BARBADOS LIGHT & POWER COMPANY LIMITED RATE …Oct 12, 2009 · 69,000, times 1.15415, 50% of the occupied pole rate recommended minus five cents exactly charged, times twelve months,

BARBADOS LIGHT & POWER COMPANY LIMITEDRATE APPLICATION HEARING

HELD AT THE AT LLOYD ERSKINE SANDIFORD CENTRE, TWO MILE HILL, ST. MICHAEL – MARIGOLD ROOM

MONDAY OCTOBER 12, 2009

DAY 4

BEFORE:

Fair Trading Commission PanelSir Neville Nicholls - ChairmanMr. Gregory Hazzard - CommissionerMr. Andrew Brathwaite - CommissionerMr. Alfred Knight - CommissionerMr. Andrew Willoughby - Commissioner

IN ATTENDANCE:

Fair Trading Commission:Ms. Peggy Griffith - Chief Executive OfficerMrs. Sandra Sealy - Director, Utilities RegulationsMrs. Kim Griffith-Tang How - General Legal Counsel (Ag.)Dr. Marsha Atherley-Ikechi - Utility AnalystMrs. Susanna Cooper-Corbin - Financial AnalystMs. Dava Leslie - Senior Legal Officer (Ag.)Ms. Heather Waithe - DocumentalistMs. Marisha Walcott - Research/Administrative AssistantDr. Richard Hern - ConsultantMs. Svetlana Schenbakova - Consultant

Attorneys representing Barbados Light & Power Company Limited

Sir Henry de B. Forde - Q.C., Attorney-at-LawMr. Ramon Alleyne - Attorney-at-LawMs. Debbie Fraser - Attorney-at-LawMrs. Nicola Berry - Attorney-at-LawMs. Sabrina Maynard - Legal Assistant

Barbados Light & Power Company LimitedMr. Peter WilliamsMr. Hutson BestMr. Stephen WormeMr. Mark KingMr. Ricardo JenningsMr. Hal HunteMr. Andrew GittensMs. Sandra FranklynMrs. Jackie Marshal-Clarke

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Monday October 12, 2009 (Day 4)9:35 a.m. – 3:30 p.m. – C.C / D.H

Mrs. Allison Saunders-FranklynMargaret Blackman

Intervenors

Barbados Consumer Research Organization Inc. (BARCRO)Mr. Malcolm Gibbs-Taitt

Barbados Association of Non-Governmental Organization (BANGO)Mr. Roosevelt KingMr. Chris Halsall

Office of Public CounselMr. Eli Edwards

Barbados Association of Retired Persons (BARP)Mr. John Campbell

Barbados Small Business Association (BSA)Mr. Clyde Mascoll

CANBAR Technical Service Ltd.Mr. Mogens Toft

IndependentMr. Douglas Trotman, Attorney-at-LawMr. Errol Niles - Attorney-at-LawDr. Roland Clarke

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SIR NEVILLE NICHOLLS: Good morning everyone, this Hearing is

resumed. Before we start Ms. Dava Leslie would swear in a new Stenographer.

(Stenographer Sworn)

SIR NEVILLE NICHOLLS: Thank you Ms. Leslie. When we adjourned last

Friday, Mr. Williams was being cross-examined by Mr. Halsall. Mr. Williams is still

on the stand and still under oath. However, before I permit Mr. Halsall to resume his

questioning, the more I reflect, Mr. Halsall on your line of questioning, the greater the

difficulty I find in relating it to anything to do with rate setting. I am not saying that

you may not have some genuine issues and concerns about access to poles and so on

but really this is not a forum for dealing with those areas. There is other legislation

administered by the Fair Trading Commission which I believe can deal or cope with

the issues that you may appear to have regarding access to poles

MR. CHRIS HALSALL: Mr. Chairman, if I may speak to that I believe if you

will allow me to proceed, it would become quite clear very shortly, the relevance.

SIR NEVILLE NICHOLLS: It is not just relevance generally, there are a

number of issues that were agreed on to be dealt with in this hearing and essentially

this hearing is concerned with an application by the Barbados Light & Power

Company for review of its rates with the purpose of obtaining an increase in those

rates. From your line of questioning last Friday, I find it difficult to see what is the

connection.

MR. CHRIS HALSALL: If I may Sir, it has directly to do with revenues and lost

opportunity for revenues that has a direct impact upon rates and rate base.

SIR NEVILLE NICHOLLS: In terms of the revenue figures that are included

in the information I find it difficult to believe that there could be any significant

impact on the revenue of the company.

MR. CHRIS HALSALL: Sir, if you would allow me to proceed, I believe within

ten minutes it will become clear that there is a value of at least $1M impact.

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SIR NEVILLE NICHOLLS: We are talking multiples of millions in terms of

the revenue figures.

MR. CHRIS HALSALL: Yes, but they only want $28M in additional revenues

and I am saying at least $1M so we are looking at a four tenth and perhaps that is not

a huge amount in your eyes but to some consumers a 4% $1M across all consumers is

not an intangible amount.

SIR NEVILLE NICHOLLS: I am just cautioning you to try to reach to a point

of questioning that is relevant to rate setting.

MR. CHRIS HALSALL: Yes Sir, understood and I appreciate it.

SIR NEVILLE NICHOLLS: Okay, you may continue.

MR. CHRIS HALSALL: Thank you Mr. Chairman. Good morning Mr. Chairman

and fellow Commissioners. Good morning Mr. Williams. At the end of questioning

last week Friday, you said that you believe that the agreement with TeleBarbados was

good for the Barbados Light & Power consumer. Is that correct?

MR. PETER WILLIAMS: Friday was a long time ago. What I can say if I can

recall is that the company deals with the issue rental of poles, not on revenue

maximization but on cost recovery basis and that we had an agreement in place with

Cable & Wireless that was to be renegotiated but that process was under way and that

the agreement with TeleBarbados was officially signed on 1st January 2008 and

reflected the costs that are included in our submission to the interrogatory and that for

the prior ten years roughly we were getting no revenue but that before that we were

getting revenue from Rediffusion, so we have started now to collect revenue that

otherwise would not have been there and that the rates, as I said, are as set out in the

agreement and we also made reference to the PricewaterhouseCoopers fair value

assessment both in terms of the poles and ducts so in that context we are getting

revenue that otherwise we were not getting before and that is reflected in the test year

presentation.

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MR. CHRIS HALSALL: Understood and appreciate it. I refer you to document

161 and the PricewaterhouseCoopers presentation which is basically talking about

cost recovery and for clarity the poles are paid for by the Barbados Light & Power so

this is actually a reflection of what a consumer pays for a pole and in the long term to

third parties. Is that correct?

MR. PETER WILLIAMS: That is correct. We have maintained the standard

although the poles have been there for many years we have maintained a standard

from a point of view of efficiency we continue to install standard sized poles and to

avoid having, as I said in my testimony on Friday, to avoid having a situation where at

the request of a joint user we would have to go and take out a small pole and put in a

bigger pole. That pole is standard whether it is used or not and hence we tend to

report on the cost recover including the poles that are not used.

MR. CHRIS HALSALL: And again the recommendation for reserved poles

would be charged at 50% of an occupied pole.

MR. PETER WILLIAMS: That is correct.

MR. CHRIS HALSALL: I refer to schedule 3 of the actual contract with

TeleBarbados, the amount being actually charged to secure these, which is the test

year, is only five cents.


MR. CHRIS HALSALL: How many poles are there total in the Barbados Light &

Power network?

MR. PETER WILLIAMS: As I said, there is no reserve being charged for Cable &

Wireless at the moment and that is also intended to be part of the negotiations so we

get no revenue from that. We have 70,000 poles, roughly and in the test year a very

small amount was rented to TeleBarbados, 1,000 poles so 69,000 is the number that

we are getting a reserved rate.

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MR. CHRIS HALSALL: So from that answer then if we do a little bit of math,

69,000, times 1.15415, 50% of the occupied pole rate recommended minus five cents

exactly charged, times twelve months, you basically short change the consumers of

Barbados by $914,000.

MR. PETER WILLIAMS: Well I would say the words of your choice are probably

not how I would term it. As I indicated, we are in a position where we have to treat to

the users of the pole in an equitable manner. Cable & Wireless at the moment is not

paying anything at the moment for the poles in use and the use of the poles is

increasing. It is a rate that is ramping up and as we are going to renegotiate with

Cable & Wireless, we intend to recover those costs and as we go forward into the

future, although we have no certainty as yet that if we go to Cable & Wireless, that we

would be increasing that revenue. As shown in the projections under L2 the

company’s return, although it is positive, in other words, with the proposed rates it is

positive it still falls short of the rate of return being requested in this hearing and we

expect or anticipate therefore that this additional cost recovery would at least help to

eliminate that but I have no certainty in that regard. I can’t say how many more poles

Cable & Wireless would use and what the final negotiated rate will be for both the

poles in service and the poles reserved but I do know the TeleBarbados rate going

forward and as we pointed out on Friday, it is lower than the recommendation of

PricewaterhouseCoopers but as I said, it is being ramped up and ultimately the intent

this to reflect, not that the recommendation would be the exact number but to reflect a

better cost recovery for the poles not in use.

MR. CHRIS HALSALL: You also admitted on Friday the contract with

TeleBarbados ramped up over three years would yield approximately 25% per annum.

MR. PETER WILLIAMS: Yes, it is stated in there. It is twenty cents, it goes five

and it doubles to ten then it goes to twenty and then stays twenty to the final year.

That is the extent of the contract but during the fourth year we fully expect that we

will be renegotiating and there would be the intent to have a ramped up rate and a

reserved rate for Cable & Wireless but we have none at the moment and in the past

we had none with Rediffusion so it depends on the outcome of those discussions.

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MR. CHRIS HALSALL: But again if I may point out, the test which is your

projection for the requirement is short by $914,000

MR. PETER WILLIAMS: And I said, that is 1% defective. What we have

reflected in the test year is the rates of return in the cost that we recovered so we have

not reflected any change as far as Cable & Wireless and we are not reflecting any

additional revenue whether it comes from reserved rates or charges for poles going

forward so it is the test year.

MR. CHRIS HALSALL: And you have also inferred that the reserved rates you

will be able to negotiate with Cable& Wireless will be no greater than what you

negotiated with TeleBarbados.

MR. PETER WILLIAMS: I would imagine so. To do otherwise, although we have

a temporary disparity and I think the intent would be to bring all charges in line

depending on the use of the portion of the pole and how we prorate the portion of the

pole they use that there would be at least a formula or a basis even though the

numbers might not match up, there would be a common basis on which they would be

negotiated.

MR. CHRIS HALSALL: And again these poles are being paid for by the

consumers of the Barbados Light & Power.

MR. PETER WILLIAMS: Yes, they are included in our rate base and they are part

of the assets on which we expect to get a return.

MR. CHRIS HALSALL: Based on the guidance from the honourable Chairman, I

am going to cut short some of my lines of questioning. If we can then, can we now

move to the recommendation by PricewaterhouseCoopers with regards to conduits?

In here, first of all I notice that there is no recommendation for a reserved fee for non-

utilized conduits.

MR. PETER WILLIAMS: The situation here is slightly different in the sense that

we erect poles throughout the island and we have done so on a standard that

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accommodates two users. The ducts and the conduits are not on a standard basis

where we have installed throughout our network or we will continue to do so to

accommodate all or any users. What we do and we have done both with Cable &

Wireless and we have done with TeleBarbados is to provide where we are doing

excavation, where we are doing installation provide them with notification, indicating

to them the opportunity to go in and if they choose to do so that they can do so. For

example we have jointly excavated with Cable & Wireless, the most recent being

along Belmont Road where we were putting in underground ducts to connect to the

Belmont sub-station and we also notified the other utilities, although we cannot share

a trench but if they wanted to put in adjacent trenches so that the cost of reinstating

the road is minimized if we do those works at the same time. We Cable & Wireless

we put in ducts as we excavated along Belmont Road we put in ducts for Cable &

Wireless and the same is true for the situation with TeleBarbados. Cable & Wireless

however have chosen to put in the duct, paid a portion of the cost and they own the

duct that they have installed. In the case of TeleBarbados we own the duct and we

charge them a rental and that rental is supposed to fully recover the cost including the

rate of return and the rate of return actually is calculated at a higher rate than we are

asking for. Where we can configure our ducts to accommodate two, we will do so but

certainly it is not a matter where we can openly say that any duct that we have that is

not in use now is available because we have to have projections and we have to have

ducts either for spare cables and even for basic failure or for expansion in capacity in

future that we need to maintain those ducts and keep available to utility. I pointed out

at one point the issue of safety of safety and clearances in the case of poles also

applies in the case of electrical ducts that they cannot come and say they want to

install in an electrical duct with electric cables and put in a sub-duct in those

insulations because that would not meet international safety regulations where we

have set out that they have to comply with. So there is no universal duct system or

duct system that we have just waiting for users and therefore there is no application

for reserve.

MR. CHRIS HALSALL: So from that may I infer then that TeleBarbados does

not have the right to reserve conduit.

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MR. PETER WILLIAMS: As indicated in the agreement, they have to indicate

when they want and provide their development plans. If they wish to use a conduit

they have to apply and we have the right certainly to refuse. As I said, if it is

something that we feel can be accommodated and has been installed in accordance

with the requirements and provides the space then we can do so but by no means do

they have any overarching right to any conduits or anything.

MR. CHRIS HALSALL: Let me refer you to page 6 of the

PricewaterhouseCoopers report. PricewaterhouseCoopers concludes and recommends

a range for low traffic areas of $15,200 per kilometre to $19,500 kilometres, this is an

annual fee. If I can then refer you to the actual TeleBarbados conduit agreement, the

agreement for actual deductions for rights of way, specifically page 49 of that

agreement referring to both pages. Again $15,200 per kilometre to $19,500 per

kilometre per year for low traffic areas, now under schedule 3 on page 49, your linear

duct line or reserves, what it shows here is .7028 per kilometre per month times 1,000

times 12, works out to be $8,649.60 per kilometre per year. Again I would like to

point out that this is approximately half of below recommended rate and again I must

ask why the divergence in TeleBarbados favour from the recommendation.

MR. PETER WILLIAMS: I can explain that. Where the company is installing duct

which as I indicated that for example, if someone wants to own the entire duct then

that is the cost of installing the duct and it is reflected there in the

PricewaterhouseCoopers rate. The company, in consultation with our legal counsel

several years ago, looked at the issue of how we would share a duct, whether we can

share fibre, dark fibre and this is not uncommon in the United States and the approach

we have adopted now is that we would install, and I referred to it in terms of the

system expansion and reliability and what we do in terms of Scada, our own fibre

network and here what we have done is put in a duct with sub-ducts and therefore the

rates that are being referred to here by TeleBarbados are sub-ducts where we also

have then within those sub-ducts the opportunity to pull in fibre and so it is therefore

split charge so we are only recovering not the full cost because they are not using the

full aspect of the installation. They are using a sub-duct within a duct which we are

also then using a sub-duct so that is the basis on which those rates were assumed and

it is maybe not my calculation but it is 50/50. For the benefit of those who may not

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understand a duct and a sub-duct it is where you have a bigger tube and then you can

pull in flexible tubes within that and where a high voltage cable or something requires

all of that space because of the size of the cable and the heat in it and all that, the

telecommunications cables are very much smaller so if we go and we put in as we did

in Forde’s Road, we put in a six inch or eight inch PVC or fibre duct, then we can pull

in several smaller tubing through that and then within that pull fibre cables or small

telecommunications cables.

MR. CHRIS HALSALL: So are you saying then that for example, the conduit run

between Central Spring Garden on the ABC highway is sub-ducted?

MR. PETER WILLIAMS: That is sub-ducted. I would not swear to the whole and

entire route but what we have is our own fibre in that so the cost as I say is not one

where we can put in duplicate ducts or put in separate ducts and then re-excavate it

along the whole route for that. It is no a precise calculation, it is not for every metre

of insulation, it is supposed to be reflective of the overall general cost if not you get

into charging for a particular piece of road or a particular section or crossing or

something like that.

MR. CHRIS HALSALL: When you say you have your own fibre in the same duct

system is that your own fibre group or is that IRU or TeleBarbados cable?

MR. PETER WILLIAMS: Now you are losing me there with the telecom lingo. If

you start to talk volts and amps I am very comfortable but what I would say is that the

cable which contains the fibre is our cable and the cable which contains the fibre is

TeleBarbados’ cable so we have two separate and distinct cable pulls. It is not that

one cable within which we share some fibres. As I said, we sought some legal advice

on that and the recommendation is that we had quite a separate and distinct cable

network if not we could be considered a telecoms provider and that is not our intent.

We can rent duct without being considered a telecom provider but we cannot rent or

lease, as is my understanding, dark fibre without moving into that realm and brings a

whole different set of responsibilities and liabilities and that is not our business so we

operate our own fibre network and it is specifically between our sub-stations, some of

our generating sites and we use it for the purpose of controlling some of our

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generators so that Seawell to Spring Garden is connected by a fibre link and our

operators at Spring Garden control the generator through that fibre network. That is

our own network and it operates independently of any other. It is not a telecoms

network.

MR. CHRIS HALSALL: If I may, I am going to leave that particular line of

questioning but I would like to telegraph to Mr. Mark King that he should be prepared

to speak in more detail on this. I do however have one other observation here and that

is PricewaterhouseCoopers page 6 – Adjacent tracks projects. The recommended rate

here is $59,700 per kilometre per year to $76,800 per year kilometre. Referring to

schedule 4 of the actual agreement with TeleBarbados, I notice here a short run of 115

metres from Chefette Warrens to CGI Warrens and I am inferring that is CGI building

in Warrens, which is TeleBarbados network operation centre.

MR. PETER WILLIAMS: Correct.

MR. CHRIS HALSALL: Was that specially built? Was that built by request?

MR. PETER WILLIAMS: I cannot recall. As you said, it is a very short run. We

had need to put in, in that development which is a new commercial development, we

had need to put in underground ducts to bring supply to that area and I cannot recall

how that was configured but as I said, it was a short run and the intent is not to start to

piecemeal every little bit of cable and duct. Utilities generally co-operate and that is

what we have done as I indicated, with Cable & Wireless where we have worked

together with them on certain installation and as well our contractor will be acting

through us for Cable & Wireless to put in the duct and therefore it is to minimize

disruption, to maximize the efficiency in the context of both. You cannot achieve that

balance without necessarily trying to nickel and dime every cost element but certainly

that is the intent so I cannot recall how that was done, to be honest now but I would

look into it.

MR. CHRIS HALSALL: I would appreciate if you could because I do recall how

it was done and I would be very interested in having the answer. So leaving that then,

again Mr. Chairman, trying to be as expedient and as pointed as I can. Refer now to

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the landing station agreement with TeleBarbados dated the 1st of January 2008. On

page 5 of this agreement under paragraph 7.1.5.1 – Minimum rent. Are you there?

MR. PETER WILLIAMS: I am not there but I am familiar with it but I was making

some notes on what we have to come back to you with.

MR. CHRIS HALSALL: That is fine. Also for the record, as you know we are

recording this, BANGO is recording this and making this available so anything that is

questioned before the transcripts are made available we have. I see here the sum of

$4,900 available monthly. Is that a reasonable rate for such facilities?

MR. PETER WILLIAMS: I am not a valuer so we did is we got Terra Caribbean

when we were renting the property, the property was vacant in part because it was a

building that was occupied previously by Control & Equipment for generators at the

Garrison. When those generators were retired we engaged Terra Caribbean to give us

a valuation for the per square foot charge for a rental property, without any obligation

or part to do any make ready or to maintain the property other than the structural

integrity of the property and we used that as a basis for the rental so it is based on a

commercial rate, market rate and as indicated in the lease agreement the revision will

be subject to a similar market review, a valuation being done by a valuer appointed by

ourselves, one by TeleBarbados and a third valuer if need be who would be agreed by

both of us and then the averages between those three. Valuation of property certainly

is not my expertise so we did engage someone to arrive at that rent. TeleBarbados

made all the made ready upgrades for that property at their expense and as I said, it

was a property which otherwise we did not require and was not earning any revenue

at that time.

MR. CHRIS HALSALL: Accepted, thank you. And lastly, the TeleBarbados

tower agreement again dated 1st of January 2008 under paragraph 7 and it says here:

“Under consideration of the fee of $1,800 in Barbados currency, we pay annually”.

Are you actually renting that tower for only $1,800 a year?

MR. PETER WILLIAMS: No. The tower is used by ourselves so the tower has

multiple uses. It accommodates to our VHS system and it accommodates also the

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microwave, it accommodates to other uses and therefore we are getting value in terms

of rental for TeleBarbados and we have limited the time span on that because we are

uncertain of the time that we would be at the Garrison. As you probably are aware,

Government has indicated in the past years that the Needhams Point development and

redevelopment may well, there is nothing definitive about this, but it is likely to

embrace our property and that we would have possibly to relocate and therefore to the

extent that we are renting it, we are renting just a portion of that. It was not a tower

that otherwise was rented out or anything like that.

MR. CHRIS HALSALL: So how did you determine a fair market value for this?

MR. PETER WILLIAMS: I cannot recall. What I would say is that it is not a

substantial issue in our minds so the rent was negotiated.

MR. CHRIS HALSALL: I can tell you myself that market value for cable access

is several thousand dollars a month so going with $150 a month, what you are actually

charging TeleBarbados, this is again a short change of approximately $50,000 and

again, with respect, I would like to remind the Commission that TeleBarbados is an

associate company of the Barbados Light & Power and it seems that…. I am being

advised that I should withdraw that attempt at that statement so I will stop there and

that is the end of my questioning Sir. Thank you very much Mr. Williams.

MR. PETER WILLIAMS: Thank you Mr. Halsall.

SIR NEVILLE NICHOLLS: Thank you Mr. Halsall. BANGO have your

examination?

MR. ROOSEVELT KING: Just two short question Sir. Mr. Williams, first I want

to deal with rate shock. You had mentioned that in setting the rates some

consideration was given to rate shock. I am trying to find out at what point do you

consider rate shock would set in? For example, even in terms of the price of oil, when

oil moved from $29 a barrel to $100 a barrel, do you think that is sufficient to cause

some shock in the rates, some shock in the bill, I should say? Maybe we should make

a clear distinction between, a technical distinction, I might add, between rate shock

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and electricity bill shock. It might be two different things because your rates are not

going anywhere but certainly the bill that are reaching the consumer are going up as

oil goes up so I am trying if you would consider that movement in the price of oil

from $29 a barrel to $100 a barrel, over a two-year span, would constitute rate shock

in your opinion or constitute some shock in your opinion.

MR. PETER WILLIAMS: The issue of rate shock to my mind is partly related to

the impact on the individual so the design of rates and transitioning of rates has to

relate to the end-user and as indicated in the submission, the company has attempted,

rather than moving to full cost of service to you go to embedded or marginal cost base

both of those methods would have suggested different rates than we have applied for

and rates that are significantly away from the existing rates in terms of their structure

and while moving closer to cost of serve, we have not moved fully to cost of service

and we have tried to moderate the impact, in other words, try to reduce the change on

the lowest user so in that context, that is what rate shock is and in our view how we

have dealt with it. Clearly, the issue of fuel and changes in fuel result in changes in

price to the consumer. I wouldn’t want to say what is considered rate shock because I

think the term there is not in reference which we have drawn in terms of rate design.

MR. ROOSEVELT KING: But you do admit though that the effects of rate shock,

you call it rate shock because the movement in rates is so peaked that it would have a

negative impact on the consumer. That is how you would define rate shock.

MR. PETER WILLIAMS: Shock, I think connotes, whether it is electrical shock or

rate shock connotes something negative.

MR. ROOSEVELT KING: And I am trying to find out if a movement,

consideration the ratio of oil to the bill, for example, a persons who is using maybe

150 kilowatt hours, his final bill would include your rate plus the fuel adjustment and

considering the ratio of fuel adjustment to the full bill. Would you consider the

movement in the price of oil from $29 to $100 to be sufficiently impactful to be

considered a shock to the consumer?

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MR. PETER WILLIAMS: What I am saying is that it depends on the consumer

because I know people who do not need to be but there are certain consumers who

have to be concerned about their bill. As I said, the lower end users who we have

sought to protect in our rate design and there are consumers who don’t even worry

about what their bill is because they have the ability to pay and their consumption

levels are quite a lot higher and I am not saying they are the norm but I am saying you

are asking me to answer a very subjective question when it comes to the impact of oil

prices on any consumer and that is not the intent of our use of the term rate shock and

not the intent of what we have outlined in our application with regard to the

moderation of rate structural changes to minimize rate shock.

MR. ROOSEVELT KING: I will leave that there Mr. Williams. I am at a loss

because I can’t understand how you can say that you are considering rate shock but at

the same point in time you can’t define it or you can’t finger it to say that this would

be considered rate shock or that would be considered rate shock. Nevertheless, just

one short final question Sir. You said that the first time you testified under cross-

examination in response to Mr. Mascoll, that the first time you experienced problems

in raising capital was just before the 1983 rate hearing. Am I correct about that?

MR. PETER WILLIAMS: I believe so. That is the last we have had any

significant challenge to raise any capital.

MR. ROOSEVELT KING: At the 1983 rate hearing you would consider would

have rectified that matter, the rate that you were given at the time would have rectified

that matter at the time, along with the fact that you got the loan through the World

Bank. You would consider that the 1983 rate that was set would have solved your

problem?

MR. PETER WILLIAMS: After 1983, as I said, we were able to obtain funding so

if the issue was that we could not get funding before and we were able to get funding,

we have resolved that concern.

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MR. ROOSEVELT KING: Also, in comparing the rate of return, which you have

listed there is 6.07%, the rate of return then if I remember correctly, would have been

7.72% in 1983.

MR. PETER WILLIAMS: The two were not comparable as I mentioned last. If

you look at the decision of the 1983 rate, the company submitted under reproduction

costing basis and the calculation, that 7.72 as I have indicated was not a decision of

the Commission or the PUB at the time but was just backward computed from the

revenue that was allowed, the expenses and was computed on reproduction cost rate

base and the rate base today is on a historic cost and if you look at the historic versus

the reproduction cost in today’s timeframe, the reproduction cost is a lot higher than it

was then so the 7.72, 6.07, they are just numbers, they are not comparable.

MR. ROOSEVELT KING: I am not sure if I necessarily agree with you Sir. I mean

the 7.72 when you calculate it represented a position.

MR. PETER WILLIAMS: And it is numbers so that position is on one basis and

the 6.07 that we achieved in the 2008 test year was on a different basis so you are

comparing apples, oranges, pears and limes and everything else. They are not

comparable. The question was what was the number and I said 7.72 was not the

decision, based on the decision, it was computed based on reproduction cost new asset

value for rate base which is quite substantially different from original or historic cost

basis for rate base.

MR. ROOSEVELT KING: Okay Mr. Williams. Mr. Chairman, I think I will wrap

up there for now.

SIR NEVILLE NICHOLLS: Thank you Mr. King. The next Intervenor is Mr.

Douglas Trotman. Do you have any questions for the witness?

MR. DOUGLAS TROTMAN: Yes Mr. Chairman. I was not here for Mr.

Williams’ testimony so I would have to rely on the affidavit as filed. I should say

good morning to everyone. Mr. Williams, I want to look at schedule D1, the income

statement for the 31st December 2008.

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MR. PETER WILLIAMS: I am there.

MR. DOUGLAS TROTMAN: In your previous submission in relation to the

cost of fuel, you would admit that the cost of fuel is borne by the consumer, all the

cost of fuel?

MR. PETER WILLIAMS: All the costs related to electric utility operations are

borne by the consumer.

MR. DOUGLAS TROTMAN: And you would admit that fuel is the major input

in your manufacturing process?

MR. PETER WILLIAMS: That is correct. Certainly it has grown in proportion to

anything else because of the increase in fuel prices and it is now, like all the utilities

in the region, the most significant element.

MR. DOUGLAS TROTMAN: And you will admit as well that 2008 was a

special year in relation to the cost of fuel in that the cost of fuel skyrocketed?

MR. PETER WILLIAMS: I think the point has been made before and we certainly

don’t disagree with that.

MR. DOUGLAS TROTMAN: And if you were to look at your financial for

2004 to 2008 and we were to look at the fuel as an expense, you would recognize that

it grew on average at about $25M a year?

MR. PETER WILLIAMS: Again, it is tied to both the price of fuel as well as to the

plant and the mix of fuel that we are using in the operation.

MR. DOUGLAS TROTMAN: But on average if you were to look at the

number for 2003 to 2004 to 5, 5 to 6, 6 to 7, the difference in fuel cost would be about

$25M. Maybe Mr. Best could deal with that when he gets here.

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MR. PETER WILLIAMS: I think if you are saying about $25M, I am not going to

argue or I am not going to confirm that particular number but I would say yes it has

grown and it grew significantly. Oil went up as we all know from around $50 per

barrel to almost $150 per barrel.

MR. DOUGLAS TROTMAN: The point I want to make is the difference

between 2007 and 2008 worked out to around $72M which is a massive increase in

fuel over the previous. The point I am making, Mr. Williams, is that the test year,

which I understand is agreed, is the year in which fuel made that exorbitant jump.

Now, the comments made in relation to fuel being a pass-through and you have

explained that over and over but for some reason I am still not convinced. When I

look at, and I am not an Accountant by any means, I am just a layman like you in

relation to this. Your income statement, D1, under revenue you have fuel revenue and

the fuel there is $272M and change. If we look at the operating and maintenance

expenses we have fuel. The fuel is listed at $297M. Now if it is a pass-through, if I

take the word pass-through, I would think that it comes to zero but certainly if you

have fuel revenue and then fuel expense and they are not the same it cannot be zero.

Correct?

MR. PETER WILLIAMS: I can explain if you would wish me to.

MR. DOUGLAS TROTMAN: Yes Sir.

MR. PETER WILLAMS: As structured now and this is something we are

proposing would be changed and has been included in our application, the basic

energy, in other words, what people see on their bill as the fixed charged, the basic or

energy charge and the fuel clause adjustment, that energy charge contains 2.64 cents

that is related to fuel. So the base revenue there of $198,801,101 as per the financial

statements on D1, that contains every kilowatt hour sold times 2.64 cents, that amount

of money. So that explains then that we are not collecting all the fuel cost through the

fuel revenue which is the fuel charge adjustment or fuel clause adjustment, sorry and

that is why it does not match so our expenses then show a much higher number so it

would suggest that we are only collecting $272M in fuel and we are actually $297M

in fuel. That is not the case. What it is, is that in that $198M of the base revenue is

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this 2.64 cents per kilowatt hour and that 2.64 cents per kilowatt hour existed from the

1960s and was then, I believe, the cost of fuel before. I don’t recall the exact date but

was then the cost of fuel when fuel prices were obviously a lot lower and fuel was

more stable and at the point that the fuel clause adjustment was introduced, the then

decision was that that would remain in the fuel clause adjustment and if you look at

the decision of 1983 and the calculation of the fuel clause adjustment you would see it

reflected there as well, that it is the cost of the fuel divided by kilowatt hour sales

minus 2.64 cents. So that explains that seeming disparity there.

MR. DOUGLAS TROTMAN: The explanation is noted, however, it does

appear as an item. Let us say that I recognize that there is proposal to correct that

which is why essentially when Mr. Worme takes the stand I would deal primarily with

those issues. I want to move to another point. Using the total revenues in your

affidavit, I believe at paragraph 29, this is your statement: “The Applicant is seeking

an increase in revenue of $28M and change, which would represent an increase of

about 5% of overall electricity prices including the fuel clause adjustment. If it is a

pass-through, why would you treat the fuel clause adjustment in your calculation of a

percentage?

MR. PETER WILLIAMS: I think that the intent there, if you look and you say well

what was the total cost of electricity in 2008, it did include fuel and the intent there

was to show what the impact would be overall in terms of the increase of $28M

roughly that $28.2M that we are seeking it would be reflective of roughly that 5.95 so

that is different than if it was increased on just the base revenue which would be a

different number and clearly too it is not intended to reflect the increase on any

particular customer because as indicated the rate structure is being altered to reflect

the or closer to cost of service and therefore some people, the residential class would

see greater or less increases and in the commercial grouping some people would see

reduction in the base energies, some people would see increases. So the combination

of the base energy per kilowatt charge and demand. That is just indicating that if you

took all of our costs including fuel, you looked at the test year and you applied our

new rates, the proposed rates, including that revenue, how much would that overall

cost go up by and that is the number there.

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MR. DOUGLAS TROTMAN: But wouldn’t you agree that it would be better if

you left out the fuel, since you are treating it as a pass-through and your rate increase

is not based on your fuel at all? Wouldn’t the percentage then be a better

representation of the actual increase would be if you deducted the $297M from the

revenue?

MR. PETER WILLIAMS: Certainly it could be calculated and it would be a

different way of presenting it so I don’t disagree with that.

MR. DOUGLAS TROTMAN: And it would obviously show a higher increase?


MR. DOUGLAS TROTMAN: Which would be more accurate and in line with

the concept of pass-through?

MR. PETER WILLIAMS: As I said, this was intended to give a reflection of the

overall cost but it can be calculated the other way and it would be higher. So if you

excluded fuel, clearly the terms of that $28M increase on a lower denominator would

be a higher percentage.

MR. DOUGLAS TROTMAN: Or we could grant you 5.9% of the balance less

fuel, since you don’t pay for it?

MR. PETER WILLIAMS: Is that a proposition?

MR. DOUGLAS TROTMAN: It is a proposition.

MR. PETER WILLIAMS: I believe our application is based on our submission but

certainly I am sure the Commission would be listening to your views.

MR. DOUGLAS TROTMAN: Staying with D1, the income statement, going to

the last column. I mentioned earlier that the price of oil certainly increased

dramatically in 2008. I noticed that you have made adjustments in relation to the fuel

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revenue, etcetera but in relation to using your test year, if you have a systematic

increase of $25M for 2003 to 4 to 5 to 6 to 7 and you get a spike in 2008 and I will

put the question this way – How come there was no adjustment to reflect there was

actually a spike in that period? I am referring again to the same concept, the same use

of fuel, we have a systematic increase of $25M, we have a spike in 2008, you are

using the test year, you have shown adjustments on the income statement, how come

no adjustment to what a normal year would be?

MR. PETER WILLIAMS: I believe I may have explained before, once we have

settled and had a decision on this application, the rates that are put in place will be

fixed. However, the fuel clause adjustment is not fixed. So the fuel costs that are

included here, if they change, the fuel clause adjustment will be modified upwards or

downwards and indeed already from this test year amount, amount of money the

company is collecting for fuel is decreased in 2009 because fuel oil prices have fallen

from their highs in 2008 and therefore that is an automatic adjustment that would take

place. There is no need to have any major adjustment to fuel in terms of our

application because that is going to take place monthly as prices change.

MR. DOUGLAS TROTMAN: I disagree but again I am speaking as a layman.

When I look at the figures, if I use that pattern or that sequence, I would think that the

fuel is overstated by some $47M and that if you were to adjust the 2008 figures to

reflect the trend you would get a different result in relation to the overall increase you

are asking for. So I am asking the Commission to actually consider, the test year

might be fixed but certainly the figure used, the figure that has been carried and used

is a figure that is grossly inflated in relation to the normal in how the company would

have paid and then recovered for the fuel.

MR. PETER WILLIAMS: I was trying to follow your argument relating it back

then to your earlier comment with regard to the 5.95% that I calculated and you

indicated then that fuel was a pass-through and therefore you should calculate it

excluding fuel because fuel was going to net zero. You are now saying that we

should adjust for fuel and that would impact on our application and I am saying, no, it

is a net zero and I agreed with you just now and I agree with you now that it is a pass-

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though and therefore there is no need to adjust the base revenue for what is going to

be adjusted through the fuel clause automatically.

MR. DOUGLAS TROTMAN: When I deal with Mr. Worme hopefully that

would cast away any doubts. The next, I don’t know if to call it a question, it is just

an observation in looking at Cap 278 that is more in the direction of Counsel. I

noticed that there is a proposed rate for streetlights and an increase but I believe that

in the first schedule of Cap 278 there is a maximum rate for streetlights. I would

speak subject to correction but I think that that is something that should be checked,

should be verified, if the statute if still standard, which I believe it is. That is a note

more so than a question. Again, when the final submissions are made, there is other

legislation that govern essentially the utilities and I recognize that…would it be

correct for me to say Mr. Williams that the Light & Power is a monopoly, would you

consider it a monopoly?

MR. PETER WILLIAMS: That is why we are here, I believe, Mr. Trotman,

because under the Utilities Regulation we have to be guided according to the

regulatory provisions that we have a licence to operate but I would say certainly that

in the context of the word monopoly we operate in a very customer focussed and

customer driven entity and we are continuing to try to do so.

MR. DOUGLAS TROTMAN: You are a monopoly so there is no competition

but you would still be considered a dominant player in the market? You are the

dominant player?

MR. PETER WILLIAMS: I am not aware of any other electric utility in Barbados

operating at the present so I would say we are overwhelmingly dominant although

people do have the provision to generate. There is no law precluding people from

generating their own electricity.

MR. DOUGLAS TROTMAN: Earlier, it was established that your receivables

are somewhere in the region of $40M?

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MR. PETER WILLIAMS: Our receivables vary depending on the element of fuel,

but yes the receivables are of that order I believe.

MR. DOUGLAS TROTMAN: Over what period would you collect those

receivables?

MR. PETER WILLIAMS: It varies by customer class and it varies by entity so the

collection period can range quite considerably but on average, it is probably about

three to four weeks, depending on the circumstances at the time.

MR. DOUGLAS TROTMAN: So essentially you have $40M, based on the

financial statements presented, you have $40M available to you which you

presumably would have already collected in 2009?

MR. PETER WILLIAMS: No, Unfortunately, I suppose, I know that utilities go

into what you call prepayment. We don’t have that money available to us actually,

the customers have it and are owing it to us and therefore we have the job of

collecting it every month and as I say, it does vary with the fuel because as the fuel

clause increases, the amounts outstanding do increase and we have therefore to

manage that cash position. The electricity is used and paid for afterwards and we try

to encourage customers to pay early but not all can or do so we have money always

owing to us and it is part of our cash working capital requirements.

MR. DOUGLAS TROTMAN: So I just want to establish, so you do have

access to cash?

MR. PETER WILLIAMS: I wasn’t clear how you drew the connection there. It is

part of our working capital requirements to be able to cover so that we can pay our

people and our suppliers and everything. Notwithstanding that amount of money is

owed to us on average, all the time. In other words, we are always having a rolling

balance of that amount of money owing to us.

MR. DOUGLAS TROTMAN: Is it possible for the Applicant to borrow money

from its sold shareholder? Is it possible?

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MR. PETER WILLIAMS: Anything is possible but I would suggest in the context

maybe you can give me the context of that question.

MR. DOUGLAS TROTMAN: As I said, I am not an Accountant or anything

but the area of debt equity ratios, for example, and you wanting to have a ratio of

35/65. I recognize that the numbers in terms of retained earnings are significant and

the company puts a lot of money back in to reinvest its money, let us say fairly small

dividends, $8M or so a year. So the question I am asking you is: You have a parent

company that certainly would have capital. Technically it is your capital but it is the

shareholders’ capital because our profits belong to the shareholders and I will ask the

question. Do you have the context? Is it possible for a subsidiary to borrow from the

parent, Mr. Williams, in your years of experience, to debt finance rather than equity

finance?

MR. PETER WILLIAMS: I don’t think that would be the route that would be

appropriate in this case. The company’s application is made against the need to raise

funds to expand and against the background it needs to be able to repay those monies

so wherever the money is coming from we have to be in a position to repay it. And

again, in the context of a question that was asked last week about where we were with

regard to any negotiations and I indicated that the funds that we require for expansion

are basically foreign currency funds and we have had discussions with the European

Investment Bank. It is a significant amount of money and this is the reason that we

are here, to be able to go to the capital market, international financing market and be

able to borrow that amount of foreign current to invest in plant which has to be

brought into Barbados. I also indicated that the Central Bank and the Government of

Barbados have allowed us as one of the few entities that can go directly to the foreign

because ultimately if we were to raise say $100M locally and we went to the Central

Bank with BBD$100M it would obviously require a significant draw on our foreign

currency reserve so what they would allow us to do is say that we are very capital

intensive. When we install plant and equipment it is in the several millions of dollars

and that is the route that is most effective to borrow money. To say that we can go to

shareholder and say to our shareholder, we are not in a position to pay you back but

we would like to borrow money. Our sole shareholder has to reflect and be

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responsible for its external shareholders. Our parent company has external

shareholders and that is certainly something that they have to bear in mind. In

response to the question, we would not seek to borrow money from our parent. That

is not the appropriate route for us to go.

MR. DOUGLAS TROTMAN: But we know that the possibility exists. I want

to just change direction a little, but come back to fuel. Fuel is a cost that we the

consumers bear. What efforts has the Applicant taken to ensure for example that, let’s

say, current event. Current events meaning that there may be a war in Iran. Very

possible and then we get a repeat of 2008. Bearing that in mind and taking in light

that it is pass-through, now and the customers pay it all and it is the primary input to

your manufacturing process that we pay for: What provisions have you made to

address that possibility? The possibility of war driving the price of oil up.

MR. PETER WILLIAMS: We have, and I think everyone is clear; we have no

control over the price of oil. What we do have control over is our generating plant,

the capacity installed and we take that responsibility extremely seriously. We have

installed plant that is capable of burning the least cost residual fuel and as indicated in

the KEMA benchmark study, our rates as a consequence are among the lowest in the

Caribbean and if I can reference to the KEMA study again. The fuel cost and U.S.

dollars per megawatt hour, again we are well below the average for the Caribbean in

terms of our fuel cost, precisely because we operate a very efficient plant and because

that is capable of burning heavy fuel oil and because we have installed waste heat

recovery systems to help us to reduce the fuel usage. Additional I have mentioned

and I have spoken to it in response to a couple of questions last week and the

comment by Mr. Mogens Toft CANBAR about the need to engage in the area of

renewables and I said the company has made efforts, significant efforts and spent

money to try and develop wind. We have indicated to our Government the intent to

invest in renewables and our willingness to do so and that is still the position. But I

also indicated some of the challenges associated with that. So we no way of

protecting from any geopolitical economic upheavals in the world but I am just saying

we are doing our best to ensure that we are operating as efficiently as we can.

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MR. DOUGLAS TROTMAN: I would respond to that and once again urge the

Commission to examine the first schedule of Cap 278 in relation to the rights of Light

& Power in this case to build fuel tanks for fuel etcetera and to land, keep and use

such petrol etcetera insofar as there may be cases pending in court, the reality is that

there a statute that gives, well, it doesn’t give any right but it certainly sets out a

mechanism you can store your oil. It doesn’t say that you have to store it in

Barbados, it says you have to store it at someplace that is approved so when I ask a

question, the whole question is that if you buy your oil, if you anticipate that David

Cameron, for example, is going to win the U.K. election and send troops into

Afghanistan, when you bring your experts that deals with wholesale contracts,

etcetera, certainly the question would be: Have you thought of purchasing oil in

anticipation. Essentially that is question, not just the domestic factors but if you are

looking to borrow money and you are saying that you want to reduce the price to the

consumer then you must get outside the box and let us purchase oil before the disaster

strikes.

MR. PETER WILLIAMS: The only thing I can say is that we have been out to

tender as I indicated last week. We go out tender every two to three years for our fuel

supplies. As I indicated, our position with regard to heavy fuel oil which is the

dominant requirement for us is that the Barbados National Oil Company is the

supplier and that is an issue that is, I believe, before the Commission in another area

and still before the courts and I don’t want to speak to it any further.

MR. DOUGLAS TROTMAN: I have one last one. It is not a question; it is just

a point for consideration. Again, referring to Cap 278, section 18 and this is along the

line of discrimination. Obviously the Commission seeks to ensure that such things

would not happen. It speaks to essentially supplying electricity and showing undue

preference to any local authority, company or person. I mentioned this in the context

that there is a section, I believe, in which the employees are given some sort of

preferential rate. Whether this section applies, again, I think the Commission should

take a look at that. In my closing I would address all the legal issues that have been

raised since I am not going to put Mr. Williams to that task. Mr. Chairman that ends

my questions. Thank you.

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SIR NEVILLE NICHOLLS: Thank you very much Mr. Trotman. I have been

advised that Dr. Roland Clarke, who would be the next Intervenor, does not intend to

cross-examine Mr. Williams. So the next on the list of Intervenors is Mr. Errol Niles.

MR. ERROL NILES: Thank you Mr. Chairman and good morning Mr.

Williams and the Panel and all other persons, the Fair Trading Commission and

guests. Are you hearing me Mr. Williams?

MR. PETER WILLIAMS: I am hearing you clearly, yes.

MR. ERROL NILES: Mr. Williams I am in the position that a lot of what I

may ask you may have been asked before but I am going to structure it somewhat

differently so as to assist the Commissioner in refusing or reducing substantially, the

rate of return. Some year ago, Mr. Williams, you are in management I take it? Even

though you are an Engineer, you are a manager of the Light and Power Company and

doing a reasonably good job, notwithstanding your prognostication that if you don’t

get these rates, something dramatic may happen. Is that not correct?

MR. PETER WILLIAMS: I am in management and I indicated in my cross-

examination that nothing dramatic would happen. I indicated that certainly

degradation of supply and service is not something that would happen tomorrow, next

week or next year so I hope I have stayed away from the dramatic and remained

firmly grounded in reality.

MR. ERROL NILES: In response to some questions from Mr. Mascoll earlier,

if you can remember, he focussed a lot on the question of risk in respect to the rate

base. You have a good team good management team in place I am sure and for

investors and certainly lenders, despite what the financial statements and so may say,

a lot of lenders, from my experience, they have a weighted average on the question of

management which makes a substantial difference whether they would and/or invest.

Is that not correct?

MR. PETER WILLIAMS: I would say that our performance either gives

confidence or destroys confidence so if we have at the moment the confidence of our

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lenders, our suppliers, we would want to continue that and if we have it, I am very

happy that we have it.

MR. ERROL NILES: In respect of your foreign component with a contingent

liability of the guarantee of Government, that even reduces your risk further. Is that

not correct?

MR. PETER WILLIAMS: That is reflected in our application and as I indicated in

cross-examinations earlier. When we go out to borrow and the rates that we are

proffered, if the Government is guaranteeing, if people have an adequate lean on our

assets, all of those things are factored into to their decision as to the rate they are

going to lend us at and therefore in the application you would see the cost of debt that

we are seeking, the rates in terms of debt already reflect that reduced risk because of

those guarantees, because of the collateral that they hold. So those things are there

already.

MR. ERROL NILES: In relation to your process of operation, you

consideration yourselves a manufacturing operation, I take it.

MR. PETER WILLIAMS: From a legislative point of view, we are a manufacturer,

we are granted manufacturing status.

MR. ERROL NILES: For that you get a number of benefits like investment

tax credits, manufacturing credits, you have a straight-line depreciation which is also

added. So these are all, in effect, reducing any risk that you may perceive that you

have or your lenders or certainly your investors would have.

MR. PETER WILLIAMS: All included and spelt out in the application and is

factored into the request that we have submitted. Certainly you are at a higher risk if

certain things were not in place. If we didn’t have the debt levels that we have or the

lending rates that we have, the interest rates were higher, all those things would be

reflected in a higher request. All of the issues of risk, whether it is risk on our

borrowings, risk on our common equity, all those things are taken into consideration

in the application so there is nothing that is being exclude, let me put it that way, from

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a risk point of view. We are showing the risk as it is and our request for the rate of

return reflects the risk that we operate under.

MR. ERROL NILES: Mr. Williams. In the past, utilities were considered

guilt edge securities and the corollary of that is the risks are low, the returns would be

low and conversely, the rate of return should be lower. Is that not a fair assessment?

MR. PETER WILLIAMS: The risk is evaluated, as I mentioned last week, our risk

is reflected against cost of equity and that cost of equity has been compared to other

utilities, electric utilities and other utilities and therefore the risk is what it is as stated

in the cost of capital study. We have made a specific point of indicating that we have

not tried to base our request for return on companies that do no compare with us. We

have not gone and asked for a return based on a risk for a business that is different to

ours. We are asking for a rate of return on the same type of business and certainly

when Mr. Camfield comes to provide expert testimony on the cost of capital study, I

am sure he will be able to demonstrate the analysis that is undertaken to arrive at the

request that we have submitted.

MR. ERROL NILES: I am taking you home to your management. I am going

to get around to that but I am taking to your management. I don’t know if you would

agree with this but in 1924, Donaldson Browne, who is the Chief Financial Officer of

General Motors said that “The objective of management is not necessarily the highest

rate of return on capital but to assure profit with each increment of volume that will at

least equal the economic cost of the additional capital required”. You would say that

that is a fair assessment or would you agree with that?

MR. PETER WILLIAMS: I have not taken time to reflect on any specific

statements from Mr. Donaldson. What I have said before is that that analysis that was

conducted in terms of our cost of capital in contained in the cost of capital report. Our

debt costs as reflected in the test year are what the debt costs are and taking into

account all the guarantees and other leans that the lenders have on our property and

therefore our request is based on the reality of what our risk is. I am not sure how that

relates to what you have just quoted.

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MR. ERROL NILES: I see that you don’t intend to yield one inch on that

point but assuming it was correct. Just assume that it was correct that the objective is

not necessarily the highest rate of return on capital but to show profit with each

increment of volume that will at least equal the economic cost of the additional

required. We noticed in your cost of capital study prepared by Camfield Associates,

they shifted from the marginal cost to demand cost which obviously has resulted in a

higher rate of return which you will extract, sorry not extract, that you will achieve, if

it is granted than if you had gone, as Mr. Mascoll was trying to suggest, the question

of the marginal increase rather than the demand cost which Mr. Camfield was

suggesting. I know you are going to say that other utilities in the region and

elsewhere do that but they don’t have, I would submit, the same kinds of system that

you have and you probably could tell us, if Mr. Camfield when he comes, could tell

us if indeed utilities in the United States do not separate the generation from the

transmission and distribution and rather than have to slow through cost right through

to the consumer, where you purchase the….If you say you manufacture, I am sorry

for the longwinded but the net effect is this. If you want to compare as the Bonbright

principle would suggest, you must be equal and you must tell us or Mr. Camfield,

whether or not, I know you are going to tell me wait but I take it that you will assume

responsibility for this entire application as Managing Director.

MR. PETER WILLIAMS: And I certainly have brought along a very skilled,

knowledgeable team and I am going to say I am going to enjoy sitting there and

listening to Mr. Mascoll and yourself have a debate and discussion with Mr. Camfield

on his analysis and the outcome of it because we have precisely done that. We have

brought people who are quite knowledgeable and experienced in the area.

MR. ERROL NILES: I have no doubt. All I want to ask you is if you have

asked Mr. Camfield whether or not the utilities in the United States and I think he said

Canada and Barbados are identical in terms of their operational strategy in terms of

generation, distribution and transmission?

SIR NEVILLE NICHOLLS: Mr. Williams, before you answer. Mr. Niles, it

is now eleven. We normally break now. I assume from your questioning that you

have some more questions to ask.

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MR. ERROL NILES: Yes Sir. I am sure you are enjoying it.

SIR NEVILLE NICHOLLS: So we should break now for about fifteen

minutes. I would maybe like to point out that it seems to me it is not correct to ask

Mr. Williams whether he has asked Mr. Camfield something. You should ask Mr.

Camfield when he comes.

MR. ERROL NILES: I prefaced it that he take responsibility for all that is in

there and he said yes.

SIR NEVILLE NICHOLLS: We will adjourn now.

BREAK 11:05 TO 11:30

SIR NEVILLE NICHOLLS: This hearing is resuming, Mr Niles.

MR. ERROL NILES: Thank you Mr. Chairman. Mr Williams at the

break we were trying to get from you this question of generation of electricity and the

distribution and transmission. I was trying to ask whether or not you think it is a good

idea to separate the generation from the distribution and transmission.

MR. PETER WILLIAMS: We have operated as a vertically integrated

utility from the inception. There are utility in Canada, North American and Europe

where they can buy a power from large generators, where they operator only on

distribution network. I think it depends on the circumstance but I believe the

integrated approach to the utility in Barbados is quite appropriate because we are a

small country, small number of Customers limited really in terms of scale and scope

for desegregation that you speak about.

MR. ERROL NILES: Right. But this vertical integration that you talk about

adds to the cost, the ultimate cost to the Consumer by part of that generation cost,

which I see was about $51 million. I think that is correct. The test year was $51

million that cost flowing through to the Consumer when indeed you sought to

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compare or to utilise the systems in the United States, where you have the separation

as opposed to the vertical integration process here and you sough to compare two

different systems. Is that a fair assessment?

MR. PETER WILLIAMS: No it’s not. In the US there are vertically

integrated utilities. Indeed most of the utilities are vertically, large utilities are

vertically integrated I was saying that they are also small utilities where they purchase

to power serves small communities. They also have some utilities which are just like

ours. I though the question was, was our approach the appropriate one and I indicated

yes I believe this to be the most efficient in that if we had separate utilities each one

would have a certain cost associated with that type of operation, administrative cost

and so on that are not best shared by having one utility where I think we are able to be

more efficient, especially in this small environment, this small business context.

MR. ERROL NILES: Do you know whether or not the study done that you

relied upon for your case related to vertically integrated companies in Canada, United

States or whether the other disaggregated I think is the word you use, was the study

done by Camfield to support your case?

MR. PETER WILLIAMS: Mr. Camfield has referenced the utilities and I

think he would be best able to speak to the utilities and there were a lot of the utilities

used and clearly in any situation we are trying to compare like with like but there

exact replicas of the Barbados Light and Power Company Ltd, there are ones that will

be a little bigger, they may have been some smaller. His job was to develop the

comparisons and he’s been able to do that quite well. The details are included in his

affidavit. He will able to respond to those details.

MR. ERROL NILES: I asked if he knew whether or not that was the case.

MR. PETER WILLIAMS: What I’m saying is he’s trying to draw

relevance.

MR. ERROL NILES: No I know but I wondered if you know whether or not it

is the case?

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MR. PETER WILLIAMS: He has drawn relevant comparisons to ours and

he made adjustments, so what I’m saying to you is that you’re asking me for a

specific answer on what is.

MR. ERROL NILES: No whether you knew whether or not the comparisons

were consistent or similar to the utilities as existed in Barbados.

MR. PETER WILLIAMS: They are consistent, they are similar and I’m saying

obviously they are not exact.

MR. ERROL NILES: Alright thank you. I’ll just briefly touch on this

question. The customer charge Mr. Williams, I’m not going to go over the point but I

know everybody was talking about the average; I’m interested in the mean. What

would you consider to be the mean band in Barbados that the customers use? You

give three bands 101 to 500 kilo watts, yes the customer charge, what would be the

mean band not the average necessarily but where you get the greatest cluster that is

the mean?

MR. PETER WILLIAMS: As I indicated, the way we have set out in the

application at schedule K, you will see that the groups of Customers starting with and

I assume you mean the percentages. 30% is under 150 kilo watt hours.

MR. ERROL NILES: 30%?

MR. PETER WILLIAMS: Go to figure 6, where it speaks about the impact. Figure

6, page 0268.

MR. ERROL NILES: Right.

MR. PETER WILLIAMS: In that you will see on the bottom of that figure it

shows the number of customers within each group. I indicated we have about a total

of a 118,000 customers. Those make the up the commercial as well as the residential

and the general service. So if we look at that we would see roughly 50% of our

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customers use 200 kilowatts hours or less, then 500 kilowatt hours it is 90% so within

the mean people would be paying $10.00 for the customer charge.

MR. ERROL NILES: The $10.00 charge?

MR. PETER WILLIAMS: Yes.

MR. ERROL NILES: They kilowatt hours would then move to 0.176 that is

your proposed rate?

MR. PETER WILLIAMS: Well as I indicated everyone pays the…

MR. ERROL NILES: The first 100 sorry?

MR. PETER WILLIAMS: Yes.

MR. ERROL NILES: The first 100 would be .150.

MR. PETER WILLIAMS: And then above that.

MR. ERROL NILES: And anything their after within the 400 mean?

MR. PETER WILLIAMS: Correct. That would be it at 17.6 cents.

MR. ERROL NILES: So each person would still be seeing some increase in

their bill?

MR. PETER WILLIAMS: Correct. And that is shown in terms of the impact on the

same figure 6 if you look you would see the current bill which is the darken portion

on top. You will see the representative increase which is the new rate, and as

indicated this includes this impact for fuel clause, which is paragraph 38. Saying that

the fuel clause for April 2009 was used in this particular instance to show this impact.

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MR. ERROL NILES: Right, now I’m going to get back to that but in terms of

your application Sir Henry referred to this Bonbright principle on which you seek to

cushion your rate hearing. The Bonbright principle is this question of gradualism,

even thou not given a lot of emphasis but one of the other principles is that effecting,

the effectiveness in yield total revenue requirement under the fair return standard

without any socially undesirable expansion rate base or socially undesirable level of

product quality and safety etc. But would you in light of the economic conditions

existing that a one-time increase would be socially undesirable without some

improvement, quick improvement in the overall global economy?

MR. PETER WILLIAMS: I think I spoke to that as well in response to questions

from the other Intervenors. I put it in this context that in a successful economy jobs

growth in economy, all of those things depend on a reliable and efficient supply of

electricity. That our request here is to allow us to raise the funds to install new plant

which will be more efficient than the plant we are proposing that we’re currently

operating and plan to retire. Therefore in that sense this is indeed an effort to ensure

Barbados continues to perform and be able to prove the services, social services and

otherwise that are necessary in a modern economy, which is the response I stand by.

MR. ERROL NILES: Fine, but would you not be prepared to say even if you

require that, prepared to go on a gradual basis, over time rather than an immediate

shot in the butt so to speak.

MR. PETER WILLIAMS: Well, as I indicated in terms of the social aspect of it we

have certainly looked at the issues of the smallest consumer and the less able in the

community to afford it and there as I pointed out is also shown in figure 6 that a

person who is using 100 kilowatt hours or less will see $3.50 increase in a month. A

person who is using, lets go right up to 500 kilo watt hours, which 90% of our

customers will see $11.00 increase, so what we have sought to do really is to

moderate on those who we consider the one most in need and the lease able to pay, to

moderate the increase in rates there, while at the same time allowing us to achieve the

overall rate of return to enable us to do what has to be done to maintain the efficiency

and reliability of our service.

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MR. ERROL NILES: Thank you. Just a minor point in relation to peak

and off peak. You have those issues in Barbados where I would take it that most of

your generation is the peak generation which is during the night time period as

opposed to the daytime?

MR. PETER WILLIAMS: The peak is actually in the day time. Our

greatest peak occurs when the days are at its hottest so certainly air condition

commercial activity accounts for that. The evening peak is a residential peak .Where

people are at home cooking using their TV, lights and this is something which is taken

into account in the cost of service. In terms of our plant and generating capacity the

demand diminishes probably after 9:00, 9:30, 10:00 o’clock from there until about

4:30, 5:00 o’clock in the morning, when it starts to pick up so that is our lowest level

of consumption, lowest peak demand. A utility measures the change in demand daily

pattern. Our load factor is about 74%. It is quite high for a utility in other words we

don’t experience the big seasonal swings that they have in North America and Europe,

where a utility will see quite dramatic changes through the seasons because of

heating, cooling all those aspect which come in different daylight hours, all those

things come into play. We are far less driven by those changes so our load factor is

fairly high in comparison.

MR. ERROL NILES: In terms of efficiency Mr. Williams then, could it be

then that you have a different charge for especially domestic customers who use less

during the day and a different charge for the night period when the peak is a little

higher for them. Because you are charging the business community a flat rate right

through and if they demand for some reason you turn on your refrigerator or your

units on Monday morning and you get a sudden surge for a few seconds you charge at

that high rate through out the year as Mr. Toft was complaining about. Would it be

far more efficient and equitable to charge the consumers a lower rate for the day time

use and a slightly higher, I know you might say you might arrive at the same figure

but at lease it would show people where they need to cut back on the use of electricity

if necessary.

MR. PETER WILLIAMS: Residential users do not have the same tariff structure as

the commercial, so when we talk about residential users, there is no demand

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component to their metering. The meter does not contain a demand element and all

the demand related charges are built into their base energy charge, because of the

simplicity in metering. Demand metering is far more complex, more costly and so

there is no element really of what happens with a particular customer and any increase

in charge in the residential case to them because of how they use electricity. The

analysis in that case is based on the load research that we’ve conducted and is

basically a sample of residential customers and the adequacy of that sample

statistically is something that I’m sure can be spoken to about in the terms of the cost

of service by Mr. O’Sheasy and how that is used in to determine the allocation of

demand related cost to the residential consumers. However, when you think of the

demand, it is not just the generators and you are referring to, it is also that in the case

of a residential customer, yes their fridge will be working during the day so that is

something that requires generating capacity but their lines, their transformers

everything that is supplying them is peaked. If you’re not using it during the day it is

still capacity that is installed there to meet their peak, which occurs typically for

residential customers, more in the evening for residential customers and as I say the

load research will show that. Commercial customers however are demand metered

and demand is to reflect the demand for that individual customer so they get charged

depending on what load they place or impose on the system.

MR. ERROL NILES: So you are saying therefore that even thou it may be

equitable it is not something that you would consider at this point?

MR. PETER WILLIAMS: No I was trying to explain, I though you were

suggesting that demand somehow the aspect of demand for residential customers

should be taken into account that the demand, there is no demand metering for

residential customers. So it doesn’t come into play for residential customers at all. All

the costs are collected. The demand cost and energy cost are collected through the

base energy charge for residential.

MR. ERROL NILES: Okay, I turn to just briefly to the question of the

debt equity. You are seeking to achieve a 35/65% ratio but I would, if I can ask who

is driving this particular ratio - the lenders, shareholders or directors?

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MR. PETER WILLIAMS: None. You are saying that we are seeking to achieve. I

believe again that question was asked maybe in a different way and this is how I

believe I responded. The company’s equity at the moment for a utility is quite high.

We have 80.8% equity in the test year.

MR. ERROL NILES: In the test Year?

MR. PETER WILLIAMS: Correct. If we had used that level of equity and given

that equity is more expensive than debt, then we would have ended up with a higher

rate of overall rate of return. So in order to consider how reasonable we were, we

looked at comparisons and the comparisons we specifically thought appropriate was

the debt equity levels in the Caribbean Utilities and we also took into consideration

the recommendation of near end 2006 audit report to the Commission, rather than

using the Company’s existing capital structure. In other words, the debt equity ratio

that perhaps a theoretical debt equity ratio should be applied. We looked at the

Caribbean Utilities and we established already that on average there are 64% equity

36% debt and we chose to use 65/35 and that means then that the component of equity

in our application for the cost of capital is lower and therefore the debt component is

higher even though our existing structure is different. We applied the cost of Debt as

it stands to the company at the end of 2008 to that 35%, rather than to 20% so the

ratio as it were was at 35% to a lower cost and the ratio of 65% to a higher cost of

debt capital, resulting in an overall lower cost of capital. And we believe that to be a

reasonable and I said almost beyond a doubt although I referred to the Commission in

that regard but we felt we should go the extra mile and put in a capital structure that

was extremely reasonable. We have no objective date as to when that capital structure

should be reached. But certainly you can see from our capital investment plan and the

financial projecting in L2, that we will be incurring debt and the existing capital

structure we have now will start to change and the debt component will increase, but

in the five year span we will not reach the 65/35 forecast as that is what it is a forecast

and therefore we will or would reach 65/35 but based on our projection we are not

where we felt this to be fair to the utility, fair to the consumer and that is what we

have put forth.

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MR. ERROL NILES: In terms however, I don’t think I agree with your

submission that equity is more expensive than debt. Not in the long run anyway

because Mr. Williams you have your vendors which are your debenture holders,

preferred shareholders and you have the ordinary shareholders. The preferred

shareholders have to be paid depending on the interest component. This is a charge

on the profit of the company isn’t it? So the interest rate on the charge is against the

profit is deductible expense. So it really affects the charge against the profit. The

ordinary shareholders are at the mercy of the Directors.

MR. PETER WILLIAMS: And that is why their costs are usually higher

because they don’t have any lean and are the last persons who can call on the assets

debts. Debts are secured and the debt costs are generally lower.

MR. ERROL NILES: But that would be after liquidation?

MR. PETER WILLIAMS: Generally debt cost for instance I think if you go

to any lending institution, they can lend you money and they require collateral so they

risk is lower, but when it comes to repayments theirs is the first call the shareholder

dividend only comes after the debtor has been satisfied and therefore I don’t know if

anyone would find evidence to counter this but I have all through my years of

schooling been told and seen evidence that equity is more than debt. That is our

position and certainly our calculations and our submission. That is why we went with

the capital structure as proposed because the debt cost is significantly lower that our

equity cost we felt it more reasonable to put forward that capital structure than the

existing one.

MR. ERROL NILES: I know you said Mr Best will deal with this but how

then do you treat the retain earnings component?

MR. PETER WILLIAMS: The retained earnings are reinvested earnings

and we have reinvested as shown in the financials, that the investors have put a

considerable amount of money back into the Company, and retain earnings represent

their value of the money they have put into plant and equipment. That is running and

operating on the behalf of customers and also it can be supported by the information

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provided in the interrogatory on the dividend pay out and that shows on average 60 to

68 maybe to 72%, I can’t remember the exact number, 72% has been reinvested and

28% paid out. The amount varies by year but on average we’ve paid out relatively

small portions in dividends most have been reinvested money used to purchase new

plant. If I compare that to US utilities, on average the Edison Electric Grouping of

utilities about 60% is paid out in dividends, 40% is reinvested and within the

Caribbean the range also is quite wide but a much higher dividend paid out. So the

investors in this case for the Barbados Light and Power have been modest in their sort

of requirement as far as dividends and the consumers I think have benefited from that

reinvestment and as I said, the consumers benefit from the capital structure being

proposed.

MR. ERROL NILES: Good. So in effect then you are saying that in Barbados

the dividend is lower than any other jurisdictions that you mentioned?


MR. ERROL NILES: Okay. I don’t want to dwell on it; I just want a general

idea?

MR. PETER WILLIAMS: Yes

MR. ERROL NILES: The truth is that return earnings is the equity

shareholders fund isn’t it? That you don’t pay any interest on?

MR. PETER WILLIAMS: No, it is not Equity shareholders funds that we

don’t pay any interest. That is money is put back into the Company by the investors

and we have to provide them a return on that investment. So Investors have a choice

when looking at their investment they can say through the Director and through their

votes I would want more money paid to me in dividends or I want it put back into the

organisation, and I would expect then to have an earning on that.

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MR. ERROL NILES: I understand that but in terms of the reality they

reinvested the retained earnings, it is money that you raised. It doesn’t have a cost

attached to the Company?

MR. PETER WILLIAMS: It does have a cost, that’s what I’m pointing out.

The cost is the return that the investors expect.

MR. ERROL NILES: Sorry, unlike a loan?

MR. PETER WILLIAMS: Well it’s different in the sense that the cost is

higher than a loan.

MR. ERROL NILES: Explain that to me.

MR. RAMON ALLEYNE: Sir, I believe the witness has answered this question a

few times in three or four different matters and also to other Intervenors. I would

imagine we should move forward rather than repeating.

SIR NEVILLE NICHOLLS: Mr. Niles this issue has been dealt with from the

very beginning and has not really been disputed. I don’t think you are going to get us

any further by pursuing it.

MR. ERROL NILES: With respect Mr. Chair, it may have been asked but not

quite in that manner. Alright Mr. Williams, we would go to a submission on that one.

Getting back to the test year, I notice you have earnings cover ratio of 3.14 so really

the company doesn’t have any particular difficulty in repaying its loans. Is that

correct?

MR. PETER WILLIAMS: Sorry I have indicated already that from 1983

and after that rate application was submitted and the decision was issued we have

been able to raise funds. I’ve also indicated that the position of the company now and

our requirement for capital to invest in new plant that we have difficulty going

forward. So the monies that we require in terms of overseas borrowing, foreign

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currency borrowing to finance our expansion plan, we cannot finance based on the

projections which show that we are going into a loss position.

MR. ERROL NILES: Let’s just turn briefly to the rate of return. In your

opening statement you said that the purpose of the affair and I think that Sir Henry

also made this point, a fail in a reasonable rate of return and the company must be

able to satisfy lenders of its ability to repair and maintain confidence with investors by

providing a fair return. That’s a subjective position isn’t it?

MR. PETER WILLIAMS: That is why we’re here. The evidence we

provide is in support of our return that we are applying for. The elements that we have

included, the debt that we have said is our existing cost of debt as opposed to any

notional cost of debt. The capital structure we have used is again theoretical and as we

considered reasonable. The Equity is cost on the basis of the submission by Mr.

Camfield in the cost of capital, a study he conducted on our behalf. We are

considering that is a reasonable submission and it is indeed why we are here and one

of the elements to be decided is the rate of return.

MR. ERROL NILES: Would you consider 9.4% to be reasonable?

MR. PETER WILLIAMS: I consider our Application for 10.48% to be the

appropriate return so therefore 9.4% would be inappropriate. I also believe that 12%

would be inappropriate.

MR. ERROL NILES: Too low or too high?

MR. PETER WILLIAMS: It is determined by the Commission, so the

Commission can say that 10.48% is not appropriate and they have after the hearing all

the evidence to base their decision on that can be slightly lower or slightly higher,

after hearing all the evidence. All I am saying is the number we have submitted we

believe to be fair and reasonable and we provided the basis on which we consider that

to be the case.

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MR. ERROL NILES: Just to turn briefly on the self insurance fund. I know

that it was weighted by Mr. Camfield and company. It was not weighted, sorry,

whereas some other components were weighted, is there a reason for that?

MR. PETER WILLIAMS: Yes Certainly. The self insurance fund has been

established under the laws of Barbados. The fund is set up for special purposes. It is

indeed insurance if you want to consider an insurance company. The monies that are

in that fund are for the provision in the event of a hurricane, or other catastrophes as

outlined in the legislation. Basically, to rebuild the system, to purchase the material

and things that are needed. It is a separate fund. It is under the legislative supervisor

of insurance. It is not part of the capital the company can employ for other purposes

and indeed the legislation speaks directly to that; that if we’re to draw on the fund for

other than insurable reasons, that we would be subject to tax and it is not allowed for

general use of the company.

MR. ERROL NILES: The fund from the deposit of the customer is weighted?

MR. PETER WILLIAMS: That’s correct, because those are funds that are

paid in to the company to secure accounts and that is money the company has access

to and can be used if we had to repay those monies so every time a customer

discontinues service, if it is a foreign national who comes here for a short period they

are required to provide us with a security deposit. As said earlier the electricity is

used now and pay later and we have to secure those to ensure that we are not in a

more severe bad debt position and when they leave if they pay their accounts up we

refund the money. So we have the money to use while it is secured by us. The self

insurance fund is different however. That is money that is set aside in a fund

specifically governed by a special legislation for a specific purpose. The legislation

precludes us from just taking that money and putting it back into general use. That is a

good reason, because if we had the money and we put it back into general use we

would have it when we need it to rebuild the system.

MR. ERROL NILES: In respect of that, is that a deductible expense under

your accounts, the contribution to the self insurance fund?

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MR. PETER WILLIAMS: It is an expense and we have provided the

information in this memo on the amount that is paid into the fund and the basis on

which that payment is made.

MR. ERROL NILES: This self insurance is largely because you said you have

difficulty insuring for a distribution network poles etcetera. Is that correct?

MR. PETER WILLIAMS: That is correct and that situation has existed

since the 1990’s and I gave the reason and rationale for that.

MR. ERROL NILES: Now just getting this point, if you were paying

insurance in the normal fashion that would also be a deductible expense?

MR. PETER WILLIAMS: And a significantly higher expense.

MR. ERROL NILES: It would be an expense in paying out a loss to

the company entirely.


MR. ERROL NILES: With the self insurance fund however, even thou you

don’t use it, if you use it, it’s subject to tax?


MR. ERROL NILES: And that tax could possibly be the equivalent to the cost

of borrowing or hiring.

MR. PETER WILLIAMS: What I’m saying to you is it’s not an option to

take the money that’s in the fund and use it for general purposes.

MR. ERROL NILES: No for purchasing equipment.

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MR. PETER WILLIAMS: No not for purchasing equipment for anything.

It is not allowed for in that way. The legislation precludes us from just taking the

money and purchasing equipment because if we have a hurricane or any catastrophic

event and we need the money we can’t say we had it put aside and we spent it, it has

been provided for and we don’t have it. We have it in the absence of insurance to

make sure we can access funds. If we were paying for insurance it would be more

expensive. We wouldn’t have a fund if we were paying for commercial insurance, but

we would call on the insurer who would have to have the funds readily available right

away to provide redress as it were to us for that circumstance, if it’s a hurricane or

whatever. We have to have that fund there and that is the fund that has been set up

and for the purpose for which it has been established. We consider it to be prudent

because the cost of commercial insurance would be much higher and the self

insurance fund is being properly governed and is under the legislation and reviewed

by the risk managers on a regular basis.

MR. ERROL NILES: I appreciate that but the difference is that it’s on the

replacement cost and not on the depreciated cost.

MR. PETER WILLIAMS: The insurance of the fund is the adequacy of the

fund. It is established to replace plant and the historic cost would be inappropriate

because ultimately if something happens we have to go back out there and we can’t

say we are going to buy a pole for the cost that we incurred 10 years ago, we have to

go and purchase a pole from the supplier at replacement cost, at today’s cost so it is

the basis of the adequacy of the fund and the risk analysis is done on the reproduction

cost of the T & D assets.

MR. ERROL NILES: Some years ago Mr. Williams it was noted that perhaps

you can use concrete poles. Is that feasible?

MR. PETER WILLIAMS: We continue to look at that. The options for

poles have change and varied. We have even imported concrete poles both the pre-

cast poles which have been manufacture and used in Puerto Rico. We looked at the

spun concrete poles and the technology is changing. When I first looked at it in 1990

the spun pole and the pre-cast, were using technology that made them still very heavy,

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very expensive. We generally still climb out poles because many places in Barbados

are not easily accessible to large vehicles so we have very narrow streets, very narrow

lanes, unpaved roads, different to a North American utility where they have wide road

and can carry heavy lift equipment for poles to put them in place. So we had stayed

away from it but we are continuing to review it and do the analysis. I notice that a

typhoon hit Japan just last week and concrete poles snapped and that is also in terms

of our options. Concrete poles are vulnerable to a certain extent but to a lesser extent

to wooden pole I would grant you that but they are very much more costly.

MR. PETER WILLIAMS: We have taken many steps to prolong the life of

our wooden pole and believe those to be very successful. We’ve been through the

boom of economic development so the number of poles we need and require every

month is not going to be the same as when we were in the 60’s or 70’s. We would

continue however to look at the option for poles. We don’t believe it is necessarily a

straight forward issue.

MR. ERROL NILES: Thank you. Mr. Chairman I think I would finish there

for the time being, except this point the marginal cost study. Mr. Williams, what is

the basis for treating all capacity cost as demand related.

MR. PETER WILLIAMS: Again I will now ask that matter be discussed

with those who have put forward the report on the cost of service. I think that is

probably more appropriate as they are the experts in that area.

MR. ERROL NILES: Let’s talk quickly about the metering. You mentioned

smart metering and earlier in your cross-examination you mentioned something about

the cost of smart metering. Is that more an efficient way to determine use of

electricity?

MR. PETER WILLIAMS: I would agree if you look into today’s paper you

would see that General Electric is now doing a pilot in Hawaii. So the technology is

still not matured. It is still on the cutting or even the bleeding edge. We will be

looking into that as indicated in earlier testimony and hope that would lead to

efficiency levels in Barbados. There are opportunities there where rolling out the

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communication networks to support it and we are putting in the types of meters that

would be required to support it, electronic meters that have the capability, so in time

we will be able to use that to the advantage of the economy and our customers.

MR. ERROL NILES: If you wish to know this was being done in Europe for a

long time and it’s being done in New Zealand and Australia but I look forward to that.

MR. PETER WILLIAMS: If there is information you have that can guide

us on the developments and as I say if you look in today’s paper you would see

reference to GE which is one of the leading companies now starting a pilot in Hawaii

and I think we are certainly going to follow the developments.

MR. ERROL NILES: Thank you that’s the end of my cross-examination.

SIR NEVILLE NICHOLLS: Thank you Mr. Niles that concludes the cross

examination by the Intervenors. At this stage the Commissioners are free to ask any

questions they may wish to ask. I can caution them the rules of relevance apply to

them as well.

MR. GREGORY HAZZARD: Mr. Williams I will try to stay on topic. My

questions are really clarifications that I’m seeking on issues raised by the Intervenors

where I felt that you may not have fully addressed their concerns. We can start with

Mr. Niles as he was last on. You were able to show why you need to be vertically

integrated in our market. In his open he had a concern about costs are split between

the various areas of your business. Please explain in detail how you keep the various

costs separate.

MR. PETER WILLIAMS: Mr. Best will speak on the management of our

cost and how it is used in more detail. The structure of the Company is our production

side which is our generation side. We capture those costs in various headings which

are in line with the accounting codes set out in our Federal Energy Regular

Commission guidelines. The codes are under a number of headings such as fuel,

supervision, O & M for the spears, ex boiler prime movers, so you can capture the

cost in various elements. It’s the same with the distribution. The cost for the overhead

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lines, under ground system, transmission distribution and the 24 hour service; all

those costs are related in maintaining the metering system, installing meters. In

customers’ service, the costs of operating various sections are kept separate.

Therefore the Call Centres and Credit Collectors costs are separate from those who

are in the area of providing information on new supplies and customers. Information

systems Finance and administration is generally the cost associated with including

things like a hurricane, regulatory matters, stores and general purchasing expenses.

The marketing area deals with the support for key accounts as well as administration

of our internal communication and finally Human Resources.

MR. GREGORY HAZZARD: How long have those systems been in placed and

how often do you audit and update them?

MR. PETER WILLIAMS: The financial audit is done every year, unless

there is reason to do a particular audit on a special area.

MR. GREGORY HAZZARD: In terms of cost allocation?

MR. PETER WILLIAMS: Cost allocation was in place from the 1980s. I

am unsure of the exact year the codes were changed. There was a different cost

accounting code system in the 70s, I am unsure of the exact year. Where applicable

we have used the FERC codes.

MR. GREGORY HAZZARD: Are there any aspects of you business you would

considerer could be done more efficiently by outsourcing or selling off those areas of

business.

MR. PETER WILLIAMS: Not that I can think of. We have also looked at

opportunities to be efficient. There are areas we have to ensure that we don’t build in

capacity which we only use infrequently. We rely on consultants for specialist help.

We have costs that are associated with contractors who do specialist work. We have

line contractors who put in poles. For us to have a full staff at all times may not be

the most effective. Those contractors also work for other companies using the same

resources which are a better allocation of cost. Years ago we have also done work for

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others such as the Water Authority providing the bill print and customer services. In

the context of the Electrical Utility business, we benchmark in terms of the resources

we have and how we apply those to the job or task we have to carry out.

MR. GREGORY HAZZARD: In your opening you have mentioned you

achieved universal service and maintained it. Was that easy to do based on your size?

Are there any peculiar costs involved in maintaining universal service that we need to

be aware of?

MR. PETER WILLIAMS: With the first question it looks easy now because

you can always say something was easy but universal service in Barbados requires a

lot of effort which I mentioned in cross-examination. The assisted wiring programme,

where the company had a programme to wire people’s houses years ago, that ceased

when the housing stock improved and people were able to build their own houses.

There was also the rural development programme that still exist but to a very limited

extent. We would help in cases where people cannot provide the cost of line

extensions. That is based on the assessment of the quality of home. In other words it

would have to be a small home, equipped to afford the cost of just bringing the wire to

their home, we still do that. Our cost and effort would be different to us than maybe

someone else. There are places where it would be very much easier because of size,

smaller islands, but then there are some islands where it would be extremely difficult

because there are less populated in terms of population density far more rugged in

terrain. So if I look at St Lucia the challenge of electrifying St Lucia is quite different

to Barbados. We have maintained universal service and there is no particular

difficulty in doing that.

MR. GREGORY HAZZARD: No peculiar cost you can attribute to maintain

universal service?

MR. PETER WILLIAMS: The issue of self insurance and our location is

that we are venerable to hurricanes. There are issues relating to access sometimes to

put in poles and plant. We don’t have the system that applies to some European

countries and some parts of the US legislated the rights of way. We have to go and

seek individual permission from every land owner for every pole that we plant, that

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presents challenges because sometimes people don’t want us to put a pole on their

property even thou it’s a boundary corner and sometimes there are situation where

they haven’t approved it and get into conflict with the neighbour and tell us to come

and remove it because it’s supplying they neighbour and I have had to intervene in

such instances. So we have no universal rights to place our equipment. We have to

seek individual approval and this is a challenge to us. Mr. McConney told me years

ago that the advice he got was that this was a good situation because where someone

feels that you are using the force of law to impose on them, you have to go and be

very courteous and ask for permission. That also creates an impression on our

customers that we are not arrogant or callous that we would come to them and ask

them, can we put a pole on their boundary lot. It just creates a very positive

impression as opposed to using the force of law.

MR. GREGORY HAZZARD: Mr. Mascoll and Mr. Skeete grilled you

fairly heavily on your capital structure and Mr. Niles had some interest as well and I

know they will go at Mr. Best quite thoroughly. The only area I want to tie up with

you is in relation to timelines. You mentioned you may not achieve your target of

theoretical capital structure in the near future and one can argue the company would

be putting themselves at a disadvantage if it could not achieve that capital structure.

Can you elaborate on the implications of not achieving your theoretical capital

structure you are using as an assumption for your application?

MR. PETER WILLIAMS: The assumption is that we will have 35% of debt

returned to us on a potion of the equity that we have now, which would be at the cost

of the debt level return which is much lower and therefore, although we are requesting

the 10.48% based on the projected capital structure, our actual cost would be what we

achieve and would mean we would not be able to obtain or reach the level of return

for our equity holders that we have projected. However I don’t believe that is going

to be untenable. We have to manage very carefully the borrowing rates because we

don’t intend to pay with our needs. We intend to achieve the lowest possible rate we

can by managing our debt cost and obtaining very low interest rates, which we were

able to do in the past, we will be able to manage the expectations of our shareholders.

The dividend payout level has been very modest. There will be a lot of factors

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influencing where our debt structure ends up. I believe it is tenable and we can

manage.

MR. GREGORY HAZZARD: You have no intension then of achieve your

target capital structure?

MR. PETER WILLIAMS: I wouldn’t say any intension. The question was

- when. The financial projection for the utility is different to many businesses. Three

years is not a long time and our investments are very much more long term. The risk

level and investors we have, 60% of whom we have through Light and Power

Holdings are Barbadian. When they come to our shareholder discussions their interest

is in service more so than in return. We will be moving towards that capital structure.

I cannot say we will achieve it or when we will achieve it.

MR. GREGORY HAZZARD: Or If?

MR. PETER WILLIAMS: Or if for that matter. It’s projections I would

think we would want to move to a more appropriate capital structure than we are now.

In other words, I don’t see us maintaining or staying at our existing capital structure,

allowing that situation to continue. So I have no time frame but I would think that our

target and objective would be to move towards a capital structure. That is in line with

what we are asking for.

MR. GREGORY HAZZARD: My last question has to do with the choice of the

test year and some details of that. Mr. Skeete, Mr. Trotman and Mr, BARCRO were

interested in that and you dealt quite thoroughly with the fuel clause adjustment. Are

there any aspects of your non-fuel cost, your other operating costs, which would have

been affected by the cost of fuel? It seemed higher in the 2008 test year than for a

normal year if there is such a time to go forward.

MR. PETER WILLIAMS: Mr. Best can speak in more details on that. The

working capital requirement was as a result of increased fuel cost under line elements

such as the price we had to pay to keep our feet on the road. In the context of our

overall application most of what we are seeing is related to the fundamental cost

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drivers situation we feel to be abnormal and we have adjusted out those costs. In

generation there was 3.9 million roughly that was excluded from our request in

expenses because we felt it was not going to be an on going O&M cost incurred by

the company. Smaller elements are dealt with in D7.

SIR NEVILLE NICHOLLS: Thank you Commissioner Hazzard.

Commissioner Willoughby.

MR. ANDREW WILLOUGBY: Mr. Williams just one question, In your

application at page 13, page 3 it was stated that the present basic electricity rates are

now inadequate to allow the Applicant to meet it’s operating and maintain expenses

also to attract new capital to replace plant that is due for retirement and also to have

the opportunity to earn a fair and reasonable return. If the rate of increase is not

granted, not saying that it is not going to be granted, can you present evidence that the

company will not be able to continue to access finance in the near future at reasonable

terms?

MR. PETER WILLIAMS: The evidence I have presented is under L2

which is the projections with the rate approved and under L1 with the rate plans that

we have with the rates as they are and discussions we have had indicate that we would

have to go to lenders, presently as we do when we are seeking to borrow funds for

financial projection and these show losses and the losses are not going to be

acceptable to the lenders that we have approached. So for us to say we are going to

go and present these projections to a lender and get a letter back saying no we would

do that. So in terms of the evidence I wouldn’t be able to bring you a letter from the

banker as we did not submit an application.

MR. ANDREW WILLOUGBY: Thank you.

SIR NEVILLE NICHOLLS: Mr. Williams, just one question as a

follow up to the last one. Are there any covenants or conditions in your loan

agreements with the European Investment Bank which address the level of the rate of

return on rate base that you are expected or required to earn?

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MR. PETER WILLIAMS: No Sir. The covenants we have with our lenders

relates to the trusties which stipulates the earnings coverage. But there is no

requirement in terms of minimum rate of return on rate base or any other type of

return that we have to achieve to satisfy the European Investment Bank or any other

lender.

SIR NEVILLE NICHOLLS: No conditions about taking steps to ensure that

you meet operating expense?

MR. PETER WILLIAMS: There are requirements that we maintain the

plant in good order and that we continue to do so during that period while the loan is

outstanding, which is normal for any loan. You maintain your property, plant

equipment whether it’s a mortgage or other type of loan that you maintain things in

good order. So if you run it down the value will be diminished and the loan is no

longer secured. So we have those stipulations but I would say there are broad

statements rather than very specific requirements that spell out in detail what we have

to do.

SIR NEVILLE NICHOLLS: Earlier today there was a reference to the

company’s management. Are they any conditions about the management retention of

a certain level of expertise or qualification in the management?

MR. PETER WILLIAMS: I am not aware of anything Sir. That may fall

under the level of how we maintain our plant. When we go to these institutions they

gauge our performance. In consideration of that they set the interest rate to the extent

that we can negotiate a good interest rate because of our demonstrated performance. I

am not aware of any specific stipulation.

SIR NEVILLE NICHOLLS: Thank you Mr. Williams. Commissioner

Brathwaite.

MR. ANDREW BRATHWAITE: Thank you Chair. Mr. Williams, following on

the question about the company’s borrowings, I want to make specific reference to

the 2008 audited financial statement Tab 5 in Volume 1 and Note 10. There is

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reference to the existing debenture trusty which we have just mentioned. Now that

deed only restricts the company from issuing debenture that rank prior to that charge.

Is that an unlimited charge or is there a dollar limit on the charge itself?

MR. PETER WILLIAMS: I am not aware so I would have to check that.

MR. ANDREW BRATHWAITE: I am happy for Mr. Best to deal with these when

he comes.

MR. PETER WILLIAMS: I am sure he would be happy to deal with them

as well.

MR. ANDREW BRATHWAITE: The Other question that maybe for him then is

there reference also to a specific earning coverage ratio and an equity debt ratio? I am

wondering what the specific rate required ratios are and to what extent the company

may be in breach or close to being in breach of those ratios over the period of the

forecasted financial information, both at the forecast information at existing rates and

at proposed rates.

MR. PETER WILLIAMS: We can provide the levels that are set. The

equity debt ratio is unlikely to breach that. We have so much equity at the moment.

But Mr. Best will be prepared to respond in detail and we can provide that.

MR. ANDREW BRATHWAITE: Okay. Now this suggests that there is

opportunity for the company to obtain financing that would be secured by a second

charge over the company’s assets and not participating in the first charge. Have you

had any actual discussions with lenders at that level and do you have any indication of

what the interest rates would be for those lenders?

MR. PETER WILLIAMS: No, because of our equity position and the very

low levels of debt anyone who is coming in second tare borrowing will have a higher

risk and perceive obviously they would have a second call and they would have a

higher risk and the rates would be higher. Therefore we have not had to resort to that

because we have had very modest debt levels so our rates would be lower and we

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would want to continue and have no difficulty getting the existing borrowers to agree

to someone else being accepted or joining in the debenture trust deed. Again our debt

level is modest. We have not investigated the proposition of someone becoming a

second tare lender. We have been trying to achieve the lowest possible debt levels

and I think we have been able to do so. It’s mainly overseas borrowing I’m talking

about. Local borrowings suffice us for the working capital issue and things like that,

and so what I’m referring to is our overseas borrowings. That’s when we have to go to

the market for a significant amount of funds for capital investment and the bank that

we are dealing with generally are amongst the ones giving us the most attractive

interest rates.

MR. ANDREW BRATHWAITE: In that respect have you had any discussions or

negotiations with entities like the European Investment Bank and to what extent is

additional financing available at this time?

MR. PETER WILLIAMS: We have had discussions with the European

Investment Bank as well as the IDB and they have both indicated interest in lending.

We haven’t went into the details of terms, because terms generally come closer to the

time you are borrowing money but we have provided them in the pass with our plant

projections. We have provided them with our system expansion plan studies, our

environmental management system. Their requirements that borrowers require which

go beyond the financial and adequate information and to be able to demonstrate not

only complying with Barbadian requirements but certainly things that fall in line with

international law requirements, like air remission noise level things that are more

environmental in nature. So we have had discussions and keep them in the loop of

our plans so that we don’t just walk into their door at the last minute. They are well

informed of our plans and are able to therefore fast-track the loan when it dose come

about.

MR. ANDREW BRATHWAITE: Okay. Finally, the note to the financial

statements suggests that you might also be able to get financing from manufactures by

giving them a first charge over specific pieces of machinery. Have you had any actual

discussions with manufactures and any indication of what their rates might be?

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MR. PETER WILLIAMS: Not at this moment, but what I can say is we

always go out to tender for plant. The tenders advertise in the European Investment

Journal through the bank we provide that. Also the IDB we use them as a root for

advertising these tenders. When we get bids we ask for financing whether it is import

or export bank type financing from the country of export whether it is the supplier

financing and we would continue to do so. We have found in the past borrowing is

more expensive than the European Investment Bank loan that we have been able to

secure. That last loan we have was in the 1980s import/export bank financing for the

part of the low speed. So that is an option and we would only take it up if it is less

costly.

MR. ANDREW BRATHWAITE: How did the rates that you have been quoted

compare to the commercial bank interest rates?

MR. PETER WILLIAMS: The commercial bank interest rates are higher

than the import/export bank rates and higher than the Development Bank type

lending. It varies and it depends on the amount you’re borrowing.

MR. ANDREW BRATHWAITE: I wasn’t clear if you were saying there’re higher

than the rates for the suppliers?

MR. PETER WILLIAMS: Commercial lending yes, because they are

usually tied into some sort of export initiatives that their country wants to support, the

export of plant so if it is coming out of Scandinavia or the Far East the commercial

bank rates are higher than if the import/export bank is giving some sort of

concessionary finance to this particular exporter or supplier to export significant

amounts of plant equipment. Those rates have been in the past when we evaluated

them not as attractive as the European Investment Bank rates that we have gotten so

far. As we become more developed the European Investment Bank has indicated that

they will only be able to lend a potion of the money. In other words, they cannot

totally finance an investment because it conflicts with their requirements in terms of

how much money they can lend to us as a country.

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MR. ANDREW BRATHWAITE: Sorry this is the European investment

Bank?

MR. PETER WILLIAMS: European Investment Bank. The sector lending I

think, they have constraints on the amount they can lend to a sector, the amount they

can lend to the country. I’m not familiar with the exact number, I’m just saying that

there are limits. It is not that we can go and necessarily get all the money from one

lender. We will make it up with our own sources, what is reinvested by our investors

but sometimes we need to go to another bank as well, depending on the number of

capita investment that is required.

MR. ANDREW BRATHWAITE: Okay, I want to turn briefly to schedule

K and briefly because I know this is Mr. Worme’s territory and we can go into more

detail with him but starting at page 263. This shows the target rate of return for each

class and the deficiency in revenue. I want to deal with the commercial customers as

well as those represented by the large power class here. The large power class we are

starting from a release rate of return of 12.4% and you are proposing a rate of return

of 14.42% for that class. There are comments in the cross-examination about the

extent to which commercial customer may be called upon to subsidise domestic

customers. There is reference to the concept of or the principle of value of service

and I wasn’t sure if you agreed that that was an acceptable basis on which to achieve a

higher rate of return on the large power than a higher rate of return than the overall

required amount. So how would you explain to the large power customer that they are

being called upon to pay higher than the overall required rate of return?

MR. PETER WILLIAMS: I think this issue of social justice is one that I

think binds Barbados together in many ways. It was commented that it’s the only

place in the world you can ask a civil servant to take a pay cut and they would do it,

which speaks very highly of Barbados. We really have a very difficult task and we

recognise that it’s not just about being at the rate application stage and awaiting a

decision but as I have indicated afterwards a post decision, when the rates are

approved in this format or in another format, we have to deal with our customers on a

day a to day basis and we have the job of convincing our large power customers that

this is fair and equitable that there are going to be asked to be paying more than the

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weighted average cost of capital. We have tried as you can see to balance all these

interest and we have tried to moderate the increase so we have on one hand the parity

ratio for the Domestic service has gone from 42% to 74% and the parity ratio for the

large power has gone down from 204% to 137% and that is where I would argue that

we would try to convince those persons that yes you are paying more but certainly in

the context of an increase we have tried to moderate the increase. We have done so

because we have recognised the need to be competitive and that if these rates were to

be applied, that’s good for the economy but it is not going to satisfy all customers and

as I also indicated that job really is to balance the economy and not necessarily that

we can satisfy any individual customer in this exercise.

MR. PETER WILLAIMS: That is one area where judgment is paramount and we

have tried to go out and engage our customers during this whole exercise to find out

what is going to be palatable and that is certainly something that we have taken very

seriously. So I think it is a very difficult question. There is no easy answer and I

hope I have satisfied you.

MR. ANDREW BRATHWAITE: That’s fine. Let us turn to figure 6 on page 268

which deals with the domestic service class. I think that you have explained that the

company has attempted to reduce the impact on lower income users by adding a very

small dollar value increase at the low end of consumption. If you look though at the

percentage increases, the percentage increase is actually higher at the lower end than

at the higher end of consumption. Was any consideration given to reversing that and

having a lower percentage increase at the lower end or at least having the same

increase across the different consumptions bands?

MR. PETER WILLAIMS: We did consider that. We did look at the issue and we

do note that it is for the very small user, I keep mentioning the $3.50 but as a

percentage in terms of an increase it represents a higher percent than some of the

others, than all the others, and in the context that we felt that the three dollars and fifty

cents when you are in that level I suppose if your two dollars and fifty cents as appose

to three dollars and fifty cents they really is not, you know, a meaningful change but

certainly, you know as you indicate, a percentage increase change quite dramatically

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because fundamentally the bill is that much lower, so the number is quite noted and

agreed.

MR. ANDREW BRATHWAITE: Well would the company have any concerns to

that type of structure?

MR. PETER WILLIAMS: No, I think if we had concerns we would have

approached it differently.

MR. ANDREW BRATHWAITE: Any concerns with having a lower percentage

increase at the bottom, at the low consumption?

MR. PETER WILLIAMS: Oh, again rate design is not one of the exactly science it

is certainly a bit of an art that we have look, and tried to look at the consequences of

the increases and we have had conversations, we have done some analysis and this is

what we have developed. But the approach could be different but we accept that they

are different ways to come up with the same revenue requirement and certainly that is

one approach to have a smaller percentage increase at the lower end and a larger

percentage increase at the higher end certainly for the customers in the higher usage

bands who are already seeing a significant increase, that increase would go up even

further, in dollar amounts not as a percentage, correct.

MR. ANDREW BRATHWAITE: Now, having said that I guest the context or part

of the context at looking at these increases is that the fuel charge is being passed on

directly to the consumer. In figure six reflects the fuel charge of fifteen point eight

cents of a kilowatt hour.

MR. PETER WILLIAMS: Yes and that’s correct and this was at April ’09. Well

it’s quite different today.

MR. ANDREW BRATHWAITE: Well do you know what it is today?

MR. PETER WILLIAMS: Just over twenty seven cents per kilowatt for the month

of October.

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MY. ANDREW BRATHWAITE: And what was it at its pick in 2008?

MR. PETER WILLIAMS: In 2008, we had effectively two fuel clause adjustment

charges working, because government had subsidies the residential and general

service customers and they had fixed the fuel clause adjustment from December 2007

at 23.5375 cents per kilowatt hour and the cost to the government then of subsiding

fuel in 2008 was in the area, or range, of thirty million dollars. Commercial customers

however saw the full increase, and that went up to about 49 cents per 49.5 per

kilowatt hour. I don’t have the exact number here but so, certainly the commercial

customers are significantly below what the charges where in 2008, however

residential customers, many of whom wants the surcharge when on or the subsidy

when on really forgot about it, the are now seeing the higher fuel cost reflected

directly in their bill because the subsidy has been removed and they, we have a

challenge because many do not understand the subsidy effect the cushion last year.

And they considered now that well fuel prices are down over last year and how come

my fuel cost in my bill are higher and you know that is a challenge for the company in

terms of the calls that are received from the customers to explain that the subsidies are

no longer in place and therefore they are seeing the full changes in fuel prices.

MY. ANDREW BRATHWAITE: The highest it would have gone for residential

for 2008 was at the subsidies rate at 23.5375 that was the highest that would have

gone in 2008, correct. And so far in 2009 what was the highest?

MR. PETER WILLIAMS: It is actually the highest now, because prices was 27,

and I can’t remember the numbers after the decimal, but it was around 27 cents, and

that is reflecting the prices that are received, enforced today, oil is around $70 dollars

a barrel. WE had started the year around US $40 dollars a barrel.

MY. ANDREW BRATHWAITE: Okay, would you agree though that even though

the rates that you are proposing the increases at the lower consumption end would be

relatively small as a dollar value? The increase that those consumers would see in

terms of their total bill including the fuel charge adjustment would be a lot more

significant that the $3.50 at the lower end.

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MR. PETER WILLIAMS: In percentage terms?

MY. ANDREW BRATHWAITE: In dollars terms. Because your argument is the

dollar value is relatively small. But the true increase including fuel, could be much

larger.

MR. PETER WILLIAMS: Certainly, the amount that we are requesting here 3.47

cents increase between April and today that our customers at that end have seen more

than that because the charge has gone from the 15.8 cents up to 27 cents. I mean it is,

if we had come to ask for a 10 cents increase in our basic charge that would be, when

I have to seek severe challenges from my friends over there. But the fuel, I mean we

do our best as I saying in terms of managing the cost but we are at the, you know, we

reflect the cost as it happens on the international market, and residential customers

down in the 100 kilowatt hour, am would have seen 10 cents for ever kilowatt hour,

roughly, and that would be $10 dollars more that they are paying now than they paid

in April, and you know, that is significantly more than $3.50. So yes you are correct

that what they have experience in that short period of six months is certainly more

that we are reflecting there in the basic change.

MY. ANDREW BRATHWAITE: Thank you Mr. Williams

MR. PETER WILLIAMS: You are welcome, Sir.

SIR NEVILLE NICHOLLS: Thank you Commissioner Brathwaite.

Commissioner Knight.

MR. ALFRED KNIGHT: Mr. Williams, I know that you are anxious to get on

with this.

MR. PETER WILLIAMS: By no means, Sir.

MR. ALFRED KNIGHT: Well, I just have one question. If you turn to page 343

and your financial forecast on existing rates.

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MR. PETER WILLIAMS: I am there.

MR. ALFRED KNIGHT: Your income before taxation is still good up to 2010.

Does that suggest to me that you do not; there is no need to rush for the increase at

this time?

MR. PETER WILLIAMS: Not at all. As I explained, the power plant that we have

to purchase we cannot wait until its needed to the install it, it is really not an off the

shelf issue, well you can’t go out there and say that I need it tomorrow and have it in

place. We have to start the process of securing that plant now and it takes two to three

years to install this kind of equipment, the saving that it will bring in term of fuel are

not insignificant and the money that we need to secure to install that plant, we have to

secure in order to go out to tender and be confident that we can award a bid for the

construction and so we have to have returns that are going to reflect a certain security

and we need to insure that we do not put off , as the question was why, why now we

do not put off this hearing and then two years from now people would be saying well

you could have save us money if you had a more efficient plant, why didn’t you come

and do something about it, why didn’t you come to the commission, why didn’t you

ask for rates if you knew that you had to put in a plant to replace and older retired

plant that needs to be retired. If we differ, then as I said, depending on the growth we

are seeing very, very modest growth in this economic situation but they are a lot of

projects that are on hold that would restart that a lot of demand that may well come

back, and we have to be in a position to meet that demand. So, we believe that the

timing of this application and the timing in terms of the request is relevant to what we

are projecting here and in 2011, 2012 is not the date that we would need to come to

you our indeed to say that our rates now need to be adjusted. We have to satisfy

investors and lenders that we are going to be able to provide them with a return.

MR. ALFRED KNIGHT: This is a follow up, though, that suggests the

implementation and the rate increase not that you cannot start your progress etc.

without the rate increase at a particular time, it suggests timing to me.

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MR. PETER WILLIAMS: Well it is certainly, it is also the ability to generate the

funds internally that we need, the capital that is expended is not expended in 2011

although it is booked at that time the capital is expended is expended starting from the

time the contract is signed. The contact is signed generally we have to find 45 percent

of the moneys up front so that the, it is not necessarily reflected in your balance sheet

but it is reflected in your borrowings, and not in the asset, the asset does not come on

stream until 2012 and that’s when its booked but we have to start expending money

starting now essentially.

MR. ALFRED KNIGHT: Thank you.

SIR NEVILLE NICHOLLS: Thank you Commissioner Knight it is now 1:05

pm, when we would normally break for lunch. I’ll first like to welcome back Sir

Henry Forde. I trust that he is feeling a lot better and I’d like to find out whether you

would wish to re-examine Mr. Williams. We start after lunch if you wish to do so.

SIR HENRY FORDE: We don’t have any questions for Mr. Williams.

SIR NEVILLE NICHOLLS: Mr. Williams you are released from the witness

stand.

MR. PETER WILLIAMS: That you very much Mr. Chairman and thank you for

the courtesies and everyone I think who have questioned me in such a courteous and

direct manner. Thank you.

SIR NEVILLE NICHOLLS: We adjourn now for lunch and be back in an hour’s

time. Thank you.

(LUNCH BREAK 1:05 TO 2:05)

SIR NEVILLE NICHOLLS: This hearing now is resumed. When we broke at lunch

Mr. Peter Williams had concluded his stint on the witness stand and the next witness I

believe is Mr. Hutson Best. We now call Mr. Best at this stage.

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SIR NEVILLE NICHOLLS: Sir Henry.

SIR HENRY FORDE: Sir, can you give me your name, full name.

MR. HUTSON BEST: Hutson Best.

SIR HENRY FORDE: And what is your occupation?

MR. HUTSON BEST: I am an accountant by profession.

SIR HENRY FORDE: By who are you employed?

MR. HUTSON BEST: The Barbados Light and Power Company.

SIR HENRY FORDE: How long have you been with the company?

MR. HUTSON BEST: Approximately 15 years.

SIR HENRY FORDE: And you first came on in the capacity as what?

MR. HUTSON BEST: Financial Controller.

SIR HENRY FORDE: And you’re now the Chief…..

MR. HUTSON BEST: Financial Officer.

SIR HENRY FORDE: And you were so appointed

MR. HUTSON BEST: In the last three years

SIR HENRY FORDE: In the last three years. So what are your principal areas of

responsibility to the company?

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MR. HUTSON BEST: Well it’s primarily looking after the finance department

looking which is divided into the functions of financial accounting, which is

preparation of the monthly financials annual report, reporting to management and to

the board; treasury accounting which looks after payment of suppliers, payment to

lenders and cash management. Management Accounting which is concerned with

preparation of the annual budget and also the fixed assets and looking after internal

audit.

SIR HENRY FORDE: So you would have had a long period of time working

with the company in a financial capacity?

MR. HUTSON BEST: Yes.

SIR HENRY FORDE: Now in this case you have prepared various

memoranda.

MR. HUTSON BEST: Yes I Have.

SIR HENRY FORDE: And filed an affidavit.


SIR HENRY FORDE: And in preparation of these documents, and in

preparation of the memorandum, where you assisted by any one?

MR. HUTSON BEST: Yes, I was assisted by members of the finance

department.

SIR HENRY FORDE: And the attaching schedules to the memorandum.

MR. HUTSON BEST: Yes, they assisted in the preparation of those as well.

SIR HENRY FORDE: The information in these documents from where were

they obtained?

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MR. HUTSON BEST: Primarily for the audited financial statements for 2008.

SIR HENRY FORDE: And the company’s records

MR. HUTSON BEST: Yes, the basis of that would be from the company’s

general ledger.

SIR HENRY FORDE: And how are these records maintained in accordance

with any system of accounts?

MR. HUTSON BEST: We follow first in terms of plant accounting and with

reporting, we follow the international accounting standards and financial reporting

standards.

SIR HENRY FORDE: Every year the company provided financial statements?

MR. HUTSON BEST: Yes, we do.

SIR HENRY FORDE: Are these audited?

MR. HUTSON BEST: Yes, they are audited.

SIR HENRY FORDE: Yes, your last audited accounts?

MR. HUTSON BEST: At, for the financial year December 2008.

SIR HENRY FORDE: Now the memoranda which you prepared, what are

they? Which was?

MR. HUTSON BEST: The memorandum on rate base, the memorandum on

the statement of income, the memorandum on revenue requirements and the

memorandum on financial forecast.

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SIR HENRY FORDE: These are with regard to the first one on the rate base

C. Would you briefly summarise the components that are included in the Applicant’s

rate base

MR. HUTSON BEST: Well if we look at schedule C 1 page 0121 it comprises utility

plant and service, which is the plant that is historic cost less accumulated

depreciation, construction working progress and then some current assets and

liabilities. And the current assets are cash working capital, materials and supplies,

prepayments and that is subtracted contributions received from customers for work

yet not started and accumulated deferred income tax liability.

SIR HENRY FORDE: With what balances did you begin?

MR. HUTSON BEST: We began with the balances as per the financial, the

audited financial statement, since December 2008.

SIR HENRY FORDE: Where any adjustments made?

MR. HUTSON BEST: Yes, adjustments were made and those where detailed at

B7, am primarily expecting construction work in progress. And also, plant that is used

and useful.

SIR HENRY FORDE: Now if we would take the utility plant in service has

any provisions been made for any adjustments to the companies request to the level of

plant in service.

MR. HUTSON BEST: Yes and those are shown at C22 page 127, where we

have taken out land not used and useful, and also construction work in progress.

SIR HENRY FORDE: What is the schedule referring to land not used and

useful?

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MR. HUTSON BEST: That’s C21, primarily relates to land at St. Lucy which

we have brought for future development and also in St. George for future

development. Those are shown on page 125.

SIR HENRY FORDE: Could you go to page 123, utility plant in service. Is the

plant, utility plant in service shown actually in service with the company as at the end

of 2008, December 2008?

MR. HUTSON BEST: Yes, all of the plant on this schedule on page 123 is in

service at the end of December 2008.

SIR HENRY FORDE: And are recorded in the company’s books?

MR. HUTSON BEST: Yes,

SIR HENRY FORDE: Could you please go back to 121. C1. You have made

provision there for appreciated depreciation

MR. HUTSON BEST: Yes, I have.

SIR HENRY FORDE: And the balances which you used for that purpose, how

where they arrived at?

MR. HUTSON BEST: Based on the decision of the Commission, which was

given I believed in February this year, the balances where arrived at by using the rates

prescribed front hat order computed based on those rates.

SIR HENRY FORDE: And your plant you said is valued on …….

MR. HUTSON BEST: …..the start cost

SIR HENRY FORDE: You have provided for construction working progress.

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MR. HUTSON BEST: Yes, we have for a limited amount of construction work

in progress.

SIR HENRY FORDE: 4.1982837

MR. HUTSON BEST: Right out of a total of 76.999

SIR HENRY FORDE: Could you give us a breakdown in details of that is

showing and in which schedules.

MR. HUTSON BEST: Its on page 1029 schedule C3. In terms of generation it

is $156,488.00 dollars in terms of distribution it is $3, 318, 411.00 dollars and in

terms of general plant $717,938.00.

SIR HENRY FORDE: And the adjustments are shown at note 3. The, under

each of those said that at note 3.

MR. HUTSON BEST: Yes

SIR HENRY FORDE: And why did you include a provision for construction

work in progress?

MR. HUTSON BEST: Because these projects will be in service by the end of

December 31, 2009, and this is permitted in crape making in the regular pre setting.

SIR HENRY FORDE: Have you made any provision for allowing for funds

being used in construction?

MR. HUTSON BEST: We have in terms of the rate base that is already in service,

but not in terms of construction work in progress.

SIR HENRY FORDE: Now, in what methodology did you use to value construction

work in progress?

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MR. HUTSON BEST: Well it is valued at historic cost and includes the cost

incurred at the end of December 2008 and it would primarily be labour, materials and

any contract charges. So it would be the direct cost.

SIR HENRY FORDE: You have provided as well, back at C1 for cash working

capital?

MR. HUTSON BEST: Yes I have.

SIR HENRY FORDE: And again, what methodology did you use to arrive at

the amount?

MR. HUTSON BEST: The same methodology from the 1983 rate case and it is

the, what is regarded as the 45 day rule.

SIR HENRY FORDE: And you consider this to be reasonable?

MR. HUTSON BEST: A reasonably and acceptable in regulatory rate making.

SIR HENRY FORDE: You also made provisions for materials and supplies

and prepayments as part of working capital or would you tell us why you have made

that provision?

MR. HUTSON BEST: Well there is certain materials which we may have in

stock at the end of December 31st 2008 which are not yet in our expenses, and

similarly with prepayment with maintenance contracts and what we’ve done is to use

the 13 month average to get away from, if they are primarily materials and supplies

vary from month to month depending on the materials from overseas etc. so the 13

month average is one of the acceptable ways of trying to normalize such swings.

SIR HENRY FORDE: You also included a figure for accumulated income tax

deferred liability?

MR. HUTSON BEST: Yes, we have.

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SIR HENRY FORDE: Could you tell us how you arrived at that figure?

MR. HUTSON BEST: Accumulated deferred taxes is primarily looking at the

differences between the written down values of the assets which we have at book rates

verses the assets at the rates that is allowed by the Inland Revenue. This again is

acceptable in rate making and was accepted in the 1983 decision.

SIR HENRY FORDE: And you have made provision in accordance with that

decision?

MR. HUTSON BEST: Yes, by deducting it from rate base, reducing rate base.

SIR HENRY FORDE: Could you please turn on memorandum on income

statement which is at schedule D, and this is for the test year ending December 31,

2008?

MR. HUTSON BEST: Yes it is.

SIR HENRY FORDE: Now your operation revenue, were any adjustments

made at all?

MR. HUTSON BEST: There was one adjustment made to the operation

revenue as shown on page 147 and also on D7 for $388, 123.00.

SIR HENRY FORDE: This is in respect to fuel?

MR. HUTSON BEST: This is in respect to fuel which was formally stored at

Texaco adjacent to our Spring Garden location

SIR HENRY FORDE: Any adjustments made to operate, operating and

maintenance expenses?

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MR. HUTSON BEST: Yes a number made to primarily to generation 3.9

million and they were all in terms of reducing the level expenses in the test year to

what we would say to normalize to a normal year or a regular year.

SIR HENRY FORDE: As the company’s Financial Officer can you confirm

that the revenue which you have reflected here in 2008 is revenue which the company

is permitted to collect from its customers.

MR. HUTSON BEST: Yes, we reconcile our revenues to what we generate it

from our three generating locations and which is then reconcile back to what we

actually bill our customers, so I can confirm that this is revenue which is reasonably,

which is correct, and should be included in the test year.

SIR HENRY FORDE: And you also prepared the memorandum on revenue

requirements?

MR. HUTSON BEST: Yes, I did.

SIR HENRY FORDE: Could you please turn to page 191 and, the information

contained there in is from, based on your books as well as the formula which you

been applied in keeping account.

MR. HUTSON BEST: Yes it is. Even though I can’t locate it just yet.

SIR HENRY FORDE: Page 191, 191 at the top.

MR. HUTSON BEST Yes, I have it

SIR HENRY FORDE: And the company is asking for a revenue requirement

deficiency of what?

MR. HUTSON BEST: Of $57 million dollars, of 570, 3207 if I understand

your question correctly.

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SIR HENRY FORDE: And the deficiency is?

MR. HUTSON BEST: And the deficiency is $28, 216, 603.00

SIR HENRY FORDE: You also prepared the forecast, the five year forecast.

MR. HUTSON BEST: Yes Sir I did.

SIR HENRY FORDE: 323. 33 all threes. Now does the company normally

prepare forecast, budget, and budgetary purposes?

MR. HUTSON BEST: Yes we do. We prepare annual budgets and from time

to time we prepare five year financial forecast.

SIR HENRY FORDE: And you, you, that responsibility fall on you at the

company.

MR. HUTSON BEST: Yes it does.

SIR HENRY FORDE: You are forecasting that on existing rates if you look to

the future, as you said, a deficiency.


SIR HENRY FORDE: And even if the rates which are asked for are granted

what is your forecast on deficiency, in rate of return or…..

MR. HUTSON BEST: In terms of what we are requesting the 10.48 we would

not achieve it during the forecast period.

SIR HENRY FORDE: It has been suggested that depreciation charges and

retained earnings may together represent a source of funds for which the company my

finance these operations. Can you give explanation of these concepts and speak to the

practicality of the suggestion.

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MR. HUTSON BEST: In terms of depreciation funds are expended at the time

which we buy plant. And we are then allowed to recover through depreciation in the

income statement, cost of that plant over the life of that plant. So the charge of the

income statement is not actually cash, the cash would have been expended in some

cases several years before. Returned earnings really is the sum of net incomes over,

from the inception of the company less any payments to shareholders. So again it is

not actual cash that the company would have in its possession at this point in time

because that cash would have been reinvested in various areas over the years.

SIR HENRY FORDE: So it has been suggested that the company has not paid

income taxes since 1983. Could you explain that to me please?

MR. HUTSON BEST: Between 1984 and December 2008 the company has

paid $124M in corporation tax, it also pays an annual license fee which is currently

$700,050 per annum, so we have made a substantial contribution to the treasury.

SIR HENRY FORDE: Can you also explain how costs are allocated among the

various departments for the company?

MR. HUTSON BEST: If we turn to page 149, 150 and 151 as the Managing

Director indicated the company is structured by departments and he went through the

various departments and what the departments do. So in the first group is fuel

expenses, which is the total cost of fuel; the second set is generation, and these would

be the grouping under the cost in generation is captured and this variously follows

through for all the various departments. So under the various departments you have

various categories which cost are captured going to page 151.

SIR HENRY FORDE: So how long was this system in place?

MR. HUTSON BEST: Probably from the 1980’s. I really can’t speak to the

1970’s in terms of what the structure was. It would have been something like this but

probably not with keeping with the firm.

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SIR HENRY FORDE: But have you been keeping with FERC?

MR. HUTSON BEST: Yes, In terms of the structure.

SIR HENRY FORDE: Now can you turn to the company’s debt profile and the

various loans?

MR. HUTSON BEST: The financial statements?

SIR HENRY FORDE: It has been suggested that the company’s debt is

guaranteed by the government. Is that correct?

MR. HUTSON BEST: Only insofar as the loans for the European Investment

Bank, the two loans from the European Investment Bank, so if we turn to page 63 of

the financial statements the loan with a balance of $12.2M and $37.2M, those two

loans were guaranteed by the Investment Bank. The other, foreign loan of $14.2 from

First Caribbean Cayman is under the venture trustee, and so is the National Insurance

and the Royal Bank of Canada. Those are Barbados dollar denominated loans.

SIR HENRY FORDE: We have revisited your various memoranda which you

prepared as part of your evidence in this case. Is there anything you wish to change in

this memorandum?

MR. HUTSON BEST: No, no.

SIR HENRY FORDE: And in the schedules?

MR. HUTSON BEST: No.

SIR HENRY FORDE: And in your affidavit?


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SIR HENRY FORDE: I ask the Commission that such memoranda and the

affidavit and the schedules are admitted together with his oral evidence in chief.

SIR NEVILLE NICHOLLS: Agreed. Thank you Sir Henry. It is now the

turn of the Intervenors. First on the list is the Barbados Association of Retired

Persons. Public Counsel.

MR. ELI EDWARDS: At this stage Mr. Chairman, I am seeking leave of Mr.

Mascoll to lead off the cross examination on behalf of the Barbados Small Business

Association. Notwithstanding that BARP is first and I represent both but I am asking

that Mr. Mascoll take the lead in cross-examination.

SIR NEVILLE NICHOLLS: Okay, thank you. Permission granted. Mr.

Mascoll you are cross-examining on behalf of the Small Business Association.

MR. CLYDE MASCOLL: Thank you Sir, good afternoon, I’ll first deal with the

rate base for which Mr. Best has responsibility. I want to turn to the issue which is

contained in appendix 1 of the procedural directions no. 2, under construction work in

progress. Should it be included in the rate base? And the methodology used to value

the construction work in progress. It has been establish that according to C3 page

0129 that the total construction work in progress of the companies is $76.9M but for

the purposes of the rate base you only include $4.1M under C1 calculation of the rate

base 0121. Mr. Best, you have indicated that the procedure which you employed you

are satisfied with and remains that only $1.1M of $192M of the construction work in

progress should be included in the rate base and could you repeat the reason given for

it?

MR. HUTSON BEST: That these would be projects that would be in service by

the end of December 2009 with in 1 year of the filing.

MR. MASCOLL: Okay, and that’s reasonable?

MR. HUTSON BEST: We believe so, Sir. By standard practice it is reasonable

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MR. MASCOLL: Okay, now when, is it true to say that when work is in progress

that the company is allowed to claim interest? On any loans outstanding in respect to

those construction wells, well the construction wells is building or whatever that you

are allowed to claim as a deductible in the interest during construction?

MR. HUSTON BEST: There is a certain criteria we use for selecting the

projects that would qualify for interest during construction.

MR. MASCOLL: Okay. So that at 0159 D6. The line interest during construction

$1, 770,853 is the amount which you have been permitted to claim.

MR. HUTSON BEST: I am clear, when you say claim is this like the regular 3

second cause this is the amount we have claimed in the financial statements.

MR. CLYDE MASCOLL: Yes, right. That’s were I am coming to, because that

will be deducted in the financial statements from your interest expenses.


MR. CLYDE MASCOLL: And therefore the bottom is the net value.


MR. CLYDE MASCOLL: Right. Now that figure $1,770,853.00 is what you have

been allowed to claim for the entire construction work in progress?

MR. HUTSON BEST: Not just construction, but construction work in progress

during 2008 some of which, sorry…..

MR. CLYDE MASCOLL: Carry on.

MR. HUTSON BEST: Some of which would have gone into rate base because

of the projects would have been finished in 2008.

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MR. CLYDE MASCOLL: Right. Such that in your rate base therefore you have

included as part of the rate base $4, 192, and 837.00.


MR. CLYDE MASCOLL: Right. Correct. And therefore part of the interest during

construction must relate to that portion of the rate base which you have included as

construction work in progress.

MR. HUTSON BEST: No, Sir.

MR. CLYDE MASCOLL: Are you suggesting that not one ounce of the $1,

770,853.00 should be allocated the portion of the rate base which you have included

under construction work in progress.

MR. HUTSON BEST: What I am saying just to be absolutely clear is that the

$1, 770, 853.00, none of that, not one dollar of that is included in the 4, 192,837.00.

MR. CLYDE MASCOLL: No, I don’t expect it to be included. I am asking

whether or not it should be assigned to any such inclusion, any part of it that is your

construction work in progress is 76 million which we have established.


MR. CLYDE MASCOLL: But you have only selected 4.1 million of that to be

included in the rate base am I correct?

MR. HUTSON BEST: That’s correct.

MR. CLYDE MASCOLL: Right, what I am asking is whether or not any of the

interest during construction in schedule in D6, if any of that would relate or be a, be

related to the four million dollars in the rate base. That is you must be incurring some

kind of loan that permits you to bill. Am I correct?

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MR. HUTSON BEST: I am saying that none is related to the 4.1 million, some

is related to the 72 million, and also the projects which went into service if we ….

You’re there Sir?

MR. CLYDE MASCOLL: Yes.

MR. HUTSON BEST: In the forth column they are transfers and adjustments

and additions and these are all plant that went into service in 2008. So I am saying

that they are some projects in there that interest during construction would apply to …

MR. CLYDE MASCOLL: Right.

MR. HUTSON BEST: These projects do not include the 76 million on page

129. So the 1 million 770 refer to the projects on page 123 and also some of the

projects in the 72 million primarily the northern under ground of 56 million.

MR. CLYDE MASCOLL: For the benefit of the other Intervenors it is not in our

interest top have more than four million dollars including in the rate base because that

will constitute a bigger base upon which the 10.48 will be applied. But I am seeking

here to establish whether there is any relationship between the interest which you

have been allowed to be deduct during construction and the a proportion, the part of

the construction work in progress that has been assigned to the rate base and you are

clear that they have been no such.

MR. HUTSON BEST: Yes. I am very clear and I believe they have been also

and interrogatory from the Fair Trading Commission to clarify that very point as well.

MR. CLYDE MASCOLL: Okay. So that I cannot argue therefore that that portion

of the construction work in progress which is in the rate base may be double counted

for one of the better expression as part of the interest during construction.

MR. HUTSON BEST: Right

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MR. CLYDE MASCOLL: Right. I cannot argue that. So that is fair to say that we

are in no way double counting for construction work in progress in this regard. Thank

you alright so let us look therefore at the, that interest deduction which is before us

here on 0159 which is D6. Well after you’ve arrived at your revenue requirement

there is a finance charge which is deducted to give you your net operating income.

Am I correct?


MR. CLYDE MASCOLL: And that will be the interest expense minus of the

interest during construction to arrive at the $6, 301 627.00. Is that so?

MR. HUTSON BEST: That’s correct.

MR. CLYDE MASCOLL: For, could you pint us for which table it is.

MR. HUTSON BEST: To page 147.

MR. CLYDE MASCOLL: Which is D1?


MR. CLYDE MASCOLL: Which is the income statement? So therefore of the 757

million dollars required revenue requirement of the company some 6.3 million w2hich

is finance cost would be removed in order to arrive at our net income. Which is at the

bottom?

MR. HUTSON BEST: Sir, to arrive at the operating income.

MR. CLYDE MASCOLL: Which is at the bottom of 0417?


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MR. CLYDE MASCOLL: So we are comfortable with that? Now the thing here

that has me, and this is where I am going, is that remember that my revenue

requirement is my rate base times the propose rate of return. Am I correct?


MR. CLYDE MASCOLL: Alright. Now there is a lot of fuzzy mathematics being

employed in determining the actual rate of return. And I say fuzzy because we have

established a lot of in the hearing so far that which is surprising to me, that the

10.48% which is being propose is not actually to the capital structure of 65equity and

35 debts. Am I true in saying that?

MR. HUTSON BEST: I think it relates..; sorry repeat the question so I can be

clear.

MR. CLYDE MASCOLL: Whether or not the 10.48% rate of return which is being

requested by the company whether it is a direct consequence of a capital structure of

65% equity and 35% debt?

MR. HUTSON BEST: That is correct it relates to 65/35.

MR. CLYDE MASCOLL: It relates to but it is not. Now let me demonstrate that

therefore.

MR. HUTSON BEST: You meant that the capital structure now, is not 65/35.

MR. CLYDE MASCOLL: It’s not 65/35.

MR. HUTSON BEST: I agree with that, it’s not 65/35 right now.

MR. CLYDE MASCOLL: Repeat it’s not 65/35

MR. HUTSON BEST: But for regulatory purposes it is.

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MR. CLYDE MASCOLL: Okay. Now, so as being said by Mr. Williams it is a

theoretical construct towards which we gravitate but we’ll never know when we will

arrive at that point.

MR. HUTSON BEST: Well the company felt that in putting forward a

reasonable case 65, 35 favours the customer and is even recommended it is a

theoretical that the commission should have considered a theoretical debt equity

structure, and we’ve done that , and it’s to the benefit of the customer.

MR. CLYDE MASCOLL: Right, I agree because if it is that debt is less expensive

which it is, than equity, and you reduce the proportion of equity in the 100% then

logically it is in the customers interest that you move towards a 35, 65 percent.

However if you turn to page 0578, 0578 which is table T, I think this is the cost of

capital.

MR. HUTSON BEST: And I cannot suggest like the Managing Director that

this will be better handled by Mr. Camfield.

MR. CLYDE MASCOLL: No, there is one reason why because…..I am becoming

increasingly more convinced and having read the hearing in 1983 my conviction is

reinforced that the fixing of public utility rates is as much an art as it is a science. But

you are the artist in this case.

MR. HUTSON BEST: I’m not an artist Sir, neither am I a scientist.

MR. CLYDE MASCOLL: You’re the artist in this case. And the reason why you

are the artist is because it really starts with trying to arrive at the operating income

requirement and from there it goes to everything else, rate structure, but it really does

start with that revenue requirement, which starts with the operating income, which as

I said is the rate base times the rate of return. now you will notice on page 05,0578,

and Mr. Best I’m not going to be excessive on this in all fairness I think, yes Mr.

Camfield is the best person to, to handle am this rate of return, no but I need to

establish some other things, am that in essence, and we are looking at table T, that

while we were told that and we were lead to believe that we are moving towards some

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magical capital structure of 65/35, that in that table the actual long term debt 31.32%.

And that common equity is not 65 it is 58.17. and then it includes customer deposits

which we were told this morning ,am do you feel Mr. Best that customer deposits

should be included in the rate of return consideration?

MR. HUTSON BEST: Well it is grounds supplied by customers which the

company has excess to use and which we use.


MR. HUTSON BEST: So, I think it’s only fair that it be included….

MR. CLYDE MASCOLL: So is it a cost, a cost to the company?

MR. HUTSON BEST: It is we pay an interest rate on it to the customers.

MR. CLYDE MASCOLL: Right. But you also, you should invest it. Do you use it?

MR. HUTSON BEST: When you say invest we use it in operations of the

company.

MR. CLYDE MASCOLL: Right. But you use it ,but that’s why there is something

called rate of return because everything you use in the operations of a company is

intended to give you a rate of return and that is precisely why we are here because

we’ve now discovered that the domestic service sector, the general service sector, all

those sectors are rally now intended to provide a better rate of return for the company,

so that everything that is used, so in this regard, I am suggesting and I am asking the

customer deposit is both a benefit and a cost to you?

MR. HUTSON BEST: Yes

MR. CLYDE MASCOLL: Right. So therefore the net of that benefit and cost, the

net of it, that is what it cost you in terms of your payment to the customer verses what

you derive in terms of the use of those funds should really be, be the consideration

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here and, and I ‘m noting that in this table T, that the cost rate for customer deposits is

6.1, 6.46%. Am I correct?

MR. HUTSON BEST: Yes, you’re correct. Plus stated in the table.

MR. CLYDE MASCOLL: Right. And therefore I’m suggesting that here that

unlike borrowing of moneys where they is an interest cost and that is classified as

debt, unlike common equity where there is an interest cost, so I’m, I’m using a

working shareholders capital for them to get a particular cost of rate of return, that in

this instance you are receiving customer deposits which you utilize in some form to

derive benefit and then you have to pay it out. So, so in essence I am saying that some

how it, it there’s something in me that is suggesting that the use of a customer deposit

aught to be treated differently, say to long term debt. Am I any where close to, to

convincing you of such?

MR. HUTSON BEST: Well I have a different view. Am, with long term debt

we traditionally would pay the interest cost probably twice a year to the lender. In this

case, we pay the interest cost annually at December where we would credit the

customers account. So if he had $100.00 and the interest is $8.00 his account now

becomes $108.00 on deposit, it is there money and not our money, where’re just

utilizing the money similar to lenders. So to me I see it in the same light but I’m an

accountant and not an economist, but...

MR. CLYDE MASCOLL: Okay ….

MR. HUTSON BEST: I really don’t see the difference between the two of

them as an accountant

MR. CLYDE MASCOLL: Okay, let’s go on. The deferred investment tax credit

has been assigned. I would love to know how, how the 10.61% was arrived at in

determining the cost of deferred investment tax credit as well the deferred

manufactures allowance.

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MR. HUTSON BEST: This is one I would like to defer to Mr. Camfield, the

specifics of the methodology.

MR. CLYDE MASCOLL: Okay. Alright. No problem. Alright lets turn then to,

yea no problem, lets turn to thee revenue requirements. Now and while we are at the

revenue requirement Mr. Chair, I also want to, to stick a pin at table T because what I

am about to do, they are related. Mr. Best am I correct in suggesting that the rate of

return as calculated is really a summary statistic of how the rate base is financed?

MR. HUTSON BEST: I am not sure, I would agree with that, to me the 10.48%

is really looking at the cost of the other side of the equation, the cost of debt, the cost

of equity and the other items that enter in to that which then has to be applied to the

rate base.

MR. CLYDE MASCOLL: Right. But the 10.48% is arrived at by weighting the

respected components of finance as identified in table T.


MR. CLYDE MASCOLL: Am I true?


MR. CLYDE MASCOLL: So therefore, instead of the summary of the statistic

10.48% I could have used, now let me explain this, turn the table to you again, now

that 10.48% is sum along the rated cost rate but is arrived at by multiplying the

proportion of capitalization of long term debt which is 31%, 31.32% times the cost of

capital of that particular type, kind of finance, which gives you the weighted cost of

capital in the extreme right hand column. Mr. Chair what I am seeking to establish

here is that the 10.48% is in actual fact, a summary statistic of the relative means by

which the rate base is financed. And I think I am absolutely correct in my position,

I’m absolutely correct in my position. In fact I’m going to demonstrate why I’m so

correct in my position. Because in, a question…no, no, no, no, it’s not for Mr.

Camfield, because this gets me to the revenue requirement which is 57038032027 it

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gets me right there. Now let me explain where I’m going. The actual interest expense

which is at, which one, D1 or, or which one?

MR. HUTSON BEST: Under the D’s….

MR. CLYDE MASCOLL: Yes it’s under the D’s. And I’m going to demonstrate it.

Go to the D’s; it’s either D1 or D6. Yes it’s at D6, you’re with me?


MR. CLYDE MASCOLL: Right. And D6, D6, and this is the point that I wish to

make, that the interest loans there since you don’t have any long term debt, that those

loans there constitute you’re debt. Am I correct?

MR. HUTSON BEST: Yea, including the long term debt which are listed like

European Investment Bank etc.

MR. CLYDE MASCOLL: Right, right, that they constitute. So in actual fact Mr.

Chair what I’m seeking to establish here is that, that 8 million dollars the subtotal,

should also be arrived at by taking the rate base itself, applying the .31 which is 31%,

so if I take 31% of the rate base and I multiply 31% of the rate base by the 5.25% of

the cost of debt it should give me something rather close to 8 million dollars? Mr.

Best?

MR. HUTSON BEST: 65/35 is a hypothetical….

MR. CLYDE MASCOLL: No not 65/35, I’m actually using table T because I know

65/35 is not it, because the 10.48 rate of return has not been arrived at from 65/35. It

has been arrived at from Table T, where…..

MR. HUTSON BEST: Which was based on 65/35

MR. CLYDE MASCOLL: Yes, but don’t mind, that’s a theoretical thing that

you’re moving towards, you’re gravitating towards it you’ve not achieved it. What…..

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MR. CLYDE MASCOLL: What I’m saying to you …..

MR. HUTSON BEST: No but I don’t agree with that last bit …

MR. CLYDE MASCOLL: No but you have to agree. And therefore I am saying

that you have to agree at 0578, yes, yes he has to agree. He has to agree.

SIR NEVILLE NICHOLLS: Now, Mr. Mascoll there is a difference of

opinion.

MR. CLYDE MASCOLL: No, Mr. Chair, there’s no…

SIR NEVILLE NICHOLLS: You can not force him to agree.

MR. CLYDE MASCOLL: No

SIR NEVILLE NICHOLLS: You can agree to differ.

MR. CLYDE MASCOLL: I’m going to ask the question after I make this

comment. What I am saying to you is that 10.48% is a direct consequence of what is

contained in table T. Do you agree Mr. Best?

MR. HUTSON BEST: Yes, I agree with that.


MR. HUTSON BEST: It’s how we get to 10.48%

MR. CLYDE MASCOLL: It’s how we get to 10.48%. And it is not based on 35

debt. It is based on 31.32 right, 58.17 common equity, custom deposit of 3.3%,

deferred investment tax credit of 5% and deferred manufactures allowance, those are

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the weights and those weights are assigned in accordance with the capitalization share

of the respective categories of debt, of financing. Do you agree, at table T, Mr. Best?

MR. HUTSON BEST: I am just saying that the underlying premise behind T.

MR. CLYDE MASCOLL: No. I understand the underlying premise

MR. HUTSON BEST: But it is just as an accountant I can’t move away from

the underlying premise.

MR. CLYDE MASCOLL: Oh, but what I am suggesting is that we have already

established from Mr. Williams, that the underlying premise will not be achieved and

will never be achieved even in the next five years. That has been established. But

what cannot be disputed is that 10.48% comes from table T.

SIR NEVILLE NICHOLLS: The interpretation from Mr. Williams’s word

would be a matter for the Commissioners eventually that’s my friend’s interpretation

of his work, as I understand it, if you are borrowing money because you get 65/35,

you don’t go and borrow 35, up to 35 in the next day, it takes a period of time to build

up to that, and you may or may not build up to that, you may go over it, you may go

under it. But the regulatory position gives you a debt structure that you try to follow

in order to get the rate of return.

MR. CLYDE MASCOLL: So we are hoping?

SIR NEVILLE NICHOLLS: It is not established in the way of my learned

friends is saying because it is a different interpretation that one may put on the matter,

out in evidence.

MR. CLYDE MASCOLL: But Mr. Chair, I accept that 65/35 is the capital structure

to which the company is intended to move. But that for the time being the rate of

return help, has been determined by the existing capital structure in table T at page

0578. Mr., Mr. Best am I not correct, that the 10.48% in table T is a direct result of

the existing capital structure in that table, which is 31.32% for long term , 58.17% for

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common equity, 3.3 and, and by the way Mr. Chair, if you want to know whether or

not I am true, if you go back to table S, if you go back to table S on the previous page

you would recognize that the hypothetical situation where the company is seeking to

arrive at is described at table S, then the company says but there’s other kinds of

financing which we use, which includes customer deposits, which includes deferred

investment tax credit, which includes deferred manufactures allowance, and therefore

table S is the hypothetical situation which the company is trying to achieve, but table

T is the actual numbers used to determine the rate of return which is being used in this

hearing. Mr. Best, I cannot be incorrect on this matter, concede on it.

MR. HUTSON BEST: But, Mr. Mascoll in all

MR. CLYDE MASCOLL: I can’t be incorrect.

MR. HUTSON BEST: But Mr. Mascoll….

MR. CLYDE MASCOLL: So concede on it…

MR. HUTSON BEST: But Mr. Mascoll….

SIR NEVILLE NICHOLLS: Mr. Mascoll let him answer

MR. HUTSON BEST: I indicated table T was based on 65, 35, you then said

that and then ask me to concede, but I already said that its 65/35, based on 65/35

MR. CLYDE MASCOLL: But n. But table S is the hypothetical situation in which

the company and…

MR. HUTSON BEST: And T is based on S.

MR. CLYDE MASCOLL: And precisely but it is not S.

MR. HUTSON BEST: But you asked me to concede even though….

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MR. CLYDE MASCOLL: You concede now then, that at table T, that, the rate of

return of 10.48% is in accordance with the actual capitalization at table T, which is

derived from table S, but which is not table S and that’s the point. Anyhow, it’s not a

big issue because Mr. Best has conceded on the matter

SIR NEVILLE NICHOLLS: Mr. Mascoll, you are entitled to draw your own

opinion.

MR. CLYDE MASCOLL: Of Course I am entitled.

MR. CLYDE MASCOLL: But the point that I wish to make then Mr. Chairman, to

Mr. Best, is that if I had to multiply them, therefore I am saying that the rate base

which is 54, 544 million point something multiply by 10.48 which is the rate of return

would yield me the revenue, the operation income of whatever it is …

MR. HUTSON BEST: …. 57

MR. CLYDE MASCOLL: 57 and this is the point that I really wish to make, that I

have been trying throughout all of these reports to find out what is the expense for the

company in respect to the payment of common equity? Do you know Mr. Best, what

roughly?

MR. HUTSON BEST: That’s why we employed Mr. Camfield, Sir,

MR. CLYDE MASCOLL: No, no, no, no, no, no, but saying I could give you now,

I can give you a figure that has to be somewhere in that vicinity, and let me explain it.

The existing rate base is %544, 198,726.00, if I find 58.1% of that existing rate base

which is consistent with what is in table T because table T is saying that common

equity is responsible for 58.71% of the capitalization shares, right? And then I apply

the 13% which is suppose to be the cost rate, then I’m suggesting it is somewhere of

the order of 42.7 million dollars in this area. Now, table at 059195 which is D6, which

is the statement of table expense I am suggesting, humbly suggesting Mr. Chair, that I

could use the same approach to arrive at that figure close to it $8,072,480.00 by using

the figures contained in figure T which should give me a feel as to what the, long term

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debt cost to the company is. So I did the reverse in order to find out what I did to find

out, and I repeat, Mr. Best, I know you’re not Mr. Camfield, but are you now in

agreement that the $57 million dollars that is being g requested here can also be

arrived at by multiplying the rate base not by 10.48% but by the complete component

parts in table T?

MR. HUTSON BEST: I am not aware of that approach being taken in

regulatory service.

MR. CLYDE MASCOLL: Mr. Best, this has nothing to do…..

MR. HUTSON BEST: We are in a regulatory environment Mr. Mascoll.

MR. CLYDE MASCOLL: No. This is mathematics, this is simple mathematics.

MR. HUTSON BEST: No I thought we were.

MR. CLYDE MASCOLL: This has nothing to do with a regulatory environment.

What I am saying to you is that an index which is what table T is is simply a weighted

average that is a relatively important of long term debt to the company as measured

by 31.32%. the relative importance of common equity as measured by 58.17%, the

relative importance to customer deposits as measured by 3.3% determining the overall

rate of return of the company. Well I, I really need Mr. Camfield.

MR. HUTSON BEST: But as soon as you dispatch me Mr. Camfield would be

here.

MR. CLYDE MASCOLL: Mr. Chairman, I really don’t know where to go because

what I’m saying is so simple.

SIR NEVILLE NICHOLLS: Well Mr. Mascoll you’ve asked a question, got

some agreement, you’ve made a point, and you’ve given you’re interpretation; I think

you can go on.

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MR. CLYDE MASCOLL: Okay, Well I don’t mind going on but I just wanted to

confirm that I was right and on the right track. So therefore, Mr. Chairman the

operating income required has been arrived at as the rate base times the proposed rate

of return which is 57,032, 027, well to my mind Mr. Chair, and Mr. Best would you

agree that this figure, the operating income required is really the most important

figure in this entire rate hearing?

MR. HUTSON BEST: Well, I think there are several things that are important

in this hearing, rate base I think is critical, the rate base of $544M.

MR. CLYDE MASCOLL: Of course it is, remember the operation income is

derived from it.

MR. HUTSON BEST: The operating expenses, depreciation of taxes I also

think is critical and the current revenue.

MR. CLYDE MASCOLL: In all fairness, I don’t know if I should be saying this

but, Mr. Chair that in this environment you would expect the company to be able to

cover its operating expenses, its depreciation of taxes. And that is a principle that has

been established in rate hearings, so that reasonably, the issue is going to boil down

to, what is the operating income requirement and whether or not that in itself it fair

and reasonably? That is how I see it. And therefore I wanted to put the emphasis on

arriving at that figure, it bothered me all weekend and then I saw it clearly. So Mr.

Best, the rate of return therefore, that is being requested of the company obviously is

seen as reasonable in the eyes of the company.

MR. HUTSON BEST: Very much so.

MR. CLYDE MASCOLL: And therefore we are here to argue whether or not that

is so. So I have no difficulty with that. Now, you also have responsibility for the

projections, the financial forecast. That’s going to be another difficult area Mr. Chair

because what method would have been used to make these forecast?

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MR. HUTSON BEST: Well we are primarily driven by the sales forecast and

the capital requirements in the five year period - which in this case is driven by

retirements. I’ve shown the assumptions that we’ve used in the forecast and I also had

the memorandum indicated in the various areas to some of the assumptions we’ve

used.

MR. CLYDE MASCOLL: You would have used assumptions but would you have

used the performance of the company in the past couple of years?

MR. HUTSON BEST: Certainly.

MR. CLYDE MASCOLL: Did we use any econometric techniques, anything to

make these forecasts?

MR. HUTSON BEST: In sales we looked at that very briefly. I can tell you the

forecast in what we have going forward between 2 and 2 ½ %. In terms of the model,

Mr. Worme can give a slight overview because he is not an economist and he had

some help in that regard.

MR. CLYDE MASCOLL: I can understand. I am not here Mr. Best to try to try to

get to facts.

MR. HUTSON BEST: In terms of the capital, the generation and you would

have seen the capital expansion memo and also the spreadsheet on the assets on which

we have to put in the forecast period to cover retirement. And those are the two

primary components on going forward.

MR. CLYDE MASCOLL: Is it true to say that the real issue here is the extent to

which the company would be able to borrow from foreign sources to expand its plant?

Or to replaced?

MR. HUTSON BEST: To replace the plant that needs to be retired and

maintain reliability.

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MR. CLYDE MASCOLL: And therefore you have to show a good rate of return in

order to be able to convince respected lenders.

MR. HUTSON BEST: Of reasonable rate of return.

MR. CLYDE MASCOLL: But do you believed on page 0193, which is the revenue

requirement these two areas where blocked out deliberately

MR. HUTSON BEST: No, Sir that’s just the articulating ability of my support

staff.

MR. CLYDE MASCOLL: But do you know that underneath the darkness there is

the realised rate of returns 6.07%?

MR. HUTSON BEST: Yes, I believe that has been referred to in other places.

MR. CLYDE MASCOLL: I was querying. Underneath here that when I found out

that it contained the realised rate of return of 6.05%.

MR. HUTSON BEST: The rate based is the similar figure above 544,198,726

an income 33430664current rate of return 6.037.

MR. CLYDE MASCOLL: Thanks Mr. Best because therein lies my concern. 10.48

minus 6.07 actually 72.0% in the rate of return. I am saying, when we come to

evaluate fairness and reasonableness we must also do it in terms of not absolute

figures but relative figures. In fact one of the Commissioners made an excellent

contribution this morning by identifying that you also need to look at percentages in

determining the fairness of something and not just the absolute value. So, Mr. Best are

you suggesting that you regard the rate of return that increases by 75.2% as the

reasonable rate of return?

MR. HUTSON BEST: Or as an accountant would say a 10.48% is a reasonable

rate of return.

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MR. CLYDE MASCOLL: I am asking therefore do you feel that you can justify

asking for a rate of return that almost doubles

MR. HUTSON BEST: I think our application and the 1000 odd pages are

reasonable. You are an economist and I don’t have to indicate to you the important

role that Light and Power plays in the development of the country. That we need to be

ready in the next 5 years. And the Managing Director alluded to that. And if you are

soled you would have seen it our way.

MR. CLYDE MASCOLL: Well I’m not sold at the rate which you are trying to get

there. Because if you try to drive to fast you may cause a collision. I understand your

course but the rate which you are seeking to get there is worrying.

MR. HUTSON BEST: If you look at the capital program which we are faced

with, we have to replace 40 megawatt which is a significant amount of plant. The

plant which we put in 2005, which have benefited customers tremendously, which is

60 megawatts, cost140 million dollars. The plant is expensive.

MR. CLYDE MASCOLL: The question I need to ask is why can’t the shareholders

recognize that these are different times and like every other person be asked to bear

some of the burden?

MR. HUTSON BEST: But if you look at the company in the last 10 years, you

can look at the plant we’ve put in and the capital expansion or the memorandum on

the capital expansion prepared by Mr. Mark King, who is coming later, show you that

between 1996 and 2002 the amount of plant we’ve put in those units at Seawell would

have cost about $20M each. I alluded just now to the 140 million at Spring Garden.

We also put in the underground transmission between Spring Garden and Seawell

which was well over $50M and these were done from retail earnings and from

borrowings and the customers have benefited only recently with the low speeds of

$70M annually. So you invest now and there is savings later on in terms of the fuel.

And is something which the company needs to do at this time.

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MR. CLYDE MASCOLL: Well, I understand the need for it, because monopolies

invest lumpy, that is, you have to put in some big investments. Initially, with the hope

of reducing your average cost of doing business over time because of the capital

intensity. What I am saying to you is that in perusing this path you have to take in to

consideration the prevailing circumstances and therefore for a company who has done

as well as the Barbados Light and Power you would expect that they would

understand, and you hear all kinds of this about how much retails earners in the

coppers to be invested. You would understand that in this environment with

everything going up that the shareholders could lower their expectations. And this is

where I am coming from here, I am not here to deny tat after 26 years the company is

in a position where other cost even though it is only 10% of the entire thing fairness

and reasonableness not to deny anybody and increase.

SIR NEVILLE NICHOLLS: Mr. Mascoll do you have any more questions?

MR. CLYDE MASCOLL: Given how it has gone Mr. Chair, I think I will await

Mr. Camfield.

SIR NEVILLE NICHOLLS: In that case we can continue tomorrow the usual

time 9:30. The hearing is now adjourned for today.

HEARING ADJOURNED AT 3:30 P.M.

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Documents

BARBADOS LIGHT & POWER COMPANY LIMITED RATE …Oct 12, 2009 · 69,000, times 1.15415, 50% of the occupied pole rate recommended minus five cents exactly charged, times twelve months,