Direct Examination of Patrick Bowman On behalf of the Manitoba Industrial Power Users Group (MIPUG) April 25, 2019 1
Outline Introduction Approach Testing application (February update) justification Assessment based on one-year forecasts Testing longer-term directional information Other topics Main Recommendation – across-the-board increase of 0% to 1.5% is justifiable based on: (a) reasonable customer expectations of annual rate increases; (b) no evidence rate increase above inflation is needed this year, and (c) benefit to smooth transition to higher rates to address Keeyask in-service (and eventual end of Bipole III deferral amortization). Consideration given to ensuring rate increase is deferred for Keeyask, similar to Bipole III account, to help ensure purpose is clear – not intended to fund growth in Hydro’s current costs. April 25, 2019 2
Introduction Evidence comprises MIPUG Exhibits: MIPUG-5 – Pre-filed Testimony Responses to information requests from the Consumers Coalition (CC-9), PUB (PUB- 12) and Manitoba Hydro (MH-22). Comment on new issues arising from process. Longstanding MIPUG Assignment – Review Hydro proposals and plans in light of regulatory principles appropriate for Crown hydro utility – long-term perspective Fundamental view that interests of customers and Hydro should not be seen to be at odds. Customers need financially sufficient Hydro, Hydro needs customer loads, competitive rates, reliable service. Not like regulation of private sector utility, or a quasi-private utility with government investment April 25, 2019 3
Approach Proceeding led to challenges for analytical assessments as to whether rates are sufficient, and are just and reasonable. Historically, Manitoba Hydro has always been regulated on basis of long-term financial targets. Rates set to collect current period costs (O&M, interest on assets in service, taxes, etc.) Testing if customers were sustainably funding (or drawing down) reserves to still permit future rate stability In part reflects hydrology variability as discussed by MH earlier in hearing Reserves are inherently longer-term concept Forecasts of one-year of finances is not sufficiently informative, on their own, to draw conclusions on rate path. For this reason, concluded context was needed beyond just one-year information. April 25, 2019 4
Approach – looked at both one-year, and MH-93 path Relied on Exhibit MH-93 Used by Hydro as a benchmark in the Application Board found “with minor adjustments, this scenario is directionally consistent with the Board’s decisions in this Order” (59/18, page 173) Defensible as a long-term trajectory Previously reviewed that MH-93 scenario showed 6 years of net losses. Existence of losses was similar to each previous IFF (as summarized in MH-93): NFAT Scenarios for Keeyask – 8 years of losses totalling $638 million IFF14 – 8 years of losses totalling $977 million IFF15 – 3 years of losses totalling $58 million Ex. MH-93 (based on IFF16) – 6 years of losses totalling $418 million In each subsequent IFF, the start of net losses moved later, meaning higher retained earnings at start of net loss period, better positioned to absorb losses. Overall – NFAT expansion era is unfolding very well. April 25, 2019 5
Context - Example of Bowman direct June 2015 re: IFF14 On surface, IFF14 showed challenges. But needed to recognize scale of hurdle. Still true for 5 impacts being absorbed Still no Government support; same pile-on effect. Operating cash flow now far ahead of this level (now debating if this can be met in each of the worst years, not just over the decade) Retained earnings now far exceed last estimated cost of 5 year drought. 6
Testing Hydro’s Updated Application (page 6-7 of MIPUG-5) Hydro’s update no longer needs 3.5% increase to avoid net losses. Instead relies on 3 claims in support (Feb 14 Supplement, page 3): 1. Waiting for low flow to give higher rates would result in increased debt: Mathematically true, but not the appropriate test for managing drought. Implies net income is the tool to manage drought risk. Ignores retained earnings, and PUB comments on reserves and regulatory action as the appropriate way to manage drought. If taken at face value, simply a directional support for perpetual large rate increases 2. Keeyask and Bipole III cost increases could exacerbate losses in MH-93 Noted as curious, given Bipole and Keeyask have good news compared to MH-93 Net losses in MH-93 (and each prior IFF) were well-known, and were part of rate transition 3. Granting rate increase now reduces likelihood of future rate shock: Again, mathematically true, but not possible to test without long-term information No information on how likely a rate shock is, how big it might be, how much a rate increase of 3.5% reduces the likelihood – cannot be assessed without long-term forecasts April 25, 2019 7
One-Year Assessment - Comparison to MH-93, for 2019/20 Key Values: Long-term debt lower (by $0.580 billion) Capital Investment cost control shows improvement (Plant in Service down by $0.543 billion) Retained earnings lower ($0.127 billion if no rate increase in 2019/20); one-year drought risk for 2019/20 reduced due to known water in storage (max one-year adverse impact reduced from $432 million to $347 million) Basically same net income ($64 million) even without the annual rate increase assumed in MH-93. One-year assessment – basically on track even before considering 2019/20 rate increase. April 25, 2019 8
One-year Assessment – Cash (and Capitalized Interest) Cash flow from Operations per MIPUG-MH-8c is positive. Exceeds Normal Capital Spending. Two perspectives per MH Rebuttal : [note: this is transitory issue – IDC not typically this large] Issues with MH approach: 1. Not consistent with ‘Used and Useful’ principles 2. Not consistent with past PUB conclusions (59/18) 3. Purports to show what happens when Keeyask comes on-line – but ignores the added Revenue (approx. $360 million – PUB book, Page 76). 4. No principled reason to treat interest different than other construction costs More important - Hydro’s approach is not bad news – from cash perspective, this is close to a ‘post Keeyask’ picture, if you add $360 million export revenues and about $30 million extra water rentals and O&M – in short, we can cash flow a post-Keeyask year with today’s rates. (PUB/MH-I-9U) Figure 6, Hydro Rebuttal, page 9 April 25, 2019 9
Longer-Term Directional Assessment Compared to MH-93, key updated information: Bipole III lower cost Keeyask earlier in-service (sooner revenues, ongoing savings). Hard to reconcile material schedule improvement with no improvement in cost ($8.7B) when IDC is approaching $25 million a month and camp is $1 million per day to operate. But will accept evidence of no net cost reduction. Keeyask risks increasingly getting resolved – example of geotech Added export contracts – SaskPower 215 MW. Potential renewals of Xcel Energy/NSP Last hearing (MH-93) evidence was no new contracts could arise or be assumed, has financial impacts within important early years of Keeyask. Interest rates – average interest rate slightly higher in 2019/20 (0.18%), this is before latest debt. But, this has been locked in for much longer, so MH-93 should show sustained benefits, with much lower refinancing impacts starting within a few years. April 25, 2019 10
Longer-Term Directional Assessment (cont’d) DSM future unknown, but hard to see case for more upward rate pressure from DSM. MH-93 included DSM programs that are now not likely to occur (most notably Fuel Choice). Note that just the change from the November application to February update is material – adds $30 million extra domestic revenue, offset by $12 million less export revenues, and reduced program spending $33 million in 2019/20 alone. (MIPUG/MH-2b) All of these updates are on top of assessments already noted by the Board about why MH-93 was conservative in 59/18. For example MH-93 did not consider export price benefits or import price reductions (2-5% in each case) due to MMTP/GNTL (page 129 of 59/18). Also did not consider any dependability premium for uncontracted dependable export energy and had 7.9% price elasticities in load forecast. No apparent material or sustained negative developments compared to MH-93 Not to confuse accounting detail regarding Keeyask earlier in-service with bad news. This is not an assessment based on “hope”. This reflects latest and best updated information. April 25, 2019 11
Other Topics 12
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