Generic Cost of Capital

Review and Variance of Corix Decision

In proceeding 28707, the Alberta Utilities Commission (the “Commission”) issues its decision regarding phase 2 of the review and variance application of Corix Utilities (Foothills Water) Inc. (“Corix”). The application focused on two issues:

  • Billing and customer service costs that Corix were not included in the calculation of shared administration costs.
  • The approved return on equity percentage, which had changed from 8.5 percent to 9.28 percent during the proceeding.


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The 2024 Return on Equity Calculation

In proceeding 28585, the Alberta Utilities Commission (the Commission) publishes its calculation of the 2024 return on equity (ROE) after having approved the parameter values required to implement the new ROE formula. The Commission’s proposed 2024 ROE, based on the formula, is 9.28 percent.



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2024 Generic Cost of Capital Formula

In proceeding 27084, the Alberta Utilities Commission (the Commission) issues its decision regarding the generic cost of capital (GCOC) that sets the cost of capital parameters for determining the fair rate of return on equity (ROE) and deemed equity ratios for Alberta’s electric and gas utilities. The result of this proceeding sets the GCOC parameters over the next five years. In sum, the Commission decided to implement the following formulaic approach for determining ROE starting in 2024:

𝑅𝑂𝐸𝑡= 9.0% + 0.5 × (YLD𝑡 − 3.10%) + 0.5 × (SPRD𝑡 − SPRD𝑏𝑎𝑠𝑒)2

In each year (t), the approved ROE will be determined by adjusting the notional ROE of 9.0 percent, approved in this decision, by the difference in forecast long-term Government of Canada (GoC) bond yield (YLD) and utility bond yield spread (SPRD) from their base values of 3.10 percent and the bond yield spread for February 2023 respectively. This approach was largely inspired by the formula used by the Ontario Energy Board (OEB).[1]



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2024 GCOC Arguments

In proceeding 27084, interveners submit their arguments over the matters put forward by the Alberta Utilities Commission (the Commission) regarding the generic cost of capital (GCOC). The Commission had already decided to proceed with a formulaic approach that was previously approved in 2009 and had asked interveners to provide recommendations for the formula’s variables. Interveners previously submited evidence detailing their variable recommendations and have since provided arguments supporting their evidence. However, some interveners continue to argue against the formulaic approach, and most proposed a specific return on equity (ROE) ratios for the 2024 GCOC.  A significant portion of argument focused on debating whether business risk has increased or decreased in the province and why the level of risk justifies each intervener’s proposal.



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2024 GCOC Evidence

In proceeding 27084, intervenors submit their evidence regarding the issues list and other matters put forward by the Alberta Utilities Commission (the Commission) concerning the 2024 Generic Cost of Capital (GCOC). The Commission decided that the equity risk premium (ERP) approach for determining return on equity (ROE) is appropriate. The ERP approach is the basis for the one-factor formula previously approved by the Commission in 2009 and the two-factor formula adopted by the Ontario Energy Board (OEB). The Commission produced an issues list based on the two-factor approach, which the following formula expresses:

  • ROE (test year) = Notional ROE (VAR1 + VAR3) + Factor One + Factor Two
  • Factor One = VAR4 x (Forecast Long Canada Bond Yield (test year) (VAR2) – Base Forecast Long Canada Bond Yield (VAR1))
  • Factor Two = VAR7 x (Utility Bond Spread (test year) (VAR6) – Base Utility Bond Spread (VAR5))

The Commission’s questions in the issues list mainly ask intervenors to calculate and justify appropriate variables (VAR) for the above equation.



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