LETTER NO. L-43-01 ROBERT J. PELLATT SIXTH FLOOR, 900 HOWE STREET, BOX 250 COMMISSION SECRETARY VANCOUVER, B.C. CANADA V6Z 2N3 Commission.Secretary@bcuc.com TELEPHONE: (604) 660-4700 web site: http://www.bcuc.com BC TOLL FREE: 1-800-663-1385 FACSIMILE: (604) 660-1102 VIA FACSIMILE November 26, 2001 Mr. C.P. Donohue Mr. Robert H. Hobbs Director, Regulatory Affairs & Gas Supply Vice President, Regulatory and Legislative Services Pacific Northern Gas Ltd. UtiliCorp Networks Canada (British Columbia) Ltd. 950 - 1185 West Georgia Street 1290 Esplanade Vancouver, B.C. V6E 4E6 P.O. Box 130 Trail, B.C. V1R 4L4 Mr. David M. Masuhara Vice President Legal, Regulatory & Logistics BC Gas Utility Ltd. 24th Floor, 1111 West Georgia Street Vancouver, B.C. V6E 4M4 Dear Sirs: Re: Return on Common Equity for a Low-Risk Benchmark Utility for the Year 2002 In letter No. L-62-01, the Commission established a written public hearing to review the yield spread between medium and long-term bonds in 2001 to consider whether amendments should be made to the mechanism prior to the calculation of the low-risk benchmark Return on Common Equity (“ROE”) for 2002. In addition, the hearing was to review whether or not to continue with the Commission’s practice of rounding the low-risk benchmark ROE to the nearest 25 basis points (0.25 percent). Following the hearing, the Commission determined by Order No. G-109-01 that the current treatment of the yield spread between 30-year and 10-year bonds did not require adjustment. The Commission also determined that the ROE for the low-risk benchmark utility, expressed as a percentage, should be rounded to two decimal places prior to adding the utility-specific risk premium. Therefore, pursuant to Order No. G-80-99, as amended by Order No. G-109-01, the Commission has determined that 9.13 percent is the appropriate ROE for a low-risk benchmark utility in the year 2002. The calculation and other documentation in support of this finding are attached. The appropriate ROEs in 2002 for individual utilities will incorporate the risk premium for each utility relative to the low-risk benchmark. Yours truly, Original signed by: JWF/cms Robert J. Pellatt Attachments cc: Mr. R. Brian Wallace Mr. Ray Aldeguer, Senior Vice President Bull, Housser & Tupper Legal and Regulatory Affairs and General Counsel Mr. Richard Gathercole, Executive Director British Columbia Hydro and Power Authority The British Columbia Public Interest Advocacy Centre Mr. J.D.V. Newlands, President Pacific Western Energy Products & Services Inc. MisCor/2002 ROE
CALCULATION OF ALLOWED 2002 RATE OF RETURN ON COMMON EQUITY FOR A LOW-RISK BENCHMARK UTILITY (PER COMMISSION ORDER NO. G-80-99, AS AMENDED BY ORDER NO. G-109-01) A forecast of long-term Canada bonds is developed based on the Consensus Economics forecast of 10-year bonds (step 1) and the observed spread between 10- and 30-year bonds over a defined period (step 2). This establishes a forecast yield for long Canada bonds (step 3). 1. Ten Year Canada Bond Yield – end of February 2002 4.900% (Consensus Economics, November 2001 Consensus Forecast) Ten Year Canada Bond Yield – end of November 2002 5.400% (Consensus Economics, November 2001 Consensus Forecast) Average of 3 and 12 Month Forecasts 5.150% 2. Add Yield Spread Between 10-Year (June 1, 2009; 5.5%) and 30-Year (June 1, 2029; 5.75%) for all Trading Days in October 2001. 0.479% 3. Equals Forecast Yield on Long-Term Canada Bonds 5.629% Where the forecast yield is greater than 6.0 percent, the sliding scale applies to the difference between 6.0 percent and the forecast yield, and this amount is added to 9.5 percent. Where the forecast yield is 6.0 percent or below, no sliding scale adjustment is applied and the equity risk premium is fixed at 3.50 percent (step 4). The equity risk premium is added to the forecast Long Canada yield to determine the unrounded allowed ROE (step 5). The unrounded ROE in percentage terms is rounded to the nearest 2 decimal places (step 7). 4. Equity Risk Premium when the forecast Long Canada Yield is 6.0% or below 3.500% 6. Unrounded Allowed ROE 9.129% 7. Rounded Allowed ROE 9.13%
2002 ROE Determination -- 10 to 30 Year Spreads Trading Days in October 10 yr. Yield 30 yr. Yield Spread (bp) 1-Oct 5.32 5.78 4 6 2 5.26 5.73 4 7 3 5.25 5.71 4 6 4 5.26 5.72 4 6 5 5.23 5.71 4 8 9 5.30 5.77 4 7 1 0 5.32 5.79 4 7 1 1 5.41 5.84 4 3 1 2 5.40 5.84 4 4 1 5 5.35 5.82 4 7 1 6 5.30 5.75 4 5 1 7 5.25 5.72 4 7 1 8 5.25 5.71 4 6 1 9 5.29 5.74 4 5 2 2 5.31 5.77 4 6 2 3 5.28 5.76 4 8 2 4 5.22 5.72 5 0 2 5 5.17 5.69 5 2 2 6 5.15 5.68 5 3 2 9 5.08 5.65 5 7 3 0 4.98 5.56 5 8 3 1 4.86 5.32 4 6 Average Spread 4 7 . 9 Note : Source : 10 yr. Bond is Canada June 1, 2011; 6.00% Globe and Mail, Report on Business 30 yr. Bond is Canada June 1, 2029; 5.75% October 2, 2001 - November 1, 2001
3 1 3 0 2 9 2 6 2 5 2 4 2 3 2 2 1 9 Trading Days 1 8 October 2001 1 7 1 6 1 5 1 2 1 1 1 0 9 5 4 3 2 1-Oct 0 1 0 2 0 10 and 30 Year Bond Yields 6.00 5.50 5.00 4.50 c t 3 5 O 1 0 1 2 1 6 1 Trading Days Y i e l d s47.9 4 6 5 8 5 7 5 3 5 2 5 0 4 8 4 6 4 5 4 6 4 7 4 5 4 7 4 4 4 3 4 7 4 7 4 8 4 6 4 6 4 7 4 6 3 0 4 0 5 0 6 0 7 0 10 yr. Yield 30 yr. Yield 1 8 2 2 2 4 2 6 3 0
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.