Taxation in the Guise of Utility Rate Increases

Commentary, Environment, Frontier Centre

Publius Publius

Manitobans are sleepwalking towards a potential fiscal disaster. Every day, more money is spent that cannot be reclaimed, and all of that money will end up being recovered from ratepayers, not the Utility’s controlling ‘owner’.

Government-owned and controlled Manitoba Hydro, the monopoly provider of electricity to consumers of all rate categories, likely will be granted yet another rate increase as of April 1, 2013. With the Utility’s plans and actions driven by the political, social and environmental objectives of an ideologically focused majority government, rate increases could be categorized as just another form of a tax increase.

The Public Utilities Board’s hearing on Hydro’s latest rate application concluded February 28th.  Based on the regulator’s limited jurisdiction, past history and the conduct of the hearing, PUB most likely will approve the Utility’s application. And, if the application is approved, Hydro’s rate-generated revenue for its 2013/14 fiscal year, and every future year thereafter, will be boosted and assisted by $120 million.

The anticipated $120 million annual boost would come from recent and proposed rate and revenue increases, which include two interim rate increases aggregating at 4.5% (Hydro seeks finalization of those increases), the incorporation of a 1% interim rate increase representing annual revenue of about $14 million that PUB directed Hydro to record as deferred income (Hydro seeks that the deferral end and the revenues be taken into its income), and, lastly, a new 3.5% rate increase that Hydro seeks to be implemented along with the other actions as of April 1, 2013.  The present value of the overall 9% bump up to Hydro’s finalized rates and annual revenues approximate $2.5 billion – a transfer of ‘wealth’ from Hydro’s ratepayers to Hydro.

At the hearing, Hydro advsised that without the $120 million of rate-generated new revenue, the Utility expected to lose mone4y in its next two fiscal years.  This, despite the recession being over, Manitoba electricity demand increasing and favourable water conditions for hydro-electric generation. Imagine the Utility’s result if even only the last 3.5% rate ask was rejected and a drought occurred.

The rate hikes sought for April 1 will not be the ‘end’ of Hydro’s rate demands of consumers.  Hydro forecasts annual rate increases of 3.5% for every year of the next two decades – increases approximately twice the expected rate of general inflation. Publius goes further, and suggests that if Hydro is allowed to implement its full capital expenditure plans and enter into contracts with American utilities based on its then-new additional generation, future rate hikes for Manitoba ratepayers may well be far higher than Hydro now forecasts.

Hydro’s record of forecasting costs (of capital projects and operations) and revenue to be generated from export sales has been terrible. The Utility’s present plans include the construction of Bipole III, Keyask and Conawapa, with each and all of these projects now projected to cost far more than when Hydro first announced its plans.  And, as to Hydro’s export revenue forecasts, which Hydro claims allows for the development of new major assets ahead of domestic need, both demand and prices for exports are lower, for prices much lower, than Hydro’s initial estimates.

The situation and prospects that Hydro initially expected when it designed its capital development plans is much different than those of the current day, yet Hydro, pressed on by government, keeps spending and committing, with the backstop if matters don’t work out as they (may) expect being Manitoba ratepayers.

Consider the case of Wuskwatim; when Hydro made its case before the Clean Environment Commission for the building of the dam and a partnership with NCN, a nothern First Nation, it expected to build the project for an overall cost of $900 million and to sell the power that would be generated to American utilities at 8 cents or more per kWhr.  In reality, the project cost almost double what was expected, and the sales prices on the export market have been less than half the prices. Hydro now ‘spins’ a new story, that being that Wuskwatim is required for ‘domestic’ demand (as the export scenario is clearly a ‘loser’), and is renogiating the terms of its partnership with NCN – under the current contract NCN would have to contribute to losses being incurred by Wuskwatim’s operations. (Hydro’s current partnership agreement with NCN does not have the partnership allocated costs on a full cost basis, making the ‘deal’ more attractive for NCN than for other ratepayers – the details of the accounting approach need to be scrutinized.)

The Utility is a swollen monopolistic bureacracy (Hydro’s personnel complement has steadily grown and its operations have not been benchmarked against other similar Crown utilities), operating under the direction of the government for the government’s own objectives.  Hydro has lost its intended focus on meeting Manitoba demand and bringing in electricity at the lowest cost possible for Manitoba ratepayers.  The Utility’s development designs, based on overly optimistic forecasts of export demand and maintaining cost pressures on the new build, represent ‘gambling’ with ratepayers’ money.

The Utility has no ‘cash’ or liquid asset reserves, to meet its development plans the Utility would borrow perhaps another $20 billion or more – more than doubling its balance sheet while increasing its generation by 40% – based on a provincial guarantee. Clearly, the lenders and credit rating agencies rely on the provincial guarantee and, frankly, ratepayers cannot expect to look to the Province if Hydro’s implemented plans lead to large losses – to make the Utility ‘whole’ there is only one ‘pocket’ the Utility and the government can go to, that being the pocket of the ratepayer. The Province already carries in excess of $25 billion of debt (perhaps $8 billion of that related directly to Hydro’s current balance sheet), and the government has been incurring deficit after deficit, and has produced no estimate as to when its own books can be balanced.

The recent PUB hearing essentially ignored what is truly required, a proper, expert-assisted and independent review of Hydro’s plans, export and First Nation commitments, net income and rate forecasts and actions taken to date (which have resulted in, likely, well over a billion spent on a plan that may never prove to be economical).

It appears that PUB and intervenors to the recent hearing ‘bought into’ Hydro’s argument that Hydro’s capital development, export sales and partnership commitments and plans need not be ‘fully tested’ in a rate hearing, despite the fact that these matters are the major drivers of rates. Once built, implications for rates follow. While government has ‘promised’ there will be a review of the need for and alternatives to Hydro’s plans, both the government and Hydro have pressed ahead spending and committing ahead of such a review. It would appear the promise of a review is but a smokescreen, while the plans, not independently tested, are being implemented.

Why is government so committed to proceed ahead of a review, if a review is ever to be held: Publius offers some suggestions.  To stop now, Hydro would likely have to ‘write off’ a billion of more of expenditures that are now being deferred in Hydro’s books, back away from commitments Hydro has made to American utilities and northern First Nations, and layoff hundreds if not more than a thousand employees. Worst still for government, would be the embarrassment of having to admit to have undertaken a risky economic project, with only the pocketbooks of ratepayers serving as the backstop.

A proper, public, expert-asssisted and independent hearing needs to take place, as soon as possible. Ahead of that, the brakes should be put on major new money going towards the capital development plan and contract making with American utilities and northern First Nations.

PUB should deny Hydro the 3.5% rate hike it seeks for April 1 and require the Utility to refund the tens of millions it has in deferrred revenue related to the 1% of an previous interim hike that PUB directed Hydro not to include in its revenue. Consideration of future rate increases should be given only after a proper review of the development plans and options have been held, by a clearly independent party (best engaged employing a committee of the legislature, all party involvement).

The review hearing should be before a body whose members are clearly independent of government – both the members of the Hydro’s board of directors and PUB’s panels are appointed by government.

The matters are so important that both real and perceived independence are required. The terms of reference should include all the projects Hydro plans to proceed with (contracts and partnerships included), and all identified options to those plans.  Plus the actions taken by Hydro that has so far developed a billion or more of deferred costs require a public examination. And, last but not least, the main objective of Hydro should be returned to meeting domestic demand at the lowest cost to consumers that is possible and reasonable.  Government should leave the running of the most important monopoly utility Manitoba has to utility professionals. Government does not seem to appreciate where it ‘should end’ and the utility ‘should begin’.

Gambling with ratepayer money should stop (perhaps 30% of Hydro’s residential ratepayers are of lower-income, and in excess of 30% of ratepayers cannot access natural gas for heating and rely entirely on electricity), and transparency along with action and open minds are required – Manitoba ratepayers should not be ‘sleepwalked’ into a fiscal disaster (and the end of the Manitoba Advantage, with all the implications that would bring).

Governments have generated economic disasters before: Ontario’s $20 billion debacle related to past Ontario Hydro cost over-runs and Newfoundland’s multi-decade contract with Quebec for electricity supply being but two of them.