Regulatory Law Chambers logo

AUC Determination of the Cost-of-Capital Parameters for 2024 and Beyond, AUC Decision 27084-D02-2023

Link to Decision Summarized

GAS – Rates

Application

The AUC initiates a mandatory review of cost-of-capital parameters every five years, subject to mid-term reopeners, on its own motion or upon application from interested parties. The cost-of-capital parameters apply to the following utilities: AltaLink Management Ltd; Apex Utilities Inc; ATCO Electric Ltd; ATCO Gas and Pipelines Ltd; ENMAX Power Corporation; EPCOR Distribution & Transmission Inc; FortisAlberta Inc; and KainaiLink LP.

The AUC established this proceeding in January 2022, as a bifurcated process to determine the return on equity (“ROE”) and deemed equity ratios. Decision 27084-D01-2022, issued after the first part of the proceeding was completed, established the cost-of-capital parameters for 2023. This decision addressed the second part of the proceeding and established a formulaic approach for setting ROE in 2024 and each year thereafter, including the deemed equity ratios for the utilities.

Decision

The AUC adopted the following formulaic approach for calculating the ROE, utilizing the equity risk premium (“ERP”) methodology:

ROEt=9.0%+0.5x(YLDt-3.10%)+0.5x(SPRDt-SPRDbase)

Pertinent Issues

The AUC adopted a formulaic approach, implementing an ERP-based two-factor formulaic approach similar to the one utilized by the Ontario Energy Board. The AUC’s generalized formulaic approach can be specified as:

ROEt=9.0%+0.5x(YLDt-3.10%)+0.5x(SPRDt-SPRDbase)

The approved ROE is determined by adjusting the notional ROE of 9.0 per cent approved in this decision by the difference in forecast long-term Government of Canada (GoC) bond yield (YLDt) and utility bond yield spread (SPRDt) from their base values of 3.10 per cent and the bond yield spread for the month of February 2023, respectively. These forecasts will be calculated by the Commission in early November of each year as follows:

(i) The forecast long-term GoC bond yield will be calculated as the weighted average of (a) the 30-year GoC bond yield forecasts published by Royal Bank of Canada (RBC), TD Bank (TD) and Scotiabank in October, or the most recent month prior to October, preceding the test year for the forecast period spanning from Q1 to Q4 of the test year (0.75 weight); and (b) the naïve forecast representing the average long-term GoC bond yield over the period October 1 to October 31 each year preceding the test year (0.25 weight). In other words, the published forecasts and actual data in October 2023 will be used to set the ROE for 2024, data from October 2024 will be used to set the ROE for 2025, and so on.

(ii) The prevailing utility bond yield spread will be calculated as the average difference between the 30-year A-rated Canadian utility bond yield and the long-term GoC bond yield over the period October 1 to October 31 of each year preceding the test year (i.e., the utility bond yield spread in October 2023 will be used to determine the ROE for 2024, and so on).

The AUC did not determine in this proceeding the cost-of-capital parameters for the various investor-owned water utilities under its jurisdiction. However, the AUC held that it may consider in other proceedings the determinations it made in this proceeding in relation to the ROE and deemed equity ratios.

The AUC also determined that the deemed equity ratios should be reviewed every five years or whenever the ROE formula is reviewed, whichever occurs first.

Related Posts

Judd v Alberta Energy Regulator, 2024 ABCA 154

Judd v Alberta Energy Regulator, 2024 ABCA 154

Link to Decision Summarized Download Summary in PDF Appeal – Production of Records Application Michael Judd ("Appellant") appealed a decision by the Alberta Energy Regulator (“AER”) that denied his...