Alberta Utilities Commission Reduces Utility Cost of Capital

By David Stevens on April 7, 2015

In a March 2015 decision, the Alberta Utilities Commission (AUC) set the generic cost of capital for 2013 to 2015 for the utilities that it regulates. In the decision, the AUC reduced cost of capital parameters applicable to the utilities that it regulates. This decision will most likely be cited and reviewed if and when the Ontario Energy Board (OEB) proceeds with its promised cost of capital review. The AUC decision is found here.

The AUC found that the appropriate Return on Equity (ROE) for the utilities that it regulates is 8.3% for 2013 to 2015. This determination was based upon a review of various tests used to evaluate appropriate ROE. The determination was supported by findings that there is an overall improvement in global financial markets and that, in this environment of historically low interest rates, the days of double digit expected returns are behind us in the near term. The AUC’s approved ROE level is well below the 10.5% requested by utilities, and is below the current 9.3% ROE approved by the OEB for Ontario utilities.

The AUC decided not to reintroduce a formulaic approach to set ROE for future years. While not closing the door on this approach for the future, the AUC agreed with the positions of several parties that a formulaic approach should not be reinstituted until market conditions (i.e. interest rates and bond yields) return to a range of normalcy.

The AUC also reduced the “equity ratio” for the utilities that it regulates by 1%. This means that the approved ROE will apply to a smaller proportion of a utility’s rate base. In coming to this decision, the AUC found that this level would be sufficient for utilities to maintain a high credit rating.

The OEB’s 2014-2017 Business Plan indicates that the OEB will “complete” its review of its current approach to the cost of capital in 2014, and will implement any modifications in 2015. The stated reason for the review is to ensure that the approach continues to meet the fair return standard. There has not yet been any public process from the OEB to review its cost of capital approach. It seems fair to expect that the AUC’s detailed decision will be relied upon by parties who seek to reduce the approved cost of capital for Ontario utilities.

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