Return on Equity (ROE)

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Return on Equity (ROE)

Return on equity (ROE) is a payment to private investors who often provide much of the funding required for to start and maintain infrastructure projects.

Regulated businesses like electric utilities are permitted to earn a return on their investments in the capital infrastructure necessary to make and deliver electricity. Many electric utilities and gas distributors across North America are regulated under this model.

In Nova Scotia, the Utility and Review Board (UARB) is responsible for setting an allowed return on equity for NS Power. As of 2013, the ROE range we’re permitted to earn is 8.75% to 9.25%, a reduction from previous years. The high end of the range is the maximum we can earn, though the low end is not a minimum. The range is provided as a target for what we aim to earn. The UARB intentionally sets the range to be similar to other Canadian utilities and energy sector firms so that we can adequately compete for investment dollars, while not burdening customers with additional costs. NS Power can only earn within the range through prudent planning and financial management. It is not a guaranteed return, and is not always achieved. If earnings are not within the range one year, they can not be made up the following year.

Financial institutions can lend money at lower interest rates, but first look for companies to provide a significant amount of upfront investment to lower any risk they would assume by loaning funds. For publicly owned companies, this upfront investment is born by the owners, which are the shareholders. At NS Power, the division of this risk is also regulated by the UARB and is also similar to other utilities – 37.5% through shareholders, and 62.5% through financial institutions. For example, if NS Power were to build a $100 million wind farm, shareholders would pay for $37.5 million and banks would pay for $62.5 million. Those investments are then built into electricity rates to be recovered over time. The mid-point of our return on equity range, 9%, would mean a return to investors of $3.4 million. If the interest rate on a loan from a financial institution is about 5.5%, it would receive $3.4 million in interest.