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PUB slams Manitoba Hydro's spending orgy


The Public Utilities Board has issued a scathing denunciation of Manitoba Hydro's plans for a decade-long, $20 billion spending orgy on giant new power plants and transmission lines.
Hydro intends to build these megaprojects to profit from exporting electricity to Americans for years before the power is needed by Manitoba customers.

But the PUB warns that if Manitoba Hydro's gamble fails to pay off, those Manitoba customers could see their monthly bills more than double, with Hydro selling electricity to U.S. customers for less than it costs to produce the power in the first place.

The' money quote' from the PUB has been cited in the Winnipeg Sun and the Globe and Mail. (The full 111 page order can be found on the PUB website. We read it so you don't have to. Quotes in italics with translation into English were warranted.)

"The Board indicates within this Order its concern that if MH proceeds with its development plan “as is” the inadvertent result could be domestic ratepayers subsidizing export sales to the United States. The Board is not at all confident that the risk tolerance exhibited by MH is shared by the majority of its ratepayers."

What hasn't been reported is how devastating that outcome could be. Nor has the public been informed of Hydro's denial, deception and defiance when it comes to reporting to the Public Utilities Board.

Currently 80,000 bills go unpaid each month because customers can't afford them, the PUB said. What effect will doubling the rates have?

"Manitoba Hydro’s historical record of having domestic rates that are the lowest or among the lowest in North America has been described as the Manitoba Advantage. And, despite these low rates, Manitoba’s cold weather and the lack of province-wide availability of natural gas mean that some customers, particularly lower income households, receive electricity bills that they have difficulty paying (some 80,000 or so accounts are apparently delinquent following any billing date – being delinquent does not mean the account ends up written-down or off, but it does infer late payment fees)."

Hydro rates have gone up 22 percent since 2004, well above the rate of inflation. Hydro wants annual rate increases of 3.5 percent for ten years and two percent (to keep up with inflation) thereafter. Rates a decade from now would be 70 percent higher than today. But in the worst case scenario, they could be more than double that. Someone paying $50 a month today would be getting billed as much as $110 a month.

The utility's rosy profit predictions have been knocked for a loop by skyrocketing construction costs coupled with rock-bottom prices in the power market, said the PUB.

Estimated costs for the two power plants on the books (Keeyask and Conawapa) have risen $3.5 billion in one year alone. But electricity is selling for only 1 to 2 cents a kilowatt hour on the spot market, thanks to the persistent downturn in the American economy, instead of the 7 cents Hydro expected.

"...the price MH receives from its American utility counterparties for spot and opportunity export sales – which are anticipated to represent at least 50% of the Corporation’s export sales - has fallen dramatically. (MH generally expects “firm” export sales, sales made at prices set in long term contracts, to represent no more than 50% of its total export sales, with the remaining sales being spot or opportunity sales at then-market prices.)"

Hydro hired the consultancy firm ICF to reassure the utility it was doing everything just peachy. The PUB says that ICF conceded its seal of approval for Hydro's big plans was invalidated by the $3.5 billion jump in costs.

"MH’s witness, ICF, provided an estimated present value of MH’s preferred approach which indicated that the approach, compared to the “no build” scenario (which omits Keeyask), the only other scenario seriously modelled by MH, could be expected to be moderately beneficial for domestic customers."
"However, that estimate was made prior to ICF’s awareness of the recent increases to MH’s capital cost projections and the steep “fall off” of average export prices. As well, there has been a substantial “run-up” of the Canadian dollar (export sales to American counterparties are prices in USD), and a change in the outlook for carbon pricing has occurred. MH has reported that in its new export contracts with American counterparties, all “environmental” attributes or benefits associated with “clean” power is to go to the counterparties, and not to MH."

"When ICF was cross-examined at the hearing, the witness acknowledged that the now expected $3.5 billion increase in the capital cost of MH’s development scenario invalidated the consultant’s earlier estimate. "

What scares the bejeezus out of the PUB is that Hydro refuses even to acknowledge the risks to its plans from the poor economy. The utility won't revise its longterm forecasts to see how a continuation of low electricity rates would affect its bottom lines. And it's outright defying the PUB's orders to provide relevant information to the oversight body.

To make matters worse, the PUB is uncomfortable with how Manitoba Hydro fudges its books. It may all be legal accounting tricks, but its giving the PUB the willies.

Manitoba Hydro claims to have reached its target of a debt-equity ratio of 75:25. The PUB questions how Manitoba Hydro reached its equity target.

"While the 75:25 debt to equity ratio target has generally been accepted as being representative of an adequate capital structure, this Board has questioned the “firmness” of components of the equity factor (which include contributions in aid of construction, Accumulated Other Comprehensive Income, and intangible and deferred costs – all “illiquid”), and has raised doubts as to whether the present target ratio of 75:25 will remain adequate if MH’s proceeds to expend (largely based on additional borrowings) approximately $20 billion on new major generation and transmission assets over the next ten or so years)."

Almost a third of Hydro's labour and benefit costs are off the books, to be accounted for in the future when the new megaprojects come into service. Accountants call that capitalization.

"The increase in amounts capitalized mutes, or masks, the growth in OM&A expense recorded on an annual basis."

Translation: Hydro is distorting its annual returns and hiding it's costs.

"If MH were to expense, i.e. charge against annual revenue/net income, labour and benefit costs that it now capitalizes, MH would, in the absence of larger rate increases than those now projected for future years, report net losses in many of its forecast future operating years, rather than forecasting annual net income for every one of its projected future years as it currently does."

"The Board questions the sincerity of MH’s commitment to rein in costs, without action rate increases above inflation remain a probable outcome. As previously indicated, MH continues to capitalize and defer a significant portion of its annual operating costs."

"...the practice allows MH to report higher annual net income results than it otherwise could (if more of the now deferred and capitalized expenses were treated as period costs and charged directly, in the year of incurrence, against the net income of that year)."

Translation: If the deferred costs were paid yearly, as they would be by a private company, Hydro's projections would show losses in many future years instead of profits.

The PUB declares that Hydro is either ignoring the bad economic news or hiding its impact. Snippets from the 111 page report:

* ".... MH declined to test, as requested by the Board, its export revenue forecast against assumptions of low opportunity export sales prices..."

* "..., MH’s current projection of its future financial position does not include the potential for lower overall export revenues."

* "... the accepted “decline” in MH’s forecast financial results does not take into account
any implications that may be related to potential lower than forecast export prices."

* "With MH declining to provide additional lower export price scenarios, for which MH was asked, the Board can only impute what domestic revenue requirements could be in the next 20 years. Shortfalls from expected net export revenue will be reflected in domestic rates, if MH’s financial targets (particularly debt to equity) remain as is."

* "Despite the Board having directed MH to engage an independent risk expert to conduct a post-audit of MH’s actions through the drought, no such report was filed. And, no evidence was presented either at a prior or recent hearing indicating that MH undertook a detailed assessment of its water resource management and decisions employed in 2003/04."

To make matters worse, when Manitoba Hydro could no longer deny the impact of lower prices and higher costs, it simply ran for cover behind a technicality.

The Wuskwatim power project which is expected to go into service next year (2012) is the smallest of the power plants in Hydro's grandiose playbook. When the project was approved, they said it would return about 7 percent on the investment dollar. Halfway through construction, they were saying it would break even.
With construction not even finished, they see we'll be practically giving power away to the Yanks for the next nine years.

Cost of production, 10 cents a kilowatt hour.
Price they pay, 1 to two cents per kilowatt hour.

Hydro's reaction? Presto chango, and the project is now designated for local use, which means that, by their rules, the costs of construction don't count in their budgeting.

"The purpose for Wuskwatim, originally conceived as a generation source for export sales, was revised by MH in this proceeding as being required for domestic purposes, although domestic load is not expected to require additional generation until 2019."

The Public Utilities Board fought back the only way it can.
It rejected another rate increase that Manitoba Hydro asked for, saying the utility has more than enough money.

"It is important to note that since 2008, this Board has approved rate increases that are expected to provide MH over $788 million in accumulated additional revenue through to and including fiscal 2011/12."

"Overall, and on the “face of it” (setting aside the Board’s ongoing concern with respect to MH’s practice of deferring and/or capitalizing a significant amount of its annual OM&A expenditures), MH’s financial position since the 2008 GRA is projected by MH to improve by approximately $253 million over the period 2007/08 through to and including 2011/12."

Translation: Thanks to rate increases, Manitoba Hydro is getting $788 million more money in the four years between 2008 and 2012. Of that, $253 million is a bonus, cash that Hydro didn't expect to get when it did its 2008 projections.

Hydro, notes the PUB, has already spent $400 million on prep work for the Keeyask power plant even though the project has not been approved.

"Regardless of the “good faith” and “good intentions” likely attached to this pre-spending, expending massive funds ahead of final regulatory approval appears to represent speculation, and, given the hundreds of millions that have been spent and the ongoing spending, a degree of speculation rarely found with private utilities, let alone Crown Corporations."
"If the plans do not work out, then the pre-spending may well have to be “written off”, with implications for rates and the current generation of ratepayers."

Translation: Manitoba Hydro is using all the extra money its received from rate payers to cover its gambling expenses.

And this barely scratches the surface of what the PUB calls it's
" lengthiest, most complex and certainly most expensive public proceeding ever held by the Board" focused on MH’s rate requests, risks and risk management.

We'll have more tomorrow, including the PUB's opinion on Bipole III and Hydro's privitization projects that see Hydro resources being sold to groups of, ahem, "investors."

*************************
Professional Reporters at work

The Winnipeg Free Press covered the PUB ruling last Saturday, although that may come as a surprise to you. The story by Larry Kusch ran on Page 10. It was 10 paragraphs long. Three paragraphs were background. Four paragraphs were comment and reaction from Hydro president Bob Brennan.

In other words, the 111 page ruling was summarized in three paragraphs in the Winnipeg Free Press, none of which mentioned that Manitobans could wind up subsidizing electricity we sell to the U.S.

The same day, the newspaper devoted 13 paragraphs to the news that two tiger cubs were born at the zoo.

And 21 paragraphs to a story detailing how a woman saw a polar bear in Churchill.

The Winnipeg Free Press becomes more irrelevant day by day.

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