Lawrence Solomon
Hamilton Spectator
August 5, 1985

WANTED: One million investors to put up $2,000 each to finance risky venture. Investors must be willing to wait until the year 2001 for first profits. If interest rates and value of dollar do not perform as forecast to the year 2005, profits may never materialize.

This want ad hasn’t appeared in any newspaper, but the venture described, the construction of a massive hydro dam to sell electricity to the U.S., is proceeding at full power.
The dam is Manitoba Hydro’s Limestone project. But by changing the numbers a little, the ad could just as easily describe Quebec’s James Bay Project, B.C.’s Revelstoke Dam, or even the Darlington nuclear plant in Ontario and New Brunswick’s Pt. Lepreau reactor.  In each case the investors are the province’s bill payers, in each case the projects are so risky they threaten the province’s credit rating, and in each case the politicians that push these projects do so in apparent disbelief that anyone could consider them anything but a boon.  Echoing ‘the claims of premiers in other provinces, Manitoba Premier Howard Pawley hailed Limestone as “a great historic” project that will “provide substantial and significant benefits for Manitoba’s economy and for its people.”

Credit rating hurt

Less than two months after this statement, which followed the National Energy Board’s permission to proceed with this export deal, the credit ratings of Manitoba and Manitoba Hydro were slashed by Moody’s, a major New York bond rating agency that judges the financial soundness of provinces and their utilities.  Moody’s dim view of the $2 billion Manitoba would need to borrow to build Limestone – a sum which would double Manitoba Hydro’s long-term debt to $4 billion – is shared by Standard & Poors, the other major credit rating agency. It considers Canada’s utilities so debt-burdened that, without the taxpayers’ guarantee behind them, “the best of provincial utilities would likely achieve a low investment grade rating.”  Oblivious to warnings such as these, Manitoba’s Energy Minister Wilson Parasiuk nevertheless touts Limestone and the hydro projects to follow so highly that he is establishing an Alberta-style heritage trust fund to channel the windfall profits expected to flow from them.  Unfortunately for him and his fellow Manitobans, events that are now unfolding south of the border may spell financial doom for the project before excavation for the dam’s foundation gets underway.

Many uncertainties

As with most electricity export deals, the amount Manitoba will receive for its power is uncertain, depending on a host of factors such as future interest rates and the value of the dollar. Most of all, Limestone’s viability depends on an obscure coal-fired station called Sherco III, which is part owned by Northern States Power, the U.S. utility that is buying Limestone’s power.

“Sherco III is coming in $100 million under budget,” enthused NSP’s Wayne Kaplan, who knows that his utility’s good fortune is Manitoba’s bad luck. According to the details of the contract signed by the Manitoba Energy Authority and Northern States Power, the revenue Manitoba receives for Limestone’s electricity will be pegged to the cost of power from the Sherco plant. Basing the costs of Canadian exports of electricity to what the American utility buying the power would have to pay to generate its own electricity is common in these deals.

Low return

For Manitoba to make its expected profit of $400 million – an amount which represents an unacceptably low rate of return by normal National Energy Board standards – Sherco Ill’s coal costs would need to more than triple between now and the year 2005, when the export deal concludes.

Allan Puttee, the Manitoba Energy Authority’s energy policy chief, considers the Limestone deal sound even “if Sherco III’s coal costs rise less than inflation.”

But Manitoba’s profit could turn to losses if coal costs stay even or actually drop – a scenario that is not inconceivable. Says NSP’s Wayne Kaplan, “It’s possible we’ll be paying less for coal in the year 2000 than we currently do.”

Future coal costs aside, the Limestone deal is still a very shaky one for Manitoba, and points to many of the perils that led utilities across the country to bail out of costly expansion plans.

• Manitoba Hydro already suffers from a highly overbuilt system, which is forced to sell its excess power at fire-sale rates.
• The Limestone Dam is so large that it will inflate the system by another 33 per cent when completed. Only 40 per cent of Limestone’s output will be taken by NSP, forcing Manitobans to absorb the cost of more excess capacity if Hydro’s forecasts of future sales don’t materialize.
• Hydro’s ability to predict future sales – like the crystal ball gazing of other utilities – is a sorry one. But even if Manitobans need Limestone’s power as soon as Hydro claims, rates will skyrocket because Limestone will be producing electricity at almost twice the current cost.
• To land the full $400 million profit, not only would interest rates and the value of the Canadian dollar have to behave and NSP’s coal costs need to triple, but Sherco III could not come in below budget (which has already happened), and Limestone would have to be built without the cost overruns that plague most electricity projects.

There is always a chance that the Limestone gamble will pay off. Coal prices could go through the roof, boosting the value of the U.S. dollars NSP will be paying in.

Poor record

But the record of massive projects built primarily to export power – as opposed to those built for domestic needs which may produce surplus power which can be exported – is not good.  Gambles in Ontario and British Columbia have not been lucky, New Brunswick now cannot find backers for its Pt. Lepreau II project, and even Quebec’s James Bay, although blessed by the OPEC oil crisis after it was begun, has been a loser.

Lawrence Solomon is a researcher with Energy Probe and the author of Power At What Cost?