January 30, 2012
It's Time to Push Manitoba Hydro's 'Pause' Button
Al Myska, Winnipeg Free Press, January 28, 2012
On Jan. 17, the Public Utilities Board issued a press release saying evidence gathered at public hearings over the previous 11 months revealed the costs of Manitoba Hydro's $20 billion capital development plan have risen dramatically while sales of electricity to the U.S. have fallen. The PUB expressed concern that, as a result, Manitobans are at risk of huge rate increases.
While much attention has been paid to the $1 billion additional cost of moving Bipole III from east to the west side of Manitoba (which will reduce its reliability, create similar environmental impacts and greater farm impacts) that is just a part of the larger concern.
The PUB recommends this larger concern over total capital plans be reviewed by an independent panel. Here is why.
On April 18, 2008, Manitoba Hydro and then-premier Gary Doer announced a potential $2 billion power sale to Wisconsin Public Service. This initiated the construction of the Keeyask and Conawapa generating stations, and was said to make the need for Bipole III more pressing.
The announcement said revenue from the sale would cover almost half the cost of Conawapa, estimated then at $4 billion to $5 billion.
At the PUB on March 7, 2011, Hydro said the current estimated cost of Keeyask is $5.6 billion and of Conawapa $7.8 billion. The PUB was told the $13.4 billion combined cost was $2.5 billion more than estimates a year earlier -- and more than the $2 billion potential sale to Wisconsin.
Keeyask is a 600-megawatt generating station and Conawapa is 1,360 megawatts. In comparison, the 1,340-megawatt Limestone generating station was completed in 1990 at a cost of $1.43 billion. Conawapa's cost is 5.5 times higher.
The cost of the nearly complete Wuskwatim generating station has risen from the 2004 estimate of $900 million to $1.6 billion, an astonishing 78 per cent, and shows the higher cost estimates for the proposed projects are valid.
Power generated from Wuskwatim will cost 7.2 cents per kilowatt hour (kW.h) to produce. Initially, it was being built for export sales. Now, Manitoba Hydro says it is needed for Manitoba customers and for justification compares the cost to alternative natural gas generation, a rationale needing review due to falling gas prices.
The demand for electricity in the U.S. has levelled off due to the recession. In the year ending March 31, 2010, Manitoba Hydro's extra provincial revenue fell to $427 million from $623 million the previous year. The average export sale price of electricity was 3.9 cents per kW.h.
In the year ending March 31, 2011, revenue was $398 million, average price near 3.8 cents per kW.h.
Prior to 2008 the average price was five to six cents per kW.h. The price of export electricity is influenced by competing energy from natural gas and coal. Natural gas was $7.20 per million BTUs in 2007, $9 in 2008, fell to $4 in 2009, and is in free fall to a current range of $2.50.
Manitoba Hydro employs five consultants to forecast prices and then chooses its own forecast. The ability to forecast is dismal; no one forecasted the decline in electricity demand or price.
There is no basis to forecast the price of electricity sold to the U.S. will rebound, and Manitoba Hydro's forecast of a 3.5 per cent per year increase is overly optimistic. Shale gas discoveries in the U.S. are projected to keep the price of natural gas low.
While Manitoba Hydro blacks out all prices, the fall 2010 Minnesota contract extension was submitted to the Minnesota Public Utilities Commission revealing Manitoba Hydro had to accept a reduction in the price and the volume of electricity it was selling.
What had been a potential 500-megawatt sale was cut by Wisconsin in the fall of 2011 to 100 megawatts. Manitoba Hydro withholds export contract prices from the PUB; the withholding is before the courts.
Manitoba Hydro filed its 20-year forecasts at the PUB hearings using 2008 projected costs and sales and a 3.5 per cent annual increase in the price of exports to the U.S.
The PUB has asked Manitoba Hydro to rerun its projections using the higher construction costs and new sales price projections.
Regarding the higher estimates for Bipole III, Hydro said it would rerun projections with higher Bipole III costs but has not done so.
Manitoba Hydro has spent $400 million toward the construction of Keeyask and more toward Bipole III.
It's time for a pause, which is not without precedent.
Construction on the Limestone generating station cofferdam began in 1976. In 1978 the project was suspended due to a dramatic reduction in demand, and restarted in 1985 for a sale to Northern States Power beginning in 1993.
In 1990, Hydro's plans included the sale of 1,000 megawatts to Ontario over a 20-year period beginning in year 2000. In 1992, Ontario terminated the agreement, postponing Conawapa and the transmission line to Ontario.
Without the spur of strongly increasing export sales of electricity, the reason to build Bipole III becomes reliability.
But there are alternatives, and they were discussed at the PUB hearings.
Power for an emergency is usually available from the much larger U.S. utilities as in the 1996 windstorm that took down Bipoles I and II.
Additional transmission lines to the U.S., Saskatchewan and Ontario would provide backup similar to Bipole III and facilitate future sales.
Another alternative would be to build low-cost gas generation similar to Brandon and Selkirk, to be used sparingly.
The most obvious is to build Bipole III on the east side where it would be compatible with Bipoles I and II and would not require additional expenditures on converter stations.
Or a combination of methods would satisfy the reliability concern.
With regard to generation capacity, Wuskwatim can supply existing domestic demands for the next 10 to 15 years.
In summary, the PUB recommends Manitoba Hydro's capital development plans be reviewed by an independent panel with the required level of expertise.
A Royal Commission would provide such a review. Permanent flood protection for the Red and Assiniboine rivers was rationalized by the 1958 Royal Commission on Flood Cost Benefits set up after the 1956 flood threat to evaluate flood protection schemes.
Expenditures on Bipole III, Keeyask and Conawapa must be halted. A pause is necessary to confirm the price and quantity of U.S. sales, the construction cost estimates and to review Bipole III, including building on the east side of Manitoba.
Building generation for export costing more than seven cents per kW.h and selling it at even the long-term average of five to six cents is not reasonable.
The Frontier Centre for Public Policy
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