No Skin in the Game

Commentary, Crown Corporations, Graham Lane, Manitoba, Uncategorized

The NDP government has and is pressuring (if not bullying) Manitoba Hydro into pursuing a massive $20-billion plus expansion of its transmission and hydro-electric generation infrastructure, a plan based on the premise of profitable sales of excess power to American utilities.

Despite a calamitous decline in the price Hydro receives for its non-firm electricity export sales, sales which have represented over 60% of total export sales, and seemingly endless increases in the projected capital cost of the plan, Hydro has already spent or committed $2-billion, entered into partnership agreements with northern First Nations, hired hundreds of new employees and signed contracts or term sheets (in-principle contracts) with American utilities.

Even the economic disaster that is Hydro’s Wuskwatim dam – cost double and sales prices half that expected (the almost $2-billion cost is additional to the $20-billion major development plan) – has failed to bring about a pause.

It is critical that the government and Hydro identify major risks ranging from further increases in construction cost estimates, through droughts and interest rate increases to a possible tripling of rates for consumers, and more, ahead of a proper, fulsome and expert public review of the economics of the scheme, and serious consideration of less costly, less risky options.

So, why is the NDP pursuing a plan identified as being risky from so many standpoints?  Why have they ignored the major economic and market changes that have occurred since the plan was developed (pre-2008)?

Follow the money is an approach often used to discern motives. And, likely to no one’s surprise, if the government’s plans for Hydro are implemented the biggest winner will be it, the NDP government. 

First and most importantly, proceeding to conclusion with its plan will not further risk government’s own financial situation. The government has ‘no skin in the game’, having made no financial investment whatsoever in Hydro or its development plan.

The only party that has skin in the game is Hydro’s ratepayers, as any future revenue deficiency will have to be met by them, and many already have trouble paying their bills.  (Approximately 35% of consumers rely on electricity for heating; unlike the situation in Saskatchewan, gas distribution in Manitoba through Centra Gas, a subsidiary of Manitoba Hydro, is quite limited.)

As it stands, Hydro forecasts that consumer electricity rates will almost certainly go up by 4%, twice the expected rate of inflation, each year for the next twenty years.  Given what is known and can be drawn from past experiences with Hydro forecasts, there is a high risk that, in the end, rate hikes will be much higher than Hydro now forecasts.  I stand by my earlier forecast of an eventual tripling of rates

While ratepayers may worry about future rate hikes, the government, with no skin in the game, awaits a windfall.

For every dollar borrowed by Hydro, the government, which guarantees debt repayment, gains an additional 1 cent a year – $20-billion of additional borrowings means $200-million more, annually, for the government’s coffers. 

For every dollar increase in Hydro’s capital base (which includes retained earnings and borrowings), additional capital tax revenue flows annually to the government.  For every kilowatt produced through water flow, for every dam the water flows through government will receive additional water rental fees.

There is even more annual revenue for government to flow from Hydro’s massive construction plan – individual income taxes from a swollen personnel complement, increased corporate taxes from suppliers to Hydro and, let us not forget, annual revenue from (recently increased) retail sales tax.

The construction is scheduled to go into high gear in 2015-16 providing jobs and money to the economy (albeit borrowed money); coincidentally, this will be the time of the next provincial election. 

Hundreds of millions, accumulating to billions of dollars over the lengthy planned construction period, will flow into the government’s Consolidated Fund, helping the government to reduce what would otherwise be an even steeper climb towards a balanced budget. If the government’s plan is actualized, the money to flow from Hydro to the government will exceed anything it can expect to realize from lotteries, liquor, and the gas and tobacco tax combined. 

Better still for government, at least from electoral-process perspective, whatever rate hikes are required to keep Hydro in the black will be met by ratepayers, not government. And, while the government will rake in billions as the projects are undertaken, Hydro will defer the costs until the assets are in service, allowing the Utility to record profits.

Due to the cost deferrals, Manitoba ratepayers will not be asked to pick up the full tab until after two elections from now.

Postscript: Given the expenses and commitments made to date, the government’s own risk is ‘to stop’ and not proceed any further, which would trigger write-offs and liabilities in Hydro’s books. Those losses would drive up the Province’s own deficit, making it even harder for the government to meet its latest promise, that being to balance its own books for 2016-17.

Of course, the ratepayers would, in the end, be on the hook for that too. A no-win situation for ratepayers is in sight.