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Russell Wangersky: It’s happening there and it’s happening here

At least we’re not alone — or more to the point, perhaps, misery loves company. Back when Muskrat Falls was only a twinkle in government’s eye, I wrote about the dangers Manitoba Hydro was having with delays and exploding costs for hydro projects — and about the danger of some of the underlying assumptions backing Muskrat Falls. Those dangerous assumptions included high and growing demand and export prices for electricity, and high oil prices.

Russell Wangersky

Way back in January of 2012, I wrote, “Muskrat Falls is based on a series of informed assumptions — but those assumptions could be wrong.”

Well, here’s another column looking at what’s happening in Manitoba, and their outlook for electrical power and exports for the next decade. And it’s not pretty.

This is from Manitoba Hydro’s latest rate application: “Since its last general rate application, Manitoba Hydro has experienced a further deterioration of its anticipated export revenues, a significant weakening in its forecast of domestic load and significantly increased capital costs associated with its major new generation and transmission projects. In response to these challenging conditions, Manitoba Hydro is dramatically advancing the pace and scale of internal cost reductions. Manitoba Hydro is also requesting higher rate increases (7.9 per cent per year for the next five years) than were proposed in previous financial plans.”

Sound familiar? It should.

But that’s not the only thing that should sound familiar: try this on for size, also from Manitoba Hydro’s rate application: “Manitoba Hydro’s previous financial forecasts have reflected an implicit assumption that underlying domestic growth, appreciating export prices and sustained low interest rates will enable Manitoba Hydro to moderate the level of rate increases required to come to terms with its financial situation.”

The utility is now forecasting that export prices will be 20 per cent lower than they had expected even last year, all the way out until 2027.

The good news? The utility’s miscalculation of demand growth inside Manitoba means they’ll have more power to send to the U.S. — albeit at lower prices than expected.

And that weaker export market will take $1.1 billion off Manitoba Hydro’s bottom line in the next decade: “The reduction in export prices accounts for about $1.1 billion of the cumulative reduction of net extraprovincial revenues over the 10-year forecast period to 2026/27. (The 2016 forecast) reflects electricity export prices that are lower by approximately 20 per cent relative to the comparable 2015 forecast. The decline to long-term power prices is due primarily to a reduction to long-term natural gas prices and increased renewable development — primarily wind generation … aided by substantial subsidies.”

Other risks facing Manitoba Hydro include risks about water supply (we have that, too) risks over the lack of a cushion if interest rises (we have that, too) further risks of declining export prices (yes) and limited financial flexibility (ditto).

In fact, because Manitoba Hydro’s debt is so great — and is tied to provincial government guarantees (like Nalcor’s debt is tied to this province’s debt), there’s a risk of something called “debt contagion.”

“Canadian and international credit rating agencies have increasingly acknowledged the contagion risk Manitoba Hydro is presenting to the credit rating of the province of Manitoba,” the rate application says. The risks surrounding Manitoba Hydro’s debt means Manitoba’s borrowing rates could rise, taking Hydro’s with it.

Why all this about Manitoba now? Well, in the next few days, Newfoundland Hydro will be putting in for its own next general rate increase. No Muskrat Falls tagged onto that one yet, but we can wait with bated breath, I’m sure.

Oh, and in case you’re wondering what an increase of 7.9 per cent a year is over a span of five years? Try 46.25 per cent.

Russell Wangersky’s column appears in 30 SaltWire newspapers and websites in Atlantic Canada. He can be reached at — Twitter: @wangersky.

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