Could the tide have turned at Manitoba Hydro?
After a year in which the Crown utility was nearly torn apart at its highest levels by controversy and infighting, there are signs that stability is on the way.
In February, the utility will get a new president and CEO when Jay Grewal, currently the head of the Northwest Territories Power Corp., takes over from Kelvin Shepherd. Grewal will be the first woman to lead Hydro.
There will also be a new CFO and chief strategy officer. Those positions were both held by Jamie McCallum, who left late last year. His position is being filled on an interim basis by longtime Hydro manager Shawna Pachal.
Add all of these changes together, and you have a significant overhaul of the leadership after one of the most volatile and controversial years in its venerable history.
The proof of this change can be seen in Hydro’s latest rate-hike application. In November, the corporation asked the Public Utilities Board (PUB) to employ an expedited process — one that would exclude intervener submissions and public hearings — to approve a 3.5 per cent increase in electricity rates, effective April 1. That would have been the second rate increase in just 10 months.
In a decision released Thursday, the PUB rejected the request, which means no rate increase until June at the earliest. Still, this most recent rate application stands in stark contrast to the massive annual increases sought by Shepherd and former board chairman Sandy Riley.
According to Shepherd and Riley, Hydro needed a massive injection of equity to stave off collapse from the enormous weight of debt created by the construction of the Bipole III Transmission Line and Keeyask generating station, likely the last in a long line of Hydro’s megaprojects.
In two consecutive rate applications, Shepherd and Riley demanded unprecedented hikes of 7.9 per cent. Even after the PUB turned down the first request and interveners thoroughly debunked its underlining rationale, Hydro’s board and management team stuck fiercely to their strategy.
Winnipeg lawyer Byron Williams, who represents a coalition of consumer groups that regularly intervene in PUB hearings on Hydro rate applications, said he was pleasantly surprised that even before Grewal takes over the helm from Shepherd, there is already a change in strategy on the rate applications front.
Williams said there are no guarantees Hydro won’t reverse path and seek historically high rate increases. However, for now, it seems that cooler heads are prevailing.
It’s really unclear what path the board will choose," he said. "But it would seem extremely unlikely they would pursue the 7.9 per cent strategy, especially after the PUB intellectually dismembered their arguments in the last rate application.
If rate-hike demands like that are unlikely, so too are the discord and conflict that infected the board.
Last March, Riley and nine of 10 directors resigned and publicly denounced Premier Brian Pallister for failing to meet with them to discuss the utility’s future strategy.
Since his appointment following the spring 2016 election, Riley had been sounding an alarm about Hydro’s growing debt. He publicly floated the idea of an "equity injection" from the provincial government. In short, he wanted Pallister to borrow money to give to Hydro to boost its equity-to-debt ratio, an important measurement of corporate fiscal health.
Pallister dismissed Riley’s request in blunt terms. The relationship between the two men continued to sour to the point where the premier refused to meet with Riley.
And then, Pallister decided to quash a $70-million land claims deal between Hydro and the Manitoba Metis Federation, a project in which Riley had been directly involved. That decision not only sparked a heated legal battle with the MMF, it also signalled the implosion of the relationship between Pallister, the leader of the Progressive Conservative party, and Riley, one of the most influential Tory supporters in the province.
A political battle such as this could have, if left unattended, created conflict and uncertainty for months, if not years. Instead, Pallister moved quickly to install a new board, led by Marina James, the former head of Economic Development Winnipeg.
The newly constituted board seems to be keenly focused on a reboot at the senior-most levels of the utility.
Although it’s difficult to prove a direct cause and effect, Shepherd’s retirement announcement in July — just four months after Riley and nine directors resigned — seems to have kicked off the strategy change. Although he took over the top spot at Hydro in late 2015, four months before Pallister and the Tories won the election, Shepherd was considered a true believer in Riley’s aggressive war on the utility’s debt.
At the very least, it appears that with Riley gone, the new board is focused on distancing itself from Shepherd and McCallum.
Hydro spokesman Bruce Owen confirmed that McCallum "had a lead role in the 2017-18 general rate application," which contained the 7.9 per cent demand. However, he left before making any contribution to the 2019-20 rate application.
Has Hydro, at both the board and the executive level, officially abandoned the alarmist hyperbole that was evident during the tenure of Riley and Shepherd?
The ultimate proof of that will not come until Hydro unveils a new long-term integrated financial forecast (IFF), the main source of information about Hydro finances both present and future.
Hydro files an updated IFF with every PUB rate application. However, the utility is making no secret of the fact that the IFF created by the former board and management is undergoing a reboot of its own.
Owen confirmed the board is reviewing "the corporation’s operations, forecasts and finances to chart a long-term course for Manitoba Hydro."
That is a fairly strong confirmation that the current board is reviewing all of the work of the former board and executives with an eye towards a more balanced strategy going forward.
As it undertakes a new IFF, the new board will have the benefit of some good news on a number of different fronts.
Bipole III is finished and although it was still grossly over budget, Hydro was able to activate the line on schedule and at a total cost that was $300 million less than the worst estimates. As well, the costs associated with completion of the Keeyask generating station have been "stabilized," according to the most recent Hydro news release.
That does not eliminate the debt crunch that Riley raged against, but it certainly allows the utility to start making progress on bolstering its equity position.
And that has to come as some relief to the Pallister government. Although Pallister must still find a way out of his bitter dispute with the Metis federation, he can look forward to a year when there are no more blood spats with political appointees, and no more extraordinary rate hikes.
With a bit of luck, the new board and management at Hydro have a chance to replace the constant conflict and uncertainty of the past 24 months with boring, quiet competence. Which, when you’re running a monopoly energy company, is more or less the goal.
Pertinent on-line comments:
Nothing has changed at Hydro. The problems are still there. The financial tsunami will hit Hydro in 4 year's time when Keeyask and the new 500 kilovolt US line are charged to the Hydro credit card and payments (power rate increases) begin. Bipole III cost $5 billion, while the cost still to be charged (Keeyask and US line) total $10 billion. That's why the worst is yet to come.
The solution was simple, but with the turmoil at the executive level, with the new Conservative Board and changing CEO's, it was not recognized:
Keeyask construction should have been stopped! Here's why:
One day after Pallister was elected in April, 2016, Hydro (Kelvin Shepherd and the VP of Power Smart) announced a massive power smart program which will save Hydro 1,285 MW over a 15-year period. Keeyask will deliver 700 MW. It's easy to see that this ambitious program would more than meet Hydro's requirements, with surplus to spare. And the clincher is that the Power Smart program delivers a kilowatt at 1/5 the cost of Keeyask. A little bit of engineering knowledge at the Hydro senior levels should have recognized that fact. Keeyask costs were still small as the plant was just getting started.
The high foreheads in this province just don't understand Hydro. It's an engineering company and needs engineering knowledge at the very senior levels, including the Board to solve the issues of poor system development which are excessively costly. A new IFF just juggles the costs, and nothing changes.
Truthseeker: "New leadership heralds brighter future". Not so, Dan. The past 4, outside CEO appointments, have all been failures! Why would things be different with Jay Grewal.
Although Bob Brennan was an inside appointment, and yielded some stability during his 23 year tenure, he developed no prospective candidates for CEO, when he retired. A failure on his part. An outside appointment followed him.
Repeated studies how shown that most successful companies develop their own management personnel and promote them. Hydro desperately needs an executive succession planning program.
Since the $5B Bipole III, the $8.7B Keeyask and the $1.1B Manitoba Minnesota Transmission Project are not needed for Manitoba, particularly if the new crown corporation Efficiency Manitoba does its job (replacing Power Smart), there is absolutely no profitable return on all this investment. Our hydro rates are rising to pay for this travesty, whether lower today by "kicking the can down the road" for the following generations to shoulder, or biting the bullet right on and raising the rates as the previous board required. (By comparison, Hydro Quebec raised its hydro rates 0.3% on April 1st, 2018).
This exported surplus electric energy is being sold at a fraction of what it costs to generate, hence our rate increases to pay for the shortfall. This surplus electric energy must be diverted back into the province so we import less oil, and truly make our total energy use at a lower cost for everyone. This is where real leadership is required.