To Sell Or Not To Sell Winnipeg Hydro

Commentary, Energy, Frontier Centre, Uncategorized

Winnipeg’s civic election warmed up last week when mayoral candidates Glen Murray and Peter Kaufmann duked it out over Winnipeg Hydro. Kaufmann would sell it to Manitoba Hydro while Murray would keep the utility, invest $235 million in it, and use the profits to help cut property taxes.

Winnipeg Hydro is one of the "big picture" issues that has highlighted city council’s unwillingness to lead. More than a year ago council commissioned a $320,000 study of the utility, but it remains buried, presumably until after the election. The study’s invisibility suggests that it makes a strong case for selling Winnipeg Hydro. Why else would the system, which has strong incentives (for now) to maintain the status quo, sit on it?

The issue of government ownership is a divisive one, and feelings can take precedence over facts. A vocal minority still rants about the evil of selling the Manitoba Telephone System, even though bundled prices–local and long distance combined–are much lower, service is better, and the government has walked away with a pile of cash to pay down debt and increase healthcare spending.

New technology and deregulation brought about the changes in the telephone business. They will do the same in the electricity industry.

Government power companies face big obstacles when markets become competitive. As political enterprises, they can’t move fast enough to keep up. Shut out of stock markets, they can only get new money by increasing public debt. And prices will fall when they are set in a competitive marketplace, not by regulators listening to protected public monopolies. Declining prices, lack of capital and lead-footed, weak political decision-making all mean sinking profitability. If a utility makes less money, its value will fall.

Britain got government out of the power business in 1990. Prices have fallen by about 15%. Choice and competition have placed consumers in the driver’s seat. What does this have to do with Winnipeg Hydro?

First, the trend to falling prices and increased consumer choice shreds some key assumptions in Candidate Murray’s plan to double profits at Winnipeg Hydro. It fatally compromises an otherwise articulate and commonsense platform for reducing property taxes.

Second, it suggests the wisdom of selling Winnipeg Hydro before the new environment lowers the value of the asset.

What about the traditional arguments in favour of continued city ownership? For example, why sell an asset that generates profits to pay for other City services? It all comes down to simple arithmetic. If Winnipeg Hydro produces a low return say 4%, when city debts cost, say 8%, it makes sense to sell the low-return asset and pay off the higher-cost debt.

What about layoffs? They seem inevitable. Winnipeg Hydro is less efficient than other utilities. In 1996, it produced $67 million worth of power and paid $25 million in staff salaries. In other words, salaries cost 37% of sales. Manitoba Hydro, in comparison, paid out a little over $250 million in salaries to generate about a billion dollars in power, or 25% of sales. Alberta’s shareholder-owned Transalta Power is about twice as efficient. Its salaries represent only 13.3% of sales, a whopping two thirds less than Winnipeg Hydro.

Where Candidate Kaufmann has erred is to seem to suggest that Manitoba Hydro is the only buyer for Winnipeg Hydro. It is not the canniest strategy. The price, and return to Winnipeg taxpayers, will be lower if the city seems eager to hand over a valuable asset on a platter. Better to make the province squirm a bit and talk to other suitors. Inevitably, they will see room for big efficiencies and bid up the price.

For now, we’ll have to wait for the mysterious vanishing report.