Hydro freeze danger signs on campaign trail

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This article was published 04/06/2023 (865 days ago), so information in it may no longer be current.

Manitoba’s NDP is promising to freeze electricity rates for two years if the party wins the next provincial election, slated for Oct. 3.

You can file that one under “good politics” but “bad policy.”

NDP Leader Wab Kinew first made the promise in November, arguing Manitobans deserve a break on their electricity bills. He didn’t say how he would prevent a rate increase, only that he would create the “conditions” for a freeze. He promised the party would release more details closer to the election.

If by creating the right conditions Kinew means reducing the fees government charges Manitoba Hydro to use the province’s water and to guarantee the Crown corporation’s debt, the Stefanson government already beat the NDP to the punch.

The Tories cut both fees in half three weeks after Kinew made his initial pledge.

By doing so, it reduced Hydro’s annual costs by $190 million and allowed the Crown corporation to cut its rate application to two per cent a year (down from the previous 3.5 per cent) for 2023-24 and 2024-25.

The NDP reiterated its zero-percent increase promise this week, after the Canadian Federation of Independent Business called on government to force Hydro to freeze its rates. The CFIB argues any rate increase would hurt small- and medium-sized businesses, who are still reeling from the COVID-19 pandemic.

Demanding government freeze Hydro rates may be good politics (who doesn’t want a rate freeze?) but it’s bad policy for several reasons.

Hydro is a monopoly. It requires the oversight of an independent regulatory body (the Public Utilities Board) to approve rate changes. The PUB usually alters Hydro’s proposed rate changes and sometimes increases them to protect the Crown corporation’s bottom line.

Hydro is a monopoly. It requires the oversight of an independent regulatory body (the Public Utilities Board) to approve rate changes.

The PUB’s statutory responsibility is twofold: to ensure ratepayers don’t get gouged, but also to preserve Hydro’s long-term financial health. The PUB tries to balance those competing interests.

It’s a complicated process.

The regulator considers a wide range of factors when setting rates, including the unpredictability of Hydro’s revenues (owing mostly to droughts, which are expected to occur more frequently in future years), as well as Hydro’s historically high debt levels, caused largely by overspending on the Keeyask generating station under the former NDP government.

By and large, the PUB does a good job of juggling those competing interests and setting rates that are “just and reasonable” for everyone.

What it doesn’t need is government meddling in the process.

Ordering Hydro to freeze rates could wreak havoc on its bottom line. Hydro’s high debt load (its debt-to-equity ratio has soared to 86-14, from 75-25, over the past 10 years) has already drawn the ire of credit rating agencies. It has been warned current debt levels are not sustainable and must be reduced.

Ordering Hydro to freeze rates could wreak havoc on its bottom line.

To do that, regular rate increases — even modest ones — are required to offset drought years by building up retained earnings. Hydro posted a $248-million loss in 2021-22 after one of the worst droughts in decades. There will likely be similar deficits in future years.

Part of the PUB’s responsibility is to smooth out rate increases over time to avoid rate shock. Freezing rates today would simply mean higher rates in the future. That’s why politicians should stay out of the process.

That goes for the Tories, too, who are also interfering in rate setting through legislative decree.

Under Bill 36, passed last year by the Stefanson government, Hydro is required to meet arbitrary debt-equity levels by certain dates. The legislation also imposes a rate cap of five per cent. Both measures undermine the independent rate-setting process.

The PUB will see to it Hydro reduces its debt-equity ratio as circumstances allow. What they don’t need are politicians directing them to meet arbitrary and possibly harmful debt reduction benchmarks (or imposing politically-driven caps or freezes on rates).

Politicians should stay out of the rate-setting process and let the PUB do its job.

What if Manitoba experiences multiple years of severe drought and its short-term export market dries up? Would government still expect Hydro to meet arbitrary debt reduction targets or abide by rate caps or rate freezes, even if it meant great financial harm to Hydro’s bottom line?

Politicians should stay out of the rate-setting process and let the PUB do its job.

They do more harm than good by sticking their noses in places they shouldn’t be.

tom.brodbeck@freepress.mb.ca