Fortnightly’s 2013 ranking of shareholder value performance shows substantial changes, with gas prices weighing on some utilities and elevating others.
America's Canadian Problem
Given the plethora of merchant plant projects that have been funded over the last several years in the United States, it seems likely that some U.S. states along the Canadian border could compete with gas-fired generators in the provinces for peak load demand in Canada, since transmission costs could be similar. U.S. gas-fired projects obviously cannot compete with Canadian hydro projects, given current natural gas prices. But natural gas seems to be the preferred fuel source for the planned conversion of many of Canada's coal-fired units, which could further level the cross-border playing field for trade in gas-fired electricity generation.
Yet with the advent of Canadian deregulation, the number of marketers there has risen dramatically, which nominally would permit the number of significant exporters to rise as well. But only a handful of the largest hydro-based utilities control most electricity exports. "We used to have just a few provincial players in the market, but in the last 10 years, we've had about 40 new marketers enter, so there is a lot more trading back and forth. Still, the total volume of exports by those 40 is less than 1 percent of the total of cross-border trade," Harvie estimates.
The failure of the new marketers to gain a stronger foothold in the export market may have more to do with regulation than with competition, though. "The electric utility industry restructuring that has taken place over the past decade has not resulted in increased Canadian electricity exports; indeed, exports have declined since the mid-1990s," Harvie says. On the other hand, U.S. deregulation has helped standardize the North American regulatory norm, others suggest. "Dozens of Canadian companies have made submissions to the FERC on standard market design, because they don't want to see any trade barriers," one consultant says.
Canada's unbundling of still-regulated transmission from distribution and generation, however, may help the export potential over the mid to long term, since transmission capacity is one limit to cross-border trade growth. But investments in generation in provinces like Ontario, where a retail electricity price cap has been imposed through 2006, could discourage enough investment to preserve the province's peak demand problem for years to come.
Whether sufficient utility capital resources will be available to make needed investments in generation and transmission also is an open question, given Canadian regulations, which permit high levels of utility debt. Standard & Poor's is reanalyzing the impact of regulation on the credit ratings of Canadian utilities, with an eye toward the possibility of higher, investment-grade ratings. Nonetheless, "Investor-owned Canadian utilities are among the most highly-levered utilities in S&P's global ratings universe, with financial profiles that are noticeably weaker than those of their global peers," notes Thomas Connell, a credit analyst at S&P in Toronto. "Many Canadian utilities typically have lower equity layers in their capital structures than their global peers, with total debt in some cases representing 60 percent to 70 percent of total capital," he said in early March.
The retail price cap in Ontario has had a singularly negative impact on investment in new generating capacity