N-1Application
40 passages
following for consideration in NSPML's 2026 Assessment: Date Filed: July 18, 2025 Page 4 of 29 ML Regulations, Section 3. 2 ML Regulations, Section 8(2). 2024 Maritime Link Benefits Report. • Return on Equity Review ("ROE"): As encouraged...
AI summary NSPML is filing its 2026 Assessment Application, proposing a 9% Return on Equity (ROE) despite a recommended range of 10.1 to 10.35% from Concentric Energy Advisors. NSPML also requests a single-year assessment for 2026 due to cost projection uncertainties, despite the Board's suggestion to consider a multi-year assessment.
3.5 2026 Equity Financing Costs NSPML's Return on Equity review is included in Sections 6 and 7. For purposes of this Assessment, NSPML has applied 9 percent on its average rate base as detailed below. Applying the NSEB-approved 30 percent...
AI summary NSPML is proposing an equity financing cost of $40.7 million for 2026 based on applying a 9% return on equity to its forecasted average shareholder equity. The reduction in equity financing costs compared to 2025 is attributed to a lower average rate base due to annual Maritime Link depreciation, partially offset by sustaining capital.
6.1 NSPML's Return on Equity NSPML's authorized ROE is currently tied to NS Power's ROE and has been 9 percent since the Maritime Link was commissioned in 2018. In the Board's Decision approving the Maritime Link in July 201320F 21 , the B...
AI summary NSPML's authorized Return on Equity (ROE) has been 9 percent since 2018, tied to NS Power's ROE. The NSEB requested a separate ROE for NSPML in the 2026 Assessment Application. NSPML argues for maintaining the 9 percent ROE, citing affordability concerns and the complexity of its operations, despite expert evidence suggesting a higher ROE range of 10.1 to 10.35 percent.
6.2 ROE Analysis and Asset Complexity - Not a Traditional Transmission Asset Factors which differentiate NSPML's risks from those of the average T&D company, are discussed below including management and maintenance of NSPML's highly comple...
AI summary This section discusses the unique risks associated with NSPML, emphasizing its complex asset management, complex agreements, and current capital structure, which differentiate it from typical transmission and distribution companies.
Highly Complex Asset: As further elaborated upon in Concentrics's Expert Evidence, the Maritime Link is a highly complex set of assets. The High Voltage Direct Current ("HVDC") interconnection comes with increased operational risk as compa...
AI summary The Maritime Link is a highly complex asset involving HVDC technology, subsea cables, and complex agreements with NLH. It has a higher debt-to-equity ratio compared to traditional T&D utilities, increasing operational and financial risks. Comparators with subsea transmission assets are limited, and ROE ranges are provided for reference.
above ground Alternating Current ("AC") transmission operations, whose operating risk 1 levels are materially less than NSPML and whose average ROE is 9.34 percent. This return 2 profile is still above NSPML's present ROE, despite their si...
AI summary The document discusses the return on equity (ROE) for above ground AC transmission operations, noting that their operating risk is lower than NSPML, but their average ROE is still higher. Concentric recommends a ROE range of 10.10 to 10.35 percent, while NSPML requests continuation of its 9 percent authorized ROE.
n the approved ROE with a 30% equity thickness. NSPML notes that its request is as a result of not being able to be able to adjust to 30 percent equity because of the factors described in section 7.2.
AI summary NSPML explains that it cannot adjust to the approved ROE with a 30% equity thickness due to factors outlined in section 7.2 of the document.
9.0 REQUEST FOR RELIEF In consideration of the above, NSPML respectfully requests that the Board issue an Order pursuant to sections 64 of the Public Utilities Act and 8 of the ML Regulations: 1. Approving a 2026 assessment for NSPML in th...
AI summary NSPML requests the Board to approve a 2026 assessment of $198.7 million, a Return on Equity of 9 percent, and a regulated capital structure with 60% debt and 40% equity, along with flexibility for original project capital.
generation. It was also intended to help meet Canadian federal 9 regulations requiring a 50% reduction in coal emissions by 2030 and Nova Scotia regulations 10 requiring 40% renewable energy by 2020. 11 The authorized ROE for NSPML has his...
AI summary The document discusses the Maritime Link project and its financing, including the use of a federal loan guarantee, the authorized return on equity (ROE) for NSPML, and the need to estimate the cost of capital for rate-making purposes. The ROE for NSPML has historically been linked to that of NS Power.
1 Figure 1: Summary of Results4 CAPM – Historical MRP 8.82% Multi-Stage DCF 9.28% Risk Premium 9.92% Average 9.34% - 2 In our report, we also discuss the unique business and financial risks of NSPML, and compare the 3 authorized return for...
AI summary The document presents different methods for calculating the weighted average cost of capital (WACC), including CAPM, Multi-Stage DCF, and Risk Premium, and discusses the unique financial risks of NSPML compared to other transmission companies, which are primarily above ground AC operations.
- 7 A. The financial majority of the Maritime Link assets are the converters and subsea cable, 8 which have greater operational risk than typical overhead transmission lines due to the 9 subsea operating environment and the complexity of t...
AI summary The document discusses the unique financial and operational risks of NSPML, including its highly leveraged capital structure, complex agreements with NLH, and the higher risk associated with subsea transmission assets. A risk premium of 75-100 basis points is recommended to account for these risks, and a higher common equity ratio of 40% is requested for NSPML.
21 D. Report Organization 22 The remainder of the report is organized as follows: Section 2 discusses the legal requirements 23 and regulatory precedents for the determination of a fair rate of return. Section 3 provides an 24 overview of...
AI summary The report is organized into sections that cover legal requirements, economic conditions, authorized returns for transmission companies, proxy group selection, ROE estimation methods, capital structure assessment, and overall conclusions.
A. The Fair Return Standard 5 The principles surrounding the concept of a "fair return" for a regulated company (Fair Return 6 Standard) were established by the Supreme Court of Canada in Northwestern Utilities v. City of Edmonton (1929) S...
AI summary The Fair Return Standard, established by the Supreme Court of Canada in Northwestern Utilities v. City of Edmonton and reaffirmed in Ontario (Energy Board) v. Ontario Power Generation Inc. , ensures that regulated utilities can recover their operating and capital costs through rates, enabling them to earn a return equivalent to investments of comparable risk, thus encouraging continued investment and operational maintenance.
17 B. The Stand-Alone Principle 18 The Stand-Alone Principle provides that the utility must be regulated as if it were a stand-alone 19 entity, raising capital on the merits of its own business and financial characteristics. In this way, 2...
AI summary The Stand-Alone Principle requires utilities to be regulated as independent entities, ensuring they raise capital based on their own financial and risk profiles. This prevents cross-subsidization within corporate structures and ensures fair returns. NSPML, for example, must compete for capital with other subsidiaries like Tampa Electric Company, which has different return metrics.
1 C. The Relationship Between Capital Structure and ROE 2 The cost of common equity depends in part on the company's capital structure. The common 3 equity ratio and equity rate of return must therefore be considered together to determine...
AI summary The relationship between a company's capital structure and return on equity (ROE) is discussed, emphasizing that lower common equity ratios increase financial risk and require higher rates of return to compensate shareholders. The decision on capital structure by regulators affects the required rate of return on common equity.
3 A. Summary and Relevance to Utility Cost of Capital 4 Utilities raise debt and equity in a global market influenced by macroeconomic fundamentals, 5 capital markets and central bank policies. The cost of debt for utilities is observable...
AI summary Utilities raise debt and equity in a global market influenced by macroeconomic factors, capital markets, and central bank policies. The cost of debt is based on recent interest rates, while the return on equity (ROE) must be estimated considering macroeconomic and capital market factors. Real GDP growth, inflation, and interest rates are key inputs for cost of capital models, and ROE is influenced by central bank policy, investor confidence, and financial market uncertainty.
23 1. Interest Rates 24 Bond yields are the most direct indicator of the cost of capital, as they reflect the level of interest 25 required to compensate debt (but not equity) investors in the current market. Bond yields are a 26 direct in...
AI summary The text discusses changes in Canadian government bond yields over time, particularly for 10-year and 30-year bonds, and how these changes affect interest rates and the cost of capital. It also compares Canadian utility bond yields to government bond yields and references forecasts from Consensus Economics for future bond yields in Canada and the U.S.
15 F. Capital Market Conclusions 16 Interest rates on government and utility bonds have increased to some extent since January 2023, 17 when the UARB approved the settlement in NS Power's previous GRA. This indicates that despite 18 the un...
AI summary Interest rates on government and utility bonds have increased since January 2023, but the cost of utility capital has remained relatively stable. Long-term interest rates in Canada are expected to rise, while those in the U.S. are expected to decline. These projections have been incorporated into financial models such as CAPM, Risk Premium, and multi-stage DCF.
9 A. Subsea Electric Transmission Company Returns 10 Concentric identified several FERC-regulated U.S. transmission lines that are comparable to the 11 Maritime Link because they are for cables that are partially subsea and partially overh...
AI summary The text discusses FERC-regulated U.S. transmission lines comparable to the Maritime Link, highlighting authorized ROEs for other subsea cable projects in a table.
5 B. Other Electric Transmission Company Returns 6 As there is not a critical mass of North American regulated utilities with a material subsea 7 component, Concentric also considered authorized ROEs and common equity ratios for other 8 in...
AI summary The document discusses authorized returns on equity (ROE) for electric transmission companies in Canada, comparing benchmarks from Hydro One Network, Alberta Utilities Commission, and Quebec's Regie. It emphasizes the use of performance-based regulation and deemed equity ratios to differentiate risk and set ROEs.
4 Figure 15: Canadian Authorized Returns - Transmission Company Province Ownership ROE Equity Ratio Hydro One (transmission) Ontario IOU 9.36% 40.0% Hydro One (distribution) IOU 9.36% 40.0% ATCO Electric (transmission) Alberta IOU 8.97% 37...
AI summary The authorized return on equity (ROE) for Canadian transmission companies ranges from 8.2% to 9.36%, with deemed equity ratios between 30% and 40%. These returns apply to companies with diverse transmission portfolios, unlike single-asset companies like NSPML.
2 SELECTION OF PROXY COMPANIES 3 Since ROE is a market-based concept and given that NSPML is not publicly-traded, it is necessary 4 to establish a group of companies that are both publicly-traded and comparable to the Company's 5 business...
AI summary The document discusses the selection of proxy companies for NSPML to estimate ROE, noting that NSPML is not publicly traded and requires comparable publicly-traded companies with similar business and financial characteristics. The proxy group includes North American electric transmission and distribution utilities.
METHODS FOR ESTIMATING THE RETURN ON EQUITY Analysts use multiple approaches to estimate the cost of common equity. The required ROE can be estimated using one or more analytical techniques that rely on market-based data to quantify invest...
AI summary The document discusses methods for estimating the return on equity (ROE), emphasizing the use of multiple analytical techniques based on market data. It highlights the importance of aligning ROE estimates with investor expectations and acknowledges that no single model is definitive. Other Canadian utility regulators also support using multiple approaches to determine a fair ROE.
23 4. Multi-Stage DCF Model 24 In order to address some of the limiting assumptions underlying the Constant Growth form of the 25 DCF model, our ROE analysis and recommendation relies on the results of a multi-period (three-26 stage) DCF M...
AI summary The document discusses the use of a multi-stage DCF model to improve upon the limitations of the Constant Growth DCF model. It outlines a three-stage approach, incorporating near-term, transitional, and long-term growth rates, with the terminal stage assuming perpetual growth aligned with nominal GDP. The model uses dividend forecasts and GDP growth data from Consensus Economics.
B. Capital Asset Pricing Model ("CAPM") - The CAPM method is based on the relationship between the required return of a security and the - 5 systematic risk of that security. As shown in Equation [4], the CAPM is defined by four - 6 compon...
AI summary The document explains the Capital Asset Pricing Model (CAPM), emphasizing its use of forward-looking estimates to determine the required return on equity. It outlines the components of CAPM, including the risk-free rate, beta, and market risk premium, and discusses the calculation of beta using covariance and variance. The analysis uses forecasted yields and historical spreads to estimate the risk-free rate.
19 Response: 20 I recommend the use of Blume-adjusted beta values. Furthermore, I recommend the use of the beta values reported by Value Line to ensure there is consistency amongst all CAPM estimates. 21 48 23 We agree with Dr. Lesser, and...
AI summary The text discusses the recommendation to use Blume-adjusted beta values and Value Line beta values for consistency in CAPM estimates. It references the BCUC's reversal of its previous stance on Blume-adjusted betas and cites expert opinions supporting their use in cost of capital analysis.
13 Figure 21: Historical Market Risk Premia – Canada and U.S. Canada 5.75% United States 7.31% Average 6.53% 15 We have previously used an average of forward-looking and historical MRPs in Canada, which 16 was the approach taken by the BCU...
AI summary The text discusses the use of historical market risk premia (MRPs) in the CAPM analysis for NSPML, noting that it is a conservative estimate compared to forward-looking MRPs. The approach aligns with recent practices in Canada, as seen in the BCUC's September 2023 decision for FortisBC.
20 4. CAPM Results 21 Our CAPM analysis for the North American Electric T&D proxy group produces an ROE estimate 22 of 8.82 percent, including an adjustment of 50 basis points for flotation costs and financial 23 flexibility. CONCENTRIC EN...
AI summary The CAPM analysis for the North American Electric T&D proxy group estimates an ROE of 8.82 percent, adjusted for flotation costs and financial flexibility. A reference is made to a British Columbia Utilities Commission decision.
1 C. Flotation Costs and Financing Flexibility 2 It is common practice for Canadian regulators to approve an adjustment for flotation costs and 3 financing flexibility, with 50 basis points being the norm (as discussed below). The adjustme...
AI summary The document discusses the common practice of Canadian regulators approving flotation costs and financing flexibility adjustments, typically 50 basis points, to compensate equity holders and ensure financial flexibility. It also highlights variations in this practice across jurisdictions, with examples from Nova Scotia, Manitoba, Saskatchewan, and British Columbia.
1 Figure 22: Jurisdictional Comparison of Financing and Flexibility Adjustment Jurisdiction Adj. Docket/Proceeding Notes Alberta 50 bps 2018 GCOC Decision 22570-D01-2018 and 2024 GCOC Decision 27084- D02-2023 Adjustment of 50 bps is normal...
AI summary The document compares financing and flexibility adjustments across various Canadian jurisdictions, noting that most have implemented a 50 basis point adjustment for flotation and financing flexibility, with some exceptions. Nova Scotia's 2023 rate application was resolved through a settlement agreement that did not specify whether flotation costs or financing flexibility were included in the authorized ROE.
1 D. Risk Premium Analysis - 2 In general terms, the Risk Premium approach recognizes that equity is riskier than debt because - 3 equity investors bear the residual risk associated with ownership. Equity investors, therefore, - 4 require...
AI summary The Risk Premium Analysis discusses how equity is riskier than debt and how the Return on Equity (ROE) is estimated as the sum of the Risk Premium (RP) and the yield on a particular class of bonds. A regression analysis using data from over 1,000 U.S. electric utility rate cases is used to estimate the relationship between risk premium and interest rates.
1 Figure 24: Risk Premium Results Using 30-Year Treasury Yield Using 30-Day Average Yield on 30-Year Treasury Bond Using Q3 2025–Q3 2026 Forecast for Yield on 30-Year Treasury Bond50 Using 2027- 2031 Forecast for Yield 30- Year Treasury Bo...
AI summary Figure 24 presents risk premium results using the 30-Year Treasury Yield under different scenarios, including 30-day average yield, Q3 2025–Q3 2026 forecast, and 2027–2031 forecast. The resulting return on equity (ROE) decreases as the yield increases.
3 A. NSPML's Deemed Capital Structure 8 examined the business and financial risk profile of NSPML. 4 NSPML has a deemed capital structure of 30% common equity and 70% long-term debt, which was approved by the Board in 2013.56 5 The capital...
AI summary The document discusses NSPML's deemed capital structure, which is 30% common equity and 70% long-term debt, approved by the Board in 2013. This structure is influenced by a Federal Loan Guarantee for the Maritime Link project.
9 B. Risk Analysis 10 Concentric examines risk from two primary perspectives: (1) business risk; and (2) financial risk. 11 Business risk for a regulated utility encompasses both operational risk (e.g., economy of service 12 territory, wea...
AI summary Concentric analyzes risk for a regulated utility from two perspectives: business risk, which includes operational and regulatory factors, and financial risk, which relates to the company's capital structure and leverage. These risks influence investment decisions and return requirements.
ell as 24 management of the physical assets which are covered in NSPML's assessments. This degree 59 Emera Incorporated – 2024 Annual Information Form, p. 11. of exposure exists notwithstanding continuation of the holdback mechanism60 1 an...
AI summary The document discusses NSPML's business risk, highlighting its inability to achieve its authorized return on equity (ROE) since the Maritime Link was placed in service in 2018. The earned ROE has consistently been below the authorized range of 8.75% to 9.25%, with an average of 8.50% from 2018 to 2024.
8 Figure 27: Authorized vs. Regulated ROE for NSPML Year Authorized Regulated(1) 2018 9.00% 8.63% 2019 9.00% 8.58% 2020 9.00% 8.25% 2021 9.00% 9.16% 2022(2) 9.00% 7.01% 2023(2) 9.00% 8.63% 2024(3) 9.00% 9.25% Average 9.00% 8.50% - 9 1) Reg...
AI summary Figure 27 compares the authorized and regulated return on equity (ROE) for NSPML from 2018 to 2024. The authorized ROE remains consistently at 9.00%, while the regulated ROE fluctuates between 7.01% and 9.25%. The regulated ROE excludes the impact of donations, sponsorships, and certain costs, which would further reduce return levels if included.
5 2. Financial Risk 6 NSPML has a deemed equity ratio of 30%. As a point of comparison, NS Power has a deemed 7 equity ratio of 40%, and the U.S. average authorized equity ratio is slightly over 50% for electric 8 T&D utilities. The financ...
AI summary NSPML has a deemed equity ratio of 30%, significantly lower than NS Power's 40% and the U.S. average of over 50% for T&D utilities. This higher leverage increases financial risk for NSPML, potentially requiring equity investors to demand a higher ROE.
27 3. Risk Premium for NSPML 28 Given the greater business and financial risk of NSPML as compared to the North American T&D 29 proxy group companies, we conclude that a risk premium above the proxy group average return is reasonable. Conc...
AI summary The text discusses the risk premium for NSPML, concluding that a risk premium above the proxy group average return is reasonable due to the greater business and financial risk of NSPML. The Hamada equation was used to estimate the risk premium, resulting in a recommended range of 75 to 100 basis points, leading to an estimated ROE of 10.10% to 10.35%.
2 OVERALL CONCLUSIONS AND RECOMMENDATIONS 3 As discussed throughout this report, our ROE analysis for a proxy group of North American 4 Electric T&D utilities with business and financial risk substantially lower than NSPML 5 demonstrates t...
AI summary The report concludes that investors in North American electric T&D utilities with lower risk than NSPML require an authorized return of 9.35% under current market conditions, based on an analysis of a proxy group of utilities.
7 Figure 29: Summary of Results63 CAPM – Historical MRP 8.82% Multi-Stage DCF 9.28% Risk Premium 9.92% Average 9.34% 8 Further, we compared the authorized return for the Maritime Link to authorized returns for other 9 regulated transmissio...
AI summary The document compares authorized returns for the Maritime Link with other regulated transmission companies, considering NSPML's unique business and financial risks. A risk premium of 75 to 100 basis points above the electric T&D proxy group is recommended, leading to an ROE range of 10.10% to 10.35% for NSPML.
N-11Evidence - Sean Cleary BCC
31 passages
1.1 Qualifications This evidence is prepared by Dr. Sean Cleary, CFA of Queen's University. I am a Professor of Finance at the Smith School of Business at Queen's University. I earned my Ph.D. in Finance at the University of Toronto in 199...
AI summary Dr. Sean Cleary, a finance professor and expert witness, outlines his qualifications and experience in cost of capital proceedings, including his work with various regulatory bodies and his research in corporate finance and capital markets.
2 EXECUTIVE SUMMARY NSPML is requesting a continuation of its current allowed return on equity (ROE) of 9%, which is tied to the allowed ROE for NS Power. It is also requesting approval of a 40% equity ratio (ER) for "sustaining capital,"...
AI summary NSPML is requesting a continuation of its allowed ROE of 9%, along with a 40% equity ratio for 'sustaining capital.' The applicant criticizes Concentric's recommendation of a higher ROE (10.1-10.35%) as inflated and argues for a lower ROE of 7.6% based on current market conditions and analysis of allowed ROEs in Canada and the U.S.
3 ISSUES WITH CONCENTRIC'S ROE RECOMMENDATIONS Concentric's recommended allowed ROE of 10.1-10.35% is far too high for several reasons, which are discussed below.
AI summary Concentric's recommended allowed ROE of 10.1-10.35% is criticized as being too high, with several reasons discussed in the proceeding.
3.1 Heavy Reliance on Allowed ROEs in Other (mostly U.S.) Jurisdictions Concentric's ROE and ER recommendations rely heavily on the main argument that since allowed ROEs and ERs in mainly U.S. jurisdictions are higher than those for NSPML,...
AI summary Concentric's recommendation to increase allowed ROE and ER is based on higher ROEs in U.S. jurisdictions, but this approach is criticized as flawed. The Alberta Utilities Commission has previously stated that it does not take guidance from ROEs in other jurisdictions and emphasizes the need to consider market expectations and specific utility factors.
3.2 Concentric's Proxy Group Concentric notes on page 39 of Appendix A that: "Since ROE is a market-based concept and given that NSPML is not publicly-traded, it is necessary to establish a group of companies that are both publicly-traded...
AI summary Concentric uses a proxy group of publicly-traded North American electric utilities to estimate the cost of equity for NSPML. However, the proxy group used in this proceeding includes a higher proportion of U.S. utilities, which are argued to be less comparable to Canadian utilities due to higher business risk. This raises concerns about the accuracy of the DCF and CAPM analyses.
3.4 CAPM Estimates Implementing the CAPM to determine Ke requires an estimate of the risk-free rate (RF), which is normally based on existing 30-year government bond yields, as it is meant to represent the actual existing risk-free asset t...
AI summary The text discusses the use of the Capital Asset Pricing Model (CAPM) to estimate the risk-free rate (RF) and highlights that Concentric's approach of using forecasted yields for 2026-2028 is flawed due to upward bias. Evidence from previous proceedings, including the 2024 Ontario Energy Board (OEB) proceedings, supports this claim. The text also notes that Concentric's forecasts are close to actual bond yields as of September 2025.
3.5 Risk Premium Model Estimates In response to NSPML (NSEB - CLEARY) IR-10(a) Concentric confirmed the following regarding the Risk Premium Model it uses in its current evidence: • that the Risk Premium approach discussed on page 52 of Co...
AI summary The document critiques Concentric's Risk Premium Model, highlighting flaws identified in the Alberta 2018 GCOC Decision. The model was found to use government bond yields instead of utilities' credit spreads and relies on U.S. approved ROEs, which are not considered market data. The recommendation is to disregard Concentric's estimates.
6 4.1.2 Capital Market Conditions The 30-year Government of Canada bond yield as of September 29, 2025 was 3.63%, while the 10-year yield was 3.18%. The total cost of borrowing to utilities is a function of both the level of government yie...
AI summary This section discusses capital market conditions, focusing on government and utility bond yields from 2003 to 2025. It notes that as of August 2025, the A-rated utility yield was 4.92%, with a spread of 1.11% over the 30-year government bond yield of 3.81%, which is below the long-term average spread of 1.39%.
5.1 Some Notes on Allowed ROEs This section provides evidence demonstrating that allowed ROEs have not declined adequately in response to the reduction in the cost of capital that utilities' have experienced, as long-term government bond y...
AI summary This section shows that allowed ROEs for utilities have not decreased sufficiently in response to the drop in long-term government bond yields and A-rated utility bond yields over the past two decades. The spreads between allowed ROEs and these measures have increased significantly, with NS Power's ROE-RF and ROE-A yield spreads rising by 22% and 18%, respectively, since 2004.
5.2.1 CAPM Overview This section employs the commonly used CAPM to estimate the allowed ROE for a typical regulated Canadian utility. Essentially CAPM can be used to estimate the required ROE (or Ke) for a firm from the point of view of a...
AI summary This section explains the Capital Asset Pricing Model (CAPM) and its use in estimating the required rate of return on common equity for regulated Canadian utilities. It emphasizes CAPM's widespread adoption by financial analysts, CFOs, and its continued use in regulatory decisions, despite its limitations.
5.2.3 Expected Market Returns and Estimating the Market Risk Premium (MRP) The next CAPM input is the MRP that is measured by the expected long-term return on the Ibid., page 25. Ibid., page 32. equity market less the long-term government...
AI summary The text discusses estimating the Market Risk Premium (MRP) using expected long-term returns on the equity market and long-term government bond yields. It references historical returns and current forecasts from finance professionals, emphasizing the relevance of these forecasts to determining a fair Return on Equity (ROE) for regulated utilities. The Alberta Utility Commission's position is cited, supporting the use of market participant expectations as a benchmark.
s during periods of less uncertainty (e.g., the boom in stock markets at the end of the 1990s). Dr. Damodaran discusses his own approach to estimating and using MRPs when valuing companies, stating: On a personal note, I believe that the v...
AI summary Dr. Damodaran discusses his evolving approach to estimating the market risk premium (MRP), adjusting it between 4% and 6% based on market conditions, with higher MRPs during periods of uncertainty and lower during stability. This reflects a shift in practice post-2008 financial crisis.
5.2.4 Estimating Beta We now require a beta estimate to apply the CAPM, and my approach is justified based on the extensive empirical analysis and discussion regarding estimating beta that is provided in Appendix C of my evidence. In parti...
AI summary The text discusses estimating beta for Canadian utilities, emphasizing that beta estimates for Canadian utilities average between 0.20 and 0.40, with 0.35 as the best estimate. It argues that traditional adjusted betas are inappropriate due to the assumption that betas gravitate toward one, and recommends adjusting toward a long-term average of 0.35 or 0.45 instead of 1.0.
5.2.5 Final CAPM Estimates While government bond yields have risen over the past few years, they still remain relatively low, both in absolute terms and by historical standards. A-rated Canadian utility bond yield spreads were sitting at 1...
AI summary The analysis discusses adjustments to the Capital Asset Pricing Model (CAPM) estimates for Nova Scotia Power, considering bond yield spreads, risk premiums, and financial flexibility. Adjustments include subtracting 0.14% for liquidity issues, adding 0.40% for higher debt costs, and 0.50% for financial flexibility, leading to a final ROE of 6.9%.
5.3.1 DCF Model Overview I use two approaches to apply the DCF model to estimate the appropriate ROE for regulated Canadian utilities using data as at the end of 2024 to: - 1. find the implied rate of return for the overall market, which s...
AI summary This section outlines the use of the Discounted Cash Flow (DCF) model to estimate the appropriate Return on Equity (ROE) for regulated Canadian utilities. It describes the Dividend Discount Model (DDM), a common DCF approach, and provides the formula for the constant-growth version of the DDM, which is used to calculate the implied rate of return on common shares.
erage nominal GDP growth estimate of 3.8% noted above into the single-stage DDM equation provided above, we get the following estimate for the implied equity return for the market as a whole for 2024: 11 Ke = $$(0.0283) \times (1.038) + .0...
AI summary The text discusses the use of the Dividend Discount Model (DDM), specifically the single-stage and H-Model variations, to estimate the implied equity return for the market in 2024. It notes that while the single-stage model yields an estimate of 6.74%, the H-Model is preferred due to its ability to account for changing growth rates over time, particularly in light of global trade tensions affecting GDP growth estimates.
re EPS growth, and further that future real GDP growth averaging above 3% is unlikely for developed markets.[35](#page-55-0) Appendix D of my evidence provides greater details regarding these matters. Table 10 below includes summary statis...
AI summary The text discusses Canadian and U.S. utility dividend yields, payout ratios, and ROEs from 2018-2024, highlighting differences between the two markets. Canadian utilities have higher dividend yields and payout ratios but lower average ROE compared to U.S. utilities, which are priced higher and have lower dividend payouts.
It is difficult to find "typical" or representative Canadian regulated publicly-traded utilities. However, using averages and medians (which offset to some extent the influence of extreme observations) provides a useful starting point. Col...
AI summary The text discusses the estimation of sustainable growth rates for Canadian and U.S. regulated utilities using ROE and payout ratios. It highlights that growth rates for Canadian utilities are lower than GDP growth rates and that the AUC has emphasized that long-term growth rates for utilities should not exceed long-term GDP growth rates, as they operate in mature markets with limited growth opportunities.
us target for regulated utilities that operate virtual monopolies in mature markets, with little opportunity for dramatic growth, as also acknowledged previously by the AUC, in the 2013 GCOC Decision: However, the Commission is also mindfu...
AI summary The text discusses the use of GDP growth rates in DCF models for regulated utilities, noting that growth estimates exceeding GDP should not be used. It highlights that analyst forecasts used by Concentric (5.53%) exceed GDP growth estimates (4.04% in Canada and 4.24% in the U.S.), and thus, the constant-growth DCF estimate should be disregarded.
h of 4.04% in Canada and 4.24% in the U.S. and the proxy group weighted average of 4.16%. As such, Concentric's constant-growth DCF estimate should be disregarded, as in fact Concentric chose to do. However, as discussed in Section 3, Conc...
AI summary The text discusses the evaluation of Concentric's DCF model, noting that its growth assumptions exceed expected nominal GDP growth for 10 years before aligning with it. This approach is criticized and should be disregarded, as it creates unrealistic assumptions about long-term earnings and dividend growth.
5.5 Price-to-Book Ratios and Equity Returns Table 10 reported a 2018-2024 average ROE for the 5 Canadian utilities in the Canadian sample of 7.51%. This figure is well below the 2024 allowed ROE for NS Power for example of 9%. This allowed...
AI summary The section discusses the relationship between allowed ROEs, earned ROEs, and investor required returns on equity by examining price-to-book (P/B) ratios and stock returns for Canadian and U.S. utilities from 2018 to 2024. The average P/B ratios for Canadian utilities ranged between 1.44 and 1.85, while for U.S. utilities, they ranged from 1.69 to 2.36.
5.6 Summary of ROE Calculations I have weighted all three of my Ke estimates equally because all three methods are used in practice and provide different perspectives on Ke. As discussed previously, CAPM is more heavily relied upon in prac...
AI summary The text discusses the calculation of the allowed Return on Equity (ROE) for Canadian utilities, using three methods: CAPM, DCF, and BYPRP. The author assigns equal weight to each method, resulting in an estimated ROE of 7.6%. The discussion emphasizes the conceptual and practical advantages of CAPM over DCF in utility cost of capital hearings.
6. CAPITAL STRUCTURE RECOMMENDATIONS My recommendations are that NSPML's ER for original capital should remain at 30%, and that its ER for "sustaining capital" should equal that of the requested allowed ER for NS Power, which is currently...
AI summary The section recommends maintaining NSPML's equity ratio (ER) for original capital at 30% and aligning its ER for sustaining capital with NS Power's allowed ER of 40%, which is considered reasonable. The section aims to estimate an appropriate ER for NS Power.
6.2 The Cost of Debt for NS Power As of August 29, 2025 the yield on long-term A-rated Canadian utility bonds was 4.92% according to the Bloomberg data used to construct Figure 3. This figure was slightly above the September 29, 2025 avera...
AI summary The document discusses the cost of debt for NS Power, noting that as of September 29, 2025, NS Power's bond yield was 4.97%, slightly above the average of 4.79% for other Canadian utilities. This is attributed to NS Power's bond ratings and maturity, but the spread remains small, indicating a reasonable cost of debt.
6.3 NS Power's Ability to Earn its Allowed ROE A useful way of reviewing the performance of utilities is to examine their ability to earn their allowed ROEs on a consistent basis. Table 13 reports the earned versus allowed ROEs for NS Powe...
AI summary NS Power has consistently earned its allowed return on equity (ROE) since 2012, exceeding it in 8 of 12 years, with only slight underperformance in the last three years. This indicates that NS Power has been able to manage its risks effectively and maintain a stable financial performance.
Table 13 NS Power Allowed versus Earned ROEs Earned Allowed Difference 2012 9.40 9.2 0.20 2013 9.24 9 0.24 2014 2015 9.25 9 0.25 2016 9.25 9 0.25 2017 9.25 9 0.25 2018 9.25 9 0.25 2019 9.25 9 0.25 2020 7.88 9 -1.12 2021 9.08 9 0.08 2022 8....
AI summary The document presents a table comparing NS Power's earned and allowed return on equity (ROE) from 2012 to 2024, highlighting differences in each year. The earned ROE for 2014 is missing, and the section discusses NS Power's financial risk and credit metrics.
6.5 Summary Overall, this section highlights that NS Power is a low-risk Canadian utility; however, it is slightly riskier than the average A-rated Canadian operating utility. This conclusion is consistent with the following main points re...
AI summary The summary highlights that NS Power is a low-risk Canadian utility, though slightly riskier than average A-rated utilities. Its debt ratings are stable, and its financial risk profile is reasonable. A 40% allowed equity ratio is deemed reasonable despite lower debt ratings compared to some utilities, partly due to its parent company Emera Inc.'s higher ratings and the low-risk financing of the Maritime Link project.
which varies through time, and hence is also subject to estimation errors. For example, while this spread averaged +0.40% over the 2004-2023 period, it has been as low as -0.23% and as high as +0.81%.
AI summary The text discusses the variability of a financial spread over time, noting that it averaged +0.40% between 2004 and 2023, but fluctuated between -0.23% and +0.81%, highlighting the potential for estimation errors.
r industries that are non-regulated, that face greater demand variability, greater competition, and that do not have as great of an ability to flow through increases in their costs to their customers. One effective way to evaluate overall...
AI summary The text compares the risk of Canadian utilities to U.S. utilities, highlighting that Canadian regulated utilities have consistently earned returns above allowed ROEs, indicating low risk. In contrast, U.S. utilities are reported to earn below their allowed ROEs on average, suggesting higher risk.
Beta Estimation In order to apply the CAPM, we require beta estimates. I copy below two figures and some of the discussion from previous Alberta GCOC proceedings, that discusses historical beta estimates: 1. I make reference to Figure 6 at...
AI summary The document discusses historical beta estimates for utility companies, referencing data from Alberta GCOC proceedings. It highlights that average betas for Dr. Booth's sample and the TSX Utility Sub-Index remained well below 1.0 over a 28-year period, challenging the use of adjusted betas in financial models like CAPM.
rget for regulated utilities that operate virtual monopolies in mature markets, with little opportunity for above average growth, as also acknowledged previously by the AUC, in the 2013 GCOC Decision: However, the Commission is also mindfu...
AI summary The text discusses the use of growth estimates in DCF models for regulated utilities, emphasizing that analyst estimates may be overly optimistic and should not be used in constant-growth or multi-stage models. Instead, sustainable growth rates, aligned with GDP growth and appropriate for low-risk utilities, are recommended.
N-13Rebuttal Evidence - NSPML
35 passages
1 2.0 CAPITAL STRUCTURE 2 3 As set out in NSPML's Application, NSPML seeks an equity ratio of 40% for sustaining 4 capital investment moving forward, while maintaining the 30% equity ratio for existing 5 capital investments (excluding FLG2...
AI summary NSPML seeks to increase its equity ratio to 40% for future capital investments while maintaining a 30% ratio for existing ones. Dr. Cleary supports this change but NSPML argues that the federal loan guarantee does not reduce equity risk. NSPML also requests a +/- 1.5% flexibility for existing capital investments to manage the 70/30 debt-equity ratio.
1 3.0 RETURN ON EQUITY 2 3 NSPML has requested approval for the continuation of its ROE at 9%, with such request 4 supported by the evidence of Concentric who, based on comparators of lower risk 5 entities, actually recommend an ROE in the...
AI summary NSPML requests approval to continue its ROE at 9%, supported by Concentric's recommendation of 10.1% to 10.35%. Dr. Cleary recommends a much lower ROE of 7.6%, which could hinder NSPML's ability to secure capital. Concentric argues that Dr. Cleary's analysis fails to account for NSPML's unique risks and market realities.
NSPML 2026 Assessment Application – Rebuttal Evidence 1 Ontario (Enbridge) and utilities in Alberta have tended to earn above their approved ROE 3 2 but fails to note that this is not the recent trend in Nova Scotia. 3 4 As stated in NSPML...
AI summary NSPML argues that Dr. Cleary's recommended return on equity (ROE) is too low, considering NSPML's unique operational and financial risks, including its complex assets, high debt ratio, and the need for cooperation with Newfoundland and Labrador Hydro. NSPML also highlights that the recommended ROE is significantly below the average for North American T&D utilities.
2 EXECUTIVE SUMMARY 3 Q. Please provide a brief overview of Dr. Cleary's ROE analyses and recommendation. 4 A. Dr. Cleary recommends an authorized ROE of 7.60% for NSPML based on the average results 5 of his Capital Asset Pricing Model ("C...
AI summary Dr. Cleary recommends an authorized ROE of 7.60% for NSPML, a 140 basis point reduction from current levels. He links NSPML's ROE to NS Power's return since 2018, but does not account for NSPML's unique operational and financial risks. The recommended ROE is significantly lower than those of other regulated utilities and subsea transmission companies, which range from 10.5% to 13.57%.
6 Q. What are your key conclusions and recommendations? - 7 A. We disagree with a number of the assumptions, assertions, and analytical approaches that 8 underlie Dr. Cleary's ROE recommendation, as well as the overall reasonableness of hi...
AI summary The response disagrees with Dr. Cleary's ROE recommendation, arguing it fails to account for the unique risks of subsea transmission companies like NSPML and does not meet the Fair Return Standard. The response highlights the need for risk analysis specific to NSPML and its comparison to proxy groups.
16 Q. Are there areas where you agree with Dr. Cleary's ROE analyses and recommendation? - 17 A. Yes. In spite of our numerous areas of disagreement, there are certain aspects of Dr. Cleary's 18 ROE evidence and analysis with which Concent...
AI summary Concentric agrees with Dr. Cleary's ROE analysis in certain areas, including his adjustment for flotation costs and financial flexibility, the 40 basis point adjustment for NSPML's authorized ROE, and his decision to average results from multiple models. They also acknowledge that the use of forecast versus current government bond yields is not a significant issue in this proceeding.
2 RETURNS IN OTHER JURISDICTIONS AS BENCHMARK 3 Q. Is Dr. Cleary's ROE recommendation consistent with the principles of the Fair Return 4 Standard? 5 A. No, it is not. The return recommended by Dr. Cleary (7.60% on 30% deemed common equity...
AI summary The response states that Dr. Cleary's recommended return on equity (ROE) of 7.60% is too low according to the Fair Return Standard, as it may not maintain the financial integrity of NSPML or attract capital for the Maritime Link project. The Fair Return Standard includes three tests: comparable investment, financial integrity, and capital attraction.
1 costs. It might even cause it to be excluded from participating in some debt markets altogether.4 2 3 Dr. Cleary's ROE recommendation is well below the current 9.00% authorized ROE for 4 NSPML, even though he acknowledges that government...
AI summary The text discusses concerns regarding Dr. Cleary's recommended return on equity (ROE) for NSPML, noting that it is significantly lower than the current authorized ROE and those of other Canadian and U.S. utilities, particularly subsea cable operators. The recommendation may negatively impact NSPML's ability to participate in debt markets.
6 A. Yes. As Dr. Cleary's data shows, yields on long-term government and utility bonds have 7 increased since January 2023, immediately prior to when the Board determined that a 8 reasonable authorized ROE for NS Power (and therefore NSPML...
AI summary The text discusses the increase in long-term government and utility bond yields since January 2023 and how this has influenced Dr. Cleary's recommendation for a higher authorized ROE for NSPML compared to previous recommendations in Ontario and Alberta. However, the recommendation to reduce the ROE by 140 basis points is seen as contradictory to the evidence on rising bond yields.
ence of Dr. Sean Cleary, Alberta Utilities Commission, 2023 Generic Cost of Capital, Proceeding ID #27084, submitted on behalf of the Office of the Utilities Consumer Advocate, February 1, 2023, at 2. - 1 authorized ROE for NSPML would be...
AI summary Dr. Sean Cleary from the Alberta Utilities Commission discusses the long-term interest rate outlook for Canada and the U.S. based on the October 2025 Consensus Economics forecast, noting that projected 10-year government bond yields are slightly higher than the April 2025 forecast, despite short-term rate cuts by the Bank of Canada in 2025.
NSPML 2026 Assessment Application - Appendix A - Concentric Rebuttal Evidence - Page 21 of 49 JAMES M. COYNE AND JOHN P. TROGONOSKI REBUTTAL EVIDENCE PREPARED FOR NSP MARITIME LINK INC. 1 the Canadian average. Dr. Cleary's short-term econo...
AI summary The rebuttal evidence argues that Dr. Cleary's short-term economic outlook for Nova Scotia is not suitable for determining the cost of capital for utility assets, as longer-term data should be used. It also suggests that if Nova Scotia is expected to have stronger economic growth than the rest of Canada, lower growth rates should not be applied in the DCF model.
6 Q. What are your conclusions with respect to economic and capital market conditions? 7 A. As shown in Figure 3 above, interest rates on government and A-rated utility bonds as of 8 October 2025 have increased by 11-61 basis points since...
AI summary The response discusses increased interest rates on government and A-rated utility bonds since February 2023, leading to higher cost of capital for NSPML due to increased investor uncertainty and risk. The conclusion is that Dr. Cleary's recommended reduction in authorized ROE is inconsistent with current economic and capital market trends.
3 Q. Please summarize the proxy group used by Dr. Cleary. 4 A. Dr. Cleary presents the results of his ROE models (CAPM, DCF) for a proxy group of five 5 Canadian companies and 28 U.S. companies. This is the same proxy group that was develo...
AI summary Dr. Cleary uses a proxy group of five Canadian and 28 U.S. companies in his ROE models, but only relies on the Canadian companies, arguing that U.S. companies are higher risk and have different ownership structures, as noted in the 2023 Alberta Utilities Commission proceeding.
13 Q. Do you agree with the composition of Dr. Cleary's proxy group for NSPML? 14 A. No, we do not agree with Dr. Cleary's decision to rely exclusively on the results of his Canadian 15 proxy group companies. In addition, we disagree with...
AI summary The respondent disagrees with Dr. Cleary's proxy group composition for NSPML, citing the inclusion of Emera, Inc. as a parent company and the use of Canadian proxy companies that may not be comparable to NSPML. The purpose of the proceeding is to set the authorized ROE for NSPML.
NSPML 2026 Assessment Application - Appendix A - Concentric Rebuttal Evidence - Page 23 of 49 JAMES M. COYNE AND JOHN P. TROGONOSKI REBUTTAL EVIDENCE PREPARED FOR NSP MARITIME LINK INC. 1 which is a separate entity from NS Power, and which...
AI summary The rebuttal evidence prepared by James M. Coyne and John P. Trogonoski for NSPML highlights the unique business and operational risks of the Maritime Link, emphasizing that Dr. Cleary did not adequately compare NSPML's risks to those of companies in his Canadian proxy group. Concentric has provided additional market data on authorized returns for other electric transmission companies, especially subsea cable operators.
1 Q. Please summarize your views on the appropriate proxy group in this proceeding. 2 A. We continue to believe it is appropriate to use the companies in our North American Electric 3 T&D proxy group to estimate the ROE for NSPML. We do no...
AI summary The response argues that the North American Electric T&D proxy group is more appropriate for estimating NSPML's ROE than Dr. Cleary's Canadian proxy group. It notes that NSPML's ROE should reflect its unique business and financial risks, and that the Board is setting this ROE in the proceeding.
2 CAPM RESULTS AND INPUTS - 3 Q. Please summarize the results of Dr. Cleary's CAPM analysis. - 4 A. Dr. Cleary's CAPM analysis use the following model inputs: a current risk-free rate of 3.63%; - 5 a beta coefficient of 0.45; and a market...
AI summary Dr. Cleary's CAPM analysis results in a 6.90% estimate using specific inputs, which are criticized as being lower than authorized returns for regulated utilities in Canada and the U.S. The critique argues that the model inputs, particularly beta coefficients and market risk premium, are inconsistent with current market data. The response emphasizes the importance of the reasonableness of the end result, as per the Hope decision.
17 RISK FREE RATE - 18 Q. Please summarize Dr. Cleary's testimony regarding the appropriate risk-free rate to - 19 be used in the CAPM analysis. - 20 A. According to Dr. Cleary, the current government bond yield should be used as the risk...
AI summary Dr. Cleary testified that the current government bond yield should be used as the risk-free rate in CAPM analysis, citing that interest rate forecasts have historically overstated rates and that current rates are more accurate. He used a spot yield of 3.63% on Government of Canada long bonds as of September 30, 2025.
3 Q. Do you agree with Dr. Cleary's use of a spot bond yield as the risk-free rate? 4 A. No, we strongly disagree with the use of spot bond yields. The bond market has been highly 5 volatile in the past year, with yields fluctuating from d...
AI summary The respondent strongly disagrees with Dr. Cleary's use of a spot bond yield as the risk-free rate, citing recent market volatility and recommending the use of an average yield over the past 30 or 90 trading days instead.
13 Q. What is your conclusion regarding the risk-free rate in the CAPM analysis? 14 A. While we continue to support the use of projected interest rates in the CAPM analysis, from 15 a practical standpoint and as Dr. Cleary correctly observ...
AI summary The witness supports using projected interest rates in the CAPM analysis but acknowledges that current Canadian government bond rates align with the October 2025 forecast, while U.S. rates are expected to decline, making the forecast conservative.
1 BETA 2 Q. What beta coefficient has Dr. Cleary relied on in his CAPM analysis? - 3 A. Dr. Cleary has relied on a beta coefficient of 0.45 for the companies in his Canadian proxy 4 group, within a range from 0.30 to 0.60, which he claims...
AI summary Dr. Cleary used a beta coefficient of 0.45 in his CAPM analysis for Canadian proxy companies, which is within a range of 0.30 to 0.60 and higher than the long-term average of 0.35 in Canada.
14 Q. Do you agree with Dr. Cleary that beta is a measure of business risk? 15 A. No, we do not agree. Beta does not measure "business risk" but rather measures "portfolio 16 risk," or the risk that a given security provides no diversifica...
AI summary The respondent disagrees with Dr. Cleary's assertion that beta measures business risk, explaining that beta reflects portfolio risk rather than business risk. The argument emphasizes that beta measures a security's covariance with the broader market, not a firm's internal business risk, and that low beta does not imply low business risk.
10 Q. What is your conclusion with regard to the appropriate beta coefficients? 11 A. All beta estimates require adjustment; it's only a matter of what method is used. We continue 12 to support the use of Blume adjusted betas from Bloomber...
AI summary The respondent concludes that all beta estimates require adjustment, recommending the use of Blume adjusted betas from Bloomberg and Value Line based on weekly return data over five years, aligning with the BCUC's 2023 decision.
18 MARKET RISK PREMIUM - 19 Q. Dr. Cleary relies on a variety of sources to estimate the MRPs used in his CAPM analysis. 20 Does his approach lead to a reasonable end result? - 21 A. No, it does not. Dr. Cleary uses a market risk premium o...
AI summary The response critiques Dr. Cleary's use of a 5.5% market risk premium (MRP) in his CAPM analysis, arguing it is too low compared to historical standards and forward-looking estimates. The critique highlights an inverse relationship between interest rates and MRP and notes that current bond yields do not support such a low MRP estimate.
8 Q. What is your conclusion regarding the market risk premium? 9 A. We continue to support using the average historical MRP for Canada and the U.S. as a 10 conservative estimate of the MRP in the CAPM analysis. We do not agree with Dr. Cl...
AI summary The respondent supports using the average historical MRP for Canada and the U.S. as a conservative estimate in the CAPM analysis, disagreeing with Dr. Cleary's approach that relies on investor surveys and academic research, which are seen as less reliable than current market data and historical returns.
17 Q. Please summarize your conclusions with respect to the CAPM analysis. 18 A. Our CAPM analysis is based on projected 30-year government bond yields in Canada and the 19 U.S., Blume adjusted beta coefficients from Bloomberg and Value Li...
AI summary The CAPM analysis uses projected government bond yields, adjusted beta coefficients, and historical market risk premiums to estimate a rate of 8.82% for the North American Electric T&D proxy group. Dr. Cleary's analysis is criticized for using unreasonably low inputs for the market risk premium and beta, leading to a potentially inaccurate result.
NSPML 2026 Assessment Application - Appendix A - Concentric Rebuttal Evidence - Page 35 of 49 JAMES M. COYNE AND JOHN P. TROGONOSKI REBUTTAL EVIDENCE PREPARED FOR NSP MARITIME LINK INC. 1 return estimate of only 6.9%, or 210 basis points l...
AI summary The rebuttal evidence challenges the return on equity (ROE) estimate of 6.9% for NSPML, arguing it is significantly lower than the current authorized ROE and any authorized ROE for Canadian regulated utilities in the last 30 years, and thus unreasonable.
2 DCF RESULTS AND INPUTS 3 Q. Please summarize the DCF model results presented by Dr. Cleary. 4 A. Dr. Cleary presents single-stage and two-stage DCF model results for both the broad market 5 in Canada and for regulated utilities in Canada...
AI summary Dr. Cleary's DCF model results show lower estimates for the cost of capital compared to authorized ROEs for regulated utilities. His model uses low growth rates, which understate the cost of equity. The respondent argues that historical EPS and DPS growth rates for North American utilities have exceeded nominal GDP growth rates, refuting Dr. Cleary's claim.
NSPML 2026 Assessment Application - Appendix A - Concentric Rebuttal Evidence - Page 39 of 49 JAMES M. COYNE AND JOHN P. TROGONOSKI REBUTTAL EVIDENCE PREPARED FOR NSP MARITIME LINK INC. 1 in 2022 and negative 29.66% in 2024. The dividend p...
AI summary The rebuttal evidence challenges Dr. Cleary's sustainable growth rate calculations, pointing out inconsistencies in dividend payout ratios compared to industry norms and the failure to account for share growth in the proxy group companies. Concerns are raised about the unrealistic growth rates used in the two-stage DCF model.
5 Q. What are your conclusions regarding the appropriate growth rate to be used in the DCF 6 model? 7 A. We continue to support the use of a Multi-stage DCF model where the first stage growth rate 8 is based on analysts' projected EPS grow...
AI summary The respondent supports a Multi-stage DCF model with growth rates based on EPS projections, GDP growth, and a transition phase, disagreeing with the use of sustainable growth rates and the Constant Growth DCF model due to its reliance on nominal GDP growth alone.
2 RISK PREMIUM MODEL 3 Q. Dr. Cleary also presents a Bond Yield plus Risk Premium model which simply adds a flat risk premium to current yields on long-term utility bonds.36 4 Is this a reliable model 5 for determining the cost of equity?...
AI summary The testimony critiques Dr. Cleary's Risk Premium model for being overly simplistic and static, pointing out that it fails to account for the inverse relationship between bond yields and equity risk premiums. An alternative model using a regression equation is presented, which better reflects changing market conditions. The Ontario Energy Board's 2025 decision is referenced as support for a more accurate approach to calculating the cost of equity.
2 ALBERTA DECISIONS AS SUPPORT FOR DR. CLEARY'S POSITIONS 3 Q. Dr. Cleary quotes numerous decisions of the Alberta Utilities Commission over the past 4 decade and implies that the AUC agrees with many of his methods and model inputs. 5 Wha...
AI summary Dr. Cleary cites Alberta Utilities Commission (AUC) decisions to support his methods and model inputs, but the response highlights that the AUC has rejected several of his arguments, including his use of a Canadian-only proxy group, risk premium, growth rates, and beta coefficient recommendations.
2 DEEMED EQUITY RATIO FOR NSPML 3 Q. Please summarize Dr. Cleary's evidence as it relates to NSPML's deemed equity ratio. 4 A. Dr. Cleary recommends that NSPML's equity ratio for original capital should remain at 30% 5 and that its equity...
AI summary Dr. Cleary recommends NSPML's equity ratio for original capital remain at 30% and for sustaining capital match NS Power's 40%. However, the conclusion is that NSPML has greater business risk than average, and the 30% deemed equity ratio is low compared to other Canadian investor-owned utilities. The FLG during the Maritime Link project supported the 30% ratio, but this is disputed.
NSPML 2026 Assessment Application - Appendix A - Concentric Rebuttal Evidence - Page 48 of 49 JAMES M. COYNE AND JOHN P. TROGONOSKI REBUTTAL EVIDENCE PREPARED FOR NSP MARITIME LINK INC. 1 Cleary that the FLG lowers the risk for equity inve...
AI summary The rebuttal evidence discusses the Federal Loan Guarantee (FLG) and its impact on equity risk for NSPML. It argues that FLG benefits debt investors only, and that NSPML should have a 40% deemed equity ratio for sustaining capital, similar to NS Power, as it does not benefit from the FLG.
CONCLUSIONS AND RECOMMENDATIONS Q. Please summarize your conclusions and recommendations. A. We continue to support our ROE analysis for the North American T&D proxy group, and we continue to find that it is reasonable to add a risk adjust...
AI summary The analysis supports a risk-adjusted ROE of 10.10% to 10.35% for NSPML, citing market data and similar transmission projects. The company's request to maintain a 9.0% ROE is deemed conservative. The testimony of Dr. Cleary does not alter these conclusions.
N-17Alberta Utilities Commission
Decision 27084-D02-2023
48 passages
Determination of the Cost-of-Capital Parameters in 2024 and Beyond October 9, 2023
AI summary This document outlines the determination of cost-of-capital parameters for 2024 and beyond, focusing on financial and regulatory considerations relevant to utility operations in Nova Scotia.
Alberta Utilities Commission Decision 27084-D02-2023 Determination of the Cost-of-Capital Parameters in 2024 and Beyond Proceeding 27084 October 9, 2023
AI summary The Alberta Utilities Commission issued Decision 27084-D02-2023, determining the cost-of-capital parameters for 2024 and beyond as part of Proceeding 27084.
1 Decision summary - 1. In this generic cost of capital (GCOC) decision, the Alberta Utilities Commission adopts a formulaic approach, utilizing the equity risk premium (ERP) methodology, to calculate the fair rate of return on equity (ROE...
AI summary The Alberta Utilities Commission (AUC) adopts a formulaic approach using the equity risk premium (ERP) methodology to determine the fair rate of return on equity (ROE) for Alberta's electric and gas utilities in 2024 and beyond. The deemed equity ratios from the 2018 GCOC decision remain unchanged, and a mandatory five-year review of cost-of-capital parameters is instituted.
2 Background and procedural summary 8. On January 3, 2022, the Commission established a bifurcated process for this proceeding with the goal of determining ROE and deemed equity ratios. The first part of the proceeding (Stage 1) establishe...
AI summary The Commission established a bifurcated process to determine ROE and deemed equity ratios. Stage 1, completed in March 2022, set cost-of-capital parameters for 2023. Stage 2, addressed in this decision, establishes a formulaic approach for setting ROE in 2024 and subsequent years, and sets deemed equity ratios for utilities.
stomers and the ultimate consumers who rely on service from the Mainline. Therefore, customers and consumers have an interest in ensuring that the Mainline's costs are not overstated. 20 24. The Commission must therefore set a rate of retu...
AI summary The Commission must set a fair return rate to ensure that utilities can earn a reasonable return on invested capital while keeping rates just and reasonable for customers. This involves reviewing all evidence to balance the needs of utilities and consumers, as outlined in past decisions.
crease in the 30-year GoC bond yield, and a compression in credit spreads. However, having regard to 22 Bluefield, page 692. 23 TransCanada Pipelines , paragraph 58. 24 Decision 22570-D01-2018, paragraph 192. downward pressure from other f...
AI summary The document discusses relevant changes in macroeconomic and capital market conditions since the 2018 GCOC decision, noting an increase in the 30-year GoC bond yield and a compression in credit spreads. Despite these changes, the Commission maintained the approved ROE near the level set in the 2016 proceeding.
5.1 The need for a formulaic approach to setting ROE 51. Over the past two decades, the Commission and its predecessors have employed various methodologies to set the approved ROE and deemed equity ratios. Prior to 2004, the 44 Exhibit 270...
AI summary The document discusses the need for a formulaic approach to setting the rate of return on equity (ROE) over the past two decades, noting that the Commission and its predecessors have used various methodologies, often determining parameters on a case-by-case basis for each utility.
5.2 ROE formulaic approach - 62. As noted in the previous section, in its directions on procedure letter, 61 the Commission put to parties the ERP-based formulaic approaches adopted by the EUB and the OEB as possible starting points for re...
AI summary The document outlines the formulaic approaches used by the EUB and OEB for setting the rate of return on equity (ROE). The EUB used a single-factor formula based on long-term GoC bond yield changes, while the OEB used a multi-factor formula incorporating long-term Canada bond yields and utility bond spreads.
5.3 Annual process to determine the ROE through the formulaic approach - 75. From 2005 to 2008 when the EUB used a formula, the EUB initiated a proceeding every year to calculate the approved ROE for the subsequent test year beginning Janu...
AI summary The document outlines the annual process used by regulatory bodies to determine the rate of return on equity (ROE) through a formulaic approach. It references past practices by the EUB and current methods used by the OEB, including the use of bond yield spreads and forecasts to calculate ROE for subsequent test years.
5.4 Periodic reviews of formulaic approach 81. Employing a formulaic approach to determine annual changes in the ROE requires periodic evaluation to ensure that the ROE produced by the formula continues to be in alignment with the standard...
AI summary The document discusses the periodic evaluation of a formulaic approach to determine annual changes in the Rate of Return on Equity (ROE), emphasizing the need to ensure alignment with standards for achieving a fair return.
5.5 Periodic reviews of deemed equity ratios - 90. In order to meet the fair return standard, the Commission has to not only establish a fair ROE, but also determine which proportion of capital invested by the utilities should be financed...
AI summary The Commission discusses the periodic review of deemed equity ratios, emphasizing the need for a fair return standard. It determines that a five-year review cycle is appropriate, aligning with formulaic ROE evaluations. Annual reviews and specific conditions for updates are not supported due to cost and complexity concerns. Mid-term reopeners are permitted under certain conditions.
6.1 Overview 97. The Commission must determine a fair return for the utilities under its jurisdiction as part of fixing just and reasonable rates. In Section 5 of this decision, the Commission determines that it will adopt a formulaic appr...
AI summary The Commission outlines its approach to determining a fair return for utilities under its jurisdiction, focusing on the formulaic method for setting the rate of return on equity (ROE) starting in 2024. The notional ROE serves as an input to the approved formula, and will be used to inform cost-of-capital parameters and other factors in the calculation.
6.2 Comparability of representative utilities - 99. In past GCOC proceedings, the Commission has frequently expressed concern with the wide range of conflicting evidence and polarized opinions on how it should approach setting a fair retur...
AI summary The Commission has historically faced challenges in determining a fair return on capital for utilities due to conflicting evidence and polarized opinions. In the 2018 GCOC proceeding, multiple proxy groups were proposed, leading to the implementation of a comparator group process to identify representative utilities. However, the weight assigned to specific utilities within the comparator group remains unresolved, with parties disagreeing on their true comparability to Alberta utilities.
6.3 Measure of the risk-free rate - 105. The risk-free rate is an important component of ERP models, such as the CAPM, and the formulaic approach approved by the Commission in Section 5. ERP-based models are based on the fundamental assump...
AI summary The document discusses the risk-free rate as a key component in ERP models like CAPM, emphasizing its role in determining the rate of return on equity. The Commission has accepted a 3.10% risk-free rate, derived from long-term government bond yields, and its use in adjusting ROE and estimating notional ROE. Parties agree on using 30-year Canada bond yields as the standard measure.
Witness (sponsoring party) Recommendation Data source Yield Dr. Villadsen (ATCO/Apex/Fortis) Use projection of the 10-year Canada bond yield plus the long-term average maturity premium between 10-year and 30-year Canadian bonds.100 Consens...
AI summary The document presents various recommendations from witnesses on how to calculate the 30-year government bond yield for regulatory purposes. Each witness provides a different method, including using historical averages, forecasts, and current yields, with varying results and data sources.
100 Exhibit 27084-X0469, PDF page 71. 101 Consensus Economics publishes long-term [10-year] interest rate projections twice a year, in April and in October. Transcript, Volume 2, page 114, lines 2-6. 102 Exhibit 27084-X0469, PDF page 41. 3...
AI summary The document references various exhibits and evidence related to interest rate projections, including long-term 10-year and 30-year Canadian government bond yields, and the use of these rates in estimating the notional ROE and implied ERP. Multiple parties provided empirical and capital market resources supporting the alignment of asset useful life with the term to maturity of the risk-free rate.
6.4 Notional ROE - 115. In this section, the Commission determines the notional ROE of 9.0 per cent using current market data and considering results of well-known and widely accepted empirical models to estimate the required return such a...
AI summary The Commission establishes a notional ROE of 9.0% using current market data and empirical models like CAPM and DCF. This ROE is calculated as the sum of the base forecast long-term GoC bond yield and the base forecast ERP, serving as a benchmark for future adjustments.
- 117. Parties recommended a notional ROE and estimated the ERP based on their respective risk-free-rate submissions. Table 2 sets out the notional ROE and ERP recommendations by party. Table 2. Notional ROE and ERP recommendations by part...
AI summary Parties submitted recommendations for notional ROE and ERP based on their risk-free-rate submissions. Table 2 outlines these recommendations, including the notional ROE, ERP, empirical approaches used, and comments from various witnesses.
123 Exhibit 27084-X0469.01 PDF pages 46-49; Exhibit 27084-X0460_C, BV-12(a) ROE Model - 40%; Exhibit 27084-X0461, BV-12(b) ROE Model - 37%; Exhibit 27084-X0689.01-C, ATCO/Apex/Fortis IR responses to the AUC, PDF pages 1-4. If deemed equity...
AI summary The document references exhibits and calculations related to the Rate of Return on Equity (ROE) model, including different equity percentages and beta values calculated by Dr. Villadsen, which are part of a regulatory proceeding.
Witness (sponsoring party) Risk-free rate (%) MERP (%) Beta Flotation allowance (%) ROE (%) 37% Hamada: 1.01-1.21 Concentric (ENMAX)124 3.73 7.59 0.83-0.86 0.50 10.73 (full comparator group) Dr. Cleary (UCA)125 2.85 5.00 0.45 0.50 5.7 (Can...
AI summary The Commission did not use the empirical CAPM (ECAPM) approach to estimate the notional ROE or ERP, following its previous approach. It acknowledges Dr. Cleary's concerns about the ECAPM methodology and the lack of adequate testing of its assumptions and variables in this proceeding.
Risk-free rate 124. In considering the parties' CAPM ROE results, the Commission took into account the extent to which parties' estimate of the risk-free rate differed from the 3.10 per cent rate that the Commission found reasonable in Sec...
AI summary The Commission evaluated the parties' CAPM ROE results, considering the discrepancy between their estimated risk-free rate and the 3.10 per cent rate deemed reasonable in Section 6.3.
Blume adjustment. 135 Nevertheless, the Commission acknowledges that adjusted betas are widely used by finance professionals, as they provide useful information in certain circumstances. - 130. As expressed in several past decisions, the C...
AI summary The Commission acknowledges the use of adjusted betas but finds that raw betas are more suitable for regulated utilities. It rejects higher beta estimates, concluding that utility stocks are less risky and volatile than the broader market, with a reasonable beta range between 0.45 and 0.75.
Flotation allowance 144. In past GCOC proceedings, the Commission has accepted a flotation allowance of 0.50 per cent in estimates of ROE obtained from the application of the various models, including CAPM. The flotation allowance is norma...
AI summary The Commission has historically accepted a 0.50% flotation allowance in estimates of Return on Equity (ROE) from various models, including CAPM, to account for administrative and equity issuance costs. No party opposed its continued use, and the Commission finds it remains reasonable.
6.4.2 Constant growth DCF model 145. The constant growth DCF model assumes that the market price of a stock is equal to the present value of the cash flows that the owners of the shares expect to receive. In general, expected future cash f...
AI summary The constant growth DCF model calculates a stock's current price based on the present value of expected future dividends. The model uses variables such as expected dividends and the discount rate, which is the required ROE. Different parties provided varying estimates for ROE and flotation allowances, which are summarized in Table 4.
Current stock price Dr. Villadsen (ATCO/Apex/Fortis) 152 Concentric (ENMAX) 153 147. To estimate the current stock price input to the DCF model, most parties calculated the average closing price over a period ranging from 15 to 90 trading...
AI summary The document discusses the estimation of the current stock price for use in a DCF model, with most parties using an average closing price over 15 to 90 trading days ending in late 2022 and early 2023. The Commission accepts this approach, provided the averaging period does not exceed 90 days and the quarterly dividend is adjusted by the chosen growth rate.
Dividend growth rate - 150. Several of the experts relied on analysts' forecasts of company-specific dividend and earnings per share (EPS) growth rates. 160 D. Madsen also considered data from other sources and both he and Dr. Cleary 161 c...
AI summary The document discusses debates around the use of dividend growth rates in discounted cash flow analysis, with experts like D. Madsen and D. D'Ascendis disagreeing on whether these rates can exceed GDP growth. The Commission has historically rejected rates above GDP but acknowledges that utility earnings growth can sometimes exceed it, though factors like market barriers may limit this.
158. The multi-stage DCF recommendations of parties are summarized in the following table. Table 5. Multi-stage DCF recommendations of parties Witness ROE Flotation allowance ROE including flotation allowance (sponsoring party) (%) D. D'As...
AI summary The table summarizes multi-stage DCF recommendations from various witnesses, including their proposed ROE, flotation allowance, and ROE including flotation allowance, with different values for Canadian and U.S. utilities.
6.4.4 Other risk premium models 165. In addition to relying on CAPM and DCF models, some parties used the following risk premium models to help inform their fair ROE estimates: (i) Concentric and Dr. Villadsen used the government bond yiel...
AI summary The document discusses various risk premium models used by parties to estimate fair ROE, including the government bond yield, utility bond risk yield, and predictive risk premium models. The Commission decided not to rely on any of these models for its current decision.
6.4.5 Notional ROE and base forecast ERP - 170. In this proceeding, the Commission was presented with a wide range of notional ROE and base ERP recommendations that were based on a variety of approaches, models and directional indices. The...
AI summary The Commission evaluated various notional ROE and base forecast ERP recommendations submitted in the proceeding. It rejected many approaches and instead relied on established models like CAPM and DCF. The Commission set the notional ROE at 9.00% and the base forecast ERP at 5.90%.
Financial model ROE (%) range Base forecast ERPs (%) range including flotation allowance (ROE less 3.10% risk-free rate) Low High Low High CAPM 5.7 11.76 2.6 8.66 Constant growth DCF 6.85 13.29 3.75 10.19 Multi-stage DCF 7.51 12.31 4.41 9....
AI summary The table presents notional ROE and base forecast ERP from various financial models, highlighting a wide range of results due to varying data sources, forecasts, and assumptions. The Commission acknowledges that these models provide guidance but do not yield a single correct number for fair return.
6.5 Other variables of the formulaic approach 183. The approved notional ROE of 9.0 per cent will serve as a base ROE to which the approved formulaic approach will be applied each year: $$ROE_t = 9.0\% + 0.5 \times (YLD_t - 3.10\%) + 0.5 \...
AI summary This section outlines the formulaic approach used to calculate the return on equity (ROE) based on the approved notional ROE of 9.0%, incorporating adjustments for changes in GoC bond yield and utility bond yield spread. It explains how the Commission determined the variables for long GoC bond yields and utility bond yield spreads.
6.5.1 Adjustment factors for changes in GoC bond yield and utility bond yield spread - 185. In future test years, risk-free rates (approximated by long-term GoC bond yield) and utility bond yield spreads will continue to vary as financial...
AI summary The document discusses adjustment factors for changes in the Government of Canada (GoC) bond yield and utility bond yield spread, explaining how these factors influence the return on equity (ROE) for test years. The approved formulaic approach accounts for fluctuations in these variables relative to their base values.
6.5.2 Base and test year values for long-term GoC bond yield - 192. As set out in Section 6.3, the risk-free rate of 3.10 per cent will serve as the base longterm GoC bond yield ( YLDbase ) in the formulaic approach. The updated risk-free...
AI summary The Commission establishes a base long-term GoC bond yield of 3.10% and outlines a method for forecasting test year values using a weighted average of bank forecasts and historical data. The approach ensures consistency between base and test year calculations, with October data from the preceding year used as a reference.
lity 200 Bank of Canada CANSIM Series V39056. 201 Exhibit 27084-X0469.01, PDF page 82. 202 Exhibit 27084-X0469.01, PDF page 33 at Figure 6, PDF page 80. bond yield spread should consider both A-rated and Baa-rated utility bonds because not...
AI summary The discussion focuses on determining the base utility bond yield spread, considering both A-rated and Baa-rated utility bonds. Concentric recommends averaging or differentiating the resulting ROE for A and sub-A rated utilities. D. D'Ascendis and Dr. Cleary provide specific recommendations for calculating the base spread using historical and current market data.
7.1 Overview, approved deemed equity ratios for 2024, and review timeframe - 202. To satisfy the fair return standard, the Commission is required to determine a fair return on the deemed equity component of invested capital. In this sectio...
AI summary The Commission determines the approved deemed equity ratios for 2024, maintaining a uniform return on equity (ROE) of 9.0% and adjusting deemed equity ratios based on risk differences among utilities. The deemed equity ratio of 37% for most utilities and 39% for Apex is set to ensure a fair return and support credit ratings in the A-range. The ratios will be reviewed every five years or when the ROE formula is reviewed.
208. The currently approved deemed equity ratios and the ratios recommended by parties for 2024 are set out in the following table. Table 7. Currently approved deemed equity ratios and the deemed equity ratios recommended for 2024 Last app...
AI summary The table outlines the currently approved deemed equity ratios and the ratios recommended by various parties for 2024. Dr. Villadsen conducted a credit ratio analysis to determine the appropriate equity ratios for ATCO Utilities, Fortis, and Apex to meet credit metric benchmarks. She recommended a deemed equity percentage of about 40% for several entities and noted recommendations for adjustments to Fortis's equity ratio.
7.3 Targeted credit ratings - 218. The targeting of credit ratings in the A-range is one of the factors the Commission will continue to use as part of its determination of the deemed equity ratios for 2024 and beyond. - 219. Credit ratings...
AI summary The Commission emphasizes the importance of maintaining a target credit rating in the A-range for Alberta utilities to ensure financial integrity, attract capital, and maintain fair return standards. Most utilities have successfully maintained their credit ratings since the 2018 GCOC proceeding, except for ENMAX, which saw a downgrade due to a debt-financed acquisition unrelated to its Alberta operations.
7.4 Credit metrics - 222. Dr. Villadsen, 227 D. D'Ascendis, 228 D. Madsen 229 and Dr. Cleary 230 each took the position that their respective recommended deemed equity ratios either considered credit metrics, or were supported by a credit...
AI summary The section discusses credit metrics used by the Commission in past GCOC decisions, including EBIT coverage, FFO coverage, and FFO/debt ratios. These metrics are important for credit rating agencies when assessing company risk and assigning credit ratings.
7.4.1 Equity ratios associated with credit metrics 234. In the 2018 GCOC decision (tables 11-14), the Commission provided a sensitivity analysis to illustrate the effect of a range of equity ratios on the three principal credit metrics for...
AI summary The document discusses equity ratios associated with credit metrics, referencing the 2018 GCOC decision and the Commission's sensitivity analysis on the impact of equity ratios on credit metrics for distribution and transmission utilities. It outlines parameter values used by the Commission in the 2018 GCOC decision and in the current proceeding.
- 237. The ROE input parameter is common to all utilities, as is the income tax rate input parameter for those utilities that are not income tax exempt. The Commission has summarized the embedded average debt rates, depreciation rates and...
AI summary The document discusses the ROE input parameter and income tax rate input parameter for utilities, noting their commonality across utilities and the Commission's summary of embedded average debt rates, depreciation rates, and CWIP percentages in Table 9.
ROE value 240. The Commission has applied the notional ROE value of 9.0 per cent in its credit metric calculations, consistent with its findings in Section 6.4.5.
AI summary The Commission has applied a notional ROE value of 9.0 per cent in its credit metric calculations, consistent with its previous findings in Section 6.4.5.
- 249. Table 15 sets out the minimum equity ratio that would be required, in conjunction with an approved ROE of 9.0 per cent, for distribution and transmission utilities in Alberta with an income tax rate of 23 per cent, as well as distri...
AI summary Table 15 outlines the minimum equity ratios required for distribution and transmission utilities in Alberta to achieve a credit rating in the A-range, based on different income tax rates and coverage ratios such as EBIT and FFO.
7.5 Overall assessment of business risk - 251. In this section of the decision, the Commission considers whether business risk factors impacting all the utilities, or a particular segment of the utilities, require the Commission to adjust...
AI summary The Commission evaluates business risk factors affecting utilities, including cybersecurity, decarbonization policies, and macroeconomic factors, and considers whether these justify adjusting deemed equity ratios. Utilities argue for higher equity ratios due to increased risks, while interveners suggest maintaining or reducing them. Stranded asset risks and a recent court decision are also discussed.
7.5.1 Macroeconomic factors 256. While the Commission acknowledges that interest rates and inflation have increased since the 2018 GCOC, resulting in higher capital costs, it is not persuaded that these factors warrant an increase in appro...
AI summary The Commission acknowledges increased interest rates and inflation since 2018 but does not support increasing ROEs or equity ratios. Alberta's regulatory framework allows utilities to recover costs related to inflation and higher interest rates through PBR and COS regulations.
7.5.2 Regulatory risk - 257. The utilities claim that regulatory risks in Alberta have increased since 2018. Among the risks they have identified are lower deemed equity ratios and lower approved ROEs than those awarded in other North Amer...
AI summary The utilities argue that regulatory risks in Alberta have increased since 2018 due to lower equity ratios, ROEs, and a credit rating change. However, the Commission refutes these claims, noting that Alberta utilities have low earnings volatility and operate in a supportive regulatory framework that encourages efficiency and cost reduction, leading to returns above approved ROEs.
7.6.1 Determination of Commission-approved deemed equity ratio for Fortis - 267. Fortis requested a 300 bps premium above the generic deemed equity ratio for an Alberta utility on the basis that it faces increased business and regulatory r...
AI summary Fortis requested a 300 bps premium above the generic deemed equity ratio due to increased business and regulatory risks, including competition from REAs and a $10 million annual reduction in revenue. The Commission rejected the request, citing negligible threat from REAs and noting that increasing equity thickness would raise rates for customers and place Fortis at a competitive disadvantage.
7.6.2 Determination of Commission-approved deemed equity ratio for Apex - 274. Apex submitted that its deemed equity ratio should be 400 bps higher than the deemed equity ratio of the average distribution utility because it faces higher bu...
AI summary Apex requested a 400 bps higher deemed equity ratio due to higher operational risks from its small size and rural service territory. The Commission acknowledged these risks but rejected the full 400 bps increase, citing a 2018 decision that reduced equity thickness due to inefficiencies from higher equity costs not offset by lower debt costs.
283. It is hereby ordered that: - (1) The final approved generic return on equity for Apex Utilities Inc. AltaLink Management Ltd. and its partners PiikaniLink L.P. and KainaiLink L.P., ATCO Electric Ltd., ATCO Gas, ATCO Pipelines, ENMAX P...
AI summary The Commission has approved generic return on equity (ROE) and deemed equity ratios for multiple utility companies, including Apex Utilities Inc., AltaLink Management Ltd., ATCO Electric Ltd., and others, effective January 1, 2024, using methods approved in this decision.
N-21UARB APPROVAL SHEET Replace L6513/Upgrade Line Terminals
44 passages
COST OF CAPITAL REPORT PREPARED FOR NOVA SCOTIA POWER INC. B. Risk Analysis 53 Section 7: Overall Conclusions and Recommendations 82
AI summary The document is a cost of capital report prepared for Nova Scotia Power Inc., including sections on risk analysis and overall conclusions and recommendations.
C. Executive Summary We have prepared this report on behalf of Nova Scotia Power Inc. ("NSPI" or the "Company"), a wholly-owned subsidiary of Emera Inc. Specifically, we have been asked to provide an estimate of the cost of capital for NSP...
AI summary This executive summary outlines the preparation of a report by Nova Scotia Power Inc. on behalf of Emera Inc. to estimate the cost of capital for rate-making purposes, focusing on return on equity and capital structure. The report relies on standard analytical tools and past regulatory decisions.
1 • selection of Canadian, U.S. Electric and North American Electric proxy groups with 2 companies comparable to NSPI with respect to business and financial risks; 3 • estimation of the cost of common equity for the proxy group companies u...
AI summary The document discusses the estimation of the cost of common equity for proxy group companies using methods such as DCF, CAPM, and Risk Premium. It compares authorized ROEs for investor-owned electric utilities in Canada and the U.S., with the North American Electric proxy group being considered most representative of NSPI due to similar risk profiles.
3 The average of all three methods for the North American Electric proxy group is 9.87 percent, 4 within the range of 9.29 percent to 10.32 percent. Based on this analysis, we believe a reasonable 5 estimate of NSPI's required ROE is 9.9 p...
AI summary The document discusses Nova Scotia Power Inc.'s (NSPI) proposed return on equity (ROE) of 9.0%, which is below the estimated 9.9% based on proxy group analysis. NSPI argues that maintaining the current ROE is necessary for rate stability and affordability, but the analysis highlights the need for a competitive ROE to attract investment and support the energy transition. A common equity ratio of 40.0% is recommended due to NSPI's financial risks and ownership of regulated generation assets.
5 D. Report Organization 6 The remainder of the report is organized as follows: Section II discusses the legal requirements 7 and regulatory precedents for the determination of a fair rate of return. Section III provides an 8 overview of e...
AI summary This section outlines the organization of the report, detailing the structure and content of subsequent sections, including legal requirements, market conditions, proxy group selection, estimation methods, capital structure assessment, and overall conclusions.
further investment will be discouraged and it will be unable to expand its operations or even maintain existing ones. This will harm not only its shareholders, but also its customers. [4](#page-37-3) The law regarding fair return for utili...
AI summary The text discusses the importance of a fair return standard for utilities, emphasizing that inadequate returns may discourage investment and harm both shareholders and customers. It references U.S. Supreme Court cases, such as Bluefield Water Works and Hope Natural Gas Co. , which provide legal guidance on determining a fair return under changing market conditions.
B. The Stand-Alone Principle The Stand-Alone Principle provides that the utility must be regulated as if it were a stand-alone entity, raising capital on the merits of its own business and financial characteristics. In this way, capital is...
AI summary The Stand-Alone Principle requires utilities to be regulated independently, ensuring they raise capital based on their own financial and risk profiles. NSPI, part of the Emera corporate structure, must compete for capital with other subsidiaries like Tampa Electric Company, which has different authorized ROE and equity ratios. This principle ensures fair returns based on individual risk profiles.
1 C. The Relationship Between Capital Structure and ROE 2 The cost of common equity depends in part on the company's capital structure. The common 3 equity ratio and equity rate of return must therefore be considered together to determine...
AI summary The text discusses how the capital structure of a company affects the required rate of return on common equity, emphasizing that lower common equity ratios necessitate higher returns to compensate shareholders for increased financial risk. It also highlights the importance of considering both business and financial risks when determining the capital structure.
3 A. Summary and Relevance to Utility Cost of Capital 4 Utilities raise debt and equity in a global market influenced by macroeconomic fundamentals, 5 capital markets and central bank policies. The cost of debt for utilities is observable...
AI summary Utilities raise debt and equity in a global market influenced by macroeconomic factors, capital markets, and central bank policies. The cost of debt is observable, but the return on equity (ROE) must be estimated based on macroeconomic and capital market factors, including real GDP growth, inflation, interest rates, central bank policy, investor confidence, and financial market volatility.
13 1. Canada GDP is an important indicator of economic activity that is a direct input to the multi-stage DCF model and also signals demand for all inputs to the economy, including capital. [Figure 2](#page-43-0) shows that the Canadian ec...
AI summary The text discusses economic indicators in Canada, including GDP growth, unemployment rates, and inflation, and their impact on the multi-stage DCF model and cost of capital. It notes a slowdown in GDP growth from late 2022 to early 2024, followed by recovery, and highlights the relationship between inflation and capital costs.
14 1. Interest Rates Bond yields are the most direct indicator of the cost of capital, as they reflect the level of interest required to compensate debt (but not equity) investors in the current market. Bond yields are a direct input to th...
AI summary The text discusses changes in Canadian government bond yields, particularly for 10- and 30-year bonds, and their impact on the cost of capital. It notes that yields increased significantly after July 2020, with spreads between bond terms reflecting economic and inflation uncertainty. The UARB approved a settlement agreement in NSPI's previous GRA in February 2023, and utility bond yields have remained relatively stable since then.
SELECTION OF PROXY COMPANIES 3 Since ROE is a market-based concept and given that NSPI is not publicly-traded, it is necessary to 4 establish a group of companies that are both publicly-traded and comparable to the Company's 5 business and...
AI summary The document discusses the selection of proxy companies for Nova Scotia Power Inc. (NSPI) to estimate its return on equity (ROE). Since NSPI is not publicly-traded, comparable publicly-traded utility companies are used. Criteria include investment grade credit ratings, and certain companies like Emera Inc. and TC Energy were excluded due to their relationship with NSPI or differing risk profiles.
1 Canadian regulators have adopted a pragmatic view of the use of U.S. data and proxy groups to 2 estimate the allowed ROE for Canadian regulated utilities. The development of a proxy group 3 comprised entirely of Canadian electric utiliti...
AI summary Canadian regulators, including the BCUC and AUC, use a North American proxy group of utility companies, including both Canadian and U.S. firms, to determine the allowed return on equity (ROE) for regulated utilities. This approach is driven by the limited number of publicly traded Canadian utilities and the integration of financial markets across North America.
d of utility companies in both Canada and the U.S. to set the authorized ROE for utilities under their jurisdiction. The BCUC explained its rationale for using a North American proxy group as follows: For the reasons outlined above, we fin...
AI summary The BCUC and AUC have both adopted approaches using North American proxy groups to determine the authorized return on equity (ROE) for utilities, emphasizing the integration of financial markets and the similarity of regulatory regimes across North America. The AUC also established screening criteria for selecting comparator companies in Alberta.
percent) were either U.S. electric or U.S. gas utilities (or both). In addition, several of the Canadian companies in the AUC's comparator group have significant U.S. operations, including Emera, Fortis, and Algonquin Power. In Ontario, th...
AI summary The text discusses the use of U.S. proxy groups for determining the cost of capital for Canadian utilities, noting challenges in finding truly comparable companies. It references the Ontario Energy Board's (OEB) 2009 decision and the National Energy Board's (NEB) bellwether TQM decision, highlighting differences in structure and risk between U.S. and Canadian utilities.
METHODS FOR ESTIMATING THE RETURN ON EQUITY Analysts use multiple approaches to estimate the cost of common equity. The required ROE can be estimated using one or more analytical techniques that rely on market-based data to quantify invest...
AI summary The text discusses methods for estimating the return on equity (ROE), emphasizing the use of multiple analytical techniques to reflect investor expectations. It highlights the importance of informed judgment in assessing results and notes that other Canadian utility regulators also advocate for using multiple methodologies to determine a fair ROE.
A. Discounted Cash Flow ("DCF") Model The premise underlying the DCF model is that investors value a given investment according to the present value of its expected cash flow over time. The standard DCF model is shown in Formula [1]: 23 $$...
AI summary This section introduces the Discounted Cash Flow (DCF) model, explaining how investors value investments based on the present value of future cash flows. It provides the formula for the DCF model and derives the cost of common equity (ROE) from it, using dividend yield and growth rate.
3 3. Growth Rate Estimates 4 In considering the appropriate growth rate for the DCF model, the most relied upon indicator of 5 investors' expectations is analysts' estimates of future earnings growth. We have relied on 6 earnings growth es...
AI summary The document discusses the use of earnings growth rates in the DCF model for determining appropriate growth rates, emphasizing that analysts' estimates are preferred over dividend growth rates due to their broader availability and alignment with long-term sustainability. It also notes concerns about potential optimism bias in analysts' forecasts and compares earnings growth rates to GDP growth.
5 4. Multi-Stage DCF Model 6 In order to address some of the limiting assumptions underlying the Constant Growth form of the 7 DCF model, our ROE analysis and recommendation relies on the results of a multi-period (three-8 stage) DCF Model...
AI summary The document discusses the use of a multi-stage DCF model to refine the ROE analysis by incorporating near-term, transitional, and long-term growth rates, with the terminal stage aligning dividend growth with nominal GDP forecasts. The model uses data from Consensus Economics, Inc., for GDP growth estimates from 2030-2034.
B. Capital Asset Pricing Model ("CAPM") The CAPM method is based on the relationship between the required return of a security and the systematic risk of that security. As shown in Equation [4], the CAPM is defined by four components, each...
AI summary The document discusses the Capital Asset Pricing Model (CAPM), explaining its components and how it is used to estimate the required return on equity (ROE). It relies on forward-looking estimates, including the risk-free rate derived from long-term forecasts of 10-year government bond yields.
3 4. CAPM Results 4 Our CAPM analysis for the integrated electric utilities produces an ROE estimate of 9.7 percent 5 for the Canadian Utilities proxy group, 10.7 percent for the U.S. Electric Utilities proxy group, and 6 10.3 percent for...
AI summary The CAPM analysis for integrated electric utilities estimates a return on equity (ROE) of 9.7% for the Canadian Utilities proxy group, 10.7% for the U.S. Electric Utilities proxy group, and 10.3% for the North American Electric proxy group.
e ten jurisdictions examined, seven have 25 historically granted the 50-basis point adjustment. Only Quebec deviates from 50 basis points by 1 allowing 30 to 40 basis points, and Manitoba and Saskatchewan, which have only Crown utilities,...
AI summary The text discusses flotation costs and financing flexibility in various jurisdictions, noting that seven out of ten historically granted a 50-basis point adjustment. Nova Scotia's February 2023 order did not specify if flotation costs were included in the ROE for Nova Scotia Power. The BCUC and OEB have made adjustments to flotation costs and financing flexibility, with differing approaches.
Jurisdiction Adj. Docket/Proceeding Notes Alberta 50 bps 2018 GCOC Decision 22570-D01-2018 and 2024 GCOC Decision 27084- D02-2023 Adjustment of 50 bps is normally included in the allowed return to account for administrative and equity issu...
AI summary The document outlines various adjustments to the allowed return on equity (ROE) across different provinces, including 50 basis points (bps) for administrative and equity issuance costs, flotation costs, and financing flexibility. Nova Scotia's 2023 rate application was resolved through a settlement agreement without specifying flotation costs or financing flexibility. Adjustments vary by jurisdiction, with some provinces using lower or higher values.
1 D. Risk Premium Analysis - 2 In general terms, the Risk Premium approach recognizes that equity is riskier than debt because 3 equity investors bear the residual risk associated with ownership. Equity investors, therefore, 4 require a gr...
AI summary The Risk Premium Analysis discusses how equity investors require a higher return due to the residual risk associated with ownership. It uses the Capital Asset Pricing Model (CAPM) to estimate the Return on Equity (ROE) as the sum of the Risk Premium (RP) and the yield on bonds. The analysis uses historical data from U.S. electric utility companies and regression analysis to estimate the relationship between risk premium and interest rates.
Using 30-Day Average Yield on 30-Year Treasury Bond Using Q2 2025–Q2 2026 Forecast for Yield on 30-Year Treasury Bond52 Using 2026- 2030 Forecast for Yield 30- Year Treasury Bond53 Yield 4.82% 4.66% 4.30% Risk Premium 5.85% 5.95% 6.15% Res...
AI summary The document presents a comparison of the resulting ROE under different yield assumptions for the 30-year Treasury bond. It also references a risk premium analysis conducted on Canadian utility decisions from 1994 to 2024, highlighting an inverse relationship between interest rates and equity risk premium.
1 Figure 28: Risk Premium Results - Canada[54](#page-81-1) 2 3 The Canadian risk premium analysis shows that the average equity risk premium in Canada since 4 1994 has been 5.87 percent. The results of the Canadian risk premium analysis, s...
AI summary The Canadian risk premium analysis shows an average equity risk premium of 5.87 percent since 1994, supporting the reasonableness of DCF and CAPM analyses for North American proxy group companies. The 9.53 percent result is emphasized as it aligns with the projected risk-free rate for 2026-2028.
1 Figure 29: Risk Premium Results - Canada Using 30-Day Average Yield on 30-Year GOC Bond55 Using 2026–2028 Forecast for Yield on 30-Year GOC Bond56 Using 2026- 2030 Forecast for Yield 30- Year GOC Bond57 Yield 3.28% 3.67% 3.72% Risk Premi...
AI summary Figure 29 presents risk premium results for Canada using different yield forecasts on 30-year GOC bonds, resulting in varying ROE outcomes. The comparison to other authorized ROEs is discussed in the following section.
3 Authorized ROEs and common equity ratios for other investor-owned electric utilities in Canada 4 and the U.S. are another relevant benchmark when setting authorized returns. Given the 5 "opportunity cost" concept underlying a fair return...
AI summary The text discusses the use of authorized return on equity (ROE) benchmarks for investor-owned electric utilities in Canada and the U.S., highlighting the average ROE figures and the relevance of opportunity cost in determining fair returns. It notes that Canadian utilities in the sample do not own significant regulated generation, unlike NSPI.
1 Figure 30: Authorized Electric ROEs and Equity Ratios Generation ROE Equity Ratio NSPI (existing) Yes 9.00% 40.0% NSPI (Concentric analysis) Yes 9.90% 45.0% NSPI (proposed) Yes 9.00% 40.0% Newfoundland Power Minimal 8.60% 45.0% Maritime...
AI summary Figure 30 presents authorized electric ROEs and equity ratios for various utilities, including NSPI, Newfoundland Power, and U.S. Electric Utilities, highlighting differences in return on equity and equity ratios across jurisdictions.
A. NSPI's Deemed Common Equity Ratio 4 In February 2023, the Board approved the settlement agreement which included an increase in 5 the deemed common equity ratio for NSPI from 37.5 percent to 40.0 percent for the purposes of 6 establishi...
AI summary The Nova Scotia Utility and Review Board approved an increase in the deemed common equity ratio for Nova Scotia Power Inc. (NSPI) from 37.5% to 40.0% in February 2023, affecting rate-setting and earnings calculations based on a five-quarter average equity thickness.
b. Implication of Capital Structure on Rate of Return The capital structure relates to a company's financial risk, which represents the risk that a company may not have adequate cash flows to meet its financial obligations, and is a functi...
AI summary The capital structure of a company, particularly the proportion of debt, influences its financial risk and, consequently, the rate of return. Higher debt levels increase fixed obligations and financial risk for equity holders, making it a key factor in determining a fair return.
c. Comparison to Other Investor-Owned Utilities As explained in Section IV, we selected proxy groups consisting of Canadian, U.S. Electric, and North American Electric utilities for purposes of establishing our ROE recommendation for NSPI....
AI summary The document compares Nova Scotia Power Inc.'s (NSPI) deemed common equity ratio of 40.0 percent with those of other investor-owned electric utilities in Canada and the U.S. It notes that NSPI's ratio is in line with most Canadian utilities but lower than U.S. integrated utilities, which have an average of 52.0 percent due to higher business risks.
Operating Utility Deemed Common Equity Ratio NSPI (existing) 40.0% NSPI (proposed) 40.0% Alberta Electric Utilities 37.0% FortisBC Electric 41.0% Ontario Electric Utilities 40.0% Maritime Electric 40.0% Newfoundland Power 45.0% Canadian El...
AI summary The document compares the deemed common equity ratio of NSPI (40.0%) with other utilities and industry averages, noting that NSPI's ratio is lower than the average authorized equity ratio of 49.0% for companies in the Electric T&D proxy group, which includes firms with significant electric generation assets.
1 e. Change in NSPI's Credit Rating Since 2021 S&P Global downgraded NSPI by two notches to BBB- from BBB+ in February 2023, 2 [65](#page-88-0) and DBRS Morningstar downgraded NSPI to BBB (high) from A (low) in December 2022.[66](#page-88-...
AI summary S&P Global and DBRS Morningstar downgraded NSPI's credit rating in 2022 and 2023, citing concerns over political intervention and regulatory changes in Nova Scotia, including caps on rate increases and return on equity. The ratings agencies also highlighted risks related to NSPI's reliance on coal-based generation and limited financial cushions.
20 f. Conclusions on Financial Risk The 40.0 percent deemed common equity ratio for NSPI is similar to the Canadian average of 40.6 percent for investor-owned electric utilities, despite the fact that the Company owns substantial regulated...
AI summary NSPI's 40.0% deemed common equity ratio is below the U.S. Electric proxy group average of 51.1%, and its long-term issuer rating (BBB-) is lower than the proxy group average (A-), indicating higher financial risk compared to peers. This is attributed to weaker credit metrics and a higher risk profile due to its regulated generation assets.
c. Generation Ownership Unlike most other regulated electric utilities in Canada, NSPI owns substantial regulated generation assets. In 2024, NSPI derived 63.9 percent of its power supply from Company-owned generation facilities, while pur...
AI summary NSPI owns a significant portion of its power supply through regulated generation assets, unlike most other Canadian utilities. This ownership structure influences its business risk profile, as noted by credit rating agencies like Moody's, which assess utilities with generation assets as having higher business risk.
21 g. Alternative Fuel Risk Although NSPI continues to face competition from alternative fuel sources, this risk is declining due to government policy that promotes electrification of buildings and increased purchases of electric vehicles....
AI summary NSPI faces declining alternative fuel risk due to government policy promoting electrification and rising electric vehicle adoption. The percentage of residential electric heating in Nova Scotia increased from 51.1% in 2020 to 60.2% in 2024. Heat pump adoption has grown significantly, impacting NSPI's electricity usage and load management.
h. Regulatory Risk 2 There have been decisions by the UARB where operating and capital costs have been disallowed. 3 Cost disallowances are always within the scope of utility regulation, but in Concentric's 4 experience, significant disall...
AI summary The text discusses regulatory risks faced by Nova Scotia Power Inc. (NSPI), including past instances where the UARB disallowed certain operating and capital costs. These disallowances affect NSPI's return on equity and include examples such as the treatment of executive compensation, Hurricane Fiona-related costs, and compliance with annual performance standards under the Public Utilities Act.
i. Political Risk NSPI is also subject to significant political risk, as evidenced by the legislation that was passed following the hearing in the previous GRA but prior to the UARB's order, when the Provincial government placed a cap on t...
AI summary NSPI faces significant political risk due to provincial legislation capping its authorized ROE and equity ratio, which has raised concerns among investors about cost recovery and ROE. This intervention is uncommon and increases NSPI's cost of capital, negatively impacting both customers and the utility.
1 j. Conclusions on Business Risk 2 As discussed in this Section, NSPI's risk profile is characterized by the following factors: 1) 3 ownership of substantial regulated generation assets; 2) the need to retire a substantial amount 4 of the...
AI summary NSPI's business risk profile includes regulated generation assets, retirement of thermal generation, capital investments for renewable transition, FAM audits, volumetric risk, weaker economic trends, and storm exposure. The company requests continuation of the storm rider pilot. Credit agencies are closely monitoring NSPI's decarbonization risks.
Criteria Score Deemed Equity Below Average Allowed ROE Good Energy Cost Recovery Below Average Capital and Operating Cost Recovery Good Cost of Service vs. Incentive Rate Excellent Mechanism Political Interference Poor Stranded Cost Recove...
AI summary The document presents a table with various criteria and their corresponding scores, including Deemed Equity, Allowed ROE, Energy Cost Recovery, and others. It also mentions a section labeled '2 e. Capital Cost Recovery', indicating a discussion on capital cost recovery mechanisms.
5. Risk Analysis Conclusions 4 Based on the results of the financial and business risk analyses discussed throughout this report, 5 Concentric concludes that: - NSPI's generation ownership distinguishes the Company from other investor-owne...
AI summary Concentric concludes that NSPI's business risk remains elevated, particularly due to environmental compliance requirements and regulatory challenges. NSPI faces higher risks compared to other Canadian and U.S. utilities, including regulatory lag and lack of protection against volumetric risk. The company also failed to achieve its authorized ROE in recent years.
2 OVERALL CONCLUSIONS AND RECOMMENDATIONS 3 For the reasons discussed throughout this report, it is appropriate to consider the CAPM using a 4 historical market risk premium, the multi-stage DCF model and Risk Premium results for both 5 Ca...
AI summary The report concludes that using a historical market risk premium, multi-stage DCF model, and Risk Premium results from Canada and the U.S. is appropriate for determining the authorized ROE for NSPI.
COST OF CAPITAL REPORT PREPARED FOR NOVA SCOTIA POWER INC. 1 the additional financial risks. If the deemed common equity ratio for NSPI is maintained at the 2 current level of 40.0 percent, our ROE recommendation of 9.9 percent is understa...
AI summary The report discusses the financial risks associated with maintaining the current deemed common equity ratio of 40.0 percent for Nova Scotia Power Inc. (NSPI). It argues that the recommended ROE of 9.9 percent is understated compared to market data for comparable companies, particularly at the requested ROE of 9.0 percent.
N-22Decision Ontario Energy Board EB-2024-0063
73 passages
This is a Decision and Order of the Ontario Energy Board (OEB) regarding a generic proceeding initiated on its own motion to consider the cost of capital and other matters for electricity transmitters, electricity distributors, natural gas...
AI summary The Ontario Energy Board (OEB) has issued a decision and order revising the methodology for determining cost of capital parameters for electricity and gas utilities, effective January 1, 2025. The new parameters include a return on equity of 9.00%, deemed long-term and short-term debt rates, and an annual ROE adjustment formula for future rate applications. The capital structure remains unchanged, and the new framework will be reviewed in five years.
eps in this proceeding included the Issues Conference, expert reports, interrogatories, a Presentation Day, a six-day oral hearing over three weeks, written submissions, and written reply submissions. The following schedules summarize and...
AI summary This proceeding involved a series of procedural steps including an Issues Conference, expert reports, interrogatories, a Presentation Day, and a six-day oral hearing. Schedules C through H outline revised methodologies for calculating the cost of capital, ROE, DLTDR, DSTDR, and prescribed interest rates. The OEA is representing the CLD+ group, which includes several major utility companies.
3.1.1 Current Cost of Capital Framework Schedule H includes a detailed description of the OEB's 2009 Cost of Capital Framework. The OEB concurs with the Staff Report from 2016 which concluded that the 2009 Cost of Capital Framework worked...
AI summary The OEB confirms the effectiveness of the 2009 Cost of Capital Framework, which met the Fair Return Standard (FRS) since its implementation. The FRS includes three components: comparable investment standard, financial integrity standard, and capital attraction standard. The OEB is establishing a new Cost of Capital Framework in line with the FRS.
Expert Report Proposals LEI stated that the term energy transition refers to a shift from an energy system that primarily relies on fossil fuel-based energy sources (e.g., natural gas, coal and oil) to net zero-emitting renewable energy so...
AI summary The text discusses the concept of energy transition and its implications for regulated utilities, particularly in the electricity and gas sectors. It outlines differing views on how business and financial risks, including energy transition, should be addressed in regulatory proceedings, with some entities arguing that current mechanisms are sufficient while others believe additional measures are needed.
Regulatory and Rate-Setting Mechanisms LEI stated that as the perceived stability of future cash flows is a key consideration for investors, a regulated utility's ability to recover its capital and operating costs profoundly relies on avai...
AI summary LEI emphasized the importance of regulatory mechanisms in ensuring cost recovery for utilities, while Dr. Cleary supported retaining current risk assessment policies. Concentric suggested comparing Ontario's mechanisms to peer companies when assessing cost of equity. Nexus argued that Ontario's regulatory environment does not significantly reduce risk and warned against approving a lower ROE for electricity distributors due to systematic underearnings.
s, March 28, 2024, p. 6. extent that energy transition increased or decreased the need for capital investments, this is dealt with through the regular rate cases, rather than a generic consideration. Several ratepayer groups submitted that...
AI summary The document discusses the impact of energy transition on capital investments and risk for electricity utilities. Ratepayer groups argue that energy transition is not currently significant and may reduce risk, while others highlight the need for new capital and the importance of accounting for energy transition risk in return on equity (ROE) decisions.
Regulatory and Rate-Setting Mechanisms OEB staff agreed with LEI and Dr. Cleary that any regulatory mechanism that can significantly impact the stability of future cash flows must be considered part of regulatory risks. OEB staff concluded...
AI summary The OEB staff, LEI, and Dr. Cleary agree that regulatory mechanisms significantly impacting cash flow stability are part of regulatory risk. The OEB's mechanisms since 2009 have moderately reduced utility risk. The OEA acknowledges this but cautions that business risk remains unchanged due to new risks like climate change. CCC and others emphasize that regulatory policies have substantially decreased risk and should influence the current ROE setting.
Energy Transition There is an energy transition underway in this province and around the world. It has been defined as a shift from fossil fuels towards a sustainable, renewable energy future. It is expected to result in a greater demand f...
AI summary The energy transition, defined as a shift from fossil fuels to renewable energy, is expected to increase electricity demand by 75% by 2050, impacting the energy sector. The OEB acknowledges both the risks and opportunities this transition presents, including increased demand and returns for utilities. While the OEB is setting a five-year Cost of Capital Framework, it has not adjusted parameters for energy transition effects due to uncertainty over the next five years.
Other Risks and Regulatory and Rate-Setting Mechanisms Utilities have argued that in addition to energy transition, other risks are increasing such as cyber security, changes in sales volumes, extreme weather events, and changes in governm...
AI summary The OEB acknowledges increased risks for utilities due to factors such as cybersecurity and extreme weather, but argues that regulatory mechanisms have reduced utility risk since 2009. The OEB also notes that no generic adjustments are being made for Enbridge Gas or OPG in this proceeding, and will monitor trade tariffs and market conditions for potential future reviews.
Expert Report Proposals The expert reports differed on their assessment of the OEB's current approach to the determination of debt and equity from the perspective of investors. LEI and Dr. Cleary both generally agreed that the OEB's existi...
AI summary The expert reports differ on the OEB's approach to determining the cost of capital, with LEI and Dr. Cleary supporting the OEB's methods, while Concentrics and Nexus highlight challenges and shortcomings in the approach. Nexus argues the OEB's method fails to meet the FRS and does not adequately serve equity investors.
Submissions OEB staff agreed with Concentric's view that the perspectives of debt and equity investors in the utility sector are among the most relevant considerations in setting the cost of capital parameters and capital structure. These...
AI summary OEB staff and several stakeholders agree that the perspectives of debt and equity investors are important in setting the cost of capital parameters. However, CCMBC argues that municipal investors have different perspectives than outside investors, while OEA and VECC emphasize the relevance of investor perspectives across North America and the importance of market data and credit ratings in determining cost of capital.
Findings Under Issue 11, the OEB asked about the perspectives of debt and equity investors related to cost of capital parameters and capital structure. There is little debate that the perspectives of debt and equity investors in the utilit...
AI summary The OEB inquired about the perspectives of debt and equity investors regarding cost of capital parameters and capital structure. Both investor groups are seen as critical in determining the balance of risk and return, which influences the cost of capital and capital structure of regulated utilities.
Equity Investors' Perspective Equity investors are more exposed to market volatility and regulatory changes and typically require a higher return to compensate for the greater risk of investing in a utility as an equity investor (versus a...
AI summary Equity investors demand higher returns due to greater exposure to market and regulatory risks. They prefer a higher equity ratio to protect against financial distress and preserve returns. The OEB faces the challenge of balancing cost of capital parameters to satisfy both equity and debt investors while avoiding excessive rates or regulatory scrutiny.
Expert Report Proposals LEI stated that the OEB's existing methodology implicitly accounts for differences in sources of funding when approving rate applications. LEI recommended that this aspect of the OEB methodology be retained. Consist...
AI summary The document discusses the OEB's methodology for determining the cost of capital, emphasizing that it should not depend on a utility's ownership structure. LEI and Dr. Cleary support maintaining the current approach, while Concentric argues that the cost of capital should be based on the use of funds rather than the source of funds.
Submissions OEB staff submitted that the approach to setting the cost of capital parameters and capital structure should not depend on a utility's ownership and the source of funds. OEB staff noted that its view is consistent with the view...
AI summary The OEB staff and various organizations argue that the cost of capital parameters and capital structure should not be based on a utility's ownership type. However, CCMBC and Energy Probe argue that the source of funds and ownership should matter, as government-owned utilities have different financial protections compared to private ones. Energy Probe also criticizes the lack of benchmarking against U.S. municipally owned utilities.
Findings Whether a utility finances its operations through capital markets, municipal debt, or government lending, the fundamental risk associated with the utility's activities (such as the regulatory environment, business model, and marke...
AI summary The Ontario Energy Board (OEB) emphasizes that the cost of capital for utilities should be based on risk profiles and use of funds, not ownership structure or financing sources. This approach ensures fairness and consistency in rate-setting, preventing disparities among utilities. The OEB maintains a stable, transparent framework aligned with financial theory and regulatory principles.
Overview of Recommended Base ROEs The two utility groups (the OEA and EDA) supported higher base ROEs, the ratepayer groups supported lower base ROEs, and OEB staff supported a middle ground approach. OEB staff recommended a 2025 base ROE...
AI summary OEB staff recommended a 2025 base ROE range of 8.79% to 9.32%, supporting a middle ground between utility groups and ratepayer groups. They argued that this range aligns with the status quo, other Canadian regulators' approvals, and that utility experts' recommendations are too high while ratepayer experts' are too low.
Fair Return Standard and Economic Rent OEB staff noted that the general principles outlined in the 2009 Report were well accepted and none of the four experts (as well as OEB staff) in this proceeding appeared to take issue with them. Howe...
AI summary OEB staff emphasized the acceptance of the 2009 Report's principles, noting that current allowed ROE may constitute economic rent. Ratepayer groups and experts like EDA and OEA argued for adjusting the deemed ROE to align with FRS, while criticizing Dr. Cleary's 7.05% base ROE proposal due to its potential negative impact on credit ratings and ratepayers.
Multiple Methodologies In OEB staff's view, it was neither necessary nor advisable for the OEB to pick one of the four expert recommendations in this case, or to make a finding on which methodology (e.g., CAPM, DCF or Risk Premium) or whic...
AI summary OEB staff recommends using multiple methodologies (CAPM, DCF, Risk Premium) to determine ROE, rather than selecting one. EDA and OEA agree that no single method is sufficient, with EDA criticizing averaging ROE figures and OEA emphasizing the value of a multi-model approach.
Non-Canadian Comparators OEB staff stated that investors are willing to accept lower returns in Ontario because the risk is lower and U.S. utilities are not actually comparable in risk to Ontario utilities. OEB staff noted that none of the...
AI summary OEB staff suggested considering global comparators for cost of capital, while EDA and OEA supported using U.S. data. Different organizations proposed varying approaches for applying the ROE to different utility segments. Each model used by experts was noted as a simplification with its own flaws.
Other ROE Matters Both the EDA and the OEA noted that their respective experts (Nexus and Concentric) made no adjustment to their proposed ROEs to reflect any risk associated with the energy transition. Several ratepayer groups noted that...
AI summary The EDA and OEA stated their experts did not adjust proposed ROEs for energy transition risks. Ratepayer groups argue higher-than-required ROEs favor capital expenditures, hindering a cost-effective energy transition.
Findings The OEB affirms that in setting this important component of the determination of the cost of capital for regulated utilities it adopts the requirements of the FRS, as set out in the 2009 Report. These requirements mandate a regula...
AI summary The OEB affirms the use of the FRS in determining the cost of capital for regulated utilities, setting a deemed ROE of 9.00% for 2025. It considers multiple methodologies, such as CAPM and DCF, but finds no single gold standard. The OEB chooses to assess the ROE against the FRS rather than averaging methodologies with known weaknesses.
Use of U.S. Based Utility Data in 2009 Report The 2009 Report provided a departure from the content used to determine what constituted comparable investments from previous utility regulation in Ontario and in other Canadian provinces.[28](...
AI summary The 2009 Report marked a shift in determining comparable investments by including U.S. utility data, a practice later adopted by LEI, Nexus, and Concentric. This approach led to higher recommended ROE levels for Ontario regulated utilities, with the current framework not impairing financial integrity or capital-raising ability.
Summary of ROE Findings The OEB has determined that the approved ROE to be allowed OEB-regulated utilities, in accordance with Section 3.6 of this Decision, will be firmly connected to the actual experience of the current 2009 Cost of Capi...
AI summary The OEB has determined that the approved ROE for OEB-regulated utilities will be tied to the 2009 Cost of Capital Framework, considering future challenges. Concerns about using U.S. cost-of-capital parameters are noted, and the OEB is cautious about adjusting the deemed ROE until the impact of the energy transition is better understood. An interim ROE of 8.75% is set for 2025.
Expert Report Proposals LEI's base ROE estimate did not include 50 basis points (or any basis points) of transaction costs implicitly assumed in the 2009 base ROE determination. LEI recommended considering the transaction costs associated...
AI summary LEI's base ROE estimate excludes transaction costs, unlike the OEB's past practice. Concentric and Nexus argue that excluding these costs risks under-recovery for utilities, and that IFRS rules support adding 50 basis points to the deemed ROE to account for flotation/transaction costs. Dr. Cleary supports the current practice of adding 50 basis points to the allowed ROE estimate.
Submissions OEB staff noted that although the deemed ROE included a 50 basis point adder for "transactional costs" since the 2009 Report, the 2009 Report provided no rationale for embedding such costs in the ROE, nor for how the adder was...
AI summary OEB staff recommended eliminating the 50 basis point adder in the deemed ROE, as it was not justified in the 2009 Report and is no longer needed. AMPCO/IGUA agreed. Concentric and Nexus provided evidence supporting the retention of the adder, but OEB staff believed it overcompensates utilities and suggested alternative remedies.
Findings The flotation cost adder of 50 basis points currently added to the ROE presents several difficulties in addressing costs attributed to have been incurred by Ontario utilities for maintaining equity. The adder is meant to recognize...
AI summary The flotation cost adder of 50 basis points added to the ROE is questioned for its relevance, as few Ontario utilities use public equity markets. The 2009 Report lacks details on the derivation of this figure, and Nexus argues for its perpetual retention due to amortization over infinity, though no evidence supports this claim.
Expert Report Proposals Expert report proposals regarding two key components of the annual ROE adjustment formula (the Long Canada Bond Forecast (LCBF) and Utility Bond Yield Spread) are discussed in Section 3.4 of this Decision in more de...
AI summary The document outlines expert proposals for adjusting the annual Return on Equity (ROE) formula, focusing on the Long Canada Bond Forecast (LCBF) and Utility Bond Yield Spread. LEI, Concentric, Nexus, and Dr. Cleary each propose different adjustment factors, with varying views on volatility, responsiveness, and empirical relationships.
Submissions OEB staff submitted that LEI, Concentric, and Dr. Cleary proposed similar annual ROE adjustment formulas for adjusting the ROE beyond 2025, building on the approach approved in the 2009 consultation, but with revised factors. O...
AI summary OEB staff proposed updating the ROE adjustment formula beyond 2025, with support from OEA for Concentric's revised factors, while SEC argued for maintaining the 50% adjustment factor due to its balance between macroeconomic changes and stability. Disagreements arose over the validity of proposed adjustments.
Expert Report Proposals LEI stated that the OEB's current approach of revising the capital structure upon application if warranted due to an increase in business/financial risks is a reasonable practice, as the OEB has noted that risks rar...
AI summary LEI and Dr. Cleary agree that the OEB's approach to revising capital structure based on risk changes is reasonable. Concentric argues that Ontario's equity ratios are too low compared to U.S. peers and recommends a minimum deemed equity ratio of 45% for all Ontario utilities, with a specific recommendation for OPG to increase its equity ratio to meet the FRS.
Submissions OEB staff and several ratepayer groups submitted that no changes need to be made to the OEB's policy on capital structure in this proceeding and the default equity thickness should remain at 40% for electricity distributors and...
AI summary OEB staff and ratepayer groups argue that the default equity thickness of 40% should remain unchanged for electricity distributors and transmitters, as Concentric's case for increasing it to 45% was not persuasive. They also agree that OPG's equity ratio should be reviewed in a future proceeding. OEB staff emphasized that Ontario's equity ratios are in line with other provinces and that changes in risk have been reflected in ROE adjustments.
Findings The OEB has reviewed the appropriateness of the capital structure for electricity transmitters, electricity distributors, natural gas utilities, and OPG considering the FRS. As part of the 2009 Report, the OEB determined that a de...
AI summary The OEB has reviewed and maintained a deemed capital structure of 60% debt and 40% equity for electricity distributors and transmitters, aligning with the FRS. OPG's capital structure is set at 55% debt and 45% equity, with a recommendation to submit evidence for potential changes. The OEB rejects the need for an upward ROE adjustment if the capital structure remains unchanged.
Expert Report Proposals LEI recommended that the status quo approach (considering deemed capital structure regardless of the actual capital structure) should be retained. In LEI's view, this ensures fairness to both utilities (flexibility...
AI summary LEI, Concentric, and Dr. Cleary recommend retaining the status quo approach for deemed capital structure, emphasizing fairness, administrative simplicity, and flexibility for utilities. The decision and order reference new transmitters in Ontario since 2009.
Submissions OEB staff and several ratepayer groups agreed with LEI and Dr. Cleary that the status quo approach (considering deemed capital structure regardless of the actual capital structure) should be retained. OEB staff noted that this...
AI summary The document discusses the approach to notional debt in rate-making, with OEB staff and ratepayer groups supporting the status quo of using deemed capital structure. SEC and OEA agree on applying actual weighted average cost of debt to notional debt, while VECC suggests adjusting pricing based on variances between actual and deemed debt. OEB staff and OEA disagree with VECC's proposal, emphasizing utility discretion in managing capital structures.
Electricity Distributors and Transmitters The 2009 Report affirmed the deemed equity ratio of 40% equity / 60% debt for electricity distributors. Since the 2009 Report, the OEB has extended the deemed equity ratio of 40% to electricity tra...
AI summary The OEB has maintained the deemed equity ratio of 40% equity / 60% debt for electricity distributors and transmitters, ensuring consistent financial assumptions for rate-setting. This approach balances fairness between utilities and customers and aligns with FRS, while allowing flexibility in financing.
OPG OPG's current approved equity ratio is 45%. The current OEB-approved capital structure is based on a deemed 45% equity component, with the remaining 55% financed through short-term and long-term debt. As with Enbridge Gas, the deemed c...
AI summary OPG's current approved equity ratio is 45%, with the remaining 55% financed through short-term and long-term debt. The OEB finds that the current approach for determining debt costs is appropriate, ensuring regulatory stability and compliance with FRS. Short-term debt is used to true up the deemed capital structure to OPG's actual capitalization.
Calculation of DLTDR OEB staff and Pollution Probe supported LEI's suggested approach. OEB staff noted that using updated data as at September 30, 2024, the base LCBF should be 3.127% and the base utility bond spread should be 1.427%, summ...
AI summary The document discusses the calculation of the Deemed Long-Term Debt Rate (DLTDR), with various stakeholders presenting different approaches. OEB staff and Pollution Probe supported using updated data, while Concentric recommended using bank forecasts. AMPCO/IGUA and CCC supported Dr. Cleary's approach of using actual bond yields, and the SEC suggested averaging yields over a slightly larger range for accuracy.
Use of the DLTDR No party took issue with the OEB's general policy to rely primarily on the embedded or actual cost for existing long-term debt instruments. As with the experts, the point of disagreement was whether the DLTDR should be use...
AI summary The document discusses the use of the Deemed Long-Term Debt Rate (DLTDR) as a cap for utilities. While no party opposed the OEB's general policy to rely on actual or embedded costs for existing long-term debt, there is disagreement over whether the DLTDR should be a universal cap. OEB staff and ratepayer groups support extending the cap to all utilities, while others argue that applying it to Enbridge Gas and OPG could lead to under-recovery of prudently incurred costs. The OEA opposes a universal cap, citing lack of evidence of issues with the current practice and differences in credit ratings.
Where: is the Long Canada (30-year Government of Canada) Bond yield as at September 30 for year t. is the spread between the 30-year A-rated Utility Corporate Bond yield (taken from ticker Bloomberg BVCAUA30 BVLI Index) and Long 65 2009 Re...
AI summary The document discusses the calculation of the Deemed Long-Term Debt Rate (DLTDR) using actual bond yield data from September 30, including the Long Canada (30-year Government of Canada) Bond yield and the spread between A-rated Utility Corporate Bond yields and Long Canada Bond yields. The approach uses actual values rather than forecasts, and the Office of the Energy Board (OEB) considers this method simpler and more accurate.
Specific Items Monitored LEI stated that consistent with the OEB's existing policy, OEB staff should continue to monitor the cost of capital parameters and test their reasonableness in the context of prevailing macroeconomic conditions on...
AI summary The Office of the Energy Board (OEB) is advised to monitor cost of capital parameters quarterly and consider including credit ratings and capital injection details in annual reporting. LEI, Dr. Cleary, and Nexus support this approach, while Concentric argues against it, suggesting annual benchmarking of ROEs and macroeconomic factors instead.
Confirmation of Meeting the FRS LEI, Concentric, and Dr. Cleary stated that the OEB should continue to annually confirm that the FRS is being met. Concentric stated that periodic rate hearings remain the only reliable method for determinat...
AI summary LEI, Concentric, and Dr. Cleary recommend that the OEB continue annual confirmation of the FRS. Concentric emphasizes periodic rate hearings as the only reliable method for determining utility ROEs consistent with the FRS and suggests monitoring recommendations to detect deviations between full reviews. Concentric also recommends continuing the 300-basis point trigger mechanism with earnings-sharing mechanisms.
Findings The OEB will continue to monitor market conditions. It is expected that OEB staff will undertake this monitoring at least quarterly and will report internally on their assessment. This monitoring will include quarter-over-quarter...
AI summary The OEB will monitor market conditions quarterly, focusing on DSTDR, DLTDR, and ROE formulas, and will report externally annually on the reasonableness of cost of capital parameters. The OEB will require reporting of major long-term debt issuances over $50 million by Ontario utilities but not credit ratings outside of rebasing rate applications.
Expert Report Proposals Consistent with the OEB's existing policy, LEI stated that the OEB should continue to publish its annual cost of capital parameter updates in October or November, but using 12-month trailing data as of the end of Se...
AI summary The OEB is considering updating its annual cost of capital parameter schedule, with LEI recommending the use of 12-month trailing data, while Concentric suggests using 90-day averages and Dr. Cleary proposes using October data instead of September data for the ROE adjustment formula.
Expert Report Proposals LEI and Concentric recommended that consistent with the OEB's existing policy, the OEB should commit to reviewing the cost of capital policy every five years. Nexus recommended that the OEB limit LEI's proposed annu...
AI summary The text discusses recommendations for reviewing the cost of capital policy by the OEB, with varying intervals proposed by different entities. LEI and Concentric suggest five-year reviews, while Nexus advocates for a three-year cycle. Dr. Cleary supports reviews every three to five years and suggests triggering a review if Canadian A-rated utility yield spreads exceed 2%.
Submissions OEB staff agreed with LEI and Concentric that the OEB should commit to reviewing the cost of capital policy every five years. OEB staff submitted that this issue is about balance and weighing the costs of performing an update o...
AI summary The document discusses differing opinions on the frequency of cost of capital policy reviews by the OEB, with some advocating for every three years, others for every five years, and some suggesting a rolling 10-year review. There is also debate on the need for trigger mechanisms for reviews.
Submissions OEB staff and a number of ratepayer groups agreed with LEI and Dr. Cleary that consistent with the OEB's existing policy, the OEB should continue to implement changes in the cost of capital parameters and capital structure upon...
AI summary The OEB staff and ratepayer groups support aligning cost of capital changes with rebasing, while SEC and VECC recommend updating base rates to avoid variance account imbalances. CCC and SEC caution against mid-Price Cap incentive rate-setting mechanism (IRM) term changes, emphasizing that cost of capital should be treated like other cost components.
Findings The cost of capital parameters of ROE, DSTDR, and DLTDR are applicable to utilities rebasing rates for 2025 (if cost of capital is in scope). For other utilities, the new cost of capital parameters will be implemented on a one-tim...
AI summary The OEB outlines the application of new cost of capital parameters (ROE, DSTDR, DLTDR) for 2025 rate rebasing, emphasizing that they should be implemented alongside other cost of service reviews. Variance accounts are granted for utilities using interim parameters, and adjustments to base rates will be based on final revenue requirements. Prescribed interest rates for DVAs and CWIP are effective April 1, 2025.
THE ONTARIO ENERGY BOARD ORDERS THAT: - 1. The following cost of capital parameters are approved on a final basis, effective January 1, 2025. Please refer to the Decision for details regarding implementation and applicability. - a. The Dee...
AI summary The Ontario Energy Board (OEB) has finalized cost of capital parameters effective January 1, 2025, including a Deemed Return on Equity of 9.00%, Deemed Long-Term Debt Rate of 4.51%, and Deemed Short-Term Debt Rate of 3.91%. Prescribed interest rates for deferral and variance accounts and construction work in progress are also set, with updates to occur annually and quarterly. Utilities must report new long-term debt over $50 million annually.
A. General Issues - 1. Should the approach to setting cost of capital parameters and capital structure differ depending on: - a) The source of the capital (i.e., whether a utility finances its business through the capital markets or throug...
AI summary This section of the proceeding explores whether the approach to setting cost of capital parameters and capital structure should vary based on the source of capital and ownership type, considers risk factors related to the energy transition and macroeconomic conditions, and examines how regulatory and rate-setting mechanisms influence utility risk.
D. Return on Equity - 10.What methodology should the OEB use to produce a return on equity that satisfies the Fair Return Standard (FRS)? - 11.Are the perspectives of debt and equity investors in the utility sector relevant to the setting...
AI summary The document raises questions about the methodology for determining return on equity that meets the Fair Return Standard and the relevance of debt and equity investors' perspectives in setting cost of capital parameters and capital structure.
F. Mechanics of Implementation - 14.What on-going monitoring indicators to test the reasonableness of the results generated by its cost of capital methodology should the OEB consider, including the monitoring of market conditions? - 15.How...
AI summary The text outlines a series of questions regarding the ongoing monitoring and implementation of cost of capital methodologies by the Office of the Energy Board (OEB). It focuses on indicators for reasonableness, financial viability, timing of updates, review intervals, trigger mechanisms, and implementation methods for changes in cost of capital parameters.
a) Prescribed Interest Rates 20.Should the prescribed interest rates applicable to DVAs and the construction work in progress (CWIP) account for electricity transmitters, electricity distributors, natural gas utilities, and OPG continue to...
AI summary The document discusses the continued use of the current approach for calculating prescribed interest rates for DVAs and CWIP accounts for various utilities, including OPG, and whether alternative methods should be used. It also raises the question of applying carrying charges or other rates to the Cloud Computing deferral account.
SUMMARY OF REVISED COST OF CAPITAL METHODOLOGY March 27, 2025
AI summary This document provides a summary of the revised cost of capital methodology, outlining changes and updates made as of March 27, 2025.
Schedule C – Revised Methodology – Cost of Capital The revised methodology for calculating the cost of capital is summarized in Table 2 below.
AI summary The document introduces a revised methodology for calculating the cost of capital, as summarized in Table 2. This section outlines the approach used to determine the cost of capital, which is a critical component in regulatory proceedings related to utility rates and financial planning.
Table 2 – Summary of Revised Methodology – Cost of Capital Electricity Natural Gas Distributors OPG's Prescribed Distributors and Generation Assets Transmitters Enbridge Gas Inc. EPCOR Natural Gas LP
AI summary Table 2 outlines the revised methodology for calculating the cost of capital, focusing on electricity and natural gas distributors. It includes entities such as OPG, Enbridge Gas Inc., and EPCOR Natural Gas LP, highlighting the different approaches for various utility types.
REVISED METHODOLOGY TO UPDATE THE RETURN ON EQUITY March 27, 2025
AI summary The document introduces a revised methodology for updating the Return on Equity, effective March 27, 2025. This update aims to improve the accuracy and fairness of equity returns in regulatory proceedings.
Schedule D – Revised Methodology – Return on Equity The revised methodology for calculating the ROE is summarized below. With the release of this Decision, the OEB is resetting and refining its formulaic approach for determining a utility'...
AI summary The OEB has introduced a revised methodology for calculating the return on equity (ROE) for utilities. The formula includes adjustments based on changes in the long-term capitalization factor (LCBF) and the spread between A-rated utility bond yields and the long-term Canada bond yield, with a base ROE of 9.00%.
Where: will be calculated using the actual Long Canada (30-year Government of Canada) Bond yield (taken from Bank of Canada series V39056) as at September 30 for year t. will be calculated as the spread between the 30-year A-rated Utility...
AI summary The document outlines the methodology for calculating the Return on Equity (ROE) using specific bond yield data, including the Long Canada Bond yield and the 30-year A-rated Utility Corporate Bond yield, with the ROE rounded to two decimal places and applied per Section 3.2 of the Decision.
REVISED METHODOLOGY TO UPDATE THE DEEMED LONG-TERM DEBT RATE March 27, 2025
AI summary This document introduces a revised methodology for updating the deemed long-term debt rate, effective March 27, 2025, reflecting changes in financial and regulatory approaches to debt valuation.
Schedule E – Revised Methodology – Deemed Long-Term Debt Rate The revised methodology for calculating the DLTDR is summarized below. The OEB will use the LCBF plus a spread of 30-year A-rated Corporate Utility bond yields over the actual L...
AI summary The revised methodology for calculating the Deemed Long-Term Debt Rate (DLTDR) involves using the Long Canada Bond Factor (LCBF) plus a spread between 30-year A-rated Corporate Utility bond yields and the Long Canada Bond yield. This approach is applied annually and updated as of September 30 each year.
REVISED METHODOLOGY TO UPDATE THE DEEMED SHORT-TERM DEBT RATE March 27, 2025
AI summary This document outlines a revised methodology for updating the deemed short-term debt rate, effective March 27, 2025. It reflects changes in financial and regulatory approaches to debt valuation and capitalization.
Schedule G – Revised Methodology – Prescribed Interest Rates The revised methodology for calculating the prescribed interest rates is summarized below. The prescribed interest rates applicable to DVAs and CWIP shall continue to be set quar...
AI summary This schedule outlines the revised methodology for calculating prescribed interest rates, which are set quarterly and updated only if there is a change of 25 basis points or more. The rates are based on data from one month prior to the start of the quarter and published on the OEB website.
SCHEDULE H DECISION AND ORDER EB-2024-0063 CURRENT COST OF CAPITAL FRAMEWORK March 27, 2025
AI summary This document outlines the current cost of capital framework as part of the Schedule H Decision and Order, issued on March 27, 2025, under reference number EB-2024-0063.
Background of Current Framework The OEB last reviewed its cost of capital methodology in 2009 culminating in its 2009 Report dated December 11, 2009.[94](#page-136-0) The Staff Report on the cost of capital policy was published on January...
AI summary The OEB reviewed its cost of capital methodology in 2009 and reaffirmed the use of the ERP approach for setting the base ROE. The OEB concluded that multiple tests, including those estimating ERP, provided a better foundation for judgment than relying on a single methodology.
The Fair Return Standard The OEB confirmed six key regulatory principles with respect to its cost of capital policy in the 2009 Report, with one of those being the FRS.[100](#page-136-6) All three requirements of the FRS – comparable inves...
AI summary The OEB confirmed six key regulatory principles in its 2009 Report, including the Fair Return Standard, which requires that the overall ROE be determined based on a company's cost of equity capital. The FRS requires that all three of its requirements—comparable investment, financial integrity, and capital attraction—be met.
Base Return on Equity In the 2009 Report, the OEB determined a LCBF of 4.25% and an ERP of 5.50%, which summed to the base ROE of 9.75% (9.75% = 4.25% + 5.50%)[.101](#page-137-0) The ERP was determined based on the average ERP of participa...
AI summary The OEB determined the base ROE in 2009 by summing the LCBF and ERP, with the ERP including flotation costs. For 2025, the OEB approved an interim ROE of 9.25% and a generic variance account related to the ROE.
Equity Transaction/Flotation Costs The current base ROE methodology includes 50 basis points for transaction costs (i.e., the base ROE of 9.75% includes 0.50% of transaction costs), as noted in the 2009 Report.[105](#page-137-4)
AI summary The current base ROE methodology includes 50 basis points for transaction costs, as noted in the 2009 Report. This accounts for 0.50% of transaction costs within the base ROE of 9.75%.
Updates to Return on Equity In the 2009 Report, the annual ROE adjustment formula was set as below[:106](#page-137-5) $$ROE_t = 9.75\% + 0.5 \times (LCBF_t - 4.250\%) + 0.5 \times (UtilBondSpread_t - 1.415\%)$$ The OEB adjusted the ROE ann...
AI summary The document outlines the 2009 ROE adjustment formula, which includes fixed parameters such as base ROE, LCBF adjustment factor, and utility bond spread adjustment factor. The OEB annually adjusts ROE based on current data, and references to the 2009 Report and other documents are provided for further details.
(v) Base A-rated utility bond yield spread. The OEB set the LCBF adjustment factor and utility bond spread adjustment factor as 0.5 based on regression analysis performed by participants, as noted in the 2009 Report.[107](#page-138-0) The...
AI summary The OEB set the LCBF adjustment factor and utility bond spread adjustment factor at 0.5 based on regression analysis from the 2009 Report. It concluded that corporate bond yields significantly influence the cost of equity and should be included in the annual ROE adjustment formula. In September 2009, the base LCBF was set at 4.250% and the base utility bond spread at 1.415%.
Capital Structure General Approach The 2009 Report continued the deemed equity ratio of 40% equity / 60% debt for electricity distributors established previously by the OEB in 2006. [110](#page-138-3) The 2009 Report said that for electric...
AI summary The document outlines the capital structure approach for electricity distributors and transmitters in Ontario, including the deemed equity ratio of 40% equity / 60% debt established by the OEB in 2006 and extended to electricity transmitters. Gas utilities and OPG have case-by-case deemed equity ratios, and the OEB sets a uniform ROE for all regulated entities based on business and financial risks.
Where: is the Long Canada (30-year Government of Canada) Bond yield forecast for year . is the spread between 30-year A-rated Utility Corporate Bond yields and Long Canada (30-year Government of Canada) Bond Yields. The data for and are de...
AI summary The document discusses the methodology for forecasting long-term and short-term debt rates, including the use of Consensus Forecasts, Bank of Canada data, and Bloomberg LP data. It outlines the OEB's approval of interim DLTDR and DSTDR rates for 2025 and the approach to short-term debt, including the use of Canada 3-month T-bill rates instead of BA rates.
Variances from Deemed Capital Structure The OEB sets rates using a deemed capital structure. The OEB sets the equity ratio at 40% and the short-term debt ratio at 4% for electricity distributors and transmitters. Although both of EPCOR Nat...
AI summary The OEB sets deemed capital structures for utilities, including equity and short-term debt ratios. EPCOR Natural Gas has different equity ratios in its service territories, and notional debt is discussed as the difference between deemed and actual debt. Different rates, such as DLTDR and DSTDR, have been used for notional debt in the past.
Implementation Changes to the cost of capital parameters from the 2009 Report were implemented when a utility filed a cost-based rates application (i.e., upon rebasing)[.129](#page-141-5) 124 OEB Letter, Updated Inputs to the OEB's Prescri...
AI summary This section discusses the implementation of changes to cost of capital parameters from the 2009 Report, which were applied when a utility submitted a cost-based rates application. The OEB updates these parameters annually and ensures they meet financial reporting standards (FRS) based on market conditions and informed judgment.
101936Board Decision
32 passages
PORT HAWKESBURY PAPER LP James MacDuff, Counsel David MacDougall, Counsel BOARD COUNSEL: William L. Mahody, K.C. HEARING DATES: December 15 and 16, 2025 ORAL SUBMISSIONS: December 18, 2025 DECISION DATE: May 11, 2026 DECISION: The Board ap...
AI summary The Board has approved NSPML's 2026 revenue requirement and cost assessment, reducing the return on equity from 9.0% to 8.75%. A compliance filing is required, and the $4 million monthly holdback remains in place until further order.
[2] NSPML requested approval to: - set the 2026 annual cost assessment, effective January 1, 2026, at $198.7 million, which is lower than the total 2025 annual assessment of $200.6 million set by the Board, and includes $39.7 million for r...
AI summary NSPML requested approval to set the 2026 annual cost assessment at $198.7 million, maintain a 9% return on equity, revise the regulated capital structure to 60% debt and 40% equity, and allow flexibility in equity thickness for original project capital costs.
- [4] NS Power includes the NSPML assessment amount in its revenue requirement and recovers it through the rates paid by its customers. The requested $198.7 million cost assessment is the amount included in the Base Cost of Fuel for NS Pow...
AI summary NSPML includes a cost assessment in its revenue requirement, which was approved by the Board in Matter M12451. The Board has found the application reasonable but reduced the return on equity from 9.0% to 8.75%. The revised cost assessment and revenue requirement must be confirmed in a compliance filing within two weeks. A monthly holdback of $4 million will continue pending further orders.
5.0 RETURN ON EQUITY AND CAPITAL STRUCTURE [38] NSPML's existing cost of capital is based on an approved return on equity of 9.0% for ratemaking purposes, as decided in the initial Maritime Link decision, 2013 NSUARB 154 ( 2013 Maritime Li...
AI summary NSPML's existing return on equity is 9.0%, as approved in the 2013 Maritime Link decision. NSPML submitted a report recommending a higher return on equity (10.10% to 10.35%), but proposed to maintain the 9.0% rate to avoid increasing customer rates. NSPML also requested changes to its capital structure, including a shift to a 60% debt and 40% equity sustaining capital structure and introducing flexibility in its regulated capital structure for original project costs.
5.1 The Fair Return Standard [42] A fair return is fundamental to ensuring a utility's ongoing financial stability. Because NSPML must secure capital to undertake necessary investments, it requires a return sufficient to attract and retain...
AI summary The fair return standard ensures a utility's financial stability by allowing a return on investment that matches the risk level. The Supreme Court of Canada emphasized that a fair return should be equivalent to what the utility could earn from other investments with similar risk and stability.
5.2 Return on Equity [53] The assessment of an appropriate return on equity typically relies on the application of several established financial models, including, but not limited to, the Discounted Cash Flow (DCF) Model; Capital Asset Pri...
AI summary The assessment of return on equity for NSPML involves multiple financial models, including DCF, CAPM, and Risk Premium. Concentric analyzed proxy companies and adjusted for risks, concluding a return on equity of 9.35% before adjusting for NSPML's subsea cable operations, which increased the range to 10.10% to 10.35%.
[60] Concentric's final return on equity results are noted in the table below (along with the results from the modifications applied in Undertaking U-8). NSPML Return on Equity Models Estimates in the Application + Flotation Estimates Usin...
AI summary The document presents Concentric's final return on equity results, including estimates from the DCF, CAPM, and Risk Premium models. Dr. Sean Cleary, a cost of capital expert for Board Counsel, provided an alternative analysis using Canadian data and more recent forecasts.
[62] Dr. Cleary recommended that NSPML should continue to have the same return on equity for rate setting purposes as NS Power. His assessment focused on the return required by NS Power. Based on his reading of NSPML's application and othe...
AI summary Dr. Cleary recommended that NSPML should have the same return on equity as NS Power, citing similar risk profiles and the impact of federally guaranteed debt. He also argued against using U.S. utilities as comparators for Canadian utilities due to higher risk and differences in regulatory environments. He noted a home-country bias among Canadian investors and the impact of recent U.S.-Canada economic and political developments.
ction, economic and political developments have contributed to a divergence in the previously aligned economic relationship between the U.S. and Canada, with the potential to become more disconnected. [65] Dr. Cleary presented estimates re...
AI summary The document discusses the return on equity for NS Power and NSPML, with Dr. Cleary recommending a 7.6% return based on financial models, while Concentric criticizes this as too low and potentially harmful to NSPML's credit rating and cost of debt.
[68] A summary of the results derived from Concentric's and Dr. Cleary's return on equity evidence is set out in the table below: Return on Equity Results Concentric Dr. Cleary DCF 9.28% 7.91% CAPM 8.82% 6.90% Risk Premium 9.92% 7.97% Aver...
AI summary The table summarizes return on equity results from Concentric and Dr. Cleary, showing differing recommendations. Concentric's range is 10.1% - 10.35%, while Dr. Cleary's is 7.6%. Dr. Cleary's testimony follows these findings.
5.2.1.1 Capital Asset Pricing Model [71] The CAPM accounts for the risk of common equity relative to risk-free securities such as government bonds. The CAPM estimates the required return of a security based on the relationship between the...
AI summary The Capital Asset Pricing Model (CAPM) is discussed, explaining its components such as the risk-free rate, market risk premium, and beta. Different estimates of return on equity are provided by Concentric and Dr. Cleary based on their respective analyses.
5.2.1.2 Discounted Cash Flow [90] The DCF model estimates the required return on equity by replicating the actions of an investor in estimating the dividend yield and future growth rate to value a firm's securities. Based on its assessment...
AI summary The DCF model is used to estimate the required return on equity by replicating investor actions, with Concentric determining a 9.28% return on equity and Dr. Cleary estimating 7.86% under his DCF (DDM) assessment.
[91] A summary of the components used by Concentric and Dr. Cleary is set out in the table below: Discounted Cash Flow (DCF) Concentric Dr. Cleary Dividend Yield 3.95% 5.2% [Bloomberg] [Morningstar] Multi-Stage Growth Rate Years 5.53% 1-5...
AI summary The text provides a summary of financial models used by Concentric and Dr. Cleary, including components like Dividend Yield, Growth Rates, Debt Cost Spread, and Return on Equity. It highlights differences in assumptions and calculations between the two models.
5.2.1.3 Risk Premium [102] The Risk Premium model can be based on historical differences in the return between bonds and equity or the expected bond-equity return spread. The Risk Premium model accounts for equity holding more risk than de...
AI summary The Risk Premium model is explained as the difference in returns between bonds and equity, reflecting the higher risk borne by equity investors. The model calculates return on equity by adding the yield on long-term bonds to the equity risk premium, with riskier companies having a larger spread.
[103] The Risk Premium model was used by both Concentric and Dr. Cleary, but in entirely different ways. A summary of the components used by Concentric and Dr. Cleary is set out in the table below: Risk Premium Concentric Dr. Cleary A-rate...
AI summary The document discusses how Concentric and Dr. Cleary used the Risk Premium model differently, with Concentric employing regression analysis on historical utility data and multiple bond yield forecasts to estimate return on equity, while Dr. Cleary used a simpler approach with lower risk premium assumptions.
5.2.1.4 Risk Adjustment [108] As noted above, Concentric applied a risk adjustment to its return on equity assessments in its models to account for the increased risk it believes exists for NSPML. In a general sense, Concentric submitted t...
AI summary Concentric applied a risk adjustment to NSPML's return on equity due to increased business and financial risks, citing factors such as subsea cable operational risks, complex contracts, and a lower equity ratio. It recommended a 75 to 100 basis point risk premium, noting that similar U.S. projects have higher returns.
5.2.2 Relationship to NS Power's Return on Equity [113] As noted above, Dr. Cleary considers that NSPML and NS Power have similar total risk profiles and should continue to have the same return on equity for rate setting purposes. At the h...
AI summary Dr. Cleary argues that NSPML and NS Power should have the same return on equity for rate setting purposes, citing similar risk profiles and regulatory efficiency. Concentric agrees that tying NSPML's return on equity to NS Power's could improve efficiency but suggests a risk adjustment of 75 to 100 basis points for NSPML.
5.3 Capital Structure [116] NSPML said that sustaining capital is not supported by federal government guarantees, and the 30% deemed equity ratio used with the guaranteed financing of the Maritime Link is materially lower than equity ratio...
AI summary NSPML argues that the 30% deemed equity ratio for the Maritime Link is lower than industry standards and requests a 40% equity ratio for sustaining capital investments. It also seeks flexibility in regulated equity balances, citing fixed federal guarantees on original capital debt. Dr. Cleary supports the 40% equity ratio for sustaining capital, aligning it with NS Power's current ratio.
5.4 Party Closing Submissions [122] NSPML submitted that the cost of capital in every segment of the economy was increasing, but it proposed to maintain its current return on equity. NSPML submitted that reasonable experts can disagree on...
AI summary NSPML argues that the cost of capital is increasing and proposes maintaining its current return on equity, disagreeing with Dr. Cleary's recommendations. The Consumer Advocate notes that NSPML did not address the NSUARB's direction on aligning its return on equity with NS Power's and suggests a potential regulatory efficiency in tying them together.
5.5 Findings [143] It bears repeating that for at least a century, the Supreme Court of Canada has recognized that investors in regulated utilities are entitled to a fair return, which is comparable to the return they would see from other...
AI summary The Supreme Court of Canada has long recognized that regulated utilities must provide a fair return to investors, comparable to other similar investments. This ensures continued investment and operational stability. Factors like comparable returns and financial integrity are relevant, while affordability and reliability are not considered in setting the allowed return, though other tools can address these issues.
5.5.1 Return on Equity [145] There is no single test for determining an appropriate return on equity. Both experts in this proceeding used a variety of models and averaged the results of these models to produce a specific recommendation. E...
AI summary The determination of an appropriate return on equity involves using multiple models, with experts averaging results and giving equal weighting to each approach in their final recommendations.
[146] In his evidence, Dr. Cleary said: I have weighted all three of my [required return on equity] estimates equally because all three methods are used in practice and provide different perspectives on [required return on equity]. As disc...
AI summary Dr. Cleary discusses the weighting of three methods for determining required return on equity, emphasizing the use of CAPM and BYPRP. He highlights the conceptual and practical advantages of CAPM, including its direct relationship to financing costs and risk adjustment, and notes the widespread use of BYPRP by Canadian CFOs.
[147] In its evidence, Concentric noted: No financial model can exactly pinpoint the correct [return on equity]; rather, each test brings its own perspective and set of inputs that inform the estimate of the [return on equity]. Consistent...
AI summary Concentric argues that no single financial model can accurately determine the correct return on equity, emphasizing the need for multiple methodologies and expert judgment. The Board finds that both Dr. Cleary's and Concentric's estimates are outside the fair return standard, suggesting an appropriate return lies between their estimates.
5.5.1.1 Use of Canadian and U.S Data in Return on Equity Models [150] Before considering the strengths and weaknesses of the models, inputs and assumptions used by each expert, the inclusion of U.S. data in the assessments will be consider...
AI summary The NSUARB considers the use of U.S. data in return on equity models for Canadian utilities, noting that while economies are integrated, regulatory and structural differences make U.S. data inappropriate for Canadian cost of capital analysis. Dr. Cleary highlights differences in regulatory environments and investment biases.
5.5.1.2 Capital Asset Pricing Model [158] Overall, the Board observes that the CAPM produced lower return on equity results for each expert than the other models they used. [159] Notwithstanding the statistical analysis Dr. Cleary provided...
AI summary The Board evaluated the use of the Capital Asset Pricing Model (CAPM) and found it produced lower return on equity results compared to other models. Concerns were raised about the reliability of Consensus Economics forecasts and the use of 30-year government bond yields based on a single data point.
5.5.1.3 Discounted Cash Flow [172] The selection of growth rates was the most significant area of controversy about the application of the DCF approach by the experts. Concentric relies on analysts' earnings growth forecasts, which Dr. Cle...
AI summary The Board evaluates the use of Discounted Cash Flow (DCF) models for determining the cost of capital, noting controversies around growth rate assumptions. Dr. Cleary's sustainable growth rate is deemed too low, while Concentric's growth rate is considered too high. The Board concludes a reasonable range for return on equity is between 8.5% and 8.9%.
5.5.1.4 Risk Premium Models [178] Overall, the Board observes that the Risk Premium Model produced higher return on equity results for each expert than the other models they used. [179] The regression analysis in Concentric's risk premium...
AI summary The Board notes that the Risk Premium Model yields higher return on equity results compared to other models. However, it raises concerns about the model's reliance on authorized equity returns from other jurisdictions, which may not reflect market-based data. Dr. Cleary's approach also includes a subjective risk premium, which lacks empirical support.
5.5.1.6 Overall Assessment of Return on Equity [191] In rebuttal, Concentric stated that if the Board approved Dr. Cleary's recommended 7.6% return on equity, NSPML would have the lowest authorized return on equity of any investor-owned re...
AI summary The text discusses the implications of setting a low return on equity (7.6%) for NSPML, noting that it would be the lowest in North America. Dr. Cleary's recommendation is questioned, with concerns about the model's comparability between Canadian and U.S. utilities and the potential for economic rent generation from customers.
5.5.1.7 Should NSPML's Return on Equity Be Tied to NS Power's? [197] Dr. Cleary submitted NSPML's rate of return on equity should be the same as NS Power's because the utilities had similar total risk profiles. Concentric noted having NSPM...
AI summary The Board considers whether NSPML's return on equity should be tied to NS Power's. While some argue for alignment, others suggest a differential. The Board concludes that NSPML has lower risk and approves an 8.75% return on equity, maintaining a -25 basis point differential relative to NS Power's 9%.
5.5.2 Capital Structure [202] NSPML is a single purpose entity. It was created to secure lower cost financing under a federal loan guarantee for the development of the Maritime Link. This included constituting NSPML as a more highly levera...
AI summary NSPML is a highly leveraged entity established to secure lower cost financing for the Maritime Link project under a federal loan guarantee. The Board acknowledges the 30% equity ratio used in the 2013 approval but declines NSPML's request to increase it to 40% or allow a higher return on equity, citing insufficient evidence of changed circumstances and the need to maintain cost controls.
10.0 COMPLIANCE WITH BOARD DIRECTIVES [227] The Consumer Advocate asked the Board to caution NSPML about its failure to follow Board directives, citing the examples of NSPML's failure to file the LTAMP and a return on equity review over th...
AI summary The Board criticizes NSPML for repeatedly failing to comply with directives, such as not filing the LTAMP and return on equity review, leading to inefficiencies and increased regulatory costs. The Board warns that future non-compliance could result in disallowing regulatory costs.
12.0 CONCLUSION [232] Taking into account all of the evidence and submissions, the Board is satisfied that NSPML's application for its 2026 revenue requirement and cost assessment is reasonable and appropriate, subject to the Board's findi...
AI summary The Board approves NSPML's 2026 revenue requirement and cost assessment, reducing the return on equity from 9.0% to 8.75%. The application to adjust equity thickness and the debt-to-equity ratio is denied. A compliance filing is required, and the $4 million monthly holdback continues into 2026. An interim order was issued on December 23, 2025, approving a $198.7 million cost assessment pending the final decision.
101936Board Decision
30 passages
PORT HAWKESBURY PAPER LP James MacDuff, Counsel David MacDougall, Counsel BOARD COUNSEL: William L. Mahody, K.C. HEARING DATES: December 15 and 16, 2025 ORAL SUBMISSIONS: December 18, 2025 DECISION DATE: May 11, 2026 DECISION: The Board ap...
AI summary The Board approved NSPML's 2026 revenue requirement and cost assessment with a reduced return on equity from 9.0% to 8.75%. A compliance filing is required, and the $4 million monthly holdback remains in effect pending further orders.
[2] NSPML requested approval to: - set the 2026 annual cost assessment, effective January 1, 2026, at $198.7 million, which is lower than the total 2025 annual assessment of $200.6 million set by the Board, and includes $39.7 million for r...
AI summary NSPML requested approval to set the 2026 annual cost assessment at $198.7 million, maintain a 9% return on equity, revise its capital structure to 60% debt and 40% equity, and allow flexibility in equity thickness for original project capital costs.
- [4] NS Power includes the NSPML assessment amount in its revenue requirement and recovers it through the rates paid by its customers. The requested $198.7 million cost assessment is the amount included in the Base Cost of Fuel for NS Pow...
AI summary NSPML includes a cost assessment in its revenue requirement, which was approved by the Board in its general rate application decision. The Board has approved the 2026 revenue requirement and cost assessment but reduced the return on equity from 9.0% to 8.75%. A compliance filing is required, and a monthly holdback of $4 million will continue pending further orders.
5.0 RETURN ON EQUITY AND CAPITAL STRUCTURE [38] NSPML's existing cost of capital is based on an approved return on equity of 9.0% for ratemaking purposes, as decided in the initial Maritime Link decision, 2013 NSUARB 154 ( 2013 Maritime Li...
AI summary NSPML is proposing to maintain a 9% return on equity despite a recommendation of 10.10% to 10.35% from Concentric Energy Advisors. It also seeks to revise its capital structure to 60% debt and 40% equity for sustaining capital and introduce flexibility in its regulated capital structure for original project costs.
5.1 The Fair Return Standard [42] A fair return is fundamental to ensuring a utility's ongoing financial stability. Because NSPML must secure capital to undertake necessary investments, it requires a return sufficient to attract and retain...
AI summary A fair return is essential for the financial stability of utilities like NSPML, ensuring they can attract and retain investors. The Supreme Court of Canada established a long-standing legal standard for determining a fair return, emphasizing that it should be comparable to returns from other investments with similar risk and stability.
5.2 Return on Equity [53] The assessment of an appropriate return on equity typically relies on the application of several established financial models, including, but not limited to, the Discounted Cash Flow (DCF) Model; Capital Asset Pri...
AI summary The assessment of return on equity for NSPML involves multiple financial models like DCF, CAPM, and Risk Premium. Concentric analyzed market conditions and selected proxy companies to estimate an appropriate return on equity, adjusting for NSPML's specific risks. A final range of 10.10% to 10.35% was proposed, though adjustments were cautioned against due to potential over-conservatism.
[60] Concentric's final return on equity results are noted in the table below (along with the results from the modifications applied in Undertaking U-8). NSPML Return on Equity Models Estimates in the Application + Flotation Estimates Usin...
AI summary The document presents Concentric's final return on equity results, comparing estimates using different models and data sources. Dr. Sean Cleary, a cost of capital expert, provided an alternative analysis focusing on Canadian data and more recent forecasts.
[62] Dr. Cleary recommended that NSPML should continue to have the same return on equity for rate setting purposes as NS Power. His assessment focused on the return required by NS Power. Based on his reading of NSPML's application and othe...
AI summary Dr. Cleary recommended that NSPML should have the same return on equity as NS Power, citing similar risk profiles and regulatory environments. He opposed using U.S. utilities as comparators, emphasizing higher risks in the U.S. market. He also highlighted the home-country bias of Canadian investors and the potential divergence in the U.S.-Canada economic relationship post-2024 election.
ction, economic and political developments have contributed to a divergence in the previously aligned economic relationship between the U.S. and Canada, with the potential to become more disconnected. [65] Dr. Cleary presented estimates re...
AI summary The text discusses the return on equity for NS Power and NSPML, with Dr. Cleary recommending a 7.6% return based on financial models, while Concentric criticizes this recommendation as being too low compared to other utilities and potentially harmful to NSPML's credit rating and debt costs.
[68] A summary of the results derived from Concentric's and Dr. Cleary's return on equity evidence is set out in the table below: Return on Equity Results Concentric Dr. Cleary DCF 9.28% 7.91% CAPM 8.82% 6.90% Risk Premium 9.92% 7.97% Aver...
AI summary The table summarizes return on equity results from Concentric and Dr. Cleary, showing differing recommendations. Concentric's range is 10.1% - 10.35%, while Dr. Cleary's is 7.6%. Dr. Cleary's testimony is referenced regarding these figures.
5.2.1.1 Capital Asset Pricing Model [71] The CAPM accounts for the risk of common equity relative to risk-free securities such as government bonds. The CAPM estimates the required return of a security based on the relationship between the...
AI summary The Capital Asset Pricing Model (CAPM) is discussed as a method to estimate the required return on equity based on risk-free rates, market risk premiums, and beta. Concentric and Dr. Cleary provided different estimates for the return on equity using CAPM, with Concentric determining 8.82% and Dr. Cleary estimating 6.9%.
5.2.1.2 Discounted Cash Flow [90] The DCF model estimates the required return on equity by replicating the actions of an investor in estimating the dividend yield and future growth rate to value a firm's securities. Based on its assessment...
AI summary The DCF model is used to estimate the required return on equity by replicating investor actions, with Concentric determining a 9.28% return on equity and Dr. Cleary estimating 7.86% under his DDM assessment.
[91] A summary of the components used by Concentric and Dr. Cleary is set out in the table below: Discounted Cash Flow (DCF) Concentric Dr. Cleary Dividend Yield 3.95% 5.2% [Bloomberg] [Morningstar] Multi-Stage Growth Rate Years 5.53% 1-5...
AI summary The text presents a comparison of financial models used by Concentric and Dr. Cleary, focusing on metrics like dividend yield, growth rates, and return on equity. It highlights differences in assumptions and calculations between the two approaches.
5.2.1.3 Risk Premium [102] The Risk Premium model can be based on historical differences in the return between bonds and equity or the expected bond-equity return spread. The Risk Premium model accounts for equity holding more risk than de...
AI summary The Risk Premium model calculates the return on equity by considering the historical or expected difference between bond and equity returns, reflecting the higher risk borne by equity investors. The model uses the yield on long-term bonds and adds an equity risk premium to determine the return on equity, with riskier companies requiring a larger premium.
5.2.1.4 Risk Adjustment [108] As noted above, Concentric applied a risk adjustment to its return on equity assessments in its models to account for the increased risk it believes exists for NSPML. In a general sense, Concentric submitted t...
AI summary Concentric applied a risk adjustment to NSPML's return on equity to account for higher operational and financial risks, citing factors such as subsea cable vulnerabilities, complex contracts, and a lower equity ratio. It recommended a 75 to 100 basis point risk premium, based on comparisons with other subsea cable projects.
5.2.2 Relationship to NS Power's Return on Equity [113] As noted above, Dr. Cleary considers that NSPML and NS Power have similar total risk profiles and should continue to have the same return on equity for rate setting purposes. At the h...
AI summary Dr. Cleary argues that NSPML and NS Power should have the same return on equity for rate setting purposes, citing similar risk profiles and regulatory efficiency. Concentric agrees that tying NSPML's return on equity to NS Power's could improve efficiency but suggests a potential risk adjustment of 75 to 100 basis points for NSPML.
5.3 Capital Structure [116] NSPML said that sustaining capital is not supported by federal government guarantees, and the 30% deemed equity ratio used with the guaranteed financing of the Maritime Link is materially lower than equity ratio...
AI summary NSPML argues that its sustaining capital investments should have a 40% equity ratio, similar to NS Power, to better align with other utilities and improve its capital structure. It also requests flexibility in its regulated equity balances, though this flexibility would not be needed if the 40% equity ratio is approved.
5.4 Party Closing Submissions [122] NSPML submitted that the cost of capital in every segment of the economy was increasing, but it proposed to maintain its current return on equity. NSPML submitted that reasonable experts can disagree on...
AI summary NSPML argues that the cost of capital is increasing across all economic sectors and proposes maintaining its current return on equity, despite acknowledging higher risk and cost of debt. It also requests flexibility in equity thickness. The Consumer Advocate suggests tying NSPML's return on equity to NS Power's, citing regulatory efficiency.
5.5 Findings [143] It bears repeating that for at least a century, the Supreme Court of Canada has recognized that investors in regulated utilities are entitled to a fair return, which is comparable to the return they would see from other...
AI summary The Supreme Court of Canada has long recognized that regulated utilities must provide investors with a fair return comparable to similar investments. This ensures continued investment and operational stability. Factors like comparable returns and financial integrity are considered, while affordability and reliability are addressed through other regulatory tools.
5.5.1 Return on Equity [145] There is no single test for determining an appropriate return on equity. Both experts in this proceeding used a variety of models and averaged the results of these models to produce a specific recommendation. E...
AI summary The determination of an appropriate return on equity involves multiple models, with experts using a variety of approaches and averaging results to form their recommendations. Each expert gave equal weighting to these approaches in their final recommendation.
[146] In his evidence, Dr. Cleary said: I have weighted all three of my [required return on equity] estimates equally because all three methods are used in practice and provide different perspectives on [required return on equity]. As disc...
AI summary Dr. Cleary explains that he has equally weighted three methods for estimating required return on equity, emphasizing the practical use and conceptual advantages of CAPM. He also highlights the intuitive nature and broader usage of the BYPRP approach in Canadian utility cost of capital hearings.
[147] In its evidence, Concentric noted: No financial model can exactly pinpoint the correct [return on equity]; rather, each test brings its own perspective and set of inputs that inform the estimate of the [return on equity]. Consistent...
AI summary Concentric argues that no single financial model can precisely determine the correct return on equity, emphasizing the need for multiple methodologies and informed judgment. The Board notes that while Dr. Cleary's and Concentric's estimates differ, both fall short of the fair return standard, suggesting a return on equity between their estimates is appropriate.
5.5.1.1 Use of Canadian and U.S Data in Return on Equity Models [150] Before considering the strengths and weaknesses of the models, inputs and assumptions used by each expert, the inclusion of U.S. data in the assessments will be consider...
AI summary The Board acknowledges the integration of Canadian and U.S. economies but rejects treating their data as interchangeable in cost of capital analysis for Canadian utilities. It highlights differences in regulation, corporate structure, and investor behavior between the two countries, as noted by Dr. Cleary.
5.5.1.2 Capital Asset Pricing Model [158] Overall, the Board observes that the CAPM produced lower return on equity results for each expert than the other models they used. [159] Notwithstanding the statistical analysis Dr. Cleary provided...
AI summary The Board notes that the CAPM produced lower return on equity results compared to other models. It remains unconvinced about the accuracy of the Consensus Economics forecasts and the use of a single day's 30-year bond yield data, citing potential anomalies and insufficient demonstration of systematic bias.
5.5.1.3 Discounted Cash Flow [172] The selection of growth rates was the most significant area of controversy about the application of the DCF approach by the experts. Concentric relies on analysts' earnings growth forecasts, which Dr. Cle...
AI summary The Board discusses the controversy surrounding the selection of growth rates in the application of the DCF approach by experts. Dr. Cleary's growth rates are criticized as either too high or too low, with the Board concluding that a reasonable range for return on equity lies between 8.5% and 8.9%.
5.5.1.4 Risk Premium Models [178] Overall, the Board observes that the Risk Premium Model produced higher return on equity results for each expert than the other models they used. [179] The regression analysis in Concentric's risk premium...
AI summary The Board notes that the Risk Premium Model yields higher return on equity results compared to other models. Concerns are raised about using authorized equity returns from other jurisdictions, as they reflect regulatory decisions rather than market-based data. Dr. Cleary's approach involves adding a subjective risk premium to utility bond yields, which lacks empirical support.
5.5.1.6 Overall Assessment of Return on Equity [191] In rebuttal, Concentric stated that if the Board approved Dr. Cleary's recommended 7.6% return on equity, NSPML would have the lowest authorized return on equity of any investor-owned re...
AI summary The document discusses the implications of setting a low return on equity (7.6%) for NSPML, with Concentric arguing it would be the lowest in North America. Dr. Cleary defends the recommendation, citing evidence from Canada. Concerns are raised about the model's comparability with U.S. utilities and the potential for economic rent generation.
5.5.1.7 Should NSPML's Return on Equity Be Tied to NS Power's? [197] Dr. Cleary submitted NSPML's rate of return on equity should be the same as NS Power's because the utilities had similar total risk profiles. Concentric noted having NSPM...
AI summary The Board considers whether NSPML's return on equity should be tied to NS Power's. While some argue for alignment, others suggest a differential. The Board finds that NSPML has lower risk than NS Power and approves a 8.75% return on equity for NSPML, a -25 basis point differential from NS Power's 9%. This differential is a rebuttable presumption.
5.5.2 Capital Structure [202] NSPML is a single purpose entity. It was created to secure lower cost financing under a federal loan guarantee for the development of the Maritime Link. This included constituting NSPML as a more highly levera...
AI summary NSPML, a single-purpose entity, requested a higher equity ratio for sustaining capital, but the Board declined the request, citing insufficient evidence of changes since 2013 that justify higher equity costs. The Board emphasized the historical basis of the 30% equity ratio and the need for NSPML to address these concerns in a future proceeding.
12.0 CONCLUSION [232] Taking into account all of the evidence and submissions, the Board is satisfied that NSPML's application for its 2026 revenue requirement and cost assessment is reasonable and appropriate, subject to the Board's findi...
AI summary The Board approves NSPML's 2026 revenue requirement and cost assessment, but reduces the return on equity from 9.0% to 8.75%. The application to adjust equity thickness and revise the debt-to-equity ratio is denied. A compliance filing is required, and the $4 million monthly holdback continues until further order. An interim order approving a $198.7 million cost assessment was issued on December 23, 2025.