Concentric was retained by a Canadian natural gas and electricity utility, represented by legal counsel, to develop comprehensive expert evidence regarding the cost of capital for its regulated gas and electric operations in British Columbia. The utility’s cost of capital was last established six years earlier. Eighteen parties intervened or participated in the proceeding, highlighting the significance of the Commission’s “generic cost of capital” determinations that would establish the Return on Equity (ROE) and capital structures for the client’s companies, while also serving as a benchmark for other utilities inside and outside the province.
Our approach consisted of providing the Commission with a comprehensive analysis that incorporated financial modeling, research on North American regulatory practices, a review of past decisions, an evaluation of key methodological issues, an examination of the merits of a formulaic approach to determining ROE, and a business risk analysis, which specifically considered the risks associated with energy transition. The Commission’s decision placed significant weight on our analysis and recommendations.
Among the Commission’s findings were the acceptance of Concentric’s approach to determining the appropriate proxy groups, the use of multiple financial models, key inputs to the models, our evaluation of business risk, and the appropriate capital structures that reflected these risks. The Commission ultimately relied on our analysis and recommendations on all the key issues addressed in the proceeding.
A key finding was the recognition that the client’s overall business risk has increased since 2016, largely as a result of the energy transition.
We consider the decision a significant breakthrough for Canadian regulators in adopting a North American approach to cost of capital determinations, which conveys a positive message to investors and ratings agencies regarding the constructive approach to regulation in the province.
