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ORDER NUMBER G‐217‐22A IN THE MATTER OF the Utilities Commission Act, RSBC 1996, Chapter 473 and British Columbia Utilities Commission General Cost of Capital Proceeding BEFORE: D. M. Morton, Panel Chair A. K. Fung, QC, Commissioner K. A. Keilty, Commissioner T. A. Loski, Commissioner on August 8, 2022 ORDER WHEREAS: A. In accordance with Order G‐106‐22 dated April 21, 2022, the British Columbia Utilities Commission (BCUC) held a second Procedural Conference (Procedural Conference No. 2) in the Generic Cost of Capital proceeding (GCOC Proceeding) on July 8, 2022;
B. The following parties attended Procedural Conference No. 2 and made oral submissions regarding further process for the GCOC Proceeding: FortisBC Energy Inc., FortisBC Inc., FortisBC Alternative Energy Service Inc., Nelson Hydro, River District Energy, Residential Consumer Intervener Association, Industrial Customers Group, Commercial Energy Consumers Association of British Columbia, British Columbia Old Age Pensioners’ Organization, et al., Movement of United Professionals, and BCUC Staff;
C. By letter dated July 8, 2022 (Exhibit A‐19), the BCUC requested written submissions regarding topics on which parties consider that there are diverging opinions between Dr. Jonathan A. Lesser (Dr. Lesser) of Continental Economics, Inc. (Continental) and Mr. James Coyne (Mr. Coyne) of Concentric Energy Advisors, Inc. (Concentric). Submissions were required by July 14, 2022, and responses to submissions by July 20, 2022;
D. In accordance with Exhibit A‐19, parties filed written submissions and responses with the BCUC; E. The BCUC has considered the oral and written submissions received and determines that an amendment to the regulatory timetable and the establishment of an oral hearing format and scope are warranted.
Regulatory Timetable, Scope, and Reasons for Decision
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Order G‐217‐22A 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 format and scope of the oral hearing are as set out in Appendix C of this order. DATED at the City of Vancouver, in the Province of British Columbia, this 10 th day of August 2022. BY ORDER Original signed by: D. M. Morton Commissioner Attachments
Regulatory Timetable, Scope, and Reasons for Decision
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British Columbia Utilities Commission Generic Cost of Capital Proceeding REASONS FOR DECISION
APPENDIX A to Order G‐217‐22A
TABLE OF CONTENTS 1.0 Background .......................................................................................................................................... 2 2.0 Issues Arising ........................................................................................................................................ 2 2.1 Need for an Oral Hearing Process and Appropriate Scope ............................................................. 3 2.1.1 Need for an Oral Hearing Process ...................................................................................... 3 2.1.2 Oral Hearing Scope ............................................................................................................. 3 2.2 Parties to be Cross‐Examined and Format of Oral Hearing ............................................................. 7 2.2.1 Parties to be Cross‐Examined in Oral Hearing ................................................................... 7 2.2.2 Format of Oral Hearing ....................................................................................................... 8 2.3 Information Requests on FortisBC Rebuttal Evidence .................................................................. 10 2.4 Updates to Mr. Coyne’s Model ..................................................................................................... 11 3.0 Panel Determination Summary ........................................................................................................... 12
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1.0
Background
APPENDIX A to Order G‐217‐22A
On July 8, 2022, the British Columbia Utilities Commission (BCUC) held a second procedural conference (Procedural Conference No. 2) in the Generic Cost of Capital proceeding (GCOC Proceeding) for parties to make oral submissions on the necessity and scope of an oral hearing. 1 At Procedural Conference No. 2, the BCUC also invited submissions on two additional items: 2 a) If there is to be an oral hearing, whether the two experts, Dr. Jonathan A. Lesser (Dr. Lesser) of Continental Economics, Inc. (Continental) and Mr. James Coyne (Mr. Coyne) of Concentric Energy Advisors, Inc. (Concentric), should be made available for cross‐examination at the same time;
b) Whether a round of Information Requests (IRs) on FortisBC Energy Inc. (FEI) and FortisBC Inc. (FBC) Rebuttal Evidence is required.
The following parties made oral submissions at Procedural Conference No. 2: FEI, FBC, and FortisBC Alternative Energy Commercial Energy Consumers Association of Service Inc. (collectively FortisBC). 3 British Columbia (the CEC)
Nelson Hydro River District Energy (RDE) Residential Consumer Intervener Association (RCIA)
British Columbia Old Age Pensioners’ Organization, et al. (BCOAPO)
Movement of United Professionals (MoveUP) BCUC Staff
Industrial Customers Group (ICG) Further to Procedural Conference No. 2, the BCUC requested written submissions and responses regarding topics that Mr. Coyne and Dr. Lesser (the experts) have diverging opinions which would assist in refining the scope of an oral hearing, should one occur. 4 All parties who attended Procedural Conference No. 2 provided written submissions except Nelson Hydro, RDE and MoveUP. FortisBC was the only party who provided a response to the written submissions.
2.0 Issues Arising In establishing the further review process for this proceeding, the Panel considers: 1. Whether there is a need for an oral hearing process and the appropriate scope;
2. The format of an oral hearing and which parties should be cross‐examined; 3. The need for written IRs on FortisBC’s Rebuttal Evidence; and 4. Updates to Mr. Coyne’s model.
1 In accordance with Order G‐106‐22; Exhibit A‐18, BCUC letter dated June 20, 2022. 2 Transcript Volume 2, Procedural Conference July 8, 2022 (Transcript Volume 2), p. 82. 3 For the purpose of the July 8, 2022 Procedural Conference, FortisBC’s counsel represented FEI, FBC, and FortisBC Alternative Energy Services Inc. 4 Transcript Volume 2, pp. 131–132; Exhibit A‐19, p. 1.
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2.1
Need for an Oral Hearing Process and Appropriate Scope
APPENDIX A to Order G‐217‐22A
2.1.1 Need for an Oral Hearing Process RCIA, BCOAPO and BCUC Staff submit that there is a need for an oral hearing while FortisBC, Nelson Hydro, RDE, ICG, the CEC and MoveUP are of the view that an oral hearing is not necessary. Parties who support the need for an oral hearing submit that cross‐examinations should have an emphasis on contrasting views in the expert evidence. 5 BCOAPO submits that topics where the experts’ opinions differ would be the focus of the argument stage. 6 Other parties submit that an oral hearing is not necessary 7 because the evidentiary record is adequate and robust. FortisBC submits that the issues are “sufficiently crystalized” to proceed 8 and in the interest of regulatory efficiency, no oral process is needed. 9 However, no one was opposed to the BCUC holding an oral hearing. Parties indicate that they would participate in an oral hearing if held and are in support if the BCUC believes an oral hearing is worthwhile and the evidentiary record could be improved. 10
2.1.2 Oral Hearing Scope Parties submit that, if an oral hearing is held, the scope should include the topics of business risk, differences between the two experts, and testing of the fair rate of return, among others.
2.1.2.1 FortisBC Business Risk Several parties in their written submissions view that FortisBC’s business risks should be a focus in an oral hearing because they affect the utilities’ capital structure and return on equity (ROE). 11 RCIA submits that the oral hearing should explore whether business risk treatment is better reflected within the allowed ROE rather than within the capital structure. 12
2.1.2.2 FortisBC Credit Risk FortisBC, ICG and BCOAPO submit that the topic of credit should be included in the oral hearing. FortisBC submits that an oral hearing should focus on the utilities’ credit ratings, credit risk, and access to capital and expert evidence. 13 Similarly, ICG submits that an oral hearing should explore whether the maintenance of current credit ratings is necessary. 14 BCOAPO states that, on the issue of credit metrics, the disagreement is not between Dr. Lesser and Mr. Coyne but rather between Dr. Lesser and FortisBC, and views that “it may be appropriate for Fortis to present witnesses for cross‐examination on certain limited issues.” 15
5 Transcript Volume 2, pp. 101, 111, 119. 6 Transcript Volume 2, pp. 101, 111, 119. 7 Transcript Volume 2, pp. 89, 100, 105, 106, 116. 8 Transcript Volume 2, pp. 89, 100. 9 Transcript Volume 2, p. 100. 10 Transcript Volume 2, pp. 89, 105, 106, 116. 11 Transcript Volume 2, p. 112; Exhibit A2‐31 BCUC Staff, p. 2; Exhibit C1‐9 RCIA, p. 2. 12 Exhibit C1‐9 RCIA, p. 2. 13 Transcript Volume 2, p. 90; Exhibit B1‐22 FortisBC, p. 6. 14 Exhibit C5‐10 ICG, p. 1. 15 Exhibit C7‐9 BCOAPO, p. 3.
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2.1.2.3 FortisBC and Energy Transition Risk
APPENDIX A to Order G‐217‐22A
FortisBC, MoveUP, ICG, BCOAPO and BCUC Staff submit that energy transition should be a focus in an oral hearing. 16 FortisBC submits that the scope of an oral hearing should include the degree of regulators’ and policymakers’ ability to mitigate the energy transition risk and the preferred approach to reflect this risk in the utility’s cost of capital (through ROE, capital structure or both). 17 Similarly, ICG questions how risks are related to provincial government climate and energy policies relevant to the assessment of the cost of capital. 18 Further, BCUC Staff wish to include consideration for energy transition risk for FEI as a business risk, financial risk, regulatory risk or other, where the two experts have diverging views. 19 MoveUP submits that “the scope of the proceeding should embrace the full scope of risk facing energy utilities” and “should not be shuttered in terms of the scope of the issues that are emerging in this sector at present, not all of which may be properly characterized as business or other kinds of risks.” 20 MoveUP states that a particular focus in the proceeding is the “differential risks as between gas and electric utilities, emerging risks facing natural gas utilities in the context of climate policy and the transformation of the energy sector.” 21
2.1.2.4 Differences Between Experts During Procedural Conference No. 2, the Panel noted that one of the potential issues of an oral hearing is to focus on the differences between the experts’ opinions. 22 The two key areas of differences between the experts are the components and assumptions used in the financial models and the selection of proxy groups. Financial Model Components and Assumptions
Several parties at Procedural Conference No. 2 submitted that there is not a lot of disagreement on the theory but rather on assumptions that are used to populate the models which can make the numbers “very, very different. And that which goes to the root, and the heart of the hearing” which is “largely about understanding the evidence, and particularly understanding differences that go beyond what is in the written evidentiary record.” 23 The areas where Dr. Lesser and Mr. Coyne have diverging views are summarized as follows: Table 1: Topics of Diverging Expert Opinions
Risk‐free rate Earnings Per Share (EPS) growth rates Market Risk Premium (MRP) Flotation cost and financial flexibility
Basis for establishing the Dividend Yield
Size Premium Interest Rate and Equity Risk Premium Financial Models Betas: sources used and whether betas trend towards 1.0 24
16 Transcript Volume 2, pp. 115–116; Exhibit A2‐31 BCUC Staff, p. 2; Exhibit B1‐22 FortisBC, p. 6; Exhibit C5‐10 ICG, p. 1; Exhibit C7‐9 BCOAPO, p. 3. 17 Exhibit B1‐22 FortisBC, p. 6. 18 Exhibit C5‐10 ICG, p. 1. 19 Exhibit A2‐31 BCUC Staff, p. 2. 20 Transcript Volume 2, p. 116. 21 Transcript Volume 2, pp. 115–116. 22 Transcript Volume 2, p. 131. 23 Transcript Volume 2, p. 102. 24 Exhibit C7‐9 BCOAPO, p. 2; Exhibit C5‐10 ICG, p. 1.
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APPENDIX A to Order G‐217‐22A With respect to the dividend yield, BCOAPO states that “it is not clear whether or not there is any disagreement as between the two experts but submits that it is far from clear that there is not.” 25 In response, FortisBC references Dr. Lesser’s responses in which he states that “Mr. Coyne’s use of a 90‐day period is not objectionable” and “if he were to perform an analysis unfettered by regulator’s requirements for such analyses, he would likely use a three‐month period” to calculate the dividend yield. 26 FortisBC further states that “Dr. Lesser’s statement that he is uncertain as to which dividends are used by Mr. Coyne does not represent a divergence in opinions, and is simply an acknowledgement of uncertainty regarding underlying data.” 27 Proxy Groups
Several parties submit that a focus in the oral hearing should be the difference between the expert’s views on the proxy group used. 28 The CEC submits that it would like to be able to question FortisBC’s review and update with respect to any changes to the proxy group. 29 Additionally, BCUC Staff and BCOAPO note that the experts’ opinions differ regarding the screening criteria of electric and gas utilities proxy group selections, and the use of a combined North American proxy group versus taking the average between the separately calculated Canadian and US proxy groups and the creation of a separate Canadian proxy group. 30
2.1.2.5 Other Potential Scope The CEC and ICG made submissions on additional scope items for a potential oral hearing. Fair Return
The CEC was the only party to submit that an area of interest is the interrelationship between the regulatory model in Performance Based Ratemaking (PBR) and the fair rate of return test. The CEC explains that “[b]ecause this utility has generally exceeded the fair rate of return because of the model of PBR,” the CEC believes that this outcome should be explored in the review of the ROE and good evidence of the company’s ability to mitigate risk and perform better when challenged. 31 Other Differences
ICG provides a list of topics which it “expects the experts have diverging opinions.” ICG’s list of topics includes the following: 32
25 26 27 28 29 30 31 32
Is evidence in previous cost of capital proceedings an appropriate reference point to consider in the evidence in the current proceeding?
Where a range of competitive returns is available, should the evaluation of a “fair return” favour the lower range presented?
Are US markets riskier than those in Canada? Should US data be given equal weight to data for Canadian utilities? What weight should be given to the equity ratios in other Canadian jurisdictions?
Exhibit C7‐9 BCOAPO, p. 2. Exhibit B1‐23 FortisBC, p. 1. Exhibit B1‐23 FortisBC, pp. 1–2. Transcript Volume 2, p. 109; Exhibit B1‐22 FortisBC, p. 6; Exhibit A2‐31 BCUC Staff, p. 1; Exhibit C7‐9 BCOAPO, p. 1. Transcript Volume 2, p. 109. Exhibit A2‐31 BCUC Staff, p. 1; Exhibit C7‐9 BCOAPO, p. 1. Transcript Volume 2, p. 107. Exhibit C5‐10 ICG, p. 1.
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APPENDIX A to Order G‐217‐22A
Are significant risk adjustments necessary to US utility data in order to recognize the use of deferral mechanisms by FEI and FBC?
How much weight should be given to the Discounted Cash Flow (DCF) model and Capital Asset Pricing Model (CAPM) model?
In response, FortisBC states that ICG’s submissions depart “significantly from the approach of all other parties. ICG has simply listed items that it wishes to canvass with the experts at an oral hearing, rather than providing a listing of areas of divergence between the experts.” 33
Panel Determination The Panel has considered the oral and written submissions received and finds that an oral hearing on certain limited topics is warranted. The Panel views that cross‐examinations at an oral hearing on certain topics will improve the evidentiary record for a better understanding of the issues in the GCOC Proceeding. Professional judgement is a key component in cost of capital proceedings, and as such, an oral hearing will allow parties to test the evidence in real time by way of directly asking the experts and FortisBC questions. The Panel also notes that no one is opposed to an oral hearing. As for the scope of the oral hearing, the Panel considers that at a minimum, Dr. Lesser and Mr. Coyne should be cross‐examined where they have diverging views in their financial modelling and proxy group selections. The Panel acknowledges that parties have generally identified similar areas where the two experts have different opinions and Table 1 above outlines these topics. Regarding BCOAPO and FortisBC’s submissions on the basis for establishing the dividend yield as to whether this is an area of divergence or acknowledgement of uncertainty of the underlying data, the two experts can either clarify or elaborate on this matter at the oral hearing. Regarding risks, the Panel considers that FortisBC’s business risks, including energy transition, and credit metrics warrant cross‐examination in an oral hearing. These risk factors have a direct impact on the Panel’s consideration of FortisBC’s capital structure and ROE. The subjective nature of risk assessment and the extent to which it affects FEI and FBC’s cost of capital are suitable topics for an oral hearing. Therefore, the Panel determines that the scope of the oral hearing will examine the following areas: FortisBC’s business risks, FortisBC’s credit metrics, and the differences between Mr. Coyne and Dr. Lesser’s opinions on their financial model and proxy group selections. The scope of the oral hearing is outlined in Appendix C of this order. With respect to the CEC’s submission regarding the interrelationship between the regulatory model in PBR and the fair rate of return test, the Panel is not convinced that it is an appropriate topic for an oral hearing in the GCOC Proceeding. The Panel notes that regardless of the regulatory model type used, whether PBR or cost of service, there will be differences between actual and allowed returns. Furthermore, the issue of whether a utility has “generally exceeded the fair rate of return because of the model of PBR” should be assessed in its multi‐year rate plan proceeding where the merits of the rate model and utility’s performance can be fully assessed and not in a generic cost of capital proceeding. Therefore, the Panel finds that the CEC’s submission for the fair rate of return test as a topic in the GCOC Proceeding’s oral hearing is not appropriate. The Panel finds that ICG’s written submissions to Exhibit A‐19 (Requests for Submissions) did not align with the Panel’s request, which was for topics on which Mr. Coyne and Dr. Lesser have diverging opinions. Instead, ICG
33
Exhibit B1‐23 FortisBC, p. 2
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APPENDIX A to Order G‐217‐22A submitted topics that ICG “expects the experts have diverging opinions.” 34 The Panel agrees with FortisBC’s reply submission that “ICG has simply listed items that it wishes to canvass with the experts at an oral hearing, rather than providing a listing of areas of divergence between the experts.” 35 Interveners have already had two rounds of IRs to FortisBC, Mr. Coyne, and Dr. Lesser. The purpose of establishing a refined scope for the oral hearing is for parties to focus on areas that would yield benefits to the evidentiary record that cannot otherwise be achieved efficiently through a written process. Therefore, the Panel finds that the general nature of ICG’s written submissions is not appropriate for the GCOC Proceeding’s oral hearing.
2.2 Parties to be Cross‐Examined and Format of Oral Hearing 2.2.1 Parties to be Cross‐Examined in Oral Hearing FortisBC and Mr. Coyne Participation FortisBC submits that FEI and FBC are the focus of Phase 1 of the GCOC Proceeding and expects that it will have to call some form of witness panel to deal with its evidence or to have its experts deal with its evidence as required. 36 FortisBC further notes that the BCUC may benefit from having a company financial witness on the panel to accompany Mr. Coyne to address questions on how the capital markets affects the company. 37 In particular, BCOAPO recommends that FortisBC witnesses from the companies speak to business risks and the determination of the companies’ financial metrics. 38 Dr. Lesser Participation
There were differing views on the participation of Dr. Lesser in an oral hearing, if one is to be held. FortisBC submits that Dr. Lesser’s attendance as a witness is unnecessary 39 and that by virtue of having his responses on the two rounds of IRs, his role is no longer required. 40 FortisBC further suggests that if Dr. Lesser is invited to appear at an oral hearing, then two parameters be imposed on his participation “at a minimum” to maintain a fair and effective process: 41 1) Continue to limit the nature of the questions to the scope previously articulated; and
2) Only those parties who disagree with Dr. Lesser’s position on a particular issue should be entitled to cross‐examine him on that issue.
In contrast, RCIA submits it does not believe that Dr. Lesser is in any way representative of residential consumers, and therefore, he should be allowed to be one of the expert witnesses that could be cross‐examined. 42
34 35 36 37 38 39 40 41 42
Exhibit C5‐10 ICG, p. 1. Exhibit B1‐23 FortisBC, p. 2. Transcript Volume 2, p. 92. Transcript Volume 2, p. 91. Transcript Volume 2, pp. 112‐–113. Transcript Volume 2, p. 92. Transcript Volume 2, p. 93. Transcript Volume 2, pp. 93–94. Transcript Volume 2, p. 102.
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2.2.2 Format of Oral Hearing
APPENDIX A to Order G‐217‐22A
Dr. Lesser and Mr. Coyne Appearances FortisBC, RCIA, CEC and BCOAPO oppose having Dr. Lesser and Mr. Coyne appear at the same time. FortisBC explains that it would be difficult if the two witnesses are on the panel together to enforce the scope that Dr. Lesser has addressed without undermining the orders put in place to ensure a fair proceeding. FortisBC views that it would be fairer if Dr. Lesser puts forward his evidence first, and then have the panels of the utilities thereafter. 43 RCIA and BCOAPO submit that having Mr. Coyne and Dr. Lesser appear together will not be beneficial or efficient because of the inability to have follow‐up questions to dig into an issue 44 and having them appear together would be “a little awkward for many of the parties.” 45 MoveUP suggests that Mr. Coyne should be presented as a panel witness for FortisBC and thereafter, be joined by Dr. Lesser “strictly to address questions of divergence in their evidence.” 46 In response to MoveUP’s suggestion, FortisBC states that it is better than having the expert panel sit together for all issues but that it “doesn’t totally address the concern of fairness.” 47 BCUC Staff submit that it would be valuable to cross‐examine the experts at the same time due to the likely scenario of having similar questions on the same topics. 48 Cross‐Examination
Several parties at Procedural Conference No. 2 commented on the nature of potential cross‐examination of Dr. Lesser and Mr. Coyne. None of these parties oppose cross‐examination, but FortisBC highlights concerns against “friendly” cross‐examination. FortisBC submits that interveners should only cross‐examine parties who are adverse in interest to them 49 and “ensure that parties aren’t engaged in sweetheart or friendly cross‐examination on an issue that is clearly one that has been identified where the experts disagree.” 50 BCOAPO states that “[i]n cases before the BCUC the lines between friendly and adverse parties are not always drawn.” 51 BCOAPO explains that some issues are not fully developed and submits that cross‐examination “is an opportunity for people to seek that kind of clarification to fully develop their understanding, as well as the panel’s understanding.” 52 Similarly, MoveUP submits that cross‐examinations are “not there to advance the cause of one party or another. But rather they’re there to assist the Commission and participants in developing an understanding of the issues.” 53 BCUC Staff take no position on whether there is a need to cross‐examine FortisBC’s witnesses on business risk. 54 Dr. Lesser Elaboration on Information Requests
BCOAPO and the CEC further recommend that an aspect of the oral hearing, if there is one, should be to include an elaboration of answers by Dr. Lesser as some of his responses were “more circumspect” than hoped, “fairly
43 44 45 46 47 48 49 50 51 52 53 54
Transcript Volume 2, p. 130. Transcript Volume 2, p. 102. Transcript Volume 2, p. 112. Transcript Volume 2, p. 123. Transcript Volume 2, p. 130. Transcript Volume 2, p. 119. Transcript Volume 2, p. 94. Transcript Volume 2, p. 126. Transcript Volume 2, pp. 113–114. Transcript Volume 2, pp. 113–114. Transcript Volume 2, p. 117. Transcript Volume 2, p. 119.
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APPENDIX A to Order G‐217‐22A curt,” and that there would be some value in exploring those topics. 55 The CEC further clarifies in its written submissions that its concerns are in regards to completeness and not a general criticism of Dr. Lesser, and identifies specific IRs that Dr. Lesser has previously responded to in Exhibit A2‐23 that the CEC would wish to follow‐up in an oral hearing. 56 In response, FortisBC submits that “in the event the BCUC were to agree with CEC that Dr. Lesser had been non‐responsive, the most appropriate remedy would be for Dr. Lesser to provide revised written responses to the IRs. This avoids the potential for CEC’s clarifying questions at the hearing to drift into friendly cross‐examination.” 57
Panel Determination As determined in Section 2.1.2 above, the scope of the oral hearing will examine FortisBC’s business risks, FortisBC’s credit metrics, and the differences between Mr. Coyne and Dr. Lesser’s opinions on their financial model and proxy group selections. Considering the oral and written submissions received, the Panel determines that the format of the oral hearing will be as follows: 1. Dr. Lesser and Mr. Coyne be made available for cross‐examination at the same time to address diverging opinions on assumptions and components of financial models and selection of proxy groups.
2. FortisBC witnesses be made available for cross‐examination to discuss FortisBC’s business risk and credit metrics.
With respect to Dr. Lesser’s participation in the oral hearing, the Panel agrees with FortisBC’s first suggestion of a parameter to continue to limit the nature of the questions to the scope previously articulated in the GCOC Proceeding in order to maintain a fair and effective process. 58 However, the Panel disagrees with FortisBC’s second parameter that only those parties who disagree with Dr. Lesser’s position on a particular issue should be entitled to cross‐examine him on that issue. 59 As noted in Appendix D to Order G‐156‐21, the BCUC engaged Dr. Lesser to provide an independent expert report in the GCOC Proceeding and to provide oral or written testimony and undergo cross‐examination. 60 The Panel highlights that Dr. Lesser continues to be an independent expert and that he should be made available for cross‐examination for a better understanding of the expert evidence provided in the GCOC Proceeding. The Panel encourages parties to seek clarification to develop their understanding of issues as required for areas where Mr. Coyne and Dr. Lesser have diverging opinions. Regarding parties’ concern of “friendly” cross‐examination, the Panel finds that if such concerns occur during the oral hearing, parties may object at such time, and the Panel will decide whether cross‐examination on that matter should continue. Regarding the concerns that parties have expressed about Dr. Lesser and Mr. Coyne appearing as witnesses on an expert panel, the Panel considers that it is procedurally fair to cross‐examine both experts at the same time on matters where they have diverging opinions. As set out in previous orders, Dr. Lesser’s role in this proceeding is to provide an independent opinion on Mr. Coyne’s evidence. 61 Dr. Lesser does not recommend any ROE or
55 56 57 58 59 60 61
Transcript Volume 2, pp. 107, 108, 111. Exhibit C6‐11 CEC, pp. 2–3. Exhibit B1‐23 FortisBC, p. 2. Transcript Volume 2, pp. 93–94. Transcript Volume 2, pp. 93–94. Order G‐156‐21, Appendix D, p. 1. Orders G‐106‐22 and G‐140‐22, Letter dated May 31, 2022 (Exhibit A‐17).
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APPENDIX A to Order G‐217‐22A capital structure for FortisBC, nor is he appearing on behalf of any party in this proceeding, and therefore, has nothing to advocate or defend in that regard. Instead, the GCOC Proceeding has been focused on Mr. Coyne’s ROE and capital structure recommendations on behalf of FortisBC. Parties have had opportunities to canvass the professional judgement of the two experts pertaining to Mr. Coyne’s evidence. Thus, recognizing that at least one of the objectives of the oral hearing in this GCOC Proceeding is to test the recommendations provided by Mr. Coyne as FortisBC’s expert witness, the Panel finds that it would be fair and efficient for the two experts to be cross‐examined at the same time on topics where they have diverging opinions. The Panel requests that Dr. Lesser and Mr. Coyne be made available in‐person for cross‐examination as an expert panel to enable an interactive session at the oral hearing. The Panel further considers that since the scope of the oral hearing as it relates to the expert evidence is limited to the areas where the experts have differing views, the Panel finds it to be most effective and efficient to cross‐examine Dr. Lesser and Mr. Coyne together on their evidence. Regarding parties’ request to have an elaboration of answers by Dr. Lesser, including the CEC’s identified specific IRs that it wishes to follow‐up in an oral hearing, the Panel finds that further clarification is not required. Dr. Lesser was sufficiently responsive to the IRs, either answering questions to the best of his abilities, including stating where his limitations were, or not answering questions due to unclear IRs from parties. Further, certain IRs by the CEC requested Dr. Lesser to opine on PBR and the fair ROE, which the Panel has ruled out of scope in Section 2.1.2.5 above. Therefore, the Panel determines that no further elaboration of answers by Dr. Lesser is needed for the IRs identified by the CEC. In light of regulatory efficiency concerns raised by parties and based on the limited scope of the oral hearing discussed above, the Panel amends the oral hearing dates by shortening the nine‐day oral hearing previously scheduled to now four days to start on Monday, November 7, 2022 through to Thursday, November 10, 2022, as set out in Appendix B of this order.
2.3 Information Requests on FortisBC Rebuttal Evidence Parties at Procedural Conference No. 2 were requested to comment on whether a round of IRs on FortisBC’s Rebuttal Evidence (Exhibit B1‐21) 62 is warranted. The CEC and MoveUP do not support a round of IRs on FortisBC’s Rebuttal Evidence while the majority of other parties at Procedural Conference No. 2 either support or have no objection. 63 The CEC and MoveUP submit that they are not seeking IRs on the rebuttal evidence, which would be redundant if there was an oral hearing. 64 FortisBC, RCIA, BCOAPO and BCUC Staff either support or have no objection to the need for a round of IRs on FortisBC’s Rebuttal Evidence and discuss how such IRs can be used effectively with an oral hearing in the proceeding. 65 BCUC Staff submit that having Mr. Coyne perform his calculations prior to the oral hearing would be an effective and efficient use of parties’ time at the oral hearing. 66 BCUC Staff also suggest that the IRs on FortisBC’s Rebuttal Evidence take place in August or September. 67
62 63 64 65 66 67
Exhibit B1‐21. Transcript Volume 2, pp. 97, 103, 108, 115, 117. Transcript Volume 2, pp. 108, 117. Transcript Volume 2, pp. 97, 103, 115. Transcript Volume 2, p. 120. Transcript Volume 2, p. 121.
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Panel Determination
APPENDIX A to Order G‐217‐22A
The Panel determines that a round of IRs on FortisBC’s Rebuttal Evidence, pertaining to “Part 2 – Rebuttal Evidence of Concentric Energy Advisors, Inc.” (Mr. Coyne’s rebuttal testimony prepared for FEI and FBC), is warranted. The Panel recognizes the risk of redundancy and costs associated with an additional round of IRs when an oral hearing is established. Therefore, the Panel requests parties to limit their IRs to calculations and questions that are quantitative in nature on Mr. Coyne’s portion of FortisBC’s Rebuttal Evidence in Exhibit B1‐21, that Mr. Coyne cannot reasonably provide during cross‐examination at the oral hearing. The timing of IR submissions and responses is as set out in Appendix B of this order.
2.4 Updates to Mr. Coyne’s Model None of the parties at Procedural Conference No. 2 object to Mr. Coyne updating his model and analysis. FortisBC submits that Concentric and Dr. Lesser have indicated that they generally favour updating for the latest data. FortisBC explains that the update is a mechanical exercise. 68 With regards to timing, while FortisBC proposes that any update be filed on or before October 20 th , which would allow time for the use of the September data, it clarifies that the suggested timing reflects that “it takes a couple of weeks to do the update after the data’s available.” 69 While BCOAPO does not object to an update of Mr. Coyne’s evidence, it submits concerns over FortisBC’s proposed timing of October 20 th , which “is perilously close to the date of that tentative oral hearing” and that its expert’s “summer and potentially most of September is already fully booked with existing processes in both British Columbia and Ontario.” 70 At Procedural Conference No. 2, FortisBC noted that Mr. Coyne is in hearings in other jurisdictions that are scheduled to end on September 21 st . 71 FortisBC further submitted that “if the Commission is planning rebuttal IRs on rebuttal evidence, it’s better to have those come sooner and to give a couple of weeks after that period” 72 in order for Mr. Coyne to respond.
Panel Determination The Panel considers that an update to Mr. Coyne’s model and analysis is appropriate and useful. The Panel directs FortisBC and Mr. Coyne to provide an update to financial models by Thursday, October 20, 2022, with data inclusive of September 2022. This update will provide information that reflects the most recent data available before the oral hearing begins on November 7, 2022. Such timing will provide parties with over two weeks lead time to review Mr. Coyne’s updates. The Panel finds two weeks to be sufficient as FortisBC is proposing to have Mr. Coyne use current market data inputs to recalculate the output of his models. Interveners should already be familiar with Mr. Coyne’s selections in his model at this point of the GCOC Proceeding. The purpose of this update is simply to allow Mr. Coyne to include the most recent data available as inputs into that model.
68 69 70 71 72
Transcript Volume 2, pp. 97–98. Transcript Volume 2, pp. 98, 129. Transcript Volume 2, p. 114. Transcript Volume 2, p. 129. Transcript Volume 2, p. 129.
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3.0
Panel Determination Summary
APPENDIX A to Order G‐217‐22A
The Panel acknowledges the oral submissions received at the July 8, 2022 Procedural Conference No. 2 and written submissions and responses to Exhibit A‐19 (Requests for Submissions). Accordingly, the Panel summarizes its determinations as follows: A. The Panel determines that an oral hearing is warranted. The amended oral hearing dates are Monday November 7, 2022 to Thursday, November 10, 2022, as set out in Appendix B of this order. B. The scope of the oral hearing will examine the areas of FortisBC’s business risks, FortisBC’s credit risks, and the differences between Mr. Coyne and Dr. Lesser’s opinions on their financial models and proxy group selections. C. The format of the oral hearing will be as follows: 1. Dr. Lesser and Mr. Coyne be made available for cross‐examination at the same time to address diverging opinions on assumptions and components of financial models and selection of proxy groups. 2. FortisBC witnesses be made available for cross‐examination to discuss FortisBC’s business risk and credit metrics. D. The oral hearing format and scope are set out in Appendix C to this order. E. One round of written IRs on FortisBC’s Rebuttal Evidence, pertaining to “Part 2 – Rebuttal Evidence of Concentric Energy Advisors, Inc.” (Mr. Coyne’s rebuttal testimony prepared for FEI and FBC), is warranted, as set out in the regulatory timetable in Appendix B of this order. F. FortisBC and Mr. Coyne are directed to provide an update to financial models by Thursday, October 20, 2022, with data inclusive of September 2022, as set out in Appendix B of this order.
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British Columbia Utilities Commission Generic Cost of Capital Proceeding
REGULATORY TIMETABLE
Action Information Request (IR) No. 1 on FortisBC Rebuttal Evidence, Part 2 – Rebuttal Evidence of Concentric Energy Advisors, Inc.
Responses to IR No. 1 on FortisBC Rebuttal Evidence, Part 2 – Rebuttal Evidence of Concentric Energy Advisors, Inc.
Update to Mr. Coyne’s Model Oral Hearing* Undertakings to Oral Hearing FortisBC Written Final Argument Intervener and Utilities Written Final Argument FortisBC Written Reply *Further details regarding the oral hearing will be provided in due course.
APPENDIX B to Order G‐217‐22A
Date (2022) Monday, September 12
Thursday, October 20 Thursday, October 20 Monday, November 7 to Thursday, November 10
Friday, November 18 Thursday, December 8 Date (2023) Thursday, January 19 Thursday, February 9
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APPENDIX C to Order G‐217‐22A British Columbia Utilities Commission Generic Cost of Capital Proceeding ORAL HEARING FORMAT AND SCOPE The following outline provides guidance on the format and scope for the oral hearing of the Generic Cost of Capital Proceeding, scheduled for Monday, November 7, 2022 to Thursday, November 10, 2022. Part 1 of Oral Hearing – Dr. Lesser and Mr. Coyne
Dr. Lesser and Mr. Coyne be made available for cross‐examination at the same time to address diverging opinions on assumptions and components of financial models and selection of proxy groups. Table 1: Topics of Diverging Expert Opinions
Risk‐free rate Size Premium Earnings Per Share (EPS) growth rates Interest Rate and Equity Risk Premium Market Risk Premium (MRP) Financial Models Flotation cost and financial flexibility Betas: sources used and whether betas trend towards 1.0 Basis for establishing the Dividend Yield o Proxy Groups Screening criteria; and Use of Canada, US, and North American proxy groups.
Part 2 of Oral Hearing – FortisBC FortisBC witnesses be made available for cross‐examination to discuss FortisBC’s business risk and credit metrics. FortisBC Risk Factors, including:
o Business Risk Business risks being reflected in capital structure, ROE, or both.
o Credit Metrics Credit ratings, credit risk, access to capital; and Whether the maintenance of current credit ratings is necessary.
o Energy Transition Risk The degree of regulators’ and policymakers’ ability to mitigate the energy transition risk; The approach to reflect energy transition risk in the utility’s cost of capital through ROE, capital structure or both; How energy transition risks are related to provincial government climate and energy policies relevant to the assessment of the cost of capital; Consideration for energy transition risk for FortisBC Energy Inc. (FEI) as a business risk, financial risk, regulatory risk or other; and Differential risks as between gas and electric utilities, emerging risks facing natural gas utilities in the context of climate policy and the transformation of the energy sector.
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