The media is lapping up Conservative alarm bells about Manitoba Hydro. At issue is the amount of debt the utility is taking on to fund new capital projects. We believe Manitobans deserve a clear response to two pointed questions before the Pallister appointed board makes major decisions that will affect the sustainability of this critically important publicly owned utility.
Is there a crisis with Manitoba Hydro? Keep reading—we’ll explain that there is not. We’ll then answer follow up with another post about the second question: Why do the Conservatives want us to think there is a crisis?
There is no crisis
We have known for years that Manitoba Hydro was planning on taking on more debt to build the new Keeyask dam and Bi Pole III transmission line. The oft-cited Boston Consulting Group (BCG) which the Conservatives hired to evaluate Hydro’s plans agrees that going ahead with Keeyask is the best alternative to meet our increasing demand for energy and for ensuring energy security (see their report).
These projects are being financed in the normal manner – through borrowing, or taking on more debt. One measure experts use to see if a company can handle more debt is the “equity to debt ratio”. It works the same as when a bank looks at your income and assets to see if it should lend you more money. The higher the ratio, the more equity there is relative to debt. The lower the ratio, the less equity there is relative to debt. So generally speaking, the higher the ratio, the better.
We also need to make an important distinction between debt taken on by Manitoba Hydro vs a private corporation.
A provincial crown corporation is a much safer bet than a private corporation because the Province guarantees 100% of its debt. While that’s not to say that Manitoba Hydro should be reckless with how much it borrows, there is no magic formula to determine what too much debt might be for a crown corporation. The BCG report thinks the ratio will bottom out at twelve per cent. It also notes that the Public Utility Board/Needs For Alternatives To (PUB/NFAT) report found that: “Single digit equity ratios were not highlighted as a significant risk when projects (were) approved” and that the ratio should recover to twenty percent by 2025.
So do we really need to be alarmed?
Sanford Riley, the newly appointed Chair of the Hydro board argues that we should be alarmed. He is arguing that hydro rates must be increased so that Manitoba Hydro will have more revenue to increase the equity to debt ratio.
But hold on. Why is this suddenly a problem when, as explained by economist John Loxley, the experts have known and accepted the decrease in the equity to debt ratio for years? Manitoba Hydro’s financial staff updates a twenty year financial forecast every year: this is made public through the Public Utilities Board, and has been rigorously evaluated by external experts, including bond rating agencies who review these forecasts every year.
A projection from the PUB/NFAT report, page 225 also shows us, as Mr. Riley and Premier Pallister know, that once Keeyask is completed, Manitoba Hydro’s payments to the Province (paid via increased water rentals, capital tax and debt guarantee fees) will double by the early 2030s to $516 million per annum.
So even if you were to agree that rates should go up to buoy the ratio, the large increase in provincial revenue could then be used to prevent large increases or as recommended, to help low-income earners pay their utility bills.
After all – and this is a point rarely mentioned – Manitoba has the second lowest hydro rates in North America, so there’s a lot of wiggle room there.
Why then are we being told that Manitoba Hydro’s debt is out of control? This is where it gets interesting.
We’ll explain more in our next post “Manufacturing Crisis”.