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Details of Manitoba Hydro's super-sweetheart deal with Minnesota

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It took the train wreck known as Manitoba Hydro to get us to set things aside and get back into the arena.

Manitoba Hydro has applied to the Public Utilities Board for another hike in rates.

This year they're asking for a rates to go up 3.95 percent.

Something about that number seemed odd. But what?

It didn't take long to answer the question with a clipping from a Canadian Press story posted two-and-a-half years ago.

"Manitoba Hydro's CEO says customers can expect rate increases of about 3.5 per cent a year for the foreseeable future as the Crown-owned utility builds new generating stations while export prices are soft."  (CP, Sept. 19, 2012)

So Hydro's minimum rate hike has climbed by almost half a percent a year. 
And that's  after the plan to build Manitoba's biggest generating station, Conawapa, which was to cost billions upon billions, was scrapped. 
That means only one thing --- Manitoba Hydro's finances are deteriorating faster than ever.  Hydro is on the fast track to insolvency and hopes to hide it as long as possible.

The CP story stated:

"The Public Utilities Board, the provincial regulator, warned last year that low prices could force Manitoba consumers to subsidize exports and see domestic prices jump by 140 per cent over the next 20 years."
      Even without Conawapa, it appears the price Hydro will be charging its Manitoba customers will triple within 20 years.   
People are confused. Why does Hydro suddenly need so much more money?

They used to say it was because of the three new dams they intended to build in the coming decade, dams that would earn huge profits from sales to the United States in the years before their power was needed here at home.

But the smallest (Wuskwatim) is built and the largest (Conawapa) is on ice. And the last thing they want is to draw attention to the one remaining, which is why they've started claiming they need the extra cash to rebuild Manitoba Hydro's existing infrastructure, not the additions to it.

By now everybody knows that the first project, called Wuskwatim, was an unmitigated disaster. It cost almost twice as much to build as projected and by the time Wuskwatim went into service export electricity prices had collapsed thanks to a boom in shale gas production.  Manitoba Hydro now sells electricity to Minnesota at a third of what it costs to produce that electricity.  
We're paying higher and higher rates at home to subsidize users of our power in the U.S.

The next Hydro mega-project is called the Keeyask generating station, and it's three and a half times as big as Wuskwatim (695 megawatts compared to 200 MW). Now imagine a boondoggle ten times worse than the new Blue Bombers football stadium, and you know where this is going.

They say the devil is in the details, and we found the paved road to Hell in Keeyask.

This month regulatory authorities in Minnesota gave the go-ahead to Minnesota Power to build a 220 mile transmission line from Manitoba to carry power from the Keeyask project.

The line is estimated to cost anywhere from $558 million to $710 million, depending on the route.  In American dollars. Excluding construction inflation and financing costs. 

That estimate is already more than 150 million dollars higher on the low end than Minnesota Power projected two years ago. That should be a warning of how high construction inflation will be.

When its all said and done, Manitoba Hydro is going to pay 72 percent of the cost of the transmission line to Minnesota.  That's because they want to build it bigger than necessary to carry just the 250 megawatts of power that we're going to sell to Minnesota Power starting in 2020. Manitoba Hydro wants the bigger line so it can sell more electricity to other customers in the future.

Hydro's bill works out to between $401 million and $511 million. U.S.  Add between $80 million and $100 million for exchange. Plus financing costs. And inflation. Oh, and add the $350 million Manitoba Hydro will pay for the transmission line from Keeyask to the Manitoba-Minnesota border, and you have a bottom line of nearly $1 billion just to send the power from us to them.

Manitoba Hydro will end up owning 49 percent of the line. Which it doesn't want to own. So, Hydro intends to sell its share of the line to another power company in 2016. Or else "assign" its share to Minnesota Power.
According to regulatory filings in the U.S.:

"Regarding operations and maintenance expenses, the record  demonstrates that whether Sub (the Manitoba Hydro subsidiary that will officially pay for the power line...ed)  transfers its shares to Minnesota Power or assigns its shares to a third party, Minnesota Power will continue to be responsible for only 33.3 percent of the operations and maintenance costs associated with the Project. (Ex. 40, p. 8.)"

Given that there's going to be all that extra capacity, the Americans decided to double down on their amazing opportunity.  The original deal between Manitoba Hydro and Minnesota Power contained a unique provision that let Minnesota "store" off-peak excess power from its wind farms with Manitoba.  
 Manitoba Hydro would, in effect, serve as a giant battery for Minnesota. Wind power is often produced at times when there's no demand for electricity. Under the deal, that power would be credited to Manitoba for delivery to its customers, while Manitoba would store water behind its dams instead of using that water to create power. When Minnesota needed power, it could tap into the "stored" energy and reclaim it from Manitoba.

“With expansion, the Manitoba Hydro system is like a 4,500 MW battery that you can draw on in the day during the day and recharge at night,” says Manitoba Hydro Division Manager of Power Sales and Operations David Cormie. “With the new line, the potential is there to purchase up to 1,500 MW at night and return 3,000 MW during the day, so there’s a huge potential to move energy in and out of the MISO footprint .
And that’s just with what is planned now. Cormie estimates Manitoba's ultimate potential is another 50 per cent.

Over the next decades we intend to invest about $20bn in new hydro and transmission,” says Cormie. "Key to these investments is inter-utility co-operation to get the right transmission built. Without willing partners like Minnesota Power, Manitoba's storage potential would be under utilized. Together, greater things are accomplished." Manitoba Hydro Division Manager of Power Sales and Operations David Cormie. “
 
It sounded so good, that Minnesota signed a side-deal with Hydro known as the 133 MW Power Purchase Agreement.  This let Minnesota use the extra capacity on the Manitoba Hydro powerline to store an additional 133 megawatts of wind energy.  All told, Minnesota can now use all the power created by wind farms that its bought in North Dakota.

But here's the fun part. It's now understood that Manitoba Hydro will buy Minnesota Power's wind power (which they call 'pumped energy'). If the wind power is part of the 133 MW Power Purchase, Minnesota will charge Manitoba a "must take fee" to cover the transmission delivery costs. Then, when Minnesota wants, it can reclaim its wind power energy to either use or resell on the open market. 

The price Manitoba pays for Minnesota's wind energy is a "trade secret." The price Manitoba Hydro gets for "selling" this power back to Minnesota Power is a "trade secret. 
What isn't a trade secret is logic. 
Power created when nobody wants it is worth nothing
How do you buy and sell something worth nothing, unless you're paying something for nothing.

Let us clarify this gobbeldy-gook.

* We're paying the lion's share of a powerline so that we can eventually use the extra capacity to sell hydro-electric power to American customers.

* Minnesota will use that over-capacity to send wind power to Manitoba --- while charging us "transmission delivery costs" for the privilege of using the line we're paying for to buy power they can't sell anywhere else. 
*Manitoba will then buy power it doesn't need. At a price that's a secret. And when that power is worthless on the open market.

* And we'll sell that power back, also at a secret price, to Minnesota whenever they want it, so they don't have to buy more power from Manitoba. Or, so they can sell that power in competition with power from Manitoba Hydro.

Still not sweet enough?

The agreements between Minnesota and Manitoba include an annual "wind storage credit", all of which will go to Minnesota Power regardless of whether the wind energy is coming or going.

Regulatory filings stated: "... the total wind storage credit benefit between the
 250 MW agreements and the Renewable Optimization agreement is 1 million
 MWh each year, equivalent to approximately the anticipated annual off-peak
 production of our Bison wind generating facilities. Minnesota Power projects the
economic benefits for customers of the wind storage provision from the 133 MW
 Renewable Optimization Agreement to be approximately $1.7 million annually
 and could rise to $4 million annually should certain market conditions develop
 under terms of the agreement."

In  other words, they would get no green credits for producing power in the night when its not needed, but if they sell it to Manitoba, they do. So we're buying power we don't need and they're scarfing up enviro credits.  
This is a deal that covers 15 years. At $1.7 million a year, Manitoba Hydro gave up $25 million.

We'll give the final word to Dave McMillan, executive vice-president of Minnesota Power. 
Actually, he spoke to the Pioneer Press in January, 2012, when the Minnesota Power agreement was first announced with great fanfare, which paraphrased him revealing vital information that's never been reported in Manitoba:

http://www.twincities.com/ci_19852384
The agreement has no cost estimate yet because the hydroelectric purchase is tied to the price of natural gas in 2020, McMillan said.

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