Current and Upcoming Issues – Nov 22-28, 2009

1. I’m really surprised: why is it that the only bloggers who are really concerned about Manitoba Hydro seem to be The Black Rod and myself?  From the PUB reports, I’m convinced that Hydro’s future viability is at risk.  Why aren’t we hearing more about this?
2. Sport Manitoba’s plans for the Smart Bag Co. building is a big story that hasn’t yet returned to the public eye… Galston mentioned it a while back, and I’ve heard a few other murmurs here and there.  I’ve found no official news from Sport Manitoba, or anything in upcoming city council meetings.  If Phase I is supposed to be complete in Dec 2009, I imagine Phase II must be a “done deal”.  Will Sport Manitoba keep the history intact?
3. Stubble burning is a big issue, and I’ve heard that it’s unnecessary and that it can’t be helped.  Hopefully over the next few days I’ll find out where the truth lies.  I do know that it’s made for a pile of sick Manitobans these past few weeks, including me.
4. Crime is out of control in Winnipeg; whether or not the number of crimes or their severity has increased from the past, I know that something must be done.  I’m hoping to come up with my own point of view on this, which may or may not coincide with the view of our provincial and federal Liberal parties.
5. I’ve made peace with the Seasons of Tuxedo.  In my opinion, there are far bigger issues in Winnipeg, and I accept that residents and leadership of this city and province feel that the vast amount of new retail on Kenaston is worth the expected commercial decline in other areas (I personally wonder if it will scuttle the Creswin plan for The Elms).  It’s not like I expected Ikea to move into a building downtown (sorry Mr. Nobody), and the victims of any retail drought will probably be other suburban malls; they lived by the sword when they slashed the downtown storefronts, so it’s somewhat poetic for them if they die by the sword.  As far as the name of the new shopping mecca: I am not a marketing specialist, so obviously my taste in names lacks judgement.  Accordingly, this blog has been renamed “Seasons of Regan” to coincide with this powerful new trend.

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Will Hydro’s Big Gamble Ruin Manitoba?

On a personal note: I have been away from this blog and from many other activities over the past few months due to a family situation; I’m not back full time to my “extracurriculars”, but the comments on the CBC story compelled me to do some of my own research.

Most Manitobans aren’t aware of the high-stakes plan that Manitoba Hydro is planning over the next fifteen years.  Starting from its current debt load of $7 billion, Hydro plans to build new generating stations and transmission lines that would add $18 billion or more in capital costs to its debt load.  This could bring its total debt load to $25 billion.

This debt load isn’t necessarily a dangerous increase as long as Hydro can increase its revenues by around 300% to manage this debt at the targeted 75:25 equity to debt ratio.  Hydro plans to rely on export to other provinces or to US states for the additional revenue, and its forecasts, like most forecasts, are based on estimated values for many variables.

For instance, the Hydro forecast has to assume an US exchange rate for any exports to the United States.  According to the Public Utilities Board (PUB), Hydro’s forecast is for a Canadian dollar at around US$0.85.

In addition, Hydro forecasts a continuation of low interest rates to finance construction, as well as US carbon taxes and/or increased fuel costs to increase the export price of Hydro’s power to 12¢/kW.h from the current price of around 5.5¢/kW.h.  As well, the PUB has shown concern that Hydro’s forecasts do not adequately include construction inflation and increased commodity costs from the past few years.

If any of their predictions are incorrect, Hydro may be left with more debt than it can adequately manage.  This situation often leads to bankruptcy in private corporations, but in the case of Manitoba Hydro would most likely result in a bailout from the Province of Manitoba.

Considering that the Province of Manitoba did not use the past decade of financial prosperity to pay down debt (despite using Hydro as a source of revenue), and considering the very real possibility of a reduction in the $2 billion in federal transfer payments, the province does not have the resources or the “rainy-day fund” to handle the size of bailout that could be necessary if Hydro goes bust.

Supply and Demand

In addition to the financial risk, there is also a risk that demand (both domestic and export) will exceed supply.  Even if no power was exported, Hydro would still need to increase supply in order to meet the expected increase in domestic demand.  With exports included, the demand will increase from a current level of 28,735 GW.h to an estimated peak of 37,223 GW.h in 2024/2025.  Without conservation or alternative sources of power, this increased demand will require the construction of Wuskwatim, Keeyask and Conawapa generating stations, as well as the Bipole III transmission line long the West side of Lakes Winnipegosis and Manitoba.  While Wuskwatim and Conawapa could meet the increase without Keeyask, Conawapa is not expected to be operational until 2024/2025, so Keeyask would handle the demand overrun that would otherwise occur in 2018.

If any economic, political, technical or environmental delays occur in the construction of any of these three generating stations, Manitoba Hydro will be forced to either import more power or throttle domestic consumption (generally through brownouts), and it’s possible that both solutions would need to be used together (along with a very large rate increase for Manitobans).

Rate Hikes

Currently, Hydro subsidizes the price of domestic electricity with its export revenues.  As domestic demand (which is significantly larger than export demand) increases, export revenues must increase in order to keep domestic rates at the same level.  If Hydro’s forecasts prove to be inaccurate and export revenues decrease, the domestic rate subsidies will have to end.  In addition, the possibility of export prices dropping below the increasing cost of generation and administration (due to higher debt and the new construction projects) could result in domestic customers being forced to subsidize exports.  This would result in an even larger increase in domestic hydro rates.

Domestic hydro rates differ based on usage.  Residential rates are currently set at  6.25¢/kW.h.  Non-residential rates actually include a better rate for a larger volume of electricity (one average figure provided by the PUB is 3.2¢/kW.h), but also have demand charges, which charge for higher demand at a given moment than the more steady requirements of residential customers.  Manitoba Hydro has a higher-than-average demand charge rate, while having probably the lowest electricity rates in Canada.  This means that the pressure on Hydro will most likely be to increase the general rates as opposed to the demand charges.  It is possible that Hydro could apply for higher rates for non-residential customers, but with residential rates as low as they are, there’s a very strong chance that residential rates would be raised at the same or a similar percentage as non-residential rates (this has been the trend in the past).

Hydro has previously estimated its generation and transmission costs at 7.0¢/kW.h, so it’s clear that an end to subsidies from export revenue would result in a shortfall of 0.25¢/kW.h for residential customers, and larger shortfalls for non-residential customers that vary based on usage and demand.

The current generation and transmission costs are estimated (according to the PUB) to increase to as much as 12¢/kW.h by 2025.  Manitoba Hydro is banking on export prices rising to 12¢/kW.h in the same timeframe.  If both the PUB and Hydro are correct in their respective estimates, the profit on exports will be minimal, and there could even be a slight loss on exports.  If PUB is correct while Hydro’s forecasts are too optimistic, the low profit or slight loss could become a large deficit.  Manitoba Hydro’s domestic customers will be left to subsidize energy for the people of Minnesota and Wisconsin.

Let’s assume that over the next 15 years the exports are revenue neutral, and generation and transmission costs reach a conservative estimate of 10.0¢/kW.h (megaprojects such as Conawapa and Bipole III will definitely increase costs during this timeframe).  In that case, residential rates will need to rise to at around 11.0¢/kW.h barring much larger increases to non-residential rates or demand charges.  That is not only an increase of 75% from today’s rates, it’s an increase of almost 100% from 2004.  In essence, Manitoba Hydro will have doubled hydro rates in the space of twenty years.

Of course, any failure or delay in the construction of the new generating stations (assuming no alternative solutions) or Bipole III could result in larger energy imports, while a higher Canadian dollar or a lack of energy pressures in the United States could further cause massive deficits from the export deals.  The worst-case scenario for rates could see up to a tripling of hydro rates.

Plan of action

Because the export deals are already signed, and because we do want to share our energy with other jurisdictions for economic and environmental reasons, we need to find ways of minimizing the risk.

The first step to minimizing risk is to have a clear accounting of just how much risk is involved.  The Manitoba government should ask for clarification from Hydro on its upcoming projects (just as the Public Utilities Board has asked), to ensure that the construction costs for the generating stations and for Bipole III are estimates that take construction inflation and overruns into consideration.  It should not be difficult for Premier Selinger, who worked as the minister in charge of Manitoba Hydro for ten years, to find out the exact export and construction forecasts.

Because the vast majority of the increased demand will come from domestic growth in consumption, there are ways for the provincial government to achieve gains through conservation.  There is also the possibility of allowing competition from private entities in the production of alternative power.  Manitoba Hydro includes an increase in wind power as part of its forecasts, even though its largest wind project is currently in jeopardy due to the financial difficulties of Babcock and Brown.  It is possible that new partnerships could emerge to compensate with new wind, solar, or biomass energy production.  If enough conservation and alternatives can be put in place, it may be possible to postpone the construction of Conawapa until more favourable export prices can be assured.  Postponing Conawapa would save approximately $6.3 billion.

There are some cost-cutting measures that are available, such as a reconsideration of the route of Bipole III (around half a billion in savings) or administrative efficiencies (probably less than $10-20 million per year).  Conversely, as it was government interference that led to the extra expense for Bipole III as well as the new Hydro headquarters, the government should be expected to contribute the cost difference from general revenues for the transmission megaproject if it believes that the endeavour is worthwhile.  In addition, the Manitoba government could suspend its yearly water rental and assessment fees that it is charging Hydro, which amount to $123 million for 2009 and could save close to $2 billion for Hydro over the next fifteen years.

If these solutions are implemented successfully, Hydro could see its $18 billion increase in capital costs reduced by one third, along with additional operating funds that could be used to pay down long-term debt.

As the PUB states, it is not reasonable for Hydro to embark on $18 billion in construction without generating some up-front capital, and the same can be said for $12 billion.  As Hydro rates have been kept artificially low for several decades, further rate increases are necessary.  Slight increases now can greatly reduce financing costs and could mean the difference between a competitive utility and a sinkhole.

Rate increases will adversely affect residents on fixed incomes, but it is the job of the government to deal with this issue, as opposed to Manitoba Hydro.  It is not fair to expect a utility company to subsidize lower income customers; subsidies should come from general government revenue.

I believe that our current crisis with Manitoba Hydro is due in no small part to pressures from the Manitoba government (and not just the current NDP government) to force a crown corporation to lose money on something that is the government’s responsibility.  This is seen not only in the subsidized electricity rates, but also in the government mandate that Hydro spend an extra half-billion dollars on a different route for Bipole III.  It is not at all appropriate for the NDP government to make expensive demands of Hydro without providing some of the funding.

I strongly hope that government action will prevent a tripling of hydro rates or a future bailout of a bankrupt Hydro, but in a way it’s the natural consequence of a government that has been using Hydro as a source of revenue at a time when the utility should have been building up capital for its expansion projects.

If someone had asked me even two years ago if I thought that brownouts and bankruptcy were possibilities for Manitoba Hydro, I would have laughed.  I guess I hadn’t taken the time to really look at the numbers.  Now that I have, I’m concerned not just for the future of Hydro but for the future of our province.  Just as a railroad construction almost bankrupted Prince Edward Island colony in 1872 (and through confederation gave our country the idyllic West Point Beach), construction for our once strong Hydro utility is in danger of destroying Manitoba’s future.  Premier Selinger had better take action soon on this crisis.

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Hydro officially backs off on gutting Exchange District buildings

http://www.winnipegfreepress.com/breakingnews/Hydro-backs-away-from-Exchange-plan39148167.html

We’ll have to wait to see what types of alternative proposals will be coming from Hydro regarding their King St. substation.  I think there are two ways this can go:

1. Hydro finds a suitable alternative which doesn’t require huge expense, leaving most citizens wondering why they didn’t look at the alternative before they so proudly confirmed their original plans.
2. Hydro returns with a statement that there are no alternatives available, and the fight begins anew.

No matter what the result of the re-examination, I don’t think it will make most residents feel any better about how things are being run at Manitoba Hydro.

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Update on Manitoba Hydro’s plan to gut the Exchange District

While the official story is that Manitoba Hydro will “step back”, there is no admission on the part of Hydro that its plan is completely unacceptable.  Here’s a quote from Hydro spokesman Glenn Schneider:

We’re taking a step back from this particular proposal and saying let’s take a step back and look at all the options that are available to us and see if this is still the best way to go forward.

Some people may view this as a retreat, but I don’t see it as such.  This is the preamble of a corporation’s attempt to turn three historic properties into lifeless façades, calling the result a reasonable compromise.

The citizens of Winnipeg need to be clear on this matter: there is no room for compromise with historic buildings within our National Historic Site.  Preservation of the buildings is acceptable.  Redevelopment of the buildings is acceptable.  But destroying these buildings for a substation expansion while leaving only the fronts will never be acceptable.

I see three options available to Manitoba Hydro that can be put forward to the community:

1. Expand the substation as needed using the adjacent surface lots (or the lots across King Street), with any overflow being handled by a separate new or existing substation placed away from the Princess – Albert corridor.  This expansion could be done under existing surface lots.
2. Find an alternative delivery method for substations, such as creating a close network of smaller, indoor substations in downtown buildings.
3. Create a new underground substation in an alternative location, such as the surface lots at Hargrave and Notre Dame or the CityPlace parking lot.  An innovative electric utility might want to look at creating Manitoba’s first Smart Park lot, with future parking spaces created underneath solar carports for charging electric vehicles.

Google's Solar Carport

There are viable options available.  If Premier Doer can route a hydro line for hundreds of extra kilometres and millions of dollars, we can certainly have a substation expansion plan that makes our city better, not worse.

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Doer Mediocrity Exhibit C: Manitoba Hydro is a public utility on its way to becoming Public Enemy #1

The latest idea from Hydro is to gut three historic buildings to expand a substation in the Exchange District:

From Mr. Christian

Related posts:

West End Dumplings

Rise and Sprawl

Policy Frog

The affected properties are the Wilson building (288 McDermot), the Glengarry building (290 McDermot) and the Daylight building (296 McDermot).  Again we have 20th century thinking from our public utility.

First we have a Manitoba Hydro that bungles all attempts at wind farms, and whose geothermal efforts are marginal at best.  Then we have a Manitoba Hydro that will build transmission lines along the West side of Lake Winnipeg (thanks to Premier Doer), losing energy in the extra length and not even considering an underwater transmission line.  Then we have a Manitoba Hydro that subsidizes employee parking at its new downtown office tower while handing out its “we love the environment” calendars to everyone.  And now we have a Manitoba Hydro that wants to tear down heritage buildings (maybe leaving a façade) to expand a substation.  From what I can tell, these actions have made Manitoba Hydro one of the worst corporate citizens in our province.

Does anyone remember the Manitoba Hydro “Beware the Underground” billboard that they had up at their Point Douglas site?  It was designed like a movie poster to warn of all of the terrifying dangers that lurk beneath the earth’s surface.  Apparently this fear extends to all area of Hydro’s planning.

Put a transmission line under water?  That’s scary!

An underground substation?  Absolutely terrifying!

TEPCO 500kV underground substation - Tokyo, Japan

[from http://www.cigre-jnc.org/sc_a3b3_2005/]

Underground substation located under park

[from http://flickr.com/photos/59265382@N00/932628960]

Obviously it’s not fair to blame this all on the executives at Hydro; they’re not in charge of fostering an integrated approach to redevelopment and to social and environmental restoration in our province.  That’s someone else’s job.  Our Premier has been criticized before for showing little to no leadership.  Manitoba Hydro is one of the most visible examples of his failings as our Premier.

It’s time for some new ideas in our province; obviously our provincial government is borrowing too many from the 1960s.

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Doer Mediocrity Exhibit B: The Economy

There are a large number of people who believe that Manitoba is weathering the “economic storm” better than other provinces because of Gary Doer.  I’m sure you can guess that I don’t agree with that idea.  While Federal transfer payments ($2.063 billion for 08/09) have certainly paid for government projects that are employing thousands of Manitobans, our current economic situation is lacklustre compared to what it could be.

Manitoba’s stability is based on having a diversified economy that includes a mix of agriculture, resources, manufacturing and services.  While a general economic downturn affects Manitoba, is doesn’t affect our province as quickly or as severely as other provinces because we don’t have an economy tied heavily to one sector.  This diversity has always been Manitoba’s strength, but it’s a strength that has been underused.

There are several important steps that need to be taken to strengthen our economy:

1. Increase funding for Research and Development: with R&D spending that is among the lowest in Canada, our province’s high tech industries are not being properly nurtured.
2. Phase out the Payroll Tax: not only is this a tax on growth, it also results in lower wages for Manitobans compared to other provinces.
3. Invest more in Infrastructure: After forty years of underfunding, Manitoba’s infrastructure (including roads, bridges, water and waste) has been in crisis for years.  The talk nowadays is for improvements in infrastructure around CentrePort, but this plan fails to account for other serious shortfalls in infrastructure renewal.
4. Reduce Personal Income Taxes: Personal income taxes have a bigger impact on regional growth differences than corporate income taxes.
5. Organize a Small and Medium-Sized Business Fund: Sound businesses that create jobs and enhance our economic diversity should be given access to start-up, expansion, and research grants.
6. Create a Culture of Energy Innovation at Manitoba Hydro: there is not enough work being done to use other renewables such as wind, geothermal, and biofuel from waste products.  Energy R&D in Alberta and British Columbia are preparing those provinces to lead energy sectors in the reconomy, while Manitoba’s alternative energy programs are faltering.

Manitoba should not be a have-not province.  British Columbia, Alberta, and Saskatchewan are all have provinces.  Out of all four Western provinces, Manitoba has the best energy prospects and economic diversification.  We also have a cultural dynamic that welcomes immigrants, and we have a hard-working and young population ready to continue our economic development.  With all of these assets, there is no excuse for Manitoba not moving towards becoming a have province.

We need a change in our legislature to move the good ideas forward.  We need more independent voices to offer opinions that aren’t part of the tired NDP and Tory playbooks.

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