Cost-of-capital parameters in 2024 and beyond

On October 9, 2023, in Decision 27084-D02-2023, the AUC adopted a formula-based approach to set the rate of return on equity, or ROE, for Alberta’s regulated electric and natural gas utilities in 2024 and beyond. The AUC also set deemed equity ratios for the utilities, which determines the ratio of debt to equity in their capital structures. Together, the two determinations contribute to shaping the profitability of each regulated utility.

The approach to what is sometimes called the generic cost of capital, or GCOC, applies to all regulated electric and natural gas utilities, and will reduce regulatory lag and burden, enhance transparency and deliver regulatory certainty.

This formula-based approach is a significant step for GCOC proceedings towards a more efficient, predictable and cost-effective regulatory process that ultimately benefits ratepayers, utilities and the broader public interest in Alberta.

The AUC formula will use an equity risk premium approach by incorporating 30-year Government of Canada bond yields and utility bond yield spread. The ROE for the following calendar year will be calculated by the AUC each November. On a notional basis using current figures, the 2024 rate would be approximately nine per cent. The existing rate is 8.50 per cent.

Background on cost-of-capital

Taken together, ROE and deemed equity ratios are called cost-of-capital parameters.

The AUC will conduct a mandatory review of cost-of-capital parameters every five years, subject to mid-term reopeners either at its own discretion or upon application from interested parties.

In determining rates, the AUC must balance ensuring utilities have a reasonable opportunity to earn a fair return on their investment, with making sure rates are just and reasonable for consumers. In setting a fair return, the requirements of comparable investments, financial integrity and capital attraction are fundamental considerations.

The AUC reviews all evidence before it in order to ensure that it achieves the three fundamental requirements in setting a fair return, while ensuring that rates are just and reasonable for and consumers.