While it is true that construction costs have escalated to unprecedented levels, this is a worldwide phenomenon as a result of dramatic increases in the costs of such commodities as steel, copper and concrete. In addition, shortages of skilled labour are driving up construction costs to levels never seen before. As unwelcome as these price increases are, the demand for clean sources of electricity is also soaring and Manitoba Hydro is able to demand significantly higher prices for the power it sells to neighboring utilities. Therefore, the overall return on Hydro's investments in new generation and transmission is being maintained and in some cases, enhanced.
With respect to the strong Canadian dollar, it is not correct that this is having a negative impact on Hydro's profits. In fact, because Hydro finances a portion of its capital requirements in U.S. dollars, it is able to manage U.S. cash inflows and outflows such that there is a virtual offset. For this reason, Hydro is relatively indifferent, from a financial perspective, to the strength or weakness of the Canadian dollar versus the U.S. dollar.
In its rate application filed with the PUB in support of a 2.9-per-cent rate increase, Manitoba Hydro cited the following reasons for needing additional revenue from domestic customers:
1) Like any other business, Manitoba Hydro is faced with increasing cost pressures as it fulfils its mandate to provide a safe, reliable and efficient supply of energy to Manitoba consumers.
2) Because Manitoba Hydro has significant requirements for funds to manage its operating and capital programs, the more funds it can generate internally, the less it will have to borrow from external markets. Reduced borrowing leads to reduced debt, which in turn leads to reduced financing costs for the ultimate benefit of Manitoba consumers.
3) In order to maintain the financial well-being of Manitoba Hydro and to provide assurance to bond-holders and debt-rating agencies that Manitoba Hydro is financially strong and self-sustaining, it is important for Manitoba Hydro to continue to make steady progress toward the achievement of its financial targets. One of the key financial targets is the debt/equity ratio which measures the proportion of fixed assets financed by debt versus equity. Manitoba Hydro has been striving to achieve a debt/equity ratio of 75:25 and has made considerable progress over the past decade -- from a ratio of 88:16 in 1997 to the current debt/equity ratio of 76:24.
4) Because Manitoba Hydro's electricity is generated almost exclusively from hydraulic sources, the corporation is vulnerable to periods of low water flows caused by prolonged drought. To adequately provide for these low water conditions which will inevitably occur, it is prudent to build a level of financial reserves that can withstand the negative financial impacts of such conditions.
5) In addition to drought, the corporation faces many other risks including the potential loss of infrastructure due to extreme weather or some other catastrophic event, the loss of export markets which could occur for a number of reasons beyond Hydro's control, and the risks associated with an aging infrastructure and an aging workforce. Again, a sufficient level of financial reserves is important to adequately address these risks.
Over the past decade, Manitoba Hydro's rate increases have been well below the rates of inflation. While this has been very beneficial for consumers, it is now prudent to gradually raise rates over time. In submitting its rate application to the PUB, Manitoba Hydro was confident that a 2.9-per-cent rate increase in 2008 followed by annual rate increases closely aligned with the rates of inflation would be acceptable for our requirements. However, the higher up-front rate increases awarded by the PUB will allow for rate increases in the future to be lower than they would otherwise be.
The PUB stated in its order that, "even with a five-per-cent increase as of July 1, 2008 and, if confirmed and implemented a further four per cent as of April 1, 2009, electricity prices will remain lower than are found in the vast majority of North American jurisdictions." Manitoba Hydro agrees with this statement and further firmly believes that its business model will continue to provide Manitobans with an electricity price and security of supply advantage for generations to come.
Bob Brennan is president and chief executive officer of Manitoba Hydro.