A little less political meddling part of Hydro solution

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This article was published 26/02/2024 (611 days ago), so information in it may no longer be current.

How do you solve a problem like Hydro?

Hydro has an uncomfortable amount of debt, much of it amassed through cost-overruns for the construction of the Bipole III transmission line and the Keeyask generating station. Thanks to worsening drought conditions, Hydro is generating less electricity for sale on export markets, turning nine-figure annual profits into nine-figure losses.

The former Progressive Conservative government left Hydro in a state of administrative and regulatory chaos. The Tories meddled profoundly with Hydro finances, set new and unjustified targets for equity reserves that would have triggered decades of higher-than-inflation rate increases, and undermined the ability of the Public Utilities Board to oversee Hydro operations.

Even in the face of that uncertainty, the NDP would go on to make a series of ambitious campaign pledges that, while ultimately popular with voters, will undoubtedly complicate its efforts to get Hydro on stable footing.

Leader Wab Kinew promised to freeze Hydro rates for a year at some point in its first term — a questionable pledge given the debt and drought pressures.

The NDP has said it will eventually repeal controversial Tory legislation that requires Hydro to stockpile significantly more money in equity reserves.

When you combine pre-existing conditions with these two promises, the NDP is facing the possibility of Hydro-generated fiscal havoc, particularly when you consider how Hydro finances have such a huge impact on the provincial budget.

In normal years, Hydro generates hundreds of millions of dollars through taxes, levies and commissions on Hydro operations. In 2021, for example, the then-PC government took $480 million in water rental fees (a levy on the volume of water that flows through generating stations), loan guarantee charges and capital taxes.

Those surcharges do tend to rise and fall with water levels and export sales, but even in drought years, it’s an important source of revenue for the government.

Then there are equity reserves.

One of the reasons — perhaps the only reason — the Tories passed legislation that means Hydro has to keep exponentially more money in reserves than previously required, is that it helps balance the summary budget.

The summary budget is the comprehensive accounting of all expenditures, revenue, assets and liabilities from everything the government does directly (through government-delivered programs) and via Crown entities. As the most valuable Crown corporation, retained earnings on the Hydro balance sheet play a huge role in helping a government balance its budget.

Although there is still no timetable for the rate freeze, Kinew has said he will take money from contingency reserves or reduce the charges and taxes on Hydro operations, to freeze electricity rates at some point in the near future. But, by doing either or both of those things, Kinew is simply taking a financial problem at Hydro and making it a general revenue problem.

The NDP’s first budget, to be delivered in the next couple of months, will be challenging, but manageable. Record federal transfer payments, along with a fairly robust economy, will likely give Kinew lots of wiggle room to keep election promises without making the deficit any worse than it is right now.

Hydro is, however, a huge wild card. If the drought worsens and Manitoba has to import expensive electricity to buttress what it is able to generate here, then the provincial budget balance will take a nose dive. Even if it does a good job at managing the core budget — the balance sheet that accounts for all direct expenditures by government — a huge summary budget driven by Hydro losses could make the NDP look fiscally inept.

On the political side of the issue, the NDP can move forward with the comfort of knowing that Tory efforts to rewrite its own inconvenient history of Hydro mismanagement have so far failed.

Last week, for example, a legislative committee met to discuss recent Hydro developments, including the recent firing of CEO Jay Grewal. The Tories put in a robust effort to paint the new government as politically vindictive in Grewal’s departure and without a plan to deliver stable, affordable electricity for Manitobans.

The Tory attacks, despite their impressive hyperbole, are pretty hilarious. Over its recent time in government, the PC party used Hydro as a political and fiscal chew toy by manipulating equity targets to fatten retained earnings (and thereby make the summary budget look better) and dramatically weakening the ability of the Public Utilities Board to oversee rate applications.

Tory finance critic Obby Khan suggested Grewal’s firing was politically “suspicious” and said the NDP government’s management of Hydro was “worrisome.”

Although it’s gratifying to know that Khan has a career in stand-up comedy in case the politics thing doesn’t work out, his shrill attacks do demonstrate how potentially vulnerable the NDP could be if weather and fiscal conditions worsen at Hydro.

It will take some deft management, and some luck, if the NDP is going to convert Hydro from the fiscal and political liability it inherited from the Tories, into a fiscal and political asset once again.

The formula for success is pretty simple: a little less political meddling and a whole lot more rain.

dan.lett@winnipegfreepress.com