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Hydro Debt Mess Complicated

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by Graham Lane

Published in the Winnipeg Sun, December 14, 2018

With all due respect to Sun columnist Tom Brodbeck, I disagree with the thrust of his Dec. 5 opinion piece “Hydro rates shock scare turned out to be bogus.” Mr. Brodbeck uses Manitoba Hydro’s recent request for a 3.5% rate increase to argue that Hydro’s previous calls for a series of 7.9% annual rate hikes were unjustified, even “bogus.”

He argues that former Hydro Board Chair Sandy Riley’s warning of the need for much higher rate increases was “nothing more than fear mongering, or incompetence.” Brodbeck’s statement reveals a serious underestimation of the precarious state of Hydro’s finances. This is surprising, but even the smartest commentators can be buffaloed by complicated and risk-laden accounting “conventions.”

Financing Hydro’s growing debt will eventually force large rate hikes, just as Riley warned. Hydro’s long-term debt, $18.2 billion on March 31, 2018, will soar to pay for the construction of the $5 billion Bipole III transmission line, the $8.7-billion Keeyask generating station, the Manitoba/Minnesota Transmission Project, and our share of the stateside Great Northern Transmission Project.

Before the Public Utilities Board “halved” the last rate hike from Hydro’s 7.9% request, Hydro had forecast its long-term debt would max out at $24.3 billion in 2022-23. That figure assumed approval of higher rate increases (which increase Hydro’s revenues). Evidence forced by PUB in the last public rate hearing projected that, with rate hikes nearer to recent levels, another billion would be added to peak long-term debt, bringing it to $25.3 billion.

But, wait, even that debt forecast is precarious since Hydro has barely begun a 20-year maintenance and refurbishment program for older facilities in its system. In 2015, Hydro projected that program would cost $13.6 billion but it has edged higher to $15.7 billion since then. How will Hydro fund this requirement without those pesky high rate hikes Riley sought?

Hydro covers interest costs during construction of new facilities by counting them as part of project cost. Annual finance costs that were about $600 million in 2017-18 will jump by about $200 million once Bipole III is in-service, presumably in 2018-19. Keeyask, without further cost over-runs, can be expected to add another $350 million to annual finance costs (if completed on schedule in 2021-22).

Circling back to Brodbeck’s analysis, he is relying on Hydro’s projection of relatively insignificant near-term annual net income “paper” surpluses in the range of $18 to $51 million to support his view. Unfortunately, any surpluses Hydro can generate in the next few years will be “paper” ones, cash outflow will continue. Debt will peak a billion dollars higher than forecast and Hydro’s financial risk will deepen. Eventually, steep rate increases will be needed, just as Riley forecast.

Hydro may be of the view that there is no hurry to pay off its debt, but this fails to take into account changes in the industry with which just about every other utility is wrestling these days. It also reveals a failure to appreciate disruptions coming from solar, wind and even competitive natural gas.

What worked 40 years ago will not work today. Riley’s warnings remain justified, unfortunately for ratepayers.

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