Have you noticed that gasoline prices are falling? The same with oil, natural gas and electricity — energy prices are coming down across the board. The declines illustrate the power of natural market mechanisms to adjust supply and demand. High prices signal a temporary shortage. Consumers respond by suppressing their demand while producers expand the search for new supplies.
New figures show that energy markets have reacted to recent price spikes with a tidal wave of investment. Cato Institute economist Jerry Taylor expects 90,000 megawatts of new electricity on stream by the end of next year in the U.S., twice the amount of California’s annual consumption. By 2004, analysts predict a further 200,000 MW of new power. Taylor also points to the behaviour of natural gas prices as a harbinger of things to come. Once skyrocketing gas prices are coming down. Supplies are expanding and prices on the futures market, where traders set prices in advance by anticipating supply and demand, indicate that gas prices will return to their (low) historic levels within two years. Peter Linder, a Calgary oil and gas analyst now predicts that natural gas prices will be 40% lower during the coming winter. Centra Gas is applying for a rate decrease, would you believe.
All this has interesting implications for Manitoba, where politicians bravely pilot large commercial organizations like our own power monopoly, Manitoba Hydro. The government seems increasingly keen on a dam-building spree to capitalize on high-energy prices in the vast market to the south.
A look at the June 18th Hansard transcripts from a committee reviewing Hydro’s operations confirms this. We learn that Hydro is both performing competently and scoring well by different benchmarks. We also see what is on the drawing board in the dam-building department. The crown corporation is considering three dams generating just under 1000 MW with a projected cost of $4.5 billion.
Most of this, $3.5 billion, would be borrowed. The new power would be destined for the U.S. export market where prices are now high. They look so good, that Hydro’s president comments “prices are getting such that we can build them (dams) on spec.”
But prices now fluctuate in a deregulated continental marketplace. What goes up can come down. The risks are obvious and were recently confirmed by the CEO of a major North American utility firm. When asked about a recent speech by Premier Gary Doer on Manitoba’s hydro future, he paused, and then advanced this scenario. Massive investments in new energy sources are now underway in the American market. Some power plants don’t take long to build, two to three years for coal plants and only a year to create a gas turbine plant. Energy prices will go down. With environmental approvals and construction time, it takes six to ten years to build a dam. When finished, we will have dams but no markets at prices that can carry the investment. Taxpayers will be left with the bill.
This is in eerie replay of what happened in the early 80s under Howard Pawley’s NDP government. Building dams on spec left Manitoba with expensive idle capacity nearly twice peak demand, millions in debt and no markets. The net result was power priced higher than it should have been and no leverage at all in the continental market. In 1984 Manitoba signed a contract with Minnesota’s Northern States Power at a price 20% lower than its alternate costs of production. It used Manitoba’s cheap power to displace its own generation which it then sold, at considerable profit, outside its market areas. The taxpayer subsidized all this, including NSP’s expanded profits.
It took years for Hydro to whittle its debt down but it is still, with a 80 to 20 debt equity ratio, highly borrowed. This compares to a 50-50 ratio at shareholder-owned Transalta, Alberta’s largest power company. Borrowing another $3.5 billion will explode Hydro’s debt equity ratio to the extreme levels of 1991, when the ratio was 94% debt to 6% equity.
Are taxpayers in for another hammering? If high market prices disappear, Manitoba can look forward to higher power prices, bigger debts and higher taxes to support this budding adventure in state capitalism. This, when other provinces are racing to cut taxes.
In an environment of technological change and deregulation, no one can predict the shape of markets in the seven years it takes to build a dam. That is why governments around the world, including those in Italy, Germany, Britain and all Scandinavian countries, have ended state ownership of the power business. They choose wisely not to be exposed to what has become a dynamic, rapidly changing, but risky business. As a bonus, these governments have profited heavily from the sales proceeds and higher tax revenues from a more vigorous industry, while watching prices fall for consumers.
But they are in the 21st public policy mode, where investors take the risks, supply the capital, create the jobs and governments tax the profits.
When will Manitoba join the real world?
