manitoba hydro final submission · 2016. 2. 19. · manitoba hydro final submission february 19,...

February 19, 2016 Index

SUPPLEMENTAL FILING TO

MANITOBA HYDRO’S 2015/16 & 2016/17 GENERAL RATE APPLICATION

MANITOBA HYDRO FINAL SUBMISSION

1.0 Executive Summary ...................................................................................................... 1

1.1 Manitoba Hydro’s Application .................................................................................1

1.2 Public Utilities Board Decision in Order 73/15 ........................................................3

1.3 Interveners Positions .................................................................................................4

1.4 The PUB has Jurisdiction to Approve Interim Rate Increases ..................................7

1.5 Conclusion ................................................................................................................8

2.0 Summary of the Reasons for the Requested 3.95% Rate Increase ............................. 10 2.1 Extensive Electric Capital Investments are Expected to Nearly Double Carrying

Costs in the Next 10 Years ......................................................................................10

2.2 Investments in Capital Assets Will Place Pressure on Manitoba Hydro’s Financial Strength and Increase the Risk of Rate Volatility ...................................13

2.3 Rates Have Not Increased to Fully Compensate for Reductions in Net Extraprovincial Revenue .........................................................................................17

2.4 Manitoba Hydro’s 2016/17 Interim Rate Proposal Maintains Net Income and Financial Ratios at Acceptable Levels and Promotes Rate Stability for Customers ................................................................................................................18

3.0 Manitoba Hydro is demostrating ongoing effective cost control................................ 20 4.0 Intervener Rate Recommendations ............................................................................. 21

4.1 Position of Green Action Centre .............................................................................21

4.2 Positions of the Coalition, MIPUG and MKO ........................................................22

4.3 Manitoba Hydro Forecasts a Minimal Contribution to Financial Reserves to 2025 in MH15 .........................................................................................................23

4.4 Deferring Non-Cash Expenses Does Not Eliminate the Need for the Requested 3.95% Rate Increases ..............................................................................................25

4.5 Rate Increases of 0-2% for 2016/17 are Inadequate to Achieve Rate Stability for Customers ................................................................................................................26

4.6 Manitoba Hydro’s Financial Results are Subject to Significant Volatility .............32

5.0 PUB Jurisdiction and Tests to Approve Interim Rate Increases ................................. 38 5.1 The PUB has Unfettered Jurisdiction to Approve Interim Rate Increases on a

Prima Facie Basis ....................................................................................................38

5.2 Manitoba Hydro has Utilized Interim Rate Requests in the Appropriate Circumstances .........................................................................................................42

of 47 February 19, 2016

SUPPLEMENTAL FILING TO 1

MANITOBA HYDRO’S 2015/16 & 2016/17 GENERAL RATE APPLICATION 2 3

MANITOBA HYDRO FINAL SUBMISSION 4

5 1.0 EXECUTIVE SUMMARY 6

7 1.1 Manitoba Hydro’s Application 8

9 On January 16, 2015, Manitoba Hydro applied to the Public Utilities Board of Manitoba 10 (“PUB”) for approval of a 3.95% general rate increase effective April 1, 2016. Manitoba 11 Hydro filed a comprehensive 2015/16 & 2016/17 General Rate Application (“GRA”) on 12 January 23, 2015 which outlined in detail the capital investment drivers and borrowing 13 requirements as well as the compelling need for steady and regular rate increases over the 14 next decade, which was extensively reviewed and tested by the parties to the GRA over 15 the course of five months. In Order 73/15, the PUB indicated it would consider options 16 regarding a process to review rates for April 1, 2016. 17 18 On November 18, 2015, Manitoba Hydro filed its Supplemental Filing to the 2015/16 & 19 2016/17 GRA, requesting that the 2016/17 rate increase of 3.95% as referenced in Order 20 17/15 be approved on an interim basis effective April 1, 2016. This increase, applied on 21 an across-the-board basis for all customer classes, is projected to generate additional 22 revenues of $61 million and result in a modest contribution to financial reserves (net 23 income) of $29 million in 2016/17. Absent the proposed rate increase for 2016/17, 24 Manitoba Hydro is projecting a net loss of $33 million from Electric operations and 25 financial ratios are projected to deteriorate further. 26 27 If approved by the PUB, a residential customer, without electric space heat, using an 28 average of 1,000 kWh per month would experience an increase in their monthly bill of 29 $3.33 effective April 1, 2016. A residential customer with electric space heat, using an 30 average of 2,000 kWh a month, would experience increases of $6.36 per month effective 31 April 1, 2016. 32 33

34

2016/17 Supplemental Filing Page 2 of 45 Manitoba Hydro Final Submission February 19, 2016

The reasons for the requested 3.95% interim rate increase remain consistent with those 1 outlined by Manitoba Hydro in the 2015/16 & 2016/17 GRA, and are as follows: 2 3 • Manitoba Hydro is in a period of extensive capital investment to meet the growing 4

energy requirements of Manitoba, to replace aging utility assets, and address 5 increased capacity needs on the system. 6

7 • The required investment in new and existing infrastructure is expected to nearly 8

double the asset base and associated carrying costs (revenue requirements) of Electric 9 operations in the next 10 years. 10

11 • Rate stability for customers is dependent upon Manitoba Hydro maintaining its 12

financial strength. The required investment in assets will place pressure on Manitoba 13 Hydro’s financial strength by deteriorating the financial results and key financial 14 ratios. 15

16 • Manitoba Hydro continues to experience downward pressure on electricity prices in 17

the export market and it is necessary to gradually increase rates over time to 18 compensate for the resulting reduction in net extraprovincial revenues. 19

20 • Manitoba Hydro’s 2016/17 rate proposal maintains net income and financial ratios at 21

acceptable levels and is necessary to promote rate stability for customers and manage 22 the deterioration of the Corporation’s financial strength during this period of 23 extensive capital investment. 24

25 For more detailed information with respect to the Reasons for the Application, please see 26 Section 2.0 of this Submission. As outlined in Section 3.0 of this Submission, Manitoba 27 Hydro is demonstrating that it is controlling its operating costs, which has allowed 28 Manitoba Hydro to maintain the indicative annual rate increases to the 3.95% level. 29 30 In its December 24, 2015 letter, the PUB determined that the scope of the intended 31 review process for this Application would be limited to Manitoba Hydro’s financial 32 situation and whether interim relief prior to the hearing of the next GRA is warranted. 33 Manitoba Hydro notes that the submissions of the Interveners raise a number of issues or 34 concerns outside of the scope that was determined by the PUB. For instance, Intervener 35 Submissions discuss that Manitoba Hydro has not yet filed the additional information on 36 sustaining capital expenditures or developed a bill affordability program as directed by 37 the PUB in Order 73/15. It is clear in Order 73/15, this information was to be provided to 38 the PUB at the next full GRA and would not form part of the process to consider rates to 39


be effective for April 1, 2016. Manitoba Hydro intends to respond to the issues raised by 1 the Interveners at the next GRA and as such has not addressed these issues in this 2 submission. 3 4

1.2 Public Utilities Board Decision in Order 73/15 5 6

In considering Manitoba Hydro’s request for an interim 3.95% rate increase effective 7 April 1, 2016, it is beneficial to review the PUB’s recent policy determinations in Order 8 73/15. In making its rate determinations in Order 73/15, the PUB found the following: 9

10 • Manitoba Hydro is bringing several major new generation and transmission projects, 11

including the Bipole III Reliability Project and the Keeyask Generating Station, into 12 service in Manitoba Hydro’s fiscal years 2018/19 and 2019/20, respectively (page 6). 13 14

• When these projects enter service, they will increase Manitoba Hydro’s revenue 15 requirement, as Manitoba Hydro will need to recover depreciation, finance costs, 16 operations, maintenance, and administration costs, and other expenses related to these 17 projects on an annual basis (page 6). 18

19 • As Manitoba Hydro’s rates are set to recover its revenue requirement, rates would 20

need to increase to recover the total carrying costs of these projects, which the PUB 21 estimated would accumulate to $987 million or 65% by 2021/22 if they were 22 considered in isolation (page 6-7). 23

24 • Manitoba Hydro is forecasting that 3.95% annual rate increases may be sought for the 25

next 15 years, a concept known as rate smoothing, instead of large, lump-sum 26 increases when these projects enter service (page 6-7). 27

28 • Manitoba Hydro’s financial targets are not going to be fully achieved over the next 10 29

years of the 20-year forecast. The PUB reiterated its concern expressed in Order 30 43/13 of the forecast deterioration in the utility’s financial measures and noted that 31 the current outlook contemplates a further deterioration from what was presented to 32 the PUB at the last GRA (page 56). 33

34 • The PUB questioned whether the then current level of retained earnings at the GRA 35

of $2.5 billion was sufficient to cover both the negative financial impact of a 36 significant drought, as well as the other fundamental risks faced by Manitoba Hydro, 37 including the loss of major infrastructure or loss of export market access (page 56). 38


• The PUB reiterated its concern raised in Order 43/13 that the move towards a 90:10 1 debt-to-equity ratio by the end of the decade may not provide sufficient financial 2 reserves to deal with droughts and other risks faced by the utility. The PUB’s 3 indicated that its ruling in Order 73/15 should not be taken as a tacit acceptance of a 4 90:10 scenario (page 57). 5

6 • Manitoba Hydro has forecasted lower export revenues, largely because of continued 7

lower export prices. Because export revenues are decreasing, domestic rates will need 8 to increase (page 4). 9

10 In recognition of the above noted findings, the PUB: 11 12

“determined that there is a compelling policy interest to phase in the 13 required rate increases over a number of years in advance of the in-service 14 dates of the new major capital projects and avoid rate shock for consumers. 15 If the Board waited until the new capital projects come into service before 16 raising consumer rates, the rate increases would have to be substantially 17 higher (page 23)”. 18

19 In determining rates for electrical power, the PUB has the ability to take into 20 consideration any compelling policy considerations. It is clear that in Order 73/15, the 21 PUB found that gradually increasing rates in order to smooth required rate increases over 22 time to avoid rate shock when the major capital projects come into service, was in the 23 interest of ratepayers. This has been evidenced by three successive rate determinations in 24 Order 43/13, 49/14 and 73/15, where the PUB has approved rate increases for the 25 purposes of mitigating the rate impact when Bipole III is placed into service, through the 26 establishment of the Bipole III deferral account. Based on this policy determination, the 27 PUB approved a 3.95% rate increase effective August 1, 2015. 28

29 1.3 Interveners Positions 30 31

Written submissions were provided by the Green Action Centre (“GAC”), the Consumers 32 Association of Canada (Manitoba)/Winnipeg Harvest (“Coalition”), Manitoba Industrial 33 Power Users Group (“MIPUG”) and Manitoba Keewatinowi Okimakanak (“MKO”) on 34 February 10, 2016. 35 36 The GAC supports Manitoba Hydro’s request for a 3.95% rate increase effective April 1, 37 2016, and indicates that it believes that rate-setting should be based primarily on longer 38 run revenue requirements, rather than short-term income variability. GAC’s 39


recommendation is based on the following key considerations (see Section 4.1 for 1 additional information): 2 3 • Manitoba Hydro made the case at last year’s GRA that 3.95% per year increments for 4

the next decade and more is the minimum trajectory needed to prevent excessive 5 deterioration of its financial ratios, which brings increased risks to the corporation 6 and its customers. The PUB ultimately supported phased in rate increases to address 7 the long run revenue requirements. 8 9

• GAC supports another 3.95% increase on April 1, 2016 and recommends that the 10 PUB wait until the next GRA to assess whether an adjustment to the rate trajectory is 11 warranted, as it expects that this review would occur at a regular GRA when a more 12 thorough examination of forecasts and risks is possible. 13

14 • GAC cautions that if the PUB is contemplating a lower than 3.95% rate increase on 15

April 1, 2016, it should consider whether a higher than 3.95% rate increase would be 16 needed in subsequent years, which would be contrary to the adopted rate-smoothing 17 policy. 18

19 In sharp contrast to the approach of the PUB, GAC and Manitoba Hydro, Coalition and 20 MIPUG continue their approach to dissect the near-term revenue requirement for 2016/17 21 to advocate for short term rate relief, while largely downplaying or ignoring the ongoing 22 financial risks and cash flow requirements that if disregarded could very easily result in 23 deterioration in Manitoba Hydro’s financial results and require significantly higher rate 24 increases than 3.95% in the future. Coalition, MIPUG and MKO recommend rate 25 increases of 0% to 2.0% effective April 1, 2016. 26

27 Coalition, MIPUG and MKO’s rate recommendations fail to adequately consider that 28 Manitoba Hydro’s financial results are subject to significant volatility, and fail to further 29 address the following factors, which are more fully described in Sections 4.2 to 4.6 of this 30 Submission: 31

32 • Despite improvements in MH15, Manitoba Hydro’s Manitoba Hydro’s financial 33

results and financial targets continue to significantly deteriorate. While there has been 34 an improvement in the financial outlook in MH15, the fact of the matter is, even with 35 the 3.95% rate increases, Manitoba Hydro is forecasting to essentially breakeven and 36 make minimal additional contributions to financial reserves over the next 7 years 37 from 2016/17 to 2022/23. Further, even with the 3.95% rate increases, Manitoba 38 Hydro’s equity ratio for electric operations is projected to deteriorate to a low of 12% 39


by 2021/22, a full 13% below its target of 25% and lingers between 12-14% for 6 1 years between 2021/22 to 2026/27 leaving Manitoba Hydro vulnerable for an 2 extended period of time to a significant financial risk such as a prolonged drought. 3 Please see Section 4.3 of this Submission for further information. 4 5

• That deferring non-cash expenses through additional regulatory deferral accounts 6 does not eliminate the need for the requested 3.95% rate increase. While this 7 approach provides the appearance that financial results are better, ultimately revenue 8 requirement is being driven by capital investment requirements. Reduction of rate 9 increases in the near term similar to the 3.36% to 3.49% scenarios requested in 10 Financial Information Minimum Filing Requirement 1, only pushes out revenue 11 requirements to the future resulting in higher net debt of $2.5 to $2.7 billion and an 12 increase in regulatory deferrals of $1.1 billion. These increased costs must be 13 recovered from future ratepayers, increasing the likelihood that future rate increases 14 may need to be significantly higher than the 3.95% rate increases projected in MH15. 15 Please see Section 4.4 of this Submission for further information. 16 17

• Rate increases of 0% to 2.0% are inadequate to achieve rate stability for customers. If 18 the PUB approved a rate increase of 0%-2.0% for 2016/17, Manitoba Hydro would be 19 required to seek annual rate increases in the range of 4.5%-5.0% for each year to 20 2024/25. Alternatively, if the PUB approved a rate increase of 0%-2% for 2016/17, 21 without any compensating higher rate increases in 2017/18 and beyond, then 22 Manitoba Hydro’s financial strength would deteriorate to levels that are below the 23 minimum 10% equity ratio acceptable to Manitoba Hydro. Please see Section 4.5 of 24 this Submission for further information. If the PUB were to approve inflationary rate 25 increases on a continual basis as suggested by certain Interveners, Manitoba Hydro’s 26 financial outlook would very quickly deteriorate back to the levels that were forecast 27 in MH14, which the PUB expressed significant concern about in Order 73/15. 28

29 • The potential for drought, given that Manitoba Hydro has experienced a number of 30

successive years of above-average water conditions. A 5-year drought commencing in 31 2017/18 could decrease retained earnings by $1.9 billion by 2021/22. This is 32 equivalent to an incremental annual rate increase of 2.52%. 33 34

• The potential impacts of further reductions in export prices. A low export price 35 scenario could decrease retained earnings by $671 million by 2024/25, which is 36 equivalent to an incremental annual rate increase of 0.82%. 37 38


• The potential for higher sustaining capital requirements. An increase in capital of 1 $100 million per year starting in 2017/18, could reduce retained earnings by $370 2 million by 2024/25, which is equivalent to an incremental annual rate increase of 3 0.45%. 4

5 • The significant exposure to future increases in interest rates in the next number of 6

years as a result of the extensive capital investment program. A total of $5.2 billion of 7 Manitoba Hydro’s prospective debt portfolio is subject to interest rate risk over the 8 next 12 months and the Corporation will require over $10 billion of debt financing 9 over the next three fiscal years. An increase in interest rates of 1% could reduce 10 retained earnings by $959 million by 2024/25, which is equivalent to an incremental 11 annual rate increase of 1.11%. 12

13 • The additional borrowing requirements associated with 2.0% rate increases until the 14

in-service of Bipole III in 2018/19 (as provided in the scenario in MIPUG/MH I-13a). 15 This would be projected to result in additional borrowing requirements of $434 16 million between 2016/17 and 2020/21. 17 18

• Over the next ten years there is a significant likelihood that Manitoba Hydro could 19 incur losses, and retained earnings and the equity ratio could drop below the 20 minimum acceptable levels. As demonstrated in Manitoba Hydro’s expanded 21 uncertainty analysis, even with 3.95% indicative rate increases, over the period 2018 22 to 2025, about 30% of the projections show a net loss for any given year. 23

24 • The requirement to maintain financial reserves to protect against other risks than 25

drought (e.g. infrastructure failure). 26 27

The Coalition, MIPUG and MKO approach essentially ignores long-term rate stability 28 and the concerns expressed by the PUB with respect to Manitoba Hydro’s deteriorating 29 financial ratios, and is contrary to the PUB policy decision from Order 73/15. 30 31

1.4 The PUB has Jurisdiction to Approve Interim Rate Increases 32 33

In their written submissions, Coalition, MIPUG and MKO have raised concerns with 34 respect to the PUB’s jurisdiction to approve interim rates on April 1, 2016, despite the 35 fact that the PUB has determined that it has such jurisdiction on numerous occasions and 36 contemplated a further process to approve rates for April 1, 2016 in Order 73/15. 37 38 The governing legislation has not changed since the issuance of past orders on this 39 subject. These Interveners have not raised any new arguments nor referenced new case 40


law which might impact the PUB’s previous decisions with respect to its ability to 1 approve rates on an interim basis in accordance with section 47(2) of The Public Utilities 2 Board Act (the “PUB Act”). It is clear that the PUB has the necessary jurisdiction to 3 award an interim rate increase in this case. 4 5 The PUB has previously determined that urgency is not a required condition in terms of 6 determining whether a prima facie case has been made. A prima facie case only requires 7 the PUB to find that upon initial examination, there appears to exist sufficient 8 collaborating evidence to support a case. It does not require anything further than an 9 initial examination of the evidence provided. 10 11 Should the PUB determine after the next GRA that the interim rate increase was higher 12 than justified, the PUB has the ability to amend its decision in a final order or make an 13 adjustment to a subsequent rate request. 14 15 Please see Section 5.0 of this Submission for further information. 16 17

1.5 Conclusion 18 19

Manitoba Hydro believes that the interim rate increase being requested continues to 20 carefully balance the need for investment to maintain safe and reliable service with the 21 need to provide steady and predictable rates for customers. 22

23 In striking the appropriate balance between investment to maintain safe and reliable 24 service to customers and rate stability for customers, Manitoba Hydro is not requesting 25 rate increases over the next 10 years in accordance with the increase in costs, but rather 26 has proposed what it believes are fair and reasonable rate increases of 3.95% that 27 balances these factors and considers customer sensitivity to rate increases. As outlined in 28 its 2015/16 & 2016/17 General Rate Application, if Manitoba Hydro were to consider 29 rate increases from a strictly financial perspective, including recovering its costs and 30 making a reasonable contribution to financial reserves on an annual basis, it would be 31 requesting rate increases in the order of 5.5% to 6%. 32

33 Manitoba Hydro is exposed to significant financial volatility, particularly with respect to 34 changes in water flows, interest rates and export prices. As demonstrated in Manitoba 35 Hydro’s expanded uncertainty analysis, even with 3.95% indicative rate increases, over 36 the next ten years there is a significant likelihood (30% of the uncertainty financial 37 projections) that Manitoba Hydro could incur losses, and retained earnings and the equity 38 ratio could drop below the minimum acceptable levels. Given this volatility, Manitoba 39 Hydro is of the view that the 3.95% proposed and indicative rate increases continue to be 40


the minimum necessary to promote rate stability for customers and manage the 1 deterioration of Manitoba Hydro’s financial strength. 2 3 Manitoba Hydro believes that its interim rate increase request is fully consistent with the 4 PUB’s policy decision to gradually increase rates during this period of extensive capital 5 investments. 6


2.0 SUMMARY OF THE REASONS FOR THE REQUESTED 3.95% RATE 1 INCREASE 2

3 MH15 forecasts electricity rate increases of 3.95% to 2028/29 (and 2.0% thereafter to 4 2034/35) as being the minimum necessary to strike the appropriate balance between the 5 needed investment to maintain safe and reliable service and providing stable and 6 predictable rates for customers, and to manage the deterioration in the Corporation’s 7 financial strength. The 3.95% rate increase effective April 1, 2016 is further required to 8 maintain 2016/17 net income and financial ratios at acceptable levels. 9 10

2.1 Extensive Electric Capital Investments are Expected to Nearly Double Carrying 11 Costs in the Next 10 Years 12

13 As discussed extensively during the public review of the 2015/16 & 2016/17 GRA, 14 Manitoba Hydro is in the midst of a period of extensive capital investment to meet the 15 growing energy requirements of Manitoba, replace aging utility assets and address 16 increased capacity constraints on its system. 17 18 The level of Manitoba Hydro’s capital investments are projected to be significantly 19 higher than in the past ten years, and are unprecedented in Manitoba Hydro’s history. The 20 following Figure demonstrates that Manitoba Hydro’s capital investments for Electric 21 operations were in excess of $1 billion between 2009/10 and 2012/13, and approximately 22 $1.5 billion in 2013/14 and $1.9 billion in 2014/15. Electric capital investments are 23 projected to be approximately $2.6 billion in 2015/16 and $3.4 billion in 2016/17. Capital 24 investments are not expected to return to previous levels until 2022/23. 25


Figure 1. Capital Investments in Electric Operations 2004/05 to 2024/25 1

2 3

As a result of the capital intensive nature of Manitoba Hydro’s business, approximately 4 two-thirds of the overall costs or revenue requirement of the Corporation is made up of 5 carrying costs (finance expense, depreciation & capital taxes) of the assets that are used 6 to provide service to customers, along with the operating and administrative (O&A) costs 7 of these assets. Once these assets are placed into service, the associated carrying costs 8 form part of the Corporation’s revenue requirements. 9 10 The following Figure compares Manitoba Hydro’s Electric operations projected non-flow 11 related expenses (O&A, finance expense, depreciation expense, and taxes and other 12 expenses), which are more fixed in nature, to the Corporation’s projected domestic and 13 net export revenues (extraprovincial revenues less fuel & power purchases and water 14 rentals & assessments) in MH15. 15

16

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ACTUAL FORECAST

For the year ended March 31millions of dollars

Sustaining Capital DSM New Generation & Transmission


Figure 2. Electric Expenses Compared to Revenues (MH15) 1

2 Manitoba Hydro’s costs rise sharply to approximately $2.7 billion over the 10 year period 3 to 2024/25, almost doubling from their current level of $1.6 billion. This increase in costs 4 is primarily driven by Manitoba Hydro’s required capital investments. 5

6 General Consumers Revenue is insufficient to fully cover the approximately $1.1 billion 7 total cost increase. Over the 10 year period, General Consumers Revenue, including the 8 proposed and indicative 3.95% annual rate increases, rises by slightly less than half 9 (42%) of the cost increase. 10

11 Including net extraprovincial revenues, Manitoba Hydro is projecting losses on Electric 12 operations in three out of the ten years in the period 2018/19 to 2024/25 and is 13 forecasting a marginal increase in projected retained earnings from approximately $2.6 14 billion in 2015/16 to $2.8 billion by 2024/25, while Manitoba Hydro's asset base doubles 15 from approximately $12 billion to $25 billion. 16

17 Manitoba Hydro is incurring significant fixed costs associated with major generation and 18 transmission projects and sustaining capital expenditures, and these investments are 19 resulting in increased revenue requirements. Manitoba Hydro’s request for an interim 20 electricity rate increase effective April 1, 2016 is consistent with the approach to 21 gradually increase rates during this period of extensive capital investments. 22

23 The current environment of significant capital investments necessitates a proactive and 24 longer term approach to rate-setting, which is consistent with the PUB’s policy decisions 25

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GCR at PUB approved rates


in Order 73/15 to mitigate rate shock to consumers by phasing the required rate increases 1 in over time. 2

3 2.2 Investments in Capital Assets Will Place Pressure on Manitoba Hydro’s Financial 4

Strength and Increase the Risk of Rate Volatility 5 6

The majority of Manitoba Hydro’s capital investments will be funded through 7 unprecedented levels of debt financing, and will place pressure on the Corporation’s 8 financial strength by deteriorating financial results and key financial ratios. 9 10 Due to the increased levels of debt financing and weaker near-term financial results, 11 Manitoba Hydro projects deterioration in the Electric operations equity ratio to 12% by 12 2021/22 before it gradually begins to recover to reach the 25% equity target by 2031/32. 13 The Electric operations capital coverage ratio is projected to be below target for several 14 years before achieving the 1.20 target by 2021/22, and EBIT interest coverage ratio target 15 of 1.20 is expected to be achieved by 2026/27. 16 17 The following figures show Manitoba Hydro’s projected net income, retained earnings, 18 and financial ratios over the 10-year period to 2024/25 in MH15, including the proposed 19 and indicative 3.95% rate increases. 20

21


Figure 3. Projected Electric Net Income 1 2

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Figure 7. Projected Electric Capital Coverage Ratio 1

2 In the next 10 years there is significant financial risk and potential for rate volatility as 3 Manitoba Hydro’s financial position deteriorates due to the large capital investment 4 requirements. 5 6 Manitoba Hydro is relaxing its adherence to financial targets over this period in order to 7 alleviate rate increases in excess of 3.95% to the extent possible. Due to the deterioration 8 in Manitoba Hydro’s financial ratios, any further increases to costs or reductions to 9 revenues increases the risk of higher rate increases to customers. 10 11 In order to ensure rate stability and predictability for customers, it is necessary that 12 Manitoba Hydro maintains its financial strength. In a Crown-owned utility such as 13 Manitoba Hydro, financial reserves are needed to maintain rate stability for customers 14 and maintain access to low-cost financing on behalf of customers as the cost of financing 15 is included in the revenue requirement of the corporation and collected from customers 16 through the rates. 17 18 If Manitoba Hydro does not receive the necessary rate increases to maintain its financial 19 strength, then there is significant risk to customers that rate changes will become more 20 volatile and there will be a need for sudden or larger rate increases in the near future. This 21 risk is particularly acute in the period of extensive capital investment. 22 23 The proposed and indicative 3.95% rate increases continue to be the minimum necessary 24 to promote rate stability for customers and manage the deterioration of Manitoba Hydro’s 25 financial strength during the period of extensive capital investment. 26

27

0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00

Fiscal Year Ending

PROJECTED ELECTRIC CAPITAL COVERAGE RATIO vs. TARGET (including 3.95% rate increases)


2.3 Rates Have Not Increased to Fully Compensate for Reductions in Net 1 Extraprovincial Revenue 2

3 The requirement for the proposed rate increase in 2016/17 is being driven not only by the 4 need to invest in the electricity system, but also by the continued downward pressure on 5 export prices. 6 7 In 2015/16, overall average export electricity prices are approximately 20% lower 8 compared to MH14 and in 2016/17, overall average export electricity prices in MH15 are 9 forecast to be approximately 34% lower than in MH14 due mainly to significantly lower 10 opportunity prices resulting from lower natural gas prices. In the period 2017/18 to 11 2024/25, overall average export electricity prices are forecast in MH15 to be 12 approximately 3% lower compared to MH14 and from 2025/26 to end of the forecast in 13 2034/35, overall average export electricity prices are approximately 6% lower due mainly 14 to lower opportunity export prices. 15 16 As discussed during the 2015/16 & 2016/17 GRA, net extraprovincial revenues have 17 enabled Manitoba Hydro to maintain low electricity rates for Manitobans. However, as 18 shown in the Figure below, the contribution to the Corporation’s overall revenues made 19 by exports has experienced a significant decline from the peak of $571 million in 2005/06 20 to approximately $100 million experienced in 2011/12 and 2012/13. Manitoba Hydro’s 21 net extraprovincial revenues are projected to be $149 million in 2015/16 and $139 22 million in 2016/17, which is significantly lower than the $365 million average net 23 extraprovincial revenues generated from 2004/05 to 2008/09. 24 25


Figure 8. Net Extraprovincial Revenue 2004-2017 1

2 3

It is necessary to gradually increase rates over time to compensate for the reduction in net 4 extraprovincial revenues. 5 6

2.4 Manitoba Hydro’s 2016/17 Interim Rate Proposal Maintains Net Income and 7 Financial Ratios at Acceptable Levels and Promotes Rate Stability for Customers 8

9 As shown in the Figure below, absent the proposed rate increase for 2016/17, Manitoba 10 Hydro is projecting a net loss of $33 million from Electric operations; the equity ratio is 11 projected to be 13%; and the EBIT interest coverage and capital coverage ratios are 12 projected to deteriorate to 0.96 and 0.88, respectively. 13 14 The proposed interim rate increase of 3.95% effective April 1, 2016 is expected to 15 generate additional revenue of $61 million in 2016/17. With this increase, the forecast net 16 income from Electric operations for 2016/17 is projected to be $29 million; the equity 17 ratio is projected to be 14%; and the EBIT interest coverage and capital coverage ratios 18 are projected at 1.03 and 0.98 respectively. 19

20


Figure 9. Net Income, Retained Earnings and Financial Ratios With and Without 1 Rate Increase (MH15) 2

3 4

Approval of the proposed 3.95% rate increase is required to maintain net income and 5 financial ratios for 2016/17 at acceptable levels, and is necessary to promote rate stability 6 for customers and manage the deterioration of the Corporation’s financial strength during 7 this period of extensive capital investment. Approval of the proposed rate increase is 8 projected to result in a modest contribution to financial reserves (net income) of $29 9 million in 2016/17. 10

Retained Earnings and Financial Ratios (without proposed rate increase) 2017

Net Income (electric operations) (33)$ Retained Earnings (electric operations) 2,579$ Debt to Equity Ratio (electric operations) 87:13EBIT Interest Coverage Ratio (electric operations) 0.96 Capital Coverage Ratio (electric operations) 0.88

Net Income (electric operations) 29$ Retained Earnings (electric operations) 2,641$ Debt to Equity Ratio (electric operations) 86:14EBIT Interest Coverage Ratio (electric operations) 1.03 Capital Coverage Ratio (electric operations) 0.98

Forecast

Retained Earnings and Financial Ratios (including proposed rate increase)


3.0 MANITOBA HYDRO IS DEMOSTRATING ONGOING EFFECTIVE COST 1 CONTROL 2

3 Manitoba Hydro is demonstrating that it is controlling its operating and administrative 4 (“O&A”) costs, which has allowed the Corporation to maintain the indicative annual rate 5 increases at the 3.95% level. Manitoba Hydro has limited increases in O&A in MH15 for 6 2015/16 to 2021/22 to below inflationary levels at 1%, excluding the impacts of 7 accounting changes. Inflationary increases of 2% are assumed for 2022/23 and thereafter 8 in MH15. 9

10 To limit increases in O&A costs at 1% (net of accounting changes), Manitoba Hydro has 11 committed to reducing approximately 330 operational positions over the 3 year period 12 from 2014/15 to 2016/17. As of December 31, 2015, Manitoba Hydro has achieved a 13 cumulative reduction of 347 operational positions as compared to a forecast of 236 to the 14 end of the 2015/16 fiscal year, as presented in the Figure below. 15

16 Figure 10. Operational Position Reductions Achieved 17

18 19 The advancement of an additional 111 position reductions demonstrates Manitoba 20 Hydro’s continued efforts to maintaining O&A costs below inflationary levels. The 21 cumulative annualized savings associated with these position reductions is approximately 22 $29.6 million to the end of 2015/16. These reductions have been achieved through 23 attrition, the application of technology and the consolidation and elimination of work 24 processes where appropriate. Manitoba Hydro has achieved a reduction in operating costs 25 of 1.4% in 2014/15, net of accounting changes, and continues to track favorably to 26 achieve the 1% target for 2015/16. 27

MANITOBA HYDROOPERATIONAL POSITION COMMITMENTS AND REDUCTIONS ACHIEVED

Committed Reductions 2014/15 & 2015/16 GRA Actual Position Reductions Achieved

2014/15 2015/16 Cumulative 2014/15 2015/16* CumulativePresident & CEO 2 - 2 2 0 2Corporate Communication & Public Affairs - 2 2 0 1 1General Counsel & Corporate Secretary 1 1 2 2 0 2Human Resources & Corporate Services 33 27 60 53 15 68Corporate Relations 3 3 6 8 1 9Finance & Regulatory 4 3 7 6 4 10Generation Operations 9 12 21 41 23 64Major Capital Projects 1 - 1 1 0 1Transmission 30 18 48 49 52 101Customer Service & Distribution 46 19 65 49 17 66Customer Care & Energy Conservation 16 6 22 21 2 23

145 91 236 232 115 347

*Reflects actual position reductions to December 31/15


4.0 INTERVENER RATE RECOMMENDATIONS 1 2

Written submissions were provided by GAC, the Coalition, MIPUG and MKO. GAC 3 supports Manitoba Hydro’s request for a 3.95% rate increase. The Coalition and MKO 4 recommend that the PUB award no rate increase for April 1, 2016, and MIPUG 5 recommends the PUB approve an inflationary level (2.0%) rate increase effective April 1, 6 2016, the revenues of which MIPUG recommends be allocated to the Bipole III deferral 7 account. The following sections provide Manitoba Hydro’s views on these submissions. 8

9 4.1 Position of Green Action Centre 10 11

The Green Action Centre supports Manitoba Hydro’s request for a 3.95% rate increase 12 effective April 1, 2016, and indicates that it believes that rate-setting should be based 13 primarily on longer run revenue requirements, rather than short-term income variability. 14 GAC’s recommendation is based on the following considerations: 15 16 • Manitoba Hydro’s hydro-electric business essentially requires long planning horizons 17

and financial commitments to build and maintain the infrastructure all Manitobans 18 depend upon to keep the lights on. Once a public review such as NFAT is completed, 19 decisions are reached, and projects are licensed and under construction, it is essential 20 that Manitoba Hydro recover the relatively fixed carrying costs of these projects in 21 order to carry out its mandate. 22

23 • After the in depth analysis of the NFAT and of last year’s GRA there is a reasonably 24

predictable stream of costs for Manitoba Hydro that have been extensively reviewed 25 in the last two years and are largely independent of annual variations in net income, 26 sustaining capital expenditures, DSM expenditures and O&A costs. 27 28

• Manitoba Hydro made the case at last year’s GRA that 3.95% per year increments for 29 the next decade and more is the minimum trajectory needed to prevent excessive 30 deterioration of its financial ratios, which brings increased risks to the corporation 31 and its customers. The PUB ultimately supported phased in rate increases to address 32 the long run revenue requirements. 33

34 • Accepting a policy decision to smooth out rate trends for a longer term as helpful to 35

some customers, the rate-setting exercise becomes one of establishing what the linear 36 rate trend should be and when to adjust it. 37 38


• GAC supports another 3.95% increase on April 1, 2016 and recommends that the 1 PUB wait until the next GRA to assess whether an adjustment to the rate trajectory is 2 warranted, as it expects that this review would occur at a regular GRA when a more 3 thorough examination of forecasts and risks is possible. 4 5

• In GAC’s view, three-year intervals for reviewing longer run revenue requirements 6 and optimal rate trajectories would leave regulatory time and resources (of the PUB, 7 Manitoba Hydro and Interveners) for considering the other regulatory priorities, such 8 as Cost of Service and Rate Design. 9

10 • GAC cautions that if the PUB is contemplating a lower than 3.95% rate increase on 11

April 1, 2016, it should consider whether a higher than 3.95% rate increase would be 12 needed in subsequent years, which would be contrary to the adopted rate-smoothing 13 policy. 14

15 The Corporation believes that the position advanced by GAC appropriately acknowledges 16 that the proposed rate increases should be assessed through a longer-term perspective. As 17 a result of the extensive investments that Manitoba Hydro has to make to continue to 18 provide safe and reliable service to customers, there is a requirement for a period of 19 continual rate increases to cover the associated costs. Setting rates considering longer 20 term revenue requirements, as opposed to being overly focused on the shorter term 21 financial outlook, is the prudent approach and in the best interest of customers. Focusing 22 only on the short term, will inevitability result in rate instability as ratepayers will be 23 faced with substantially higher rate increases in the future, especially considering the 24 longer term and significant investments Manitoba Hydro is undertaking. Manitoba Hydro 25 also supports a three-year test year GRA process, which is permitted by Section 27 of The 26 Crown Corporations Review and Accountability Act. 27

28 4.2 Positions of the Coalition, MIPUG and MKO 29 30

In its written submissions, Coalition and MKO recommend that the PUB deny Manitoba 31 Hydro’s request for an interim rate increase of 3.95% effective April 1, 2016 and that no 32 rate increase should be given until a full and complete GRA hearing. 33 34 MIPUG recommends that the PUB approve a rate increase effective April 1, 2016 at the 35 rate of inflation (2%), the revenues of which MIPUG recommends be allocated to the 36 Bipole III deferral account. 37


Manitoba Hydro’s understanding of the key reasons for the recommended 0% to 2% rate 1 increase by Coalition, MKO and MIPUG are as follows: 2 • An improvement in the financial outlook in MH15 driven to a large degree by lower 3

finance expense; 4 • Their view that MH15 does not comply with the regulatory accounting requirements 5

from Order 73/15; 6 • Their view that there is no urgency to granting a interim rate increase and that there is 7

no harm to Manitoba Hydro’s financial position in waiting a year to implement the 8 next rate increase; and, 9

• Their observations with respect possible reductions to future revenue requirements as 10 a result of their analysis. 11 12

Manitoba Hydro’s view with respect to the issues raised by Coalition, MIPUG and MKO 13 are discussed in the sections below. 14

15 4.3 Manitoba Hydro Forecasts a Minimal Contribution to Financial Reserves to 2025 in 16

MH15 17 18

MIPUG and Coalition have suggested that Manitoba Hydro should not be awarded the 19 full 3.95% rate increase requested as there has been an improvement in MH15 over 20 MH14. 21 22 In MH14, Manitoba Hydro was projecting significant losses in the order of $900 million 23 between 2018/19 and 2025/26. If these projected losses were to materialize, they would 24 significantly reduce the financial reserves of Manitoba Hydro and this deterioration 25 would increase the risk of the need for rate increases in excess of 3.95%. 26 27 At page 3 of its written submission, Coalition indicates that MH15 shows an 28 accumulation of net income that is almost $1 billion higher than MH14. To clarify, in 29 MH15, Manitoba Hydro is projecting that financial reserves will be relatively stable in 30 comparison to current levels and increase marginally ($260 million) in the first 10 years 31 of the forecast, including the impacts of the 3.95% rate increases. 32 33 While there has been an improvement in the financial outlook in MH15, the fact of the 34 matter is, even with the 3.95% rate increases, Manitoba Hydro is forecasting to 35 essentially breakeven and make minimal additional contribution to financial reserves over 36 the next 7 years from 2016/17 to 2022/23. Further, even with the 3.95% rate increases, 37 Manitoba Hydro’s equity ratio for electric operations is projected to deteriorate to a low 38 of 12% by 2021/22, a full 13% below its target of 25% and lingers between 12-14% for 6 39


years between 2021/22 to 2026/27 leaving Manitoba Hydro vulnerable for an extended 1 period of time to a significant financial risk such as a prolonged drought. 2 3 The projected financial reserves in MH15 are now more consistent with the levels 4 projected in MH12 and MH13, as indicated by the figure below. The following figure 5 shows the cumulative total net income (loss) from 2015/16 to 2024/25 from MH12 to 6 MH15, as well as projected retained earnings at 2025. 7 8 Figure 11. Cumulative Net Income/ (Loss) and Retained Earnings in MH12 to 9 MH15 10

11 12 Manitoba Hydro notes that it has been forecasting indicative rate increases of 3.95% per 13 year since MH12. As demonstrated by the above noted figure, Manitoba Hydro has 14 continued to hold the projected rate increases at the 3.95% level despite the deterioration 15 in MH13 and MH14, in keeping with its long-term approach to rate-setting. Manitoba 16 Hydro did not over react to the deterioration in MH13 and MH14 but rather maintained a 17 steady approach to rate setting and requested no more than a 3.95% increase. To now 18 reduce the 3.95% rate increases in MH15, as suggested by Coalition and MIPUG, as a 19 result of a reduction in losses that return the financial outlook of Manitoba Hydro to 20 essentially breakeven is short-sighted, reactionary and risky for ratepayers. 21

22 The stabilization of projected financial reserves in MH15 combined with continued cost 23 containment initiatives should assist Manitoba Hydro in maintaining the 3.95% rate 24 increases in the near to medium term and reduce the risk of the requirement for higher 25 than 3.95% rate increases in the future. 26 27 However, if lower than average water flows occur in the first ten years of the forecast or 28 lower forecast electricity export prices continue, rate increases higher than the projected 29 3.95% per year may be required. Additionally, as further extensive reviews and analyses 30 of asset condition and aging infrastructure progress, an increase in capital investment 31 requirements in future periods relative to MH15 may be required to address customer 32

Cumulative Net Income/(loss)

2016-2025 ($millions)

Retained Earnings 2025

($millions)

MH12 811$ 3,105$ MH13 (7)$ 2,572$ MH14 (714)$ 1,948$ MH15 260$ 2,858$


growth requirements and to sustain Manitoba Hydro’s current infrastructure. This would 1 also place upward pressure on rate increases. 2 3 The proposed 3.95% rate increase for 2016/17 and the indicative rate increases of 3.95% 4 per year in MH15 from 2017/18 to 2028/29 continue to be the minimum necessary to 5 support needed investments in infrastructure, to preserve the financial integrity of the 6 Corporation and to protect customers against much higher rate increases in the future. 7

8 4.4 Deferring Non-Cash Expenses Does Not Eliminate the Need for the Requested 9

3.95% Rate Increases 10 11

Coalition and MIPUG have suggested that Manitoba Hydro should not be awarded the 12 full 3.95% rate increase as they believe that MH15 does not comply with Order 73/15 13 with respect to the accounting treatment for the differences in depreciation expense and 14 overhead ineligible for capitalization. 15 16 Manitoba Hydro submits that Scenarios 1b and 1c with the assumed even annual rate 17 increases of 3.36% to 3.49% that Coalition and MIPUG allege to be in compliance with 18 Order 73/15, further increase the risk to future rate payers of rate instability and 19 intergenerational inequity. As noted in the response to PUB/MH I-4a, while deferring 20 non-cash overhead and depreciation provide an appearance that net income is higher, 21 ultimately revenue requirement is being driven by the balance sheet and the need to 22 maintain reasonable financial reserves while funding the major capital projects. 23 Reduction of rate increases in the near term only pushes out revenue requirements to the 24 future, not only increasing costs to future customers, but also increasing the likelihood 25 that future rate increases may need to be significantly higher than the 3.95% rate 26 increases projected in MH15. Scenarios 1b and 1c result in net debt that is $2.5 to $2.7 27 billion higher than MH15 by 2034/35 and result in an increase in regulatory deferral 28 accounts of $1.1 billion that must be recovered from future ratepayers. 29 30 In Manitoba Hydro’s view, both Coalition and MIPUG have erroneously concluded that 31 these scenarios are compliant with the regulatory accounting requirements of Order 32 73/15. This scenario was provided in response to a Minimum Filing Requirement which 33 set out certain assumptions with respect to the treatment for the differences in 34 depreciation expense and ineligible overheads, as well as an associated amortization 35 period. As explained in the paragraphs below, these assumptions were not specifically set 36 out in Order 73/15 as claimed by Coalition and MIPUG. 37 38 In Order 73/15, at page 46, the PUB found that Manitoba Hydro should retain its existing 39 CGAAP Average Service Life (“ASL”) methodology for rate-setting purposes until 40


Directives 8 and 9 from Order 43/13 have been complied with and the PUB has been 1 provided with an IFRS-compliant depreciation study based on ASL. 2 3 Additionally, at pages 35-36 of Order 73/15, the PUB noted that overheads no longer 4 eligible for capitalization have increased since the 2012/13 & 2013/14 GRA and the PUB 5 indicated that the additional $20 million of ineligible overheads should continue to be 6 capitalized for 2015/16 for rate-setting purposes. 7 8 Inherent in the Coalition and MIPUG position on this issue is the assumption that the 9 PUB has specifically directed in Order 73/15 that Manitoba Hydro establish regulatory 10 deferral accounts for the differences in deprecation and ineligible overheads. There are no 11 such directives provided in the ordering paragraphs in Order 73/15. Furthermore, the 12 amortization period of the ELG versus ASL and ineligible overhead differences were not 13 set out in Order 73/15, but rather were simply specified as assumptions in the question in 14 Financial Information MFR 1. The treatment of these differences, both for financial 15 reporting and rate setting purposes, is a matter that requires further review and direction 16 from the PUB at Manitoba Hydro’s next GRA. 17 18 In advance of the closing of its financial statements for the 2015/16 fiscal year, Manitoba 19 Hydro intends to seek confirmation from the PUB on the financial reporting treatment of 20 the differences between ELG and ASL and ineligible overheads to ensure consistency 21 with the intent of Order 73/15. 22 23

4.5 Rate Increases of 0-2% for 2016/17 are Inadequate to Achieve Rate Stability for 24 Customers 25

26 In their written submissions, MKO and Coalition suggest that there is no urgency to 27 granting a interim rate increase and that there is no harm to Manitoba Hydro’s financial 28 position in waiting a year to implement the next rate increase. MIPUG further suggests 29 that Manitoba Hydro’s financial position can be sustained and will not deteriorate with 30 rate increases in line with inflation (2%). 31 32 As discussed in Section 5.1, the PUB has already determined that urgency is not a factor 33 to be considered when granting an interim rate increase. Further, in Manitoba Hydro’s 34 view, there is no evidence to support the claims made by MKO and Coalition. In fact, the 35 evidence supports just the opposite conclusions: 36 37 • If the PUB approved a rate increase of 0%-2.0% for 2016/17, Manitoba Hydro would 38

be required to seek annual rate increases in the range of 4.5%-5.0% for each year to 39 2024/25, in order to achieve the same level of retained earnings in 2024/25 as forecast 40


in MH15. The sensitivity analysis shown on page 27 of IFF15 demonstrates that a 1% 1 reduction in the proposed rate increase in 2016/17 would require incremental rate 2 increases of 0.26% above the projected annual 3.95% increases for each year between 3 2017/18 and 2024/25. Therefore, a 0% rate increase in 2016/17 would require rate 4 increases of 5.0% per year, and a 2.0% rate increase in 2016/17 would require rate 5 increases of approximately 4.5% to 2024/25. 6 7

• If the PUB approved a rate increase of 0%-2% for 2016/17, without any 8 compensating higher rate increase in 2017/18 and beyond, then Manitoba Hydro’s 9 financial strength would deteriorate to levels that are below acceptable ranges, which 10 will place ratepayers at significant risk for future rate instability. A 0% rate increase 11 in 2016/17 results in a projected equity ratio that deteriorates to a low of 9% in 12 2023/24, and remains at or below 10% for 6 years between 2021/22 to 2026/27. 13 Moreover, these Interveners consistently recommend 2.0% rate increases whether the 14 proceeding is an interim rate increase or a GRA. As such, their argument/scenarios 15 that show a 2.0% rate increase in the test year followed by 3.95% rate increases 16 thereafter are disingenuous. A 2% rate increase in 2016/17, 2017/18 and 2018/19 (in 17 accordance with MIPUG/MH I-13a) results in a projected equity ratio that 18 deteriorates to a low of 8% in 2025/26 and remains at or below 10% for 8 years 19 between 2021/22 to 2028/29. 20

21 • The PUB indicated in Order 73/15 that it was concerned with the deterioration in 22

Manitoba Hydro’s financial outlook in MH14. If the PUB were to approve 23 inflationary rate increases on a continual basis as suggested by certain Interveners, 24 Manitoba Hydro’s financial outlook would very quickly deteriorate back to the levels 25 that were forecast in MH14, which the PUB expressed significant concern about in 26 Order 73/15. Coalition’s contention that Manitoba Hydro did not explore any “middle 27 ground” between 2.5% and 3.95% annual rate increases is simply not true. In 28 Manitoba Hydro’s view, the proposed 3.95% rate increase is the minimal acceptable 29 level for the reasons outlined in this Submission. 30

31 The following figures provide a comparison of the net income, retained earnings, equity 32 ratio, interest coverage ratio and capital coverage ratio under the following scenarios: 33 • MH15 3.95% rate increases; 34 • 0% in 2016/17, followed by the MH15 indicative 3.95% thereafter (as requested in 35

PUB/MH I-5a) vi.); 36 • 2% in 2016/17, followed by the MH15 indicative 3.95% thereafter (as requested in 37

PUB/MH I-5a) vi.); 38 • 2% rate increases in 2016/17 to 2018/19, followed by 3.95% rate increases in 2019/20 39

to 2034/35 (as requested in MIPUG/MH I-13a). 40


Figure 12. Projected Net Income under Varying Rate Increase Assumptions 1

2 3 As shown in the Figure above, the 0% in 2016/17 rate scenario results in a net loss of $33 4 million in 2016/17 and net losses of $556 million over the 2017 to 2025 period, and the 5 2.0% in 2016/17 rate scenario results in a net loss of $1 million in 2016/17 and net losses 6 that total $144 million over the 2017 to 2025 period. The 2.0% in 2016/17 to 2018/19 rate 7 scenario results in total net losses of $791 million over the 2017 to 2025 period. 8 9 By comparison, the MH15 3.95% rate increase results in net income of $246 million 10 between 2017 to 2025. 11

12

(200)

(150)

(100)

(50)

-

50

100

150

Projected Net IncomeMH15 MH15 - 2% in 2017 MH15 - 0% in 2017 MH15 - 2% in 2017-2019


Figure 13. Projected Retained Earnings under Varying Rate Increase Assumptions 1

2 3 As shown in the Figure above, the 0% in 2016/17 rate scenario results in projected 4 retained earnings of $2.1 billion in 2025, and the 2.0% in 2016/17 rate scenario results in 5 projected retained earnings of $2.5 billion in 2025. 6 7 The 2.0% in 2016/17 to 2018/19 rate scenario results in projected retained earnings of 8 $1.8 billion in 2025. This scenario results in retained earnings which are lower than 9 Manitoba Hydro’s $1.9 billion estimate of the cost of 5-year drought and do not provide 10 sufficient reserves to mitigate the potential financial impacts of the considerable array of 11 risks the Corporation faces in fulfilling its mandate. 12 13 By comparison, the MH15 3.95% rate increase results in retained earnings of $2.9 billion 14 in 2025. 15

16

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Projected Retained EarningsMH15 MH15 - 2% in 2017 MH15 - 0% in 2017 MH15 - 2% in 2017-2019


Figure 14. Projected Equity Ratio under Varying Rate Increase Assumptions 1

2 3 As shown in the Figure above, a 0% rate increase in 2016/17 results in a projected equity 4 ratio that deteriorates to a low of 9% in 2023/24, and remains at or below 10% for 6 years 5 between 2021/22 to 2026/27. A 2% rate increase in 2016/17 results in a projected equity 6 ratio that deteriorates to a low of 11% in 2021/22, and remains at this level for 5 years to 7 2025/26. 8

9 A 2% rate increase in 2016/17, 2017/18 and 2018/19 results in a projected equity ratio 10 that deteriorates to a low of 8% in 2025/26 and remains at or below 10% for 8 years 11 between 2021/22 to 2028/29. 12 13 In MH15 the equity ratio is projected to reach a low of 12% by 2021/22, and increase to 14 13% in 2024/25. 15

16

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Projected Equity RatioMH15 MH15 - 2% in 2017 MH15 - 0% in 2017

MH15 - 2% in 2017-2019 10% Minimum


Figure 15. Projected EBIT Interest Coverage Ratio under Varying Rate Increase 1 Assumptions 2

3 4

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Projected EBIT Interest Coverage RatioMH15 MH15 - 0% in 2017 MH15 - 2% in 2017 MH15 - 2% in 2017-2019 1.20 Target


Figure 16. Projected Capital Coverage Ratio under Varying Rate Increase 1 Assumptions 2

3 As can be seen in Figure 15 and Figure 16 above, the 0.0% and 2.0% in 2016/17 rate 4 increase scenarios result in projected interest and capital coverage ratios that are well 5 below those projected in MH15 and well below target of 1.20. This is also true of the 6 2.0% in 2016/17 to 2018/19 rate increase scenarios, where the EBIT interest coverage 7 ratio is at or below 1.0 for 10 years between 2017/18 to 2025/26, and the capital coverage 8 ratio is at or below 1.0 for 5 years of out of the 10 year period to 2024/25. 9

10 4.6 Manitoba Hydro’s Financial Results are Subject to Significant Volatility 11 12

In the written submissions of Coalition and MIPUG, they make a number of observations 13 with respect to possible positive variations to future revenue requirements, such as the 14 early achievement of position reductions and the possibility of future reductions in 15 interest rates. 16

17 Coalition and MIPUG continue their approach to dissect the near-term revenue 18 requirement for 2016/17 to argue for short term rate relief while largely down playing or 19 ignoring the ongoing financial risks and cash flow requirements that if disregarded could 20 very easily result in deterioration in Manitoba Hydro’s financial results and require 21 significantly higher rate increases than 3.95% in the future. Coalition and MIPUG’s 22

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Projected Capital Coverage RatioMH15 MH15 - 2% in 2017 MH15 - 0% in 2017

MH15 - 2% in 2017-2019 1.20 Target


positions are reactionary and do not take into account the volatility that is experienced by 1 Manitoba Hydro. 2 3 Coalition and MIPUG’s submissions fail to fully consider the following factors: 4 • The potential for drought, given that Manitoba Hydro has experienced a number of 5

successive years of above-average water conditions. Manitoba Hydro has experienced 6 above-average water flows since the 2003/04 fiscal year. Looking back at the 7 historical records of water conditions, this is one of the longest periods of above-8 average conditions in Manitoba Hydro’s history. History has also shown that long 9 periods of above-average water conditions is followed by long periods of below-10 average conditions. There is very little that can be done to slow the deterioration in 11 financial position once it is recognized that Manitoba Hydro is in a low flow period. 12 The best insurance against the financial impacts of a drought is to maintain a 13 sufficient level of financial reserves and manage debt levels, by implementing regular 14 and reasonable rate increases. As shown in the sensitivity analysis on page 27 of 15 IFF15, a 5-year drought starting in 2017/18 could decrease retained earnings by $1.9 16 billion by 2021/22 compared to MH15, which is equivalent to an incremental annual 17 rate increase of 2.52%. 18 19

• The potential impacts of further reductions in export prices. In MH15 for 2016/17, 20 export prices are approximately 34% lower on average compared to MH14. Over the 21 longer term, export prices were forecast to be approximately 7% lower compared to 22 MH14. Manitoba Hydro notes that long term natural gas and in turn MISO energy 23 market price expectations have continued to decline since the electricity and natural 24 gas prices that formed the basis for MH15 was prepared. Based on these continued 25 decreases in natural gas prices, Manitoba Hydro anticipates further decline in MISO 26 energy market prices. As shown in the sensitivity analysis on page 27 of IFF15, a low 27 export price scenario could decrease retained earnings by $671 million by 2024/25 28 compared to MH15, which is equivalent to an incremental annual rate increase of 29 0.82%. 30

31 • The potential for higher sustaining capital requirements. As noted in IFF15, Manitoba 32

Hydro is undertaking further extensive reviews and analyses of asset condition and 33 aging infrastructure progress, which may determine that an increase in capital 34 investment requirements in future periods may be required relative to IFF15 to 35 address customer growth requirements and to sustain Manitoba Hydro’s current 36 infrastructure. This would also place upward pressure on rate increases. As shown in 37 the sensitivity analysis on page 27 of IFF15, an increase in capital of $100 million per 38 year starting in 2017/18, could reduce retained earnings by $370 million by 2024/25, 39 which is equivalent to an incremental annual rate increase of 0.45%. 40


• The significant exposure to future increases in interest rates in the next number of 1 years, as a result of the extensive capital investment program. Manitoba Hydro’s all-2 in long term debt financing rates have increased by over 40 basis points since their 3 record lows in early 2015. Manitoba’s long term credit spreads trended sharply 4 upward during the mid to latter part of 2015, with current market conditions in 5 January 2016 showing that the actual credit spread is at levels not seen since the 6 financial crisis. The future direction, timing and pace of interest rate movements 7 remain uncertain. It is forecast that the gradual release of the extraordinary monetary 8 policy interventions will eventually return interest rates to pre-crisis levels. As shown 9 in the figure below, the interest rate risk in the immediate future is high, with 29% (or 10 $5.2 billion) of Manitoba Hydro’s the prospective debt portfolio being subject to 11 interest rate risk over the next 12 months. 12 13 Figure 17. Summary of Interest Rate Risk Profile14

15 16

As shown in the following figures, Manitoba Hydro will require $10.7 billion of debt 17 financing in the next three fiscal years, and the Corporation’s Weighted Average 18 Interest Rate and financial results will be highly sensitive to interest rate changes. 19 20 In response to largest borrowing requirements in the Corporation’s history and 21 growing sensitivity to interest rate and market liquidity risks, Manitoba Hydro began 22 maintaining larger balances of unencumbered cash as part of its enhanced prudential 23 liquidity practice, and intends to be funded approximately three months in advance of 24 the Corporation’s cash requirements. 25 26

Debt Portfolio not subject to

Interest Rate Risk within 12 months

71%($12,764 M)

Fixed Rate Long Term Debt to be

Refinanced within 12 months

0%($10 M)

New Borrowings within 12 months

17%($3,055 M)

Interest Rate Risk Prof ile

29%($5,200 M)

Chart 7: Summary of Interest Rate Risk Profile (%)(Prospective as at December 31, 2015)

Refinancing ofUnderlying Debt

4%($660 M)

Floating Rate Debt8%

($1,475 M)


Figure 18. Borrowing Requirements 2016/17 to 2018/19 1

2 3

Figure 19. Borrowing Requirements 2016/17 to 2018/19 4

5 6

As shown in the sensitivity analysis on page 27 of IFF15, an increase in interest rates of 7 1% could reduce retained earnings by $959 million by 2024/25, which is equivalent to an 8 incremental annual rate increase of 1.11%. 9

10 • The additional borrowing requirements associated with 2.0% rate increase until the 11

in-service of Bipole III in 2018/19. The figure below compares the cash flow from 12 operations associated with MH15 with 3.95% rate increases, and the scenario from 13 MIPUG/MH I-13a, which assumes 2.0% rate increases in 2016/17, 2017/18 and 14 2018/19, and 3.95% rate increases in 2019/20 and 2020/21. 15

16 17

Fiscal Year ($ millions CAD) 2016/17 2017/18 2018/19 TotalNew borrowing requirements 3,080.1 2,669.5 1,806.4 7,556.0Refinance maturing long term debt 319.9 330.5 993.6 1,644.0Refinance maturing underlying physical debt 660.0 250.0 592.0 1,502.0Total Fiscal Year 4,060.0 3,250.0 3,392.0 10,702.0

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2016/17 2017/18 2018/19

Refinance maturing underlying physical debt

Refinance maturing long term debt

New borrowing requirements


Figure 20. Comparison of Cash Flow Surplus/ (Deficit) Between MH15 and 1 MIPUG 13a Scenario 2

3 4

This figure demonstrates that 3.95% rate increases in MH15 are projected to provide 5 sufficient cash flow from operations to fund electric sustaining capital expenditures. 6 The scenario with 2.0% rate increases in the first three years, followed by rate 7 increases of 3.95% are projected to result in a cash flow deficiency of $192 million 8 relative to total electric sustaining capital expenditures. More importantly, if the PUB 9 were to approve the rate increases suggested by MIPUG, the difference in cash flow 10 between MH15 and the MIPUG 13a scenario is projected to result in additional 11 borrowing requirements of $434 million over this timeframe. 12

13 • Over the next ten years there is a significant likelihood that Manitoba Hydro could 14

incur losses, and retained earnings and the equity ratio could drop below the 15 minimum acceptable levels. Manitoba Hydro is exposed to significant financial 16 volatility, particularly with respect to changes in water flows, interest rates and export 17 prices. As demonstrated in Manitoba Hydro’s expanded uncertainty analysis 18 discussed in Section 5.4 of the Supplemental Filing, even with 3.95% indicative rate 19 increases, over the period 2018 to 2025, about 30% of the projections show a net loss 20 for any given year. 21

22 • The requirement to maintain financial reserves to protect against other risks than 23

drought (e.g. infrastructure failure). Manitoba Hydro’s financial and operational risks 24 are significant and include the impacts of drought, new infrastructure development, 25 aging infrastructure renewal and replacement, weather, price and market 26 uncertainties, interest, inflation and foreign exchange rates, skilled labour availability 27 and costs, increasing regulatory, environmental and legal requirements and 28 accelerated technological change. In Order 73/15, the PUB expressed its concern that 29 Manitoba Hydro’s current level of retained earnings may not be sufficient to cover 30 the vast array of risks to which Manitoba Hydro is exposed. Manitoba Hydro 31 manages these risks and provides customers with long-term rate stability and 32 predictability through the maintenance of an adequate level of financial reserves 33


(retained earnings). Even with the indicative 3.95% rate increases, Manitoba Hydro is 1 forecasting to essentially breakeven and make minimal contribution to financial 2 reserves over the next 7 years from 2016/17 to 2022/23. 3


5.0 PUB JURISDICTION AND TESTS TO APPROVE INTERIM RATE INCREASES 1 2 In their written submissions, Interveners have raised concerns with respect to the PUB’s 3 jurisdiction to approve interim rates on April 1, 2016, despite the fact that the PUB has 4 determined that it has such jurisdiction on numerous occasions and contemplated a 5 further process to approve rates for April 1, 2016 in Order 73/15. 6 7

5.1 The PUB has Unfettered Jurisdiction to Approve Interim Rate Increases on a Prima 8 Facie Basis 9

10 The PUB is authorized to grant interim rate increases pursuant to s. 47(2) of The Public 11 Utilities Board Act (the “PUB Act”) which states that: 12 13

“The board may, instead of making an order final in the first instance, make an 14 interim order and reserve further directions, either for an adjourned hearing of 15 the matter, or for further application.” 16

17 The legislature clearly intended to provide the PUB with broad discretion to control its 18 own process and determine when interim orders are appropriate. 19 20 Interveners have on a number of occasions attempted to restrict the PUB's authority to 21 grant interim rate increases and such attempts have been consistently rejected: 22 23

Order 18/10, pg. 5 – “All Board Members at the Interim Rate Consideration 24 Hearing find that the Board has the jurisdiction to approve interim rate 25 adjustments for MH.” 26

27 Order 40/11, pg. 28 – “In response to Interveners views as to the ability of the 28 Board to approve an interim rate increase and that approving an across-the-board 29 interim increase could disadvantage certain classes, the Board finds: a) that it has 30 the necessary jurisdiction – urgency is not a required condition; …” 31

32 Order 116/12, pg. 18 – “As it has found previously, the Board confirms that it has 33 jurisdiction to approve interim rates for MH…” 34 35 Order 49/14, pg. 16 & 17 – “The questions to be determined by this Board are 36 whether it would be just and reasonable to grant interim rates, and whether 37 Manitoba Hydro would suffer a deleterious effect in the absence of an interim rate 38 increase. For the reasons set out below, the Board considers it to be in the public 39 interest to approve an interim rate increase, albeit at a level lower than requested 40


by Manitoba Hydro…. The Board agrees with Manitoba Hydro’s rebuttal 1 submission that urgency is not a necessary precondition for an interim rate 2 increase.” 3 4

As shown above, the PUB has already determined that urgency is not a required 5 condition in terms of determining whether a prima facie case has been made. A prima 6 facie case only requires the PUB to find that upon initial examination, there appears to 7 exist sufficient corroborating evidence to support a case. It does not require anything 8 further than an initial examination of the evidence provided There exists a number of 9 examples of the PUB issuing interim orders in circumstances which are not urgent such 10 as SEP and Curtailable rate orders. 11 12 The very purpose of an interim order is to provide the PUB with the flexibility to make a 13 preliminary determination on the initial evidence provided. Manitoba Hydro included its 14 forecasts for the April 1, 2016 fiscal year in its GRA Application of January 16, 2015 and 15 the parties were afforded an opportunity to test that evidence in a full hearing. The PUB 16 stated in Order 17/15 that 17 18

Additionally, in the GRA materials filed to date, Manitoba Hydro included 19 its forecasts for the April 1, 2016 to March 31, 2017 fiscal year as well as 20 other future years. As that information will be reviewed by the Parties to 21 this GRA Hearing, it will be open to the Board to provide further 22 direction, in its final GRA Order, as to any additional information to be 23 filed and considered before determining whether any process should be 24 instituted for possible April 1, 2016 interim rates.1 25

26 As a result of the PUBs order, Manitoba Hydro provided further, updated information 27 with its filing of November 2015 for the PUB to consider in terms of reaching a decision 28 on interim rates. In this instance, the PUB has gone even further than an initial 29 examination. The PUB afforded Interveners the ability to make preliminary submissions, 30 allowed Interveners and its advisors the ability to pose information requests to receive 31 additional information and finally, allowed Interveners to make further final submissions 32 on the matter. 33

34 Interveners have requested an explanation as to how section 48 applies to Interim Rate 35 Applications.2 Manitoba Hydro cautions the PUB in terms of accepting the Interveners 36 assumptions and interpretation of section 48. There are various sections through-out the 37

1 PUB Order 17/15, pg. 5 2 CAC Submission dated February 10, 2016, Appendix D


PUB Act which intentionally use the term “rates”.3 Section 48 on the other hand refers to 1 “outlay, loss or deprivation”, but does not make reference to “rates”. If legislatures intend 2 for language to be interpreted consistently or apply throughout various sections of 3 legislation, the same language will be purposefully utilized throughout legislation. When 4 that consistent language is not used in a section, it is assumed that the section has a 5 different application and/or meaning.4The notable absence of any reference to “rates” in 6 section 48 suggests that it does not apply to interim rate increases, or to rate increases at 7 all. Further guidance as to the actual application of sections is typically found in the 8 heading to each section. The heading to section 48 reads as follows - “Order involving 9 expense to parties to be after notice and hearing.” This further supports the interpretation 10 that the proper application of this section is to expenses to any owner of a public utility or 11 person and not to rates as suggested by Interveners. 12 13 Interveners have argued that pursuant to section 48 of the PUB Act there must be a full 14 hearing prior to the PUB making an order with respect to a rate increase.5 This raises 15 further doubt as to its application to rate increases as the interpretation of the PUB Act 16 suggested by the Interveners serves to create internal inconsistency within the Act. For 17 example, section 45 of the PUB Act grants the PUB the authority to make interim ex 18 parte orders; and section 125 of the PUB Act authorizes interim orders for gas "rates, 19 tolls or charges". If all orders of the PUB dealing with rate increases (including interim 20 orders as being argued by the Interveners) require a full hearing as suggested by the 21 Interveners, then sections 45 and 125 of the PUB Act is in clear conflict with section 48 22 of the PUB Act. 23 24 If s. 48 were to be applied broadly as suggested by Interveners, it would further render 25 other provisions of the regulatory scheme governing Manitoba Hydro inoperative and 26 unnecessary. Section 47(2) of the PUB Act plainly authorizes the PUB to make interim 27 orders. Section 28 of The Crown Corporations Public Review and Accountability Act 28 contemplates the compensation or refunds where final orders do not confirm interim 29 approved rates. If the PUB were required to hold a full hearing with respect to rate 30 requests, the PUB could issue final orders in every instance and there would be no 31 requirement to provide for interim rates. Interpretations that produce confusion or 32 inconsistency or undermine the efficient operation of a scheme may be appropriately 33 labeled as absurd.6 Manitoba Hydro submits that the interpretation of section 48 as being 34 proposed by Interveners cannot be accepted. The legislature clearly understood interim 35

3 Including sections 77, 8, 116, 120,124, 126 and 127 4 Sullivan and Driedger on the Construction of Statutes, Buttersworth Canada Ltd. 2002, pg 189 5 CAC Submission dated February 10, 2016, Appendix D; MIPUG Submission dated February 10, 2016 pgs 2-3; MKO Submission dated February 10, 2016, pg. 6. 6 Sullivan and Driedger on the Construction of Statutes, Buttersworth Canada Ltd. 2002, pg. 248


rates could be approved in a broad range of circumstances and that a mechanism ought to 1 be in place should final orders not confirm the interim rates. 2 3 The overriding regulatory principle when considering any rate application, including 4 interim rates, is the public interest as articulated by the Manitoba Court of Appeal: 5 6

“The PUB has two concerns when dealing with a rate application; the interests of 7 the utility’s ratepayers, and the financial health of the utility. Together, and in the 8 broadest interpretation, these interests represent the general public interest.”7 9

10 The legislature has afforded the PUB broad jurisdiction as to when and in what 11 circumstances it approves interim rates. The appropriate concern is whether the interim 12 rate increase is in the general public interest. While factors such as urgency, length of 13 time required to issue a final order or financial difficulty may be valid considerations for 14 the PUB in coming to its decision, none are determinative of the matter. The decision to 15 be made is whether the interim rate increase is in the general public interest. 16 17 Manitoba Hydro submits that it is in the general public interest to grant an interim rate 18 increase effective April 1, 2016. If an interim rate increase is not granted, then Manitoba 19 Hydro would either have to forego a rate increase for the 2016/17 fiscal year or increase 20 the magnitude of its rate increase on April 1, 2017 and future years to compensate for the 21 lost revenue. Neither of these options are in the best interest of promoting rate stability 22 and predictability in the long-term for rate payers. 23 24 There are a number of factors which are outside Manitoba Hydro’s control such as 25 interest rates, water conditions and export prices. This makes the next few years 26 extremely important for Manitoba Hydro and its customers. While Manitoba Hydro is 27 strongly of the view that there exists no requirement that it demonstrate urgent financial 28 need, the fact is that there still exists serious risk of financial difficulty requiring attention 29 during Manitoba Hydro’s time of extensive capital expenditures. 30 31 As noted in Manitoba Hydro’s Supplemental Filing, rate stability for customers is 32 dependent upon maintaining the financial strength of the Corporation. Granting the 33 interim rate request will maintain net income and financial ratios at acceptable levels and 34 will promote rate stability for customers. It will also manage the deterioration of 35 Manitoba Hydro’s financial strength and the pressure placed on Manitoba Hydro’s 36 financial ratios. Should the PUB determine after the next GRA that the interim rate 37

7Consumers Association of Canada (Man.) Inc. et al v. Manitoba Hydro Electric Board, 2005 MBCA55.


increase was higher than justified, the PUB has the ability to amend its decision in a final 1 order or make an adjustment to a subsequent rate request. 2 3 The governing legislation has not changed since the issuance of these orders. Interveners 4 have not raised any new arguments nor referenced new case law which might impact the 5 PUB’s previous decisions with respect to its ability to approve rates on an interim basis in 6 accordance with section 47(2) of the PUB Act. It is clear that the PUB has the necessary 7 jurisdiction to award an interim rate increase in this case. 8 9

5.2 Manitoba Hydro has Utilized Interim Rate Requests in the Appropriate 10 Circumstances 11

12 The premise of Coalition’s submission is that Manitoba Hydro is developing an 13 unhealthy addiction to interim rate increases to the detriment of Manitoba consumers.8 In 14 fact, Coalition has erroneously suggested that Manitoba Hydro has filed its eighth interim 15 rate application in the last seven years9 and attached a simple Table as Appendix A 16 attempting to support its statement. Although there have been five interim rate approvals 17 granted between 2010-2015, Coalition has failed to explain the nature or circumstances 18 surrounding those interim rate approvals. 19

20 When looking at the actual PUB Orders listed in the simple Table provided by Coalition, 21 it becomes very apparent that Manitoba Hydro has not in fact filed eight interim rate 22 applications, but rather, filed only three interim rate applications over the last seven 23 years, and requested two interim rate approvals as part of a full General Rate 24 Applications in order to maintain the financial stability of the Corporation while the 25 Public Utilities Board was in the midst of carrying out a full review process. 26 27 In the three cases where Manitoba Hydro filed an interim rate application, it is very 28 apparent that those requests were for legitimate reasons and that the regulatory calendar 29 could not accommodate an extensive review at the time of the application. In those cases, 30 the PUB conducted its full and extensive review of the interim rate increases at the 31 following full GRAs. 32 33 Manitoba Hydro finds itself in the position of having to provide a summary of each of the 34 fiscal years between 2010 and the current request in order to ensure that the PUB has the 35 full and proper facts before it in terms of the interim rates which have been granted and 36 the interim rate requests made by Manitoba Hydro. 37

8 CAC Submission dated February 10, 2016, pg.1 9 CAC Submission dated February 10, 2016, pg. 1


2010/11 and 2011/12: 1 On November 30, 2009, Manitoba Hydro filed a full General Rate Application which 2 amongst other things, requested a two year rate increase (2.9% effective April 1, 2010 3 and 2.9% effective April 1, 2011). Following the filing of its GRA, the PUB determined 4 that the review of the application would include an extensive review of Manitoba 5 Hydro’s risks. It was apparent early on that there was not going to be an agreement on a 6 timetable that would facilitate an April 1, 2010 rate adjustment and as such, RCM/TREE 7 recommended that an interim rate adjustment be implemented. Manitoba Hydro 8 supported the recommendation and following submission from the parties, the PUB 9 issued Order 18/10 which allowed for a 2.9% interim rate increase10. 10

11 As a result of a number of events and factors, the major factor being the extensive range 12 and complex nature of issues to be considered, the oral hearing did not begin until early 13 January 2011 and was not anticipated to conclude until the fall of 2011. With this revised 14 expectation regarding the 2010/11 & 2011/12 GRA review, and that the GRA would not 15 conclude until long after April 1, 2011, the PUB sought submissions from Interveners 16 and Manitoba Hydro with respect to possibly approving a further interim rate 17 adjustment.11 The PUB approved an interim rate of 2% (versus the 2.9% requested by 18 Manitoba Hydro in its 2010/11 & 2011/12 General Rate Application). There was no 19 interim rate request by Manitoba Hydro for either the 2010/11 or 2011/12 fiscal years. 20

21 In fiscal year 2011/12, CAC has also included Order 99/11 in its list of interim rate 22 approvals. There was no interim rate request by Manitoba Hydro which resulted in Order 23 99/11. Order 99/11 was the first of two PUB Orders issued arising out of the completion 24 of the 20 month process to review Manitoba Hydro’s 2010/11 & 2011/12 GRA12. In 25 Order 99/11, the PUB indicated that the existing interim rates and Manitoba Hydro’s 26 request for a further .9% rate increase (the increase remaining from its original 2.9% 27 request in November 2009 and the 2% interim increase awarded by the PUB in April 28 2011) would be further considered and may be adjusted on a final basis in a subsequent 29 Order of the Board.13 The second Order (Order 5/12) was issued in January 2012. 30

31 2012/13: 32 As the PUB issued Order 5/12 on January 17, 2012 and Manitoba Hydro did not have an 33 opportunity to file an extensive GRA, Manitoba Hydro requested that the PUB approve 34 an interim rate request and would be filing a more comprehensive General Rate 35 Application to be filed later in the spring. The PUB determined in Order 32/12 that 36

10 PUB Order 18/10, pg. 3-4 11 January 31, 2011, Transcript pg.2477-2478; PUB Order 40/11, pg. 6 12 PUB Order 99/11, pg. 7 13 PUB Order 99/11, pg. 106


Manitoba Hydro’s deteriorating financial forecast between April 1, 2012 and March 31, 1 2013 needed to be addressed by an immediate, but interim rate increase of 2%.14 2

3 On June 15, 2012, Manitoba Hydro filed its General Rate Application for fiscal years 4 2012/13 and 2013/14. Amongst other things, Manitoba Hydro requested a 2.5% interim 5 rate increase effective September 1, 2012 while the PUB was conducting its process to 6 review the General Rate Application. The PUB determined that given the timing of the 7 GRA filing in mid-June 2012, and that a new final rate order will likely not be issued 8 until early 2013, the interim rate increase allows for the timely implementation of the 9 new rate structure and recovery of revenue in the interim period pending the PUB’s final 10 ruling.15 11

12 2013/14 13 There was no interim rate request made for this fiscal year. 14

15 2014/15: 16 On March 7, 2014, Manitoba Hydro filed an interim application requesting an interim 17 rate increase effective April 1, 2014 in order to avoid resources and scheduling 18 constraints during the Needs For and Alternatives To (“NFAT”) proceeding and to ensure 19 timely implementation of the proposed rate increase. 20

21 The PUB granted an overall 2.75% interim rate increase stating that the issues and 22 decisions that result from the NFAT Review will have impacts on the rate levels that are 23 set in future General Rate Applications for Manitoba Hydro and that it would be 24 premature to reach any conclusions as to the outcome and rate impacts flowing from the 25 NFAT Review as those matters will be the subject of future General Rate Applications 26 that Manitoba Hydro must bring before the Board.16 27

28 2015/16 and 2016/17: 29 On January 16, 2015, Manitoba Hydro filed a General Rate Application requesting, in 30 addition to other matters, approval for an interim rate increase of 3.95% effective April 1, 31 2015 and an increase of 3.95% effective April 1, 2016. In Order 17/15, the PUB 32 determined that it expected to issue a final Order for the 2015/16 fiscal year, but not the 33 2016/17 fiscal year. The PUB stated in Order 17/15 that “Additionally, in the GRA 34 materials filed to date, Manitoba Hydro included its forecasts for the April 1, 2016 to 35 March 31, 2017 fiscal year as well as other future years. As that information will be 36

14 PUB Order 32/12, pg. 2 15 PUB Order 116/12, pg. 3 16 PUB Order 49/14, pg. 3


reviewed by the Parties to this GRA Hearing, it will be open to the Board to provide 1 further direction, in its final GRA Order, as to any additional information to be filed and 2 considered before determining whether any process should be instituted for possible 3 April 1, 2016 interim rates.”17 Further, in Order 73/15, the PUB confirmed that the PUB 4 would consider various options regarding a process to review rates for April 1, 2016.18 5 Following the PUB’s direction that it would consider interim rates for 2016/17 and that it 6 would set a process for this review, Manitoba Hydro filed its Supplemental Filing to its 7 2015/16 & 2016/17 General Rate Application on November 18, 2015. 8 9 The Coalition argues that Manitoba Hydro’s addiction to interim rate processes should 10 not be enabled in the current instant.19 Manitoba Hydro trusts that the summary provides 11 the PUB with the proper context in which Interim rate approvals and requests were 12 granted however, as the PUB is aware, the evidence provided for a rate request needs to 13 be examined on its own merits. The suggestion by Coalition that past interim rate 14 increases or applications should have an impact on the review of this interim rate request 15 should be dismissed. 16

17 PUB Order 17/15, pg. 5 18 PUB Order 73/15, pg. 24 19 CAC Submission dated February 10, 2016, pg. 14

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