Manitoba Hydro has quietly postponed its next planned megaproject, the $3.5 billion Keeyask generating station, for at least a year because it can't agree on a contract with with its American customers.

Hydro is preparing to double in size over the next decade with the construction of three new power stations on the Nelson River---Wuskwatim, Keeyask and the big daddy of them all, Conawapa. Getting the Americans to pay a fat premium for the "clean" power from these plants is supposed to cover most of the $17 billion cost of building them.

But the Yanks' reluctance to sign on the dotted line is making Hydro's house of cards wobble.

Hydro officials told the Public Utilities Board that two factors are affecting negotiations---the economic downturn in both countries, and the unexpected development of shale gas.

The PUB is holding hearings into Hydro's insatiable desire for rate hikes to its Manitoba customers. Manitoba Hydro wants you to pay 2.9 percent more for power this year and 3.5 percent a year more for the conceivable future.

A big part of the PUB hearings centers on how Hydro measures and assesses the risks of its multi-billion dollar dreams.

The Wuskwatim project is almost finished with first power expected to be produced late this autumn. But almost three years ago the PUB cautioned that Wuskwatim would make a marginal profit at best, and that was when financial conditions were twice as good as they now are.

Manitoba Hydro told the PUB it had expected this year's export prices to bounce back from the recession, but that isn't happening. Their internal forecasts saw an average export price of 4.1 cents a kilowatt hour last year rising to 6 cents this year. Instead they were getting an average of 3.26 cents last year with this year's price rising to, maybe, 4.5 cents if they're lucky.

This is affecting the bottom line by millions of dollars, but even worse is why.

Natural gas prices have fallen so low they are kneecapping Hydro's plans.

The development of shale gas has more than doubled natural gas reserves. As long as coal and gas prices stay low, American customers are enticed to buy power on the short-term spot market rather than to lock into contracts that command a higher price for a guaranteed power supply. As an example, the average spot price for power in the midwest is 2.3 cent per kilowatt hour and Hydro is getting an average 5.7 cents kwh from its contracted sales. And they were expecting much, much more from their new customers for Keeyask and Conawapa power.

The PUB is examining the assumptions Manitoba Hydro used to set its export prices, particularly for the planning of the future megaprojects.

As late as 2009, Hydro included a carbon tax in its planned prices. Such a tax would raise the cost of coal and natural gas and make hydroelectric power more attractive. But the U.S. hasn't passed a carbon tax. And even a voluntary Midwest carbon trading market that Hydro joined collapsed late last year.

Hydro never anticipated the boom in shale gas, their officials told the PUB, although they expect the low prices are fleeting. They said (they hope) that gas producers are selling below the cost of production to snatch a piece of the market, and gas prices will start to rise later this year.

The PUB, perhaps inadvertently, pried a secret or two out of Manitoba Hydro in the first week of hearings.

Why, they were asked, does Hydro sometimes buy dependable power for 4 cents kwh while at other times they sell electricity on the spot market for a measley 1.9 cents kwh? Hydro officials sparred with the PUB lawyer for a bit before confessing they hide the price of wind power in that "dependable" column. Then, claiming "confidentiallity", they clammed up.

The PUB, before approving any rate hike, is examining how well Hydro controls its own costs, a big chunk of which is salaries. Hydro said it pays its employees 20 percent less than Saskatchewan pays, foreshadowing years of catch-up increases.

But, they said, they have to pay top dollar or lose employees. Well, the PUB lawyer asked, how many did you lose last year? Five. But in 2007 Hydro lost 17 employees, prompting a 10 percent bonus (since phased out) for high-value employees who stayed.

And we learned that Manitoba Hydro has officially entered the realm of Enron economics in its financial statements. Hydro paid itself $159 million and recorded an equal reduction in transmission costs attributed to the Wuskwatim project.

How's that, you ask?

The money flowed from a corporation, with Hydro and an Indian reserve as unequal partners, that has the right to buy into the Wuskwatim power plant and share the revenues. So Manitoba Hydro, the partner, pays Manitoba Hydro the developer, to share net revenue which may never materialize.

And you wonder why the Public Utilities Board is worried.