Hey there, time traveller!
This article was published 8/3/2011 (2003 days ago), so information in it may no longer be current.
Once upon a time, a long time ago, I used to spend my free time reading the Fabulous Furry Freak Brothers. In time I collected all their comics, including the Adventures of Fat Freddy’s Cat.
Now, many years later, I don’t read them so much, although I follow their antics on Facebook.
Now, I spend my free time reading the transcripts of the ongoing Public Utility Board hearings into Manitoba Hydro’s rate application.
My, how times change.
The hearings are important for a number of reasons. Perhaps the most important one is that this is the first time public regulator has had a chance to pry into the inner workings of the province’s biggest and most vital Crown corporation.
PUB is taking this unprecedented closer look to see if the big wheels at Hydro know what they’re doing as they head into a massive dam-building plan to sell more power to the United States.
It’s a huge deal for the province.
Over the past couple of years, Hydro has taken a lot of shots that the big wheels at Hydro don’t know what they’re doing, that they’re ignoring the sleeping elephant in the room: Drought. Or a multi-year drought.
If Hydro goes ahead building new dams and transmission lines, what happens if a drought hits the province and there’s not enough water to spin those turbines?
This came to a head several months ago when a fired contract worker – the New York consultant – alleged the Hydro was putting the province at risk of blackouts and losing tons of money because it hadn’t done its homework on its drought risk.
Those allegations set off a spate of reviews to see if her allegations held any water.
One of the hired guns to come in a take a look at Hydro was consulting firm KPMG, a prestigious international firm known for playing it straight.
KPMG found no merit in the New York consultant’s allegations.
Recently, KPMG appeared at the PUB hearing to answer questions about their report.
Here’s a small part of what they had to say:
THE CHAIRPERSON (Graham Lane): Thank you, sir. Is it fair to suggest that KPMG holds that the largest risk faced by Hydro is a multi-year drought?
MR. WILL LIPSON: That's -- that's our view, yes. I think it's shared by Hydro, but -- if it's not the largest, it's definitely in the top three.
THE CHAIRPERSON: Is it also fair to say that droughts appear to be, based on historical experience, inevitable?
MR. WILL LIPSON: I would say "yes." You know, nobody in this room and certainly nobody that I'm aware of can control whether a drought occurs or not.
THE CHAIRPERSON: Certainly not us. Is it also fair to say that KPMG holds that Hydro's approach to this risk is reasonable?
MR. WILL LIPSON: I'm doing all the talking here. No, I'm prepared to keep going. You know me. Yeah, no, I -- I think that's a large element of what -- what we actually were addressing in the assignment and, overall, I would say yes, I think Manitoba Hydro are prudently addressing this, you know, number 1 risk.
There are policy calls. They could be a bit more conservative in some areas or less conservative in some areas, but, overall, you know, they are experts in a lot of the areas that -- that need to be looked at, and they're doing a more-than-reasonable job in the circumstances in our view.
MR. ANURAG GUPTA: And -- and, sir, if I could just very briefly add -- I -- I won't take much time.
I think one of the things we found counter intuitively is that the sale -- entering into these sale contracts and advancing the plans actually mitigates the financial impacts for drought. And in a way it's actually very easy for Hydro to, you know, to just sit back and not do anything and then say, Well, why are we negotiating with counterparties? Why -- why are we advancing plans?
So the fact that they are going through these efforts, they're negotiating with counterparties -- and I've been in negotiations and negotiations with counterparties -- they're never a fun thing to do. They can be stressful. I think that shows that they are – they are cognizant of this and they're taking positive steps to address risk instead of just sitting back and saying, Well, a drought is inevitable. If it happens, we'll take a loss. We've got the Province behind us. Who cares? That -- that's definitely not the view.
THE CHAIRPERSON: Thank you. Do you -- you were talking about drought, if it wasn't the top one it was certainly in the top three.
Do you consider the selection of a particular development plan one that, in hindsight, turns out to be suboptimal is also a risk -- a risk that -- which is more approachable by Hydro than drought?\
MR. WILL LIPSON: Sorry, by "development plan", you mean in terms of Keeyask and Conawapa? I – I think Mr. Gupta was just talking on that point to some degree.
They -- they are integrated. The – you know, the -- the key -- one of the absolute key findings of our assignment was what Mr. Gupta just talked about, that the development program, again coupled withgetting the long-term contracts in place and the timing and everything else it's associated with, that plan and the analysis -- or the -- the inputs that went into the analysis through the SPLASH model are such that, you know, the -- the -- it -- it -- this is a very big step forward to mitigating that risk of drought.
Is it the optimal way forward? I -- we're aware Manitoba Hydro considered alternatives. I don't know that it considered, you know, changes by a month here or a month there. I mean, there's a limit to how many analyses you do. But, overall, we're -- we're quite comfortable they come up with something that if it's not the optimal, it's quite close to an optimal development plan, but subject to change if circumstances change.
You know, my experience on major projects like this is there -- inevitably there's going to be some delay, there's going to be some hiccup, there's going to be something that comes out of environmental processes that was unforeseen. So you continually keep an eye on the -- on the analysis, you continually update, and eventually, when the time comes to, you know, make the firm commitment, you know, at that point you just confirm that that is the optimal plan.
THE CHAIRPERSON: Do you have any opinion as to whether Hydro has identified and considered carefully all available depart -- developmental -- development scenarios?
MR. ANURAG GUPTA: Certainly, sir, in the power -- in the PRP we -- we see evidence of them analyzing, not just the sale versus no-sale scenario that's been the primary focus of our discussion, but they have looked at multiple other development sequences.
THE CHAIRPERSON: Preference has been -- reference has been made to Manitoba Hydro's discount rate for new development.
Whatever the rate is, in your practice, is that rate similar to that used by other major utilities with respect to major developments?
MR. ANURAG GUPTA: Sir, the methodology that I've read by which Manitoba Hydro develops its weighted average cost of capital, in my view, is very similar to what any other corporation or utility would also -- the factors they would look at in -- in coming up with -- with a WACC (Weighted Average Cost Of Capital).
THE CHAIRPERSON: But is the threshold rate they're using -- the discount -- comparable with other utilities? Do you have an opinion on that?
MR. ANURAG GUPTA: Le -- let me -- maybe it's -- it's not the best answer but because the factors they're looking at are what I would expect other utilities to look at, I would have some -- I would some comfort that the number that comes out is reflective of their -- their capital situation and -- and their rated -- their true rated average cost of capital for their particular situation.
MR. WILL LIPSON: Yeah, and maybe just to expand. Not everyone else has a provincial guarantee on their debt. They’re unique -- not everybody else is so -- is 98 per cent hydro and, you know, two per cent fossil fuels. There are so many factors that go into the output that comes out of the process.
So, again, what we've stressed is that they've looked at the right sorts of factors, applied it in the circumstances here, and have developed a, you know, internal policy outcome of that process, and that's what we reviewed. The number that comes out I don't think is out of whack with where you see other people.
But I'm sure some expert could be brought in to show a table of, you know, 20 other utilities and do some standard deviation or statistical analysis on them and try and prove or disprove any comments of that sort.
Now, I don’t by any means claim to be an expert on Hydro. Remember, I’m more an expert on Fat Freddy’s Cat.
All I’m saying is that Hydro has been under the gun by all these allegations now largely considered to be unfounded if not off-the-wall.
And now we have KPMG saying as much to the PUB.
My, how times change.