September 15, 1997
The Future Of Winnipeg Hydro
To sell or not to sell? That's the question facing the City as it considers putting Winnipeg Hydro on the block.
The debate focuses on one question. Will we be better off if the City gets out of the power business?
It's true that Winnipeg Hydro boasts the lowest rates on the continent. It's also true those rates could be a lot lower if City Council didn't subsidize its other operations with Hydro profits. The $500 million required to upgrade the utility's generating plants would probably be sitting in the bank now if those funds hadn't been siphoned off into general revenue.
Unfortunately, a rational determination of the issue has been thwarted by the smoke-and-mirrors accounting and distorted operating methods used by government organizations. Winnipeg Hydro is a business but doesn't pay the taxes levied on private companies. It also enjoys lower interest rates because of the City's good credit rating.
These subsidies create the illusion that the lower prices flow from the economic efficiency of municipal ownership. It's like letting Superstore charge lower prices by exempting it from the taxes levied on its competitors. Such hidden advantages make crown corporations appear to be more profitable than they are. They also promote the common misconception that their costs are lower 3/4 which they aren't. Also, if profits cannot be retained because they're used to keep transit fares low or wading pools open, decisions about the utility's future become complicated.
That brings us to the dilemma faced by officials in Fairbanks, Alaska. Its electric utility, according to Frank Biondi, manager of the city's Municipal Utilities System, was "not managed properly." City council, needing to cover its losses but unwilling to anger residential voters, jacked up commercial rates. Consequently, businesses in Fairbanks have been paying electric bills 30-40% higher than those facing their competitors outside the city limits.
Fresh from a stint in Anchorage, where he had helped sell the telephone utility, Biondi set out the choices for the Fairbanks councillors. They could leave things alone, which was not acceptable. They could apply better management techniques, which would take three to four years to work. Or they could sell the company. They chose the latter and, for good measure, decided to unload three other utilities: the telephone company, a heating plant and the sewer and water works.
Fairbanks then listed the four companies, which promptly sold. Biondi characterized the sewer and water works proposal as "more controversial" than the "slam dunk" telephone and electricity offloads. The Alaska Public Utilities Commission should approve the sales soon.
Fairbanks' council put the issue to the electorate in a referendum. Residents, tired of high prices, approved the measure by a ten-point margin. The utilities, which paid only 7% of income in lieu of taxes before (Hydro pays zero), will be subject to full income and property taxation under the new ownership. Six thousand Fairbanks ratepayers will save about $10,000 a day in electricity costs.
Those who doubt the wisdom of selling Winnipeg Hydro need to ask themselves the following questions. Would the utility still be profitable if it paid property and business taxes like other companies? Would it be able to raise the capital to upgrade its facilities when the city's debts are already so overwhelming? How would it function in the new world of competitive electric markets?
The case for selling Hydro seems overwhelming. The money raised would cut Winnipeg's inordinately high debt and lower the interest bills that absorb 20% of expenditures. And selling the operation to a private, tax-paying company like Centra Gas or Unicorp would have the added benefit of offering some relief to taxpayers.
The advent of competition in the supply of electricity cannot be prevented. It's now possible for industrial plants, businesses and even neighbourhoods to produce cheaper power on their own.
The privatization of MTS was inevitable because of technology-driven market changes. The same is happening in the power business.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."