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Manitoba Hydro Series Part Two: Wuskwatim boondoggle

The Wuskwatim power project is such a boondoggle that the Manitoba Public Utilities Board is begging the government not to use it as a model for its future hydro developments.

The PUB dissected the Wuskwatim project in July in its formal explanation as to why its raising electricity rates higher than Manitoba Hydro requested.

The utilities board started by noting that everything Manitoba Hydro told the Clean Environment Commission to get approval for Wuskwatim has turned out to be wrong.

* They said the project would cost about $900 million. It's currently estimated to cost $1.6 billion. (And it's already a year behind schedule because Hydro can't find a general contractor to take on the job...ed.)

* They said it was needed "to serve export markets" for nine years before its power was needed for Manitobans. Manitoba Hydro now says it needs Wuskwatim built by 2012 "to meet domestic needs and firm export contracts."

* They said the profits from Wuskwatim would help keep the cost of electricity to Manitobans low. The project will break even--- in the best case scenario --- and will otherwise lose money from the get-go.
And that's the good news.

When you see how the project is structured, your hair will stand on end.

The closest comparison is to a little-known outfit called ENRON.

So pour yourself a big, stiff drink and be ready to hurl.

Hey, we said a BIG drink. And keep the bottle handy.
**************************

The Manitoba NDP pledged never to privatize the utility known as Manitoba Hydro. Instead, they're selling off Hydro's resources--its new dams, transmission lines and power-- at firesale prices.

The Wuskwatim project, the first new hydroelectric development in Manitoba in 20 years, is being built in "partnership" with Nisichawayasihk Cree Nation (aka NCN, aka the Nelson House Indian Reserve). You'll soon see why the quotation marks are deserved. Now hold onto your hats because this is a bumpy ride.

- The Wuskwatim project is estimated to cost $1.6 billion dollars
- Transmission lines make up $320 million
- Leaving construction costs of $1.28 billion.

The dam will be built through a limited partnership that is to provide 25 percent of the cost of construction. The partners are:
- Manitoba Hydro at 0.01 percent,
- Manitoba Hydro again at 65.99 percent, and
- NCN at 33 percent.

This mumbo jumbo means the limited partnership is supposed to put up 25 percent of the cost of building Wuskwatim, and NCN is supposed to put in 33 percent of the partnership's share of the cost.

Manitoba Hydro will be loaning the partnership the other 75 percent of the cost ($979 million, "based on Manitoba Hydro's current estimated cost"). Yes, it will essentially be borrowing money to lend itself to build its own project.

The Nelson House reserve is partnering through its own holding company, Taskinigahp Power Corporation (TPC). "Based on the current construction cost estimate for the generating station, TPC’s cost for the partnership units would be $102 million. According to the agreements, TPC will invest up to $34 million of its own capital and borrow up to $68 million from MH to fund the balance," wrote the Public Utilities Board.

Here's the first problem---arithmetic
.

"MH assumes TPC will subscribe for 33% of the ownership interest, i.e. 33% of the 25% equity component." said the PUB.

Well, if the equity component is $1.28 billion ($1.6 billion minus $320 million), then 25 percent is $320 million and TPC's share is $105.6 million, $3.2 million MORE than the PUB says.
Not that it really matters.

"And, an NCN holding company will hold NCN's partnership interest in the project. With the holding company inserted between it and the partnership, and with almost all of its investment funded through a loan from MH, without any mark-up, its risks are negligible." declares the PUB.

Yes, that's right, the Nelson House reserve is getting half-ownership of the $1.6 billion Wuskwatim project at virtually no risk and money borrowed at no cost from the people who are building the dam and transmission lines.

That's New Democonomics at its purest.

FYI, about 2500 members of the Nisichawayasihk Cree Nation (NCN) live in Nelson House and another 1700 off reserve.

And it only gets better.

Manitoba Hydro is going to charge itself (and its junior partner) for marketing and transmission costs "and risks borne by the Corporation", i.e. itself. It's going to borrow money at an estimated 7 percent interest to lend itself (and its junior partner) at no interest, effectively subsidizing the junior partner.

The $320 million that Hydro will have to borrow for the necessary transmission line won't be included in the partnership's debt.

"The standard formula for determining MH's debt to equity ratio has been amended," the PUB said ever so politely. "This arrangement, having the transmission asset held “off-balance sheet”, and by MH directly, will allow for profit-sharing to occur much earlier than would be the case if the standard 75:25 ratio test was applied employing the standard debt and equity components."

Debts held "off-balance sheet" to speed up "profit-sharing." Sound familiar?

Enron, anyone?

Oh, and Manitoba Hydro is giving its "partner" another break. It has cut its overhead costs to the partnership by more than 25 percent. The PUB says "... the Wuskwatim Project Development Agreement allocates MH’s overhead costs at a rate of 21% as opposed to the “normal” 29%, this reduction allowing for the exclusion of a share of costs related to Winnipeg facilities and computer systems not expected to be utilized by the project."

The partnership is expected to maintain a 75:25 debt to equity ratio. Except for the first 10 years of operation because Wuskwatim is expected to lose money for at least six years, from 2012 to 2017. But that's not a worry for one of the partners.

"The agreement between Hydro and NCN also allows for advances on dividends to NCN, even during loss years and/or when the equity threshold test has not been met." revealed the PUB.

"MH indicated that dividend advances are to be limited to 5% of the
actual cash invested by NCN, and are to be repaid by NCN out of forecast future distributions."

In other words, no matter how much they put in, they'll get half of it back by the time Wuskwatim is supposed to be making money.

And, yes, folks, it gets better still.

While NCN is expected to put in $34 million of its own money (and borrow the rest of its share from Manitoba Hydro), the PUB notes that "until the project is finished, NCN is required to invest only $1 million."

"The First Nation carries no direct risk with respect to the $1.6 billion project. It has an option to take up to a 33% ownership position, but it need not do so, it can evaluate the situation upon the project’s completion." added the utilities board.

After examining the intricacies of the partnership agreement, the PUB dove into the economics of the project.

Reach for that drink now.
************************

"In justifying the Wuskwatim project to the CEC, MH advanced many
assumptions. Based on the then-projected construction costs of the project the levelized cost of the energy was to be 6.6¢ per kW.h (costs forecasted before the CEC). Given the escalated cost of the project, the Corporation’s revised estimated cost of energy has increased to 7.2¢ per kW.h. "

"Before the CEC, and in forecasting export prices to be realized by Wuskwatim, MH utilized a USD/CDN exchange rate of 1.35. Based on its most current forecast in 2007, the exchange rate utilized in the Corporation’s forecasts as for when Wuskwatim comes in-service in 2012 was 1.14...

"At the CEC Hearing, and in the Corporation’s justification of the project, MH calculated that the Internal Rate of Return (IRR) would be 10.3%, based on generation being sold as exports. As a result of the escalation in the cost of the project and employing the same type of financial analysis as was presented to the CEC, the IRR has reduced to 7.8 %, excluding sunk costs, and to 6.5% including sunk costs. And, even this revised IRR would be further materially reduced if the Canadian dollar remains at par."

Translation:
Manitoba Hydro is borrowing money at 7 percent for a project that might make a return of 6.5 percent---if the value of the Canadian dollar drops another 10 cents American.

"On an overall economic basis, with construction cost estimates up 60% more and the forecast price per kW.h basically unchanged, Wuskwatim's net present value may not meet the original floor threshold assumed at the CEC hearing. MH now bases its requirement for Wuskwatim on domestic rather than export requirements. Accordingly, MH states it no longer requires Wuskwatim to meet or exceed its threshold economic return, as MH now classifies the construction as being necessary to meet future Manitoba load requirements."

Translation:
Manitoba Hydro has changed the rules.
It now claims that Wuskwatim is needed for Manitoba customers and therefore it doesn't have to make a profit.

The PUB isn't buying:

"That said, the Board does not agree that Wuskwatim is required for domestic purposes, particularly with its current expected in-service date. Yet, this view is of little consequence, as the Board is not required to give approval to MH's capital plans and projects. As well, Wuskwatim’s plans are well past the “point of no return”."

To its horror, the Public Utilities Board realized that Manitoba Hydro fully understands how phony its "partnership" agreement is, and the reason Hydro will do and say anything to paper over any criticisms---Manitoba Hydro is paying protection money to northern Indian reserves to get new hydroelectric projects built.

In its blandest bureaucratic language, the PUB raised the reddest of red flags:

"MH concurred with the hypothesis that the Wuskwatim/NCN arrangement was driven by factors other than "strict economics", and that the driving factor for the arrangement is MH's operative assumption that without an agreement with NCN Wuskwatim could not proceed. The Board notes that as the generating station and related transmission lines will be located in NCN's traditional trading area, it is not surprising that the First Nation would insist on compensation for its support of the project, and that a lack of support from NCN would have made proceeding unlikely."

But the deal is so flawed, and means that ratepayers will be hosed so badly, that the PUB has gone out on a limb to ask the government to give it final say in future projects.

"From the Board’s review of the WPLP Agreements, it has arrived at significant concerns with the financing arrangements, cost sharing and revenue allocation, and while there may be reasons that go beyond strict “economics” that lie behind the terms of the arrangement, the Board’s concern with the overall structure of the arrangement is such that
the Board cannot, at least without being in receipt of further rationale, recommend that the agreements serve as a template for any future joint ownership opportunity..."

"While the WPLP is not recommended for use as an “automatic” template for further First Nations participation in Generation and Transmission projects, the experience of Wuskwatim, todate, should be used to model possible outcomes of possible future arrangements with respect to Keeyask and Conawapa.

For any future projects where joint ownership is contemplated because of the potential impact on consumer rates, the Board recommends MH seek the Board’s prior review and approval."

In its own impenetrable language, the PUB has issued a warning to all Manitobans:

"Therefore, while the Board does not find all of MH’s actions justifiable on a strictly MH-centric economic rationale, it considers itself obliged to ensure MH has sufficient revenue to allow it to achieve objectives transparently established or approved by government."

Translation:
We can't stop them.
They can do anything they want.
And they're forcing us to raise your rates much, much higher than they should be.

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