Who will go broke first, Manitoba Hydro or the Manitoba taxpayer (part 1) ?
Manitoba Hydro is a utility in crisis. It's been so mismanaged---not by its directors, but by its political masters---that Hydro's financial stability is at risk.
And if that goes, it will take the Province with it.
The Manitoba Public Utilities Board tried to raise an alarm in July, only to be ignored. Blame the Olympics. Blame the late start to summer. Blame the bureaucrats who think the way to get your attention is to give a report a sexy title like:
AN ORDER SETTING OUT FURTHER DIRECTIONS, RATIONALE AND BACKGROUND FOR OR RELATED TO THE DECISIONS IN BOARD ORDER 90/08 WITH RESPECT TO AN APPLICATION BY MANITOBA HYDRO FOR INCREASED RATES AND FOR RELATED MATTERS.
But after wading through 413 pages of jargon-ladened, soul-sucking, mind-numbing gobbledy-gook, we were left with one message:
BE AFRAID. BE VERY, VERY AFRAID.
With virtually no public debate, the NDP plans a series of mega-projects right out of the Sixties playbook, projects that will result in literally 25 years of non-stop construction of power dams and transmission lines. That construction boom will act as the driver of the Manitoba economy for a quarter-century.
The only thing wrong, says the PUB, is that the plan is so loosey-goosey that it raises the question: who will go broke first, Manitoba Hydro or the Manitoba taxpayer?
The PUB's July order isn't a red flag. It's a shipping container of red flags.
Here's just a small sampling of alarm from the PUB (emphasis ours). Feel free to skip the next page if you feel a brain cramp coming on as we'll summarize the details in English immediately after.
* MH has set out planned capital expenditures that are unprecedented in the Utility’s history.
* MH’s plans for capital expenditures may involve the expenditure of $18 billion or more over the next 15 years, expenditures predicated in part on what may or may not be overly optimistic export prices - this level of capital expenditure will result in significantly increased debt levels, export commitments and general business risks;
* ... new generation and transmission facilities costing over $6 billion, costs which have not yet been incorporated in the forecasts of the Corporation.
* The Board also expresses concern with the Corporation’s withholding of information related to its export transactions and projections, for stated confidentiality reasons, as that withholding made it difficult if not impossible for the Board to arrive at findings with respect to ...most importantly, the likelihood of profitability with respect to its export commitments and the risk that these commitments will lead to years of either additional imports of power or thermal generation to avoid supply shortfalls.
* ... collectively these projects negatively impact MH’s debt to equity ratio and net income in the initial years, placing increased strain on the financial stability of MH and adding additional risk for existing ratepayers. The Board is concerned that MH has not developed a threshold for capital expenditures and associated debt growth that considers all projects, together with the health and financial stability of the Company.”
The Board reiterates the prior concerns, and notes that with planned major capital expansion, such concerns are now graver.
* Overall, since the 2004 GRA, MH’s net income has been $847 million higher than that forecast at that time. The increase in net income is due in part to improved water conditions, conditions better than the median results expected, which led to higher than forecast exports. As well, rate increases approved by the Board since the 2004 GRA have contributed approximately $350 million in additional revenue for the fiscal years 2004/05 through 2008/09.
The Board would have expected such additional revenue to have significantly improved the financial strength of the utility, as displayed in its meeting its financial targets, compared with the original forecast. Yet, it didn’t, and the Board is concerned that MH is still not forecasting to achieve its debt:equity target within its forecast period, not by 2011/12 nor throughout the entire 11 year forecast ending in 2017/18.
* It is not as if MH is already at its 75:25 debt:equity target, or that MH has projected to the Board that it expects to reach and maintain that target. In fact, due to the planned acceleration in capital spending, driven primarily by export considerations, the Corporation is not expected to meet its 75: 25 debt to equity ratio target during the current forecast period, which extends to 2017/18, and those forecasts already assume annual average rate increases of about 3% each year.
* ... it is clear MH’s anticipated capital spending and associated increased debt levels is and will place upward pressure on rates.
In plain English, the PUB is saying that the NDP intends to spend money like the proverbial drunken sailors for the next 15 years, with no limits to how much or how it's going to affect Hydro's credit rating.
Manitoba Hydro hasn't included a third of its planned spending in the forecasts the PUB has to use to set rates. And the utility is hiding vital information which the PUB needs to determine how high to raise rates, namely whether Hydro is likely to make any profits at all from its contracts to sell power to the Americans or whether it will have to buy power, literally for years, to meet its commitments.
Hydro made $847 million more than it expected in the four years from 2004 to the present and pissed it all away. None of these windfall profits were used to meet its financial targets, such as reducing the debt/equity ratio that lenders use to set the utility's borrowing rates. And Manitoba Hydro has no plan to lower its debt/equity ratio over the next ten years, or, for that matter, anytime in the foreseeable future.
Oh, and electricity users in Manitoba will be paying at least 3 percent more each and every year for the next 10 years even before any rate increases caused by the mega-projects' runaway costs.
Is it any wonder that the PUB is worried to death? They know they're being set up to take the heat when rates go sky-high.
The PUB notes repeatedly in its "order" that it doesn't have the power to stop the madness. It can only raise rates to counter the damage being done to the utility, but it recognizes there's a limit to high high rates can go.
"To “starve” MH by suppressing rates in an effort to stymie a project would be to counter government policy, a measure that the Board cannot undertake." declares the agency."
So the PUB is pleading for changes to the law to let it assess the viability of a mega-project before it gets the go-ahead.
The PUB realizes that Manitoba Hydro's forecasts are worse than worthless. They have absolutely no connection to reality. Just look at their three most recent.
* The Manitoba Hydro head office on Portage Avenue was estimated to cost $75 million in 2003. By the time it opens in 2009 the "projected revised cost" is $278 million.
* The capital cost of the Wuskwatim project was presented to the Clean Environment Commission as $900 million. The "updated cost estimate" is now $1.6 billion and Manitoba Hydro still can't find a general contractor to take on the job.
* The constructon cost of Bipole 3 was estimated in 2003 to be under $400 million. The estimated cost has "dramatically increased" to $2.2 billion.
How is the PUB supposed to assess rates when Hydro's costs are doubling, tripling and in the case of its HQ, the only one nearly finished, almost quadrupling before the project is complete?
And that isn't even the worst challenge they face.
Manitoba Hydro's business model goes like this:
- We sign contracts with American buyers for delivery of electicity well in the future and long before we need the power for Manitobans.
- We build the dams and power lines, then sell the electricity to the Yanks at higher than domestic rates which pays off the cost of the dams and power lines.
- By the time we need the power for ourselves, the infrastructure is paid off, and we get to keep our rates low.
Here's the problem.
The price of Manitoba electricity isn't determined by the cost of providing it.
So if costs double, triple or quadruple what they're estimated at, the price doesn't double, triple or quadruple. Manitobans have to swallow the costs and eat a reduced profit---if there is any profit?
For, you see, in order to sell the Hydro mega-projects, Gary Doer has invented the prices that our American customers will pay. Manitoba Hydro's future profits are based on nothing more than a wing and a prayer.
The Public Utility Board reveals for the first time the illusionary basis for the NDP's 25-year spending plans:
"MH’s future export price forecasts are predicated on imposition of a carbon tax, yet there is no current certainty of such a tax being implemented and having a materially beneficially effect within the immediate horizon of IFF07-1;"
"For MH to compete for base load, a substantial environmental premium would have to exist for clean energy; that is coal generation would have to be “penalized”.
"The 1.5 to 2.0¢/kW.h increase in the high export price curve forecast circa 2015 appears to coincide with MH’s anticipation of legislated action on the CO2 front."
"MH’s IFF 07-1 appears to reflect export market conditions as experienced in fiscal 2007/08 to the end of September 2007, but also assumes that the Canadian dollar will return to $1.16 USD/CDN exchange rate by the end of the forecast period (fiscal 2017/18)."
"While MH forecasts the Canadian dollar falling back about 15 cents from its current level, the Board is not confident with that forecast, and if near parity remains MH’s export price forecasts are in jeopardy."
"MH’s exchange rate forecast fails to fully recognize the significant appreciation of the CDN dollar versus the U.S. dollar, and the underlying reasons for the appreciation that suggest the change may persist. This has had the effect of MH overstating both the value of U.S. export sales and finance expense."
And that's not all.
"While MH anticipates that interest rates and inflation will continue to be low, history suggests that both factors fluctuate. Increases in either interest rates or inflation would be problematic to the costs of the proposed capital expansion program."
So IF there's a carbon tax that prices coal out of the market, and IF the value of the Canadian dollar drops to 85 cents U.S, and IF interest rates don't go up for the next ten years, Manitoba Hydro MIGHT make a profit from the billions of dollars it plans to spend.
The NDP is risking the financial future of Manitoba Hydro and of the province by putting ideology over economics. The PUB is terrified of the implications.
So are we.
Much, much more to come -- starting with a look at the Wuskwatim boondoggle that's going to be the template for Manitoba Hydro's expansion over the next 10 years.