William E Ireland, QC D Barry Kirkham, QC+ Robin C Macfarlane+ J David Dunn+ Douglas R Johnson+ William G Farish James D Burns+ Alan A Frydenlund+ * Allison R Kuchta+ Daniel W Burnett+ Harvey S Delaney+ James L Carpick+

Christopher P Weafer+ Paul J Brown+ Patrick J Haberl+ Michael P Vaughan Gregory J Tucker+ Heather E Maconachie Harley J Harris+ Cheryl M Teron Gary M Yaffe Susan E Reedy Jonathan L Williams Leon Beukman Jean L McPherson Michael F Robson James H McBeath Kate J Fischer Sherri A Robinson Paul A Brackstone

R Rees Brock, QC, Associate Counsel + Law Corporation Carl J Pines, Associate Counsel+ * Also of the Yukon Bar R Keith Thompson, Associate Counsel+

Susan E Lloyd, Associate Counsel

Hon Walter S Owen, OC, QC, LLD (1981) John I Bird, QC (2005)

PO Box 49130 Three Bentall Centre 2900-595 Burrard Street Vancouver, BC Canada V7X 1J5

AFFILIATED WITH AIRD & BERLIS L LP TORONTO

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Telephone 604 688-0401 Fax 604 688-2827 Website www.owenbird.com December 19, 2005

VIA ELECTRONIC MAIL

British Columbia Utilities Commission 6th Floor, 800 Howe Street Vancouver, B.C. V6Z 2N3 Attention: Robert J. Pellatt, Commission Secretary

Dear Sirs/Mesdames:

Re: Terasen Gas Inc. and Terasen Gas (Vancouver Island) Inc. - Application to Determine the Appropriate Return on Equity and Capital Structure and to Review and Revise the Automatic Adjustment Mechanism ~ Project No. 3698394

We are counsel to the Commercial Energy Consumers of British Columbia (the “CEC”). Attached please find the submission of the CEC pertaining to the above-noted matter.

A copy of this letter and attached submission has also been forwarded to the intervenors by e-mail.

If you have any questions regarding the foregoing, please do not hesitate to contact the writer.

Yours truly,

OWEN BIRD LAW CORPORATION Christopher P. Weafer

Christopher P. Weafer CPW/jlb Enclosure

cc: CEC cc: Registered Intervenors

Direct Line: 604 691-7557 Direct Fax: 604 632-4482 E-mail: cweafer@owenbird.com Our File: 23841/11

IN THE MATTER OF AN APPLICATION BY

TERASEN GAS INC. AND TERASEN GAS (VANCOUVER ISLAND) INC.

TO DETERMINE THE APPROPRIATE RETURN ON EQUITY AND CAPITAL STRUCTURE AND TO REVIEW AND REVISE

THE AUTOMATIC ADJUSTMENT MECHANISM

PROJECT NO. 3698394

SUBMISSION OF

THE COMMERCIAL ENERGY CONSUMERS ASSOCIATION OF BRITISH COLUMBIA

IN THE MATTER OF AN APPLICATION BY TERASEN GAS INC . AND TERASEN GAS (VANCOUVER ISLAND) INC .

TO DETERMINE THE APPROPRIATE RETURN ON EQUITY AND CAPITAL STRUCTURE AND TO REVIEW AND REVISE THE

AUTOMATIC ADJUSTMENT MECHANISM

SUBMISSION OF THE COMMERCIAL ENERGY CONSUMERS ASSOCIATION OF BRITISH COLUMBIA (The "CEC")

I . Introduction .......................................................................................................... 1 I1 . Jurisdiction of the Commission ..................................................................... 2 In . The Unique Facts before the Commission: The Acquisition of Terasen Inc . ("TI") by Kinder Morgan Inc ........................................................................ 3 IV . Assessment of Risk ......................................................................................... 16 . .

Definition of Risk ................................................................................................... 16 Assessment of the Company's Risk ...................................................................... 17 Review of the Terasen's Assessment of its Gas versus Electric Position ............... 18 Terasen's Assessment of Other Risk Factors .......................................................... 24 Gas Supply Management ......................................................................................... 24 Cost Management ................................................................................................... 25 Regulatory Accounting ..................... .. .................................................................. 26 Deferral Accounts ................................................................................................... 26 Lack of Growth as a Business Risk ...................................................................... 27 Underlying Risk ....................................................................................................... 28

V . Terasen's Response to Risk ......... ..... 30 Annual Report ............................................................................................................ 32 Prospectus .............................................................................................................. 32 Assessment of Gas & Electric Prices ....................................................................... 32 Internal Analysis and Study of Risks ....................................................................... 34 Market Response to Price ...................................................................................... 34 Market Perception of Price Competitiveness ........................................................... 35 Economics of Alternative Fuels ............................................................................... 35 Core Market Durability and Elasticity ..................................................................... 35 Terasen Inaction in Response to Risk ..................................................................... 36

VI . Regulator's Response to Risks ...................................................................... 40 PNG as the High Risk Example ............................................................................... 43

VII . Conclusion ................................................................................................... 45

IN THE MATTER OF AN APPLICATION BY TERASEN GAS INC. AND TERASEN GAS (VANCOUVER ISLAND) INC.

TO DETERMINE THE APPROPRIATE RETURN ON EQUITY AND CAPITAL STRUCTURE AND TO REVIEW AND REVISE THE

AUTOMATIC ADJUSTMENT MECHANISM

SUBMISSION OF THE COMMERCIAL ENERGY CONSUMERS ASSOCIATION OF BRITISH COLUMBIA (The "CEC")

I. Introduction 1. In this proceeding, Terasen Gas Inc. ("TGI") and Terasen Gas (Vancouver Island)

Inc. ("TGVI") jointly (the "Companies") have applied to have the British

Columbia Utilities Commission (the "Commission" or "BCUC") establish the

appropriate return on equity and appropriate capital structure for rate making

purposes. The application is brought pursuant to the Utilities Commission Act (the

"Act") and in particular those parts of sections 59 and 60 of the Act which require

that the Commission establish rates that are just and reasonable and in doing so

balance the interests of customers and investors in the public utility regulated by

the Commission. These are the submissions of the Commercial Energy

Consumers of British Columbia (the "CEC").

2. The Joint Industry Electric Steering Committee ("JIESC), the British Columbia

Old Age Pensioners Organization et a1 ("BCOAPO) and the CEC jointly

sponsored the evidence of Dr. Laurence Booth with respect to the appropriate

return on equity ("ROE") adjustment mechanisms and the appropriate capital

structure. The CEC adopts the evidence of Dr. Booth and the submission which it

understands Mr. Wallace will file on behalf of the JIESC as Mr. Wallace has dealt

directly with Dr. Booth in preparation of his evidence and argument.

3. The CEC submits that the balance of evidence in this proceeding combined with

the recent development of the acquisition of TGI by Kinder Morgan Inc. ("KMI")

should guide the Commission to maintain the existing return on equity and capital

structure for TGI and TGVI and to make no adjustment to the Automatic

Adjustment Mechanism.

4. The CEC's submissions are divided into five general areas. Firstly a review of the

jurisdiction of the Commission in reviewing the Application. Secondly, a review

of the unique facts before the Commission which sees the Commission faced with

a request for adjustments to the Companies' ROE and debt equity structure,

resulting in increases to customer rates, being at an exact point in time when the

Applicants are being sold at a significant premium to book value. The CEC

submits that to give any merit to an argument that a new shareholder should be

rewarded with a rate increase after paying such a significant premium to existing

shareholders would not be "fair and reasonable". Thirdly, the CEC will review

the business risk submission of the Companies. Fourthly, the CEC will review the

Companies response to business risks. Fifth, the CEC will discuss the regulatory

response to business risks.

11. Jurisdiction of the Commission

5. The Utilities Commission Act at sections 59 and 60 sets out the statutory

framework for the consideration of the Applications. The statute provides that

rates must be "just and reasonable". In setting just and reasonable rates the

Commission must balance the interest of customers to be charged fair and

reasonable rates for services with the interest of the shareholders right to fair and

reasonable compensation for their investment.

6. The Applicants appear to be arguing at paragraph 115 of their argument that the

service provider has a right to earn a fair and reasonable return which is absolute.

This interpretation is problematic, and incorrect, for at least two reasons. Firstly it

is not consistent with the interpretation of the duty of regulatory bodies to balance

the customer and shareholder interests as identified by the guiding jurisprudence

on the matter including determinations of the Supreme Court of Canada. As

pointed out by the BCOAPO in their submissions at paragraphs 4-10, this

interpretation is not consistent with the balancing of the customers and

shareholder interests discussed by the Supreme Court of Canada in Bell Canada v.

Canada (CRTC) [ 1989) 1S.C.R.1722. Secondly the Applicants interpretation is

problematic from a practical standpoint because if the Applicants interpretation

was correct it would entitle new shareholders, who have paid a premium to

departing shareholders of a regulated entity, as in this case, to come to the

Commission and request that they be entitled to a fair rate of return on their

investment, including any premium paid for their investment. This interpretation

is clearly not supportable, nor fair, just and reasonable. Further, it has been

implicitly rejected by the Commission in its Decision of May 31, 2005 dealing

with the Revenue Requirement Application of Fortis Inc.

7. The CEC submits that the Commission has a broad discretion in determining what

is a fair and reasonable compensation for the service and submits that the facts

before the Commission demonstrate that the Applicants are presently earning a

fair and reasonable rate of return based on the existing rate of return and debt

equity structure. The investment of KMI in purchasing TI at a significant

premium to book value unequivocally confirms this.

1II.The Unique Facts before the Commission: The Acquisition of Terasen Inc. ("TI") by Kinder Morgan Inc.

8. The circumstances before the Commission are unique. Rarely, if ever, has a

Commission had before it a generic ROE review proceeding which sees an

applicant seeking significant changes to its ROE and debtlequity stmcture due to

increased risks in its operating environment while at the same time the utilities in

question are before the same Commission seeking approval of an application for

change of ownership in which the purchaser is paying 2.7 times book value for the

Corporate group of companies, which include as their primary set of assets the

utilities which are "at risk". This purchase at its high valuation is conclusive

evidence in and of itself that the existing ROE and debtlequity structure is

delivering a more than fair, just and reasonable return to: (a) departing

shareholders; and (b) the new shareholders involved in the purchase.

9. A great deal of the hearing time and information requests and responses in this

generic ROE proceeding focussed on the testimony of Dr. Booth and Ms.

McShane as they debated the merits of their respective analytical tools in

attempting to assist the Commission to arrive at a determination as to a fair and

reasonable return for the Companies. Mr. Johnson highlighted the problems of

relying on theory in his cross-examination referenced at page 39 of his argument:

"Mr. Johnson: Q: If I can ask you to turn to page 193 of Copeland (and) Weston (Text), 1'11 ask you to agree with something, Dr. Booth.

i. 'Lucy: I've just come up with a perfect theory. It's my theory that Beethoven would have written even better music if he had been married.

ii. Schroeder: What's so perfect about the theory?

iii. Lucy: It can't be proved one way or the other."'

10. While the CEC will endorse the evidence of Dr. Booth, the fact of the matter is

that either of the sets of theories put forward by either of the expert witnesses in

this proceeding can be challenged as "not proven". What is provable is the reality

in which the Commission finds itself in assessing the Application. The CEC

submits that the Commission should engage in a practical, common sense analysis

of the unique facts, which impact the Applicant utilities this point in time. As

customers, the CEC asks the Commission to adopt tests in reviewing and

establishing a "fair and reasonable return" for the shareholder which take into

account the significant purchase premium paid for the utilities within the time

frame of consideration of this Application. Clearly if a purchaser did not think

that the existing levels of ROE and debt equity were sufficient they would not

have paid the significant premium which has been agreed to by the purchaser and

seller.

11. It is important to note that the purchaser of TI, KMI, is a sophisticated,

commercial party. If they were concerned about this application and its impact on

the assets they were buying, there is nothing which prevented them from factoring

this into its purchase and sale agreement. They did not, and the Commission has

no evidence before it from KMI indicating that the purchase price paid is not a

complete and accurate indication of the risk prof le of the Applicants at this point.

The only conclusion the Commission can reasonably and fairly draw is that KMI

was of the view that the existing ROE and debtlequity structure was fair and

reasonable. To make a decision which results in any upward adjustment to rates

in the face of is would not be "fair and reasonable".

12. The most pertinent and directly applicable evidence before the Commission is that

the acquisition of TGI by Kinder Morgan was done at 11.8 times the 2006

EBITDA and 2.7 times book value. (Ex C2-6, Page 3, lines 6 to 9) This is without

doubt the best direct evidence of the investor's reactions to the risks. The former

shareholders of the Company viewed this as exceptional value and approved the

buy out thereby capitalizing their value and recovering their investment. The new

shareholder of the Company has just declared in the price it paid that it views the

income risks as exceptionally attractive. This judgment of the shareholder is the

strongest evidence before the Commission and should be accorded exceptional

weight. The reason it should be accorded the strongest weight is because it reflects

what the investor's real actions are in direct response to an assessment of its risks

and not what the company says are the risks; the assessment results are

"provable".

13. The issues around this being a TI purchase and allocation of the values to the

subsidiaries was discussed with the Applicants panel. Mr. Bryson under cross-

examination about the premium paid by KMI refers to growth in other businesses

as a basis for understanding some of the premium. He also refers to the fact that

pure utility purchases may often have some premium associated with them.

(Transcript Volume 2, Page 123, line 9 to Page 125, line 6)

14. Dr Booth under cross-examination was asked about the relative risk of growth. He

offers the view that there is absolutely no question that markets generally regard

growth as risky. He gives reasons for this. (Transcript Volume 5, Page 672, line

10, to line 20)

15. The consequence is that growth prospects in competitive businesses like oil

pipelines warrant higher return and therefore in an acquisition situation are

discounted at a higher rate. So we can infer that even if the growth prospects are

attractive to KMI they would be insufficient to account for the high multiple paid

for TI without also taking into account the fundamental low-risk values of TGI.

16. If we look at the size of the revenue streams from the Company businesses and

assume that Mr. Bryson's view of $5 billion growth taking place all in the

business lines not involving natural gas distribution we can see the overwhelming

size and importance of the Company in the transaction. The following tables are

intended to provide general order of magnitude assessment of the impact of the

forecasted growth of the various business of TI. Simplified data has been

extracted from TI's 2004 Annual Report and used to use the order of magnitude

impact of a 2 . 7 ~ net book value purchase on returns to the shareholder.

Terasen Gas Terasen Pipelines Terasen Water Other ($ in millions)

Assets Invested* $3,375 $1,350 $187 $58 Net Book Values* $2,467 $999 $32 $394 Revenue* $1,494 $225 $201 $35 Earnings* $95.5 $70.9 $6.6 ($23.6) Equity % 33% 50% 50% N/A ROE 11.5% 14% 43 % N/A (On book equity) (* Exhibit B-3A, BCUC IR #1, Question 1.5, Appendix 1.5)

17. These net book values are for the plant assets and for various purposes TI's other

assets may be distributed to TGI and TGI may have some other assets. The

calculations could be amended if required but for these purposes it is instructive to

use the simplified information to do demonstrative calculations.

18. If we do some simple calculations on this evidence along with the evidence of the

fact that the buyout value is approximately 2.7 times hook value we can see the

magnitude of the discount of what is being earned as a reasonable return on the

investment.

Terasen Gas Terasen Pipelines Terasen Water ($ in millions)

Assets Invested* $3,375 $1,350 $187 2.7 times Net Book* Values* $6,660 $2697 $86 Revenue* $1,494 $225 $201 Earnings* $95.5 $70.9 $6.6 Equity % 33% 50% 50% ROE 4.3% 5.2% 16.2% (On paid value) (* Exhibit B-3A, BCUC IR #I, Question 1.5, Appendix 1.5)

19. If we attribute apremium to book value to the utility of 1.5 times and attribute the

rest of the paid value to the pipelines and leave the water utility at 2.7 times book

we get the following results. There is no way to know the real values in the mind

of the purchaser but making any reasonable calculations from the evidence

demonstrates how much the purchaser of TI has valued the opportunity.

Terasen Gas Terasen Pipelines Terasen Water ($ in millions)

Assets Invested* $3,375 $1,350 $187 Times book* 1.5 5.6 2.7 Net Book Values* $3,700 $5657 $86 Revenue* $1,494 $225 $201 Earnings * $95.5 $70.9 $6.6 Equity % 33% 50% 50% ROE 7.8% 2.5% 16.3% (On book equity) (Exhibit B-3A, BCUC IR #I, Question 1.5, Appendix 1.5)

20. Assuming a growth of $5 billion in assets for Terasen Pipelines and earning about

the same as the existing Terasen Pipeline assets and look at the combined results

we can see what the combined future would look like. The returns come out to

around 7.9% overall for the combined entity with the growth.

Terasen Gas Terasen Pipelines Terasen Water ($ in millions)

original growth combined Assets Invested* $3,375 $1,350 $5000 $7,350 $187 Times book* 1.5 5.6 2.7 Net Book Values* $3,700 $5657 $5000 $10,657 $86 Revenue* $1,494 $225 $1,125 $1,350 $201 Earnings* $95.5 $70.9 $350 $421 $6.6 Equity % 33% 50% 50% 50% 50% ROE 7.8% 2.5% 14% 7.9% 43% (On book equity) (Exhibit B-3A, BCUC IR #I, Question 1.5, Appendix 1.5)

21. The Commission can do its own calculations on the evidence and perhaps do

different calculations. It can assess the expert opinions and give weight as it sees

fit. The CEC contends that any reasonable assessment of the situation supports Dr

Booth's conclusions that an exceptional premium was paid and that it reflects an

assessment that the Company assets are low risk and are already receiving a more

than reasonable retum under the existing ROE formula and debt equity ratio.

22. The Company appears to be of the view that its recent acquisition by KMI is not

relevant to or should have no effect on the decision before the Commission. No

updated evidence commenting on the transaction from the new shareholder was

filed in the proceeding. Notwithstanding the absence of evidence from the

Companies' new shareholder, it would be completely inappropriate for the

Commission to ignore the unique juxtaposition of this transaction as compelling

evidence in this hearing justifying no change and arguably a decrease in the ROE

of the utilities.

23. KMI upon purchasing TI and thereby TGI can be presumed, without evidence to

the contrary, to have conducted its due diligence and was aware of the BCUC

formula for determining the ROE for the Company. Their valuation included their

anticipation of the ROE for the future being determined by the BCUC. It had to

include the possibility that the ROE may continue to be determined by something

like the current formula being applied to the Companies. This is absolutely

unique. No other ROE hearing in any other jurisdiction in Canada has occurred

with direct application to a utility, which has so recently been acquired by a single

shareholder. The Commission does not have to strain through indirect evidence to

estimate the balance between the shareholder and the customers. It has been

provided with the shareholder's own direct judgement of the balance as well as its

long-term view of the risks. Nothing could be clearer. While the company says it

is facing increased risks and challenges its new shareholder has just declared that

those risks do not scare them. In fact they are prepared to pay a huge premium for

the privilege of taking on those risks.

24. From a customer perspective, it is imperative that the Commission weight this

evidence heavily and not engage in rewarding the shareholder beyond what it so

recently must have factored into its valuation and purchase decision. To do

otherwise would be nothing short of foisting the excess purchase premium onto

the customers of the Company. Nothing could be more unfair or unreasonable.

This unique situation suggests only one direction for fair and reasonable rates for

customers and fair and reasonable returns for the shareholder. In Dr Booth's

words

"This extreme valuation implies that the financial parameters applied to the Terasen companies are extremely generous and confirms my judgment that they should be reduced." (Ex C2-6, Page 3, lines 7 to 8)

25. Dr Booth's views on the relevance of the Kinder Morgan purchase of the

Company are that it is difficult to argue that the returns to the Company are unfair

or that it has difficulty attracting capital. He concludes that either the returns are

way too generous or KMI has found a new way to wring cash out of the

Company. (Ex C2-6, Page 82, lines 17 to 29 and Page 83, lines 1 to 6)

26. Commissioner Milbourne raises the issue of acquisitions and Dr Booth provides

an explanation of the valuation information available from the acquisition

transaction. (Transcript Volume 6, Page 946, line 6 to Page 949 line 12)

"And that's why KMI's acquisition of Terasen is so significant, because the valuation parameter is simply out of the reasonable range of financial parameters. We look at other companies selling on premiums to book, and looking at multiples of earnings, and then all of a sudden KMI comes along and sort of breaks the bank and pays a huge premium, well above what's going on in other utilities." Transcript Volume 6, Page 949, lines 5 to 12)

27. Cross-examination of Dr. Booth did not address the KMI take over other than to

address whether or not the KMI transaction might result in downgrading of the TI,

TGI credit. The only direct issue to arise in regard to attributing weight to the

KMI buy-out came out of the Utility Customers cross-examination of the Terasen

panel. The fact that the KMI purchase was of TI and not TGI directly gives rise to

uncertainty as to how much of the purchase premium to attach to TGI (Transcript

Volume 2, Page 123, line 12 to Page 127, line 1)

28. As discussed, Mr. Bryson offered the only potential explanation for the

exceptional premium as being the growth potential for the non-regulated business

that are part of the TI business but not part of the TGI business (Transcript

Volume 2, Page 124, lines 4 to 10). No evidence was filed by KMI.

29. Dr Booth points out that growth is usually considered a more risky investment

opportunity and points out that there is a more logical explanation for the

premium if one considers the double leverage being used to make the purchase. A

full discussion of the double leverage issue comes out in cross-examination of Dr

Booth. The cross-examination tries to suggest that TGI will be ring-fenced and

implies that that might in some way avoid the purchase transaction extracting

value out of the low risk TGI. Dr Booth makes it clear that the financing structure

is using double leverage and that remains a fact regardless of ring-fencing. The

cross-examination tries to suggest that KMI has the borrowing capacity and that

this in some way makes the investment purchase capital structure decision

irrelevant in extracting value out of the TGI low risk assets, Dr. Booth makes it

quite clear that the purchase is using double leverage and that this allows the

purchaser to get value out of the low risk assets. (Transcript Volume 5, Page 702,

line 16 to Page 708, line 19) He confirms very firmly in his testimony that one of

the ways for TGI to wring value out of the TI purchase is to finance the purchase

with debt at a holding company level based on the ability of the low risk assets to

carry more debt. (Ex C2-6, Page 83, line 8 to Page 85, line 19)

30. Specifically, the CIBC (August 19, 2005) report claims that KMI plans a "double

dip" financing structure and that one of the advantages of the deal is that the after

tax cost of debt is about 2.0%. (Ex C2-6, Page 83, lines 17 to 19)

31. On balance the evidence of the double leverage being used to effect the purchase

is a set of compelling facts. The investment community clearly has used this to

explain to investors what the purchase transaction is all about and why it makes

sense. The meagre evidence potentially opposing Dr Booth's views at best

tempers the view with some uncertainty but in now way rises to a suitable level of

explanation.

32. We are left with compelling and unique circumstances where the ROE and Capital

structure regulatory hearing takes place with an acquisition of the company right

in the middle of the regulatory process. The facts in evidence lead clearly to Dr,

Booth's conclusions and recommendation that:

"Terasen's financial parameters remain as is. There is no demonstrated need to increase Terasens' ROE or common equity ratio when it has been bought at such a high market to book ratio" (Ex C2-6, Page 84, lines 29 to 31)

33. In the May 31,2005 decision of the Commission in the matter of FortisBC Inc.'s

2005 Revenue Requirements Application, at page 26, the Commission stated:

"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 Aquilla (B.C.) and to pay a premium in so doing."

Clearly, that "fundamental test" has been met in this case as well.

34. A further practical test, which the Commission may utilize and give significant

weight is whether or not the utilities have been able to meet their revenue

requirements during the period of time the existing ROE formula has been in

place. This test was also relied on by this Commission in the May 31, 2005

decision dealing with FortisBC. At page 24 of the decision, the Commission

stated:

"Even so, the Commission Panel considers the question of whether a utility has been able to meet its revenue requirements as a useful test of the reasonableness of an allowed ROE. In the period since 1994 FortisBC has with one exception met or exceeded its revenue requirements."

35. TGI has had a similar experience achieving its ROE in all but one year under the

existing formula and in that year the failure to do so a result of extraordinary

payments for restructuring approved by the Commission (Ex C2-6, Page 31, lines

2 to 7). The Commission should take credit for the successful results for

shareholders resulting from the existing ROE and Capital Structure

determinations. It is fair and reasonable for the Commission to determine that the

purchaser of TI, KMI, knew of the May 31, 2005 Fortis Decision and factored the

determinations noted above into its commitments to the Commission and into its

purchase price. In the face of that important determination by the Commission

KM still entered into a transaction which valued the assets of TGI, including the

companies before the Commission seeking increased compensation for customers

in rates, at 2.7 times book value.

36. In Exhibit B-l filed on June 30, 2005 the Company stated at page 2 of its cover

letter, in bold print was added for emphasis: "Terasen is significantly

discouraged from, and potentially challenged to be able to continue to invest

capital in the province beyond that which it is required to meet our basic

obligation to serve in existing service areas." On August 1 , 2005 the Company

announced that it had entered into an agreement to sell to KMI, which had a

purchase price with a premium of 2.7 times book value. (Ex C2-6, Page 3, lines 6

to 9). It is worthwhile noting that in its Decision dated November 10, 2005 the

Commission noted commitments of the new owner KMI, originally made in

KMI's application to the Commission for approval of the purchase. At page 34 of

its Decision the Commission stated: "In its original application, KMI also assured

the Commission that it will ensure the Terasen Utilities are in a position to meet

their capital investment obligations." The Commission and customers should rely

on that commitment based on the ROE and debdequity stmcture in place at the

time that commitment was made less than three months ago.

37. Not only has the transaction demonstrated that the fairness of the present levels of

ROE and dehdequity it is important to note that the purchaser made commitments

in the proceeding which saw the Commission approve the sale confirming that

customers would not be required to pay the premium paid by the purchaser. At

page 33 of the Decision of the Commission released approving the purchase by

KMI on November 10, 2005 the Commission stated: "The Commission also notes

that in response to Information Requests from the LMLGUNCEC, KMI has

provided an assurance" that it does not intend to recover from Terasen Utilities

(sic) ratepayers any premium that it may be paying for acquisition of the shares in

Terasen Inc."

38. It is worthwhile noting that the KMI investment decision was made after the May

31, 2005 Decision of the Commission dealing with FortisBC quoted above which

concluded directly that a recent purchase of a utility, at a premium, would be

taken into account in setting the appropriate risk premium for the acquired utility.

It is also important to note that the Commission has not in the past increased rates

of retum to allow recovery of a purchase premium. It is submitted that to increase

the Company's rate of retum in this proceeding, given the significant premium

paid by KMI would be doing just that a step detrimental to customers and contrary

to the commitments of KMI in the application for approval of the acquisition.

39. It is worthwhile noting that the two largest British Columbia based private power

utilities operating under the Commissions jurisdiction under the existing ROE and

debt equity formulas reviewed and approved by the Commission were sold in the

past two years, both at significant premiums to book value attracting significant

new investors into British Columbia, FortisBC and KMI. This is current,

convincing evidence not only of the fairness of the formula to shareholders but is

also strong evidence of the investment community's confidence in utility business

prospects in British Columbia. If either purchaser was concerned that the ROE or

debt equity structures were materially impacting on the ability of the utilities to

raise capital or earn a fair return on their investment they would not have paid a

premium to acquire the utilities.

40. It is also worth noting that the Commission was advised by FortisBC in the review

of their revenue requirement that absent an increase to their risk premium they

were not ale to secure long term financing. It is apparent that notwithstanding the

Commission's rejection of that position and refusal to grant the risk premium,

FortisBC was nonetheless able to secure $100,000,000 in long term financing

term under the existing ROE formula and adjustments within months of the

issuance of the Commission's decision.

41. Another practical test which the CEC submits the Commission consider, in

balancing the interest of customers and the shareholder, is an assessment of the

performance of TGI over the period of 1999 to 2006. No evidence has been led

by the Company which enables the Commission to clearly separate out the utility

assets. That is not a matter which makes it easy for the Commission or the

Customers to determine to what extent they are over compensating the utility for

its services, however the information on TI is at least helpful to determine if the

shareholder has been "unfairly" treated by the Commission. The CEC submits

that this review demonstrates that the Commission has done a good job ensuring

that the shareholder has earned their fair and reasonable return utilizing the ROE

and debt equity structure and adjustment formula in place today.

42. In balancing the interests of customers and shareholders at this specific point in

time, it is submitted there is no basis to conclude that an adjustment to the ROE or

debt equity ratio of the Applicants is required.

43. During the period of time the Applicants have been under the existing ROE

formula it is patently clear that TI has performed extremely positively from a

shareholder perspective. Notwithstanding the difficulty in separating the utility

assets out in conducting the assessment it is simply not credible to argue that the

utility assets have not played a dominant role in the financial success of TI. The

performance is set out in the following series of graphs drawn from the Terasen

2004 Annual Report

Graph Number 1

Teraren Ins. Equity to Total Capltal mmrt

Telasen's financial strenpth has increased slqniflcantly.

(Ex B-3A, BCUC IR1, Question 1.5, Appendix 1.5, page 42)

Graph Number 2

(Ex B-3A, BCUC IR1, Question 1.5, Appendix 1.5, page 42)

Graph Number 3

(Ex B-3A, BCUC IRl, Question 1.5, Appendix 1.5, page 46)

Graph Number 4

h r a ~ n lnc. rntunon c m m F N t " ,- m.nwhlshms i-nit,,

w, quit".

(Ex B-3A, BCUC IR1, Question 1.5, Appendix 1.5, page 46)

44. The stellar financial performance of TI is certainly partially attributable to the

utility operations of the Company. There is no evidence the utility operations

have hurt the financial returns of TI and the significant increase in the share price

of TI over the period of time since the existing ROE and debtlequity formulas

were adopted, culminating with the purchase premium extracted from KMI would

indicate that the balance between shareholder and customer has been positive for

the shareholders.

IV. Assessment of Risk

45. This Application is essentially about the risks faced by the Applicants and the

choices for appropriate responses to risks by the Applicant and by the BCUC.

This means that the Commission needs to start with a good definition of the risks

and a good understanding of the responses to risk and what makes them

appropriate. Because there are competing view of the risks, the response choices,

what is appropriate and the weight to be given to the evidence and judgments of

experts it is important to isolate out the issues very carefully if the BCUC is to

deliver a decision, which results in fair and reasonable rates for customers and fair

and reasonable returns for utility shareholders.

46. What represents the appropriate way to determine fair rates and a fair return? In

considering the most appropriate way to determine fair and reasonable rates for

customers and a fair and reasonable return on equity for a generic low risk

benchmark utility in British Columbia, the CEC submits that the Commission

needs to consider the following questions:

(a) What are the risks faced by utilities and TGI in particular?

(b) What should the company's response be to risk?

(c) How should a regulator best handle a utility's risk, in determining a fair and reasonable return?

Definition of Risk

47. We have two somewhat different perspectives on what represents utility risk from

the expert testimony. Ms. McShane offered a somewhat simplified version of

risk, which is explained as business risk and financial risk totalling the combined

risk of the finn (Ex B-I, Page 2, lines 45 to 47). Dr. Booth provided a more

comprehensive explanation of risk as business risk, financial risk, investment risk

and regulatory risk (Ex C2-6, Page 2, lines 4 to 6)

48. There are similarities between the two explanations however, the CEC submits

that Dr. Booth's explanation is far more refined and the key risks differentiated

are critical to the decisions the Commission is facing. Dr Booth defines business

risk as uncertainty in the demand for the company's product and the possibility of

product obsolescence. (Ex C2-6, Page 22, lines 12 to 15). He further refines the

definition as the variability of the firms ROI or EBIT. Looking at how easy it is to

forecast operating costs and how stable revenues are, he proposes as the way to

analyze the risk. (Ex C2-6, Page 23, lines 26 to 28).

49. This is critical because the Company's evidence all revolves around the existence

of the potential for uncertainty in the demand for its product and does not deal

with the second part dealing with how easy it is to forecast and how stable it is.

50. Dr Booth defines financial risk as the financial leverage involved in debt financing

for the firm and that the simplest way to measure this is through the debt to equity

ratio. (Ex C2-6, Page 23, lines 15 to 18)

51. Dr Booth does not define regulatory risk but implies that it is the risk to income

based on regulators decisions. (Ex C2-6, Page 22, line 9)

52. Dr Booth aggregates business risk, financial risk and regulatory risk into income

risk or accounting ROE variability. (Ex C2-6, Page 22, lines 6 to 7).

53. The financial risk and regulatory risk are critical elements isolated out in Dr

Booth's evidence because the regulator has a huge impact on these risks and

therefore has a very circular role in the determination of income risk.

54. Dr Booth defines investment risk as the way in which investors react to the

income risk and other economic variables. (Ex C2-6, Page 22, lines 8 to 9)

55. This is critical because Dr. Booth goes directly to the evidence of the investor's

reaction to TGI's income risk and TGI's evidence is largely silent on the direct

evidence but focuses on the views of ratings agencies and other proxies.

Assessment of the Company's Risk

56. The Company has not provided financial projections indicating that it will not

earn its return on equity. The response to Utility Customers Information Request

8.1 is that only 18.1% of the Company's revenue and expenses are not recovered

through deferral accounts (Ex C2-6, Page 25, lines 19 to 23). The Company has

highly predictable accounting income. Consequently it has a highly stable ability

to earn its ROE. The evidence is that the Company has consistently over earned

its ROE and in the one year it did not the reason was for expenses which were

related to creating its ability to over earn its ROE in future years. (Ex C2-6, Page

31, lines 2 to 7)

Review of the Terasen's Assessment of its Gas versus Electric Position

ACTUAL vs ALLOWED ROE

57. The Companies' view of business risks is primarily about the effect of gas on

electric competition creating conditions for failure to earn a return on equity

investment, or recover its capital investments.

13

12 -

11

10 9 - -

8

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1 -Ailawed -Post

-

I

01 1 I I I

7

Figure 4 Hisloii~ai and Forecast Annual Natural Gas and Eiecaic Energy Costs in Lovier Mainland 2000 through 2006

Oar vr. Ekxtric - TCI MnUdi Bill Forecast Based M Current 24-Month Hedging Term

1 U.000

(Exhibit B-1 , Tab 1, Page 9)

58. The most important point about this risk of gas on electric competition is that the

existence of the underlying risk of gas commodity prices being priced at market

and electricity generation owned by BC Hydro being priced at embedded cost has

not changed. The risk has existed since deregulation of natural gas pricing and as

such it is a risk for which the utility has been compensated for a long time. This

risk was created when the government of British Columbia expropriated BC

Electric and the crown began building and owning the electric generation assets

and electricity energy policy fell under provincial policy management.

59. What has happened is that the over supply of natural gas in this region created

when the regulation for producers allowed them to reduce their reserves has

disappeared as everyone knew it would and we now have demand outstripping

supply creating high prices for the time being. As the supply and demand issues

evolve and the concomitant price fluctuations and the competitive responses of

builders work their way into the market place the realization of underlying risks

takes place. However, the underlying risks have remained constant. TGI is

exposed to the risks of being in the natural gas business and being in a region

where electricity generation has been owned by the crown and is priced at

embedded cost. It is also exposed to the regulatory risks of being regulated by the

BCUC. Again that has not changed.

60. In assessing the Company's risks of gas on electric price competition the

Company has made its own assumption about electricity prices in the future.

"MR. WALLACE: Q: Okay. And now you -- obviously B.C. Hydro's rates have been very level through that period. Do you anticipate any increase next year?

MR. THOMSON: A: Yes, we understand -- or for forecasting purposes we have assumed in a number of proceedings that Hydro's rates will escalate by approximately half the rate of inflation. That's an estimate. We haven't had that confirmed by B.C. Hydro.

MR. WALLACE: Q: And that's your estimate, not one you obtained from Hydro, I take it." (Transcript Volume 2, Page 84, lines 10 to 21)

61. If this is a critical risk issue why would they not use forecasts such as the ones

being used by BC Hydro? Why would the Company not confirm expected rates

with BC Hydro? Why would there not be a deep ongoing dialogue to deal with

this risk issue? The absence of evidence on this is remarkable given the claim that

this is a primary risk area.

"MR. WALLACE: Q: Gentlemen, I want a simple answer to my question. I thiik you've answered it by not answering it, but I would like it answered. You have not undertaken a simple study or retained an expert to carry out a simple study to look at what's happening to Hydro's deferral accounts, what's happened to the market, what's happening to its costs and see what that means for its rates going forward, and whether that might lead to increases of five, ten or even more percentage, have you? MR. THOMSON: A: Not that I'm aware of." (Transcript Volume 2, Page 98, lines 2 to 12)

62. What's worse the Company's actions will be largely indifferent to the price of

electricity.

"Even if we're out by a factor of 100 percent on that, it's dwarfed by what we're seeing in the volatility in natural gas markets. It's not going to drive differences in our behaviour." (Transcript Volume 2, Page 96, lines 12 to 16)

63. The Company's expert witness was provided a page from the BC Hydro forecasts

that indicated that the price assumption imbedded in the forecast for electricity

was rates increasing at the rate of inflation (Exhibit C2-15). She thought it obvious

that the 100% difference in forecast of electric rates would take some pressure off.

"MR. WALLACE: Q: No, simply if that occurred that would be less of a concern to Terasen than the half inflation scenario that was spoken to by the company witnesses.

MS. McSHANE: A: Yes, I mean, that obviously would take some competitive pressure off. I'd note that there are both high and low scenarios here, so that there is a possibility that prices will, you know, rise. The band is 2.5 percent above and below." (Transcript Volume 4, Page 397, lines 21 to 26 &Page 398 lines 1 to 4)

64. The TGI evidence here is short-term. They also reference recent increases in

natural gas prices, which have spiked significantly. However, there is no

comprehensive presentation of future prospective prices.

65. Mr Wallace confirms on cross-examination that Ms McShane is not aware of any

price forecasts for electricity and gas. (Transcript Volume 3, Page 332, lines I to

5)

66. Mr Wallace on cross-examination of Ms McShane obtains an estimate of what is

expected to happen to natural gas prices. She estimates price equilibrium at 6 , 7 or

8 dollars per MCF, which she offers is below the current levels of $11.45 per

gigajoule. She also offers an explanation for the recent higher prices being related

to hurricanes in the Gulf of Mexico. (Transcript Volume 3, Page 329, line 5 to

Page 330, line 5)

67. Dr Booth on cross-examination is sceptical of any forecasts for higher natural gas

prices remaining very high or continuing to increase. He provides an explanation

that higher prices draw alternative supply and this will lower the costs toward the

costs of the new sources. He explains that the new sources may be LNG

shipments from around the world, which he understands are expected to cost

somewhere around $4. (Transcript Volume 5, Page 656, line 13 to 658, line 2)

68. When we look at the issues raised by the Company carefully we will see that

whether or not the effects of the price competition exist as the Company seems to

imply is a matter of debate.

69. The Company claims that it is facing slower growth, declining usage per account

and customer losses or disconnects. A review of the evidence raises questions as

to whether this is accurate. While there is little doubt the Company has some

challenges, the CEC submits that they are not as black and white as claimed nor

are they as bleak as pictured.

Figure 5 New Construction Starts and Terasen Gas Net Cusiomer Additions

1990 - 2004

(Exhibit B-1, Tab 1, Page 12)

70. The CEC submits that the most important observation about this information is

that it is mismatched in terms of the timing of the data. Housing starts are

measured at a different time than customer additions. The footnote to a table of

information on housing starts preceding this graph provides a relevant explanation

of the problem in looking at the data. (Exhibit B-I, Page 11) The bottom of the

data for customer additions is lagged behind housing starts. Also the flow of

revenues lags the customer addition as explained in the footnote.

71. If one takes the data presented here and shifts the customer additions back one period

the relationship between housing starts and customer additions becomes much more

constant than the implied dramatic decline. (Transcript Volume 2, Page 84, line 2 to 9)

Original Lag Adjusted 2004 42% 2003 31% 52% 2002 42% 41% 200 1 27% 53% 2000 65 % 36% 1999 100% 58% 1998 54% 75% 1997 67% 36% 1996 76% 66% 1995 80% 75% 1994 72% 55% (Left hand column data from Exhibit B-I, Page 12, Table 3)

72. When the other anomalies in the data and the underlying measures are taken into

account the decline may be present but it may not be the 50% the company presents.

The real facts are not in evidence only this limited proxy, which is not as negative as

asserted by the Company

TGI Residential Use Rates iExcludtw Fofl Nebcn)

(Exhibit B-1, Tab 1, Page 14)

73. The company refers to declining use rates as a factor putting pressure on customer

rates. However, as the housing stock gradually switches over to high efficiency

gas furnaces and the percentage of new homes with high efficiency furnaces

increases one would expect declining use rates. Further more while there may be

some incremental increase in costs per GJ the overall customer bill will drop

because of the higher efficiency.

74. In addition over this timeframe increasing use of thermostat controls to use gas

more economically has been at play as well as increased use of insulation. This

too will contribute to declining use rates but the contribution to lower bills is more

important and a bigger factor than the cost per GJ pressures created. Further, with

a higher percentage of new residences being multifamily dwellings, which

typically have lower heating energy requirements, one would also expect the use

rate to decline. This also means that the housing stock is increasingly efficient

with lower bills. While this graph represents declining use rates it does not

necessarily mean that there is a catastrophic process under way. As the

Commission is aware, some of the same efficiency processes are underway for

electricity as well. To be competitive it is necessary for gas to be improving its

efficiency as well. Lowered bills for natural gas use is far more important than the

use rates and the effects of decreased use on rates. Interpretation of this graph as

evidence of the consolidation and firming of the core market toward its more

fundamental needs for the product is appropriate and not a negative factor

increasing risk.

Terasen's Assessment of Other Risk Factors

75. The company talks about a few other factors contributing to its challenges.

Specifically it refers to; gas supply management changes; cost management

pressures; potential regulatory accounting changes; and declining differentiation

regarding deferral accounts. (Exhibit B-1, Pages 15 to 18)

Gas Supply Management

76. It is interesting to note that in its discussion of gas supply management the

Company makes the following submission.

"Access to such resources to serve growing demand in the region can be a challenging proposition." (Exhibit B-1, Page 15)

77. Apparently the gas supply argument is that there is a growing demand and serving

it in current gas market conditions is a challenge. This statement is in contrast to

the prior paragraphs suggesting declining market share and use rates. With the

Company here projecting growing demand we have evidence that the Company

has internally conflicting positions.

78. The Company proposes that it has extended its hedging program out further into

the future, taking on additional credit risk but also tightening credit policy to off

set this risk.

79. The Company filed no evidence on the quantitative assessment of the gas supply

risk or the offsetting policy changes. There is no evidence to support this

assertion of risk impacting on the Company's ability to earn its return and recover

its investment.

Cost Management

80. In discussing cost management the Company is of the view that it has limited

ability to pass through costs to customers and references maintaining a cost

advantage to overcome the capital costs of installations and conversions.

"It is important to maintain an operating cost benefit to gas users to overcome capital and installation cost challenges for new construction and conversions, especially at TGI where heating requirements drive a greater absolute expenditure for the average consumer." Exhibit B-1, Page 16)

81. The Company provides no evidence of what the capital cost hurdles are for new

construction and conversions and what the customer or developer response is to

these costs or what options it has explored for dealing with this cost benefit

decision point. So the Commission has no persuasive evidence to rely on in

assessing this assertion of this assertion of risk.

82. Even with more information the Commission cannot make decisions to

maintaining an operating cost benefit for gas users. This will be up to the energy

market place. The Commission certainly can and does play a role in determining

policies, which affect the competitive positions of gas and electricity, but the

Company has not put forward requests for these changes. Instead this application

asks for increased returns and equity to debt ratios.

Regulatory Accounting

83. In discussing regulatory accounting changes the Company suggests that there may

be impacts and that it has made interventions. The issue is not resolved and the

Company presents no information to quantify the magnitude of what it may have

to deal with. Again the Commission has no substantive evidence to support an

increase in ROE.

Deferral Accounts

84. In discussing deferral accounts the Company prefers to put it in the context of

differentiation of uses of deferral accounts in other jurisdictions. The discussion

confirms that the Company has very attractive deferral account treatment and that

other jurisdictions are slowly adopting these approaches. It outlines the benefits of

deferral accounts and the usefulness of having them for the customers and the

progressive approach the Commission has taken.

"DR. BOOTH: A: That's right. I do think it should have an impact on the capital structure, which is why I'm quite happy with Terasen Gas having a 33% common equity ratio, since no other gas entity in Canada has such a comprehensive set of deferral accounts." (Transcript Volume 5, Page 63 1, Lines 19 to 24)

85. The Company's main assertion is that where deferral accounts have been used to

differentiate risk between utilities in different jurisdictions that this is

inappropriate because deferral accounts cannot deal with its main concern about

the gas on electric competitive position.

86. The Company attempts to link two separate points, which the CEC submits are not

linked. The first point is that the Company has the most attractive deferral account

treatment when considering that other jurisdictions are adopting some of these

treatments. These deferral accounts contribute to providing the Company with

very stable and predictable earnings. This lowers its exposure to volatility. It also

demonstrates a very favourable regulatory risk environment. The second point is

that the Company's gas on electric competitive position can not be dealt with

through deferral accounts. However, in no way does it link to or diminish the

positive position the Company has as a consequence of its regulatory deferral

account treatment. Further it is a reality that has not changed. Deferral accounts

have never been proposed as dealing with gas on electric competitive position.

The Commission in assessing this argument needs to reject this attempted linkage,

deferral accounts remain a major contribution to lowered risk.

Lack of Growth as a Business Risk

87. Dr Booth provided an important piece of evidence under cross-examination about

the nature of growth and risk for utilities. He stated that growth for a regulated

utility is not material. He pointed out that no growth results in low demand for

capital and a high cash flow available for distribution.

88. This difference in views about growth and the relationship to risk is at the heart of

understanding why the Company view is so distinctly different from the customer

view. The difference is counter intuitive so it is critical that the Commission go to

the logic of the reasoning to determine the weighting of this evidence. The CEC

submits that the Commission needs to consider this difference and understand its

own role in mitigating this situation relative to a non-regulated business for which

this would present a risk. Because it remains easily forecast, the regulated utility

return on equity and capital recovery remain stable through revenue requirement

awards.

"MR. JOHNSON: Q: And then in the third paragraph you say, "In contrast, a declining rate base company is generally regarded as lower risk since there is no need to access capital markets." Correct?

DR. BOOTH: A: That's correct.

MR. JOHNSON: Q: So if I understand what you're saying there, if the company is growing it's less risky; if the company is not growing it's less risky.

DR. BOOTH: A: I'm saying the argument can go both ways. There's arguments on both sides.

MR. JOHNSON: Q: Well, which is it, Dr. Booth? Which is --

DR. BOOTH: A: I don't think it's material.

MR. JOHNSON: Q: You don't think growth is material?

DR. BOOTH: A: No, not for regulated utilities. The reason the -- it's answered the way that it's answered is that when we look at the stock market growth is risky. There's absolutely no question that growth stocks are riskier than low growth stocks. And the reason for that is that when we look at growth stocks more of their cash flows are in the future time periods and they're getting pounded in the stock price, and firms are expected to earn high rates of return and they have significant growth, a large part of the stock market value comes from the future. And one thing we know about non-regulated firm is competition, as a habit of competing those future profits away. So high growth firms are always regarded as risky in the stock market. Now, when you come to utilities, the argument about growth, as I say there, can go both ways. On the one hand growth means that you don't have this high value added component -- or you should not have this high value added component in the stock price. So what happens is the growth allows more customers to lower the unit costs on the system, thereby making the distribution charge slightly lower, making it slightly more competitive. But it means that you have to go out to the capital markets constantly to access capital to finance their growth, which means that you generally have to have a little more -- a bit more financial flexibility and you need to have better financial parameters.

On the other hand, a declining rate base company is generating all its huge cash flow from depreciation, and it doesn't have to spend much expanding the system, so any debt or credit - any rating agency looking at the company will see this company and say, well look, it's got this huge cash flow generating ability, it's low risk." (Transcript Volume, Page 671, line 19 to Page 674, line 10)

Underlying Risk

89. The CEC submits that the key questions for the Commission and responses are as

follows:

Risk: What is an underlying risk and does it differ from the realized reality of outcomes associated with the risk?

The CEC contends that the underlying risk does differ from the realized reality of particular outcomes associated with the risk. This is why the reference sources for the tests for appropriate returns and equity levels are associated with looking at alternative investment options such as market returns for low risk companies. They are average returns for undertaking risk not the particular returns to be awarded specific outcomes. The specific outcomes or realizations of the risks can vary dramatically over time and from company to company.

Risk: Does the realization of a risk that has been there for a long time make a company more risky?

The CEC submits that the realization of a risk that has been there for some time does not change the underlying risk of the company. The risk was always present and the fact of the change of the level of outcome relative to the risk does not change the risk that these outcomes could occur.

Risk: Should a utility that is now facing the realization of a risk it has been compensated for in the past now get additional returns because it is happening or has happened?

If the ROE awarded utilities simply moves with the outcomes then it becomes more like insurance against certain outcomes. This would be a poor concept for the Commission to accept. The CEC contends that a utility that is now facing the realization of a risk for which it has been and continues to be compensated should not have access to even greater returns and even greater investment levels when the risks are being realized.

Risk: I f the change in the outcome realization of a risk is to be responded to with changes in return and equity ratio why have they not been linked to these changes?

If it was appropriate to change the return on equity and the equity ratio whenever the particular outcomes of known risks change then the mechanisms proposed for setting these returns should have considered parameters linked to these outcomes. Neither of the expert witnesses proposed such linkage. The experts and the theories under which they propose returns consider underlying market risk premiums relative to a basket of low risk investment opportunities, which can be analysed. The CEC submits that this remains appropriate and asks the Commission to be cautious about accepting the theme of the Company's application that presents a tale of woes about certain of its anticipated particular out comes.

90. The Commission needs to be as sceptical of the Company's view that the sky is

falling as it should be of the claim that if it did fall there is some obligation on the

Commission to reward the Company for the outcome. Ultimately the Commission

should come down on the side that says there may be some bad utility investments

because the risks of customers leaving may occur. The Commission should allow

for there to be unfortunate outcomes for the utilities it regulates if a utility is

unlucky or poorly managed and risks undertaken in their investments are realized

and result in losses. The real prospect of losses means the utility shareholders are

actually undertaking some risk and deserve the returns on their investments.

V. Terasen's Response to Risk

91. Commissioner Milbourne made some insightful comment with regard to what risk

is and how it should he responded to as a prelude to questioning Ms. McShane.

"Once an event has a high degree of certainty, then it's part of your fabric or reality, and it gets dealt with differently. It's not longer a risk. It's a circumstance within which now you're doing business. And I kind of have this sense that -- listening to the dialogue here over the last few days, that much of what gets characterized as risk would in a, kind of a competitive environment be simply classified as business conditions and realities. And once they're there in front of the organization, then they have to be coped with and managed.

I guess what I'm leading around to is what's your kind of view or experience on how that should happen? Should the fact that circumstances evolve that are unfavourable to the enterprise result in the enterprise getting a higher return as a result of unfavourable circumstances happening?" (Transcript Volume 4, Page 539, lines 11 to 26, and Page: 540, line 1)

92. Ms McShane's answer reveals a key difference. There is a presumption that the

existence of business conditions which might cause some negative impact on the

utility's ability to earn a return on or to recover its capital is sufficient to justify an

increased return or increased equity portion in its capital structure.

"And so when we look at, you know, three or four or five utilities next to each other, then determining, you know, how the capital stmcture or ROE should differ as among those is a function of the different operating conditions, the different competitive environment they find themselves in, the different supply environment, regulatory environment. But those are all business conditions, and -- but they all sort of lead to different probabilities of some negative impact that would either lead a utility to be unable. to earn the return on or to recover its capital." (Transcript Volume 4, Page 540, lines 17 to 26, and Page: 541, line I to 2)

93. One of the key parts of Commissioner Milbourne's insight is that once the

uncertainty as to outcome is resolved the risk becomes a reality and has to be

managed. This means that the company can do a number of things to eliminate or

mitigate its ultimate risk of loss.

94. Ms. Mc Shane acknowledges that a regulator can do a number of things to address

a company's risks and therefore by implication that a company can apply for

regulatory treatments which ameliorate given business conditions. However, she

does not really concern herself with what the company should be doing in

response to risk.

95. She and Dr. Booth share the same view that the ultimate test is whether or not the

probability that the company can earn a return on its capital and recover the

capital is increased.

96. The Companies' executives and Ms. McShane differ markedly from Dr Booth as

to when a risk is or will be:

(a) a slim possibility (has a high certainty that it is not likely to occur) and

therefore it is not appropriate to increase returns or equity to debt ratios;

and

(b) a real possibility (has a significant probability that it may or may not occur

or high uncertainty) where is may be appropriate to have return on equity

and capital structure reflect the uncertainty; and

(c) a reality (has a high certainty that it will occur) and has been or can be

forecast and accommodated such that the ultimate risk of not earning the

return on equity or recovering capital becomes a slim possibility and it is

therefore not appropriate to increase returns on equity or equity to debt

ratios.

97. Dr. Booth's tests is that if the company has acknowledged the uncertainty and is

taking serious actions to measure it, quantify it, and deal with it then it may be

worthy of reflecting in the allowed ROE and the allowed capital structure. He

points out that the Companies have not done much to acknowledge the uncertainty

and little to measure it quantify it and to deal with it. They do not appear to take it

very seriously he concludes. (Exhibit C-2, Page 32, lines22 to 26)

98. Dr Booth is extensively cross-examined on this point and continues to posit that

where the company does not feel there is sufficient risk to monitor it and

ameliorate it there is little reason for anyone to believe that the risk is material. He

is quite clear that the proper view is a forecast competitive price problem and

tracking to determine customer response is only a first basic response among

many others. (Transcript Volume 5, Page 650, line 1 to Page 653 line 3)

99. The record is replete with evidence to support Dr Booth's contention. The

following recount some of the evidence that TGI's substantive actions to identify

risk, measure it, quantify it and deal with it are limited and underscore a degree of

overstatement in this hearing. This overstatement and inconsistency should cause

the Commission to substantially diminish any kind of weight it might otherwise

have considered giving the TGI evidence and witnesses.

Annual Report

100. If the risks were substantive one would expect TGI to have invested in

studying them and to have made considerable disclosures of them in their Annual

Report and Prospectuses where there is a legal obligation to disclose and to he

truthful.

101. Commissioner Milbourne goes through a fairly thorough discussion of

disclosure in the TI Annual Report (Exhibit B3, BCUC IR 1.5, Appendix I .5) in

Transcript Volume 3, Page 279, line 5 to Page 300 line 21) Essentially if one

reads the Annual Report there is scant if any discussion of risks and requirements

for changes in regulation or for that matter changes in the company's actions. In

fact there are frequent references to positive prospects and healthy performance.

Prospectus

102. Mr Wallace confirmed with Ms McShane that she is not aware of any

disclosure of the potential for customers to switch to alternate fuels in the Annual

Reports or Bond Prospectuses of the company. (Transcript Volume 3, Page 332,

line 6 to Page 333 line 18)

Assessment of Gas & Electric Prices

103. Mr Wallace confirmed on cross-examination that Ms McShane is not aware of

any price forecasts for electricity and gas. (Transcript Volume 3, Page 332, lines 1

to 5)

104. Mr Thompson confirmed that TGI has not even done any studies of where

electricity prices are going to be going in the future (Transcript Volume 2,

Page 95, lines 15 to 19).

105. Mr Jesperson confirmed TGI has forecast electricity rates to be '/2 the rate of

inflation and that they had a 95% confidence that gas would remain

competitive with electricity. (Transcript Volume 2, Page 97, lines 4 to 14)

106. Ms McShane acknowledged when shown evidence from a BC Hydro forecast,

filed in a BC Hydro regulatory hearing, that electricity rates were forecast to

increase at the rate of inflation that if that were the case it would be more

favourable than the TGI forecast of '/z the rate of inflation. (Exhibit C2-15, &

Transcript Volume 4, Page 397, line 1 to Page 398 line 4)

107. However, BC Hydro's recent revenue requirement hearing and rate increases

have been ignored.

108. When asked why TGI did not track losses and do a study to see where things

might be going Mr Jesperson offered that they attend BC Hydro regulatory

hearings and are informed by them. He offers that they believe that the

volatility in natural gas prices dwarfs anything else so it would not matter if

they were out by 100% and it would not change their behavionr. (Transcript

Volume 2, Page 95, line 26 to Page 96, line 23)

109. TGI not only appears not to have done serious analysis, it appears to be

cavalier with the critical information it is presenting. It is hard not to conclude

that TGI management is driven by some incentive making them prone to

unbalanced spinning the issues bordering on overstatement of the issues.

Internal Analysis and Study of Risks

110. TGI has provided evidence that it has not taken prudent steps to even

understand this issue.

1.5 Please provide research studies commissioned by the Applicant to

demonstrate the validity of this risk.

Response: TGI has not commissioned any research studies to

demonstrate the validity of the risk of the price position of natural gas

vis a vis electricity.

(Exhibit B-5, CEC R 1.5, Page 5)

Market Response to Price

111. TGI has limited prospective evidence and no quantitative analysis submitted

on what the market response to prices changes is has been and might

reasonably be expected to be.

6.1 Please provide a table indicating the number of existing

residential customers that have switched from natural gas to

alternative energy sources since 2000. The table should indicate

the total revenue loss in absolute dollars as well as a percentage

of revenues (minus gas cost)

Response: TGI does not track the number of existing

residential customers that have switched from natural gas to

alternative energy sources.

(Exhibit B-5, JIESC-BCOAPO-CEC IRl, 6.1)

112. TGI does however track the number of accounts removed or abandoned,

which provides an indication of the loss of existing customers. An account is

recorded as removed or abandoned due either to the demolition of the

residential premise or the account has been terminated or locked off for non-

payment of the account. Some of these customers eventually return as a new

premise customer (i.e. new house) or as a reconnection with the remaining

customers either leaving TGI's service territories or switching to alternative

fuels.

113. Mr Fulton on cross-examination takes the TGI witnesses through a discussion

of the effects of price increases on conservation and on customer additions.

The witnesses confirm that conservation does occur with price increases and

that TGI is still forecasting customer additions albeit with a possible 25%

reduction in rates of customer attachments. (Transcript Volume 2, Page 180,

line 8 to Page 184 line 17)

Market Perception of Price Competitiveness

114. TGI witnesses offer that market perception of prices is very important.

However, TGI has no research information on the extent of misunderstanding,

the extent of uneconomic customer behaviour being driven by false

perceptions nor any study of what might be required to assist customer.

Economics of Alternative Fuels

115. TGI does not forecast customer switching to alternative fuels so there is little

to go on. However, TGI does forecast customer abandonment and removals to

be steady in the order of 1000 per year. TGI provides a payback analysis to

show how uneconomic it is to switch to electric heating and that it would

require prices to be 35% higher to resulting even a reasonable payback for

consumers. Even at today's spiked prices for natural gas it is still economic to

replace an old furnace with a high efficiency furnace. (Exhibit B-5, JIECS-

BCOAPO-CEC, IR1 6.2)

116. As discussed above, TGI is underestimating the prices for electricity we can

presume this analysis is overly conservative.

Core Market Durability and Elasticity

117. There is no evidence filed by TGI that it has studied the elasticity of demand

for natural gas particularly in its core residential and small commercial

markets. There is no evidence that it has studied scenarios where natural gas

prices are comparable to alternatives and determined what needs to be

monitored and evaluated. TGI has not filed evidence of what constitutes the

dynamics of customers switching and has not put forward evidence with

respect to how it will retain customers. TGI has not really done anything like

the comprehensive logical steps that would be required to defend itself in a

competitive situation. The Commission needs to take note of this lack of

evidence and reject the argument that because there are challenges TGI should

be given an income boost.

Terasen Inaction in Response to Risk

118. TGI appears to believe that it is sufficient to point to the evidence of potential

risk and that the existence of the potential for risk should be sufficient to

warrant a transfer of costs relative to the risk to its customers. There is an

absence of evidence that the company has exhausted the actions it might take

to ameliorate the business condition risks it refers to.

119. The CEC submits that the TGI response to business conditions should be

broad and deep before it is given relief in respect to its obligations to deal with

the risks and is enabled to transfer the cost related to those risks to its

customers. When examining risks and TGI's response to risks we need to look

for not only evidence of what they have done to mitigate risk but also at what

they have done to increase or aggravate the risks. In addition we need to look

at what they could have done to mitigate risk but did not. This evidence may

come in the form of actions taken or not taken and may come in the form of

precursor steps to action involving providing information about risks and

potential actions to its stakeholders

120. TGI when questioned by the CEC about initiatives it had taken with its tariffs

to help it govern its competitive position responded that it was reviewing rates,

had implemented commercial commodity unbundling, was looking at

residential commodity unbundling and thought generally that rate design

changes were unlikely to help. (CEC IR - 1.3) Asked specifically about

competition from heat pumps TGI offered that a back-up rate for situations

where natural gas is being used as a back-up for electric might be helpful but

that they had not asked for or implemented any changes (CEC IR 2) In answer

to what had TGI proposed to the Province regarding changes that might assist

its competitive position TGI provides an interesting list. It highlights changes

to the marginal costs for electricity pricing, the Southern Crossing Pipeline,

direct purchasing for customers, hedging programs, efficiency programs, niche

market pursuit, and subsidies for low income individuals. (CEC IR 1.4)

Interestingly TGI offers that it has commission no studies with respect to

validating the risk of natural gas price risks versus electric pricing. Instead it is

relying on a few elements of potentially correlated data. (CEC IR 1.5)

121. The primary risk TGI is touting emanates from the business conditions

regarding its price competitiveness with electricity. It is submitted that the

following are straight-forward, readily apparent things TGI could do to

mitigate any decrease in the spread between the prices.

(a) It could seek higher marginal rates for electricity consumption by

intervention in BC Hydro rate design cases or through complaint to the

Commission seeking redress of the hook cost electric pricing to the

market pricing for natural gas.

(b) It could seek to reduce its cost of gas by holding longer-term contracts

or natural hedges to spikes in the cost of gas.

(c) It could seek to avoid choices to expand into higher cost to serve

situations where it had no obligation to serve.

(d) It could seek to avoid making capital investment expansions where it

had a choice and was not obligated to make the investment, thereby

reducing its cost structure.

(e) It could avoid making uneconomic customer additions and or seek

revision of the expansion policy so that expansions occur under more

favourable conditions or with greater customer contributions.

(f) It could avoid making capital investments with poor pay offs.

(g) It could avoid making operating decisions, which significantly increase

its operating cost structure or reduce its revenue structure.

122. The following are some of the things TGI has done voluntarily to aggravate

the risks.

(a) TGI voluntarily pursued obtaining a new Customer System and

became engaged in significant expenditures and a record of activity,

which has not been economic for its customers. Most interesting has

been the loss of savings it enjoyed by being in a joint billing and

collection system with BC Hydro. TGI has developed bad debt

problems, had to improve its collections record and eventually had to

lock-off and disconnect customers resulting in loss of margin. (Exhibit

B-5, JIESC-BCOAPO-CEC, IRI 6.1) The Commission should not be

drawn into an argument that the circumstances are solely a result of gas

and electricity prices.

(b) TGI voluntarily pursued construction of the SCP pipeline resulting in a

25% increase in rate base. (Transcript Volume 3, Page 296, lines 13 to

18) Unfortunately TGI's annual reviews of the SCP utilization show

that it has a miniscule annualized load factor. Though TGI can defend

itself by pointing to Commission approval of its plans for construction

of SCP the ultimate outcome is that TGI's rates have increased

substantially because of capital expenditures without sufficient

matching revenue streams. The Commission should not engage in

rewarding this performance even where it has been involved in

approval of the plans.

(c) TGI proceeded with the acquisition of TGVI knowing many of the

problems such as the potential for the Provincial Government royalty

rebate to expire. This problem is huge if it the rebate is not extended. It

has a substantial exposure to industrial customers being over 65% of

load with over 213 having no long-term contracts. The supply coming

from a single pipeline from the mainland. Repayment of non-interest

bearing government held debt. Exposure to electric pricing based on

embedded historical cost electricity. (Exhibit B-I, Page 12) These risks

have been present from the beginning because they were there when

TGI bought the utility. The Commission should not accept TGI's

arguments that it is somehow now more risky as the risks materialize.

The Commission cannot hope to deal with these issues through

increasing equity and return on equity. The Commission needs to

recognize that when companies buy into a risk it is their problem to

manage it. Many other forms of regulatory assistance can be and are

provided by the Commission.

(d) TGI is now proposing to expand to provide service to Whistler with the

same gas on electric competition risks underlying the expansion and

the service. This hardly seems to be the actions of a company who

thinks this risk represents a real potential for its shareholder to lose its

capital investment. The Commission should not compound TGI

undertaking the risks by turning around and buying into the argument

that as the realization or materialization of the risks becomes a reality

that somehow the company is more risky and deserves higher returns

and customers yet higher rates.

(e) TGI through its non-regulated businesses is engaged in competing with

itself, specifically TGI. TGI can and attempting to market and provide

alternative energy sources. This both mitigates the parent company risk

and increases the pressure on gas consumers. Mr Thompson and Mr

Jesperson confirm that TGI non-regulated businesses are involved in

providing alternative energy sources and therefore are in effect

competing with TGI. They confirm this would hedge the competitive

risk for TI (Transcript Volume 2, Page 173, lines 21 to 26 and Page

174, lines 1 to 3). The Commission should not on the one-hand pay

increased returns to TGI while the TGI parent gains increased returns

and reduces its risks by competing against itself. This double dipping

while it should not necessarily be stopped does not merit increased

returns.

123. These responses are at best tepid and weak in terns of dealing with the risk

TGI poses as significant. The CEC believes TGI has not taken a

comprehensive approach to dealing with the risks it perceives and should not

be granted any increased returns on equity or increased equity to debt capital

structure at least until it has demonstrated a more serious approach to dealing

with the risks.

VI. Regulator's Response to Risks

124. TGI proposes to recognize the risk in increased return on equity and higher

equity to debt levels. TGI submits the evidence regarding the price of natural

gas on electric competition and interprets that its business risks have

increased. TGI's further evidence is to draw attention to the returns allowed to

other Canadian Utilities and equity to debt levels for these other utilities.

(evidence the first exhibit filed at opening for effect).

125. TGI further relates the evidence of potential credit rating reviews and the

concern about downgrades and the rating agency view of appropriate

responses

126. The CEC proposes that the Commission continue its current approach to

handling risk, working with other regulatory mechanisms.

127. The evidence of Dr. Booth provides an interesting perspective that the BCUC

regulation of ROE has about got it right using both a formulaic approach and

effective deferral accounts to have the uncontrollable risks transferred to the

customers

128. Dr. Booth proposes that if and when risk is realized it is more effective for the

regulatory repose to be a direct acceleration of recovery as potential for the

realization of the risk occurs.

"In the first place the risk is essentially a forecasting risk. As residential customers drop off the system then it is a question of whether Terasen can predict this drop off in terms of its revenue requirement. Currently this is not happening, but if it does, the risk is not that it will happen but that Terasen does not forecast it and thus can not rebalance to achieve its revenue requirement. The second and more risky situation is if the company cannot rebalance to achieve its revenue requirement. This unlikely situation might occur if industria1 and commercial users refuse to pay the higher rates resulting from the loss of residential load. In this case the recovery of the rate base is in question and Terasen runs the risk of stranded assets. However, if this risk is realistic, then the correct response is to change the depreciation rate so that the cost of potentially stranded assets is recovered from the existing users. The company acknowledged this in answer to JIESC-BCOAPO-CEC 7.2 and that the BCUC approved partial implerncntation of 26 higher depreciation rates in BCUC Order G-51-03." . (Exhibit C-2, Page 33, lines 16 to 27)

129. This is fundamentally one of the most important pieces of evidence before the

Commission after the KMI acquisition evidence. It goes to the heart of what

the Commission needs to consider. Does it have a case where underlying

fundamental risks have changed or does it have a case where risks that have

always been present are being realized or threatening to he realized and the

company is seeking to be insured against what it has not done to protect itself

or against the risks it undertook when it made the purchase?

130. The benefit of this approach is evident when one applies this to a utility and

look at the effect on rates and therefore the aggravation of the problem.

131. Using TGI's approach of raising equity thickness and return on equity we get

higher rates and costs to customers, which can be expected to aggravate the

realization of the risks long-term.

132. The Commission can calculate the cost increase to customers for the TGI

approach 38% equity versus 33% at 9.5% before taxes versus 7.75%. It

amounts to about $30 million in added costs and would require rates to be

almost 2% higher than they might otherwise be.

133. Using Dr Booth's approach of accelerating depreciation we get higher costs

temporarily, which accelerates capital recovery, and lower costs long term as

the rate base declines, which lowers rates in relative terms and ameliorates the

realization of the risks.

134. The Commission can determine that if the same amount of cost increase, $30

million, were captured in increased depreciation rates requiring approximately

the same rate increases 2% the depreciation rates could increase an average of

over 1%. This would accelerate capital recovery from approximately 40 years

to approximately 28 years.

135. Clearly Dr Booth's recommendation is far more effective use of charges to the

customer. It provides a direct way to reduce the company's exposure to the

potential realization of risks.

136. What we see emerging from the evidence is a solid theory about how the

Commission should respond to risk. It has three parts based on the level of

realization of risk.

(a) The first part deals with underlying risks not yet realized and where the

mechanisms for their realization are far off into the future.

(b) The second part deals with a period of time when the realization of the

risks is a serious near term possibility because the mechanisms for the

realization are in play and risk avoidance strategies have not been

taken and or cannot now be taken.

(c) The third part deals with the reality that the realization mechanisms

have in fact come to pass and the losses are becoming real

137. We see from the evidence in this hearing and related decisions that appropriate

regulatory response changes with the level. The following summarizes the

matching.

138. What represents the appropriate regulatory response to risks (level I)?

Setting of debt to equity ratios & return on equity levels

appropriate to underlying risk

Deferral Accounts for risks not controlled or with normal range

variation

Appropriate forecasting and management of risks

Appropriate policy to monitor risks and respond to them

Hedging policies to avoid the short-term volatility of gas prices

Acquisition of fuel sources for long-term cost management

By pass policy to allow competitive response to alternative service

Avoidance of expenditures that decrease the average revenue per

rate base $ invested

Appropriate natural gas tariffs to better reflect the costs of service

139. What represents appropriate response to the pending realization of risk (level

2)?

(a) Special customer retention tariffs where contribution is more critical than full

recovery

(b) Review of competing regulated energy tariffs

(c) Accelerated depreciation for recovery of capital concerns versus higher

ROE

140. What represents appropriate response to realization of risks and pending losses (level

3)?

(a) Loss minimization

(b) Capped rates to retain contributions & capital investment recovery

(c) Avoidance of expansion & new service obligation

(d) Closing out scenario - safety level maintenance

PNG as the High Risk Example

141. Interestingly there have been a number of references to PNG as an example of

a company with much greater risks and with a higher equity to debt ratio and a

higher return on equity to compensate them for the risks.

142. In the PNG case the higher risk is because the demographics of the PNG

customer base have a few big loads of a few industrial customers with

relatively small residential and commercial loads. Dr Booth is cross-examined

about his perception of risk for PNG. He offers that it was very risk because of

the possibility of the industrial loads dropping off and specifically mentions

Methanex and Skeena. (Volume 5, Page 655, lines 1 to 20) He goes on to

point out that those risks have now materialized. (Volume 5, Page 655, lines

21 to 25) Thus PNG was at risk of a large industrial customer leaving, which

would create the potential for unrecoverable investment. So this underlying

risk was rewarded with a higher return and required a higher equity to debt

ratio.

143. Dr Booth on questioning about PNG's risks and the regulator's ability to

remove the risks offers that PNG enjoys a responsive regulatory environment

and when it loses 70% of its industrial load the regulator can help minimize

the losses but it cannot remove the possibility of loss. (Transcript volume 5,

Page 679, lines 21 to 26 and Page 680 lines 1 to 6) Prior to the loss of a large

customer load PNG might have anticipated the pending realization of this risk.

Anticipating a trigger event to create unrecoverable investment PNG could

have made a case for faster depreciation to get its capital recovery sooner. It

could have sought to establish special customer retention rates. However, there

is no need to change the ROE or Equity to Debt ratio as the risk undertaken by

the investors threatens to become a reality. Where the company fails to

manage the risk or has misjudged events that might lead to the realization of

the risk there is no change in the underlying risk.

144. However, if the PNG risk of a large industrial load leaving becomes a reality it

does not mean that the company should have a higher return on equity and

increased equity levels. This would only exacerbate the problems. It means

higher rates for remaining customers to the point where higher rates would

simply drive customers off the system to the detriment of the remaining

investors. It means that the investors who undertook the risk for a higher

return may have to take the loss if there is no further room to charge

customers. The potential realization of a loss or the actual realization of a loss

does not equate to a change in underlying risk. It simply represents the

realization of the risk. When this happens in the case of PNG for example the

Commission needs to assist in the loss minimization processes and capital

restructuring that will need to take place to recognize the loss. After the

realization of the risk the investors take the losses in order of their security.

145. The Commission needs to determine what principles it will use after a utility

company presents evidence as to when and how a loss might occur. The

Commission would be well served to recognize the evidence in this hearing as

the basis for formulating appropriate responses.

146. Dr. Booth notes that it is not risky like PNG, where the risks have

materialized. (Transcript Volume 6, Page 919, lines 17 & 20)

147. Relating the PNG discussion to TGI Dr. Booth is of the view that the risks are

not comparable. He sets the TGI risk very low and specifically gives his

judgement of the risk as a numerical view of the probability of failure to earn a

return or recover capital. (Transcript Volume 5, Page 655, lines 25 & 26 to

Page 656, lines 1 to 5)

148. Dr Booth elaborates further that TGI and PNG have very different risks.

(Transcript Volume 5, Page 664, lines 12 to 26 and Page 665 lines1 to 3)

VII. Conclusion

149. The CEC submits that the KMI purchase is in and of itself strong evidence that

no change is required to either the Terasen Capital Stmcture, at 33% equity, or

to the Commission's formula for determining the Return on Equity. The CEC

submits it would be inappropriate to add to the customers rates directly

following the KMI purchase given the exceptional premiums paid.

150. The CEC submits the TGI's assessment of its risks has been sketchy and that

its response to risks has been weak. The CEC does not believe that the

Commission has sufficient evidence of a risk profile that would warrant the

proposed increase in capital stmcture equity and return on equity.

151. The CEC submits that the Commission should propose to have TGI, over the

next two to three years, work with its customers toward a better understanding

of any risk which may face TGI and its customers. The CEC proposes that

before increases in equity and return on equity are addressed, TGI should

work with its customers toward better regulatory responses to be proposed to

the Commission.

152. The CEC submits that there should be no change to TGVI because its risk

relationship to TGI should remain the same as it is now. The CEC submits

that TGI should work with the Provincial Government and its customers to

develop long tern plans for dealing with the pending materialization of risk

TGVI faces.

that TGI should work with the Provincial Government and its customers to

develop long term plans for dealing with the pending materialization of risk

TGVI faces.

153. The CEC submits that the more persuasive and convincing evidence is found

in Dr. Booth's submission and his recommendations should be adopted by the

Commission. Particularly given that Dr. Booth's evidence is supported by the

events which have unfolded since both sets of expert evidence were filed, the

Application for and subsequent approval by the Commission of the sale of TI.

The CEC adopts Dr. Booths evidence and the anticipated submission of Mr.

Wallace of JIESC who has worked with Dr. Booth in this proceeding.

ALL OF WHICH IS RESPECTFULLY SUBMITTED.

Christopher P. Weafer Christopher P. Weafer, Counsel to the Commercial Energy Consumers Association of British Columbia