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2022 Generic Cost of Capital, AUC Decision 26212-D01-2021

Link to Decision Summarized

Rates – Return on Equity


In this decision, the AUC set out the return on equity (“ROE”) of 8.5 per cent and deemed equity ratio of 37 per cent (39 per cent for Apex Utilities Inc.) collectively referred to as “parameters” for the year 2022 on a final basis. These parameters apply to the following utilities:

·        AltaLink Management Ltd. (“AML”);

·        Apex Utilities Inc. (“AUI”);

·        ATCO Electric Ltd. (“AE”);

·        ATCO Gas & Pipelines Ltd. (“AGP”);

·        ENMAX Power Corporation (“ENMAX”);

·        EPCOR Distribution & Transmission Inc. (“EDT”);

·        FortisAlberta Inc. (“Fortis”);

·        KainaiLink L.P.;

·        City of Lethbridge;

·        PiikaniLink L.P.;

·        The City of Red Deer; and

·        TransAlta Corporation.

The parameters set out in this decision do not apply to EPCOR Energy Alberta GP Inc, ENMAX Energy Corporation, and Direct Energy Regulated Services because they are regulated pursuant to the Electric Utilities Act, Regulated Rate Option Regulation, Gas Utilities Act, and the Default Gas Supply Regulation, respectively.

Background and Procedural Summary

In each of the Public Utilities Act, the Gas Utilities Act, and the Electric Utilities Act, the AUC is required to set a fair return for utilities as a part of setting just and reasonable rates for customers. The components of a fair return determined in a generic cost of capital (“GCOC”) proceeding are the parameters. While each of these statutes provides matters for the AUC to consider, there is no given method for determining a fair return.

Historically, the AUC considered parameters for each utility on a case-by-case basis. In the 2004 test year, the AUC set a generic ROE for all utilities and adopted an adjustment mechanism formula to determine the ROE in subsequent years. This formula was used from 2005 to 2008, but the global financial recession beginning in 2007 caused the AUC to alter its approach.

Beginning in 2009 as a response to the recession, the AUC began establishing parameters for a two to three-year test period at a time. This is following an intensive regulatory process in a GCOC proceeding in which parties submit a broad range of economic and financial evidence to arrive at expectations of reasonable return.

In January 2020, parties filed evidence for the 2021 GCOC proceeding. On March 19, 2021, the AUC suspended its established process due to uncertainty in financial markets caused by the COVID-19 pandemic. To provide a measure of stability, the AUC utilized a menu-based approach, allowing each utility to select its own preferred option for settings its parameters. This ultimately resulted in the AUC prospectively approving generic parameters for all utilities by extending the approved rate for 2020 to the end of 2021 on a final basis.

The 2022 GCOC proceeding was initiated on December 22, 2020, and sought parties’ comments. The first question sought to determine whether there were sufficient grounds to extend the existing parameters for a further period of time or whether they should only be maintained until a specific threshold such as a specific set of market conditions have passed. The utilities predominantly requested that the current parameters be extended for at least one year, dispensing with the need for the 2022 GCOC proceeding, while the Consumers’ Coalition of Alberta and the Office of the Utilities Consumer Advocate opposed this view.

Following the comments from parties, the AUC concluded that given the economic and market data that would normally be used to inform its judgment remaining in a state of flux, there is an inadequate basis to depart from the currently approved ROE and equity thicknesses (either up or down).

The AUC also rejected the suggestions made by interveners that a full-scale GCOC proceeding is required citing the probable need for multiple and significant updates regarding economic and market data due to it being a time of major uncertainty. It was also unclear to the AUC that in these circumstances, the rates resulting from a proceeding would be just and reasonable.

Conclusion

In light of the persistence of economic uncertainty caused by the COVID-19 pandemic, the AUC found that there is not sufficient cause to undergo a GCOC proceeding. Therefore, the AUC approved the ROE of 8.5 percent and deemed an equity ratio of 37 percent (39 percent for Apex Utilities Inc.) for the year 2022 on a final basis.

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