Hey there, time traveller!
This article was published 2/11/2016 (293 days ago), so information in it may no longer be current.
THE recent pronouncements of impending debt disaster by the new chairman of Manitoba Hydro calls for comment. Not only were they politically motivated in a manner unprecedented for someone in that position, they were also both disingenuous and alarmist.
Almost everything in the report by the Boston Consulting Group Hydro board chairman Sanford Riley was reacting to was known at the time of the provincial election. Both Bipole III and the Keeyask dam were known to be too far along to be cancelled, and the Brian Pallister-led Progressive Conservative official Opposition at that time was aware of this.
The growth in Hydro’s debt was — and is — inevitable given these capital projects, which the Boston Consulting Group recognizes as being necessary, are being debt-financed in the normal manner. It also follows that a rise in the debt-equity ratio is inevitable. This has been planned for years and has been known to and accepted by bond-rating agencies for years. Hydro’s financial staff updates a 20-year financial forecast each and every year; this is made public through the Public Utilities Board, has been subject to much external evaluation and is reviewed annually by the bond-rating agencies. Yet Riley acts as if this is all news to him.
The Boston Consulting Group report also accepts that going ahead with Keeyask is the best alternative and much superior to generating the power needed through gas turbines on financial, let alone environmental, grounds. Again, there’s nothing new here, as this was the conclusion of the 2014 Needs For and Alternatives To process conducted by the Public Utilities Board.
Contrary to the capital expansion program being "imprudent" and "reckless," it is absolutely necessary for the future growth and security of the province. It is similar to previous investments in Hydro, which have given the province among the lowest electricity rates in the country.
Riley is arguing that rate increases are now needed in excess of those planned and built into financial forecasts. His sole justification for this is that he and his new board feel a higher equity-to-debt ratio is needed sooner than planned. There is no magic number for the debt-equity ratio for a Crown corporation with a 100 per cent debt guarantee from the province. Hydro experienced single-digit equity-to-debt ratios between 1970 and 1995 without the sky falling in. The ratio will correct itself by the early 2030s on the basis of demand growth and the planned rate increases, without additional rate increases.
And this is after considerably larger payments by Hydro to the province in the form of increased water rentals, capital tax and debt guarantee fees that will follow completion of Keeyask. These payments, amounting to $262 million in 2014, will double to $516 million annually by the early 2030s, according to the Needs For and Alternatives To report. They are, to some degree, discretionary at the call of the government, and a portion could be used to prevent additional rate increases, or, as the report recommended, to mitigate the impact of currently planned rate increases on low-income earners.
Further rate increases would adversely affect low-income earners. They would also raise the nagging suspicion they might be a prelude to the privatization of Manitoba Hydro, notwithstanding government protestations to the contrary.
John Loxley is a professor of economics and former Manitoba Hydro board member.