Electricity rates – latest news
May 19, 2017
General Rate Application questions
On May 5, 2017, Manitoba Hydro sent a letter to the Public Utilities Board requesting a 7.9 per cent increase in electricity rates for 2017, and a 7.9 per cent increase in 2018.
With the rate application before the PUB, many customers have questions about the request. Here are some answers to the most common questions we are hearing.
Q: What will the rate increases mean for the average residential customer?
A: For the residential customer using an average of 1000 kilowatt hours per month (without electricity for space heating), the 7.9 per cent increase in 2017 will result in a monthly increase of $6.88 in electricity bills. The 7.9 per cent in 2018 will result in a further increase of $7.43 per month for the same residential customer.
This table provides a summary of the monthly bill impacts of the proposed rate increases to a residential customer for a range of consumption levels from 200 kWh to 5000 kWh per month. Residential monthly bill calculations (PDF, 91 KB).
Q: These are much higher increases than we've seen in the recent past. Why is this necessary?
A: Simply put we need to generate more revenue to cover the cash operating and debt financing costs of the business. Without the rate increases, the company will not have enough cash flow to pay for its core operations, which is not sustainable.
We are borrowing large amounts of money to invest in our major capital projects including Keeyask and Bipole III as well as to renew our aging infrastructure. At the same time we are seeing Manitoba electricity use growing more slowly than previously expected and export prices on the short-term opportunity (spot) market are also continuing at significantly lower levels than previously seen.
As a result, we are projecting a reduction in total revenues of about $1.5 billion over the next 10 years compared to previous forecasts.
In addition, we need to have enough cash flow to build our equity and other financial reserves to protect our customers from the financial impact of a prolonged drought, rising interest rates or other emergency events. These are real risks that are inherent in operating a hydroelectric utility. Without adequate financial reserves, the additional costs associated with these events would need to be passed on directly to customers in the form of sudden, steep rate increases. This rate shock would have significant negative consequences for our customers and for the provincial economy.
Q: This is going to be challenging for many customers to manage. Aside from rate increases, what else are we doing to improve this situation?
A: We appreciate any electricity rate increase has major impacts on our customers, especially those with lower incomes or electric heat. That's why we aren't just asking customer to pay more.
We are reducing our operating costs through a significant reduction in our workforce and by finding efficiencies in how we work. This directly reduces the amount of rate increase we require.
We are also working hard to sell more of our surplus power through long-term firm export contracts that provide higher pricing and a supplemental revenue source for Manitoba Hydro. Export revenue assists with offsetting our fixed costs which benefits customers here in Manitoba.
Finally, we continue to work with customers to find ways to reduce their energy costs and manage their bills. While the Province is establishing a new energy efficiency agency, until the new energy efficiency agency is established by the Province we will remain actively engaged with customers delivering programs that can assist them in managing their energy bills.
Q: Why not stop spending on Keeyask?
A: We have evaluated various options with respect to Keeyask and found that completing the project is the most economical option. Stopping or pausing work on Keeyask which is in the middle of construction will create considerable additional costs, result in a major loss of export revenue and bring forward other adverse business risks. Even though electricity consumption is growing more slowly than previously projected, it is still growing. We will need new sources of energy in the future and Keeyask will fulfill this need for years to come.
Q: Are these rate increases the result of the new budget for Keeyask?
A: The cost increases for Keeyask contribute to the higher rate increases but are not the only factor. Even if Keeyask had remained on track to meet its original budget and completion date, we would still need rate increases to enable Manitoba Hydro to be financially sustainable over the longer term. Along with increased costs on our major projects, we are also facing a $1.5 billion reduction in expected revenues because of lower than previously projected growth in domestic electricity usage as well as decreasing prices on the short-term export opportunity market.
Q: What are the chances of a drought or another emergency really happening? Why not just take our chances?
A: The risks of a drought or some other event affecting our operations are very real. Manitoba had a prolonged drought in 2003–2004, which resulted in a net loss for the company for that fiscal year of $436 million. At that time, Manitoba Hydro was in a strong enough financial position to absorb that loss without immediately passing all the costs onto our customers.
If we were to see a prolonged drought today – the organization does not have adequate financial protections in place and might need to recover those costs through sudden, steep rate increases. The implications of this rate shock for our customers and for the provincial economy are much too significant to leave to chance.
Q: Why don't we just borrow more instead of raising rates?
A: Further increasing our debt actually increases the financial pressures and risks we face. The investment in Bipole III and Keeyask is already more than doubling the company's overall debt. Accumulating a high level of debt without sufficient revenue is simply unsustainable. These rate increases are needed to ensure our debt remains manageable and does not impact the ability of Hydro and the province to access capital or significantly increase our borrowing costs. Any increase in borrowing costs is ultimately passed through to our ratepayers.
In addition, we need increased rates to build adequate financial reserves to absorb unexpected costs resulting from droughts or unforeseen emergencies. Without those reserves Hydro runs the risk of no longer being considered self-supporting and faces increased borrowing costs that are passed through to customers.
Q: Were previous forecasts for electricity load growth and export prices wrong?
A: Forecasting is complex with many variables. Forecasts are never 100 per cent accurate and that accuracy declines the further out you look.
Load growth forecasts consider many variables including population growth, potential economic development and the success of demand side management efforts. Similarly on the export market, price forecasts consider the predicted supply and demand for electricity, the costs of generation, expected regulatory changes and potential development of new sources of supply. A great deal of work goes into creating our forecasts but there are a lot of different factors that interact in complex ways to produce the final result.
To account for the variability of the factors at play, we typically provide a high, medium and low forecast scenario which provides a range of estimates, but we use the medium forecast in our plans. The changes in our new forecasts are still within the range of previous low and high estimates, but in general are more negative for our business outlook.
Q: Why has this number changed from the 3.95 per cent that has been promoted for many years as our appropriate level of rate increase?
A: The 3.95 per cent increases are not adequate. We are facing lower than expected growth in Manitoba demand for electricity, continued low prices on the export opportunity market, a high level of current and anticipated borrowing and cost increases on our major capital projects. Without higher rate increases, we will continue to have negative cash flows in our core operations. That simply isn't sustainable.
Q: Why are we asking for the rates to increase so much in the first five years? Can't we spread those increases over a longer period of time?
A: Our rate application accelerates the rate increases proposed in our previous plan into a shorter time frame at the front of the period, when our finances are most distressed and the risks to our customers and our organization are highest, however at the end of the five-year period rates are projected to return closer to inflationary levels (two per cent).
Having higher increases in the first five years of our plan, together with our work to accelerate cost reduction initiatives, provides a significant improvement in our financial outlook and reduces our risks as compared to making the changes slowly over a much longer time frame. In our previous plan, we would not have been returning to increases at inflationary levels until after 2029. Under the current plan, Manitoba Hydro's rate increases return to levels consistent with the levels of inflation in 5 years.
Q: How can we say increasing rates protects our customers?
A: We need to have sufficient financial reserves to protect our customers from the impact of a prolonged drought or other emergency event. These are real risks that are inherent in operating a hydroelectric utility. Without adequate financial reserves, the additional costs associated with adverse events, such as a prolonged drought, would need to be passed on directly to customers in the form of sudden, steep rate increases.
This rate shock would have significant negative consequences for our customers and for the provincial economy, so it is much better to proactively plan for both rate increases and cost reductions to help reduce those risks.
View electricity rate schedule for large businesses (PDF, 68 KB).
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