Deemed Equity Thickness

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 Albertaโ€™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:

๐‘…๐‘‚๐ธ๐‘ก= 9.0% + 0.5 ร— (YLD๐‘ก โˆ’ 3.10%) + 0.5 ร— (SPRD๐‘ก โˆ’ SPRD๐‘๐‘Ž๐‘ ๐‘’)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 formulaโ€™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. ย 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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