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
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%.
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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