Review and Variance, Rates
In this decision, the AUC considered a Stage 2 review of the deemed equity ratio for AltaGas Utilities Inc. (“AltaGas”) of 39 per cent for the years 2018 to 2020 (inclusive) approved in Decision 22570-D01-2018, and whether the 39 per cent approved deemed equity ratio should be varied. The AUC confirmed the findings in Decision 22570-D01-2018. The approved deemed equity ratio for AltaGas for 2018 to 2020, inclusive, will remain at 39 per cent.
Background
Decision 22570-D01-2018, the 2018 generic cost of capital decision (“2018 GCOC decision”), was issued on August 2, 2018. In that decision, the AUC approved a deemed equity ratio of 39 per cent for 2018 to 2020 for AltaGas, a reduction of 200 basis points from the 41 per cent deemed equity ratio that had been approved for 2016 to 2017 in Decision 20622-D01-2016. AltaGas applied for a review and variance (“R&V”) of the 2018 GCOC decision, pursuant to Rule 016: Review of Commission Decisions.
In this decision, the members of the AUC panel who authored Decision 22570-D01-2018 were referred to as the “Hearing Panel” and the members of the AUC panel considering the review application were referred to as the “Review Panel.”
Rule 016 sets out the process for considering an application for review. The review process has two stages. In the first stage, a review panel must decide whether there are grounds to review the original decision. This is sometimes referred to as the “preliminary question.” If the review panel decides that there are grounds to review the decision, it moves to the second stage of the process where the AUC holds a variance proceeding to decide whether to confirm, vary or rescind the original decision.
The first stage of AltaGas’s R&V application was considered in Proceeding 23947. The AUC’s findings were set out in Decision 23947-D01-20193:
AltaGas has demonstrated that the improved rating of AltaGas’s new parent, ACI [AltaGas Canada Inc.], represents a materially changed circumstance since the original decision was issued and that this change could lead the Commission to materially vary the findings in the original decision. Accordingly, AltaGas has satisfied the requirements for a review of Decision 22570-D01-2018: 2018 Generic Cost of Capital and its application for a review of the findings in paragraphs 836-843 is allowed.
AUC Findings
In the 2018 GCOC decision, the AUC found that it would not depart from its historical practice of maintaining a credit rating target in the A-range for the affected utilities.
The AUC acknowledged in the 2018 GCOC decision that AltaGas has never had access to A-grade debt, and that although it may be part of AltaGas Canada Inc’s (“ACI’s”) stated corporate goals, there was no evidence to suggest it would be able to issue debt at A-range credit rating levels in the foreseeable future. The AUC noted that AltaGas has, in previous GCOC decisions, received the benefit of an equity ratio that reflects achieving an A-range credit rating. In the 2018 GCOC decision, the AUC determined that an adjustment to the equity ratio of AltaGas was required to recognize the incongruity between the assumption, in the approved deemed equity ratio, that AltaGas could obtain debt at A-range credit rating levels and the reality that AltaGas could not. The Review Panel noted that the question in this second stage R&V proceeding is whether, now that the parent of AltaGas has a higher B-range credit rating than it did when Decision 22570-D01-2018 was issued, AltaGas’s approved deemed equity ratio should be increased by the 200 basis points that were removed in the 2018 GCOC decision.
The Review Panel noted that much of the evidence presented by AltaGas in this proceeding focused on whether the AUC should have removed the 200 basis points from AltaGas’s equity thickness in Decision 22570-D01-2018; rather than whether AltaGas’s equity thickness should be adjusted in light of AltaGas’s improved credit rating (from BBB to BBB+) subsequent to the 2018 GCOC decision. AltaGas did not argue for a partial return of approved deemed equity ratio, but for a full return of the 200 basis points even though it had still not achieved the targeted A-range credit rating. While AltaGas stated that it “… would be open to the Commission to award a different equity thickness…,” AltaGas did not offer any suggestion or support for what a partial award should be or upon what factors it would be based.
The Review Panel found that a full return of 200 basis points was not warranted because the parent of AltaGas has still not obtained the necessary A credit rating to receive the previously approved 41 per cent deemed equity ratio. It was also not persuaded by the arguments of AltaGas that the reduction to its equity ratio should not have been made by the Hearing Panel. The Review Panel noted that this ground was argued and dismissed by the AUC in the first stage R&V, and that many of AltaGas’s arguments addressed issues that were rejected in the Stage 1 review and did not focus on the fundamental issue of AltaGas’s parent’s increased credit rating and its potential impact on AltaGas’s equity ratio.
The Review Panel found that the reason for which AltaGas’s equity ratio was reduced (it is not an A credit-rated utility) remained unchanged. The AUC could not therefore allow a full return of the 200 basis point equity ratio reduction. It could, however, assess whether it should consider some partial return of the 200 basis points in equity ratio. This, in turn, gave rise to the question of whether the approved deemed equity ratio should change in lockstep with the utility’s credit rating.
The Review Panel agreed with a submission from the Office of the Utilities Consumer Advocate (“UCA”) that had a BBB rating been specifically targeted in the Hearing Panel’s determination of AltaGas’s equity ratio, the value would have been much lower than the approved 39 per cent. The Review Panel noted that the Hearing Panel did not impose a deemed equity ratio for AltaGas commensurate with a BBB-range credit rating due to the magnitude of the equity ratio reduction that would be required and the resulting sizable effect on AltaGas. Given that the approved deemed equity ratio did not target the BBB-range, AltaGas’s equity ratio of 39 per cent, while lower than other utilities to reflect its lower credit rating, is still within an A-range credit rating. As indicated by the UCA, the equity ratio of 39 per cent, when combined with a return on equity (“ROE”) of 8.5 per cent, “well exceeds the minimum credit metrics for an A-range credit rating.”
Notwithstanding the fact that at a 39 per cent equity ratio, AltaGas continues to receive the benefits of an A credit-rated utility, the Review Panel considered whether a credit rating improvement from BBB to BBB (high) for the parent of AltaGas warrants an upward adjustment to AltaGas’s approved equity ratio.
The Review Panel noted that AltaGas did not argue for a partial equity ratio increase, nor did it provide any basis for arriving at a determination of a value for a partial adjustment. It was open to AltaGas, a sophisticated party represented by counsel, to adduce such evidence and make such an argument. Absent a case put forward for a partial variance, the AUC had insufficient evidence to make a determination for a partial equity ratio adjustment.
Based on the foregoing, the AUC found that the improved rating of AltaGas’s new parent, ACI, is not sufficient to materially vary the findings in the 2018 GCOC decision. Accordingly, the AUC did not vary the decision and confirmed the approved deemed equity ratio of 39 per cent for AltaGas for the years 2018, 2019 and 2020.
