The Black Rod

The origin of the Usher of the Black Rod goes back to early fourteenth century England . Today, with no royal duties to perform, the Usher knocks on the doors of the House of Commons with the Black Rod at the start of Parliament to summon the members. The rod is a symbol for the authority of debate in the upper house. We of The Black Rod have adopted the symbol to knock some sense and the right questions into the heads of Legislators, pundits, and other opinion makers.

Location: Winnipeg, Manitoba, Canada

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Thursday, September 11, 2008

Manitoba Hydro Series Part 3: Subsidizing American buyers

Faced with reading 415 pages of nearly impenetrable bureaucratic jargon, the human mind begins to shut down in self-preservation.

Maybe that's why it took so long to plow through the Public Utilities Board's latest explanation for why electricity rates have been hiked higher than requested by Manitoba Hydro.

And why we almost missed the biggest shocker in the report.

It was only when reviewing our notes that we realized what the PUB identified as the driving force behind Hydro's plans to spend more than $1 billion a year for the next 15 years on new hydro developments.

Do you think it's to provide a reliable supply of electricity to Manitobans at a reasonable cost?


It's to assure power to Hydro's American customers AT ANY COST.

Manitoba premier Gary Doer has said on numerous occasions he wants to turn Manitoba's hydroelectric power into the equivalent of Alberta's oil, a source of wealth from exporting a natural resource.

The PUB says Doer has already gambled---and lost.

For the past three years, thanks to the run-up in the value of the Canadian dollar, we've been selling power to the U.S. cheaper than to ourselves. In other words we're subsidizing Americans to buy our power.

"... in the last three years, MH has over estimated the average CDN $ export price," the PUB states.

Fiscal Year IFF-2nd Year Price Forecast Actual Results
2006 6.2¢/kW.h 5.2¢/kW.h
2007 7.5¢/kW.h 5.1¢/kW.h
2008 7.1¢/kW.h1 5.0¢/ kW.h (est.)

And like any gambler, Doer knows what to do next---bet double or nothing. Only he's betting with your money.

The government has been fooling regulatory bodies like the Clean Environment Commission by claiming huge potential profits from power sales, profits the PUB finds impossible to bank on.

"While MH forecasts the Canadian dollar falling back about 15 cents
from its current level, the Board is not confident with that forecast, and if near parity remains MH's export price forecasts are in jeopardy."

Manitoba Hydro's house of cards is built on the premise that the exchange rate will drop to 86 cents U.S., that a carbon tax in the U.S. prices coal out of the market, and interest rates stay the same for the next decade or so. Not one of these factors --- All of them have to come true for Hydro to make any money.

The PUB has also shown that Manitoba Hydro has no idea what the new power developments will cost.

"Construction cost inflation over the past five years has been dramatic,in some years 10 times or more the rate of general inflation for some construction cost elements, particularly commodities (steel, cement, etc. - ed.)."

Every billion dollars in cost means less profit, more risk and ultimately, higher rates for Manitobans.

The government has set the PUB up to take the blame for the increased costs to Manitoba customers. The PUB can't stop Hydro from building unprofitable hydrolectric projects, yet it has to prop up the financial stability of Hydro, through higher revenue from local customers if necessary.

And it will be necessary.

The PUB has pointed out that instead of using higher profits from exports in recent high-water years to improve its finances, Manitoba Hydro spent all the money with nothing to show for it, and is coming cap in hand for ever higher rates.

To prop up Manitoba Hydro, the NDP have identified new public enemies---the poor and middle class who try to keep their heating costs down by using space heaters, and big businesses that use a lot of cheap electricity. If the government can squeeze these groups out of the market for electricity, it can buy some time during which it can provide power it has already sold to the U.S. without having the increased supply needed.

"There is a risk that If natural gas customers move in any significant way to electricity as the sole or supplementary space-heating source for their residences, (a growing risk given recent natural gas commodity price increases and volatility), MH will have less energy to export and may have to import power in some years to meet its commitments."

This explains the real reason the government is treating the poor and middle class like criminals. People who are trying to stay warm in winter by using space heaters instead of turning up the gas are doing it because they can't afford another few hundred dollars in heating bills.

So the government, in its perverted wisdom, wants them to spend a few thousand dollars to buy new furnaces, and to go deeper into debt to do it.
This makes complete sense -- to bureaucrats and ideologues.

And those companies that get power at reduced rates, and hire Manitobans? -- are unwanted, too. The government says they get a free ride and don't provide enough jobs. So the NDP wants to drive them out of Manitoba, and take the jobs they provide with them, so that Manitoba Hydro can sell the power to the U.S. which will provide no jobs for it.

For the first time ever, the Public Utilities Board has provided numbers to Manitobans to see what they're paying and what the NDP is dreaming.

Here's how the PUB put it:

"With respect to MH, while the costs of generation, transmission and
distribution assets acquired decades ago have allowed for residential rates of 6 cents per and 3.2 cents for major industry, the new generating stations and transmission facilities will demand much higher rates simply to break even, let alone produce the net income required to allow MH to move forward supported by a reasonable capital structure."


"In 2007/08, a dramatic shift in the Canadian/U.S. exchange rate contributed to average export prices moving below 4¢/kW.h for opportunity energy sales, and below 5.5¢/kW.h for firm (dependable) energy contract sales."


"MH's exchange rate forecast fails to fully recognize the significant appreciation of the CDN dollar versus the U.S. dollar, and the underlying reasons for the appreciation that suggest the change may persist. This has had the effect of MH overstating both the value of U.S. export sales and finance expense."


"It can be realistically speculated if the costs of Bipole III, Keeyask G.S., and Conawapa G.S. (generating statied) were fully allocated against export revenues, average export sales prices would have to be 11¢ CDN per KWh to break even.

Manitoba Hydro has absolutely no wiggle room, says the PUB.

"MH currently has executed agreements and/or term sheets for about 3,500 GW.h (900 MW) per year of firm energy for both 2008/09 and 2009/10. These volumes essentially utilize all of MH's dependable energy resources available for export."

"The 500 MW commitment to Wisconsin Public Service (WPS), to commence in 2019, will increase MH's firm export requirements to 3,600 GW.h, and this is substantially above forecast dependable energy resources in place at that time. MH will require the Keeyask Generating Station to be in place or, alternatively, will have to employ natural gas turbines to provide the energy. MH will need to proceed with its new generation and transmission plans in a very timely fashion to avoid the high costs that would accompany being obliged to generate power though natural gas, import the power or buy the commitments out."
"When the 250 MW contract with Minnesota Power takes affect in 2020, MH will then be committed to supplying 5,000 GW.h of firm energy into the U.S. If Conawapa is not in-service by then, natural gas turbine generation and more wind generation (or imports) will be required to offset a shortfall that could approximate 2,000 GW.h. in 2020."

In a nutshell, Manitoba Hydro has no idea what the new hydroelectric developments will cost, but the government has given them a blank cheque because deals have been signed and we have to deliver power to the U.S.even if the price is less than the cost of production.

The PUB knows its being set up and its fighting back, as only bureaucrats can.

The board has ordered Manitoba Hydro to go public with its assessment of how high rates to Manitoba users will go because of the new projects.

"The Board will direct MH to propose to the Board by January 15, 2009 terms of reference for a regulatory review of the impact that MH's planned Capital program may have on consumer rates. The Board will also direct MH to quantify its risks in an effort to determine the appropriateness of the current financial stability targets."

The PUB may ultimately have to take the fall.

But they've signalled they'll take Hydro, and the government, with them if they go.

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