DBRS Morningstar Comments on Impact of Cost of Capital Decision on Alberta Utilities

On October 9, 2023, the Alberta Utilities Commission (AUC) issued its decision on the cost of capital parameters in 2024 and beyond for Alberta regulated utilities. In its decision, the AUC adopted a formulaic approach for determining the return on equity (ROE). The formula is similar to the one the Ontario Energy Board has used since 2010, with both based on a notional ROE plus changes in bond yields and bond spreads. In our preliminary review, we believe the decision is modestly positive for the affected regulated utilities.

Key takeaways include the following:
-- The notional ROE is set at 9.0%, higher than what we have seen in Alberta over the past decade. This is indicative of the current interest rate environment and in line with the higher ROE we have seen for peers across Canada.
-- We expect regulatory lag on determining the ROE to be reduced going forward, as the ROE can now be calculated mechanically annually. The regulatory process will also become more transparent as the ROE will be set using empirical data rather than through submissions from the utilities and intervenors and will ultimately be decided by the AUC.
-- We also expect the ROE going forward to be more responsive to market conditions as it will be based on the prevailing interest rate environment. However, as the ROE will now be adjusted annually, this will reduce some stability in earnings as ROEs had historically been set for multiple years.

“We expect Alberta utilities to see a modest increase in earnings for 2024, assuming no material decline in the interest rate environment for the remainder of October, because of the higher notional ROE in the formula,” said Tom Li, Vice President, Energy, Utilities, and Natural Resources. “We will continue to monitor the cost of capital proceeding and the final determination of the 2024 ROE.”