Wash, rinse, repeat: How the Manitoba Hydro problem is being kicked down the road

There is something almost otherworldly about Manitoba Hydro. It appears, for some, to exist in the Shire, Asgard or on the forest moon of Endor.

For many Manitobans the relationship starts and ends with the flip of a switch, a constant supply of hot water and some discomfort with the bill at the end of the month.

To be fair, the Crown utility has provided huge economic development and clean, consistent electric power for Manitoba customers.

Some would argue, though, Hydro's reality lies out of sight: in giant work camps, along corridors of neatly cut right-of-ways stretching nearly the length of the province, on the traditional territory of several First Nations, and in mega projects like the Keeyask dam and the Bipole III transmission line.

Those mega projects are the sources of massive cost overruns and looming debt. They are where decisions of the past threaten to haunt the economic well-being of the future.

Back to Square 1

The recent Public Utilities Board decision granting a 3.6 per cent rate increase won't do much to right-size the company's books and the Pallister government seems primarily focused on pointing out they weren't the authors of it.

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Manitoba Hydro is still totalling the bill, but it estimates it will pay between $15 million and $20 million to cover the costs of the last PUB hearing. 

For that, the utility got a rate increase more than 50 per cent short of the 7.9 per cent increase it said it needed, is borrowing to pay for it and will have to start the whole cycle over again almost immediately, as the PUB decision is only for one year.

The ring-bearers of the bad financial news for Hydro for most of the last two years were a board of directors appointed after a change in government ushered in promises of independence, autonomy and business acumen for the Crown corporation.

"Premier Brian Pallister made it clear there would no political micromanaging of Crowns such as Hydro or Liquor and Lotteries," then-Crown services minister Ron Schuler told CBC News in 2016, shortly after the Progressive Conservative government came to power.

So a new board of Manitoba Hydro, populated by business-savvy people and led by executive Sandy Riley, began to gong signals of fiscal alarm.

"Hydro is a ticking time bomb," Riley told CBC News more than a year ago.

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That "time bomb" kept ticking after the mass resignation of Riley and eight other members of the 10-person Hydro board in March, and it continues to tick after Manitoba's Public Utility Board decided on the 3.6 per cent rate increase earlier this month.

If Riley and his fellow board sitters were still at the table, they would no doubt say that 3.6 per cent will do little to clip the proper wire and stop the detonation.

The explosive device that made the Hydro board so nervous has a timer set to blow when construction stops and energy flows from two of its biggest recent projects — the Keeyask dam and the Bipole III transmission line.

Hydro financial health subject to debate

The PUB, by ordering a 3.6 per cent rate increase, apparently doesn't see the fiscal issues at the utility in the same way as Hydro's board and management.

"Clearly, the PUB has a very different view of the financial situation facing Hydro and the best approach to deal with it," Shepherd said after the utility board's decision.

A legitimate concern for economically vulnerable ratepayers seems to have guided its decision, but it's based on the belief Hydro's books aren't so bad.

The Opposition NDP also believes Hydro is on sound footing.

It's a financial exercise that is hard to follow if your accountancy skills are challenged, but a simple description came to CBC News this week via the finance department of Hydro itself — specifically explaining the effect of the completion of the Bipole III line and the Keeyask dam project.

"The accounting rules are such that during construction you don't recognize the interest expense in your annual income statement; you instead add that cost to the 'real' costs of concrete, labour, etc. that together become the cost of the project," Hydro's finance department wrote.

Hydro 'pregnant' with pending expenses

"In a way, we are in a sense 'pregnant' with huge pending expense obligations and also already paying the cash out today … and on top of that our ongoing regular sustainment capital investments are not being fully funded in our rates so we are borrowing for that, too," Hydro said.

"If we were magically able to complete the projects tomorrow we would go from break even to a $700-750 million loss. Which would mean our rates (on $1.5 billion annual domestic revenue) were almost 50 per cent too low. To maintain just break even we need rates to be 50 per cent higher than they are today when Bipole III and Keeyask are in service." 

Hydro is essentially on the cusp of borrowing to stay in business today and will have to borrow a lot more to stay in business tomorrow when these projects come online.

Hydro president Kelvin Shepherd was even more blunt earlier this month when the PUB made its decision. 

"There is a limit," Shepherd said. "We don't have a lot of surplus to pay for that debt.… Our interest costs are going to approach $1.3 billion on revenues of only $1.5 or $1.6 billion." 

Shepherd made those observations while sitting next to Crown Services Minister Cliff Cullen.

The PUB decision had a reservoir full of recommendations for his government.

It almost appears as if the utilities board recognized Hydro's fiscal fragility and was unwilling to to help through a rate hike, but suggested the government should assist in other ways. 

The battle of the balance sheets

With a laser focus on cutting the PST by 2020, sharing Hydro's red ink isn't what Premier Brian Pallister appears to be eager to do.

The PUB recommended, among many other things, the government look at its own pickings from the Hydro trough. A successive series of governments have collected billions in water rates, capital taxes and borrowing fees from Hydro.

A suggestion that the government transfer some revenues from its soon-to-be-introduced carbon tax to Manitoba Hydro to lower potential future electricity rate increases was met with the only firm decision the government could muster in the rate decision aftermath.

That would be a "no," Cullen said.

He acknowledged this week the government had been looking at Hydro issues for some time, but chose to defer any decisions for more study. 

"There are a lot of moving parts to this puzzle," Cullen told reporters. "[The PUB] have gone certainly quite a ways in terms of providing recommendations."

For the Opposition NDP, who in government triggered the building of the Keeyask dam and ordered the Bipole III built on a location that added $900 million to its cost, the PUB decision was a good day. Rates stay comparatively low and Hydro, Minto MLA Andrew Swan asserted, was in good financial health.

New export contracts, Swan said — reached not by Hydro staff, but by the PC government's initiative — would cover the costs of the debt problem.

With the cost to produce a kilowatt of power from Keeyask exceeding what U.S. power companies seem willing to pay, it would no doubt take a special arm-twisting of the governors of Minnesota and Wisconsin by Premier Brain Pallister to get new electricity contracts.

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Pallister, for his part, seems more keen on launching a review of the major projects that have jolted Hydro into the red ink.

Perhaps Premier Pallister could entice a blue-ribbon panel of elite business people with the promise of no "political micro-managing" to do the review?