DBRS Comments on BCUC’s Decision on FEU Amalgamation, Rate Design Application

DBRS notes that on February 26, 2014, the British Columbia Utilities Commission (BCUC) issued a decision on FortisBC Energy Utilities’ (the FEU) Application for Amalgamation and Rate Design (the Decision). The FEU comprises FortisBC Energy Inc. (FEI), FortisBC Energy (Vancouver Island) Inc. (FEVI), and FortisBC Energy (Whistler) Inc. (FEW). DBRS has reviewed the Decision and is of the view that the Decision is credit neutral to FEI, reflecting the following factors: (1) the business risk profile of the amalgamated entity would not significantly change from FEI’s current business risk level. This reflects the fact that the amalgamated entity will have a larger customer base than FEI and that risk attributable to the small size of FEVI and FEW, combined with their high rates, will be eliminated following the amalgamation; and (2) the BCUC recommends that the return on equity (ROE) and capital structure remain the same for the amalgamated entity as for FEI; however, the final determination as to the appropriate ROE and capital structure is deferred to the Generic Cost of Capital (GCOC) Proceeding.

In the Decision, the BCUC’s major determinations are as follows:

(1) That it is in the public interest that the FEU amalgamation be allowed and that the amalgamation will provide economic and other benefits to FEU customers as a whole. The benefits include regulatory efficiency from one entity filing a revenue requirements application, one set of income tax returns, and one set of annual reports, etc.

(2) That the FEU may adopt common rates for the amalgamated entity following the confirmation: (a) the Lieutenant Governor in Council has, by order, consented to amalgamation, and (b) the amalgamation has been effected. The common rates are critical for the amalgamated entity to establish rate stability over the long term, especially for customers of FEVI, who can expect rate increases over a period of time without the amalgamation.

(3) That the BCUC agrees to accept the rate design proposal put forward by the FEU for temporary rate design once the amalgamation is legally effective. The FEU proposed to use FEI’s existing rate design methodologies as a basis for the rate design for the FEU.

(4) That postage stamp rates for all customers will be phased in over a three-year period, and that the balance of FEVI’s Rate Stabilization Deferral Account (RSDA) will be used to phase in the rate increases for the customers of FEI.

(5) That ROE and the capital structure for the FEU are recommended to be the same as that of FEI. The final determination is deferred to the GCOC Proceeding.

DBRS expects that the final determination of ROE and equity thickness for the amalgamated entity will be reasonable with respect to its business risk profile. In the event that the final ROE and equity thickness of the amalgamated entity are materially lower than that of FEI, it could have a negative impact on the FEU’s earnings and cash flow.

Notes:
The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on the DBRS website under Methodologies.