Rate of return

Rate of return

Determining a fair rate of return for regulated utilities

​​The Alberta Utilities Commission has the responsibility to ensure that the delivery of Alberta’s utility services takes place in a manner that is fair, responsible and in the public interest. Included in this mandate is an obligation to determine the fair rate of return for regulated utilities. It is important to have the right incentives for these businesses so they continue to invest in Alberta’s utility services and infrastructure and provide important utility services to Albertans. Part of this includes allowing shareholders to receive a fair return on their investment, but this must be balanced against ensuring fair rates for customers.

The utility industry is what is known as a natural monopoly. This means that there is limited or no competition. While generally we think of monopolies as a bad thing, in this case there would be more negative economic and environmental impacts than benefits to having more than one set of wires and poles or pipelines to deliver energy to customers. Therefore, Alberta sets defined service territories for utility companies and regulates them. Part of regulating the utility companies includes determining the rate of return that is used in setting customer rates, since there is no competition and the regular market forces of supply and demand are absent.

Generic cost of capital proceedings

​Determining the fair rate of return for regulated companies in the absence of these market forces is not simple, and requires complex financial analysis. The AUC determines the rate of return through something called the generic cost of capital proceeding. In this proceeding, the utilities and representatives of residential and commercial consumers  present to the Commission analysis, evidence and financial experts review of utilities’ finances, credit ratings, credit markets, economic trends and other influencing factors. These proceedings are held every few years to update and review economic and financial developments since the last proceeding. 

Fair rate of return for investors


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