Where are Laura Secord and Paul Revere when we need them?
Manitoba Hydro (seemingly supported, cajoled, pushed and/or intimidated by the provincial government) continues to implement its preferred development plan.
The plan includes the construction of Bipole III (west side route, despite questionable economics and engineering assumptions) and at least one if not both of two planned new northern hydr0-electric generation stations (Keeyask and Conawapa). Once Bipole III is built, the domestic rate impact will be significant and immediate, that is unless there was a guaranteed secondary source of revenue. While that could come only from new generation, driving the construction of a new generating station, the problem is: what if the new generation also loses money? Doubling down is even considered risky at a casino, ‘doubly so’ when government is involved.
While neither the cost estimate for the overall plan (updated several times from earlier and considerably lower estimates, the current projected aggregated cost cited in the media is in excess of $20 billion), nor projections of Hydro-anticipated export revenues have been adequately tested by an expert independent body, vast sums have already been spent and many commitments made.
It is not Hydro that will borrow the money required to make the largest expenditure (and gamble) in the Province’s history, but the provincial government. (Despite its long history as the monopoly provider of electricity, Hydro has ‘no’ liquid assets: Hydro is no Apple, with billions of cash in reserve, the Utility’s retained earnings are ‘paper entries’). And, it is not only the, say, $20 billion of borrowed money that will be required to be repaid, but also financing charges.
The government and Hydro would have taxpayers and utility ratepayers (the parties that stand to ‘lose’) accept, at face value, their ‘claims’ that all of the costs of the ‘preferred’ development plan will be met by net export revenues and ‘reasonable’ future rates charged to Manitoba ratepayers on projected increases in the domestic demand for electricity.
Furthermore, they assert that future rates will be lower than they would be if their plan was scrapped (or deferred) for other options. Lower cost options have been advanced, they include the construction of a combined cycle natural gas generator (not only far ‘cheaper’ but also reduces the risk of having to import expensive power in a drought), the installation of more wind turbines, and/or more aggressive energy efficiency measures – the latter to drive down demand.
Publius understands that Hydro’s plan was developed at a time when (a) natural gas prices were higher and were expected to rise further; (b) before new technology led to a glut of natural gas, driving its price down to very low levels; (c) industrial demand in both Manitoba and the U.S. market was higher and expected to grow further; (d) wholesale electricity prices were higher (Hydro’s fixed-price exports only represent less than 50% of the volume); (e) America was more focused on climate change and clean power than the economy; (f) America had yet to offer a ‘rich’ subsidy for wind, driving the development of clean power in the states; (g) export prices were expected to increase sharply, with a premium to be paid for ‘clean’ power; (h) the aggregate construction cost projection for Hydro’s plan was much lower; (i) Bipole III was to go down the eastern side of the Province, a shorter route with less engineering problems and a lower cost; and, (j) the Canadian dollar was not at par with the American dollar (exports into the United States are priced in USD). On the other side of the ledger, interest rates were higher.
Has the ‘loss’ of any of the above initial positive conditions led to a major re-think of the plans? Apparently not.
Despite two former NDP cabinet ministers calling for a ‘halt’ to the implementation of the plan (and a serious re-think); despite the opposition of former Hydro executives and engineers; despite the calls for a delay by both opposition parties; despite the ‘disasterous’ experience of Wuskwatim (costs doubled over the pre-build estimate and the value of spot export sales to the United States market, the original destination for Wuskwatim, has fallen by a half or more); despite Hydro apparently now re-negotiating its ‘partnership’ with NCN to keep the First Nation on-board (notwithstanding the extremely generous terms of the original ‘deal’); despite all of the changes that have occured to the original set of positive assumptions; and, despite a series of articles and editorials in the media calling for a ‘re-think’, the government and Hydro plod on, seemingly undeterred. For them, it apears they actually equate the Province’s hydro-electric generation opportunities to Alberta’s oil.
Hydro’s accounts and reports suggest it has already spent $1 billion or more on its government-supported-driven plans. While it refuses to provide a public accounting of that expenditure, with, apparently, at least $223 million spent on lawyers and consultants in an effort to gain the support of northern First Nations, it continues to spend, make commitments (American utilities, First Nations, hire in advance of full-scale construction, purchase equipment and services), and, finally, seek further and increases to domestic rates taht would be well above the expected rate of inflation.
All of this occurs within a wider context, the situation and prospects of the provincial government’s accounts. The government of this, unfortunately, so-called ‘have not’ province has a large existing accumulated deficit, anticipates a large deficit this year, and suggests a risk of future annual deficits. The federal government, which provides grants to the Province, representing almost 40% of the provincial government’s annual revenue, is looking to bring its own accounts to surplus – conceivably this means reduced expectations for federal largesse for Manitoba lie ahead.
The provincial government depends on external borrowing, and its gross debt has grown substantially since 1999. And, with further borrowing required to meet currently expected future annual provincial government deficits, borrowing a further $20 billion for a commercial enterprise (selling power to American utilities, ahead of domestic need for the power) should raise concerns sufficient to justify the ‘pause’ to reconsider recommended by a Winnipeg Free Press editorial.
One would normally think that such a government has enough risks in its core operations to consider and act on taking on new commercial risks, particularly when this comes at a time when debt rating agencies are growing increasing uneasy about debt increases, and prospects for interest rate increases are high.
In the end, for Publius, the risk of proceeding (without even a pause to allow and then assess an objective and fulsome review) outweighs the short-term benefits that can arise from an economy engaged in government stimulus spending (i.e. Hydro’s plan).
As matters now stand, if government allows Hydro to ‘go over the cliff” with an inadequately tested commercial gamble and ‘things’ don’t work out as they plan (not much has, recently), while their leadership could walk away and retire (perhaps to a warmer climate), the general population of Manitoba cannot.
Leaving aside the risk of a credit downgrade that would make a difficult sitaution even more problematic (and extend to government’s core activities), the result of ‘things not working out’ could well be much higher domestic rates than those contemplated by Hydro. And, a considerable reduction, if not the disappearance, of the so-called “Manitoba Advantage”, would have ‘ripple’ negative consequences for everyone, including government.
Having already spent so much, entered into commitments, hired people and let contracts to consultants, lawyers and engineers, and having defended the plans for so many years, Publius accepts that it would be hard for the government to stand up, be accountable, and, at least, provide for a proper ‘all in’ review in an open forum before ‘all the public’s money’ is on the table.