Winnipeg Free Press - PRINT EDITION

Winnipeg Hydro sale in hindsight

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In the summer of 2002, Manitoba Hydro purchased Winnipeg Hydro. The terms included money, the assumption of Winnipeg Hydro's personnel, assets and operations, and commitments. Those ranged from the building of a new Hydro head office downtown to enhancing the city's energy efficiency.

As individuals, we often look back to past actions and evaluate how we made out. We consider transactions such as houses bought and sold, and jobs taken and left, and evaluate how we made out. While we cannot change the past, we can learn from it. Corporations don't act differently.

So, how did the parties involved in the sale and purchase of Winnipeg Hydro make out?

In exchange for the assets and operations of Winnipeg Hydro, Manitoba Hydro promised to:

-- Pay the city $25 million a year for the first five years, then $20 million a year for years six through to nine, then $16 million a year for every year thereafter (forever).

-- Annually pay the city $1 million for services and between $1 million to $1.75 million in new property taxes.

-- Assume full responsibility for the 500-plus Winnipeg Hydro workforce.

-- Guarantee the city annual energy efficiency savings.

-- Erect a new 400,000-square-foot head office in downtown Winnipeg.

In the transaction, Manitoba Hydro acquired Winnipeg Hydro's retained earnings of $63-million, two dams (Pointe du Bois and Slave Falls, built in 1911 and 1931, respectively), transmission and distribution lines, and sundry other assets, along with 95,000 new customers.

Winnipeg Hydro's generating and transmission infrastructure provided only 40 per cent of the power required. The rest had been purchased from Manitoba Hydro and the terms of that contract were overdue for renewal. Winnipeg Hydro's rates were the same as Manitoba Hydro's.

It was known the Pointe du Bois turbines and the transmission line to Winnipeg needed to be replaced. Accordingly, Winnipeg Hydro was contemplating a $256-million upgrade to Pointe du Bois, with an additional $45 million for the line. Other infrastructure upgrades were also expected for Winnipeg Hydro.

With the purchase, Manitoba Hydro became responsible for all of Winnipeg Hydro's infrastructure.

So, 11 years after the transaction, which party struck the better deal? I say the city.

The city gained the equivalent of having approximately $500 million on hand, with a guaranteed annual cash flow of no less than what it received when it owned Winnipeg Hydro. It avoided both the risk of having to meet underfunded pension obligations on hundreds of employees and the cost of addressing a major infrastructure deficit.

This takes into account neither the city's continuing application of a 2.5 per cent tax on annually increasing hydro bills nor the increased property taxes levied on Hydro's new head office.

With respect to the infrastructure deficit, the bill the city avoided includes the $560 million Hydro expects to spend to replace the Pointe du Bois spillway (retired Hydro engineer Per Stokke claims the spillway could be repaired for a maximum cost of $45 million), along with a forecast $1.5 billion to eventually rebuild the dam's powerhouse (unless the dam is scrapped). As for the rest of the old Winnipeg Hydro infrastructure, including Slave Falls, it, too needs revitalization, and that bill likely will run in the hundreds of millions of dollars.

Let's not forget Manitoba Hydro's new $283-million head office.

The 695,000 square feet and $400 per square foot far exceed the expectation. Annual operating, property tax and carrying costs of the building are in excess of $25 million.

Prior to the building's completion, Hydro claimed the annual cost of its new building would be fully offset (by reduced rental of office space and a reduction in the consolidated utility's personnel complement). In actuality, that forecast was not realized and Manitoba Hydro's personnel complement has gone up.

The growth in personnel (more than 1,000) can be found in virtually every aspect of Manitoba Hydro's operations, not just those working on its development plan.

How about ratepayers? At the time of the acquisition, both Manitoba Hydro's and Winnipeg Hydro's customers had enjoyed a decade-long rate freeze. Since then, rates are up sharply and future rate increases are forecast to run at least twice the rate of inflation for the next 20 years.

Which government got the better of the transaction? Hands down, the city. This is not to say the acquisition was wrong or Manitoba Hydro should have driven a tougher bargain. Analysis merely indicates that, and with the additional benefit of hindsight, the city made a wise choice to dump its electricity utility.

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

Republished from the Winnipeg Free Press print edition December 4, 2013 A9

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