February 26, 2011
Manitoba Hydro: Reforming the Jurassic Crown (Part 7 of 8)
Manitoba’s chronic reliance on transfer payments, its ever-inflating public sector and its increasing concentration of sectoral decision-making power in the hands of a few on Broadway is having an enervating effect on the province, Law Professor Bryan Schwartz argues in The Supplicant Society. It doesn’t have to be that way, Manitoba can change for the better, Schwartz demonstrates in this series for the Winnipeg Free Press and the Frontier Centre for Public Policy. The series continues weekly on Saturdays, ending on March 5. Footnoted versions of this article can be found at WinnipegFreepress.com and at www.fcpp.org.
Manitoba Hydro has a monopoly on the retail supply of electricity in Manitoba.2 As a Crown corporation, Manitoba Hydro is exempt from federal and provincial corporate income taxes. Yet it produces comparatively little profit for its government owner or for the people of Manitoba.3 Manitoba is squandering the potential of Manitoba Hydro to be an engine of economic growth. Manitoba Hydro is a Jurassic Crown, stuck in a bygone era.
Part of the problem relates to Manitoba Hydro’s mandate. Manitoba Hydro's mandate needs to be reviewed and clarified, including addressing the extent to which it includes generating a reasonable return to the provincial treasury. Manitoba Hydro is directed by legislation to supply energy to meet Manitoba’s needs and to promote economy and efficiency.4 Instead of promoting energy efficiency, Manitoba Hydro’s non-residential rate structure discourages conservation by rewarding heavy or wasteful users of power.5
Although the provincial government includes Manitoba Hydro’s net income for purposes of Manitoba’s balanced budget legislation,6 Hydro has rarely paid a dividend from its cash profits to its government owner.
The provincial government has also offloaded major public policy expenses onto Manitoba Hydro that should have been part of the provincial budget. Instead of the much shorter and cheaper route along the eastern side of Lake Winnipeg that Hydro initially favoured, at the government’s behest Hydro now plans to build its new BiPole III power line on the western side of the province. Hydro’s estimate of the added cost for the west side line over the east side route is $410- million,7 while critics assert that the cost could be as high as $1.75-billion.8 The east side route is also more environmentally sound, as it would not waste renewable energy that would be lost in transmission over the longer west side route. If for public policy reasons the Manitoba government wants Hydro to build its new power line on the west side route, the extra cost should be borne by the government, not Hydro. If the government has public support for such a major public policy expense, it should have no concern in making it part of its budget and subject to prior approval by the Manitoba Legislature.
Part of the problem relates to Manitoba Hydro's governance. While legislation applying to Crown corporations generally requires that their boards act in the best interest of the company, it would be useful for the Hydro Act itself to specifically recapitulate this responsibility. Other governance issues should be addressed in a modernized statute. For example, Hydro’s board is appointed by the government. The process is not transparent. Though its board is supposed to provide strategic oversight and direction to Hydro management, board appointees are not required to have any particular industry expertise. The disclosure of Manitoba Hydro’s governance practices in its annual report does not measure up to standards expected of publicly traded corporations.9 Despite having over $12 billion in consolidated assets at March 31, 201010, Hydro publishes no return on equity targets.
Manitoba Hydro states that its shareholders are the public of Manitoba,11 but no shareholder in a publically traded company would tolerate such treatment. Neither should Manitobans.
Manitobans deserve better.
There should be a thorough review and clarification of Manitoba Hydro’s mandate and governance. Among the reforms that would improve Hydro’s governance, transparency and accountability are:
• Amending Manitoba Hydro’s legislation to make it clear that its board and management have a fiduciary responsibility to act in the best interests of the corporation;
• Requiring Manitoba Hydro board appointees to have relevant financial or industry expertise;
• Giving the provincial government explicit legislative authority to issue written directives to override or substitute for decisions made by the Manitoba Hydro board. The directive and the government’s reasons for issuing it should be public, as would Hydro’s impact analysis, including any material financial, environmental, labour or system implications. A directive would not take effect until after Hydro’s impact analysis is made public;
• Ensuring that the rate structure for non-residential users promotes energy efficiency and economy;
• Periodic evaluation of Manitoba Hydro by independent experts to determine whether its board and management have maintained or enhanced the market value of the public’s investment;12
• Ensuring that Manitoba Hydro’s public financial accountability documents such as its annual report and quarterly updates meet or exceed standards for publically traded corporations; and,
• Ensuring that the extra costs of any public policy activities carried out by Manitoba Hydro that a publically traded corporation would not undertake without compensation are first approved and appropriated by the Manitoba Legislature.
Manitoba Hydro is a key component of the provincial economy. It touches the everyday life of every Manitoban. It is a major employer. With a better defined mandate and improved governance, Manitoba Hydro could help reform Manitoba from a supplicant society into a more vibrant one, but Manitoba Hydro itself needs to be reformed. In the meantime, the Jurassic Crown remains an obstacle to a rejuvenated society.
This article was co-written by Sheldon Schwartz who worked for the Province of Saskatchewan during a career spanning 25 years, including as Assistant Deputy Minister of Finance, responsible for Saskatchewan's treasury and debt management functions and as the Chief Financial Officer and VP of Finance and Administration for the Crown Investments Corporation, the Province's holding company for its commercial Crown Corporations.
1. This article was co-authored with Sheldon Schwartz.
2.The Manitoba HydroAct, C.C.S.M. c. H190, s.15.2.
3. Manitoba Hydro’s consolidated net income for the 2009-2010 fiscal year ended March 31, 2010 was $163 million. On its 2009-2010 electricity operations, Manitoba Hydro earned $164-million on revenues of $1,599 million. Hydro posted a $1 million loss on revenues of $138 million on its 2009-2010 natural gas operations: Manitoba Hydro, Manitoba Hydro-Electric Board, 59th Annual Report on p. 51. Available online at http://hydro.mb.ca/corporate/ar/2009/publish/index.html.
4. The Manitoba HydroAct, supra note 68, s. 2.
5. Effective April 1, 2010, Manitoba Hydro’s General Service energy charge (the charge for non-residential electric service based upon the electric energy consumed or billed where Manitoba Hydro provides the transformation) fell sharply with consumption, from 6.84cents/kilowatt hour(kWh)on the first 11,000 kWh to 4.69 cents/kWh on the next 8,500 kWh, and to 3.05 cents/kWh on the balance. For residential users, the energy charge rise slightly with consumption—from 6.38 cents/kWh on the first 900kWh to 6.57cents/kWh on the balance. See Manitoba Public Utilities Board, “Procedural Order 33/10: Manitoba Hydro General Rate Application,” on pp. 2 and 5. Available online at http://www.pub.gov.mb.ca/pdf/10hydro/33_10.pdf.
6. “For the purposes of this Act, the balance as at the end of a fiscal year is the average of the net results for the fiscal years within the four-year period ending at that time. The net result for each of those years is the net income or loss as shown in the audited summary financial statements for the government reporting entity for that fiscal year...” The Balanced Budget, Fiscal Management and Taxpayer Accountability Act, C.C.S.M. c.B5, s. 3(1). Manitoba Hydro is part of the government reporting entity, see Manitoba, 2009-10 Manitoba Public Accounts, Vol. 1, on p. 111. Available online at http://www.gov.mb.ca/finance/pdf/annualreports/pubacct_1_10.
7. Bob Brennan, Letter to the Editor, Brandon Sun, April 18, 2008. Available online at http://findarticles.com/p/news-articles/brandon-sun-the/mi_8087/is_20080418/letter-editor-15-billion-figure/ai_n50725125. For more discussion on the BiPole III route, see Bryan Schwartz and Elijah Harper, “East side the right side,” Winnipeg Free Press, May 14, 2007, available online at http://www.winnipegfreepress.com/historic/32228799.html; and Bryan Schwartz and Elijah Harper, “East side advantage,” Winnipeg Free Press, October 17, 2007, available online at http://www.winnipegfreepress.com/historic/32489899.html. Also see Bryan Schwartz and Perry Chung,“East vs. West: Evaluating Manitoba Hydro’s Options for a Power Transmission Line from an International Law Perspective,” Asper Review of International Business and Trade Law 2007 Volume VII, p 1. Available online at http://www.asper-chair.com/index.php/asper-review.
8. Mary Agnes Welch, “Hydro exports may not cover new line: Tories,” Winnipeg Free Press, September 18, 2010, A8. Available online at http://www.winnipegfreepress.com/local/hydro-exports-may-not-cover-new-line-tories-103195264.html.
9. Manitoba Hydro’s annual report does not appear to meet Toronto Stock Exchange guidelines set out in “Corporate Governance: A Guide to Good Disclosure.” Available online at http://www.ecgi.org/codes/documents/tsx_gtgd.pdf. Unlike SaskPower, its Saskatchewan Crown corporation counterpart, Manitoba Hydro does not disclose in its annual report whether it is in compliance with governance standards for publicly traded companies that were developed and implemented by the Canadian Securities Administrators (CSA) under National Policy 58-201, Corporate Governance Practices and National Instrument 58-101, Disclosure of Corporate Governance Practices. As a Crown corporation, Manitoba Hydro is not required to comply with these CSA standards. However, the CSA standards provide the benchmark of good governance practices in Canada: National Instrument 58-101 Disclosure of Corporate Governance Practices, Form 58-101F1 and Form 58-101F2. Available online at http://www.tmx.com/en/pdf/Notice-NP58-201_CGGuidelines_NI58-101_CGPractices_Apr15-05.pdf In its 2009 Annual Report, SaskPower reported substantial compliance with CSA governance standards: SaskPower, SaskPower Annual Report 2009, pp. 18-23.Available online at http://www.saskpower.com/news_publications/annual_reports/2009/pdfs/AR2009_complete_report.pdf.
10. Manitoba Hydro’s consolidated assets as at March 31, 2010 were $12,437 million. Total assets for electricity operations as at March 31, 2010 were $11,856 million, while total assets for natural gas operations were $581 million: Manitoba Hydro, Manitoba Hydro-Electric Board, 59th Annual Report on p. 51. Available online at http://hydro.mb.ca/corporate/ar/2009/publish/index.html.
11. Manitoba Hydro, A History of Electric Power in Manitoba, p. 33.
12. For a more complete discussion of the framework to conduct an independent valuation and review of a commercial Crown corporation, please see S. Schwartz, “Saskatchewan’s Commercial Crown Corporations: Time for a New Crown Review”, Saskatchewan Institute of Public Policy, Policy Dialogue, Winter 2008, pp. 10-11. http://www.uregina.ca/sipp/documents/pdf/Winter2008_PD_online.pdf and S. Schwartz, “Time for a New Crown Review”, Frontier Centre for Public Policy. Available online at /main/publication_detail.php?PubID=2263.
is the Asper Professor of International Business and Trade Law at the University of Manitoba. He holds a LL.B. from Queen’s and a Master’s and Doctorate in law from Yale Law School. He is the author of seven books and over seventy academic articles in a wide variety of areas, including constitutional and international law, law and economics, Aboriginal law, human rights law, and law and literature. He is the inaugural editor of two journals: the Asper Review of International Business and Trade Law and Underneath the Golden Boy, an annual review of legislative developments in Manitoba. Over the years, he has received numerous awards and honours for teaching, research and community service. Bryan is also a practicing lawyer. He has been counsel to the Pitblado law firm since 1994, and appeared many times before the Supreme Court of Canada. He frequently advises governments, organizations and individuals on legal issues involving policy development or legislative reform. He has often appeared as a media commentator, and has published op-ed pieces in newspapers such as the Winnipeg Free Press, the Ottawa Citizen, and the Globe and Mail.