no point in asking for them,
it would be a waste of time.
Now, maybe I misunderstood, maybe my memory
is faulty, but for good or for ill, that's my
understanding.
ME GUY SARAULT:
Okay.
This will complete my cross examination. And
I thank you for your patience.
BY THE WITNESS:
Thank you.
LE PRÉSIDENT :
Merci, Maître Sarault. Donc, nous allons ajourner
jusqu'à demain neuf heures (9 h 00) pour continuer
avec les contre-interrogatoires. Est-ce qu'il y a
des intervenants qui vont vouloir poser des
questions - il y en avait un ou deux qui avaient
réservé des temps d'interrogatoire - pour planifier
la journée de demain?
Me STEVE CADRIN :
Alors, bonjour. Steve Cadrin pour l'Union des
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municipalités du Québec. Nous n'aurons pas de
question à poser au panel, simplement réitérer
qu'il s'agissait d'une expertise commune avec le
docteur Booth et que nous appuyons, évidemment, ses
conclusions. Je pense que maître Sarault s'est
perdu dans la quantité d'intervenants qui
l'appuyaient. Il y avait trop d'intervenants qui
l'appuient, je pense. Alors, voilà, nous l'appuyons
donc.
LE PRÉSIDENT :
Merci.
Me DOMINIQUE NEUMAN :
Dominique Neuman pour Stratégies énergétiques et
l'AQLPA. J'ai des questions, mais ce sera très bref
là. C'est seulement sur deux items là que... et qui
couvrent notamment ce qui avait déjà été posé à la
question 39 de notre demande de renseignements.
Merci.
LE PRÉSIDENT :
Donc, ce sera demain matin. Pour l'Union des
consommateurs, Monsieur Bellemare.
M. JACQUES BELLEMARE :
Oui. Maître Sicard n'est pas ici, mais je pense
qu'elle aura une ou deux questions.
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LE PRÉSIDENT :
Additionnelles. O.K. Donc, nous allons reprendre
l'audience à neuf heures (9 h 00) demain matin.
AJOURNEMENT DE L'AUDIENCE
______________________
Nous, soussignés, MARC BEEBE, JEAN LAROSE
et CLAUDE MORIN, sténographes officiels dûment
autorisés à pratiquer avec la méthode sténotypie et
sténomasque, certifions sous notre serment d'office
que les pages ci-dessus sont et contiennent la
transcription exacte et fidèle de la preuve en
cette cause, le tout conformément à la Loi;
Et nous avons signé :
____________________
____________________
MARC BEEBE
Sténographe officiel
JEAN LAROSE
Sténographe officiel
____________________
CLAUDE MORIN
Sténographe officiel