GRAHAM LANE, the former chairman of the Public Utilities Board, has used these pages recently to warn ratepayers that Hydro's proposed capital plans amount to a $20-billion gamble. Lane makes a number of erroneous conclusions and assertions, but for now I will address in this piece two issues he has addressed to date.
He points to the Crown utility's experience with construction costs.
While it is correct that the cost of building the new Wuskwatim dam was significantly higher than preliminary estimates prepared in 2005, the completed project was far from the "economic disaster" depicted by Lane. In fact, there were good and justifiable reasons for the increases in costs (from a preliminary estimate of $988 million in 2005 to a final cost of $1.8 billion in 2013), as detailed to the Public Utilities Board.
Virtually every major project undertaken in North America at that time was subject to similar or higher price escalation. Wuskwatim was built during a period in which there were unprecedented increases in input costs, including steel, copper, cement, fuel, heavy equipment and contractor labour. Compounding extremely high input costs was the difficulty in attracting and retaining skilled workers because of intense competition from other major international projects, such as the oilsands in Alberta.
Because of the long lead times required to construct major new generation and transmission facilities and because of the inescapable linkage to prevailing conditions in international markets, there will always be a risk that actual costs will be substantially higher -- or lower -- than initial estimates. Limestone Generating Station is an excellent example of substantially lower-than-estimated costs to build. The timing of Limestone construction was ideal in terms of procurement of materials, labour and equipment, with the result that Limestone was constructed at a total cost of $1.4 billion, less than half the cost of the original $3-billion estimate.
Despite the higher-than-estimated costs, Wuskwatim's unit costs of about 7.5 cents per kilowatt hour are competitive with other forms of power generation. Furthermore, the unit costs will be increasingly attractive each and every year of its 100-year life as the fuel costs of other forms of generation escalate, as they inevitably will. Wuskwatim's unit costs are even more attractive if some form of carbon control and sequestration is reflected in the costs of other generation fuel sources (coal and natural gas).
One of the most noteworthy and enduring features of the Wuskwatim project is the innovative partnership agreement with the Nisichawayasihk Cree Nation (NCN). The first of its kind in Canada, the partnership with NCN demonstrates what can be accomplished with a spirit of co-operation and mutual respect between the parties.
Overall, Wuskwatim was a successful project and one that will provide significant and ongoing benefits to communities in northern Manitoba as well as to energy consumers throughout the province.
As for Lane's characterization of Hydro's capital development plan as a gamble, it should be noted the plan is supported by highly sophisticated and detailed financial and economic projections, which will be reviewed extensively by the PUB's Needs For and Alternatives To (NFAT) review. Until that occurs, it is premature to jump to conclusions about the future power-supply plan for the province. But it is important to recognize that doing nothing is not an option; even with aggressive energy conservation programs, Manitoba needs new electricity supply by 2023 or earlier.
There appears to be a perception that new generation is being built on speculation to serve the export market. This is definitely not the case. Export sales provide an outlet for temporary surpluses that occur when large blocks of new generation are placed in service or when water flows are favourable. Export sales provide a significant subsidy to electricity rates in Manitoba and allow domestic rates to be much lower than they would otherwise be. Without the export market for surplus capacity and energy sales, it would not be possible for Manitoba to have the low-cost hydro-electric system it has today. Manitoba Hydro's proposed capital development plan (Keeyask in 2019 and Conawapa in 2026) will meet domestic load-growth requirements while taking advantage of opportunities to sell temporary surpluses at financially attractive prices on the export market.
Vince Warden recently retired as Manitoba Hydro's senior vice-president for finance and administration and chief financial officer.