Regulatory Risk and Reward in Utility Investing: Nova Scotia Power’s Rate Settlement and Investor Confidence

The utility sector is a classic example of the delicate balance between regulatory oversight and investor returns. For investors, the key question is whether regulatory frameworks can ensure fair returns for utilities while protecting consumers from excessive costs. Nova Scotia Power’s recent rate settlement offers a compelling case study in this dynamic. Approved in February 2023 by the Nova Scotia Utility and Review Board (UARB), the settlement locks in a 14% overall rate increase over two years—6.9% annually for 2023 and 2024—despite a legislated 1.8% cap on non-fuel rate hikes under Bill 212 [2]. This outcome underscores the tension between regulatory constraints and the need for utilities to fund infrastructure and decarbonization efforts.

The settlement’s approval was justified by the UARB as necessary to cover “reasonable costs” for grid modernization and climate resilience [2]. Notably, it included a three-year storm cost recovery rider to address rising expenses from extreme weather events and a decarbonization deferral account to manage coal plant retirements [2]. These provisions reflect a forward-looking regulatory approach that acknowledges the dual pressures of climate change and aging infrastructure. For investors, such clarity can reduce uncertainty, a critical factor in utility valuations.

Investor confidence in Nova Scotia Power has remained resilient, supported by its parent company Emera Inc.’s strong credit profile. Morningstar DBRS reaffirmed Nova Scotia Power’s BBB (high) and R-2 (high) credit ratings in 2023, citing a “stable trend” in its financial health [1]. Analysts at Cantor Fitzgerald further signaled optimism, with Thomas Blakey initiating coverage with an Overweight rating and a $116 price target, highlighting the utility’s role as a 20% contributor to Emera’s net income [2]. These endorsements suggest that the rate settlement, while modest in headline terms, aligns with long-term value creation.

However, regulatory risks persist. Critics argue that Nova Scotia Power’s proposed 9% return on equity for the intertie transmission line project—higher than the typical 40% equity ratio in provincial legislation—could lead to excessive profits at the expense of ratepayers [1]. Economist Sean Cleary estimates this could generate $4.1 million in additional profits, shifting financial burdens to consumers [1]. Such debates highlight the fragility of regulatory trust and the potential for future pushback, particularly as climate-related costs rise.

Nova Scotia Power’s experience illustrates a broader trend in utility investing: regulatory frameworks that balance cost recovery with affordability can bolster investor confidence, but rigid caps or opaque processes may stifle innovation. The utility’s ability to maintain its BBB (high) rating while navigating these challenges speaks to its operational discipline. Yet, as the intertie project debate shows, even well-managed utilities must remain vigilant against regulatory overreach or public backlash.

For investors, the lesson is clear: regulatory risk is not a binary issue but a spectrum. Utilities like Nova Scotia Power that engage proactively with stakeholders and align with policy goals—such as decarbonization—can mitigate risks while securing returns. However, complacency in addressing cost structures or profit margins may erode trust, as seen in the intertie controversy. The key lies in monitoring regulatory developments and assessing whether a utility’s rate base can adapt to evolving economic and environmental demands.

Source:[1] Morningstar DBRS Confirms Credit Ratings on Nova Scotia Power Inc. at BBB (High) and R-2 (High), Stable Trends [https://dbrs.morningstar.com/research/445056/morningstar-dbrs-confirms-credit-ratings-on-nova-scotia-power-inc-at-bbb-high-and-r-2-high-stable-trends][2] Nova Scotia regulator approves 14% electricity rate hike [https://ca.news.yahoo.com/nova-scotia-regulator-approves-14-142059338.html]