By Molly McCracken, CCPA Director February 26, 2021
For Immediate Release (Winnipeg): The province of Manitoba’s commissioned Economic Review of Bipole III and Keeyask report by Brad Wall recommends privatization of Manitoba Hydro, the province’s cherished, publicly-owned crown corporation. This stands in contrast to the vast majority of Manitobans opposed to privatization and the provincial government’s own publicly stated commitments.
Privatization and P3s
Manitoba legislation requires a referendum to privatize Manitoba Hydro, but it does not prevent the piecemeal sale approach currently underway, which is along the lines of how BC Hydro sold off assets to private companies. Manitoba is following the playbook of BC Hydro, from where Manitoba Hydro’s current CEO hails. This has already begun with the winding-down of Manitoba Hydro International, a profit-making arm of the crown corporation and more recommended today by Wall.
Wall recommends P3s on future projects to contain costs and deal with risk. P3s are privatization – governments contract out the design, building, financing and maintenance (DBFM) of a project. Mountains of evidence point to problems with P3s precisely on cost and risk. For example, the Auditor General of Ontario found that P3s cost the province $8 billion more than if the projects had been publicly financed and operated.
The Wall report also opens the door to privatization by recommending a review of transmission tariffs “to ensure that they are not a barrier to other companies building new generation in Manitoba for export” to “foster competition”. This would hurt the Crowns’ ability to return profits to the public purse.
“It is surprising after the tragedy of the complete failure of a privately run and unregulated energy system in Texas, that Wall would recommend steps that could take Manitoba down that dark path” says Molly McCracken, CCPA Manitoba director.
Keeyask financial considerations
Wall’s report deals with capital costs and debt management but does not consider the long term contracts for the sale of hydroelectricity to external customers in Saskatchewan and the Northern US states. These are revenue sources that far exceed 35 years and enable Hydro to manage its debt load.
Mega projects like hydroelectric dams are incredibly complex and expensive endeavors. Bent Flyvbjerg of Oxford University found that nine out of ten projects have cost overruns, with overruns of up to 50 per cent in real terms not unusual.
In addition, the change in costs of the project cited by Wall and the Manitoba government are not adjusted for inflation. The original estimate for Keeyask comes in at $7.06 billion in 2019 dollars, making the overrun $1.6 billion in real terms, or 25 per cent. Converting the Bipole III’s 2011 estimate to 2018 dollars (when the project was completed) puts it at $3.65 billion, bringing the real cost over-run down to $1.05 billion—or 29 per cent.
Manitoba Hydro: the Long View (2019) and Manitoba Hydro and the Public Utilities Board: An Uncertain Future (2020), both by Lynne Fernandez, the previous Errol Black Chair in Labour Issues.
CCPA Manitoba will be conducting further analysis on this report in the coming weeks.
Fact checking and more rapid response analysis to the Wall report
What does this mean for Manitobans?
Manitoba Hydro’s debt/equity ratio – that is the ratio at which debt due to these and all Hydro operations actually declined from 27 per cent in 2010 to 15 per cent in 2018 due in part to the high value of these new projects. As the late Economist and former Manitoba Hydro board member John Loxley noted:
““There is no magic number for the debt-equity ratio for a Crown corporation with a 100 per cent debt guarantee from the province. Hydro experienced single-digit equity-to-debt ratios between 1970 and 1995 without the sky falling in. The ratio will correct itself by the early 2030s on the basis of demand growth and the planned rate increases, without additional rate increases”.
A notable difference is the time horizon Wall recommends Hydro projects be amortized – 35 years – when these are 100 year projects. The PUB recommended 70 years and it is on this basis that it has pushed back for lower rates for Manitobans.
Once Keeyask is completed Hydro will be paying the province higher payments by way of water rental, capital tax and debt guarantee fees. They could reach as high as $516 million per year by the early 2030s. These are not highlighted in Wall’s report.
Year after year the PUB, after hearing substantive opinions from a variety of expert witnesses, has ruled in favour of lower rate increases that allow MH to service its debt while expanding its infrastructure. debt levels are not out of line with what was planned and approved by the PUB and the bond-rating agencies that reviewed Hydro’s preferred development plan long before the Conservatives were elected.
The Manitoba government has introduced Bill 35 “The Public Utilities Ratepayer Protection and Regulatory Reform Act” which strips the PUB of rate-setting role and gives the Manitoba Cabinet this power. Given Hydro requested much higher rates in recent years than the PUB granted.
Need for Keeyask hydroelectricity established
In its comprehensive 2014 review of Keeyask and Bipole III, the Public Utilities Board agreed that there was a need to increase the supply of electricity. The panel found MH’s 20-year load forecast to be reasonable, although the 1,700 GW of new pipeline load needed for the Energy East pipeline did not materialize as predicted, anticipated demand is coming from increased use of electric transportation due to the urgency of meeting climate targets.
Saskatchewan and Manitoba have already secured a contract for electricity sales and line extension, and the federal government recently gave $1.6 million to a project feasibility project in Nunavut. The plan, if approved, is to connect five Nunavut communities to MH’s hydroelectric and fibre-optic network.
Wall ignores a major reason why Bipole III went down the west side of Lake Winnipeg. Previous to Bipole III, the majority of Hydro power ran through Bipole I and II at Dorsay station. If a major storm or forest fire had damaged the station or the lines leading to it, power would have been out to southern Manitoba. Bipole III is a crucial back up in this scenario and catastrophic events are more frequent due to climate change.
One of Wall’s recommendations on cost overruns recommends reimbursed cost contracts for below ground work and fixed cost for above ground work. Delays and cost increases for Keeyask were caused by unexpected conditions with the bedrock, below ground which his recommendation does not address.
Wall’s report cites a mental health hospital constructed in North Battleford, Saskatchewan as an example of the private contractor absorbing cost overruns. What Wall does not note is that constant repairs have rendered huge parts of the hospital unuseable, with patients being moved constantly affecting their care. Those costs are absorbed by the taxpayer. Changes in design as occur with Hydro projects would be absorbed by the taxpayer.