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Winnipeg Free Press - PRINT EDITION

Hydro's ownership of Centra Gas remains conflicted

Posted: 02/26/2014 1:00 AM | Comments: 0

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Natural gas is in the news. Price increases due to cold weather; the increasing use of gas for electricity generation; a spectacular explosion of a portion of TransCanada's pipeline south of Winnipeg; a call by Pembina Valley for natural gas service for its fast-growing communities; experts recommending fuel diversity for our hydro-focused utility; and the ongoing controversy over fracking.

Centra Gas was purchased by Hydro from WestCoast Energy in 1999. Hydro paid a pretty penny: $245 million for the shares, $75 million to gain tax-exempt status and, as well, responsibility for $190 million of debt.

WestCoast sold after the Public Utilities Board forced it to absorb millions of dollars lost by Centra in the natural gas futures market. WestCoast got a good price; with a strong stock market just before the dot.com crash, its prospects for getting a better return on its money were good.

The bigger mystery is why Hydro bought Centra, particularly under a Conservative government that had sold MTS. For Hydro, it was an enticing opportunity to secure another monopoly and control natural gas distribution as well as electricity.

An NDP government had tried to acquire Centra a decade before to operate separate from Hydro, but failed. During that effort, the president of then Manitoba Oil and Gas and I were sent to review an Alberta gas producer for possible acquisition. Back then, the NDP was enthusiastic about natural gas.

After the purchase, Hydro downsized Centra's personnel through attrition, integrating its operations into its own. At the time, Centra had 240,000 customers, largely in Winnipeg; today it has 270,000, still concentrated in Winnipeg. The gas-distribution grid is not nearly as extensive as is the electricity grid.

The primary concern of Hydro's board, executives and its sole shareholder, the NDP government, is not "growing" the natural-gas distribution grid, but rather expanding hydroelectricity. With Hydro's recent acquisition of Swan Valley Gas Corporation, the government is effectively the only energy game in town, owning two energy monopolies not in competition with each other.

So, how has Hydro's ownership worked out for Manitobans? Not so well.

Hydro has made mistakes during the 14 years it has owned Centra. A couple revolve around the volatility of natural gas commodity prices, two others due to inattention to consumer issues.

Early in its ownership during a Enron-induced spike in natural gas prices, Hydro failed to lock in its gas purchase costs, leaving it with more than $100 million of unbilled commodity charges. Those accounts were eventually billed; customers paid heavily for Hydro's slow reaction.

More recently, after hurricanes Katrina and Rita (2005) drove up natural gas prices to unsustainable levels, Hydro once again made the wrong move. This time, it locked in high prices to the detriment of ratepayers. In the first instance, the PUB had recommended Hydro lock in prices at lower prevailing levels; in the second, PUB had urged Hydro to "ride" a fast falling market.

Hydro was also far too slow in offering long-term gas-supply contracts to residential customers. Inadequate competition had allowed two private brokers to offer "unduly" expensive contracts through door-to-door commissioned sales. The PUB repeatedly urged Hydro to enter the market. When Hydro eventually did, it came after many customers had locked in at high rates.

Another lost opportunity relates to lower-income households. The PUB funded Hydro, through rates, for an aggressive campaign to upgrade lower-income households to high-efficiency furnaces. While Hydro has improved its effort, it is still far from adequate. And, while natural gas prices are still relatively low despite this fierce winter, the historical record is one of considerable price volatility. A more aggressive effort to upgrade furnaces should be ongoing.

Government-owned monopolies are not known for moving as quickly as market-driven companies in competitive industries. Hydro's natural gas business has been a sideshow, its natural interest resides with hydroelectricity.

Recently, Hydro published a brochure forecasting heating by natural gas, long-term, will be half the cost of electric heat. Yet, in its submission to the PUB for its hearing into Hydro's planned expansion, the utility forecast consumers will increasingly choose the much more expensive electric heat.

Why?

Could it be Hydro's electricity-expansion plans have increased what was already an enormous conflict of interest? While households, businesses and institutions are much better off using natural gas for space and water heating, and industry can rely on natural gas for manufacturing, it could be asked whether Hydro deliberately is suppressing gas demand by abusing its double monopoly. Is it limiting natural gas distribution to support the Selinger government's hydro-focused expansion plans?

If not, then why has Hydro not extended the natural gas grid farther? And why does Hydro forecast households will increasingly choose electric space heaters and water heating despite their much higher cost?

More heating by gas would reduce future growth in the demand for electricity, adding to the case for not building Bipole III, Keeyask and Conawapa.


Graham Lane is a retired chartered accountant. He was the chairman of the Public Utilities Board from 2004 to 2012. Centra Gas and Manitoba Hydro are rate-regulated by the PUB. Earlier in his career, he was a vice-president of the Public Investment Corporation, and was involved in a bid to buy Centra Gas.

Republished from the Winnipeg Free Press print edition February 26, 2014 A11

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