$1.1 Billion deficit might not be our biggest problem

Note: just a couple more posts, then I'll ease off the Hydro stuff for a while. In fact I'll see if I can go the whole summer without posting about Hydro. Should be doable as long as they don't do something stupid like try to build Bipole III with these.

***

Manitobans were treated recently to the news that they are each $1000 more in debt, as their provincial government rings up a deficit north of $1 billion for the first time.

That may sound bad ... and it is ... but there is another financial shit storm brewing out there that you should know about. The name of this storm: Keeyask

Keeyask is a proposed $5.6 billion generating station that is currently going through the environmental assessment stage. The primary purpose of this mega project is to support export sales to the U.S., as we already have enough of capacity for ourselves, and have almost finished construction of the $1.6 Billion 200 MW Waskwatim station, which itself will be used exclusively for exports until 2020.

That's $7.2 billion in hydro damn construction. (The much larger Conawapa, if built, would likely dwarf both of those.) To transport all this power, of course, is the $4 billion Bipole III corridor. If you're keeping track, that's $11.2 billion in construction, the majority of which is only required to support electricity exports.

What's the export market like? Well, so far we have an estimated grand total of $4 billion in export agreements signed. That's a big gap to make up. Maybe you have faith in the electricity export markets ... I know Minister Dave Chomiak does ... but the outlook is not great. The supply of much cheaper natural gas is expanding, and there is no assurance of a big increase in demand for power. Our export contracts contain a fixed price component and a variable component that depends on spot price. We have already seen the variable export price of electricity drop as low as 0.5 cents per kilowatt hour -- about 7% of what you pay on your hydro bill.

What I'm getting at is that there is a huge element of risk here. But that's not the half of it ...

The $11.2 billion capital costs mentioned above are all based on Hydro's estimates. Hydro projects have a habit of growing. For example, Wuskwatim construction costs rose from $900 million to $1.6 billion -- 78 per cent -- and now we also find out that there are "increased operating, administrative and other costs" from this article, and it hasn't even started operating yet!

The cost of Bipole III, as you know by now, has ballooned from $2.2 billion to $4 billion, with construction still a few years away. Even with our current infrastructure it now costs 10 cents per kilowatt hour to produce electron juice according to The Black Rod, who also says that "we'll be losing at least 3 cents a kilowatt hour" on the power we'll export from our new stations. This, based on a PUB report.

Don't believe Black Rod? James Beddome, leader of the Green Party of Manitoba, also quoted vastly increased costs of producing power during the last election. I don't recall the figures, but they were not disputed by Hydro to my knowledge. Just know that, when you read "$11.2 billion capital costs" above, the actual total will be higher. Potentially MUCH higher.

So, at the end of the day, we could have billions more added on to our level of exposure. But wait! There's more ...

Hydro has formed a partnership with neighbouring First Nations communities, the Keeyask Hydropower Limited Partnership, and together they negotiated a revolutionary joint development agreement. That itself sounds reasonable, but here's the thing: the agreement allows the four First Nations to own up to 25% of Keeyask, the financing of which will largely be provided by Hydro itself. No ... that's not the thing that I'm getting at. This is the thing: The First Nations do not have to commit until much later in the process, when the actual construction costs become clear and export opportunities (or lack thereof) clarify.

What this means is that if Keeyask construction costs escalate, and export revenues do not, the First Nations do not have to buy in. On the other hand, if it looks as though revenues may exceed operating expenses and amortized capital costs, the First Nations can say "ya, we'll take a piece of that" and buy in for a quarter with Hydro as the major creditor.

The deal was arranged in this way to protect the First Nations from risk. Fair enough -- one could argue that they have little capacity to absorb massive losses from a mega project gone awry -- but this heaps all the risk on Manitoba rate payers. It limits the potential upside, while leaving us carrying the entire bag for the down side.

A senior Hydro official tells me that there will be an independent review of these capital investment projects. Other things that I have read elsewhere suggest that it may not be a certainty, or that it might not be completely independent and transparent. I sure hope it is, because these are big bucks we're talking about. If things don't pan out exactly right, billions more could be added Manitoba's summary debt.

(By the way, you should read the recent post by The Black Rod. There are some good quotes and points in there.)

Did you think that's it? Hell no. I'm only just getting started!! The rest is coming in a follow-up post just as soon as I can piece together the time to write it...

Bipole disorder: It's not too late to go down the east side!!!

I am glad that Welch wrote her synopsis of Hydro's state of affairs. Allow me to comment of a few of her points:

on power rates:
"lawyer Williams said there could be a debate that starts percolating over just what Manitobans ought to pay for power -- the cheap rate we pay now or something closer to the real market value, which might spur people to conserve their megawatts."

Start percolating? Get with the program already. It's been debated on the internet many times already. YES we should be paying market rates, at least on marginal power consumption. If you maintain low rates on the first 200 kwh or so, and jack up the rates on the incremental consumption, you'll promote conservation without hurting the low incomers. You can employ market forces while feeling all warm and fuzzy about protecting the vulnerable people. That's the best of both worlds for a liberal province.

on wind power:
I don't know what's going on here, but there obviously isn't any motivation to make this happen. "The Doer government has promised to build another 600 megawatts of wind power." He also promised to get rid of hallway medicine. Next ...

The dams:
" 'We've got a lot of stuff going on, but everything seems to be under control,' said Hydro CEO Bob Brennan," who added: "NOT"

Cap and trade:
I am generally a fan of market-based mechanisms like this, but I was listening to a dude who works in the power industry in Vancouver and in his opinion there are major flaws with this plan. I must do more research to comment on this.

Bipole III:
"The province did finally table long-awaited legislation to help protect the east side's boreal forest from development, paving the way for a UNESCO World Heritage site and effectively killing any chance of a power line down the east side."

Grrrrrr. This is sooooo annoying. For those who are not familiar with the facts of the issue, let me summarize:
1. The east side of the lake aleady has development in the form of logging and mining and other such things. A new road is being proposed to access remote communities. The bipole line would not damage this area to any significant degree, and therefore this area does not need "protecting" any more than the Upper Fort Garry gates needed protecting.
2. The proposed west-side route will fell near as many trees as the west side route due to the longer distance. Some of those trees may be in protected aspen parklands. Plus, accoring to Jim Cotton (on some previous post), there is already a wide swath of land cleared down the side of the lake.
3. The Bipolee III power line does not preclude qualification for UNESCO membership, nor does the absence of said power line guarantee membership.
4. UNESCO membership means bugger all. What is it going to do? Fill the forest with eco tourists? No. The same hunters and fishers will visit the area then as they do now. Jake and Margaret from Vermont aren't going to vacation in the middle of a mosquito infested forest because it has a UNESCO designation. And the question has to be asked: do we even want tourists in this pristine area? Would it be better protected by keeping it below the radar? Why is this designation so important?
5. The proposed west-side route is far more expensive to build. According to Welch: the PUB "is a little worried about Hydro's financial future." As am I, by the way. Which is why I don't think we should be wasting hundreds of millions of dollars on a longer path for Bipole III.
6. The west-side route will waste thousands of megawatt-hrs of electricity per year, resulting in the loss of around $7-15m per year according to my calculations here, not to mention a shit load of GREEN power. If you are at all concerned about the environment, you should be outraged by this callous waste of green electricity. Every megawatt wasted will be replaced by dirty power somewhere down the line.

It's not too late to reverse this idiotic decision!!!

Hydro Math

Looks like Hydro has inked a Howard Stern-like $1billion contract to sell power to Minnesota. I guess Bob Brennan had better get on the horn and find somebody to build the Wuskwatim dam.

Just doing a little math here ... $1 billion over 15 years for 250 megawatts = $267k per megawatt-year or about $30 per MW-hr. That's a bargain, compared to the $40 cited here, but I guess you need to cut a deal if you want to secure your customer for the long-term. I hope that's indexed for inflation.

Hydro isn't saying what the surplus will be sold for, but even at $30/MW-hr, that works out to between $7.4 mil and $14.7 mil in annual line losses from the west-side Bipole III route. Think about it ... we could build a waterpark with a few years of that money.