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Best option for Hydro in future

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With announcements coming as regular as church bells ringing on a Sunday morning, it is clear that regardless of reason, risk and ratepayers' pocketbooks, the Selinger NDP government will push Manitoba Hydro into a potentially devastating expansion.

With the Clean Environment Commission and Public Utilities Board acting more like government lapdogs instead of neutral and objective public sounding boards, the likelihood the government will order a halt to the expansion is smaller than the likelihood of 30 C weather tomorrow.

Recently, the PUB pitched an excellent report by an expert engaged by the Manitoba Métis Federation. Hydro and the government didn't want to hear it. Following up on that repudiation of common sense, the board rebuffed another intervener's effort to see the export contracts the government has been bragging about.

The PUB's review, the NFAT, (needs for and alternatives to) is basically pointless. It comes five years too late and with NDP government terms of reference barring a review of all options. It is but an expensive smokescreen. Hydro has likely already spent more than $1 billion on its misadventure while making commitments to new staff, contractors, manufacturers, First Nations and American utilities.

Most recently, and well before PUB finishes its sham process and American regulators and the National Energy Board get started, Hydro announced the signing of a general contractor for building Keeyask and raised the potential for a gas plant to follow Keeyask (rather than Conawapa).

If Conawapa can be scrapped for a gas plant, why not Keeyask and Bipole III? A gas plant instead of Bipole III and Keeyask would save billions while providing needed diversity of supply, reducing drought risk.

Unless ratepayers are saved by a court, an American regulator or a credit rating agency, by election time the NDP will likely have signed off on $10 billion of unnecessary and wasteful Hydro spending. Bipole III, at least the north to south part, will be finished and Keeyask and the new transmission required south of the border will also be under construction.

So what if the current government is turfed? Given these circumstances, what should a new government do?

I suggest it would have three options after first halting further work on Conawapa and cleaning up Hydro's balance sheet. Deferred costs with respect to Conawapa and intangible assets should be written off, while liabilities for unfunded pension obligations and a provision for reducing operating costs over time to industry norms should be recorded.

The options are:

1. Accept the situation as it is and allow Hydro to make regular applications for rate increases sufficient to reach its 75:25 debt-to-equity ratio objective.

2. Apply Option 1 but suspend levying the annual debt guarantee fees and capital taxes of government on Hydro.

3. Limit future annual electricity rate hikes to the rate of inflation, apply the provisions of Option 2 and forgive Hydro's debt to the province by a sufficient amount to allow Hydro to reach and then maintain a 75:25 debt-to-equity ratio (assuming annual operating expenses at industry norms).

Option 1 should be rejected as it would likely result in rate hikes well beyond inflation and cause distress to all of Hydro's customers.

Option 2 would reduce rate hikes otherwise required, but those increases would still be beyond the ability of too many to pay.

I favour Option 3. While the cost to the government's treasury would be significant (both from the ongoing reduction of annual levies on Hydro and the write-down of its debt to the province), it would allow a well-managed utility to meet its responsibilities to Manitobans (and its export customers) while not over-burdening consumers (including the 30 per cent who are of lower income) and industry.

Two decades ago, the Ontario government found itself in a similar bind with respect to Ontario Hydro mistakes and relieved its utility of $20 billion of debt. Unfortunately, Ontario chose to recover that $20 billion-plus interest from electricity customers, resulting in excessive rates still burdening and hurting both Ontario consumers and industry. Ontario's approach should be rejected.

If there is a new government, it should restore Hydro's past "reliable power at lowest cost for Manitobans" objective.

It should also take two other actions to allow Manitobans to both understand exactly how the NDP government corrupted the PUB's hearing process to enable its Hydro debacle and how to prevent a legislative watchdog process from becoming a government lapdog process.

First, a new auditor general could be tasked to review the events that led up to the implementation of Hydro's so-called Preferred Development Plan and the $244 million-plus spent by Hydro on negotiating contracts with First Nations and American utilities. Second, the appointment processes for members of the Clean Environment Commission, the Public Utilities Board and Manitoba Hydro's board should be changed -- appointments should be made following open competitions and the approval of an all-party committee of the legislature.

What has happened over the last 10 years with Manitoba Hydro should never be allowed to occur again.

 

Graham Lane is a retired chartered accountant. From 2004 to 2012, he was chairman of the Public Utilities Board.

Republished from the Winnipeg Free Press print edition March 26, 2014 A7

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About Graham Lane

Graham Lane is a retired chartered accountant who worked in the public and private sectors for 50 years, concluding his career as chairman of the Manitoba Public Utilities Board.

He has also held key positions at Credit Union Central, Public Investments of Manitoba, the Manitoba Public Insurance Corp., the University of Winnipeg, and the Manitoba Worker's Compensation Board.

Before gaining his CA designation in Quebec, he was third in Canada in the then-national intermediate examination. He has a diploma in business administration from the University of Western Ontario and has served on numerous charitable and service boards.

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