With reference to Dr. Carpenter s discussion of Gaz Metro s business risk on page 14.

Transcription

1 RÉPONSE DE GAZ MÉTRO À UNE DEMANDE DE RENSEIGNEMENTS Origine : Demande de renseignements n o en date du juin 0 Demandeur : Association des consommateurs industriels de gaz Référence : Dr. Paul Carpenter s Evidence Préambule : With reference to Dr. Carpenter s discussion of Gaz Metro s business risk on page. Questions :.. a) Is it Dr. Carpenters view that PBR increases or decreases Gaz Métro s risk? b) Please indicate whether Gaz Metro has failed to earn its allowed ROE at any time while operating under PBR and by how much. c) Dr. Chrétien reduces Gaz Metros risk premium due to the ability of Gaz Metro to earn an above average ROE due to PBR. This implies that PBR reduces Gas Metros risk does Dr. Carpenter agree with this assessment and can he provide extracts from any recent Canadian testimony where he has discussed the impact of PBR on a regulated utility s business risk. Réponses :..a) See Dr. Carpenter s testimony at page, line to page, line...b) See response to Gaz Métro-, document..a)...c) As described in the testimony cited in response to a), Dr. Carpenter s view is that Gaz Métro s Performance Incentive Mechanism can be expected to increase its business risk relative to the traditional models of cost of service regulation employed for other utilities in North America but that recent changes to the Mechanism would directionally lower its risk. Dr. Carpenter understands Prof. Chrétien s testimony to be recommending a reduction of 0 basis points in Gaz Métro s positioning on the basis of Gaz Métro s view that its PBR mechanism gives it the opportunity to increase its authorized base rate of return. Dr. Carpenter would not recommend such a reduction in Gaz Métro s positioning on the basis of business risk. Original : 0.0. Gaz Métro, Document. Révisé : Page de

2 WRITTEN EVIDENCE OF FOR ENBRIDGE GAS DISTRIBUTION INC. The Brattle Group Brattle Street Cambridge, Massachusetts August 0 Original : Gaz Métro -, Document. Page de

3 0 coordination between the needs of the electricity market and the requirements it places on gas infrastructure, there is risk nonetheless. Board Staff puts it this way in its report: A central planning function exists in the electricity market primarily through the IESO and OPA, while no provincial agency exists in the natural gas market. Board staff are not advocating a central planning function in the gas market, but information exchanges could be valuable to stakeholders. This Review is the first step in understanding the implications of new gas-fired power generators for the province s natural gas infrastructure. However, Board staff realize that there is great uncertainty with respect to future infrastructure requirements, and periodic updates might be required. The Staff s report points out that many stakeholders raised concerns regarding the risks associated with underutilized capacity from overbuilding and/or stranded assets. Board Staff indicated that these issues would be dealt with on a case-by-case basis. Q. What do you conclude about the uncertainty of gas-fired power generation demand for the Company s business risk? A. While growth in the demand for gas to supply power generation in Ontario is an opportunity for the Company, it is one that creates uncertainty as to the amount, timing, investment requirements, and cost recovery. Moreover, it is an opportunity for the Company that may face substantial competition, as reflected in the bypass application of GEC and the Board s regulatory policy to use that competition to pick the winners. As the Board Staff stated in its report cited above, there is no central planning function for gas infrastructure in Ontario. This set of business risks did not exist at this level of scale or uncertainty in. D. HEIGHTENED REGULATORY UNCERTAINTY ASSOCIATED WITH THE COMPANY S DISTRIBUTION BUSINESS Ibid., pages -, emphasis added. Ibid., page. Original : Gaz Métro -, Document. Page de

4 0 Q. You described changes in the Company s market risk due to dramatic changes in commodity prices. Are there any indications that this market risk may well increase in the future in ways that would be of concern to investors in the Company s equity? A. Yes. There is substantial uncertainty associated with the future regulation of the Company s gas distribution business, as recognized by the Board in its Natural Gas Forum process. This uncertainty enhances the market risk that the Company faces. Q. What is the nature of this future uncertainty? A. As part of its Natural Gas Forum process, the Board determined that it will begin a process to establish a firm gas rate regulation framework. The Board has articulated its goals for a rate regulation framework as follows: The Board believes that a multi-year incentive regulation (IR) plan can be developed that will meet its criteria for an effective ratemaking framework: sustainable gains in efficiency, appropriate quality of service and an attractive investment environment. A properly designed plan will ensure downward pressure on rates by encouraging new levels of efficiency in Ontario s gas utilities to the benefit of customers and shareholders. By implementing a multi-year IR framework, the Board also intends to provide the regulatory stability needed for investment in Ontario. The Board will establish the key parameters that will underpin the IR framework to ensure that its criteria are met and that all stakeholders have the same expectations of the plan. The Board envisions a series of generic and utility specific proceedings that together will establish a firm framework for gas rate regulation. The Board described this series of proceedings as follows: Annual Adjustment Mechanism The Board will hold a generic hearing to determine the appropriate base for setting the annual adjustment mechanism. The Board expects that once the generic methodology is determined, its application to each utility may result in different specific adjustments. Rebasing Each IR plan must begin with a robust set of cost-based rates, based on a thorough and transparent review. The Board s view is that a thorough cost-of-service Natural Gas Regulation in Ontario: A Renewed Policy Framework, Report on the Ontario Energy Board Natural Gas Forum, page. Ibid., pages -. Original : Gaz Métro -, Document. Page de

5 0 rebasing must occur at the end of each IR s plan s term before a new plan is put in place. Rebasing is an important consumer protection feature. Through robust rebasing, efficiency improvements will be revealed and their benefits passed on to customers through base rates for the next period. The Board will determine the base rates through a hearing for each utility. The Term of the Plan - The Board expects that the term of IR plans will be between three and five years. The Board s view is that three years represents the minimum term that may be expected to give rise to productivity increases, and its preference is for a term of five years. The Board is reluctant to approve a term greater than five years at this time, give the importance of ensuring that productivity gains are passed on to customers in subsequent periods. The term of the plan will be determined in the generic hearing on the annual adjustment mechanism. Service Quality Monitoring The Board will develop the service quality framework, and will undertake a consultation to finalize the measures, standards and reporting mechanism. The Board expects to use its rule making tools to implement this framework. Financial Reporting The Board will consult with stakeholders and modify the Gas Reporting and Record Keeping Requirements (RRRs) as necessary to meet the requirements for financial reporting in the new ratemaking framework. While the Board intends to conduct this consultation and modify the RRRs before the development of the first IR plan, it expects that the RRRs may be further refined in the context of specific IR plan development. Data Filing Guidelines The Board will undertake a review of the gas utility data filing guidelines for rate hearing processes, and then develop a set of draft filing guidelines, which it will distribute for consultation. Wherever possible, the Board will seek to develop consistent guidelines for Union and Enbridge, and will consider issues such as electronic filings. The Role of Alternative Dispute Resolution The Board is mindful of the concerns stakeholders have expressed and the efforts they have made to propose improvements to the ADR process. The Board will not decide at this time the precise structure of Original : Gaz Métro -, Document. Page de

6 the ADR process. The Board has already undertaken a review of the ADR process, and it will consider the submissions made through the Natural Gas Forum before releasing its conclusions in the ADR review. The Board expects that the ADR process will evolve further in the process leading up to the first IR applications. The resolution of all of these issues by the Board will determine the extent to which the future market risk faced by the Company and its shareholders will increase over and above current market risk. Current uncertainty regarding the ultimate resolution of these issues exposes the Company and its shareholders to an additional regulatory risk. Q. What do you conclude with respect to the Company s business risk as it relates to its equity thickness and cost of capital? A. Since the last time the Board examined the Company s business risk as it relates to its deemed equity thickness there have been significant changes in the market in which the Company operates. The Company s business risk today is higher than it was in due to fundamental changes and increased uncertainty in gas and oil commodity markets and the potential for bypass of its distribution facilities. Substantial uncertainty as to the effect of the Ontario Government s new gas-fired electricity generation initiatives on required natural gas infrastructure in the province may place potentially new and large financing requirements on the Company with uncertain outcomes. Finally, investors in the Company s equity will also recognize that there is significant uncertainty as to the regulatory model that will apply to the Company in the future, as reflected in the issues before the Board in its Natural Gas Forum process. For all of these reasons I conclude that an increase in the Company s equity thickness is warranted. Q. Does this complete your written evidence? A. Yes, it does. Original : Gaz Métro -, Document. Page de