Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Allwest Reporting Ltd.2nd Floor 855 Homer St.,
Vancouver, B.C.
BRITISH COLUMBIA UTILITIES COMMISSION
IN THE MATTER OF THE UTILITIES COMMISSION ACTR.S.B.C. 1996, Chapter 473
and Re: Terasen Gas Inc. (“Terasen Gas”)Terasen Gas (Vancouver Island) Inc.
Application to Determine the Appropriate Return on Equity (“ROE”)
and Capital Structure
and to Review and Revise the Automatic Adjustment
Mechanism
ORAL ARGUMENT
BEFORE:
MR. R. HOBBS Chairperson
MR. R. MILBOURNE Commissioner
MR .A.J.PULLMAN Commissioner
VOLUME 7
APPEARANCES G. FULTON Commission Counsel C. JOHNSON M. GHIKAS
Terasen Gas Inc. and Terasen Gas (Vancouver Island) Inc.
R.B. WALLACE Joint Industry Electricity Steering Committee and
British Columbia Utility Customers C. WEAFER Commercial Energy Consumers Association of Briish
Columbia P. MacDONALD B.C. Old Age Pensioners' Organization, Council Of Senior
Citizens' Organizations, Federated Anti-Poverty Group, End Legislated Poverty, West-End Seniors Network, Tenants Rights Action Coalition And B.C. Coalition Of People With Disabilities.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 975
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
CAARS
VANCOUVER, B.C.
January 17, 2006
(PROCEEDINGS RESUMED AT 2:14 P.M.)
THE CHAIRPERSON: Please be seated. This is the oral
phase of argument for an application by TGI and TGVI
to determine an appropriate ROE and capital structure.
My name is Robert Hobbs. With me are Commissioner
Milbourne and Commissioner Pullman. I will take
appearances, but before I do that I'm going to
identify for you the outline of the proceedings so
that you can comment on it while you're making your
appearances.
I have established two parts to the agenda.
Part 1 deals with Exhibit B-27, which is the new
evidence submitted by TGI and TGVI. The next item
under Part 1 is the JIESC letter dated December 21st,
2005, which, Mr. Fulton, I believe has not yet been
marked as an exhibit and I think the next exhibit
number for that is Exhibit C2-23. So if I am correct,
we will mark that letter from Mr. Wallace as Exhibit
C2-23.
(LETTER FROM JIESC DATED DECEMBER 21, 2005 MARKED
EXHIBIT C2-23)
THE CHAIRPERSON: So the first part is to hear
submissions with respect to B-27 and Exhibit C2-23,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 976
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
and I think the format of that part of this
afternoon's proceeding will be to hear submissions and
whatever submissions you may have.
And then in Part 2 we will move to the
format that we've established for an oral phase of
argument, and your comments will be restricted to
matters that arise from questions from commissioners.
And I have four topic headings in Part 2. The first
is Relevant Judicial Regulatory Decisions and the
Fairness Standard. The second is Significance of KMI
Acquisition and Regulatory Precedent. The third is
Significance of Preferred Shares in Other Canadian
Utilities. And the fourth is Interest Coverage
Ratios. And Commissioners Pullman and Milbourne may
also have some topics that they will raise.
Very likely when I have finished those four
topics and as we move through those topics,
Commissioners Milbourne and Pullman may very well
supplement my questions with their own questions as
they relate to those four areas.
With respect to Part 1, I think because
we've now heard from TGI and TGVI with respect to
Exhibit B-27 in their reply submissions, we can first
hear from the intervenors with reply to TGI. And then
when we deal with Exhibit C2-23, I think we can hear
first from Mr. Wallace, then Mr. Johnson, and then Mr.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 977
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Wallace. And as I say, as you're making your
appearances, if you feel that I need to make some
changes to the afternoon's agenda, I'd be pleased to
hear what changes you might suggest. So with that,
I'll take appearances.
Proceeding Time 2:18 p.m. T02
MR. FULTON: Terasen Gas Inc. and Terasen Gas (Vancouver
Island) Inc.
MR. JOHNSON: Mr. Chairman, my name is Johnson, Cal
Johnson, and with me is Matthew Ghikas.
MR. FULTON: Fortis Inc.
Joint Industry Electricity Steering
Committee.
MR. WALLACE: R. B. Wallace, on behalf of the JIESC.
MR. FULTON: Lower Mainland Large Gas Users Association.
Commercial Energies Consumers' Association
of British Columbia.
MR. WEAFER: Chris Weafer for the CEC, Mr. Chairman,
members of the panel.
MR. FULTON: British Columbia Old Age Pensioners'
Organization, et al.
MS. MacDONALD: Pat MacDonald, M-A-C-capital D-O-N-A-L-
D.
MR. FULTON: Are there any intervenors present today
whose names I have not called? That concludes the
list of appearances for today, Mr. Chairman.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 978
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
THE CHAIRPERSON: Thank you. Then let's begin by
hearing I think first from you, Mr. Wallace, with
respect to Exhibit B-27.
MR. WALLACE: Thank you, Mr. Chairman. I think my
comments can be relatively brief on this matter. We
have now had an opportunity to review the Moody's
report of December 19th and to discuss it with Dr.
Booth. Obviously, we accept that the downgrade has
happened, but we point out to the Commission that even
after the downgrade, TGI still maintains an "A" credit
status with Moody's and an "A" credit status with
CBRS, and accordingly we see no reason that the
utility will not be able to raise money on reasonable
terms.
We also point out that ratings are one
agency's view of the utility. It remains, as we put
in our position, that a more important view is how the
market treats the equity and the debt of the company,
and it is our submission that the fact is that the
market treats TGI debt in very much the same way it
treats Enbridge, and Union Gas, and we spent some time
in our main argument with respect to that. And that
equity is very attractive at current rates. So we see
no problem occasioned by the Moody's investor services
report, and submit that it does not change the picture
significantly from the picture that was before you
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 979
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
during the hearing.
Did you wish me to address the exhibits
filed by the JIESC at this time, or later?
THE CHAIRPERSON: I was thinking that we'd do that as a
second item.
MR. WALLACE: That's fine, thank you.
THE CHAIRPERSON: Okay.
Are there any other intervenors who wish to
speak to B-27?
Any reply, Mr. Johnson?
Proceeding Time 2:22 p.m. T03
MR. JOHNSON: As indicated in the Moody's report,
Moody's recognizes that the deemed equity and allowed
ROE permitted by this Commission are amongst the
lowest in Canada which, as they say, contributes to
TGI's weak financial metrics relative to global peers.
The important message I submit with regard to the
Moody's downgrade is that this isn't unique. It is --
was preceded by an S&P downgrade, and now we have a
Moody's downgrade, so two of the three major credit
rating agencies have downgraded Terasen Gas.
And it is indicative that something has
changed. The submission of the intervenors is largely
to the effect that nothing has changed here, that
everything is just as it always was, there's no need
to change the capital structure, no need to examine
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 980
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
return on equity. But what is telling in these
downgrades is that, from the perspective of
independent parties whose job is to look at credit
ratings, they see that there has been a change. They
first -- Moody's first assigned its A-2 level to TGI
in 2001, and it's now downgraded that.
So I have to comment that Moody's makes it
quite clear in the document, Exhibit B-27, that the
downgrading has nothing to do with the KMI
acquisition. They accept the ring fencing that's in
place. They are saying that they're downgrading TGI
for TGI's financial circumstances.
So they recognize that something has
changed, and what has changed, in my submission, is
the business risks and the financial risks of TGI have
increased. There has been a deterioration of ROE over
the period since their initial rating, and this is
just another piece of evidence -- it's not of itself
overwhelming, but it's another piece of evidence
that's consistent with what the companies have been
saying to you, that TGI operations are in a
significantly worse position than they were when the
Commission established its capital structure of TGI,
and when the Commission last looked at return on
equity.
Thank you.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 981
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
THE CHAIRPERSON: The Moody's report does speak to the
Commercial Paper funding that TGI does, and gives that
some air time, at the very least, in Exhibit B-27.
And that was not a matter that was before us in this
proceeding. Can you comment on the significance of
that, or whether or not the panel should --
MR. JOHNSON: If I might just have a moment.
Historically, or certainly over the last
number of years, I don't know the exact number of
years, don't know the exact number but over recent
years, Terasen Gas Inc. has used Commercial Paper
quite extensively, and it has done that to reduce the
cost of debt. It's used a large -- a larger
proportion of Commercial Paper than most other
utilities in Canada, and that is perhaps why there is
a significant discussion or it's discussed at the
length that it is in this rating report. In most
circumstances the proportion of short-term debt in the
capital structure is quite small. In the case of TGI
it's more significant than most utilities, and that
has worked to the benefit of customers over the years.
Proceeding Time 2:26 p.m. T4
THE CHAIRPERSON: And Moody goes on, the fourth line from
the end of the paragraph with respect to TGI and says:
"If the regulators approve the use of an
interest rate deferral account to limit
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 982
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
TGI's exposure to interest volatility…"
Is the Commercial Paper Program approved by the
Commission?
MR. JOHNSON: Certainly it's part of what's in that
deferral account. I'm advised that the specifics of
the Commercial Paper Program aren't approved by the
Commission. As you are probably aware, the Act
requires Commission approval if the securities are
over one year in length, and the Commercial Paper
we're talking about here is all less than a year. But
notwithstanding the specifics aren't approved, the
issue of the short-term debt component has been the
topic of both hearings in front of the Commission
where there has been discussion of the magnitude of
the short-term debt component, and is certainly
discussed on a regular basis in all revenue
requirement filings of Terasen Gas Inc. There is
always some discussion of both the magnitude the of
the debt component and the anticipated cost of that
component because the variances from the costs that's
used for revenue requirement purposes, the variances
go into this short-term interest deferral account.
THE CHAIRPERSON: Has there been any change in TGI's
strategy with respect to Commercial Paper funding in
the last few years?
MR. JOHNSON: In Terasen Gas Inc.'s last public revenue
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 983
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
requirement hearing, which was in November of 2002 for
the year 2003, there was a discussion in the
application and I believe it was also discussed in the
oral hearing, that Terasen Gas Inc. was proposing and
it was accepted, I believe, that the portion of the
capital structure represented by short-term debt be
reduced from 15 percent to approximately 8 percent.
And that was replaced by a medium-term note that had a
floating rate, interest rate. And as I say, that was
a topic of the public hearing process, and the reasons
for reducing that to -- from 15 percent to 8 percent.
But even the 8 percent continues to be significantly
-- in terms of what's normal for utilities across
Canada, the 8 percent is larger than you would
normally see.
Proceeding Time 2:30 p.m. T05
COMMISSIONER MILBOURNE: Mr. Johnson, was there a
tangible or measurable bond market reaction to the
announced downgrade, in terms of Terasen Gas Inc.'s
premium over long Canadas relative to those of its
peers?
MR. JOHNSON: I'll have to ask for advice on that. I --
it's not something I look at in the paper each day.
I am advised that the bond market in
December is not a particularly -- the corporate bond
market in December is not a particularly active
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 984
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
market, just traditionally, and that it would be
difficult to determine if there was any -- you can't
point to some specific reaction. There just isn't
that much trading of corporate bonds at that time of
year, and so the company can't say "Yes, we can see X
happened on the 19th or 20th of December."
COMMISSIONER MILBOURNE: So would it be -- would it be
fair to characterize the response as, there's been no
determinable change in the market?
MR. JOHNSON: That's fair.
COMMISSIONER MILBOURNE: Thank you.
THE CHAIRPERSON: I have nothing further. Thank you,
Mr. Johnson.
That then does bring us to you, Mr.
Wallace, with respect to what is now Exhibit C2-23.
MR. WALLACE: Thank you, Mr. Chairman. Mr. Chairman, I
filed a couple of letters before Christmas, and I just
want to make sure the right one got marked as the
exhibit. I didn't hear the date as you read it out
there. I think it should be the letter of December
21st, 2005. The other was simply a procedural comment.
THE CHAIRPERSON: Yes, that's correct. December the
21st, 2005, is Exhibit C2-23. And I think your other
letter of comment is dated December the 22nd, 2005.
MR. WALLACE: Yes.
THE CHAIRPERSON: Okay.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 985
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. WALLACE: Thank you.
Mr. Chairman, with respect to Exhibit C2-
23, there's not a great deal that I can add that isn't
evident on it, and that we didn't cover in our letter
requesting its submission, so I can be quite quick.
The two exhibits, or the two attachments which we
asked be marked as exhibits, the billing insert,
"Managing Your Energy Cost, Things That Really Work,"
and the projection -- what I call Slide 28 from the
2005 TGI annual review, are Terasen-generated
documents. They are documents that we submit show a
much less pessimistic view of the future of gas on
electricity price competition which as we understood
it during the hearing was the principal competitive
and risk issue that Terasen was stressing throughout
the proceeding.
The insert, the first document, states
that:
"Natural gas really works compared to other
fuels. Any way you look at it, natural gas
is still the best fuel for heating your
home. Even with today's uncertain energy
prices, a high-efficiency Energy Star
heating system is a clean-burning,
environmentally-friendly…"
I'm sorry,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 986
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
"…is clean-burning. Environmentally-
friendly natural gas is considerably more
economical than electric, propane, or oil-
fired systems."
And the graph that's attached to the letter shows a
annual fuel cost for space heating for natural gas of
$607 and electricity at $759, or 25 percent more than
natural gas. And it's our submission that that is a
much bigger spread than anybody would pick up from
either listening to the Terasen witnesses talking to
the Commission, or from the revised Table 1, Figure 1
which is attached and follows and shows a price
relationship between gas and electricity on October
1st, 2005. We submit that those simply can't be
reconciled with the pessimistic -- or the insert
cannot be reconciled with the pessimistic attitude of
Terasen witnesses on electricity/gas pricing
competition.
Proceeding Time 2:35 p.m. T6
Similarly, slide 28, the last attachment,
is from the TGI annual review of November 10th, 2005,
immediately prior to the commencement of the hearing
and was a document we didn't become aware of until
later. But it shows natural gas prices falling from
the peak levels that we were facing at the time of the
hearing, from near record highs to below $7 Canadian
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 987
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
in 2010. And again, that long-term picture is simply
inconsistent with the risk picture that was being
painted during the ROE hearing. And obviously I think
we all know that gas prices have already fallen
substantially and are now below $9 already. So we
were at a peak level, we concede that, but we think
the long-term picture is clear and the long-term
picture is much better demonstrated in these exhibits.
Thank you.
THE CHAIRPERSON: Thank you, Mr. Wallace. Mr. Johnson.
MR. JOHNSON: Thank you.
Firstly let me just say that with regard to
these two documents, they're not documents that
Terasen Gas was in any way seeking to hide or keep
from the Commission. The bill insert, as Mr. Wallace
indicates, was sent around to many customers. Slide
28 was a document that was presented by Terasen at the
annual review which occurred in, I think, November the
10th, just before the ROE proceedings started, and it
was presented to intervenors and Commission Staff were
at the annual review. So this is not -- if there's
any suggestion in Mr. Wallace's comments that somehow
the company was trying to put forward one view of life
in one proceeding and a different view of life in the
ROE proceeding, that that can't be further from the
truth. I mean, these were documents that were made
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 988
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
publicly available and presented to intervenor groups.
Perhaps Mr. Wallace didn't obtain a copy but they're
not hiding sort of evidence that's kept in the
background.
The bill insert type information, as I
indicated in the earlier letter to the Commission, is
available on the Terasen website, information such as
this. It's also available -- very similar information
is available on the B.C. Hydro website. So there's no
cloak of secrecy here at all.
The Terasen position with respect to gas
prices is that gas prices were at record highs. I
don't think there's any dispute over that. I think
Mr. Wallace has indicated the same. There's no, I
don't think, any dispute that the information
presented in Exhibit B-6, the earlier document filed
in October, was accurate information. It has
footnotes explaining exactly how the numbers are
derived.
The bill insert -- let me just finish on
that point first. The fact is that natural gas prices
at the time of the hearing in November and today, are
much much higher than they were in the past. We can -
- you can argue a bit about they might be 50 cents
more or 50 cents less or whatever than they were a
week ago or a month ago. But the evidence before you,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 989
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the undisputed evidence before you, is that if you
look at where the gas prices were in 1994 when the
capital structure of Terasen Gas was last examined by
this Commission, that the gas -- there was about a 60
percent differential between the price of electricity
and the price of natural gas. Gas was approximately
40 percent of the price of electricity. By November,
the price of natural gas and the price of electricity
were very close, one to the other.
Proceeding Time 2:40 p.m. T07
The futures market, as displayed in the
slide, does show that in terms of futures trading, the
price two years out is lower than the price today.
That actually was evidence in the proceeding. It's
noted in the JIESC argument that, in cross-examination
of Ms. McShane, she was asked about where she was
expected gas prices to be two years out, or three
years out, I can't recall the exact question. And she
gave evidence it was very consistent with what is in
that slide 28.
So this, again, wasn't something that was
new, or wasn't before the Commission. But in my
submission, the important part is that if you looked
at the futures price in that slide 28, and compared
that to the futures price of a year ago, you would
see, just as you see for spot prices, current prices,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 990
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
you would see a dramatic increase in the prices over
time. And what we're dealing with here in terms of
risk is the risk that these gas prices are something
that the Commission can't control. You can't wave a
magic wand and say, "Gas prices go back down." And
the risk that Terasen, both of the Terasen companies
are now facing is the risk that the price of gas is
very close to the price of electricity, and it may be
substantially -- may be higher a year from now. We
don't know. We can have a futures price, but that is
simply an indication of today's market reaction, and
that's not to say that a year from now, or two years
from now, the prices are going to be what's in the
slide 28. We know we can almost be certain they won't
be that price. We don't know if they'll be somewhat
less or somewhat more, but we know they won't be -- or
can assume they won't be exactly that price.
It's my submission that, looking at the
larger picture, the bigger picture, the companies are
facing much more significant competitive risk than
they were in the past. We can argue about the exact
price, but there can't be any doubt about the
competitive risk. And this point was made in the
submission; we replied to some extent to these
documents. And the point was made that much of this
is to do with perception of consumers. It's not
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 991
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
simply the exact price. If you asked someone on the
street, or if you asked me, exactly what I'm paying
for electricity, I can't tell you a price. But what I
can tell you is what I pick up from newspapers and
what I pick up from the general marketplace. And I
don't think there can be any doubt that the general
marketplace recognizes that the price of fossil fuels
are much higher than they were in the past. And when
making decisions on energy choices, that is in
people's minds.
And that was struck home by what was quoted
in our argument from the submission of Mr. Wait. Mr.
Wait, who sort of represents a normal, actual consumer
out there, said quite clearly in the opening page of
his submission that when he made his choice of energy
choices in his house, he chose natural gas. But if he
was doing it again today, it would be very
questionable if he would choose natural gas. And the
reason for his concern is not just the spot price of
gas, but he recognized right in that paragraph that
electricity prices are relatively stable, and will be
relatively stable, but gas prices, you've got concerns
over volatility and you've got concerns over where the
price is going to be.
And so, I say, slide 28 was a snapshot in
time. It's an accurate document, don't dispute it,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 992
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
but it doesn't in any way detract from the position
that Terasen put forward in this proceeding.
Proceeding Time 2:45 p.m. T8
The insert, the bill insert is clearly
promotional literature by Terasen Gas. I mean, to
some extent in the evidence of Dr. Booth and as
repeated by intervenors in their submission, they were
critical of Terasen that it wasn't monitoring
customers leaving the system. Well, if Terasen wasn't
out there trying to advertise and keep people on its
system and attract business, they would be, and
properly so, equally critical. The bill insert is a
document that's attempting to keep people on the
system, to get people to use natural gas, and there's
nothing wrong with that. The bill insert is based on
an examination of space heating costs alone. It
doesn't include the B.C. Hydro basic charge and it
doesn't include the Terasen Gas basic charge. So
neither basic charge is included, and when that
comparison is done and when it's compared using a high
efficiency furnace, a 95 percent efficiency furnace
which is what's in that bill insert, then that is an
accurate representation as at that point in time.
That completes my submissions, Mr.
Chairman.
THE CHAIRPERSON: Thank you. Mr. Wallace.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 993
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. WALLACE: Mr. Chairman, I would agree with Mr.
Johnson at least as far as he goes in saying that the
documents weren't hidden. That I agree with. But
beyond that I agree with very little of what he has
said.
There is clearly a difference, when they
are trying to sell something, on the pessimism that is
exhibited in the ROE proceeding where Mr. Johnson's
words are that the prices are very close. And that's
consistent with revised Table 1, Figure 1, which by
the way, is an efficiency of gas equipment 90 percent
so very close to the 95 percent high efficiency
mentioned on the Energy Star.
That very close description is very
different from a 25 percent advantage shown on
Managing Your Energy Costs, Things That Really Work.
I don't think anybody would think 25 percent and very
close are the same thing, and I don't think they were
intended to convey the same feeling by any means. I
suggest to you they were meant to convey very
different meanings.
And similarly, the graph that was presented
of future prices was -- forward gas prices, I'm sure
was intended to convince customers that yes, gas is
closer now than it has been, but the situation is
going to improve. And again, that was a pessimism
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 994
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
that did not come through in the ROE hearings. And I
mean, that, I guess, what I would suggest is excessive
pessimism creeps into company witnesses in ROE
hearings quite regularly and it's not too surprising
because you're looking out and seeing what can the
risk be. But the Commission doesn't have to buy into
that. I think the Commission can stand back and take
a more objective view of what are the risks. And yes,
gas prices are higher than they used to be, but are
they a substantial risk to Terasen in the sense that
in the future it will not earn its return or allowed
return? Or are they a risk in terms of rate base
being stranded or any other such thing?
It is our submission, no, there is no
relevant significant increase in risk to Terasen as a
result of electricity versus gas prices. Thank you.
THE CHAIRPERSON: Thank you.
That brings us to what I've referred to as
Part 2 of this afternoon's proceeding, and here I want
to begin with you, Mr. Wallace, in your argument at
page 3. I'll make a couple of observations, Mr.
Wallace, and then I'll invite your comment.
Proceeding Time 2:50 p.m. T09
MR. WALLACE: Thank you.
THE CHAIRPERSON: In the paragraph that begins, "The
basic purpose of this proceeding," you've said in I
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 995
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
think it's the third sentence in that paragraph:
"That being said, the JIESC believes that
all of the resources TGI and TGVI require,
including capital, must be obtained at the
lowest possible cost."
And I first would like to see if you would agree with
me that that should be read in the context of the
second -- I guess it's the third-last sentence, where
it says:
"In order to attract capital, the return
must be equal to the returns available to
investors on investments of comparable
risk."
MR. WALLACE: Available to investors, sir, yes.
THE CHAIRPERSON: Available to investors. And if I read
that reference to lowest possible cost in that
context, I might reach a different conclusion than if
I wasn't to do that and I was just simply to refer to
it as the lowest possible cost, which might suggest
that you can do an arithmetic calculation to determine
what that lowest possible cost is. So is it
necessary, in your view, for me to read that paragraph
in its entirety, or are you submitting that the
reference to the lowest possible cost stands on its
own?
MR. WALLACE: No. I think you read the paragraph in its
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 996
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
entirety, as you have said. We recognize that Terasen
must be able to attract capital in a variety of
markets over a period of time. We would not, for
example, suggest that they go out and do something
tricky that gets them some low-cost capital today, and
won't allow them to raise capital for another five
years. It clearly is a long-term view. And they have
to be able to attract capital on reasonable terms.
THE CHAIRPERSON: Right. Okay, thank you.
Then let me ask about your analogy to the
Commission's role with respect to the cost of hard
assets. Would you accept that there's at least these
two distinctions between the exercise that's before us
in this proceeding and an exercise that's before us
with respect to the recovery of costs for hard assets
-- and they are, first, that in the context of hard
assets, there typically is no obligation to the
supplier of the hard assets. One might argue, even,
that there's no fairness requirement. And two, that
in the broadest sense, the estimating process for
assessing the costs is considerably different, that,
you know, when we're looking at the cost of hard
assets, we can look at it from a variety of different
ways, but we can look at confidence levels that are
fairly narrow, and that it's almost analogous to an
arithmetic calculation where, in this exercise,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 997
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
perhaps it's not, perhaps it's anything but an
arithmetic exercise. And so I welcome your -- you
know, you've used the analogy, I welcome your comments
with respect to whether or not you'd accept the
distinctions I draw.
Proceeding Time 2:55 p.m. T10
MR. WALLACE: Mr. Chairman, with respect, I would differ
on those distinctions.
First you suggested no obligation, no
fairness. A purchase might be complete on a truck,
say, but if it was a lease there is a longer-term
relationship so there may well be obligations that are
ongoing. I think in a general sense there is a
fairness requirement, that if Terasen is to be
perceived as a reasonable company in the market of the
size it is, that it is going to have to deal with its
suppliers in a fair manner or it's not going to have
suppliers. That's the ultimate test. Can you get out
there and purchase it?
Now, it's a little more clear, I agree with
you in the sense of the arithmetic, that if you put
out a request for proposals or a call for tenders or
something on trucks, you'll get in 15 bids. You will
take the lowest one possibly, or maybe the second
lowest depending on other matters, but you will take a
look at it and it is a little more concrete. And that
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 998
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
seems more concrete. I'm not sure that's much
different than going out to raise debt and seeing what
the spread in the market is on that debt. Are you
paying a premium over what Enbridge or what Union
would pay on that debt to place it in the market? And
if you're not paying a premium on the spread, then I
submit to you you're doing very well. If you're
paying a big premium, then you may be looking at it
and seeing people won't deal with us.
So I think the market test prevails in
either case. It's looking at it. Can you attract
capital and maintain integrity? If you put your
equity out and people are only going to give you $90
on what would be share value of 100, means they're
trying to increase their return on that by putting up
less capital, and clearly therefore you have not
satisfied the market, and that would not be a good
thing to do.
If on the other hand you get 2.7 times,
maybe your return is far higher than it needs to be to
attract capital to you. Well, undoubtedly your return
is far higher than it has to be to attract capital.
So in the same way that you go out to
attract trucks with a dollar, you go out to attract
capital with your return. And I think they can be
looked at and they can be subject to market tests for
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 999
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
reasonableness.
THE CHAIRPERSON: Thank you.
Let's turn and then I'll invite comments
from Mr. Johnson, but let's turn to Mr. Johnson's
reply. I'll give you a chance to read it, Mr.
Wallace, although you may already have.
MR. WALLACE: Yes, which paragraph?
THE CHAIRPERSON: Paragraph 75 on page 26 of TGI's reply.
MR. WALLACE: Okay. I have read it but it was a little
while ago. If you could give me just a minute. Yes,
I've read that.
THE CHAIRPERSON: Mr. Johnson makes reference to two
regulatory precedents in response to your reference to
lowest possible cost. And my question is a fairly
simple one and it's really to provide you with an
opportunity to comment on his reply. But my question
is this: Do you accept that he has in these two
excerpts correctly captured the NEB in NEB's view?
MR. WALLACE: I think in reading them, yes, but I don't
think that makes our submission incorrect, and I think
he's wrong in that. The first of the submissions says
it shouldn't be the lowest -- fair and reasonable
return doesn't mean the lowest return that can be
allowed and still allow the utility to access debt
markets. The allowed return on equity needs to
recognize the returns available to equity investors.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1000
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
And I agree. You have to be able to attract equity
capital. You have to be able to attract debt capital.
So I have no quibble at all with the
submission there. I do have a quibble that that isn't
lowest cost. I think it's getting to balanced
structure and recognizing you need various types of
capital in a balanced capital structure.
With respect to the second one, contrary to
what some parties advocated during the hearing, the
board is of the view that it is not appropriate to
overleverage a pipeline in order to identify the
minimum acceptable deemed common equity ratio
possible.
Proceeding Time 3:00 p.m. T11
Again, I don't say it has to be the
minimum. They do have to be able to raise capital
over time. But there should be a balanced capital
structure, you should be able to attract capital at
both debt and equity capital, and our view is that
Terasen very clearly can do that, on the evidence in
this record.
And the third quote is very similar.
"The Board does not accept the suggestion
that NGLT's common equity ratio should be
leveraged in order to identify the minimum
acceptable level."
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1001
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Again, a balanced capital structure that allows a
utility to attract capital, both types, is
appropriate, and we submit that's what exists in this
case.
THE CHAIRPERSON: My next question is related but it
hasn't -- at least that I've noted -- been spoken to
directly in the submissions. And it's this, Mr.
Wallace: If the panel concludes that you're correct,
that there has not been a significant change in
business risk, what is the scope of our review at that
stage? Does that suggest because there's been no
change in business risk, that we should then accept
the earlier decisions of the Commission? Or maybe
there are other alternatives here, and I welcome your
comments and suggestions as to what those might be, if
I don't capture this correctly, but -- or is it -- is
the panel at this point in time, even if it was to
conclude that there had been no change in business
risk, required to have a review of the ROE and capital
structures in the broader context of the circumstances
today?
MR. WALLACE: I would -- I don't think the Commission is
compelled to have a review. I would accept that the
Commission can look at more than just business risk,
that it can look at the broader conditions today, but
I would suggest in doing that that you should be
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1002
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
looking -- if there's no change of business risk, and
the utility is able to raise capital, equity and debt,
on reasonable terms, and there appears to be no reason
to believe it won't continue to be able to do that in
the future, then you should either lower or leave the
return the same.
THE CHAIRPERSON: Thank you.
One more area that I'd like to pursue with
you, Mr. Wallace, while you're on your feet, and it
arises from the CEC submission. On page 11, paragraph
34 -- and I'll give you an opportunity to read that.
MR. WALLACE: I have read it as you gave us notice in
advance, and thank you for that.
THE CHAIRPERSON: Okay. We do our best. Often
preparation is closer to the oral phase than you
might anticipate, but I was glad to be able to do
that.
MR. WALLACE: That happens to all of us, sir.
THE CHAIRPERSON: Right. My question is this. And it
may be contrary to the Commission's panel on the
FortisBC decision, but my comment that I'd like you to
comment on is this. Does stability in earnings, where
you have actual ROEs tracking allowed ROEs closely,
speak to the issue of risk, and risk only, and doesn't
speak to the issue of fairness except indirectly
through risk?
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1003
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Proceeding Time 3:05 p.m. T12
MR. WALLACE: I would concur with your suggestion that I
believe making the allowed ROE speaks to risk rather
than to the reasonableness of the ROE. If they make
it all the time, then there's very little risk they
won't make it. But I think Mr. Johnson even used the
example of if it was 5 percent or 2 percent, or
something, that it wouldn't be reasonable, and that
could well be the case.
THE CHAIRPERSON: Thank you. Those are all my questions
for you.
MR. WALLACE: Thank you.
THE CHAIRPERSON: At this time. I am going to welcome
comments first from any other intervenors that arise
from comments that Mr. Wallace made, and then I'm
going to give Mr. Johnson an opportunity to comment on
any matters that arose from my exchange with Mr.
Wallace. Are there any intervenors who wish to
comment on my exchange with Mr. Wallace? Mr. Weafer.
MR. WEAFER: Mr. Chairman, just -- you referenced our
argument, and I didn't know if you were going to ask
us about our argument. Following up on Mr. Wallace's
comment, and making sure I understand the Chair's
question.
Mr. Johnson replied that if the return had
been set at 5 percent for a number of years, instead
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1004
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
of an unreasonable level, then it wouldn't be an
appropriate return, and the Commission shouldn't
approve that. The facts you have before you in this
case is the company has met the set return and has in
fact exceeded it. And contemporaneous with this
application process, a buyer has come along and paid
2.7 times book value, looking at the achievement of
that return over a period of time, which would
indicate the level is reasonable.
THE CHAIRPERSON: Right. And we're going to get to that
issue in a moment. I didn't -- that's my second item
on the agenda. But what I really wanted to confirm,
or to seek Mr. Wallace's comments on, is does the
close tracking of the actual ROE to the allowed ROE
speak to risk, or does it speak to fairness? And I
think I've heard Mr. Wallace on that point, unless you
have a different view than --
MR. WEAFER: No, I just wanted to make sure we were --
THE CHAIRPERSON: Right. We will get --
MR. WEAFER: -- if we're coming back to this or not,
that's really what I wanted to get to. Thank you.
THE CHAIRPERSON: Yes, we're going to deal with your
paragraph 33.
Any other intervenors who wish to comment
on my exchange with Mr. Wallace? Mr. Johnson.
MR. JOHNSON: Thank you very much.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1005
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Commenting firstly just on page three of
the JIESC argument, where you had a discussion with
Mr. Wallace on the paragraph at the middle of the
page. My submission is that, whereas hard physical
assets are items that one can usually quite easily
price in the marketplace, can go and --- to use his
example of a truck, you can go and get a price on a
truck fairly easily. The evidence of the fair price
for equity and the fair price for debt is a much more
difficult process. There isn't somebody that -- out
on Broadway that sells equity financing. And that's
why we end up in proceedings such as this, and have
expert witnesses to discuss at some length what is the
fair price. And so my submission is this, with regard
to cost of equity in particular, it's that the
Commission must listen to the evidence of the expert
witnesses in this area, and judge their evidence, and
determine from that evidence what is the fair price.
Proceeding Time 3:10 p.m. T13
I was going to take you to paragraph 75
when Mr. Wallace was talking, but you took him there
already so I won't have any other comments on
paragraph 75.
Turning to the question of the scope of
review, you asked Mr. Wallace if the Panel concluded
that his position was correct and that there was no
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1006
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
change in business risk, then should the Commission
accept an earlier determination -- should this Panel
accept earlier determinations of the Commission? A
few comments with respect to that.
Firstly, with regard to the automatic
adjustment mechanism, you heard the evidence of both
witnesses, Ms. McShane and Dr. Booth, that they were
of the opinion that the current manner in which the
adjustment mechanism works, the one-to-one
relationship when bond yields, forecast bond yields
are below 6 percent, they were both of the opinion
that that wasn't fair, to use that word. They both
said that that was harsh or a penalty to the
utilities, and both agreed that the .75 mechanism was
more appropriate. So in my submission, even if you
were to conclude that there hadn't been any change in
business risk, that's still an item that's in effect
outstanding and you certainly shouldn't accept the
conclusion of the Panel from 1999 when you have
unanimous expert evidence in front of you that that's
not how it should work.
And I must stress the point that was made
in our initial argument that simply changing that
formula and just saying, well, now we'll go forward
with .75 to 1 instead of 1 to 1, wouldn't correct the
problem. That would simply exacerbate the problem
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1007
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
because when interest rates came down from the 6
percent level, the adjustment has been 1 to 1 going
down. And if you change the formula and make it .75
going up, it just -- it makes it worse. And so if
that was going to be the result, that's certainly not
what the companies are seeking.
So I say with respect to that particular
item, there's no dispute amongst the experts that that
should be remedied, and in any remedy of that you have
to keep in mind that it's -- to use Dr. Booth's words,
it's "penalize the companies going down". So that has
to be remedied notwithstanding anything else, any
other findings you have in this proceeding.
Secondly I'd say with regard to -- even if
you were to conclude that there has been no change in
business risk, which I certainly urge you not to find,
the application of the companies to you was not
founded only on business risk. The company's
application does discuss a number of changes in
circumstances. There is no question whatsoever that
we're in a different interest rate environment. You
heard the evidence of both Dr. Booth and Ms. McShane
that the risk premium that used to be present in bond
returns is no longer present. That's a change that's
independent of any business risk. But there used to
be, and there's again no dispute on this point -- they
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1008
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
might dispute how much it was, but there's no dispute
on the point that the risk premium that was present in
bond returns is no longer present in bond returns.
And if nothing else happens, that causes the market
risk premium to widen, to spread, simply because the
bond returns don't have that higher return because of
the risk involved in them. So you have that spread.
Proceeding Time 3:15 p.m. T14
Another factor that was mentioned in the
proceedings and in our submission is that -- and this
is again sort of an overall economic factor -- is that
historically, Canadian interest rates have been higher
than U.S. interest rates. And this, again there was
no dispute amongst the experts on this point, that in
the past Canadian rates were three-quarters one
percent higher on average for long-term rates than in
the U.S. And it is that factor, that bond return
differential, that has been the primary cause of the
market risk premiums in Canada to be lower than the
market risk premiums in the U.S. That's been a
significant contributing factor.
Again the undisputed evidence, no
disagreement amongst the experts, that currently bond
returns, long bond returns in Canada, are about the
same as they are in the U.S., and no one is -- none of
the experts were forecasting, there's no forecast that
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1009
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
someone this is going to go back to the way it was
before. We're now in a changed economic environment
where long bond returns in Canada are roughly the same
as long bond returns in the U.S. That of itself means
that the bond, the market risk premiums in Canada
should be looked at more in terms of what's occurred
in the U.S., because we don't have that built-in
differential that previously existed. So that's
another broad factor which I say again, there's no
real -- there's no dispute on that circumstance.
And so I'm sure there's others as well that
I can't think of at the moment. But my submission
here is that looking at business risk definitely does
not end the examination. There are many other factors
that were put in evidence that are addressed in the
submissions that are issues that you should be
examining, and clearly are issues that are different,
the facts are different than when the Commission last
looked at this in 1999. And so you shouldn't just
revert to what was there before but must examine all
of the circumstances, not just the issue of business
risk.
The final item, I think, on those that were
addressed was paragraph 34 of the CEC submission.
THE CHAIRPERSON: Can you repeat yourself, Mr. Johnson,
please?
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1010
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. JOHNSON: I'm sorry?
THE CHAIRPERSON: Can you repeat yourself?
MR. JOHNSON: Oh, I was going to the CEC, paragraph 34 I
believe it is, of the CEC submission which you
discussed with Mr. Wallace.
THE CHAIRPERSON: Yes.
MR. JOHNSON: And if I can just say that -- yes, that
point that's made in that paragraph is also made in
paragraph 32 of the BCOAPO submission and was
addressed in our reply at, I believe, paragraph 90.
And as Mr. Wallace mentioned, I, in the reply, used
the example of a 5 percent return on equity, and the
fact that the utility earned 5 percent doesn't in any
way demonstrate that 5 percent is a reasonable level.
I was going to and I will use the example that if the
return conversely was -- for some reason the
Commission said a return of 25 percent on equity and
for the particular circumstances of that utility it
was able to earn 25 percent each year, that equally
well wouldn't demonstrate that the 25 percent was a
reasonable level.
But I think Mr. Wallace and I are basically
at one on that point, that it doesn't demonstrate the
reasonableness of the level.
THE CHAIRPERSON: When you read that portion of the
Commission's decision, does it suggest to you that
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1011
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
that's what the Commission Panel in that context said?
And if so, what's your recommendation to the
Commission Panel in this proceeding?
MR. JOHNSON: I have looked at that Fortis -- the passage
in the Fortis case, and I was -- after your letter
came out saying that this was going to be an issue
that was raised or would be raised in this proceeding,
I was scratching my head saying, "How can I say
something other than they got it wrong?" And I think
that's all I can say. I don't have an explanation. I
think simply that that's just an incorrect conclusion.
Proceeding Time 3:20 p.m. T15
THE CHAIRPERSON: What I want to explore with you, Mr.
Johnson, is whether or not there are any
considerations for this panel. If we also conclude
that that earlier panel got it wrong, for whatever
reason, is that an issue that we should address in our
decision? Is it an issue that we should -- but what's
your recommendation to us in that regard?
MR. JOHNSON: It has been cited by both the CEC and the
BCOAPO, as I mentioned, and it's therefore difficult
to avoid addressing it, two of the intervenors have
raised that as a point that's before you. I think all
that I can suggest is that this panel express its
views on whether meeting -- the ability to meet
revenue requirements is a useful test of
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1012
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
reasonableness. And I don't know any other way to put
it.
THE CHAIRPERSON: Okay.
MR. JOHNSON: I've completed what I had to say.
COMMISSIONER PULLMAN: Thank you. Mr. Johnson, if
you'll -- you touched on an issue there on the
automatic adjustment mechanism, and probably now is as
good a time to any is to get you to explain para 208
of your initial submission at page 61. What I think I
-- do you have it?
MR. JOHNSON: I have it.
COMMISSIONER PULLMAN: Okay. What I think I hear you
suggesting is that your client, having been beaten up
on the way down, should be given an opportunity to
earn it back as rates go up. Am I correct?
MR. JOHNSON: Certainly that's part of what I'm saying,
Mr. Pullman, no doubt about it.
COMMISSIONER PULLMAN: Because I cannot see why we would
-- when setting a new rate, we would have any -- take
very much interest in what Ms. McShane thought rates
might be, when we actually know what rates are.
MR. JOHNSON: The evidence before you, and this again is
true of both Ms. McShane and Dr. Booth, was that they
came forward with a recommendation as to what the
return on equity should be, assuming a given bond
yield forecast. And they were slightly different
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1013
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
numbers, but both of them were basing it on a
particular forecast. And let's just for the moment
assume that Ms. McShane's foresight was perfect, and
that the return, or the forecast bond yield coming out
of the November, 2005 consensus forecast was 5.25
percent. So, and if you had accepted her evidence,
then she would have granted a return of 10.5 percent.
Or if you didn't accept her evidence, in any event,
you would have granted a return based on 5.25 percent.
If you then also accepted what both Ms.
McShane and Dr. Booth said, in terms of the automatic
adjustment mechanism, adopting the .75 to 1
adjustment, if in the subsequent year, if we're now
looking at November of 2006 consensus forecasts, and
the then-forecast was for 4.79 percent, which is what
came out of the current one, what would have happened
in the adjustment mechanism would have been what's set
in this paragraph.
COMMISSIONER PULLMAN: Then 10.155 would be the rate for
2007.
MR. JOHNSON: Right, because it just would work
automatically.
COMMISSIONER PULLMAN: Yes. It's setting -- setting the
clock back, and your proposal has reset the clock back
to 5.25. And I'm saying that I can't see a huge
amount of logic in that.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1014
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. JOHNSON: Well, I think the logic in that,
Commissioner Pullman, as I started out saying, the
evidence of Ms. McShane was based on a particular set
of circumstances. And I can't presume to guess
exactly what her evidence would have been if instead
of using a 5.25 percent forecast of long Canadas for
building up all of her assumptions, she'd used, for
example, a 4.75, which is quite close to this.
COMMISSIONER PULLMAN: Yes.
Proceeding Time 3:25 p.m. T16
MR. JOHNSON: But all I can say is that both Ms.
McShane and Dr. Booth agreed that there is a
relationship between bond yields and equity returns,
such that the equity returns should be higher relative
to the bond return, when you're dealing with lower
interest rates. So presumably if they both believe
that the .75 is correct, then both of them would say
that at a 4.75 percent forecast, the spread should be
bigger. That's inherent in the recommendation of the
.75.
COMMISSIONER PULLMAN: Well, I think if Ms. McShane
started off with 4.75 rather than 5.25, the number
she'd have come up with would have been slightly less
than 10.5. I guess all I'm concerned -- I now
understand what you're recommending, and we're
basically talking about 11 basis points, which is --
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1015
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
you're trying to claw back on behalf of your cust- --
client, I'm sorry -- because of the adverse impact of
the AAM below 6 percent.
MR. JOHNSON: I don't regard it as clawing back, I
regard it as saying the evidence that the company put
forward was -- said to this Commission, "You should
award an ROE return of 10.5 percent when forecast bond
yields are 5.25 percent." The second part of the
evidence they put forward was that variances from that
forecast yield should be dealt with through a .75 to 1
formula.
COMMISSIONER PULLMAN: I understand what you're saying.
MR. JOHNSON: And that's just consistent with this
paragraph.
COMMISSIONER PULLMAN: Yes. I don't agree with you, but
I understand what you're saying.
MR. JOHNSON: Thank you. Okay.
THE CHAIRPERSON: If you start with Dr. Booth's 5,
instead of Ms. McShane's 5.25 -- your assumption is
that the premium is going to be larger at the 5 than
the 5.25, and that they'd both be in agreement. If
they were -- if they are, in all other regards, on all
other points in agreement, they would also agree that
at 5 there should be a larger premium than at 5.25.
MR. JOHNSON: Yes.
THE CHAIRPERSON: Right. As you move -- as you move --
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1016
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
yes. Okay.
MR. JOHNSON: Yes.
COMMISSIONER MILBOURNE: I'd appreciate your helping me
understand a little bit more. When you talk about the
factors other than business risk, you referred to
interest rate regimes, you referred to Canada/U.S.
interest rate differentials, and so on and so forth,
as being factors that we should be considering
carefully. I'd find it helpful if you could point me
to some parts of the evidence, or whatever, that would
indicate some tangibility surrounding those agreed-
upon changes in the macro-environment, as it affects
the companies, as it affects the Canadian utilities
group. It's the same -- we all recognize that
circumstances change, have changed. They're
dynamically changing in the financial markets, but
could you relate -- help me understand where that --
where you submit that changes tangibly these access of
Terasen companies to debt or equity. Tangibly, not
subjectively.
MR. JOHNSON: Perhaps you could repeat the question,
Commissioner Milburn.
COMMISSIONER MILBOURNE: After I put all that effort
into it?
Proceeding Time 3:30 p.m. T17
MR. JOHNSON: Yes. Well, let me explain my difficulty.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1017
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
My comments were intended, and I hope they were
related to economic factors that were distinct from
business risk.
And I was pointing to parts of the evidence
which I understood there was really no dispute between
the economic -- the financial witnesses. I believe
all of the points I raised were areas where they were
generally in agreement, and I submitted that with
respect to those areas, they influence the appropriate
return on equity. Those are factors that the
financial witnesses use in their assessment of the
appropriate return on equity.
But when I heard your question, it appeared
to me at least to be asking in part how those economic
factors were affecting the business risk of Terasen,
and that wasn't the purport of my comments.
COMMISSIONER MILBOURNE: I'm sorry if I was excessively
circuitous. For the purpose of my question, I accept
your position that everybody agrees that these things
have changed. And it's I guess in kind of plainest
terms. Like accordingly you're saying that as a
result of that, there should be changes made in the
capital structure and allowed return for Terasen. But
we equally heard that that should be subject to some
sort of reasonableness test. And I guess what I'm
trying to get at is how would you go about measuring
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1018
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the -- finding some tangible evidence that that was
necessary? As result -- like, nobody is arguing that
the circumstances haven't changed. They change all
the time.
MR. JOHNSON: I think it really comes down to the tests
that the financial witnesses use to determine what is
the appropriate return on equity. They use three
tests, as you know. The equity risk premium test runs
off of bond yields, bond returns. And so to the
extent that the -- to take a very simplistic example,
if bond yields five years ago were at 10 percent and
now they're at 5 percent, there would be common
agreement amongst the experts that that change in
economic circumstances had to be taken into account in
the appropriate return for the utilities. And I won't
go any further in that. That just follows.
Similarly in the DCF tests you're looking
at costs of money and such, and you're taking into
account current economic circumstances. And so to the
extent that they change there has to be changes in --
or they would recommend changes in the return on
equity, and in the comparable earnings test the same
thing. You're looking at what other companies are
earning.
So all of those are economic circumstances,
which I say has to be taken into account and is then
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1019
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
used by the financial experts to build up their
recommendation on a return on equity. Now, whether or
not you can point to something tangible beyond the
fact that the yield on bonds changed, I don't know
that I can. That's what the experts do in their
evidence.
COMMISSIONER MILBOURNE: Okay, and the automatic
adjustment formula as currently practised takes that
into account.
MR. JOHNSON: Yes. The automatic adjustment formula is
intended to, as I understand it, to take into account
in some perhaps rough and ready fashion, the accepted
view that return on equity doesn't change -- or
changes with returns on bond yields but not
necessarily one for one.
COMMISSIONER MILBOURNE: Okay, thank you.
Proceeding Time 3:35 p.m. T18
THE CHAIRPERSON: That then brings us to the second topic
item in my list and that's the significance of the KMI
acquisition and regulatory precedent.
I want to begin this discussion by having
Mr. Johnson and Mr. Weafer confirm what I think their
positions are, and then I think that's going to lead
to a discussion, and I'll take you to the regulatory
precedent, to a discussion of at least two decisions,
and they've been both referred to in submissions, the
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1020
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
AUB decision and the BCUC decision, but before I do
that I want to see if I correctly, at least at this,
at the level that's referred to in the arguments,
correctly capture the positions.
So, firstly, TGI I think has stated their
position on this matter at page 9, paragraph 23.
MR. JOHNSON: Which submissions are these?
THE CHAIRPERSON: The reply. So TGI reply, page 9,
paragraph 23. My impression, Mr. Johnson, there in
the second sentence you have made it quite clear that
in your view the acquisition of the companies should
play no part in the company's request for relief in
this proceeding. And CEC have said that, page 12,
paragraph 38, that the acquisition by KMI should be
taken into account in setting the appropriate risk
premium, and I assumed from that it follows that the
appropriate return.
I really juxtaposed those two positions
just at the outset of this discussion because I think
there is, on my reading of the submissions, a
significant difference in views with respect to that
and I also find it interesting how -- what positions
are taken and that, you know, one is it should not be
taken into consideration; another one is it should be
taken into account.
Again I think this discussion, and in a
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1021
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
moment I'll welcome Mr. Weafer's comments, but I think
I'll take us first to what I think is the AUB decision
references. If you go to the AUB decision, which is
A3-1, and I begin on page 26 of the AUB decision, I'll
wait for you to get there, so Exhibit A3-1, AUB
decision, page 26.
Proceeding Time 3:40 p.m. T19
The Board says in the second full
paragraph, the second sentence:
"The Board considers these acquisitions
which are discussed further below may be an
indication that the regulated returns
available in Alberta are not too low for
U.S. firms relative to investment
opportunities in their home country given
all relevant considerations."
And then I flip over to page 28, the last sentence of
the third last paragraph:
"Nevertheless the experience regarding the
market-to-book values of utilities and the
experience regarding the acquisition of
Alberta Utilities in recent years gives the
Board some comfort that its recent ROE
awards have not been too low."
And then on the last paragraph on that page:
"Directionally the Board concludes that the
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1022
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
experience regarding the market-to-book
ratio of the utilities and the experience
regarding acquisition of Alberta Utilities
in recent years is relevant and supports
continuation of an ROE at or below the
Board's CAP M estimate."
Now, the FortisBC decision also speaks to
this issue as referred to by CEC. It's in the bottom
of page 26 of the FortisBC decision:
"The Commission Panel notes that a
fundamental test of the appropriateness of
an allowed ROE is whether the utility has
been able to attract equity capital.
Evidence of this test has been met, the
willingness of FortisBC to purchase the
equity of Aquila B.C. and to pay a premium
in so doing."
And I think I will begin, Mr. Johnson, with
you, given that you've taken the position that the
acquisition by KMI should take no part in our
deliberations. I'll begin with you and see what your
position is with respect to the regulatory precedent.
And there may be another number of alternatives here,
but is your position that the regulatory precedents
are incorrect? Is it your position that these
circumstances are somehow distinguishable? How do you
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1023
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
reconcile your position with the two regulatory
precedents that I have given you?
MR. JOHNSON: To use your words, Mr. Chairman, it's my
submission that the circumstances here are
distinguishable.
THE CHAIRPERSON: Please proceed.
MR. JOHNSON: There isn't any dispute with respect to the
fact that KMI paid two times book value. It paid that
for the shares of Terasen Inc. It didn't pay that for
the shares of Terasen Gas Inc., nor did it pay it for
the shares of Terasen Gas Inc. or Island Inc. or any
other gas distribution assets.
And just as a side note there, if you look
in the CEC submissions, I believe, earlier in pages 6
and 7 of those submissions, that CEC attempts to come
up with some sort of analysis of how the premium was
paid, and they come up with I think a premium of
something like 1.5 times book for Terasen Gas, and 5.6
times book for Terasen Pipelines, et cetera. I don't
agree with any of those calculations.
Proceeding Time 3:45 p.m. T20
They're sort of fraught with a bunch of assumptions
and errors, and I won't try and go through those, but
what my submission has in common with those
calculations is that you can't simply assume that the
2.7 times relates to the Terasen Gas Inc. acquisition.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1024
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
And that there is really little evidence of in this
proceeding. It wasn't something -- although the
intervenors make a great point of this in their
arguments -- I don't know how many times 2.7 times
appears in the arguments of the intervenors. I was
going to count it at one point, but I gave up -- it's
not something that they pursued with any vigour in the
proceeding.
In paragraph 20 of the reply submissions, I
say that the submissions of the intervenors refer
frequently to this 2.7 times book, and argue that the
premium demonstrates that the new shareholder was
satisfied with the current return on equity. The
companies submit that the evidence in this proceeding
demonstrates that the current return on equity is less
than fair and reasonable, and there's no support for
the intervenors' argument that the new shareholder was
satisfied.
The evidence before the Commission
regarding the reasons for the KMI acquisition of
Terasen Inc., and the payment of the premium, is that
of Mr. Bryson, and I quote the answer that Mr. Bryson
gave regarding the purchase, an answer from a question
by Mr. Wallace. And that, I believe, is in effect the
entirety of the explanation in this proceeding of why
it was that KMI purchased the shares of Terasen Inc.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1025
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
for the price they did purchase. And as Mr. Bryson
notes in that passage, the KMI has publicly indicated
that they are very interested in the oil pipeline
assets. The operations in Alberta and south of
Alberta.
So, I say, this firstly is -- this is
different than the Fortis purchase of Aquila, which
was discussed in the FortisBC case, where what was
clearly being purchased were electric distribution
type of assets. Here, we have KMI purchasing, or
expressing, publicly expressing, its prime interest in
the oil business, the pipeline business. And you've
referred to passages in the AEUB decision, there is
another passage at page 28 of that decision which I
will refer you to. And this is in a -- I guess it's
the fourth full paragraph on page 28, where the Board
says, in line 4 of that paragraph, the paragraph
starts out "For example, NGTL…". The fourth line
says:
"The Board also recognizes that in some
cases a premium might be paid for regulated
assets in anticipation of significant future
growth in rate base, to achieve geographic
diversification, or to obtain a foothold in
a new market."
And I say that all three of the items that the AUB
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1026
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
mentions there are very applicable to the KMI
purchase.
THE CHAIRPERSON: Right. But then doesn't the Board
then go on in the next paragraph, third sentence, and
say:
"The Board is not aware of the strategic
factors that may have affected the price
paid to acquire Alberta utilities in recent
years."
Proceeding Time 3:50 p.m. T21
And nevertheless it gives the Board some
comfort. And does that not suggest that in fact the
Board has acknowledged, yes, we don't know all of the
strategic influences in terms of the premium, but it
does give us some comfort. That's a long way from "no
part in", is it not?
MR. JOHNSON: I'm not intimately familiar with what
utilities had been purchased in Alberta in the years
preceding this decision to know which utilities that
AUB is referring to. I just don't know. But if those
were purchases of a company that was entirely a
utility, it was an electric distribution utility or
purely a gas distributing utility and that's all that
you were buying, then I can understand what the Board
is saying here. But I say what distinguishes the KMI
purchase is the KMI wasn't purchasing just these gas
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1027
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
utilities. It was purchasing a parent company that
had a number of interests, and it has expressed its
view that what it was most interested in isn't these
gas utilities.
The other --
THE CHAIRPERSON: Well, before --
MR. JOHNSON: Okay. I'm not saying they were irrelevant
to its purchase. Clearly you can't say that.
THE CHAIRPERSON: At least one of the acquisitions that
has occurred in recent years in Alberta is one that I
can speak to and have some familiarity with. And that
in and of itself may create some interesting issues.
But when I read the AUB decision in the context of at
least that acquisition, which was the acquisition of
distribution assets and retail assets with some
strategic factors at play that made it difficult to
assess the purchaser's allocation of the premium
across two different, very different asset types, one
of them being distribution and the other one being a
different creature altogether, when I read the AUB
decision in that context which they were very well
aware of, that sentence that I read to you, "The
strategic factors are not known," speaks to that
issue. And then they go on and they say, "Well, it
also -- nevertheless it gives us some comfort."
So they are, even in the context -- and
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1028
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
you're endeavouring to distinguish the circumstances
here from the circumstances, I think, in this
decision, and I'm not suggesting to that that ground
is not available to you, but I do need to raise the
issue with you that this Panel might very well
conclude that the Board's comments here were in the
context of acquisitions where it wasn't just a pure
distribution at play in there. It becomes more
difficult, I think, for you on your argument that I've
heard so far, to distinguish the circumstances here
from the circumstances that the Alberta Board was
speaking to.
MR. JOHNSON: I don't agree with what you've said. To
the extent that the Board is talking about
acquisitions where there were a variety of assets that
weren't pure play utilities, then it is harder to
distinguish. I won't try to argue that point. But to
that extent I say the same thing applies in Alberta as
it does here, that if you can't specifically -- if
there isn't evidence that clearly attributes the
premium to the district, the regulated utility, then
they have the same problem.
Proceeding Time 3:55 p.m. T22
They may have wished to ignore that problem
and make this statement, and if that's so then I'd
have to say I don't agree with it, but that is the
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1029
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
same problem, and I say the fundamental issue here is
that what KMI was purchasing was a much broader-based
company than the gas distribution assets and what the
evidence before you establishes is that their prime
interest was not these gas distribution assets. What
they were most interested in were the pipeline assets.
There was significant growth opportunities in the
pipeline assets.
KMI is also a U.S.-based outfit, everyone
knows that. They were, as the AUB talks about, sort
of establishing a foothold in a new market area. They
were moving into Canada with this. Everyone is
familiar from the newspapers of the development that
is going on in the oil sands and how that, and that
relates to the oil pipeline business that the Alberta
operations of Terasen are involved in.
There is another aspect of this that I say
must be kept in mind. In the arguments of the
intervenors there is something that, the argument goes
that, and I think to some extent the FortisBC decision
indicates this as well, but the purchase of the
distribution assets carries with it the connotation
that the purchaser is satisfied with the return that
was then existing.
I submit that that's not a conclusion that
one can properly draw. The evidence before you is
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1030
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
clear that Terasen Gas and Terasen Gas Vancouver
Island first approached this Commission in the summer
of 2004 seeking a review of return on equity and
capital structure.
The Commission issued a letter or an order
which indicated the Commission didn't want to deal
with it then but would deal with it in 2005. The
application was filed at the end of June of 2005. The
KMI purchase was announced in early August of 2005.
So, firstly as it was said in that paragraph of the
reply submission that you quoted from or referred to,
Mr. Chairman, the KMI purchase didn't play any part in
bringing this application forward.
The companies were well on the road to
bringing this application forward before KMI was
anywhere on the scene.
The second part, though, is that KMI, this
application was public. It's fair to conclude that as
part of their due diligence they were quite aware of
the existence of this application and as was said in
the reply, they have the right, as a prospective
shareholder, to expect fair regulatory treatment, as
does any shareholder.
They have that right to expect that
they'll be treated fairly and have the right to expect
that if the evidence in this proceeding demonstrates
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1031
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
that the return was less than adequate or the capital
structure should be otherwise, they have the right to
expect that that will get changed notwithstanding that
there's a new shareholder.
THE CHAIRPERSON: It's a different issue, though, is it
not? I mean, here we're talking to what comfort, I'll
use the AUB language, the Commission can draw with
respect to, allowed ROEs from the fact that KMI made
the acquisition.
MR. JOHNSON: And I submit you can't really draw anything
that suggests that KMI was satisfied with the return
that was in place.
Proceeding Time 4:00 p.m. T23
THE CHAIRPERSON: Because they expected fair treatment.
MR. JOHNSON: Because they expected fair treatment.
They knew there was an application in front of this
Commission. Let's step -- if we step back for a
moment, and say if the circumstances of TGI and TGVI
are identical, under both a KMI purchase and a non-KMI
purchase, it's the same operating companies, it's got
the same customers, there's the same electric prices,
everything is the same, how in that world does the
fact that KMI purchased cause a different result in
this Commission's decision? The Commission hears the
same evidence, shouldn't the result be the same? They
knew an application was in front of the Commission.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1032
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Let me perhaps use an analogy that's got
nothing to do with utilities. I thought of this when
you gave notice you were going to ask this question.
I tried to get something in that had nothing to do
with utilities. Let's say that company A is going to
acquire all of the shares of company B, and company B
is a coal mining company. And the only reason I
picked a coal mining company is because I think coal
mining companies traditionally sell their coal under
long-term contracts. So, company B is a coal mining
company, and it sells all of its coal under a long --
under long-term contracts -- under a long-term
contract. Just keep it simple. And company A
announces in the summer of 2005 that it's going to
purchase all of the common shares of company B, and
it's going to purchase them at a premium over book
value. And a premium to the then-existing market
value, let's keep it nice and simple. And so company
B is selling all of its coal under a long-term
contract, and that contract expires at the end of
2005. Okay? Just like we've got here, we're going to
set a new ROE for the following year.
So that company B, the coal mining company,
all of its shares, all of its coal is sold under a
contract that expires at the end of 2005. And let's
just assume that the price per tonne of coal under
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1033
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
that long-term contract is $100 a tonne. And that was
the market price when the contract was first
negotiated some years ago, it doesn't matter when.
But in 2005, at the time of the acquisition, the
market price for coal had risen to $250 a tonne. Does
the fact that company A purchases company B at a
premium indicate that company A is satisfied with the
price of coal in the current contract? That it's
satisfied with the $100 per tonne price? Well,
clearly it doesn't. Company A, when it purchases
company B, has the right to expect, and can expect
that at the end of that contract the price will be
negotiated, and the end result will be a fair price.
And I say that's actually fairly analogous
to what we have here, that KMI purchased Terasen,
although it's an indirect acquisition of the interests
in the utilities. But it knew that the current
determination of capital structure and return on
equity was going to expire at the end of 2005, because
the Commission said it was going to set something new
for 2006, or was going to look at the question for
2006. It knew there was an application in, to deal
with those issues. And it has the right, I say, to
expect that it's going to get fair treatment and
there's going to be a fair result. There's nothing in
that purchase that indicates that it's satisfied with
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1034
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the current return on equity. No more than there is
anything in the purchase of the coal mining company
that indicates that the coal mining company was
satisfied with the $100 per tonne price.
THE CHAIRPERSON: I thought, until I heard your analogy,
Mr. Johnson, that you might distinguish yourself from
the FortisBC decision by arguing that it was a pure
play distribution acquisition. But when I hear your
analogy it suggests to me that in fact you think the
comment from the Commission Panel in the Fortis
decision that's at the bottom of page 26 is incorrect.
Proceeding Time 4:05 p.m. T24
MR. JOHNSON: I did say with regard to the other comment
in the FortisBC decision that I thought it was
incorrect. I can't say with regard to this particular
passage in the FortisBC decision that that's wholly
incorrect, that you could always assume that the
purchase price has no relevance. I say that in this
particular circumstance it doesn’t have relevance, but
I'm not prepared to say that you can -- that it wasn't
correct in the case of the FortisBC acquisition. It
may have been correct there. I'm not intimately
familiar with all the circumstances of the FortisBC
acquisition, so I'm not going to say that that's sort
of unequivocally incorrect.
THE CHAIRPERSON: Well, Company A is -- if it's open for
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1035
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
us to conclude that Company A in your analogy is --
that the acquisition of company B by company A is not
in any way an indication of company A's views of the
$100 per tonne, doesn't that in that situation suggest
that you would in fact disagree with the comment from
the Commission where the Commission, at the very least
I think, suggests that the willingness of FortisBC to
purchase the equity of Aquila B.C. is, as I say at the
very least, relevant to a conclusion with respect to
the allowed ROEs? And I think your analogy suggests,
no, you can't, you can't draw any conclusions about
company A's views of the $100 per tonne.
MR. JOHNSON: I say you can't draw any view that the
acquiring company is satisfied with the $100 a tonne,
or in this case is satisfied with the ROE that was
existing or exists under the old formula. Yes, I do
say that. You can't say it's satisfied with what was
there.
COMMISSIONER MILBOURNE: Just so I understand your
analogy, it is a little bit difficult to take the
multiples that you've got from 100 to 250 down to kind
of the 9 and a half percent to 10 percent or something
in that range. But are you saying that there was a
certainty that the price would increase, or was there
an apprehension that -- was there a probability?
Because in both cases here we're simply talking about,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1036
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
I think, a probability.
MR. JOHNSON: Yes, in my analogy I wouldn't suggest there
was a certainty.
COMMISSIONER MILBOURNE: Okay.
MR. JOHNSON: I mean, market prices could have collapsed
the next day and --
COMMISSIONER MILBOURNE: Given that it was only a
possibility or probability, one would I think -- a
reasonable person would say, "Well, yeah, they must
have been somewhat valuing that $100 a tonne stuff
because there's no certainty it's going to go any
higher." It doesn't mean satisfaction. That's not
the issue. It could be seller of the coal at $100 a
tonne takes some satisfaction that that price was
reasonable even though it might increase. If
somebody's willing to pay that for it.
Are you saying that the M&A game is just
all about future of --
MR. JOHNSON: No, I wouldn't go that far.
COMMISSIONER MILBOURNE: Okay, well, that's why I'm
trying to understand where your analogy or metaphor
fits in this context, because there was a fairly --
there is, I think, or was or continues to be a fairly
reasonable degree of likely expectation around what
ROEs and capital structures are likely to do in this
province. A fairly narrow band of expected outcomes.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1037
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. JOHNSON: Oh, I wasn't trying to infer in my analogy
that the relationship was 100 to 250 in terms of ROE.
I just picked those numbers out of the air. They
weren't meant for anything more than that.
I don't disagree with you, Commissioner
Milbourne, that a reasonable expectation would not be
that this Commission was going to aware a 25 percent
return on equity or anything like that, but I do say
that it doesn't demonstrate that the acquirer was
satisfied with what existed.
Proceeding Time 4:10 p.m. T25
COMMISSIONER MILBOURNE: I accept that. But I think
that -- and the Chair's obviously more capable than I
am of speaking for himself -- I think we're addressing
regulatory comfort with a regime, as opposed to
whether or not the purchaser is satisfied or not.
MR. JOHNSON: I'm not sure if that was a question or a
comment.
THE CHAIRPERSON: Right.
COMMISSIONER MILBOURNE: Probably both.
THE CHAIRPERSON: What I was pursuing with you, Mr.
Johnson, was whether the acquisition by KMI is at all
relevant to what's before the panel, and that's
appropriate capital structure in ROEs going forward.
And your view is, it should take no part in that
deliberation, and that was the issue that I was
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1038
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
pursuing with you.
MR. JOHNSON: Yes.
THE CHAIRPERSON: We are now at 4:10. It really is very
difficult for me to predict how long we're going to
be. I won't be surprised if we're another two hours,
and the panel is available tomorrow morning. We can
adjourn now, as one alternative, until tomorrow
morning, or we can adjourn for a fifteen-minute break
and carry on this evening.
MR. JOHNSON: While I'm on my feet, I'll address that
first, if I might. Our view is that we should press
on and continue this, and not adjourn for tomorrow
morning.
THE CHAIRPERSON: Are there any other views? Mr.
Weafer?
MR. WEAFER: I have ten girls who are going to be
sitting in a gym at five o'clock waiting for me to
come and coach, and subject to correcting that, I'm
prepared to go on. But I do have an appointment that
I'm going to have to get changed on short notice.
THE CHAIRPERSON: Okay. Anyone else wishes to speak to
this? Well, let's break for 15 minutes, and we'll
proceed this afternoon, unless Mr. Weafer has strong
objections to doing so. So we'll break for 15
minutes.
(PROCEEDINGS ADJOURNED AT 4:12 P.M.)
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1039
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
(PROCEEDINGS RESUMED AT 4:27 P.M.) T26
THE CHAIRPERSON: Unless there are any objections, I'm
going to assume that we are proceeding this afternoon.
Thank you.
That then brings us, unless I'm missing
something, that then brings us to comments from the
intervenors with respect to the exchanges that we have
just had with Mr. Johnson. Are there -- unless
there's a preference in order, I'll first hear from
Mr. Weafer, then Mr. Wallace, then Ms. MacDonald if
she has any comments.
MR. WEAFER: Thank you, Mr. Chairman. Our argument on
this point is set out in our written filing, but I
take it you'd like us to take you through that a bit,
and make sure there's an understanding of our
position.
Firstly, the evidence --
THE CHAIRPERSON: Before you move on, then. You need
not repeat your written argument, so unless there's
matters that arise from the exchange with Mr. Johnson
that you would like to add, you can assume that we've
read your written argument.
MR. WEAFER: That's fine. Then from Mr. Johnson's
comments, which I think were a reiteration of parts of
his arguments, and need to be responded to. Firstly
the Commission -- the onus in this application is on
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1040
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the applicant to make their case. Basic, fundamental
principle of this application. The application has
been severely complicated by the KMI transaction.
There's no doubt about that. The acquisition occurred
after this application has been filed, and there's a
paucity of evidence on the record from the applicant
with respect to the impact of the KMI transaction, on
what they're seeking in this application. The
evidence Mr. Johnson points to is evidence of Mr.
Bryson, who at the time he gave the evidence was not
even employed by KMI. The application for approval of
that transaction had occurred within days of his
testimony, and the deal hadn't even closed. So what
we have is speculation from Mr. Bryson with respect to
what KMI was thinking when they did the acquisition,
with reference to some public statements made by KMI.
But no substantive evidence filed by the company with
respect to the impact of that transaction on the
evidence they've filed in this proceeding.
The best evidence you have with respect to
the impact of that transaction, and what should it --
how it should impact your decision-making in this
process is given by Dr. Booth. Dr. Booth succinctly
says there's no demonstrated need to increase tariffs
since ROE, or common equity ratio, when it has been
bought at such a high market-to-book ratio. That's
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1041
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the expert evidence before the panel.
Proceeding Time 4:31 p.m. T27
Mr. Johnson's speculation on hypotheticals
and mining company A versus mining company B, or Mr.
Bryson's speculations in terms of what was driving
KMI, is not persuasive evidence.
Clearly the Chair has identified regulatory
decisions which have taken into account acquisitions,
processes which have impacted determinations by
regulatory bodies, and they've seen those acquisition
values as relevant in determining fair and reasonable
ROE and debt equity ratios.
The distinguishing point in those cases is
we're not aware of any matter before a regulatory
tribunal where an acquisition is occurring right in
the middle of the process of the transaction. We are
certainly not aware of a transaction done at 2.7 times
book value, to repeat it again, and have a company say
that shouldn't impact on your decision-making. It's
unbelievable.
If the company believed that that 2.7 times
book value was not appropriate to be considered by
this Commission, they should have led some evidence on
it. It didn't. The opportunity for the acquisitor,
KMI, to file evidence at some point in the proceeding
was available. It was not up to intervenors or others
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1042
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
to try and disprove a fact that was readily evident in
terms of the purchase price paid.
To take you back to Mr. Johnson's analogy
of the mining companies, another fundamental
difference between that analogy and what's gone on
here, and Mr. Chairman, I have to take you back to
page 11 of our argument and the Fortis decision,
paragraph 33 and paragraph 34. I want to go back to
those points.
In the mining company analogy the cost of
coal is something that is not readily forecastable.
In this situation KMI had an opportunity in its
regulatory due diligence to determine what the
Commission's decision-making patterns were, and while
you're not bound by your prior decisions, that's
understood, they are certainly persuasive and they
should be taken into account by any purchaser of
assets which involve regulated assets, which are the
dominant assets of Terasen Inc., 65 percent of the net
asset value, as I understand it.
Clearly, in doing due diligence this
information was readily available to KMI in
determining whether the debt equity ratio and the ROE
awarded by this Commission has been fair, just and
reasonable at the specific point in time they're
acquiring the company.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1043
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Paragraph 33 is helpful to you. Paragraph
34, there's been discussion around whether this is
appropriate, whether this is correct, and I just want
to reiterate what I said earlier. It is certainly
appropriate and correct to look at this test in the
context of an acquisition process going on, due
diligence on an acquisition process going on which
involves a review of whether the company has met its
ROE in the period of time leading up to the purchase.
Proceeding Time 9:14 a.m. T5
So on a standalone basis I accept the
Panel's comment as to whether this is correct, but
certainly when you've got facts, as we have here,
which is KMI looking at whether the company has met
its ROE in the prior years, and it has except for one
exception, that it's fair and reasonable to assume
that they could conclude that the existing ROE was set
at a reasonable rate. And in the face of that
information they elected to pay 2.7 times book value
for the assets.
Mr. Chairman, the Panel faces a balancing
of interests here, and the company has stated that the
acquisition is not relevant. As you're well aware,
the KMI acquisition process was a matter which
involved significant public input and concern. And I
do refer you in our argument to quotes from that
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1044
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
decision where representations were made by KMI with
respect to the impact of the acquisition. And as
you're well aware, the decision to approve that
acquisition was on a basis, on a test in the Act,
which was there will be no detriment to customers.
And if that is immediately followed by an increase in
the ROE and the debt/equity ratio of the utility
Terasen, I submit that the public interest would not
be served as there would certainly be a customer
perception, which Mr. Johnson also spoke about earlier
today, which would say that the Commission is not
acting in the public interest with respect to customer
interest.
So in conclusion, Mr. Chairman and members
of the Commission, I don't think you could have a more
pertinent significant change in circumstances, as Mr.
Milbourne talked earlier about the adjustment test.
You couldn't have a more pertinent change in
circumstances than the significant premium being paid
by Terasen in determining what is the appropriate ROE
and debt/equity ratio than this purchase price. That
position is clearly buttressed by the expert evidence
of Dr. Booth, which is really the relevant evidence to
look to in the context of the present circumstances we
find ourselves in. Clearly Dr. Booth's evidence
supports the utilization of the purchase, the fact of
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1045
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the purchase, as being a valid point for
consideration.
Those are my submissions, Mr. Chairman.
THE CHAIRPERSON: I can anticipate that Mr. Johnson is
going to refer us to his fairness argument with
respect to fair regulatory treatment, and maybe so in
the context of your argument with respect to
detriment. And it's an interesting test to apply in
these circumstances. If I understood you correctly,
you're suggesting that if immediately following the
acquisition we increase the ROE, it follows that
there's been a detriment to customers. And if that's
your submission, how do you reconcile that with the
need for us to provide that fairness that Mr. Johnson
refers to?
MR. WEAFER: Because, Mr. Chairman, the fairness test has
been applied by the investor. The investor made a
determination to pay 2.7 times book value at a
particular point in time, which clearly is indicative
of knowing what the ROE is at the time, knowing what
the debt/equity ratio is of the assets they're buying,
the company they're buying. Clearly that's
overwhelming evidence of fairness to the investor that
the Commission should approve the maintenance of those
levels within the context of months, within months of
the purchase decision being made.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1046
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
THE CHAIRPERSON: You're not suggesting that there won't
come a time for a review. You're suggesting that not
enough time yet has passed.
MR. WEAFER: I'm saying the best assessment of the risks
and the value of the company being bought is made by
the entity that purchases. That purchaser's current
estimate made in August of '05 was this is worth 2.7
times book value. It would be unreasonable to
conclude anything other than the existing deemed
debt/equity and ROE is unfair to that investor.
Proceeding Time 4:40 p.m. T29
And so, yes, the passage of time can be
relevant. If they were -- if they were absolutely in
a context where the investor can actually give
evidence as to what was on their mind when they made
the investment, which we just don't have today. We
have speculation. And that is not helpful to the
Commission.
Mr. Chairman, another way of looking at it,
in terms of Mr. Johnson's cold hard statement that the
purchase is irrelevant to setting the ROE or the
deemed debt-equity ratio, one would assume that if the
company was sold for less than book value, they'd
certainly be coming to you saying it's relevant.
THE CHAIRPERSON: Mr. Johnson suggests that the
acquisition of the assets by KMI are distinguishable
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1047
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
from the acquisition of the assets, or from the assets
that were acquired in the FortisBC decision. The
comment in the FortisBC decision that you've referred
to in paragraph 33 is one I hear you adopting as being
fully applicable in these circumstances, even though
there may be assets that are different in the two
circumstances. You don't see anything turning on
that.
MR. WEAFER: I certainly don't see the Commission
drawing a distinction that it refers to whether the
utility has been able to attract equity capital.
They're not saying an electric utility or a stand-
alone utility. And in fairness, Mr. Chairman, I do
recognize there is a basket of assets in the Terasen
acquisition. I mean, I accept that. But it is not up
to you, absent having evidence in front of you, to try
and draw the distinction as to where that should be
made. And for Mr. Johnson to simply say, "Well, it's
different," that's an argument. But there's no
evidence to show why it should be treated differently.
And there's no evidence as to how the book value
should be attributed all to pipeline, or partially to
pipeline. The rough attempt we made to show a market
valuation of the pipeline versus the utility was
simply that, because there was no other evidence on
the record to demonstrate. But even if you do that
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1048
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
assessment, you have to go a long way, attributing
value to the other assets of Terasen, to come up with
anything other than a significant premium for Terasen
Utilities. In fact, you virtually can't get there.
It's clear a significant premium was paid for Terasen
utilities in the mind of the customers, and the
applicant hasn't given you any evidence to determine
otherwise.
THE CHAIRPERSON: Thank you. Thank you, Mr. Weafer.
MR. WEAFER: Thank you.
THE CHAIRPERSON: Mr. Wallace?
Proceeding Time 4:45 p.m. T30
MR. WALLACE: Thank you, Mr. Chairman.
I don't think it will come to you as any
surprise that we think the BCUC and the AUB on this
point got it right. We cited in our argument the AUB
decision at some length at pages 25 and 26 and I won't
go back to that.
The fact is that you're looking here, or in
a utility case, putting aside the coal case, which I'm
not sure was terribly helpful at all, is return only
comes on rate base with regulated utilities. The
premium does not get a return. The effective return
therefore is much lower than the allowed return and in
this case we don't know how much lower because there
is this confusion among the assets, but I wouldn't
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1049
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
take that confusion that Mr. Johnson talks about and
take it too far.
As I recollect, and it's vague now but Mr.
Bryson basically said that he understood that the oil
pipeline assets were more attractive from something he
had read, but clearly he was not one of the wheelers
and dealers who made the decision, who did the
business evaluation, et cetera, for the purchase.
What we're looking at, though, is 2.7
times book value, and I apologize to Mr. Johnson's
sensitivities for repeating it, but that's a huge
number. The risk premiums that have been talked about
in other cases generally have been in the 1.3, 1.6,
1.9 even. 2.7 is immense. The assets that were being
purchased were roughly 60 to 65 percent, the income-
earning assets, that is, TGI, Terasen Gas, and about
30 percent TransMountain, another regulated utility on
which you can't earn a return on the premium.
Then there's another roughly 10 percent
that was some water works and other things, which I
understand from the news has been sold already. So
clearly it was off on the side. To take, as CEC tried
to take, that 2.7 times and spread it over the two
main utility assets, or over TGI and the other assets,
you still can't do anything but come to a significant
market-to-book premium on TGI.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1050
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Now, I don't say that who owns the asset
should make a difference on the return they get, so
whether it's KMI or whether it's Terasen or it's
somebody else that owns the asset, I don't think that
makes a difference in what the fair return is. That
being said, I see no case for arguing that the
purchase price is not relevant evidence that this
Commission should take into consideration.
It should take it into consideration, and
it should take it into consideration exactly in the
way that the BCUC and the AEUB have done so. It's the
right thing to do. It's been done in the past. The
utility bought knowing that these tests were out
there. Ms. McShane I think testified in both of those
proceedings, was aware of both of these decisions. I
can't believe that KMI in doing its due diligence
wouldn't be aware of it and wouldn't be aware that,
yes, people are going to look at this market-to-book
but we're going ahead, it's a good deal and we want to
do it.
So I submit strongly you should go with
those decisions of the previous boards. Thank you.
THE CHAIRPERSON: Is there anyone else who wishes to
comment? Mr. Johnson, I'm going to give you an
opportunity to reply on this one.
MR. JOHNSON: I'll be quite brief.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1051
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Mr. Weafer early in his submissions said
that the application was severely complicated by the
KMI acquisition and there was no evidence from the
applicant regarding how the acquisition would impact
the proceeding. I take issue with both of those.
I submit that the application was not
severely impacted, or impacted in any way, by the KMI
acquisition, and the applicants didn't put evidence
forth no how the acquisition would impact because we
say there should be no impact. Obviously, as Mr.
Wallace says, the identity of the owner should play no
part, and we submit that in the circumstances the
prices that the acquisition company, KMI, paid for the
shares of Terasen Inc. should play no part. So I'm
not sure what Mr. Weafer would have had us call in the
way of evidence.
Mr. Weafer talked about the evidence of Dr.
Booth. I find that somewhat surprising, really,
because if you look at the evidence of Dr. Booth and
all of his equity risk premium tests and such, he
doesn't somehow say, well in an equity risk premium
test you suddenly factor in what KMI might have
purchased. His evidence is along the lines of a
traditional equity risk premium test when it comes to
looking at return on equity, as does Ms. McShane's
evidence.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1052
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
He doesn't in some way factor that in to
how you come up with a return on equity. So his
evidence, I submit, would have been identical. He
would have done the same exercise whether or not KMI
was there.
Mr. Weafer seemed to be suggesting, and
there was exchange with you, Mr. Chairman, about the
KMI, the Commission order that approved the KMI
purchase and seemed to be saying that because there
had been a lot of public comment on that, that that
was a reason that you shouldn't grant any increases,
or shouldn't grant TGI or TGVI what they're
requesting.
Proceeding Time 4:50 p.m. T31
And you've noted the fairness argument, and I agree
that -- I confirm that I will put forward that
fairness argument that the companies TGI and TGVI
should be provided with an appropriate return
notwithstanding the purchase, and it would be quite
improper for the Commission to conclude that, "Well,
we think it would have been appropriate to increase
the return on equity but we've decided not to do so
because there was just a bunch of -- there was a
public furor over the acquisition." That would be
obviously very improper and incorrect.
Mr. Weafer seemed to be saying that somehow
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1053
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
the application changed things, or the purchase
changed the application. As I've noted before, that's
not so. The application went in before the KMI
acquisition and there was no changes in the
application whatsoever as a result of the KMI
application.
In their written argument the CEC made an
argument that the applicants were trying to recover
the premium that KMI had paid, and that's simply and
totally incorrect.
Mr. Weafer said that if the company had
been sold for less than book value, then certainly the
company would be -- or somebody would be coming
forward to ask for a change. I assume he was talking
about an increase. I'm not sure on what basis that
would be. Again at this point it's pure speculation.
Turning then to Mr. Wallace, he gave you
some percentages of assets. He didn't mention, as was
mentioned by Mr. Bryson, that there is very
significant growth potential in the business of -- the
pipeline business. And that was a factor that the AUB
did note in its explanation for why people might pay a
premium. And he said in terms of the pipeline
business it's all actively regulated. The pipeline
business that's operated, while part of it is NEB
regulated, parts of those businesses are subject to
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1054
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
various types of long-term settlement arrangements or
long-term tolling arrangements that aren't subject to
the same sort of active regulation as we have here.
I believe those are all my submissions in
reply.
Proceeding Time 4:55 p.m. T32
THE CHAIRPERSON: Thank you. That brings me, then, to
the third topic, the significance of preferred shares
in other Canadian utilities and on this one, again,
Mr. Wallace, I'd like to begin with you.
At page 23 of your decision -- pardon me,
of your submission. It's the risk we run when we run
late. The first full paragraph, second sentence.
"In our submission there is no regulatory
precedent for ruling that a reduction in
preferred shares should be compensated for
by an equal, or as in TGI's request, a
greater amount of common equity."
And then earlier in your submission, second full
paragraph on page three. So, page three, second full
paragraph, you comment on Dr. Booth's evidence. You
say:
"Dr. Booth's evidence is that TGI's
financial and business risk profile are
generally comparable to Union and Enbridge,
which have 35 percent equity ratios but have
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1055
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
less regulatory protection. Accordingly,
TGI does not require as large an equity
component as Enbridge or Union Gas in its
capital structure."
I guess my question to you is, it goes to
the relevance of prefs in Enbridge and Union Gas's
capital structure, and I see that as a different issue
than you've raised on page 23. That's, on page 23,
you speak to a replacement of common equity with
prefs, or vice versa, I suppose. But on the issue of
comparability, which is spoken to on page three, I
didn't quite understand your position. Is it
appropriate, when we're making a determination of the
appropriate capital structure for TGI, to consider the
prefs in the capital structure of Enbridge or Union
Gas, or is it your view that we shouldn't?
MR. WALLACE: Well, Mr. Chairman, this is probably a
question that would have been better for Dr. Booth
than for me, but I think what I can say is that Dr.
Booth, who was the witness, who was clearly aware of
the prefs in the capital structures of the other
utilities, maintained that a 35 percent equity ratio
was appropriate, and I'm sure if he didn't think so,
he would have said so. And I would supplement that by
what is at paragraph 23. The two items there -- one,
that the redemption of the preferred shares did not
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1056
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
lead to a deterioration in the Terasen DBRS rating,
and second, in a parallel case, that TCPL Mainline,
when it redeemed or replaced its preferred shares with
junior subordinated debt, which was clearly classified
as debt, it did not increase the equity ratio, or the
NEB did not for that reason. It did subsequently
increase it for the TCPL Mainline, but it made it very
clear that the reason was increasing the equity ratio
was due to increased competition and related business
risk, and that was confirmed by Ms. McShane.
So we have Dr. Booth clearly supporting the
35 percent, clearly aware of the pref situation, and
we do have a -- I think -- very relevant parallel in
TCPL.
THE CHAIRPERSON: Thank you. And if we go to the TGI,
and this is with Mr. Johnson, page 22, so the initial
submission of TGI, page 22, paragraph 72, we have the
evidence of Ms. McShane being quoted. And in that
context, Ms. McShane is asking us, I think, to
consider the pressures of other Canadian utilities
and, you know, Mr. Wallace may be correct in that
these are questions that ought to have been put to Dr.
Booth and Ms. McShane, and perhaps not very much comes
of it at this stage in the proceeding, unless, Mr.
Johnson, you want to add to those comments. I think
it's Ms. McShane's position that in fact one needs to
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1057
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
consider the prefs when making comparisons of TGI to
other Canadian utilities. But if I'm wrong, this is
your opportunity to correct me.
Proceeding Time 5:00 p.m. T33
MR. JOHNSON: If I might just have a few words here, Mr.
Chairman, yes, I think what you've said is correct,
that Ms. McShane does say that that's something that
should be compared. But going back to referring to
page 23 of JIESC's argument, the tenor of that
argument is that the companies, or TGI, was seeking to
exchange the prefs, or the absence of the prefs, for
common. And that's not the position that the
companies were putting forward. The companies were
certainly saying that the absence of the preferred
shares in its capital structure, or the existence of
preferred shares in the capital structures of others
such as Union or Enbridge that you mentioned, those
are factors to be taken into account and to be
considered when comparing these utilities. But the
company wasn't saying you just remove 3 percent of
prefs and automatically substitute 3 percent of
common. They were saying there's a number of factors
that have to be considered, and the existence or lack
of existence of preferred shares is one of those
factors that gets taken into account.
THE CHAIRPERSON: Right, yes. Thank you.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1058
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
COMMISSIONER MILBOURNE: Mr. Chairman, maybe just to that
latter point, you kind of touch on this issue at page
82 and 83 of -- paragraphs 82 and 83.
MR. JOHNSON: Is that the initial submissions or the --
COMMISSIONER MILBOURNE: No, your reply submissions.
MR. JOHNSON: If I might just find that. Paragraphs 82
and 83?
COMMISSIONER MILBOURNE: Yes, I think I've got the right
records.
MR. JOHNSON: Yes.
COMMISSIONER MILBOURNE: And could you kind of explain
those two paragraphs and how they live together to me,
please?
MR. JOHNSON: Yes, there does appear to be some confusion
about this subject.
COMMISSIONER MILBOURNE: Thank you.
MR. JOHNSON: There's perhaps a couple of things going on
at once but let me try to explain.
In 1994 when the Commission last looked at
the capital structure of Terasen Gas Inc. for
determination of the appropriate debt/equity ratio,
Terasen Gas Inc. had preferred shares in its capital
structure which was approximately 8 or 9 percent
preferred shares. So there was -- at that point when
the Commission was looking at the capital structure,
it decided that 33 percent equity continued to be
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1059
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
appropriate. And that was 33 percent common equity,
excuse me. 33 percent common equity. And the utility
then had -- let's call it 8 percent of preferred
shares and also had -- and then the balance would
debt, mostly long-term debt with some short-term debt.
So subsequently, in -- I can't recall the
exact year but sometime later, say '98-'99, somewhere
in that period -- '99-2000 period -- the preferred
shares that were in the capital structure of Terasen
Gas came up to maturity and they were redeemed, and
they were -- the common equity component wasn't
increased. It remained at 33 percent. So that those
preferred shares were effectively replaced with debt,
and that's sort of -- that's the factual background of
what happened in the capital structure. So that's one
thing that's going on. Those are just the facts.
Proceeding Time 5:05 p.m. T34
The other thing that's going on, though, is
that the capital markets' view of preferred shares has
changed. That in 1994, when the Commission was last
looking at the capital structure, preferred shares
were regarded by analysts and credit rating agencies
as having value to protect the bond-holders. They
were regarded as having some value, from a bond
credit-rating perspective. And then over time, that
view has changed, and Mr. Bryson discussed this on the
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1060
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
witness stand, how the views of the analysts have
changed.
And I may get this a bit wrong, but in
essence what happened is if the preferred shares could
be called on for cash -- in other words, the preferred
shareholder at the point of time of redemption had a
right to get cash, then the analysts started saying,
"Well, that's not really any protection for the bond-
holders, because those preferred shares can grab some
of the cash." So they were regarded as not really
having any value. And then I believe it went to,
well, if they could be exchanged for other -- is it
common shares? -- if they could be exchanged for
common shares, the bond-holders, or the credit
analysts started saying, "Well, that doesn't have as
much value as it used to."
And what Mr. Bryson was saying is that,
right now, the only -- from a credit analysis bond-
holder type perspective -- the only type of preferred
shares that are regarded as really providing value to
the bond-holders are perpetual preferred shares, where
the holder of the shares doesn't have any right of
redemption or exchange. But perpetual preferred
shares require a very good credit rating to be able to
issue them. The common issue is -- common issuers of
perpetual preferred shares are the banks, they issue
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1061
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
perpetual preferred shares on a regular basis, and
they also have some recent accounts in their capital
structure for some special way for their regulatory
purposes that causes them to like to issue preferred
shares, but that's another story.
So, over time, the value of preferred
shares has decreased, and what these paragraphs were
addressing, to some extent at least, was that Dr.
Booth seemed to be saying, in his written evidence,
"Well, what you should really do here, if you need
more equity, is go out and issue some preferred
shares." And the answer to that is, "Well, issuing
redeemable, retractable-type preferred shares doesn't
really do much, if anything, from a credit rating
analysis, and the company isn't in a position to issue
perpetual shares, preferred shares." And that's what
I was trying to summarize here.
COMMISSIONER MILBOURNE: Okay, just so I've kind of got
it straight in my mind. At the time you redeemed or
cancelled your preferred shares, was that in the
regime where the analyst community and the accounting
rules had changed?
MR. JOHNSON: That's my understanding, yes.
COMMISSIONER MILBOURNE: At the time, they were debt.
MR. JOHNSON: They were regarded basically as debt, yes.
COMMISSIONER MILBOURNE: Right. So -- okay. There was
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1062
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
no change in -- at the time, as a result of the
cancellation of the prefs.
MR. JOHNSON: At that time, correct.
COMMISSIONER MILBOURNE: Thank you.
MR. JOHNSON: But they were regarded as equity back in
'94.
COMMISSIONER MILBOURNE: Right. But not at the time
they went away.
MR. JOHNSON: Yes.
COMMISSIONER MILBOURNE: And secondly, the same argument
would apply to the preferred shares if issued by
comparable Canadian utilities. They would be debt.
MR. JOHNSON: If they were -- if they were not
perpetuals.
COMMISSIONER MILBOURNE: Enbridge and Union's, if
they're not perpetuals, they're debt.
MR. JOHNSON: I'm not sure what they are. I'm advised
that they are perpetual preferred shares.
COMMISSIONER MILBOURNE: They are perpetual preferred
shares?
MR. JOHNSON: They are, yes.
COMMISSIONER MILBOURNE: Okay.
MR. JOHNSON: They may have some old perpetuals, that
have been around for a long time.
COMMISSIONER MILBOURNE: Okay, thank you.
MR. JOHNSON: Okay.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1063
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
Proceeding Time 5:10 p.m. T35
THE CHAIRPERSON: That begs the question as to ATCO Gas's
prefs.
MR. JOHNSON: I'm advised as well that ATCO does have
perpetuals.
THE CHAIRPERSON: Turning to page 55 of the AUB decision.
MR. JOHNSON: I have it.
THE CHAIRPERSON: The first sentence:
"In earlier sections the Board noted that
the 2004 approved common equity ratios in
this decision for the equity utilities were
not adjusted to reflect any impact of ATCO's
use of preferred shares."
I don't know if you can help me, Mr. Johnson, in
interpreting that. Does that suggest that when the
Board made a determination with respect to ATCO's
common equity that they did not consider the fact that
ATCO had prefs?
MR. JOHNSON: Perhaps you could repeat the question, Mr.
Chairman.
THE CHAIRPERSON: Well, I think I've drawn your attention
to a sentence that I'm having some difficulty
interpreting.
MR. JOHNSON: Yes.
THE CHAIRPERSON: My question really is can you help me
interpret that. What does that mean?
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1064
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. JOHNSON: Well, if you go down two paragraphs, and
I'm not sure if this sheds any light on it, the Board
does there say that:
"The Board considers there may be merit in
further consideration of the appropriateness
of the continuing use of preferred shares as
a form of financing, to understanding the
redemption options and to fully explore the
related implications and options."
So, when I looked at this some time ago my conclusion
was that that was still sort of an open issue in front
of the AUB as to whether or not it would be
appropriate for ATCO to keep those preferred shares in
its capital structure. Most preferred shares, in my
understanding, at least, even if they're perpetual,
there's a right on the company to redeem them even if
the holder doesn't have a right to redeem. But I have
to say I don't know the details of ATCO's, those
particular preferred shares that are in the capital
structure of ATCO.
THE CHAIRPERSON: Right. Your interpretation of that
third paragraph suggests that one could interpret, one
could reasonably interpret that first sentence of that
section to mean that they made a decision about ATCO's
common equity without consideration of the prefs and
that they were going to do that afterwards?
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1065
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. JOHNSON: As I said earlier, it appeared to me that
they left the issue of the prefs as an open issue that
they were going to consider later.
THE CHAIRPERSON: Yes, okay. I'm going to, given the
nature of the discussion that we've just had, I'm
going to give the intervenors an opportunity to
comment now if they wish to.
MR. WALLACE: Mr. Chairman, my concern is that a bit of
the material that's come before you now is more in the
nature of evidence than argument. I would like to
have an opportunity to raise it with Dr. Booth and if
necessary respond to it in writing, within a couple of
days.
THE CHAIRPERSON: Right, and that's in fact why I asked.
I think, I want to make sure that this fair. What we
have just been told may very well not be in the
evidence. It may be in the evidence. If we go
through the writing reports in detail we might very
well find it. If there are no objections from Mr.
Johnson, that may be a reasonable alternative here.
MR. JOHNSON: I don't object to that at all. I think
what Mr. Wallace is requesting is quite fair.
THE CHAIRPERSON: Right. So Mr. Wallace will have an
opportunity to make comments on the exchange that Mr.
Johnson and I just had sometime before the end of the
day on Monday.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1066
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. WALLACE: Thank you.
THE CHAIRPERSON: That then brings us to the last item,
and that's interest coverage ratios. At least it's
the last item on my topic list. It's my impression
that this issue did not get very much attention during
the proceeding or in argument and my purpose in
raising it is in anticipation of the panel making some
comments with respect to interest coverage ratios in
our decision.
Proceeding Time 5:15 p.m. T36
So the nature of my comment really is to
confirm an understanding of the evidence as opposed to
submissions on that evidence, although I may provide
that opportunity as well. And I do so somewhat
hesitantly because I want to make sure that I'm fair
to everyone in doing this. And so what I propose to
do is to make some comments on what I think is in the
evidence, and then first give particularly the
intervenors an opportunity to raise any concerns they
may have about me putting questions to TGI about my
comments. And if they don't have any concerns about
that, I think my question to TGI is going to be a
simple one: Can you confirm whether or not I'm
correct?
So I'll begin with Ms. McShane's Schedule
2, tab 2, and a DBRS report that Mr. Fulton can make
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1067
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
available to you now. And it is in the evidence but a
copy has been made to make it somewhat easier for you,
and for the record it's dated June the 22nd, 2005. And
it is in Exhibit B-3B, Appendix 58.5. So I'd like you
to have two documents: Ms. McShane's Schedule 2, and
this DBRS report.
Now, if you turn to page 6 of the DBRS
report, you will see coverage ratios and there are
EBIT interest coverage ratios there. And I believe
that this is Ms. McShane's source of coverage ratios
for the purposes of Schedule 2, with two further
coverages for 2004 and 2005. Ms. McShane's schedule
doesn't include 2004 and 2005.
Then if I turn to a submission dated
November the 30th, 2005 from Terasen, it's an
application that's been approved by Order G-137-05,
and Mr. Fulton can make this available to you as well,
on page 3 of that. So I'll give Mr. Fulton a moment
to make it available to you.
Proceeding Time 5:20 p.m. T37
We have interest coverage ratios for 2004
and 2005. They are different than the interest
coverage ratios from the DBRS report, and if I now go
to the transcript, and Mr. Fulton can make this
available to you as well, in volume 2, page 149 and
150 -- I'm not going to read these into the record,
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1068
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
they're already in the record, but I will give you an
opportunity to read pages 149 and 150.
It's my impression that what Mr. Bryson is
explaining is in fact the difference between the
numbers, the 2004 and 2005, from the November the 30th
filing, and the numbers in the DBRS report.
And I want now to turn to the issue of the
target for interest coverage ratios, and begin this
with a reference to the AUB decision, page 50. If I
need to slow down, I will. If I turn onto page 50 of
the AUB decision, which is Exhibit A3-1, about two-
thirds of the way down on that page, there is a
paragraph which is as follows:
"Based on this evidence, the Board concludes
that an acceptable pre-tax interest coverage
ratio for taxable electricity, electric
distribution company is at or above 2.2
times."
That may provide a source with respect to the target,
and the annual report of TI, the 2004 annual report,
also indicates on page 42:
"Interest coverage is targeted to be at or
above 2."
That's the end, you'll be happy to hear, that's the
end of my review of the evidence with respect to
interest coverage ratios, and as I said, before asking
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1069
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
any questions, I would -- should I finish my sentence,
Mr. Fulton?
MR. FULTON: Yes. Yes.
THE CHAIRPERSON: Before asking any questions, I'm going
to take objections to me now asking in this very late
time in the proceeding to get confirmation that I'm
not making any mistakes in my review of the evidence.
And so really, all I'm after is for that -- if there
are mistakes, then it's a different question, it
becomes more complicated, but I'm assuming that I have
not made any mistakes, and out of an abundance of
caution I'd like to just confirm, because this issue
has not been canvassed in a lot of detail in the
proceeding.
Now I'll hear from you, Mr. Fulton, and
then Mr. Johnson.
Proceeding Time 5:25 p.m. T1A
MR. FULTON: Mr. Chairman, I only raised to my feet
because you had not asked me yet to circulate the
pages 41 and 42 from the Terasen Inc. annual report,
and I am prepared to do that at this point if you'd
like.
THE CHAIRPERSON: Thank you. Please. I think actually I
should hear from the intervenors first. Are there any
objections to my questions?
MR. WALLACE: Mr. Chairman, I'm not sure it's an
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1070
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
objection to your questions because clearly we don't
want mistakes on the record. My concern is that I'm
not quite sure where it's going because it, as you
say, has not been a big issue in this hearing. A
suggestion that they were in violation of their
debenture requirements would be a matter of serious
concern and may, even if you were correct, lead to us
wanting to have an opportunity to look at the record,
because that has not been raised and obviously it goes
to a very fundamental point. If it's simpler than
that then maybe that concern doesn't arise. But I
don't want to, by not objecting to your question,
preclude myself from saying, "Okay, but we need a
further process in any event."
THE CHAIRPERSON: Right, and I guess I can add this.
It's my impression that there has been no violation.
It's really simply confirming that some assumptions
I've made in fact are safe assumptions to make from
the evidence, so it doesn't go to the issue of there
being a violation. In fact the numbers from the
November the 30th filing I think confirm that it's
above the trust deed numbers.
MR. WALLACE: Thank you.
THE CHAIRPERSON: Yes. Any other objections? Mr. --
MR. JOHNSON: I think I'd better speak up, Mr. Chairman.
THE CHAIRPERSON: Sure.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1071
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. JOHNSON: My instructions are that your understanding
of how these fit together is not correct.
THE CHAIRPERSON: No.
MR. JOHNSON: That what Mr. Bryson was discussing in the
transcript reference that has been distributed isn't
an explanation for these different numbers, doesn't
reconcile these different numbers. But I would
basically have to relay from Mr. Bryson how these
things fit together.
THE CHAIRPERSON: Okay, well, that does complicate
matters. We may, through further analysis of the
numbers, reach the correct conclusions in our
decision. I must admit that my turning to this issue
has just been in the last few days and I haven't spent
very much time studying it, so I might very well reach
the correct conclusions independently of assistance.
And that may be the preferred approach.
So I think I'm in your hands again, Mr.
Wallace, as to --
MR. WALLACE: Mr. Chairman, I don't think any of us like
to take a chance that you might reach the right
conclusions on a thing like this, on the separation of
the numbers. So I don't think we would have an
objection to Terasen filing a letter explaining --
reconciling the numbers, provided we get an
opportunity to respond to that letter.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1072
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
THE CHAIRPERSON: Is that satisfactory, Mr. Johnson?
MR. JOHNSON: Yes.
Proceeding Time 5:30 p.m. T2A
THE CHAIRPERSON: Okay. So let's do that, then. Can
you do that by the end of the week?
MR. JOHNSON: Yes.
THE CHAIRPERSON: And then by the end of the day
Tuesday, Mr. Wallace? I'd keep -- more time is
available to you.
MR. WALLACE: I would probably need a couple of more
days. I'm going to be flying to Inuvik on
Monday/Tuesday, and so I'll have to be in touch with
Dr. Booth, sort of when it fits in. So if it could
be, say, Thursday, then I think that would fit in.
THE CHAIRPERSON: Well, let's make it Friday.
MR. FULTON: I was going to suggest we could get that to
Mr. Wallace by Friday morning, which --
MR. WALLACE: That, not knowing Dr. Booth's schedule,
may help. If we could have till Thursday, we will
respond as quickly as possible. I would love to have
it out of the way before I leave for Inuvik.
THE CHAIRPERSON: Okay. Thank you, Mr. Wallace. We
will do that, and by the end of the day on Thursday.
COMMISSIONER PULLMAN: Mr. Wallace, if I can take up one
issue with you. At page three of the JIESC
submission, going back to page three again, you have
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1073
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
it in front of you. I'm at the bottom of the page,
the last paragraph, last two sentences.
"When the allowed returns equal the
investor's required return, the market-to-
book ratio will be equal to one, and a
market/book ratio in excess of one will
maintain the financial integrity of the
utility."
I will be interested in your views as to how this
Commission or panel should view the market-to-book
ratios of utility holdings in companies in Canada, and
the implication, I think, that has run through this
hearing, that a ratio in excess of one demonstrates
generosity by the regulator.
MR. WALLACE: No, I think what we have said, and what
Dr. Booth says, is that a market-to-book of one does
signify that you have reached the allowed returns
equal the investor's required return. He then
recommended a 50 basis point cushion in order to
ensure that the financial integrity is maintained.
And Ms. McShane in her evidence also adds a 50 basis
point cushion, and very explicitly for -- and I don't
remember the exact number, but in order to ensure a
market-to-book ratio of 1.1 or 1.15 or something like
that.
So, no. We urge you to allow an adequate
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1074
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
cushion to at least maintain a market-to-book of one.
When you get substantially over that, then we say that
the return is becoming higher than is necessary to
attract capital on reasonable terms.
COMMISSIONER PULLMAN: My problem is that I think,
listening to you, if we would have given Terasen a
return of 3 percent, then Kinder Morgan would have
paid one times book for the assets it bought. I mean,
you --
MR. WALLACE: I'd be surprised. I mean, if it -- you
know, I suspect it would have made a huge difference
to the premium they would have been prepared to pay,
if you were giving -- allowing a return of 3 percent
on 65 percent of the earning capacity.
COMMISSIONER PULLMAN: Well, they paid 30 times --
approximately 30 times book, I'm guessing.
MR. WALLACE: 2.7 times book.
COMMISSIONER PULLMAN: Sorry, 2.7 times. That's 30
times earnings --
MR. WALLACE: Yes.
COMMISSIONER PULLMAN: -- if you do the math. Allowing
-- assuming a rate of return on equity of nine percent
that gives you thirty times earnings which -- if you
do the math backwards. What I think I hear you and
Dr. Booth telling us is that we could have gone with a
return of 3 percent on Terasen.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1075
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
MR. WALLACE: No, Dr. Booth has said that market-to-
book, and again I'm sorry, I don't have the exact
number, but of -- I think it would be 7.25 percent
before he added his 50 basis points would likely yield
a market-to-book ratio of 1. And then he puts in the
fifty basis point change.
COMMISSIONER PULLMAN: Four percent would have done it.
Four percent return on equity --
MR. WALLACE: Well, that -- that's not --
COMMISSIONER PULLMAN: -- would have been enough for
Terasen to have been bought out at one times book.
MR. WALLACE: That is not his evidence.
COMMISSIONER PULLMAN: Okay. I'm just -- my problem is
that, as you probably gather, this Commission has
absolutely no say on how the market -- how the market
values utility stocks.
MR. WALLACE: No, of course it doesn't. And you could
give a 12 percent return, and if they thought there
was a huge risk coming, the market to book might be
.5.
COMMISSIONER PULLMAN: It hasn't been that low since
people were building nukes, but --
MR. WALLACE: No. Because Commissions have done a
pretty job of making sure that the financial integrity
of utilities is maintained, so that they can raise
capital in virtually all markets, and we have not
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1076
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
disputed that that's a good thing to do.
COMMISSIONER PULLMAN: Thank you.
Proceeding Time 5:35 p.m. T3A
COMMISSIONER MILBOURNE: I had one area of interest. It
was in Dr. Booth's submissions with respect to his
discourse under comparable earnings and it was at page
71 of his evidence. It was this discussion about
using preferred shares with an annual reset as a
surrogate for comparable earnings. I kind of went
through the various submissions and replies. I didn't
find anybody kind of picked that up and commented on
it. I'm wondering if either the applicants or any of
the intervenors would wish to comment on that subject.
MR. WALLACE: I suppose it's incumbent on me to say
something and I think really all I can say is I can't
add anything to what Dr. Booth has said. It is his
evidence and we support that evidence.
COMMISSIONER MILBOURNE: Thank you.
MR. JOHNSON: I won't be much longer than Mr. Wallace,
but this view of Dr. Booth's, which I think is
probably unique to him, I haven't seen this sort of
evidence before, disregards all of the other factors
that can affect the earnings of utilities. To suggest
that the investors are almost guaranteed a preferred
type of return and certainly over the longer term
that, in my submission, isn't a correct analysis.
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1077
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
COMMISSIONER MILBOURNE: I'm sorry, could you repeat the
last part of what you're saying?
MR. JOHNSON: In my submission that is not a correct
analysis.
COMMISSIONER MILBOURNE: Which is?
MR. JOHNSON: That what the automatic adjustment
mechanism is doing, which is what he's talking about
here, is turning the return on a common share into
something similar to a preferred share.
COMMISSIONER MILBOURNE: Could you explain to me why that
isn't a reasonable kind of surrogate or model?
MR. JOHNSON: Because it's ignoring all of the other
factors that may affect the earnings on common shares.
I mean, in a normal capital structure, if you have
preferred shares, you have common shares, preferred
shares and debt. The debt are protected by -- in
effect the return on the debt is protected by, if you
have perpetual preferreds in there, it's protected by
the preferreds and the common. The preferred shares
are protected by all of the common because they
usually have a call on dividends before the common
receives anything. And he's suggesting here there
you're really turning all that common, which is the
base, into preferred, which is further up in the
capital structure.
COMMISSIONER MILBOURNE: I may have misunderstood. It
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1078
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
wouldn't be the first time. But I took it that what
he was advancing was kind of a model independent of
these other approaches to comparable earnings, just
saying this is how you could achieve an estimate of
comparable earnings by viewing the return on the
common shares of a utility, which is subject to an
automatic reset mechanism and certain regulatory
protections, viewing that as if it were a preferred
share with kind of an annual reset, which puts it into
the range of somewhere between perpetuals and five
years and you can go look in the papers and see what
kind of returns you get on those, do the tax
calculation and come up with a surrogate approach to
comparable earnings.
Maybe rightly or wrongly, that's what I
understood this to say. That was what I was asking
for comment on.
Proceeding Time 5:40 p.m. T4A
MR. JOHNSON: Okay, I didn't understand it to say that.
I do know that in the past, and I think this was even
mentioned in passing in this proceeding, that Dr.
Booth -- and this goes back some time ago -- did have
a separate approach to return on equity that made use
of preferreds, but that was not what he was advancing
in his evidence and that's not by my understanding
what he's talking about here. I sort of read this as
TGVI-TGI Hearing January 17, 2006 Volume 7 Page: 1079
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Allwest Reporting Ltd., Vancouver, B.C.
an observation and nothing more, that he was putting
forward this idea that somehow the automatic
adjustment mechanism made common shares really similar
to preferred shares, and I'm saying I take issue with
that view and suggest it's not correct.
COMMISSIONER MILBOURNE: Thank you.
THE CHAIRPERSON: That then brings us to the end of the
oral phase of argument but for two outstanding items;
that is, by the end of the day on Monday to hear from
Mr. Wallace with respect to the exchange that I had
with Mr. Johnson regarding the press, and secondly, to
receive a submission from TGI by Friday morning with
respect to the interest coverage ratios with comments
from Mr. Wallace no later than the end of the day next
Thursday.
Thank you for your assistance this
afternoon, and that closes the oral phase of argument.
(PROCEEDINGS ADJOURNED AT 5:42 P.M.)