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An Echo?
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Commentary, Cape Breton Post, June 12, 2013

In Manitoba, the provincially owned electrical utility is planning a massive expansion of its hydroelectric operations, even though its profits from the sale of electric power have fallen dramatically, to the point that Manitoba ratepayers are actually subsidizing the sale of cheap power into the U.S. grid.

It sounds somehow familiar. Here is a sample of comments from Graham Lane, a former head of Manitoba's public utilities board, talking about the wisdom of using ratepayers to pay for power for others. Lane was presenting a paper for the Frontier Centre for Public Policy.

"While many Manitobans are aware of the provine's massive expansion of Manitoba Hydro's northern hydroelectric generation and transmission facilities, few understand the negative implications for their own pocketbooks. Recently, Manitoba's NDP government has unleashed a barrage of propaganda in support of the planned costly development, including the repeating of an implausible claim originally made by former Manitoba premier (Gary) Doer that hydroelectric power is 'Manitoba's oil,' in essence, equating Manitoba's hydroelectricity prospects with Alberta's oil and gas opportunities.

"Despite the fact that Hydro's ratepayers will be required to meet the full rate implications of the government's direction, the level of openness and transparency with respect to these plans have been woefully and long absent. Hydro has already spent billions and made commitments to First Nations, American utilities, contractors, manufacturers, employees and trainees, all before an independent and expert review of the plans and options has been undertaken and final approvals for proceeding secured.

"I make the case that the revenue, cost, demand and export price forecasts provided by Hydro (often cited by the government in support of its plans) are not worth 'a grain of salt' as every major forecast made by Hydro over the past decade has been widely off the mark. There have been major cost overruns and other forecasting errors, and circumstances have changed following the inauguration of the plans.

"The challenges faced by Hydro do not exist in a vacuum - the province's own balance sheet is laden with debt, with annual deficits in the past as well as in the future outlook (without even considering the prospects of future restraint by the federal government as to the transfer grants that keep this province 'alive'). This paper supports the position that the underlying financial position and prospects of the province and Hydro, and the risk inherent in the government's Hydro expansion plans, doesn't support a gamble of tens of billions."

It's a different province, different projects than Muskrat Falls, but interesting reading nonetheless.

Almost an echo of things heard here: "I hold that the bodies presently providing 'oversight' with Hydro are conflicted and unable to properly protect ratepayers. The planned Public Utilities Board Needs For and Alternatives To Review is, unfortunately, a sham. Other matters associated with Manitoba Hydro's actions clearly require independent audits, along with a proper independent review and reconsideration of the present plans. . . . The ratepayer communities, which, in the end pay the bills, must be truly involved in the process."

Posted on June 17, 2013 by Publius
Moving ever Moving Forward (towards the cliff)

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This past week the Public Utilities Board (PUB) accepted a few applications (and denied a few others) for intervener status at its upcoming fall 2013 Needs for and Alternatives To (NFAT) review of the government’s plans for the construction of two new hydro-electric dams (Keeyask and Conawapa). The NFAT is part of the government’s ‘full speed ahead’ and ‘dam the torpedoes’ approach to its Hydro development plans.

Publius, for the reasons set out  below, shares former PUB Chair Graham Lane’s description of the planned NFAT, it is, as he has said, a sham. (Also, see a previous Publius post: “Show Trial on the Red”).

In  fact, there has been considerable and appropriate criticism of the upcoming review.

The criticism has several dimensions – timing (the review will come well after a billion or more has already been spent by Hydro on the overall development plan, along with commitments made to First Nations, American utilities, trainee Hydro employees, etc.); restrictions on PUB’s mandate (government has determined that PUB will not review or question either the construction of Bipole III,  which, it seems evident, is to be undertaken ‘come hell or high water’; contracts entered into by Hydro with First Nations to share ownership in the dams; or, transparently review Hydro’s export contracts and term sheets, despite the fact that the ultimate party at risk is Hydro’s ratepayers and the Province’s taxpayers); the lack of independence of government represented in the persons of the PUB panel, all appointed by government; the cost (lawyers, consultants, interveners and advocates will likely bill millions before the review is completed, costs that will be eventually reflected in Hydro’s monthly electricity bills to ratepayers  - this following a quarter of billion and more dollars that have previously been spent by Hydro on lawyers, consultants and projects to gain First Nation cooperation, all related to the current development plan); and, prejudicial (to PUB’s NFAT) statements made and repeated again and again by the Premier and his Cabinet colleagues before the review even begins (indicating that the overall Hydro development plan, currently forecast to cost $33 billion over twenty years, will proceed).

All of this ‘activity’ should not divert ratepayer/taxpayer attention from Hydro’s major concurrent activity, that being proceeding with plans and expenses for and related to a west-side routed Bipole III.  Just as is the case with the overall development plan, Bipole III has also come under heavy criticism, and, once again, the criticism is warranted, and hasn’t been effectively responded to.

Arguments solidly-based on changes that have occurred in the economy and in Hydro’s market area since government arrived at its stupendously expensive plans for the Crown-owned monopoly call for, at the least and most immediate, a deferral of Bipole III.

The case has been made that there are alternatives available to the current development plan, alternatives that could materially reduce Hydro production costs, future Hydro rate increases, and the overall risks associated with the development plan, alternatives available, less costly and less risk for the benefit of ratepayers, taxpayers and the provincial economy.

No more should be spent on Bipole III until a proper, expert and independent review of the overall development plan and options thereto has taken place.

The government’s strategy is to build Bipole III come ‘hell or high  water’  – avoiding criticism as best as possible by preventing even its own agency’s (PUB’s) NFAT review from questioning it, because, in part, once Bipole III is built the government’s case for another hydro-electric dam is, at least on face value, made stronger.

And, without Bipole III there will be no further new northern dams built over the near to mid-term. (The last one, Wuskwatim, ended up costing twice the estimates made just before construction began, while is delivering half the revenue it was expected to produce – losses of $100 million a year are projected (each $100 million is equivalent to a 8% rate increase).

Without another hydro-electric dam, increased electricity exports to the United States (at the low prices the market allows, spot prices being one-third to one-quarter of the marginal cost to produce) , another First Nation partnership (the current one is being revamped because it produces losses for the First Nation, not the promised profits) , the hiring of hundreds if not thousands of new employees, the engaging of contractors and manufacturers required to build the dams, and huge additional revenue flows to the government’s Consolidated Fund will not occur.

While proceeding with the present plan can be expected to meet the government’s objectives, see above, the parties at ultimate risk remain the ratepayers and taxpayers of this Province. It is the ratepayers that, even based solely on Hydro’s current projections, will be required to pay much higher rates and carry the risk of even worse results developing over time.

The ‘Show Trial on the Red’ (PUB’s upcoming NFAT) should be put on the back burner, as should be the construction of Bipole III. There are just too many doubts and risks, too many unanswered questions, and lack of penetrating analyses produced by independent experts. Once built, Bipole III cannot be ‘repealed’, and the risk is too high to proceed ahead of the entire plan being dissected expertly, transparently, and comprehensively.

If a proper review led to a deferral, cancellation or major revamp of the government’s plans, it must be  know that there would be consequences. These could include charges against the government’s own summary accounts as intangible and deferred assets and costs now carried on Hydro’s books were written down. Painful as such a circumstance would be, for taxpayers as well if it affected core service delivery, the twin mantras (‘your first loss is your best loss’, and, ’don’t put good money after bad’) are often true.

The ratepayers and taxpayers of Manitoba should not be put at risk by a  commercial adventure insufficiently supported by proper analyses being undertaken by a monopoly directed by a conflicted government.

The most immediately needed action is to put Bipole III on hold.
Posted on June 19, 2013 by Kate Jackman-Atkinson
Assets and Liabilities

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With the imminent PST hike and the forced amalgamation of small municipalities dominating discussions about provincial politics, Manitoba Hydro has been pushed out of the limelight.

That changed last week.  

Last Wednesday, retired Public Utilities Board chair Graham Lane publicly shared his criticism of Manitoba Hydro’s capital and expansion plans, likening the corporation to a bus heading off a cliff.

Manitoba Hydro has long been seen as a crown jewel for the provincial government, a cash cow that, at times, provides revenue to bolster the province’s books. This close relationship means that the crown corporation is vulnerable to meddling from the provincial government. One of the most obvious examples of this is the routing of Bi Pole III. Despite years of planning to run a new bi-pole line down the east side of the province, the provincial government dictated that the line would be run down the longer western side of the province, despite serious objections.

It is actions such as these that have Lane sounding the alarm.

In his presentation, Lane singled out five issues that point to potential problems for the crown corporation, arguing that much has changed since the crown corporation’s golden years in the 1960s and 1970s.

Once such change has been rapidly escalating construction costs. Hydro’s most recent dam, Wuskwatim, was expected to cost $900 million to build. When it opened in July 2012, the cost had ballooned to $1.8 billion. The BiPole III project, which includes generation and transmission capacity, is expected to cost $4 billion. By the time shovels hit the ground, who knows how much that price will rise to get the project completed.

In addition to rising costs, Lane also pointed to a mismatch between the cost to generate electricity and prices at which that electricity is sold. He noted that the Hydro’s plans for export sales are reliant on spot sales to the Unites States. The problem is that the American electricity market has undergone some dramatic changes recently. Lane said that these changes have meant that sales at spot prices are bringing only three cents or less per kilowatt hour. He said that the marginal cost of bringing new generation and transmission to market will exceed 10 cents per kilowatt hour.

In addition to a sagging economy that doesn’t need as much electricity, there has been another fundamental change in the American power landscape. The cost of producing power from natural gas has fallen, which has led to a production boom in the U.S. This has made consuming domestically produced natural gas an economically sound choice, which is coupled with an American preference for supporting American jobs.

Lane’s final point has to do with domestic demand, as industrial demand for power is flat or falling. The level of power-intensive industries in the province has declined. The Tembec paper mill, HudBay smelter and Vale smelter and refinery are all scheduled to close or have closed already.

Lane isn’t the only former high profile person who has come out against Hydro’s proposed plans.

Manitoba Hydro is an asset, but it’s also a liability. The Manitoba government is responsible for its debts, which means we are all responsible for it. In 2011, Manitoba’s real GDP was $44 billion, making the entire BiPole III project worth 10 per cent of our province’s entire output.  

Developing new generation and transmission capacity has been in the works for a long time, but a lot has changed since the project was first conceived. A lot has even changed since 2007 when public consultation meetings for the project started. We need to make sure this is what we really need and that it’s entirely based on sound financial analysis. Making sales is great, but any business owner will tell you that you don’t sell something for less than it costs to make it. If we can’t produce electricity for less than the going rate at which it can be sold, we shouldn’t be producing it – and Manitobans shouldn’t be subsiding American power consumption. If, on the other hand, the major concern is domestic demand for the cost of the proposed project, wouldn’t Hydro be better off to encourage conservation?

Posted: 06/07/2013 & Re-posted 06/10/2013
Public Responsibilities Ignored 

Publius attended a Frontier Centre Winnipeg luncheon address by Graham Lane, a former Chair of Manitoba’s Public Utilities Board.

In an address of about three quarters of an hour, Mr. Lane shared serious concerns about the provincial government’s determination to have Manitoba Hydro (a Crown corporation with a monopoly over electricity and natural gas supply in Manitoba) enter into long-term electricity export contracts with American utilities and partnerships with northern First Nations, requiring, at great cost, the building of two new hydro-electric generation stations and Bipole III.

Noting the projected costs of Hydro’s overall capital expenditure plan, that now being $33 billion, apparently three times Hydro’s current balance sheet, Lane forecast the potential for very major rate increases lying ahead for Manitoba  ratepayers, rate increases high enough to bring about energy poverty for lower  income households and risk general economic disruption.

He also criticized the absence of Auditor General reviews of both Hydro’s expenditures (and contract terms) to attract the Utility’s First Nation partners and allegations of a ‘whistleblower’ (previously an advisor to Hydro). It has been reported that the Auditor General, who has recently indicated her intention to retire ahead of the end of her contract term, was, previously, a member of the Board of Directors of Hydro.

Lane cited a lack of openness and transparency by both the provincial government and Hydro, and derided the planned involvement of the agency he previously led, PUB, in what he called a sham review of government’s plans. He noted the changed economic environment that have developed since the plans were developed, and criticized government and Hydro resistance to reconsider their development plans, despite evident risks for ratepayers.

Following Lane’s address, a vocal defence of the plans emanated from the Minister Responsible for Hydro (Mr. Chomiak) and the Premier (Mr. Selinger), a defence while loud in ‘anger’ devoid of substance. A similar, devoid of substance but calmer, written defence of the questionable plans has now been provided by Hydro’s President (by way of an article published in the
Winnipeg Free Press).

Neither Chomiak, Selinger, nor Thompson have addressed many of Lane’s concerns, and the ones they did address they have failed to do so in adequate detail or with evidential support.

None of the three respondents answered Lane’s criticism of needed audits not being undertaken because of the recusal of the Auditor General from reviewing Hydro actions and plans, the ongoing spending ahead of the planned review.  Nor did they respond to the specific rate forecasts offered by Lane.

None of the respondents questioned Lane’s rendition of Hydro’s previous poor forecasting of construction costs, export sale prices and industrial demand forecasts. None addressed Lane’s concern about the lack of diversified supply, and the risks that thus lie with future droughts. None addressed the risk for existing ratepayers of new or expanded ‘power hog’ industries being allowed large industry rates that are one-third, if not less, of the marginal cost of new supply.

None spoke of the restrictions placed on the apparently upcoming PUB review of Hydro’s already well-underway plans – PUB apparently cannot consider the disaster that is the Wuskwatim experience, or review the expenses incurred and contracts entered into with First Nations, or even question the necessity and implications of Bipole III (and the route laid out for it).

None acknowledged Lane’s concerns about the non-competitive and secret processes surrounding the appointment of Hydro directors and PUB members, raising the risk of conflicts of interest.  Nor did any of them counter Lane’s assertion that during the planned ‘build phase’ of  Hydro’s plans, government will reap hundreds of millions of dollars from capital tax and debt guarantee fees, the aggregate likely accumulating into the billions before the build is complete, costs that Hydro will not expense but defer.

(If Hydro was a private company owned by another private company, if cost transfers occurred between the subsidiary and its parent, Publius understands that neither revenue nor expense would be recorded until the receipt and expense events were in synch.)

And, none of the respondents backing the development plans have disputed Lane’s assertion that ratepayers are the only party at direct risk, that government hasn’t a dollar invested in Hydro’s capital, and that ratepayers will be called upon to meet whatever net costs the present plans end up generating.

For Publius, it seems clear public responsibilities are not being upheld. Officials and agencies are not fulfilling their obligations to the public interest.

The importance of Hydro’s plans, with potential major negative implications for domestic ratepayers, require an immediate opening up of the books and plans, the involvement of truly independent and expert parties, the involvement of an all-party committee of the Legislature, and a slow-down of plan expenditures and further commitments until that is done, and done properly.

If things ‘go bad’, a possibility that Lane raised in his very open address, not only will ratepayers be called upon to deal with it, Publius suspects ratepayers will only know of it, and its dimensions, after another election or two.

By then, all those complicit in the current ‘hiding show’ are likely to be long gone from the public scene.

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