Manitoba Hydro is embarking on a record-breaking spending spree that will saddle Manitobans with decades of above-inflation rate increases.
This article first appeared in the Winnipeg Free Press.
If this is the season of giving, Manitoba Hydro is taking the top spot.
The public monopoly is embarking on a record-breaking spending spree that will saddle Manitobans with decades of above-inflation rate increases, push the company into the red for parts of the next decade and see it take on tens of billions of dollars in debt. The main beneficiary of this spending will be ratepayers in the United States, who will have access to ample amounts of below-cost power.
Manitoba Hydro’s appetite to spend increasing amounts of money — regardless of the cost to its ratepayers — grows each year. Over the next decade, Manitoba Hydro will outlay $16.8 billion on capital projects, a $351-million increase from what it predicted last year. Over the next two decades, the company will spend $25.7 billion, a $720-million increase from what it predicted last year. Much of that spending will be on dams and transmission lines that will pump below-cost power to the U.S.
To finance that spending, Manitoba Hydro is going deep into debt. The utility’s long-term debt is expected to more than double, from $10.8 billion in 2013 to $23.5 billion by 2027. As recently as 2010, its long-term debt was just $7.4 billion.
The company admits its debt levels will be so high that in some years, it will finance some of its interest payments by issuing more debt.
Those debt levels could become even higher. The Crown corporation has an abysmal track record on forecasting how much its big capital projects will cost and how long they will take to build.
The cost of the Bipole III transmission project has increased by 44 per cent, or $1.4 billion, in just the past year and is now expected to cost $4.6 billion and will add $384 million each year in new costs, yet won’t generate any related offsetting revenue. The Keeyask dam’s price tag, meanwhile, has grown from $3.7 billion to $6.5 billion – a 76 per cent increase.
Manitoba Hydro’s past record is no better: the Wuskwatim dam was initially expected to cost $800 million but came in at $1.7 billion; the cost of its headquarters jumped from $75 million to $300 million.
Some of these big projects have been pried away from regulatory oversight, so there’s no independent review on whether the costs being incurred are in any way prudent. The Public Utilities Board recently said it “is very concerned” about ongoing cost increases at these projects.
Manitoba Hydro’s aggressive spending plans will require annual rate increases of nearly four per cent for the next 14 years, double expected inflation. The ability to limit annual rate increases to twice inflation depends on interest rates remaining low — mitigating debt payments — and an end to further cost escalations at its capital projects. The company is also banking on high water flows to power its dams and export electricity prices to stop falling below the utility’s optimistic forecasts.
But even those rate increases aren’t enough to keep Manitoba Hydro’s balance sheet from being left bruised and battered. The company has tempered last year’s forecast calling for financial losses between 2019 and 2025 to hit nearly $1 billion, but at the same time admitting its short-term profit forecast from now until 2019 has deteriorated. While Manitoba Hydro is supposed to maintain a 75-to-25 debt-to-equity ratio, it’s already above that, and under its current plans, it will slip to nearly 90 to 10 because of the debt it will issue to finance its spending spree. At 90 to 10, the company is nearly fully leveraged.
Most of Manitoba Hydro’s spending is justified by its plan to export that power into the U.S. Yet, export prices have been falling dramatically as U.S. states are increasingly turning to low-cost natural gas plants for power. Expensive imports from massive hydro projects aren’t needed, or must be priced below the cost of producing that power.
Manitoba Hydro recently lowered its forecast for export revenue by $670 million over the next 20 years and now expects export prices to be 34 per cent lower in 2016 than it forecast last year.
Lower export prices leave Manitoba ratepayers on the hook to cover the costs of building expensive dams and transmission lines.
Yet, it’s not just the spending on big projects that has been rising faster than inflation. Annual operating expenses have increased by 31 per cent over the last five years to $542 million, while the number of full-time employees has grown by nearly 20 per cent over the last decade. Wages for workers at its large capital projects are increasing by 7.6 per cent annually.
Spending on upgrading or replacing existing assets grew from $470 million in 2014 to $570 million the following year. Even still, Manitoba Hydro admits four per cent annual rate increases won’t be enough to keep its current equipment up-to-date and in good order, so in some years it will have to borrow money to perform basic maintenance.
Unless Manitoba Hydro reconsiders its aggressive spending plans, or those plans come under greater scrutiny from the province’s regulator, ratepayers face a future of repeated faster-than-inflation rate increases to pay for higher debt levels, mostly for the benefit of their U.S. counterparts.
Brady Yauch is the executive director and economist at the Consumer Policy Institute, a division of Energy Probe Research Foundation.
Republished from the Winnipeg Free Press print edition December 23, 2015 A9