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This article was published 22/5/2017 (1214 days ago), so information in it may no longer be current.

Opinion

Prudence or panic?

If you’re having trouble figuring out what Manitoba Hydro is up to with its latest rate increase application to the Public Utilities Board, don’t feel bad. The truth is tough to pin down.

Hydro has asked the PUB for an eight per cent increase every year for the next five years to stave off a debt crisis and insulate the utility against a profound drop in electricity export prices or a drought.

Others see panic in Hydro’s application, an overreaction to debt concerns that could severely affect consumers and the provincial economy.

Either way, Premier Brian Pallister has a lot of political capital riding on Hydro’s application. If the PUB turns down the rate increases, the Hydro board and the Tory government that appointed it will face tough questions.

As the Crown corporation and various intervenors prepare for public hearings this fall, a number of outstanding issues need clarity. In no particular order, here are some of the things to keep in mind.

Is the sky really falling? Many observers and third-party intervenors have noted the revised integrated financial forecast used by Hydro to justify these rate increases is questionable, given the fact that not much has changed in Hydro’s financial situation in the last 12 months.

Even with export prices at historic lows, Hydro is still profitable. That means every penny of any rate increase approved by the PUB goes directly into retained earnings. In the last two years, based largely on the underlying financial strength of the utility, the PUB gave Hydro smaller rate increases than initially requested.

The great equalizer, from Hydro’s perspective, is the prospect of a prolonged drought. Manitoba hasn’t experienced a significant drought for some time, and there is a school of thought that our next extended dry spell is just around the corner. A drought would turn Manitoba from a net exporter to a net importer of electricity, and make the utility lose money.

Same result in half the time. In its rate application, Hydro has essentially abandoned a previous forecast that sought annual rate increases of 3.95 per cent per year over 10 years. The current rate application is seeking the same end goal in half the time.

Hydro will argue it needs to expedite plans to address its equity-to-debt ratio, one of the principal measurements of its financial health. The debt portion of that equation has been rising due to work on the Keeyask generating station and Bipole III transmission line. Hydro chairman Sandy Riley has argued that Hydro must boost equity or bond raters will lower the utility’s credit rating. According to the Public Interest Law Centre, the proposed rate increases could boost retained earnings by more than $2 billion over the next five years and provide some equity-to-debt relief.

However, there is some question about whether that’s necessary. Under the previous forecast, Hydro expected to bottom out at 10-90 in equity-to-debt ratio, which is extremely low for a private-sector company but not as unusual for a Crown monopoly. That suggests this rate application has less to do with a debt crisis and more to do with a shortage of delayed gratification on the Hydro board.

Rising costs or enhanced padding? The Hydro board has made significant adjustments to its forecast based on increases in the estimated costs of completing Keeyask and Bipole III. However, in interviews and company publications, CEO Kelvin Shepherd confirmed that these revised estimates include substantial increases to "contingencies," sums added to project costs for worst-case scenarios associated with construction: weather, spikes in the price of materials, labour shortages or disputes, unforeseen engineering problems.

Intervenors — the third parties that have standing before the PUB to question Hydro on its rate application — have already served notice they will dig deep into these contingencies to ensure this is prudent planning rather than padding used to justify higher rates.

More damage than good? Hydro’s proposed rate hikes will, if approved, have a significant effect on Manitoba’s economy. That is a reality the PUB cannot ignore in its final decision.

The effect on consumers, particularly at the low end of the income spectrum, would be substantial. A quick study of the high cost of electricity in provinces such as Ontario reveals the havoc that can ensue if rates are allowed to rise too much, too quickly.

However, the impact would be just as severe on big industrial entities, a category that accounts for more than 25 per cent of Hydro’s total domestic load.

These companies were drawn to Manitoba specifically to take advantage of low electricity costs. The Manitoba Industrial Power Users Group, the lobby that represents these companies, is expected to make it clear before hearings start this fall that the rate hikes as proposed could force some of them to re-think their presence in Manitoba.

The departure of some of these large industrial users would hit the Tory government hard in the form of lost corporate income taxes, personal income taxes and valuable economic activity. That will be tough for the Pallister government to endure, particularly as it continues to wage hand-to-hand combat with the budget deficit. The PUB will certainly listen carefully to any argument from an intervenor about the negative economic effects of the proposed rate increases.

Although ratepayers have a lot riding on the hearings, the Pallister government is just as vulnerable, if not more so.

If the PUB approves the rate hikes, Pallister will be working overtime to ensure that consumers know this is a legacy of NDP mismanagement of capital projects. However, with each subsequent year of eight per cent rate increases, there is a chance the Tories will eventually share the blame.

If the PUB turns down Hydro’s ask, and dials down the annual rate hikes, then there will be awkward questions to be answered about the political agenda at work. Specifically, the premier will have to reassure Manitobans he and Riley did not seek to use Hydro rates in a cynical bid to cripple the NDP for years to come.

There’s a lot riding on these PUB hearings: higher electricity rates are the tip of the iceberg.

dan.lett@freepress.mb.ca