Cost of Capital in Canadian Utility Regulation: Example ATCO

Cost of Equity

Market risk premium Beta Canada bonds Flotation Overall

Intervenors 5.10% 0.52 4.75% 50 b.p. 7.90%

Company 5.99% 0.93 4.13 50 b.p 10.2%

Embedded Cost of debt = 5.64%

Capital structure

Intervenors 35% Equity Bond rating A to BBB

Company 40% Equity Must preserve A

Weighted Average Cost of Capital for 40% tax rate

Intervenors: 7.90% x .35 + (1 - .40) 5.64% x .65 = 4.96%

Company: 10.2% x .40 + (1 - .40) 5.64 x .60 = 6.11%

Cost impact for ATCO with rate base of approximately $2.85 billion in 2008

Difference in WACC estimates x rate base = cost impact

115 b.p x $2.85 billion = $32.8 million

In 2008 ATCO cash flow from operations was approximately $872 million and free cash flow was ($4 million). Cost difference is 4% of cash flow from operations and over 100% of free cash flow.

Source: Materials from Generic Cost of Capital Hearing, Alberta Utilities Commission, AUC – 1578571 / Proceeding No. 85, 2009.