Hydro delay hits budget process

Opinion

Hey there, time traveller!
This article was published 28/03/2017 (2577 days ago), so information in it may no longer be current.

Spring in Manitoba means many things.

It means potholes and brown grass and (in Winnipeg at least) dusty mounds of the grey grit that was poured liberally over the city’s frozen roadways over the previous five months.

It also typically means hearing about Manitoba Hydro’s latest electricity rate application. Although the date moves around year to year, it is not unusual for Hydro to notify the Public Utilities Board of its intentions to raise rates by January, with hearings sometime during the spring or early summer.

This year, things have unfolded a bit differently. Nary a word was heard from Hydro in January of this year, prompting the PUB to take the unusual step of writing to Hydro on March 17 to ask when a rate application might be expected.

The PUB received a response on March 24, in which the utility indicated it will not file its rate application until “late April or early May.” With three to four months of preliminary negotiations around scope and the funding of intervenors, that means a formal rate application hearing will not take place until the fall.

That is not unprecedented, but it is unusual. And in this particular year — when it is expected the Progressive Conservative government will be using the spectre of eroding financial stability at Hydro to help justify its expedited austerity measures — a delay of this kind is extremely unfortunate.

Why have things been pushed back so much? In its March 24 letter, the utility attributed the delay in filing the 2017 application to “significant new matters or material changes since Manitoba Hydro’s last General Rate Application.”

Specifically, it listed the appointment of a new board, subsequent reviews of the utility’s operations, increases in the forecasted costs of Keeyask generating station and Bipole III transmission line, a “deterioration” in the forecast for growth in domestic electricity and a softening of export prices. It also mentioned Hydro’s decision to eliminate 900 jobs and other cost-saving measures.

Translated, Hydro is arguing that its financial position has worsened significantly since the last rate application. That in and of itself is not a huge surprise. That theory has been repeatedly enunciated in public by board chairman Sanford Riley and president Kelvin Shepherd, who have both sounded multiple alarms about Hydro’s worsening debt-to-equity ratio, the principal measurement of the utility’s financial health.

However, the correspondence between Hydro and the PUB only reveals part of the story here. It seems increasingly apparent that the new Hydro board, put in place less than a year ago, is committed to dramatic changes in the Integrated Financial Forecast.

Drafted by the utility’s senior management, the forecast includes best estimates of future revenues and liabilities over a 20-year-period, including things such as export market prices, domestic electricity use and capital expenditures. Taken together, the forecase forms the backbone of Hydro’s argument to the PUB for a rate increase.

Almost from the moment he took control of the board, Riley has been working diligently to construct a much dimmer view of Hydro’s financial future.

In February, Riley took the unusual step of publicly requesting an equity investment by the province to help stabilize Hydro’s debt-to-equity. He suggested that without a cash infusion, Hydro would have to go to the PUB and request double-digit rate increases that could be as high as 20 per cent.

This dire prediction was further bolstered in early March when Hydro announced that the combined costs of Keeyask and Bipole III had risen to $8.7 billion, a total higher than any previous financial forecast. In internal newsletters to Hydro employees, Shepherd has said the revised budget reflects increased “contingency, escalation and interest rate allowances” along with revised estimates of the cost of concrete work.

As is always the case, the PUB will have the final say on the veracity of the new integrated financial forecast and capital costs estimates. Riley’s hyperbole will either be substantiated, or disputed, when the PUB gets to the hearing stage this fall.

It is worth noting that just one year ago, Hydro’s forecast managed to avoid much of the doom and gloom that is emanating from the board right now. In fact, after scrutinizing the forecasts, the PUB found significant improvement in most areas of the utility’s long-term financial prospects. As such, it has allowed Hydro to continue pursuing its goal of rate increases of approximately four per cent annually until 2021. Informed observers are extremely interested to hear the PUB’s take on an entirely new long-term forecast.

Here’s the rub: In the upcoming provincial budget, to be tabled April 11, the future financial health of Hydro will be a constant presence as Premier Brian Pallister and Finance Minister Cameron Friesen make their case for enhanced austerity measures to bring down a chronic budget deficit.

Pallister and Friesen have repeatedly connected the government’s fiscal strategies to Hydro’s mounting capital expenditures. They have argued that unless the utility improves its debt-to-equity ratio, it could eventually undermine the province’s credit rating, and drive up borrowing costs. Given that Hydro is committed to finishing Keeyask and Bipole III — it has been determined that abandoning the projects now would be impractical — the province must cut deeper and faster than previously thought to guard against fiscal collapse.

Unfortunately, we won’t have the benefit of at least seeing the full details of Hydro’s financial forecast until well after the budget is tabled. That denies citizens, journalists and political critics the opportunity to assess the veracity of the Pallister government’s argument in favour of enhanced austerity.

In government, as in life, timing is everything. And at this moment in the history of the province, the timing of Hydro’s 2017 rate application is most unfortunate.

dan.lett@freepress.mb.ca