Let’s examine Hydro heresy

(Feb. 24, 2007) The idea that Manitoba Hydro might sell electricity to Manitobans at something like a market price rather at cost and use the extra money to reposition the provincial economy has long been heresy, seldom spoken or raised publicly outside the editorial pages of this newspaper. The taboo, however, was broken in a significant way on Thursday.

Robin Wiens, the Hydro official in charge of setting rates, gave a talk without prejudice on various rate structures to the Manitoba Association of Business Executives. It was the first time he has done so. The association had invited him to speak because its members are increasingly curious to explore the heresy. They want to determine whether a different pricing policy might finally unlock the great promise that Hydro is supposed to hold but which has not been realized through observance of the existing orthodoxy – that cheap electricity rewards Manitobans and will attract economic development.

Manitoba Hydro currently sets rates to recover the “embedded” costs of producing electricity. That is, rates are set to pay debts in an orderly way, to build reserves, cover maintenance and turn over to the province some $250 million a year. The rate policy is at once hugely popular and hugely wasteful. It is popular because the rates are the lowest in North America. But because electricity is so cheap, Manitobans waste it by the megawatt. Few houses, for example, are equipped with light switches that automatically turn lights off when occupants leave a room, but a very great many houses will burn their Christmas lights tonight and likely will still be doing it in July. A study by Energy Probe several years ago found that Manitobans are the most wasteful users of electricity on Earth.

This “at cost” price of electricity has a second unfortunate and negative impact – it shifts the cost of wasting electricity today onto consumers tomorrow. The easiest way to express how this works is to look at the recent construction history of hydro generating stations. Three – Kettle, Long Spruce and Limestone – are essentially the same plant. But Kettle cost $324 million to build, Long Spruce $507 million and Limestone $1.45 billion. The next identical plant – Conawapa – is expected to cost $5.5 billion.

In order to ensure that consumers today don’t defer the cost of wasting cheap electricity from these plants today to future consumers, Hydro could set rates on what is called a “marginal” basis. On a marginal basis, the cost of generating a kilowatt of electricity more than doubles from about 2.5 cents to about 5.3 cents per kilowatt.

A 100 per cent increase in electricity rates today would be fairer to future Manitobans. But as importantly, it would result in consumers – essentially every Manitoban – being forced to conserve energy by finding ways to use less of it. It is curious but perhaps not surprising that Hydro has never studied what the relationship is between rates and consumption. It has no idea what level of price would produce what level of conservation. Mr. Wiens told the business audience that “anecdotally” and in “the literature there is concurrence” that a 10 per cent increase in price yields a one or two per cent cut in consumption. It follows, then, that moving to a marginal rate structure would lower domestic consumption by 10 per cent to 20 per cent, which would increase exports by the same amount without having to increase generating capacity. (It should be noted, too, that the “embedded” rate is lower than straight accounting would suggest because exports are used to subsidize it.)

A marginal rate structure would increase Hydro’s annual revenues by at least $1 billion. That’s money enough to help underwrite the cost of expanded conservation programs as well as meaningful tax cuts that could make Manitoba competitive again with its neighbours.

It could mean that Manitoba was actually harnessing and using its water resource to produce wealth as other western provinces do instead of wasting it on the assumption that Manitobans are better off believing that they can get something for nothing and clinging to the failed idea that cheap electricity will cause industry to beat a path to our well-lit doors.

Given the concerns about global warming and the environment that are everywhere, but no where more often stated than on Broadway, a public policy debate on marginal pricing should be raging in Manitoba today. But it isn’t. Instead, we have a government that fear-mongers about the future of Hydro even as it manipulates the utility’s orderly plans for Conawapa to create the appearance of a dynamism that it so clearly lacks. Opposition parties, too, are culpable, afraid to debate what might be good and possible for fear of the fear-mongering.

So meaningful debate is not likely soon. But that business executives are starting to seriously question a failed orthodoxy, that they entertain ideas deemed heretical, suggests that a Reformation might be coming.

Winnipeg Free Press editorial,  Feb. 24, 2007
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