The Newfoundland and Labrador Board of Commissioners of Public Utilities issued a decision on June 8, 2016 in respect of a General Rate Application filed by Newfoundland Power Inc. In the decision, the PUB addressed the cost of capital, the capital structure and the risk profile for NP.
On the subject of risk profile, the PUB concluded that NP’s financial and business risk have not materially changed since NP’s last GRA and it found that NP continues to be an average risk utility.
Since 1996, the PUB has accepted that, for rate-setting purposes, a capital structure for NP with a 45% common equity ratio is appropriate. It was argued before the PUB that the 45% common equity ratio is too high and should be reduced to 40%. The PUB decided that the evidence before it did not support a decrease in NP’s common equity ratio and it found that the ratio should remain at 45%. The factors previously identified as supporting the 45% common equity ratio – NP’s small size relative to its peers and its low growth potential – continue to be present. In reaching its conclusion that the common equity ratio should not be lowered, the PUB referred to the importance of stability in the management of capital structure for a utility and it described particular circumstances in the case before it that called for a conservative and stable regulatory approach.
As far as return on equity is concerned, the PUB had in the past given primary weighting to Capital Asset Pricing Model results in determining a fair return. The PUB said, though, that current market conditions require it to exercise judgment in considering these results. The PUB found that the unadjusted CAPM calculation of 7.4% did not produce a fair return for NP and should be considered in light of other evidence, including a multi-stage Discounted Cash Flow calculation. Considering all of the circumstances, the PUB decided that a fair ROE for NP for rate-setting purposes for 2016 and 2017 is 8.5%, compared to the previously-approved ROE 0f 8.8%.