$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.

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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...