The 'Manitoba advantage' takes a beating

Is this the end of the much-vaunted Manitoba Advantage?

For most of the last 13 years, the NDP government here has trumpeted "the Manitoba Advantage," a slogan that envelops the reasons this province is the best place in the country to live and work. The Manitoba Advantage included clean air and water, modest housing prices and, perhaps most importantly, cheap electricity. Although it's more marketing than mathematics, the Manitoba Advantage was a hit.

First and foremost, it was designed to make Manitobans feel good about living in Manitoba. As many of us know, leaving Manitoba and then moaning and whining about what it was like back home is the right of any former Manitoban. The Manitoba Advantage was a soothing salve for all the sharp-tongued resentment former Manitobans love to emit, and the chronically poor self-image remaining Manitobans can't help but display.

However, the Manitoba Advantage was also part of a campaign to attract immigrants and businesses. And in those goals, there was perhaps no greater lever in the Manitoba Advantage tool box than Manitoba Hydro.

Cheap electricity has been a benefit to Manitobans. Although many lower-tax advocates want to tie themselves into knots worrying about how our tax brackets compare with Alberta's, the low cost of living in Manitoba is a benefit. And cheap electricity is a big part of that. However, cheap electricity has never really been the great economic development tool as it was once billed.

Businesses did come to Manitoba for the cheap electricity. But they did not employ many people or produce much in the way of value or wealth in the province's economy. There is a strong baseline of economic activity from the construction of new generating stations, but it will not leave behind lasting wealth or employment.

Hydro has never been, and will never be, to Manitoba what oil is to Alberta or Newfoundland. As the price of the black gold rises, so too do government royalties. Electricity has never produced the level of revenue oil has. Manitoba collects "water rental" taxes, a fee on the amount of water that flows over and through Hydro's northern dams. However, those taxes are not tied to the price of electricity, and so have none of the growth potential of oil and gas royalties.

Electricity is a valuable commodity, but the sale of it is limited to customers who are hooked up to the same grid as the generating stations. Manitoba once dreamed of seeing an east-west national electricity grid built that would allow it to send electricity to provinces to the east and west. The grid was dashed by its sheer cost, and along with it, the dream of earning billions in electricity sales to Ontario's industrial heartland.

That leaves us with transmission lines south to Minnesota and Wisconsin. And while those contracts have been lucrative for Hydro, they are becoming less lucrative over time. Why? The culprit is natural gas. Huge, cheap reserves of natural gas pried out of rock formations by high-pressure water and chemicals in a process called fracking.

Despite its very questionable environmental footprint, fracking has flooded the U.S. market with cheap natural gas, much of which is being burned to generate electricity sold at rates much lower than Manitoba Hydro's export prices. Fracking has completely turned the North American energy market on its ear, and in the process significantly lowered Hydro's long-term outlook.

In recent filings to the Public Utilities Board, Hydro concedes it now expects to earn $1.1 billion less in export revenues over the next 10 years, and $4 billion less over the next 20 years. That's particularly bad news at a time when Hydro is spending billions to build new generating stations.

Hydro's own outlook should be the cause of significant concern by the province and its citizens. To maintain some semblance of balance between its debt and equity, Hydro is asking for rate increases. Although there are many ways to slice a Hydro rate increase, it is certainly reasonable to conclude a major factor -- perhaps the major factor -- in those rate increases is the rising debt from building new generating stations that will earn less revenue than envisioned when the dams were conjured by Hydro engineers.

There was a time when it was tough to see how Manitoba Hydro wouldn't be a major advantage to the citizens of this province. Unfortunately, it was also tough to see how natural gas would return to become a dominant competitor.

We have a long way to go before the Manitoba Advantage becomes a disadvantage. But we know now it's not quite the advantage we thought it was.

dan.lett@freepress.mb.ca

Republished from the Winnipeg Free Press print edition June 27, 2012 A6