ORDER NUMBER

G-106-22

 

IN THE MATTER OF

the Utilities Commission Act, RSBC 1996, Chapter 473

 

and

 

British Columbia Utilities Commission

Generic Cost of Capital Proceeding

 

BEFORE:

D. M. Morton, Panel Chair

A. K. Fung, QC, Commissioner

K. A. Keilty, Commissioner
T. A. Loski, Commissioner

 

on April 21, 2022

 

ORDER

WHEREAS:

 

A.      By Order G-66-21 dated March 8, 2021, pursuant to section 82 of the Utilities Commission Act, the British Columbia Utilities Commission (BCUC) established a Generic Cost of Capital (GCOC) Proceeding;

B.      By the March 22, 2021 registration date for participants, a total of nine utilities registered as applicants, pursuant to Appendix C of Order G-66-21. Seven non-utility parties and two utilities registered as interveners;

C.      By Order G-156-21 dated May 21, 2021 and as amended by Order G-205-21 dated July 7, 2021, the BCUC established the scope of the GCOC Proceeding and set out a two-stage proceeding to establish public utilities’ cost of capital;

D.      By Order G-183-21 dated June 11, 2021, the BCUC established further process in the regulatory timetable to seek submissions from registered utilities and interveners on whether the use of a benchmark utility (Benchmark Utility) is appropriate to determine the cost of capital for public utilities in British Columbia (BC);

E.       By Order G-281-21 dated September 24, 2021, the BCUC established that a Benchmark Utility methodology will be used in the determination of the cost of capital for utilities in BC in this GCOC Proceeding. Additionally, the BCUC established further process in the regulatory timetable and directed FortisBC Energy Inc. (FEI) and FortisBC Inc. (FBC) (collectively, FortisBC) to submit evidence in support of their respective cost of capital;

F.       By Order G-288-21 dated October 6, 2021, the BCUC amended the regulatory timetable for Stage 1 of the GCOC Proceeding, which included one round of information requests (IRs) on FortisBC’s evidence, and a procedural conference scheduled for April 14, 2022;

G.      On April 14, 2022, registered utilities and interveners made oral submissions to the Panel regarding further process for Stage 1 of the GCOC Proceeding;

H.      The BCUC has considered the submissions received regarding procedural matters of Stage 1 of the GCOC Proceeding and considers that an amendment to the regulatory timetable is warranted.

NOW THEREFORE for the reasons set out in Appendix A attached to this order, the BCUC orders as follows:

1.       The regulatory timetable is amended to establish further process, as set out in Appendix B to this order.

2.       The scope of the GCOC Proceeding is amended as set out in Appendix C of this order.

 

DATED at the City of Vancouver, in the Province of British Columbia, this                 21^st              day of April 2022.

 

 

BY ORDER

 

Original signed by:

 

D. M. Morton

Commissioner

 

Attachments

British Columbia Utilities Commission

Generic Cost of Capital Proceeding

 

1.0              Background

On March 8, 2021, the British Columbia Utilities Commission (BCUC) issued Order G-66-21 to establish the Generic Cost of Capital (GCOC) Proceeding. In setting a rate pursuant to sections 59 to 60 of the Utilities Commission Act, the BCUC must ensure a rate is, in part, not unjust and unreasonable. A rate is unjust or unreasonable, in part, if it is insufficient to yield a fair and reasonable compensation for the service provided by the utility, or a fair and reasonable return on the appraised value of its property. In other words, the shareholders of regulated public utilities must be afforded a reasonable opportunity to earn a fair return on their invested capital. By Orders G-66-21, G-156-21, G-183-21, G-231-21, G‐281‐21, and G-288-21, the BCUC established a regulatory timetable and scope for the GCOC Proceeding. The BCUC is conducting the GCOC Proceeding in multiple stages.

 

To date, the evidentiary record of Stage 1 of the GCOC Proceeding includes one round of information requests (IRs) on Dr. Jonathan A. Lesser of Continental Economics, Inc.’s report dated August 4, 2021, and one round of IRs on FortisBC Energy Inc. (FEI) and FortisBC Inc. (FBC)’s evidence, dated January 31, 2022.

 

As set out in the regulatory timetable by Order G-288-21, the BCUC held a procedural conference on April 14, 2022, for registered utilities and interveners in the GCOC Proceeding to make oral submissions on what further process, if any, is appropriate for Stage 1 of the GCOC Proceeding. Specifically, as set out in Exhibit A-12, parties were asked to provide submissions on the following matters:

 

1.       Whether there is a need for further written or oral process on any topics and why.

2.       Whether any interveners intend to file intervener evidence, including:

a.       A description of the nature and relevance of that evidence.

b.       A description of the qualifications of the individual(s) being asked to prepare that evidence.

c.       An estimate of the anticipated length of that evidence and the amount of time and budget needed to: (a) prepare that evidence; and (b) respond to information requests on that evidence.

3.       In addition to, or in lieu of, intervener evidence, whether there is a need for Dr. Lesser to provide additional oral or written evidence.

4.       Any significant time constraints and/or periods of unavailability, which should be taken into consideration when establishing the regulatory timetable.

5.       Any other relevant procedural matters that parties wish to bring to the attention of the Panel that will assist in the efficient and effective review of the GCOC Proceeding.

The following parties made oral submissions at the April 14, 2022 Procedural Conference:

 

 

 

•         FEI, FBC, and FortisBC Alternative Energy Service Inc. (collectively, FortisBC)[1] •         Pacific Northern Gas Ltd. (PNG); Pacific Northern Gas (N.E.) Ltd. (PNG (NE)) (collectively, PNG) •         Nelson Hydro •         Corix Multi-Utility Services Inc. (Corix) •         Creative Energy Vancouver Platforms Inc. (Creative Energy)

•         River District Energy (RDE) •         Residential Consumer Intervenor Association (RCIA) •         Industrial Customers Group (ICG) •         Commercial Energy Consumers Association of British Columbia (the CEC) •         British Columbia Old Age Pensioners' Organization, et al. (BCOAPO) •         BCUC Staff

 

In these reasons for decision, and in consideration of the submissions received, the Panel establishes further process for Stage 1 of the GCOC Proceeding.

2.0              Issues Arising

In establishing the further review process for this proceeding, the Panel considers the following procedural items:

1.       Further process, if any, for the review of FortisBC’s evidence;

2.       Whether there is a need for additional evidence from Dr. Lesser, and if so, the scope and process for that evidence.

3.       Clarification on whether the appropriate benchmark will be determined as part of Stage 1 or Stage 2 of the GCOC Proceeding; and

4.       The effective dates for FEI and FBC’s cost of capital.

2.1              Further Process for the Review of FortisBC’s Evidence

Interveners generally view that further process is appropriate for the review of FortisBC’s evidence, including a second round of IRs on FortisBC’s IR No. 1 responses and possibly an oral hearing.[2] While RCIA, the CEC, and ICG submit that an oral hearing is appropriate[3], BCOAPO believes that having IR No. 2 may negate the need for an oral hearing altogether.[4] BCUC staff propose a second round of IRs to further explore FEI and FBC’s risk assessment and Mr. Coyne’s calculations.[5]

 

FortisBC does not oppose further process for the review of FEI and FBC’s evidence.[6] However, if there is an oral hearing, FortisBC proposes that the Panel issue a scoping order or issues list that would identify certain matters to be addressed within the oral hearing based on the written record. In FortisBC’s view, the scoping order or issues list would help focus the oral hearing and allow FortisBC to arrange appropriate witness panels.[7]

 

The CEC suggests the BCUC hold another procedural conference after all written evidence is filed to determine the necessity and scope of an oral hearing.[8] BCOAPO supports having a second procedural conference.[9] FortisBC accepts that a second procedural conference may be appropriate after FortisBC files rebuttal evidence. Further, FortisBC suggests that oral hearing dates should be set in advance for planning purposes, and the BCUC can cancel those dates later if needed.[10]

2.2              Additional Evidence from Dr. Lesser

Utilities in the GCOC Proceeding submit that no additional evidence from Dr. Lesser is necessary.[11] FortisBC notes that parties already had an opportunity to submit Dr. Lesser IRs on his report.[12]

 

Interveners wish to leverage the BCUC’s consultant, Dr. Lesser, to obtain additional evidence on the record.[13] RCIA views that it would be efficient and beneficial to have another professional academic opinion and compare that to FortisBC’s opinion.[14] RCIA wishes to have a second round of IRs to ask Dr. Lesser questions on FortisBC’s evidence.[15] The CEC proposes that questions for Dr. Lesser be focused on Mr. Coyne’s evidence, which would provide a secondary view on that evidence.[16]

 

However, ICG notes that Dr. Lesser’s August 2021 report was prepared before the scope of the GCOC Proceeding was established. ICG submits that Dr. Lesser should provide evidence on all scope items in Order G-281-21, rather than asking Dr. Lesser questions.[17] The CEC and RCIA do not oppose ICG’s proposal of a broader scope for Dr. Lesser’s additional evidence if the BCUC deems it to be appropriate.[18]

 

In response to parties’ proposals for further involvement of Dr. Lesser, FortisBC submits that it does not oppose RCIA’s submission to ask Dr. Lesser more questions limited to Mr. Coyne’s evidence. However, FortisBC views that ICG’s suggestion is “fundamentally changing the role of Dr. Lesser halfway through the process, and there is a fairness issue involved with that.”[19]

 

Interveners indicate that they will not be filing their own intervener evidence.[20]

2.3              Clarification on the Timing to Establish the Benchmark Utility

Appendix B of Order G-281-21 states that Stage 1 of the GCOC Proceeding will consider whether the Benchmark Utility should be FEI, FBC, or both utilities.

At the procedural conference, PNG sought clarification as to when the BCUC would like submissions on whether FEI or FBC would be the benchmark for its own cost of capital review. PNG states that the choice of the benchmark utility is a topic that is better addressed by other utilities to which the benchmark utility applies, and this can be done at Stage 2 of the GCOC Proceeding.[21] Corix and RDE made similar submissions regarding the process in which the BCUC will decide on the benchmark utility as this decision will affect their own cost of capital filings.[22]

 

At the procedural conference, the Panel confirmed that the decision on FEI and FBC’s rates will be determined first in Stage 1 of the GCOC Proceeding, and then the proceeding will move onto reviewing which utility (or utilities) will be the benchmark at Stage 2 of the GCOC Proceeding.[23] Accordingly, Appendix C of this order

G-106-22 provides the amended scope of the GCOC Proceeding.

2.4              The Effective Dates for FEI and FBC’s Cost of Capital

Appendix B of Order G-281-21 states that Stage 1 of the GCOC Proceeding will consider the effective dates for which the FEI and FBC cost of capital will take effect.

 

ICG requests that the Panel establish an effective date of January 1, 2023, for the GCOC Proceeding following the April 14, 2022 Procedural Conference. ICG’s concern regarding this matter stems from its participation in the FBC Annual Review of 2022 Rates that was established by Order G-374-21. In ICG’s view, the BCUC by Order G-374-21 set final rates for FBC and foreclosed possibility of the effective date to be January 1, 2022. Looking forward to the next annual review for 2023 rates, ICG submits that setting an effective date of January 1, 2023, for FBC in the GCOC proceeding will allow the panel hearing the 2023  annual review  to contemplate a future rate change by making those rates interim until the BCUC renders its decision on Stage 1 of the GCOC Proceeding.[24]

 

While FortisBC views that a January 1, 2023 effective date seems reasonable for rate setting, it notes that a procedural conference is not the best time to address this matter. FortisBC will make such request before the end of the year in any case.[25] The CEC submits that there is no need for the Panel to decide on interim rates at this time as there is no evidentiary basis for such determination. This matter should be considered upon an application by the utility.[26]

 

PNG submits that it takes no position as to when FortisBC’s rates will adjust.[27] However, PNG, Nelson Hydro, Corix, Creative Energy, and RDE are concerned about the long lag time between interim and final rates for utilities involved in Stage 2 of the GCOC Proceeding. At this point, January 1, 2024 seems to be the earliest for Stage 2 utilities’ rates to come into effect.[28]

3.0              Panel Determination

The Panel acknowledges the oral submissions received at the April 14, 2022 Procedural Conference, and establishes an amended regulatory timetable for further process in Stage 1 of the GCOC Proceeding, as set out in Appendix B of this Order G-106-22.

 

Overall, interveners are generally aligned that an additional round of written IRs is appropriate to obtain more evidence on FortisBC’s proposals. The necessity and scope of an oral hearing are to be determined depending on how the written evidentiary record unfolds. FortisBC understands and accepts that further process is desired among interveners. The Panel accepts that the complex nature of the subject matter in cost of capital proceedings warrants further exploration, and therefore, finds that a second round of IRs to ask FortisBC and their expert questions is appropriate. The Panel is also convinced that holding another procedural conference for parties to make submissions on the necessity and scope of an oral hearing is reasonable before parties dedicate their resources to prepare for an oral hearing.

 

As for further involvement from Dr. Lesser, the Panel notes that none of the interveners plan to retain their own expert and instead wish to leverage Dr. Lesser’s expertise to gain more evidence on the record. Intervener submissions vary in terms of the extent to which Dr. Lesser should be involved, and the Panel acknowledges FortisBC’s concern regarding procedural fairness if the BCUC changes Dr. Lesser’s role part way through the proceeding. The Panel confirms that Dr. Lesser’s role in Stage 1 of the GCOC Proceeding continues to serve as the BCUC’s independent expert for cost of capital technical expert services. Thus, the Panel recognizes that Dr. Lesser’s professional background will likely add value if questions directed to Dr. Lesser pertain to the evidence of Mr. Coyne, filed as Appendix C of Exhibit B1-8-1,[29] and any associated IR No. 1 responses filed by FortisBC or Mr. Coyne.

 

As for ICG’s request regarding the effective dates for FortisBC’s rates resulting from the GCOC Proceeding, the Panel views that it is unnecessary to make such a ruling at this time. The effective dates for FEI and FBC’s cost of capital can be decided later in Stage 1 of the GCOC Proceeding. To the extent that such determination may affect the approval of FBC and FEI’s 2023 rates in their annual review proceedings, parties are free to raise this issue in those proceedings.

 

Based on the reasons and determinations as set out above, the Panel amends the regulatory timetable for Stage 1 of the GCOC Proceeding, as set out in Appendix B of this Order G-106-22.

British Columbia Utilities Commission

Generic Cost of Capital Proceeding

 

 

 

 

 *Details regarding Procedural Conference No. 2 and the Oral Hearing will be provided in due course.

 

 

British Columbia Utilities Commission

Generic Cost of Capital Proceeding

 

 

PROCEEDING SCOPE – Stage 1

 

1.       The determination of the allowed return on equity (ROE) and deemed capital structure of FortisBC Energy Inc. (FEI) and FortisBC Inc. (FBC), and the effective dates for which FEI and FBC’s cost of capital will take effect.

2.       Whether re‐establishment of a formulaic ROE automatic adjustment mechanism (AAM) is warranted. If a return to the use of a formulaic ROE AAM is warranted, then:

a)       The specifications of the ROE AAM formula.

b)      The frequency that the ROE AAM will apply (i.e. annually or some other frequency) and to whom the ROE AAM will apply.

c)       The date for which the ROE AAM will take effect.

3.       The criteria, off-ramps, or other triggers to warrant a future cost of capital proceeding.

4.       Any other items that may arise during the proceeding to be considered in Stage 1. The Panel will communicate any additional items to participants.

 

PROCEEDING SCOPE – Stage 2

 

1.       Whether the Benchmark Utility should be FEI, FBC or both. The groupings of public utilities for cost of capital determinations.

2.       The establishment of the cost of capital for public utilities, or groups of public utilities, except for BC Hydro.

3.       Whether any range or default in the equity component and equity risk premium is warranted for public utilities, or groups of public utilities.

4.       Whether the determination of a deemed interest rate is warranted. If warranted, then:

a)       The circumstances where a deemed interest rate is required.

b)      The determination of the deemed interest rate where required.

c)       Whether an interest rate AAM is warranted.

d)      The effective date for which the deemed interest rate or interest rate AAM will take effect.

5.       Any items that may be identified during the proceeding to be considered in Stage 2. The Panel will communicate any additional items to participants.

 

PROCEEDING SCOPE – After Completion of Stage 1 and Stage 2

1.       Deferral account financing costs.

2.       Other matters as may arise out of Stage 1 and Stage 2.