In December 2009, the Ontario Energy Board released a Report on the Cost of Capital for Ontario's
Regulated Utilities (EB-2009-0084). In the 2009 Report, the
Board indicated that it will continue to use a formula-based equity
risk premium approach to determine Return on Equity for regulated
utilities. The Board also indicated that the Long Canada Bond
Forecast continues to be an appropriate base for the equity risk
premium determination. However, in order to ensure that the
formulaic approach accommodates changing economic and financial
conditions, the Board decided to refine and re-set the
formula-based ROE approach.
In the 2009 Report, the Board said that it will periodically
review the formulaic ROE adjustment mechanism and that a review
period of five years is appropriate. In 2014, Board Staff commenced
a review of the results of the current policy since its inception
at the end of 2009, the actual financial results of rate-regulated
utilities and the performance of the existing policy in relation to
Board Staff's Report summarizing its
review of the cost of capital policy was issued on January 14,
2016. In the course of the work that underlies the 2016 Report,
Board Staff reviewed the actual results achieved by Ontario's
rate-regulated utilities and it conducted a jurisdictional review
of approaches to cost of capital followed by other regulators in
Canada, the United States, the United Kingdom and Australia. Board
Staff also considered other aspects of the regulation of utilities
under the OEB's jurisdiction, including Multi-Year Applications
and the use of Deferral and Variance Accounts.
Board Staff concluded that the OEB's cost of capital policy
has worked as intended, that movement in the parameters has
followed macroeconomic trends and activity, and that the approach
has not resulted in excessive or anomalous volatility. Board Staff
noted that, to the extent that volatility was observed in the
financial performance of utilities, this was largely due to factors
other than the effect of the cost of capital policy.
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