Mar

5

If your company is a domestic power generator like Constellation (CEG) or Calpine (CPN), the proposed Trump Administration tariffs at the Canadian and Mexican borders could help elevate gross margins. If Canada cuts off electricity altogether, additional margins may become available. While generators may benefit, US consumers will be harmed.

Uncertainty clouds northern US grids amid Canada tariff threat

Canadian premier says he will cut off electricity exports to US ‘with a smile on my face’

M. Humbert writes:

It’s my understanding that utilities are generally regulated to provide a steady ROA based return. If so, I don’t believe that they can raise their prices and increase their gross margins, as that would raise their ROA. They can raise their prices though if their costs go up (to maintain their ROA). It’s been a while since I last looked at utilities though. Am I mistaken about this?

Carder Dimitroff responds:

Yes, regulated utilities generally provide steady ROAs. However, some states fully regulate their electric utilities. Other states deregulated bulk power (wholesale power) and the generators that supply bulk power. Most population centers in the US are in deregulated states.

In the deregulated states, the title to bulk power passes to regulated distribution utilities at substations adjacent to transmission lines. Specifically, titles pass to distribution utilities at substations' step-down transformers.

Ontario supplies bulk power to unregulated states (Minnesota, Michigan, and New York). Quebec supplies bulk power to New York and New England. New Brunswick also supplies New England. All three provinces own and operate nuclear power plants. While Canadian transmission lines feed power directly to specific locations within those states, imbalances propagate to other states.

Ontario updated its strategy. They now plan to tax Ontario power exports at 25%.

Steve Ellison writes:

In this video Peter Zeihan says that a hurdle to green energy is that essentially all cost is up front, unlike natural gas plants in which only 20% of the lifetime cost is in construction, and 80% is in fuel costs over the life of the plant. So even when total lifetime cost of green energy is less than that from a natural gas plant, the higher upfront costs make financing more difficult. If true, I would guess cost recovery of the upfront expenses is also more risky in a deregulated market.


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