The Frontier Centre for Public Policy (FCPP) has just released Running Hard to Adapt in a Dangerously Fast-Changing Industry by Ian Madsen, a senior policy analyst with the FCPP. The paper conducts an indepth valuation and strategic appraisal of SaskPower, using an intrinsic value method and market-based valuation system.
Established in 1923, SaskPower is responsible for providing electricity to the province of Saskatchewan, serving over 522,000 customers. Unlike some of its Crown utility peers in Canada, it is not in bad financial condition. The company has negative free cash flow and low returns on assets, equity and capital employed. Utilities usually pay a dividend to investors. The company is showing sufficient income to pay a dividend, but, given current low cash generation, investors may not consider the dividend sustainable. However, if the firm can show a credible, viable plan of redirection and commercial success and resilience to challenges, a share flotation could be successful, which could lead to a dividend thereafter, but if its debt burden was lower the sale would be smoother.
Analyzing SaskPower’s future from a public choice perspective, Ian Madsen argues that this Crown Corporation’s long-term future is safest in private, rather than public, hands. Whilst it was once convention and accepted wisdom that slow-change industries such as electric utilities were effectively insulated from the risks that plague other economic sectors, it is increasingly becoming apparent that this is no longer the case. Furthermore, private companies generally outperform those within the realm or in total ownership of government. The risks inherent in dynamic economic, business, and technological climates are better taken on by private investors than put on the shoulders’ of provincial or national taxpayers.
We are increasingly seeing that the electric utilities sector is shifting slowly but surely toward a new paradigm. As Madsen points out, in the present situation, Saskatchewan taxpayers are the ultimate stakeholders in SaskPower and ought not to bear the risks inherent in this emerging marketplace. In this changing environment, it is more important than ever before that Crown corporations such as SaskPower be protected from the potential for mismanagement and meddling that comes with government control. Madsen acknowledges that SaskPower has been mercifully devoid of major political meddling throughout its history, but that the potential for this – especially considering the often-conflicting agendas and incentives of electoral and economic imperatives – can never be discounted.
As the energy and electrical utility sectors evolve amidst projections for low demand growth for electricity in North America, it is vital that SaskPower continues to be nimble and dynamic. Forays into carbon sequestration, and wind, solar, and ‘peaking’ gas-fired power offer some positives in this regard. It has also made investments in ‘smart-grid’ management, which should help it adjust to a more variable, less predictable demand and supply future.
Even harder to do will be to make SaskPower, whether or not it is divested in whole or in part, a flexible, versatile, dynamic, and fast-evolving competitive, customer-responsive player in the new energy marketplace, given its limited potential roster of customers. It could actually become so, as its large fleet of gas-fired generation plants make it a flexible ideal ‘virtual battery’ for intermittent wind and solar power elsewhere in North America. This may require additional capital investment, and of the right kind (possibly expensive and extensive high voltage direct current (HVDC) transmission lines), with the right strategy, to become successful and a valuable company for its new owners, or at least, to become not a burden if it stays a Crown entity.
Ultimately, whilst the present and median term future looks reasonably solid, and SaskPower is certainly better run than a typical Crown corporation, there are changes into the broader sector on the horizon that could yield considerable risk to taxpayers. Protecting taxpayers from this risk is both a good unto itself and perhaps necessary in order for the required capital investment necessary for SaskPower to reorient itself to meet tomorrow’s challenges head-on.
