Assets and Liabilities

Crown Corporations, Energy, Frontier Centre, Saskatchewan, Uncategorized, Worth A Look

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?