Concentric was retained by a Canadian natural gas and electricity utility through counsel to develop comprehensive expert evidence on the cost of capital for its regulated gas and electric operations in British Columbia. The companies’ cost of capital was last set six years earlier. Eighteen parties intervened or participated in the proceeding, recognizing the importance of the Commission’s “generic cost of capital” determinations that would establish the ROE and capital structures for the client’s companies, and serve as the benchmark for other utilities inside and outside the province.
Our approach was to provide the Commission with a comprehensive analysis incorporating financial modeling, North American regulatory research, a review of past decisions, an assessment of key methodological issues, the merits of a formulaic approach to determining ROE, and business risk analysis, including specific consideration of energy transition risk. The Commission’s decision placed significant weight on our analysis and recommendations. Among the Commission’s findings were acceptance of Concentric’s approach to determining appropriate proxy groups, the use of multiple financial models, key inputs to the models, our assessment of business risk, and the appropriate capital structures reflecting these risks. The Commission ultimately relied on our analysis and recommendations on all 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 breakthrough for Canadian regulators adopting a North American approach to cost of capital determinations, which sends a positive message to investors and ratings agencies regarding the constructive approach to regulation in the province.
