Effects of changes in risk exposure on capital structure, cost of capital, and gas transmission costs

The single most important cost in the Canadian gas transmission industry is the cost of financial capital. Under the current regulatory framework, the NEB has protected the monopoly position of Canadian gas transmission companies by discouraging by-pass and pipe on pipe competition. This has allowed Canadian gas pipelines to be highly levered and yet attract both debt and equity at relatively low rates. Recent actions by the NEB and events in the industry have suggested that the current regulatory framework is beginning to change. Specifically, the NEB appears to be encouraging by-pass and pipe on pipe competition within the Canadian gas transmission industry. The introduction of by-pass and pipe on pipe competition could shift existing risk from customers to shareholders, and increase the overall level of risk exposure in the industry. A substantial increase in risk exposure may negatively impact the capital structure, cost of capital, and gas transmission costs.