05439 1 MANITOBA CLEAN ENVIRONMENT COMMISSION 2 3 VERBATIM TRANSCRIPT 4 Volume 23 5 6 Including List of Participants 7 8 9 10 Hearing 11 12 Wuskwatim Generation and Transmission Project 13 14 Presiding: 15 Gerard Lecuyer, Chair 16 Kathi Kinew 17 Harvey Nepinak 18 Robert Mayer 19 Terry Sargeant 20 21 Wednesday, May 12, 2004 22 Radisson Hotel 23 288 Portage Avenue 24 Winnipeg, Manitoba 25 05440 1 LIST OF PARTICIPANTS 2 3 Clean Environment Commission: 4 Gerard Lecuyer Chairman 5 Terry Sargeant Member 6 Harvey Nepinak Member 7 Kathi Avery Kinew Member 8 Doug Abra Counsel to Commission 9 Rory Grewar Staff 10 CEC Advisors: 11 Mel Falk 12 Dave Farlinger 13 Jack Scriven 14 Jim Sandison 15 Jean McClellan 16 Brent McLean 17 Kyla Gibson 18 19 Nisichawayasihk Cree Nation: 20 Chief Jerry Primrose 21 Elvis Thomas 22 Campbell MacInnes 23 Valerie Matthews Lemieux 24 25 05441 1 LIST OF PARTICIPANTS 2 3 Manitoba Conservation: 4 Larry Strachan 5 Trent Hreno 6 7 Manitoba Hydro/NCN: 8 Doug Bedford, Counsel 9 Bob Adkins, Counsel 10 Marvin Shaffer 11 Ed Wojczynski 12 Ken Adams 13 Carolyn Wray 14 Ron Mazur 15 Lloyd Kuczek 16 Cam Osler 17 Stuart Davies 18 David Hicks 19 George Rempel 20 David Cormie 21 Alex Fleming 22 Marvin Shaffer 23 Blair McMahon 24 25 05442 1 LIST OF PARTICIPANTS 2 3 CAC/MSOS 4 Byron Williams 5 Bill Harper 6 Roger Higgin 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 05443 1 INDEX OF EXHIBITS 2 Number Page 3 4 CAC/MSOS 1006: Summary of Manitoba Hydro 5 Assessment Enhanced DSM 6 Potential versus Current 7 Program Targets 5564 8 9 CAC/MSOS 1007: Application, Volume 1, Chapter 10 2, Consolidated Revenue 11 Requirements and Financial 12 Schedules 5565 13 14 CAC/MSOS 1008: Summary of Manitoba Hydro 15 Calculations of Wind Power 16 Economics 5565 17 18 CAC/MSOS 1009: CAC/MSOS Reference Export 19 Price Scenario 5565 20 21 CAC/MSOS 1010: CAC/MSOS Expected Export 22 Price Scenario 5566 23 24 25 05444 1 2 INDEX OF UNDERTAKINGS 3 4 UNDERTAKING NO. PAGE 5 6 7 8 9 NO UNDERTAKINGS GIVEN 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 05445 1 WEDNESDAY, MAY 12, 2004 2 Upon commencing at 9:07 a.m. 3 THE CHAIRMAN: All right. Ladies and 4 gentlemen, it's a few minutes after nine. It's 5 time that we should begin. The sky is clear, the 6 visibility is good, the trees are happy, the 7 farmers are happy and Hydro is happy today. So we 8 should see a lot of smiling faces. Some of them 9 are finding it hard to get here today. 10 We begin this morning with the 11 presentation from CAC/MSOS and I'll let the 12 gentlemen presenting introduce themselves and Mr. 13 Grewar will swear you in. 14 MR. GREWAR: Gentlemen, could you each 15 state your name for the record. 16 MR. HARPER: My name is Bill Harper. 17 DR. HIGGIN: My name is Roger Higgin, 18 H-i-g-g-i-n. 19 MR. GREWAR: Gentlemen, are you aware 20 that it is an offence in Manitoba to knowingly 21 mislead this Commission? 22 MR. HARPER: Yes. 23 DR. HIGGIN: Yes. 24 MR. GREWAR: Do you promise to tell 25 only the truth in proceedings before this 05446 1 Commission? 2 MR. HARPER: Yes, we do. 3 DR. HIGGIN: Yes. 4 MR. GREWAR: Thank you, sirs. 5 (BILL HARPER: SWORN) 6 (ROGER HIGGIN: SWORN) 7 MR. WILLIAMS: Good morning, Mr. 8 Chairman, members of the panel. Byron Williams 9 for the record. Just a couple of, before we get 10 into the direct evidence of the witnesses for 11 CAC/MSOS, a couple of procedural matters. First 12 of all, to assist the panel and people who may be 13 wishing to ask questions, we had provided notes 14 for direct evidence which is a document which is a 15 rough guide to the material that's going to be 16 presented by Dr. Higgin and Mr. Harper. We're not 17 asking that it be marked as an exhibit because, no 18 doubt, the witnesses will not follow the text 19 exactly but it's there as a guide so people can 20 follow along and make notes on in terms of whether 21 they may wish to ask questions. 22 There are a couple of copies of that 23 back on the back table. But because of its 24 length, what we've tried to do for public 25 participants is just present a couple summary of 05447 1 conclusions on that table. 2 There are also a number of exhibits 3 that will be presented during the course of Mr. 4 Harper and Dr. Higgin, in the course of their 5 direct examination. So those will be presented. 6 I think they are on the table already and we'll 7 ask Mr. Grewar at the end of their direct to enter 8 those as exhibits. 9 We're ready to proceed. 10 THE CHAIRMAN: All right. Go right 11 ahead. 12 MR. WILLIAMS: Mr. Harper, could you 13 please outline the purpose for your appearance 14 today before the Clean Environment Commission? 15 MR. HARPER: Yes. Dr. Higgin and 16 myself were retained by CAC/MSOS to review and 17 comment on Manitoba Hydro/NCN's need for and 18 alternatives to the Wuskwatim Project submission 19 to the Clean Environment Commission which was made 20 in April of 2003. 21 The objective was really to perform a 22 due diligence review of the evidence that Manitoba 23 Hydro and NCN had filed. A review focused on the 24 economic and the financial analysis filed by the 25 parties. The review did not address the 05448 1 environmental, cultural or socioeconomic issues 2 that are included in the Commission's terms of 3 reference on the NFAAT side. 4 In terms of the scope, the ECS 5 evidence included not only an assessment of the 6 specific rationale, alternatives and assumptions 7 used to justify Wuskwatim, but it also included an 8 assessment and comment on Manitoba Hydro/NCN's 9 overall analytical approach, methodologies that 10 they used and considerations as to what the next 11 steps should be in terms of future regulatory 12 oversight. 13 It is our view that the conclusions 14 and recommendations on these latter aspects of the 15 filing are of critical importance. It appears 16 that Wuskwatim may be the first of only a number 17 of Hydro projects that will have to be considered 18 by the government and indeed by the Clean 19 Environment Commission. 20 As a result, it is important that 21 coming out of this process should not only be the 22 correct recommendations with respect to Wuskwatim 23 but also confirmations as to what sort of approach 24 should be used in the future when you look at the 25 next project. 05449 1 MR. WILLIAMS: Thank you, Mr. Harper. 2 I wonder if you could outline your qualifications 3 as they relate to the issues raised in the Need 4 For and Alternatives submission of Hydro/NCN? 5 MR. HARPER: Yes. I've spent close to 6 30 years working in the energy sector. My first 7 five years were spent doing economic analysis for 8 the Ontario Ministry of Energy, primarily on 9 electricity issues. And while I was with the 10 Ministry, I worked on the development of basically 11 end-use demand models that the Ministry used to do 12 projections of energy and electricity demand in 13 the province. And in that regard, I appeared 14 before the Select Committee of the Legislature 15 regarding the Ministry's electricity demand 16 forecast. 17 I subsequently spent close to 20 years 18 working for Ontario Hydro, primarily in the areas 19 of cost allocation, rate design and regulatory 20 affairs. And you may ask what that has to do with 21 power resources? And I see the Chairman asking me 22 to slow down. And I should probably comment I am 23 noted for speaking too fast sometimes, so don't 24 hesitate to tell me to slow down. I'm used to it. 25 During the period that I was working 05450 1 with Ontario Hydro, I spent time working on the 2 development of time of use rates, real time 3 pricing, interruptible and back-up power options 4 for industrial customers. And the development of 5 these sorts of rate options involves working 6 really closely with the systems operations and 7 power resource planning people in the utility. I 8 have also appeared and testified before the 9 Ontario Energy Board on a number of occasions 10 regarding these rates and their justifications. 11 Also in the early nineties, and I hesitated to 12 mention this in Manitoba, but I appeared as a 13 witness before the Ontario Environmental 14 Assessment Board into the Ontario Hydro's Demand 15 Supply Plan hearing on part of their demand 16 management panel that they had before the plan was 17 subsequently scrapped. 18 Following the breakup of Ontario 19 Hydro, I moved to Hydro 1 where, as manager in the 20 Regulatory and Stakeholder Affairs Division, I had 21 responsibility for the preparation of rate 22 applications to the Ontario Energy Board as well 23 as more generic submissions regarding the 24 restructuring and re-regulation of the province's 25 electricity sector. 05451 1 Since joining ECS, that's Econalysis 2 Consulting Services, in 2000, I have supported 3 clients' participation in regulatory proceedings 4 regarding electricity rates, resource planning and 5 industry restructuring in Quebec, Ontario, 6 Manitoba and B.C. I have appeared before the 7 Regie and testified on Hydro Quebec's heritage 8 pool and resource plan and also before the 9 Manitoba Public Utilities Board during the recent 10 status update proceeding. 11 Finally, I've just recently been 12 appointed to the Ontario Independent Market 13 Operator's Technical Panel which is responsible 14 for providing recommendations to the IMO's Board 15 of Directors on the proposed changes to market 16 rules that guide the operation of the Ontario 17 electricity market. 18 MR. WILLIAMS: Thank you, Mr. Harper. 19 Dr. Higgin, first of all, congratulations. I 20 understand there's a new member of the family this 21 morning. 22 DR. HIGGIN: Yes. I'm a new 23 grandfather as of this morning. 24 MR. WILLIAMS: That's probably your 25 most important qualification, but perhaps you 05452 1 could outline your qualifications as they pertain 2 to the issues raised in the Need For and 3 Alternatives submission? 4 DR. HIGGIN: Yes. I've spent about 35 5 years working in the energy and environment 6 sectors. And when I first came to Canada, I 7 worked in the Ontario Public Sector and worked on 8 the area of environmental enforcement and 9 standards development. And then I spent quite a 10 long time, 15 years in the Ontario Ministry of 11 Energy, both as a policy advisor and later on, I 12 was in charge of the development of their 13 renewable energy and conservation programs. And I 14 ended up as Assistant Deputy Minister of that 15 programme's division with a $35 million budget and 16 70 staff. 17 Included in there, we did the Ontario 18 Energy Efficiency Act which was one of the first 19 provincial Energy Efficiency Acts in Canada. I 20 left there for a first stint at the Ontario Energy 21 Board as a regulator. And amongst other things, I 22 used to battle with Ontario Hydro and Mr. Harper 23 used to be on the other side of the battle on that 24 point and appeared before as one of the Hydro 25 staff members and in charge of their intervention 05453 1 later. 2 So after I left the OPS in about 1990, 3 I spent a number of years in the private sector 4 running the Gas Industry's Technology Development 5 Program. And then as a COO of a hi-tech start up 6 company as well. 7 And then I went back to the OEB in 8 about '96 and I did again many new types of 9 hearings, including as is developed performance 10 based regulation, cost of service regulation, 11 standard supply and electricity and so on. So I 12 did a lot of hearings and wrote many decisions. 13 And then the last four years since I 14 retired from there, I've been an associate at ECS 15 and I've appeared as an expert witness at the 16 Regie and Quebec and the Alberta Utilities Board. 17 And my work really is focused on helping or 18 assisting and advising public interest groups, 19 both in Ontario and other parts of Canada. 20 Right now I'm also a member of the DSM 21 Stakeholder Consultatives for Union Gas and 22 Enbridge Gas Distribution. So I have a 23 familiarity with DSM. And I'm also a member of 24 the Ontario Energy Association Technology 25 Committee and that's been recently looking at 05454 1 issues such as distributed energy and smart 2 metering technologies. So that really is a 3 summary. Thank you. 4 MR. WILLIAMS: Thank you, Dr. Higgin. 5 Both to Mr. Harper and Dr. Higgin, in the course 6 of this proceeding, there has been some written 7 material filed on the record on behalf of CAC/MSOS 8 and that includes the February 10th report on the 9 review of the Need For and Alternatives to the 10 proposed projects as well as a number of 11 interrogatory responses to questions posed by 12 either CEC staff or Hydro/NCN. Could you confirm 13 that those materials were prepared directly by you 14 or under your direction? 15 MR. HARPER: Yes I can. 16 DR. HIGGIN: Yes, we would. 17 MR. WILLIAMS: And I wonder if you 18 could just summarize for the panel's assistance 19 and confirm that in preparation of your evidence, 20 you reviewed the NFAAT submission prepared by 21 Hydro in April of 2003, the subsequent 22 supplementary material as well as responses to 23 information requests and the record before the 24 CEC? 25 MR. HARPER: Yes. I think I'd like to 05455 1 respond with a qualified yes. I know myself and 2 Dr. Higgin has as well made an effort to identify 3 and review all the materials filed by MH/NCN and 4 other parties that we consider to be relevant to 5 our assignment. 6 However, with the volumes of material 7 that had been presented to the Commission, I 8 couldn't attest to the fact I read absolutely 9 every single piece of paper but I think we have a 10 good working knowledge of the information that's 11 been put before the Commission at this time. 12 DR. HIGGIN: I will agree and say that 13 we've looked at the materials and have a 14 reasonable working knowledge of that and mostly 15 focused on the information on the Need For and 16 Alternatives that has been put before the 17 Commission. 18 MR. WILLIAMS: Thank you. Can you 19 confirm that the information prepared in your 20 report and information responses is accurate to 21 the best of your knowledge? 22 DR. HIGGIN: Yes, subject to updates 23 and additional evidence and clarifications filed 24 by the proponents and other parties since we 25 prepared that report, which was February 10th. So 05456 1 there's been a number of updates and additional 2 information and we will address some of those in 3 our presentation that follows. 4 MR. HARPER: I guess my response would 5 essentially be the same in terms of there are some 6 corrections that were made during interrogatory 7 responses and some other points we'll be making 8 during the course of our presentation. But other 9 than that, yes. 10 MR. WILLIAMS: Thank you. I would 11 like you now to turn to your report of February 12 10, 2004, not physically but intellectually, and 13 ask you by outlining your interpretation of the 14 terms of reference as at the speak to 15 justification, need for and alternatives to the 16 Wuskwatim projects. 17 MR. HARPER: Yes. And I think it's 18 fair to say that justification, need and 19 alternatives are all concepts that are 20 interrelated but we want to take them one at a 21 time. 22 First in terms of need. We concur 23 with the Canadian Environmental Agency's 24 definition which defines "need for" as the problem 25 or opportunity the project is intended to solve or 05457 1 satisfy. That is, need establishes the 2 fundamental rationale for the project. 3 Next, and I think this is probably the 4 simplest of the three, alternatives are really the 5 different ways that one could actually address 6 that need once you've defined it. 7 And then finally, justification is the 8 process that one goes through in demonstrating 9 that the proposed undertaking that's been put 10 forward by one or more proponents is the preferred 11 alternative for addressing that identified need. 12 Generally, justification involves such things as 13 identifying the potential alternatives, 14 establishing a set of criteria. Assessing the 15 attributes of each alternative based on those 16 criteria. And finally, arriving at a conclusion 17 as to which alternative best meets the need. Or 18 that conclusion may require trade-offs between the 19 various criteria. 20 And indeed, we see one of the key 21 roles of bodies such as the CEC is basically 22 offering independent and informed view as to the 23 relative merits of various alternatives when there 24 are such trade-offs required. 25 MR. WILLIAMS: In terms of the 05458 1 Wuskwatim projects as a whole, please outline your 2 understanding and view of Hydro/NCN's position as 3 to the need for these projects. 4 MR. HARPER: In its initial April 5 submission, Manitoba Hydro and NCN state, and it's 6 on page 5 of their overview, the advancement of 7 the Wuskwatim inservice date from 2020 to 2009 8 would be primarily to obtain additional export 9 revenues and profits. 10 In subsequent testimony, Manitoba 11 Hydro's witnesses have really confirmed this by 12 indicating that the fundamental drive for 13 Wuskwatim is that advancing Wuskwatim will enable 14 Manitoba to increase exports, particularly in the 15 early years. However, they've also suggested that 16 there are other needs for Wuskwatim in terms of 17 reliability and also from an environmental 18 perspective as well as byproducts in the form of 19 economic stimulus. 20 Mr. Thomas, on behalf of NCN, the 21 other proponent for the projects, offered a 22 slightly different perspective regarding the need 23 for the project and suggested that opportunities 24 for jobs and training, local business development 25 and profits were all equally important when 05459 1 considering the need for Wuskwatim. 2 In order for a need to be legitimate 3 in our view, the problem or opportunity that 4 undertaking is meant to address must be linked to 5 a justifiable want or requirement for the 6 proponent. 7 A likeness to when I'm walking through 8 the mall with our children. If they are asking me 9 and telling me they need a new pair of shoes, 10 that's one thing. If they tell me they need the 11 latest Game Boy game for their Nintendo set, 12 that's another issue of need. It has to go 13 through a much tighter level of scrutiny in terms 14 of justification from my perspective. 15 In Manitoba Hydro's case, its 16 objectives are set out in legislation which 17 directs the utility to (a) Provide a supply of 18 power adequate to meet the needs of the province. 19 (b) To promote the economy and efficiency and the 20 development, generation, transmission, 21 distribution, supply and end-use of power. And 22 (c) Under acceptable terms and conditions to 23 market power outside the province. 24 With this mandate, it's easy to see 25 that reliability is a legitimate need for Manitoba 05460 1 Hydro. However, it's clear from the information 2 we've seen presented during the course of these 3 proceedings, that the advancement of Wuskwatim is 4 not required in order to solve a reliability 5 problem. As a result, while reliability may be a 6 secondary consideration, it can't really be 7 considered a basis of need for the project. 8 However, exporting electricity is also 9 part of Manitoba Hydro's mandate and promoting 10 economy in the form of lowering costs to domestic 11 customers by profiting from such exports can also 12 be considered one of Manitoba Hydro's objectives. 13 Furthermore, there is an identified 14 opportunity, as we've seen from the evidence 15 presented, in terms of a likely surplus on the 16 inter-tie and available export markets on the 17 other side of that inter-tie prior to the need 18 date for new generations solely for reliability 19 purposes. 20 As a result, and just to conclude all 21 this, in our mind, the opportunity for increased 22 export revenues. And more importantly, increased 23 profits does represent a legitimate need for 24 Manitoba Hydro's perspective for the projects. 25 MR. WILLIAMS: Need has also been 05461 1 referred to, at least in your earlier comments, by 2 Hydro in terms of environmental and more general 3 economic benefits. And what are your views about 4 those being identified as needs that would be 5 addressed by the project? 6 MR. HARPER: I guess I just finished 7 saying from Manitoba Hydro's perspective, the need 8 is really the opportunity to increase exports, 9 particularly in that 2010 to 2020 period. And 10 improve customer value by maintaining rates lower 11 than they would otherwise be. Environmental and 12 economic benefits are legitimate criteria to use 13 in assessing the available alternatives but they 14 really aren't the basis for need. 15 MR. WILLIAMS: Mr. Harper or Dr. 16 Higgin, do you have any views on the need for the 17 project as put forward by NCN? 18 MR. HARPER: In our review, we did not 19 specifically look at the question of need from 20 NCN's perspective. Our focus tended to be more on 21 the implications for Manitoba Hydro and its rate 22 payers. And there are a couple of reasons for 23 this. First being our client CAC/MSOS represent 24 ratepayers of Manitoba Hydro. The second being 25 the CEC will be making recommendations to the 05462 1 Government of Manitoba who is then responsible, 2 among other things, for authorizing Manitoba 3 Hydro's investment in the project. As a result, 4 we believe Manitoba Hydro's perspective was 5 important to the Commission's deliberations. 6 And finally, as Mr. Thomas indicated, 7 as a community, NCN will be making its own 8 determinations as to whether the need and the 9 justification for the project is acceptable from 10 their perspective. 11 MR. WILLIAMS: Thank you. Could you 12 please outline the approach Hydro/NCN have taken 13 to justify the projects? 14 MR. HARPER: Since the need is based 15 on the opportunity to increase exports, 16 alternatives to Wuskwatim are essentially 17 alternative means of making additional electricity 18 available on the system for those exports. 19 Manitoba Hydro/NCN have identified a number of 20 ways this could be accomplished. You could 21 develop other types of generation by Manitoba 22 Hydro. You could improve the production 23 capability of existing generation facilities on 24 the system or you could also free up existing 25 generation facilities through demand-side 05463 1 management initiatives. Or fourth, you could also 2 encourage other parties on the system for third 3 parties to develop generation as well which would 4 tend to offset the need for Manitoba Hydro 5 generation. 6 So basically, Manitoba Hydro has gone 7 through and identified a number of alternatives in 8 these various areas and then performed an initial 9 screening as to the reasonableness of those 10 alternatives based on economic and environmental 11 criteria and developed a short list. And that 12 short list essentially included new generation in 13 the form of gas-fired CTs, a limited number of 14 hydraulic developments, one of which was 15 Wuskwatim, and wind generation. But also included 16 supply-side enhancements at a number of existing 17 generation sites and demand-side management 18 initiatives. 19 Manitoba Hydro then proceeded to 20 justify the project from an economic and financial 21 perspective by; (1) Submitting that Wuskwatim was 22 economically viable even after taking into account 23 the risks associated with the project. (2) 24 Submitting that proceeding with Wuskwatim did not 25 preclude Manitoba Hydro from exploring other 05464 1 alternatives that were on that short list and 2 could prove to be economic. And (3) Submitting 3 that any negative financial impacts the projects 4 were manageable and in the long term, there were 5 positive financial impacts and rate benefits to 6 customers. 7 MR. WILLIAMS: Mr. Harper, I wonder if 8 you could comment on Hydro's approach? 9 MR. HARPER: The initial steps 10 undertaken by Manitoba Hydro and NCN to identify 11 and screen were reasonable and consistent with 12 utility practice elsewhere. In particular, the 13 initial screening allows proponents to develop a 14 shorter and more meaningful list of alternatives 15 which can be subject to more detailed analysis. 16 However, in our view, there were some 17 shortcomings with the subsequent steps. 18 First, the Manitoba Hydro/NCN 19 submission did not contain a comprehensive 20 justification of the Wuskwatim project from a 21 portfolio perspective. Such a comprehensive 22 justification would involve using the short listed 23 alternatives to develop alternative portfolios of 24 options, each of which will be capable of 25 satisfying that identified need and then 05465 1 evaluating each of them against the criteria which 2 include economic, financial and other criteria as 3 well. A rationalization would then be presented 4 as opposed to why the portfolio proposed was the 5 preferred course of action. 6 I believe we filed an example of this 7 sort of approach as used by the BCUC in response 8 to a Commission information request, CEC/CAC/MSOS 9 NFAAT 1-1. 10 Second, economic and the risks of the 11 project were assessed only from a project 12 perspective and not from a Manitoba Hydro 13 perspective. 14 MR. WILLIAMS: Mr. Harper, let's deal 15 with the first concern you raised which relates to 16 the absence of a comprehensive justification based 17 on portfolio analysis. What are the implications 18 of that? 19 MR. HARPER: While the approach used 20 by Manitoba Hydro and NCN can demonstrate that a 21 proposed undertaking represents an acceptable 22 alternative from an economic and financial 23 perspective, it will not clearly establish that it 24 should be the preferred alternative. 25 Manitoba Hydro and NCN contend that in 05466 1 this particular case, this issue really doesn't 2 arise since the export opportunity is large enough 3 to accommodate and develop all of the short listed 4 options. If this is the case, then the Manitoba 5 Hydro/NCN approach is reasonable provided there 6 are no limitations on either Manitoba Hydro's 7 financial or intellectual capital that will 8 preclude pursuing all of those opportunities at 9 the same point in time. 10 However, this may not be the case in 11 the future projects which could be subject to the 12 review by the CEC. And it's important that the 13 correct approach to the question for needs and 14 alternatives to be established now. 15 Furthermore if one is not careful 16 going into this analysis, assuming that a 17 particular alternative, in this case Wuskwatim as 18 the preferred alternative, could bias the results 19 as one looks at the economic and financial aspects 20 as opposed to one where you have just short listed 21 alternatives and are looking at each of them on a 22 level playing field. 23 It is also clear that the adoption of 24 a more comprehensive approach in this case would 25 require more information than is currently 05467 1 available on the future potential for expanded DSM 2 programs, NUGs or supply-side enhancements. These 3 shortcomings essentially limit the ability of 4 Manitoba Hydro and NCN to undertake a 5 comprehensive portfolio analysis at this point in 6 time. However in our minds, they do represent a 7 deficiency in the current submission and should 8 not be considered acceptable for future filings. 9 MR. WILLIAMS: Mr. Harper, you also 10 mentioned that your belief that the economic 11 analysis of the project should have also been 12 performed from a Manitoba Hydro perspective. I 13 wonder if you can explain why? 14 MR. HARPER: There are a number of 15 reasons why we believe the economic analysis must 16 be considered from a Manitoba Hydro perspective. 17 As I mentioned earlier, the CEC will be making 18 recommendations to the government who, in turn, 19 will decide whether to approve and guarantee 20 Manitoba Hydro's investment in the project. It 21 seems critical to us that the CEC be able to 22 advise the government on the economics of the 23 project from a Manitoba Hydro perspective as 24 opposed to say an NCN perspective or any other 25 perspective. 05468 1 The undertaking of financial analysis 2 from a Manitoba Hydro perspective is a necessary 3 prerequisite to going through the needs for an 4 alternatives assessment but it does not 5 demonstrate that a project is economically viable 6 from a Manitoba Hydro's perspective. It is the 7 economic analysis that weighs the returns and 8 risks of a project. Financial analyses do not do 9 this. Rather what financial analyses help us do 10 is look at issues such as borrowing and customer 11 rates and allow us to consider whether the 12 proposed project will create borrowing or debt 13 problems in the short-term, create rate problems 14 in the short-term and what sort of rate benefits 15 it will lead to in the longer term. 16 Finally, economic analyses such as the 17 IRR analysis that's used in this case is performed 18 to determine if an investment will make a positive 19 economic contribution to the firm and participants 20 involved. Different participants will have 21 different expectations with respect to returns and 22 different risk tolerances. Therefore, any 23 economic IRR analysis that uses hurdle rates to 24 judge the adequacy of returns adopts a particular 25 perspective, if not explicitly, then implicitly by 05469 1 default. If you use a number it's going to have 2 inherent in a certain assumption about risk and 3 return that the proponents want to use. In fact, 4 the NFAAT analysis of Wuskwatim, the hurdle rates 5 and the risk premiums used were those of Manitoba 6 Hydro's. Not those of NCN or not those of the 7 partnership overall. And as a result, it would 8 seem appropriate to be used in conjunction with 9 the Manitoba Hydro perspective. 10 MR. WILLIAMS: But don't the terms of 11 reference say that the Commission should be 12 looking at the project overall? 13 MR. HARPER: Yes, this is something 14 that Manitoba Hydro suggested in its rebuttle to 15 our evidence as a reason for not taking the 16 Manitoba Hydro perspective with respect to 17 economic analyses. First, I don't mean to parse 18 words, but it's not clear that the requirement to 19 look at the project in its entirety refers to 20 ownership. It could equally refer to not 21 separating the transmission and generation aspects 22 of the project which I think is a valid approach. 23 You have to look at the project overall. You 24 can't do economic analyses on transmission and 25 economic analyses on generation separately. 05470 1 And second, Manitoba Hydro, also in 2 its rebuttal, seemed to argue that since ownership 3 is not important from an environmental 4 acceptability perspective, the economic evaluation 5 should not separate the project into Manitoba 6 Hydro and NCN portions. We disagree. Clearly 7 from an environmental perspective, ownership is 8 not an issue unless you get to the point where (1) 9 the proponents have a particular issue with 10 respect to their past environmental record. But 11 in the case of economic analysis, ownership 12 arrangements can have a profound effect on the 13 risk and returns to the various parties and the 14 perspectives of each need to be considered. 15 MR. WILLIAMS: Thank you, Mr. Harper. 16 Earlier you referred to the initial screening of 17 alternatives by Hydro/NCN. I wonder if you can 18 comment briefly on how that was performed? 19 MR. HARPER: The initial screening 20 undertaken by Manitoba Hydro and NCN considered 21 both the economics of each alternative, that is 22 the cost, as well as general environmental 23 criteria such as air emissions and land use. 24 As a cost screen, Manitoba Hydro and 25 NCN used a construct which is called LECs or 05471 1 levelized energy cost which is a calculation which 2 considers both the capital and the ongoing cost of 3 each alternative along with the expected energy to 4 be gained and determines an average cost per 5 kilowatt hour or megawatt hour produced over the 6 life of the alternative. 7 Levelized energy costs is a fairly 8 simple calculation; however, as an initial 9 screening tool, it does take into account the 10 overall level of energy produced and the time 11 value of money involved. First of all, I think 12 it's fair to observe that -- excuse me, it's also 13 fair to observe that LECs, or their equivalent, 14 are used by other electric utilities for exactly 15 the same purpose, that is going through initial 16 screening of which resource options are reasonable 17 and should be identified for further scrutiny. 18 MR. WILLIAMS: Thank you. In terms of 19 the LEC methodology and the way it was applied in 20 the Wuskwatim analysis, do you have any concerns? 21 MR. HARPER: Yes, we have two. The 22 first, and this is really consistent with my 23 previous comments, was that the Manitoba Hydro and 24 NCN had undertaken its analysis of the project 25 really from a project perspective essentially 05472 1 assuming it was 100 percent owned by Manitoba 2 Hydro. However, we know that this is not the case 3 for Wuskwatim and may not be the case for other 4 hydraulic developments. And as such, the cost to 5 Manitoba Hydro will differ from those for the 6 project overall. This approach also we found is 7 being somewhat inconsistent with the way they 8 looked at the LEC say for demand-side management. 9 Really what they did is they looked at the cost to 10 Manitoba Hydro at that point in time as opposed to 11 say also participant cost which would also be 12 involved in options. 13 Furthermore, the information presented 14 during the proceedings as indicated has indicated 15 the cost of other generation options can be 16 influenced by ownership. For example, Mr. Adams 17 indicated that for tax and subsidy reasons, wind 18 development is probably more an appropriate 19 undertaking by private developers as opposed to a 20 Crown corporation such as Manitoba Hydro. 21 In contrast, though, if we look at the 22 business case for Brandon, we found that for the 23 gas-fired generation there, Manitoba Hydro 24 concluded that sole ownership by Manitoba Hydro 25 was preferred to a private partnership. 05473 1 So you can see there are 2 considerations of ownership that are important in 3 terms of finding costs. 4 It would be appropriate to use a 5 common perspective when looking at LECs for 6 various alternatives and we suggested that 7 perspective should be Manitoba Hydro's. One of 8 the reasons for this is that any option deemed to 9 be economic will be incorporated into Manitoba 10 Hydro's power resource plan, and as such, a 11 Manitoba Hydro perspective approach helps to 12 ensure that the power resource plan represents the 13 least cost alternatives to Manitoba Hydro overall. 14 A second concern, and this was really 15 a minor one, was that the LEC calculation did not 16 include all the costs associated with the project 17 given that it involved the partnership 18 arrangement. And in particular, excluded in this 19 is and allowance for administration costs for the 20 services that Manitoba Hydro will be providing to 21 the Wuskwatim limited partner and also assistance 22 it would be doing in managing the transmission 23 development fund. 24 MR. WILLIAMS: Mr. Harper, in terms of 25 the two concerns you've identified and with 05474 1 reference to the screening process, is it your 2 view that they have any material effects on the 3 results of the analysis? 4 MR. HARPER: No. From a quantitative 5 perspective, they don't. I think we included some 6 analysis in our report which indicated that if you 7 used a Manitoba Hydro perspective on the LECs, the 8 value might increase by say 10 percent. And at 9 that level, the LECs would still be, say, 73 to 74 10 dollars and well within the range of the other 11 alternatives that passed the initial short lists. 12 And similarly, as we discussed in our 13 materials, including the additional administration 14 cost is unlikely to increase the value of the LEC 15 by more than a dollar per megawatt hour. 16 MR. WILLIAMS: Just finishing up in 17 terms of the intial screening process, do you have 18 any more comments? 19 MR. HARPER: Yes, given Manitoba 20 Hydro's statutory objectives and their specific 21 reference to efficiency and generation, 22 transmission, distribution, end-use of 23 electricity, it would be appropriate if these two 24 considerations had also been factored into the 25 initial screening. Doing so would give more 05475 1 emphasis to DSM due to its contribution to end-use 2 efficiency. It will give more emphasis to 3 supply-side enhancements due to its contribution 4 to generation efficiency. And it would give more 5 emphasis to NUGs, particularly co-generation due 6 to the enhancements it would make both in 7 generation efficiency and transmission efficiency. 8 However, since these alternatives in 9 this case all pass the initial screening of 10 Manitoba Hydro/NCN, this added emphasis at this 11 point in time wouldn't have changed the results of 12 the analysis. 13 MR. WILLIAMS: Mr. Harper, turning to 14 the individual alternatives considered by 15 Hydro/NCN, could you please highlight or recap 16 their conclusions with respect to their initial 17 screening? 18 MR. HARPER: The conclusions are 19 essentially found on page 4 of their April 2003 20 submission where it's stated, and I believe 21 there's three points. Hydro power, DSM, wind 22 generation, CCCTs, SCCTs and coal are all 23 available at a lower cost and other options 24 considered. 25 Secondly, DSM, hydropower and wind 05476 1 have lower environmental impacts than the other 2 options considered. 3 And third, supply-side enhancement 4 projects should be pursued as they become 5 available if economic. 6 MR. WILLIAMS: Mr. Harper and Dr. 7 Higgin, Mr. Harper has listed a number of these 8 options and I'd like to go through them in turn 9 and get your comments on Hydro/NCN's conclusions 10 and future plans. And let's started with SSE, and 11 then we'll give you a chance to talk, Dr. Higgin. 12 MR. HARPER: Manitoba Hydro's current 13 resource plan includes an additional 770 gigawatt 14 hours of energy through supply-side enhancements 15 by 2012. Given the demonstrated economics of such 16 options and the opportunity they offer to promote 17 efficiency and generation, another one of Manitoba 18 Hydro's objectives, we believe the pursuit of SSE 19 options should be assigned a high priority by 20 Manitoba Hydro and any need for and evaluation of 21 new generation should assume that all economic SSE 22 options have already been pursued. 23 MR. WILLIAMS: Welcome back, Dr. 24 Higgin. What's your opinion of Hydro's assessment 25 of demand-side management economics? 05477 1 DR. HIGGIN: Our review of the MH/NCN 2 evidence on DSM is on pages 2731 of our ECS 3 report. We look first at the existing PowerSmart 4 plan and the targets as currently included in the 5 power resource plan which is set out in the 6 documents, specifically PowerSmart resource 7 options for the 2001 corporate plan. That's filed 8 here, Appendix 6 of the MH/NCN evidence. 9 Our review indicated that the existing 10 PowerSmart program is on track to its targets of 11 1272 gigawatt hours and 356 megawatts of 12 reductions. And that the utility cost, which is 13 indicated by MH/NCN, as $245 million indicates 14 that it is a cost effective program and has a 15 levelized energy cost range in the order of 1.83 16 to 7.16 cents per kilowatt hour which is good in 17 terms of its economics. That's the conclusion. 18 Next, though, we then look at where 19 Hydro is going with demand-side management. To do 20 that, Hydro, in its August supplementary filing, 21 brought forward the consultant's study for DSM 22 potential for the future. And the potential for 23 expanded DSM we summarized in table 4 of our 24 evidence on page 29. And we know that Hydro 25 directed the consultants in examining that that 05478 1 potential to use a cost of conserved energy of 2 6.15 cents per kilowatt hour as a cut-off in 3 screening potential DSM technologies and measures. 4 While we often see different CCE limits being used 5 for each of residential, commercial and 6 industrial, we accept the use of a single value as 7 long as it's at the high end and is acceptable. 8 We accept Hydro's explanation and its calculations 9 supporting the use of 6.15 cents as a cut-off for 10 the screening by the consultants of the future DSM 11 potential. 12 MR. WILLIAMS: Thank you, Dr. Higgin. 13 I wonder if you can summarize your views on the 14 potential for additional DSM as part of a 15 preferred resource portfolio? 16 DR. HIGGIN: The emphasis here is on a 17 preferred resource portfolio. I should note that 18 unlike wind energy, the 2003 Power Resource Plan 19 and the Financial Forecast only include the 2001 20 PowerSmart Plan and Targets. Hydro says that this 21 is a timing issue. Nonetheless, it makes it very 22 difficult to construct a proper portfolio and to 23 analyze and to compare DSM on an apples to apples 24 basis between the DSM and the other elements of 25 that portfolio. 05479 1 MR. WILLIAMS: Mr. Chair, just for the 2 panel, we presented some exhibits to you and one 3 of them was titled the Summary of Manitoba Hydro 4 Assessment Enhanced DSM Potential. And I believe 5 my friend, Dr. Higgin, will be coming to that. So 6 if you want to have that at hand. 7 Dr. Higgin, I wonder if you can 8 summarize your findings and conclusions on DSM as 9 part of a preferred resource development portfolio 10 and as an alternative to the Wuskwatim 11 advancement. 12 DR. HIGGIN: Yes. We provided our 13 main comments on the priority of DSM on pages 30 14 to 31 of the ECS report. And in some, we 15 expressed some concerns about limited additional 16 achievable potential in the industrial sector and 17 postulate that if the detailed program design 18 supports this, then DSM targets of about two times 19 the current level by 2012 are realistic and 20 perhaps even as high as, a real stretched target, 21 three times the current targets by 2017/18. 22 Now we've prepared this exhibit which 23 tries to summarize what is meant by a two times 24 DSM scenario. Hydro/NCN have not just doubled the 25 existing program targets for 2011 and 2012, and 05480 1 the last date I've used is 2017/18, rather they 2 constructed a scenario where the existing program 3 results in incremental servings about the 2002 or 4 2003 levels of about 670 gigawatt hours by 5 2017/18. And that's shown on the chart -- on the 6 table that we've provided. 7 Therefore, two times DSM, which is 8 also shown there as two times current DSM program, 9 would be an additional 670 gigawatt hours above 10 the current program. And that is a definition 11 that we think is (A) appropriate, and (B) we find 12 that it makes everybody sort of talking about 13 things on the same page. And therefore, that's 14 what we've used in our comments and we think 15 that's appropriate. 16 Finally, we say that we should have a 17 great high priority be given to putting in place 18 an expanded DSM program. And we'd like to see 19 that design for the new PowerSmart DSM program 20 with at least two times the current targets. 21 That's by the range anywhere from 2011 to 2018, 22 included in the 2004 Power Resource Plan, filed 23 for review with the PUB, as soon as possible. And 24 the reasons? Well, it's urgency. We think 25 there's missed opportunities. And ensuring 05481 1 maximization of economic DSM programs with an 2 appropriate cost benefit to ratepayers. 3 MR. WILLIAMS: Thank you, Dr. Higgin. 4 Since the filing of the ECS report in February, 5 have there been any significant developments and 6 new information filed with the Commission? And if 7 so, I wonder if you could outline them and also 8 the materiality to your conclusion on DSM? 9 DR. HIGGIN: Yes, there has been some 10 evidence filed by other intervenors which 11 criticizes Hydro's load forecast. It also 12 criticizes the current PowerSmart DSM program in 13 terms of whether it's state of the art or not. 14 And also criticizes the consultant's studies on 15 the economic potential for more demand-side 16 management. 17 We've reviewed this evidence and 18 Hydro's recent rebuttle evidence that addresses 19 that new evidence. And I think that the material 20 changes are that Hydro has revised its estimate of 21 energy intensities used for the industrial sector. 22 That's at Exhibit MH/NCN 1018. And information on 23 the 2003 sectoral load forecast has been provided 24 by Hydro in that Hydro rebuttal. 25 In terms of Hydro's evidence, there is 05482 1 some concern also that the DSM consultants' 2 studies are not calibrated to the load forecast. 3 In general, we have no reason, though, to revise 4 our main conclusions about DSM and the high 5 priority that should be given in Hydro's plans. 6 The priority of expanding economic DSM programs 7 and importantly, the need to complete the detailed 8 program design as soon as possible should be a 9 high priority. 10 In doing so, I should comment that the 11 screening of economic initiatives for the new DSM 12 program should include the marginal resource cost 13 technology screening method, should use total 14 resource cost, TRC, and very importantly also 15 should use ratepayer impact measure assessments to 16 ensure that the portfolio will have appropriate 17 ratepayer impacts in the longer term. 18 MR. WILLIAMS: Mr. Harper, I wonder if 19 you can comment on utility generation? 20 MR. HARPER: Maybe to start off by 21 clarifying what we mean by non-utility generation 22 or NUGs. NUGs is generation that is owned or 23 operated by a party other than Manitoba Hydro. 24 There are really two different circumstances under 25 which NUGs can occur. The first is load 05483 1 displacement NUGs often in the form of 2 co-generation where the generation facilities 3 shares a common steam source with the facilities' 4 other energy requirements. 5 THE CHAIRMAN: Slow down, please. 6 MR. HARPER: In such instances, the 7 electricity produced is first used to reduce the 8 customer's demand for electricity from the local 9 utility. In this case, Manitoba Hydro. And then 10 if there's any surplus, the customer will be 11 looking for opportunities to sell that, say, to 12 Manitoba Hydro. 13 In the case of co-generation, there 14 are benefits not only in the form of load 15 reduction and increased resources available for 16 export but also in energy efficiency improvements 17 in the overall use of energy through this common 18 use of a steam source. 19 Opportunities for co-generation exist 20 not only in the industry but also in other large 21 and commercial and institutional buildings such as 22 hospitals that have large amounts of steam use for 23 their purposes. 24 The second circumstances where the 25 generation of surplus to the needs of the parties 05484 1 producing it primarily because it's a merchant 2 plant which has been constructed solely for the 3 purpose of selling power to the local utility. A 4 prime example of this would be the wind generation 5 that's been talked about in this proceeding here 6 where the objective is for the proponent to 7 develop the project and sell the power on an 8 economic basis either to Manitoba Hydro or say on 9 an export market. 10 MR. WILLIAMS: Thank you for that 11 explanation, Mr. Harper. I wonder if you can 12 briefly discuss Hydro's policy as it relates to 13 NUGs? 14 MR. HARPER: Hydro's policy with 15 respect to NUGs is that, first, for parties 16 seeking to sell more than two megawatts of power 17 into the Hydro system, the utility will pay a 18 price that's based on exported prices. Second, 19 for NUGs below two megawatts, the pricing is based 20 on Manitoba Hydro's run-off rates. That's really 21 the tail rate or the end rate on their rate 22 structure, a value which is often less than the 23 on-peak opportunity price for exports. 24 And third, for NUGs that simply reduce 25 customer's demand, the benefit of NUGs is 05485 1 restricted to the customer's bill reduction. 2 Again, a value which can be less than the firm or 3 on-peak opportunity export prices. However, 4 Manitoba Hydro has suggested that funding is 5 available for industrial DSM opportunities to 6 assist in implementing such options through its 7 DSM programs. 8 MR. WILLIAMS: Mr. Harper, could you 9 comment on the results of the policy to date? 10 MR. HARPER: To date, no NUGs have 11 been developed in the Province of Manitoba. And 12 Manitoba Hydro has suggested that this is because 13 the present market economies are insufficient to 14 support any developments in this area with the 15 exception of wind, and also because there is a 16 lack of industrial steam hosts. 17 However, it would appear to us that 18 Manitoba Hydro could be more aggressive in its 19 pursuit of NUG opportunities. This comment is 20 based on the following observations. 21 The recent consultant reports that Dr. 22 Higgin referred to on DSM opportunities in the 23 industrial commercial sectors did not consider NUG 24 or co-generation opportunities. And while 25 Manitoba Hydro has suggested that customers can 05486 1 receive incentives under its Industrial 2 Performance Optimization Program for installing 3 such generation, a review of the terms and 4 conditions of the program really doesn't make this 5 clear at all. So proponents wouldn't be readily 6 aware that this program could be used for that 7 particular purpose. 8 And third, for load displacement 9 generation, customers' benefits are limited solely 10 to bill reductions even though the benefit to the 11 system is significantly greater. 12 MR. WILLIAMS: If there was a desire 13 to move toward a more aggressive pursuit of NUG 14 opportunities, what, if anything, might you 15 suggest? 16 MR. HARPER: There are a couple of 17 ways Manitoba Hydro could encourage NUGs. First 18 of all, it could reconsider its policy of not 19 rewarding customers other than through bill 20 reductions for using NUGs to reduce their loads. 21 In its rebuttle, Manitoba Hydro finds this an 22 unacceptable policy because essentially they'd be 23 paying a customer a higher price to buy the energy 24 than what they are selling it to them at. 25 However in this regard, it should be 05487 1 noted that, for example, under the commercial 2 program, hospitals are offered financial 3 incentives over and above bill reductions if they 4 will undertake DSM measures such as low E windows 5 in order to reduce their loads. And in those 6 cases, the hospitals benefit both from the lower 7 bills and from that financial incentive. It is 8 not clear to us by load reductions through the 9 construction of generation should not be treated 10 similarly, particularly if those reductions are 11 achieved through co-generation and lead to 12 efficiency improvements as well. 13 Providing incentives, particularly in 14 the case of co-generation or NUGs that use 15 renewable or waste products could be considered 16 contributing to Manitoba Hydro's objectives with 17 respect to efficiency and economy. In addition, 18 we think Manitoba Hydro could clearly articulate 19 to potential NUGs how their Industrial Performance 20 Optimization Program could apply to them. 21 MR. WILLIAMS: Mr. Harper, perhaps you 22 could next address Hydro/NCN's conclusions with 23 regard to gas-fired SCCTs and CCCTs. And in doing 24 so, perhaps you can remind me what those terms 25 refer to? 05488 1 MR. HARPER: I have a similar problem 2 in how many C's and S's I put in each of those 3 terms. The levelized energy costs for SCCTs, 4 which really refers to single cycle combustion 5 turbines, and this is really where the energy is 6 used just once, as suggested by the name, to 7 produce electricity. And CCCTs which are really 8 combined cycle combustion turbines where the 9 energy is used and then recycled energy used 10 again. And as a result, those CCCTs, because 11 there's more technology involved, have a higher 12 capital cost but they are more efficient and 13 therefore have a lower operating cost than the 14 single cycle combustion turbines. 15 Both of these technologies are 16 extremely sensitive to future natural gas prices. 17 I think that's something the Manitoba Hydro Panel 18 indicated as well when they were before you, and 19 to future assumptions about how environmental 20 premiums that may be associated with gas-fired 21 generation will evolve. 22 Manitoba Hydro has not provided its 23 forecast as to the expected price of gas but 24 rather has provided a range of low to high gas 25 prices as well as an indication as to what they 05489 1 think is a range for environmental premiums. 2 Under the low gas price scenario, 3 CCCTs are lower cost than Wuskwatim and SCCTs are 4 roughly the same price. Under a high gas cost 5 case, the LECs for generation from SCCTs exceeds 6 the cost of Wuskwatim even before you add in any 7 environmental premiums. However in the case of 8 CCCTs, based strictly on the high natural gas 9 prices but no environmental premium, they are 10 roughly equivalent to Wuskwatim and it takes the 11 environmental premium to tip the difference. 12 In our pre-filed material, we provided 13 a table comparing Manitoba Hydro's natural gas 14 price forecast with a gas price forecast prepared 15 by the various consultants Manitoba Hydro used, 16 and with recent gas price forecasts prepared by 17 the departments in both the U.S. and Canadian 18 governments. The table was subsequently revised 19 in response to information requests posed by the 20 proponents. Overall, the natural gas price range 21 used by Manitoba Hydro/NCN in its LEC analysis is 22 generally consistent with the range of values 23 forecasted by these other parties. So they've got 24 the envelope right. 25 During their appearance before the 05490 1 Commission, Manitoba Hydro's representatives 2 pointed out that the gas price forecast prepared 3 by their consultants were somewhat dated. The 4 studies were done a little while ago. They noted 5 that current forecast price of gas was in excess 6 of $6.00 per million BTU U.S. for January 2005 7 delivery and that recent forecasts by analysts 8 call for higher prices than those included in 9 their submission. ECS acknowledges that there's 10 been an increase in natural gas prices between 11 2002 and 2003 and that a number of analysts are 12 now calling for higher natural gas prices in the 13 future than previously forecast. However, we 14 would point out that the EIA, that's the Energy 15 Information Administration, it's a branch of the 16 U.S. Department of Energy, a forecast that was 17 referenced by the proponents was the one that we 18 included in our evidence and is one of the tests 19 we used to test the reasonableness of the gas 20 price forecast. 21 And also I think it's important to 22 recognize that gas prices are volatile on a year 23 over year basis and that recent natural gas price 24 forecasts prepared by B.C. Hydro, actually there's 25 a current B.C. Hydro generic rate application 05491 1 going on which we're involved in, suggests that 2 2005 may be the top of the cycle. B.C. Hydro 3 forecasts for 2010 is for $4.75 Canadian price for 4 Sumas gas as opposed to $6.31 in January 2005. 5 And actually, my counsel didn't catch 6 that, but one of the exhibits that we have 7 prepared for this morning is a copy of the 8 undertaking that was filed at the BCUC by B.C. 9 Hydro indicating what their forecast price of gas 10 and actually export electricity would be from 2003 11 through to 2013. 12 MR. WILLIAMS: Thank you for that 13 reminder, Mr. Harper. The document at the top is 14 the number 2 in reference application Volume 1, 15 Chapter 2, consolidated revenue requirements and 16 financial schedules. It's a four-page document. 17 MR. HARPER: And again, the numbers I 18 quoted can be found in there. 19 Overall, ECS believes the range of gas 20 prices initially used by Manitoba Hydro continues 21 to be reasonable for evaluating CTUs as an 22 alternative. As noted earlier, the overall 23 levelized energy cost range for SCCTs is such that 24 they are not an economic alternative strictly for 25 energy production due to their high fuelling 05492 1 costs. Therefore, they are not seen as a valid 2 alternative for increasing overall energy 3 available for export. 4 In the case of CCCTs at a conceptual 5 level, we find it hard to see how power produced 6 in Manitoba Hydro for export using CCCTs could be 7 competitively priced when one of the alternatives 8 available to the target utility would be to 9 construct its own CCCT. It's like entry into a 10 car race and having an extra 20 pounds in your car 11 and exactly the same car beside you because you 12 have to pay for the transmission and transmission 13 losses to get there. 14 So overall, our conclusion is that 15 Wuskwatim represents a more economic alternative 16 than either SCCTs or CCCTs for increasing 17 generation available for export and that 18 conclusion appears reasonable to us. 19 MR. WILLIAMS: Dr. Higgin, I'm going 20 to turn to you, but lest I be found by my 21 witnesses again delinquent, there is an exhibit 22 that Dr. Higgin will be referring to shortly which 23 is titled "Summary of Manitoba Hydro calculations 24 of wind power economics." It's a one-page 25 exhibit. 05493 1 Dr. Higgin, with that being said, I 2 wonder if you could provide your opinion of 3 Manitoba Hydro's assessment of wind power 4 economics. 5 DR. HIGGIN: Thank you. My view is 6 that right now, the calculations for wind are all 7 over the map, if you pardon the pun. The 8 methodology is okay. It's used its standard 9 resource screening methodologies, levelized energy 10 costs and internal rate of return. And the major 11 assumptions and variables are known. That's the 12 wind resource which you can characterize a number 13 of ways, including the annual capacity factor, the 14 size of the wind farm, the capital and operating 15 costs are very important, system integration costs 16 and available subsidies. And if you're using an 17 IRR calculation, also the export price of course 18 is an important factor. 19 So ECS's view of the data that 20 Manitoba Hydro/NCN had filed at the time of 21 preparation of our report is shown in table 6 on 22 page 37 of our report. And this shows a levelized 23 energy cost range of 6.85 to 10.05 cents per 24 kilowatt hour. And that's roughly corresponding 25 to the August supplementary filing column in the 05494 1 exhibit we filed. And you see at the bottom, the 2 LEC, 6.85 to 10.05 cents per kilowatt hour. 3 In our report, we also conclude that 4 certain conditions precedent should be satisfied 5 before making any major investment at ratepayer 6 expense. And in the interim, Hydro should do wind 7 resource monitoring and facilitate private 8 developments like Sequoia. 9 MR. WILLIAMS: Dr. Higgin, I wonder if 10 you can discuss what, if any, new information has 11 been provided by Hydro since the preparation of 12 your report. And how, if at all, it's affected 13 your view on wind energy as a component of a 14 preferred resource portfolio and as an alternative 15 to advancement of Wuskwatim? 16 MR. HIGGIN: The major new information 17 is in response to certain parties to this 18 proceeding that requested analyses of a scenario 19 for an additional 450 megawatts of wind energy by 20 2009 on top of the 250 megawatts that Hydro has in 21 the Power Resource Plan. This additional 450 22 megawatts is an alternative to advancement of 23 Wuskwatim. 24 The first problem we've encountered is 25 consistency of assumptions and comparability of 05495 1 the 250 megawatt and 450 megawatt scenarios which 2 we call small wind and big wind respectively. 3 So counsel to CAC, that's you, 4 requested -- 5 MR. WILLIAMS: Thank you for the 6 reminder. 7 MR. HIGGIN: -- Hydro to come up with 8 a standard reference case for small and big wind. 9 And that undertaking is filed as Exhibit MH/NCN 10 1004. And that's what I've relied on in the 11 right-hand columns of this exhibit. 12 So we've compiled the data. And we 13 would like to just make a couple of comments about 14 the standard reference cases. 15 We find that even with very optimistic 16 capital and operating costs, and as I note on the 17 exhibit, the capital and operating costs for small 18 wind are even lower in this assumption than the 19 previous filings. For example, the capital cost 20 has gone down and the operating cost has gone 21 down. And no wonder the IRR has then gone up. 22 That's another set of assumptions that have been 23 used. And I think I know where they came from but 24 basically, it's not consistent with the earlier 25 assessment of the 250 megawatt wind case. 05496 1 So what we see then if we just look at 2 the column for the 250 megawatt, we first of all 3 see that under the Power Resource Plan, the 4 assumption there is that there is no Wuskwatim. 5 There is SSE and DSM included in the Power 6 Resource Plan. That is a different assumption to 7 the assumptions in the earlier scenarios. And 8 that's what I think that Hydro is asked to assume 9 in making those calculations. 10 Anyway, you see the result. You see 11 that the IRR is 8.2 percent without the WPPI, as 12 we call it, or the wind power program incentive, 13 and 9 per cent with the WPPI. And we should just 14 compare that with the hurdle rate policy that this 15 type of project on a reasonable basis is medium to 16 high risk and the hurdle rate should be at least 17 10 per cent. 18 MR. WILLIAMS: Thank you, Dr. Higgin. 19 What is your assessment of the position advanced 20 by Manitoba Hydro on wind energy, either as an 21 alternative to Wuskwatim or as part of a preferred 22 development portfolio along with other generation 23 and demand reduction options? 24 DR. HIGGIN: Well, I don't want to be 25 down on wind energy. I'm a fan of wind energy, 05497 1 first of all. As you see my background, I've had 2 several flings with wind energy over the last 30 3 years. 4 MR. MAYER: We hope they were all 5 positive. 6 DR. HIGGIN: And some fell down and 7 some didn't. But, no, seriously, I am a fan of 8 wind energy so I'll start off by saying that. And 9 I think it is a technology that it's finally come, 10 that it's now one that can be considered for 11 utility generation. And so the key is, it's best 12 to be looked at and has a better opportunity in 13 cases where there is a government policy that says 14 we want wind energy such as a renewable energy 15 portfolio standard and also, very obviously, have 16 high electricity prices or, in this case, high 17 export electricity prices. And I'm not sure that 18 Manitoba may be in that position to give the high 19 priority to wind energy at this particular time. 20 However, it is appropriate that Hydro 21 consider it as an option for the planning period, 22 and no disagreement there. 23 But in conclusion, Manitoba Hydro 24 assessments show that wind power is not currently 25 competitive with other available generation 05498 1 options. And it also is difficult, based on very 2 optimistic assumptions, that it could even be 3 considered an alternative to Wuskwatim or even 4 reasonable to include as a preferred emphasis on 5 preferred resource development portfolio. 6 Now in our report we note that the 7 wind power development at ratepayer expense 8 shouldn't be considered until certain conditions 9 precedent are met. And the first of these is 10 there should be a development plan. And in the 11 interim, we suggest that Hydro facilitate private 12 wind development since the risks are more 13 appropriately borne by the private sector rather 14 than Manitoba Hydro ratepayers. 15 Finally, we don't understand why the 16 power resource plan includes 250 megawatts of wind 17 power on the same basis as other resource options 18 with proven economics and a proven track record. 19 Contrast the work done to include wind power 20 presumably in the 2003 plan, and also we expect in 21 the 2004 resource plan, with the fact that we need 22 still to update the 2001 PowerSmart resource 23 options plan for DSM and the targets for DSM and 24 get those into the power resource plan. 25 So finally, the issue of government 05499 1 policy. We're not aware of any government policy 2 imperative that says we want to give priority to 3 wind energy in Manitoba. Several other provinces, 4 including Ontario, have issued requests for 5 proposals for wind energy and/or established 6 renewable energy portfolio standards. The 7 Canadian Wind Energy Association, Mr. Hornung was 8 here, summarized these initiatives in his letter 9 to the Federal Minister of Finance last December. 10 And we had included a copy of that I believe in 11 CAC/MSOS Exhibit 1005. And the attachment 12 indicates no renewable energy portfolio standard 13 or RRFP in Manitoba. And Mr. Hornung, president 14 of CanWEA, as we call it, or the Canadian Wind 15 Energy Association, confirmed this at transcript 16 4090. 17 MR. WILLIAMS: Mr. Harper, finally in 18 terms of the other options, I'd like you to turn 19 to other Hydro options and ask you to provide your 20 views on Manitoba Hydro/NCN's conclusions as to 21 these options. 22 THE CHAIRMAN: And slowly. 23 MR. HARPER: As well as Wuskwatim, 24 Manitoba Hydro has identified Gull, Notigi and 25 Conawapa as attractive sites for Hydro development 05500 1 in the future. However, the fact that Wuskwatim 2 can be brought into service earlier than any of 3 these other projects, and the fact that the output 4 from these other projects tends to exceed the 5 existing transmission inter-tie capacity for most 6 of the time, really makes the economics of 7 Wuskwatim more attractive overall, if you're 8 looking at that total 2010 to 2020 period in 9 either of these projects. That is because as well 10 as these factors, Wuskwatim has the lowest LEC, 11 highest IRR of the four. 12 MR. MAYER: Excuse me, Mr. Harper, you 13 said the other three projects exceed the 14 inter-tie. Notigi, so far as we know, is 100 15 megawatts. 16 MR. HARPER: Sorry, I apologize. That 17 was Gull and Conawapa. I think the issue was 18 Notigi was quite a bit higher cost again in terms 19 of its LEC and that was what led it to be. I 20 think, actually, I was going through my notes and 21 I think there's an editing problem on the notes. 22 MR. MAYER: Not counsel's problem. 23 MR. HARPER: Right. My problem this 24 time, yes. In our view, therefore, Manitoba 25 Hydro/NCN's conclusion that Wuskwatim is the most 05501 1 attractive new hydraulic option for increasing 2 generation available on the system is a reasonable 3 one. 4 MR. WILLIAMS: Thank you both, Mr. 5 Mayer and Mr. Harper, for cleaning my record on 6 that subject. 7 Mr. Harper and Dr. Higgin, overall, 8 what are your conclusions about the screening 9 results for the various alternatives and how they 10 compare with Hydro/NCN results? 11 MR. HARPER: Overall, our conclusions 12 based on the initial screening results are that 13 Wuskwatim is the preferred alternative for 14 capitalizing on export opportunities in terms of 15 new generation options. In this regard, our 16 findings are similar to those of Manitoba Hydro 17 and NCN. 18 Our conclusions are also that as part 19 of a preferred resource portfolio option pursuing 20 economically feasible DSM, supply-side 21 enhancements, and NUGs should be given a higher 22 priority than new generation. In this area, our 23 conclusions may be viewed as being somewhat 24 different from those of the proponents in two 25 ways. First, we believe that there is an 05502 1 opportunity for NUG development, particularly in 2 co-generation and load displacement NUGs and more 3 than what has been suggested. 4 Second, we believe that the economics 5 of any new generation option should be tested 6 assuming that all economic DSM, SSE and NUGs have 7 been exploited first. 8 Finally, and specifically with respect 9 to wind, we believe that the actual development of 10 wind power projects should be left to third 11 parties until such time as the economics have been 12 proven. Manitoba Hydro's involvement at this time 13 should be limited to preparatory work such as wind 14 speed monitoring and facilitating private sector 15 wind power developments. 16 MR. WILLIAMS: Thank you very much 17 both Dr. Higgin and Mr. Harper. As I recall your 18 earlier responses, the short listing of 19 alternatives was just the first part of the 20 justification analysis. Could you please briefly 21 remind us as to what the balance of the process 22 entails? 23 MR. HARPER: The balance of the 24 analyses involves first calculating the expected 25 economic benefits from Wuskwatim using an internal 05503 1 rate of return analysis, then testing the 2 economics of other selected short-listed 3 alternatives relative to Wuskwatim to confirm that 4 it is the preferred alternative. Third, 5 performing sensitivity analysis to test that the 6 impact on Wuskwatim's internal rate of return, if 7 you vary the assumptions in the analysis, it is 8 acceptable. 9 And then based on these sensitivities, 10 Wuskwatim was assigned a medium to low risk 11 profile. The conclusions were drawn as to the 12 overall attractiveness of Wuskwatim by comparing 13 its expected internal rate of return to a 14 risk-adjusted hurdle rate. 15 And then finally, having confirmed 16 that the project was economically viable on a 17 risk-adjusted basis, Manitoba Hydro and NCN 18 performed analysis as to the year over year 19 financial implications; that is, looked at the 20 capital expenditures, borrowing and requiring rate 21 increases arising from the development of 22 Wuskwatim, and drew conclusions as to the 23 financial implications to Manitoba Hydro and its 24 ratepayers, both positive and negative, of 25 advancing Wuskwatim. 05504 1 MR. WILLIAMS: Mr. Harper, you've 2 mentioned the term "internal rate of return" a few 3 times. I wonder if you can just discuss what that 4 analysis entails? 5 THE CHAIRMAN: If I can remind you 6 just to slow down. 7 MR. HARPER: Sorry. First I should 8 note that internal rate of return analysis is a 9 standard financial and economic evaluation tool 10 that can be found in virtually any financial text. 11 What internal rate of return analysis 12 effectively does is look at all the project's 13 incremental costs and all the incremental revenues 14 associated with the project, and then works out 15 the annual discount rate which, if applied to the 16 stream of costs and stream of revenues, would 17 equal to one equalling the other. So effectively, 18 the net present value of the project will be zero 19 at the start or when the project was going to 20 commence. 21 This discount rate at which the stream 22 of revenues equals of the stream of costs on a net 23 present value basis is defined as the internal 24 rate of return for the project. 25 One way to look at the usefulness of 05505 1 this number is to think about the fact that if the 2 project was to be financed entirely by borrowing 3 and that the cost of debt equalled that internal 4 rate of return, and the party borrowing the money 5 and undertaking the project would just break even. 6 There would be no profit or no loss. So taking 7 that one step further, the implication is if 8 investor's cost of borrowing is less than the 9 internal rate of return, then the investor has an 10 opportunity to make a profit and the project is 11 economically viable. 12 MR. WILLIAMS: As I understand it, 13 Hydro/NCN use an LEC analysis for their initial 14 screening and then the IRR analysis at this latter 15 stage. And I wonder if you can just discuss the 16 difference between the two approaches? 17 MR. HARPER: All right. They are both 18 conceptual differences and differences at the 19 level of detail between the two. At a conceptual 20 level, the levelized cost analysis is really a 21 form of net present value calculation that 22 calculates what's the net present value of the 23 stream of future cost using a predetermined 24 discount rate. In this case, the LEC was done 25 using a 10 per cent real discount rate. 05506 1 In contrast, the internal rate of 2 return analysis effectively works out the discount 3 rate at which costs and revenues combined equal a 4 net present value of zero. 5 In terms of the analysis itself as 6 performed by Manitoba Hydro and NCN, the IRR 7 analysis considers a number of factors that are 8 not captured in the LEC analysis. Specifically 9 the IRR analysis includes the revenues, in this 10 case the export revenues as well as costs. It 11 captures the implication of the shape of the 12 production or energy savings, whether it's peak or 13 off-peak. It captures the implications with 14 respect to the firmness of the load or the export 15 product that it will be satisfying. And finally, 16 it captures any limitations on the value or costs 17 of the project arising from incorporating this one 18 project's alternative energy production into the 19 overall system operations of Manitoba Hydro. 20 In other words, it's a more 21 comprehensive evaluation tool. But I think as 22 we've seen, it takes an incredible amount of work 23 to apply it and therefore it's more appropriate to 24 apply it after you've managed to come up with a 25 short list of alternatives using a broader 05507 1 screening tool such as LEC. 2 MR. WILLIAMS: That being said, do you 3 have any concerns as to how the IRR analysis was 4 performed by Hydro/NCN in their assessment of 5 Wuskwatim? 6 MR. HARPER: Yes. There are really 7 four issues that we identified as discussed in our 8 report. The first was the various analysis 9 performed by Manitoba Hydro and NCN used two 10 different base cases. In some instances, the base 11 case assumed Wuskwatim would come into service in 12 2020 and the IRR was then calculated based on the 13 impact of advancing the in-service date to 2009. 14 In other instances, the base case 15 assumed the construction of SCCTs or single cycle 16 combustion turbines, when and as required for 17 reliability purposes out into the future. And 18 then the IRR was calculated by adding Wuskwatim 19 with a 2009 in-service date. The latter approach 20 was called the neutral case. First one I 21 described was called the advancement case. 22 Most of the sensitivity analysis 23 initially presented and the conclusions were 24 arrived at regarding the economics of Wuskwatim 25 tended to focus on the neutral case. 05508 1 Given the 2002 Power Resource Plan had 2 identified Wuskwatim already as the preferred 3 option for new generation in 2020, it is our view 4 the advancement case should be used for purposes 5 of assessing the economics and risks of the 6 project. This change in base case really doesn't 7 affect the expected IRR. In both cases, it's 10.3 8 per cent. However, the choice of base case does 9 have implications when looking at the results of 10 the sensitivity analysis, or when looking at the 11 results of adopting a Manitoba Hydro as opposed to 12 a project perspective. 13 MR. WILLIAMS: Mr. Harper, you 14 identified four issues, by my rather uncertain 15 count. That's one. So perhaps you could provide 16 the other ones as well? 17 MR. HARPER: Okay. The second one, 18 this is really similar to the concern we had about 19 the LEC analysis, was that there was some 20 incremental costs associated with the project that 21 were not included in the analysis. These tended 22 to be rather small, however. And our conclusion 23 was that if we were to include these costs in the 24 project, it wouldn't have much impact on the IRR. 25 So you increase it in the order of .1 per cent. 05509 1 However, from a completeness sense, it's important 2 that when you're looking at an incremental project 3 like this, you identify and include all costs in 4 the project assessment. 5 Third, the initial base case used to 6 assess the economics of Wuskwatim do not include 7 any more DSM, NUGs or SSE than what was in the 8 2002 Power Resource Plan. While the program 9 resource design has not been completed, given the 10 results of the recent DSM potential studies and 11 the earlier conclusions regarding the priority 12 that should be attached to DSM, NUGs and SSE, the 13 base case should assume that additional generation 14 resources or equivalent demand-side energy savings 15 will be available over the study period by these 16 options. 17 It is reasonable to assume that that 18 combined, these options could contribute gigawatt 19 hours equivalent to say two to three times the 20 current DSM targets. Allowing for this in the 21 analysis, however, as we have seen by sensitivity 22 analysis done by Manitoba Hydro and NCN, would 23 increase the IRR by roughly again 0.1 per cent. 24 MR. WILLIAMS: Excuse me, Mr. Harper, 25 you said increase the IRR? 05510 1 MR. HARPER: Excuse me, decrease the 2 IRR. I apologize. 3 MR. WILLIAMS: Carry on. 4 MR. HARPER: Finally, and this is 5 perhaps the most significant point, the analysis 6 looks at the economics solely from a total project 7 perspective. As discussed earlier, we believe it 8 is also important to consider the economics of the 9 project from a Manitoba Hydro perspective. 10 Manitoba Hydro and NCN have indicated that 11 utilizing a Manitoba Hydro perspective would 12 reduce the original IRR of 10.3 per cent for the 13 advancement case down to 9.4 per cent, a reduction 14 of about 0.9 percentage points. 15 MR. WILLIAMS: If your issues or 16 concerns were addressed, what would be the overall 17 expected IRR for the projects? 18 MR. HARPER: Before answering your 19 question, it should be noted that during the 20 course of the proceeding, Manitoba Hydro and NCN 21 also updated the analysis themselves to reflect 22 new information, including revised project costs, 23 a one-year in-service date delay, a new load 24 forecast, and some revisions to financial 25 indicators. The net impact of these updates has 05511 1 the impact of reducing the IRR from about 10.3 per 2 cent to 10 per cent. The refinements of the 3 calculation that we have suggested are required 4 would reduce it to 9.9 per cent or slightly less 5 on a project basis, and to 9 per cent overall on a 6 Manitoba Hydro perspective basis. 7 MR. WILLIAMS: So we have an adjusted 8 IRR, both from a project and from a Hydro 9 perspective. I wonder if you could outline the 10 various analysis Hydro/NCN performed to assess the 11 implications of proceeding with Wuskwatim as 12 compared to the other short-listed options? 13 MR. HARPER: Okay. Yes. Manitoba 14 Hydro and NCN specifically looked at the 15 attractiveness of advancing Gull or Conawapa as 16 opposed to Wuskwatim, the economic viability of 17 wind generation assuming Wuskwatim is advanced, 18 the economics of SCCTs with and without the 19 advancement of Wuskwatim, and the economics of 20 Wuskwatim, assuming wind power or additional DSM 21 were already in place. 22 In terms of other Hydro projects, the 23 IRRs for Gull and Conawapa were 9.0 per cent and 24 10.1 per cent, as compared to the Wuskwatim 10.3 25 per cent. So, again, Wuskwatim came out best on 05512 1 the LEC screening. It comes out best on the more 2 detailed IRR analysis. 3 In terms of wind power, the analysis 4 demonstrates that the IRR for developing 250 5 megawatts of wind in addition to Wuskwatim was 7.5 6 per cent, assuming that the wind power program 7 incentive was in place for 10 years, or 6.5 per 8 cent if it was not. Without Wuskwatim, the IRR 9 increases to 9.0 with the incentive or 8.2 per 10 cent without the incentive. However, in both 11 cases, these analyses assumed a 35 per cent 12 capacity factor, and continued real reductions in 13 wind power capital costs and operating costs 14 through to 2009. Given the risks associated with 15 wind development, these values should be 16 considered against a hurdle rate of at least 10 17 per cent as appropriate for a medium to high risk 18 project. 19 In terms of SCCTs, the analysis 20 indicated that if an SCCT was constructed in 2009 21 instead of advancing Wuskwatim, the IRR would be 22 5.6 per cent. Clearly a lot less than Wuskwatim 23 IRR. However, if the SCCT was constructed in 2009 24 along with Wuskwatim, the IRR actually increases 25 to 6.5 per cent. The fundamental reason for an 05513 1 SCCT is it can be used for backup to determine 2 opportunity energy sales into firm energy sales 3 and Wuskwatim puts more energy on the system. 4 Finally, the analysis indicated that 5 developing Wuskwatim, assuming 250 megawatts of 6 wind generation and doubling the current DSM 7 programs, reduces the IRR for Wuskwatim 10.3 per 8 cent to 10.2 per cent or just one-tenth of a per 9 cent. 10 MR. WILLIAMS: Thank you, Mr. Harper. 11 Based upon this material, in your view, is the 12 analysis sufficient to demonstrate that Wuskwatim 13 is the preferred alternative? 14 MR. HARPER: First, the point we've 15 made a number of times already is that in our 16 view, Wuskwatim is not the preferred alternative. 17 There are DSM, SSE and NUG opportunities that 18 should be exploited to provide additional gigawatt 19 hours for export in preference to Wuskwatim. 20 However, the analysis also indicates that based on 21 Manitoba Hydro's load forecast and current 22 expectations as to the potential for DSM, NUGs and 23 SSE, these resources will not fully exploit the 24 export opportunity as indicated by the available 25 tie line capacity, and there's an opportunity for 05514 1 additional new generation as well. 2 In this regard, the analyses do 3 demonstrate that Wuskwatim is the preferred new 4 generation alternative for creating additional 5 resources as compared to other Hydro or thermal 6 generation projects. 7 Detailed confirmation that DSM, SSE 8 and NUG opportunities are not sufficient to 9 preclude the development of Wuskwatim, but require 10 additional studies, including completion of the 11 new DSM program design and targets that Manitoba 12 Hydro is currently working on. 13 Based on the information available, we 14 conclude that the preferred portfolio for resource 15 alternatives will include DSM, SSE, NUGs and 16 Wuskwatim. 17 THE CHAIRMAN: Sorry, Mr. Williams. 18 Having reached that conclusion but having not 19 completed the whole thing, I think it's 20 appropriate that we take a short break and give a 21 chance for our reporter to also rest her fingers, 22 considering the speed of Mr. Harper. So we will 23 take a 15 minute break. We shall be back at 20 24 to. 25 05515 1 (PROCEEDINGS ADJOURNED AT 10:29 A.M. 2 AND RECONVENED AT 10:50 A.M.) 3 4 THE CHAIRMAN: Gentlemen, time to 5 proceed forward. 6 MR. WILLIAMS: Mr. Chairman and 7 members of the panel, in my vicarious excitement 8 over Dr. Higgin's grandchild this morning, I 9 neglected to introduce my clients. In the back 10 row somewhere is Mr. Chuck Cruden from the Society 11 of Seniors, as well as Ms. Eileen Cruden from the 12 Society of Seniors. And somewhere as well is Ms. 13 Gloria Desorcy from the Consumers Association. 14 Back to you, Mr. Harper. And I'd like 15 you to turn to the sensitivity analysis and risks 16 assessment undertaken by Hydro/NCN. And perhaps 17 you can explain why we do this? 18 MR. HARPER: As I discussed earlier, 19 the internal rate of return or IRR analysis 20 indicates what the expected return on a project 21 will be. Typically projects are considered 22 economically viable if the return exceeds the cost 23 of capital to the parties making the investment. 24 In the case of Manitoba Hydro, whose 25 cost of capital is roughly 6 per cent, 10.3 per 05516 1 cent or even the revised IRR that we talked about 2 of 9 per cent for Wuskwatim, which suggested that 3 the project was economically viable. However, the 4 IRR calculation includes the number of assumptions 5 as to how the future is likely to unfold. In 6 reality, it is unlikely that the future will turn 7 out exactly as forecast for purposes of the IRR 8 calculation. 9 The purpose of the sensitivity 10 analysis is to identify the major areas of risk 11 related to those calculations and then test the 12 sensitivity of the IRR results to reasonable or 13 likely variations in those factors. Based on this 14 understanding of risks, a risk adjusted hurdle 15 rate from the project is established that reflects 16 both the underlying cost of capital for the 17 parties making the investment, as well as a risk 18 premium. The expected IRR for the project is then 19 compared with this risk adjusted hurdle rate to 20 determine whether the project is economically 21 viable, considering both the expected returns and 22 the risks associated with the project. 23 By way of an example, Manitoba Hydro 24 has a corporate policy on economic evaluation 25 which calls for projects to be evaluated on a 05517 1 range running from low to medium to high risk, 2 where low risk projects use a hurdle rate 3 equivalent to the corporation's cost of capital, 4 medium risk projects are screened against a hurdle 5 rate of 10 per cent, and high risk projects are 6 screened against a hurdle rate in the order of 15 7 per cent. The policy also provides some general 8 guidelines as to how a decision should be made to 9 determine whether a particular project is low, 10 medium, or high risk. 11 MR. WILLIAMS: Thank you for that 12 answer. I wonder if you can, in broad strokes, 13 outline the risks associated with the Wuskwatim 14 projects? 15 MR. HARPER: Okay. The risks, and 16 this is essentially just from an economic and 17 financial perspective, can be broken down into 18 four categories. There are operational risks, 19 financial risks, market risks and business risks. 20 MR. WILLIAMS: Let's start with 21 operational risks. What are the operational risks 22 associated with the Wuskwatim projects? 23 MR. HARPER: Operational risks would 24 include such things as in-service date delay, 25 variations in the output of Wuskwatim, variations 05518 1 in the overall Hydro capabilities on the system 2 overall, which will impact on the ability to 3 export the total amount of output from Wuskwatim, 4 and variations in the capability of the system, 5 say from a transmission or from other reasons to 6 export additional generation. So they are really 7 operational or physical aspects of the system. 8 Overall, the operational risks 9 associated with Wuskwatim have relatively low 10 impacts on the IRR, typically 0.5 per cent or less 11 on an individual basis. This leads us to conclude 12 that the operational risks do not appear to be 13 significant. 14 Subsequent to the preparation of our 15 pre-filed information, Mr. Ralph Torrie, on behalf 16 of TREE/RCM, filed materials suggesting that 17 Manitoba Hydro's load forecast significantly 18 overstated future requirements for electricity, 19 and then under lower load forecast assumptions, 20 DSM and distributed generation would provide 21 sufficient resources to fully exploit this export 22 opportunity. 23 We reviewed Mr. Torrie's evidence, 24 along with Hydro's rebuttal, and concluded that 25 while there is some validity to his remarks 05519 1 regarding Manitoba Hydro's load forecast, the 2 impacts are not sufficient to make Wuskwatim 3 uneconomic. 4 MR. WILLIAMS: Thank you for that 5 answer, Mr. Harper. I wonder if you can turn to 6 financial risks and outline some of the risks 7 associated with the project and your conclusions 8 as to those risks? 9 MR. HARPER: Financial risks would 10 include such things as potential variations in the 11 final capital cost of the projects, variations in 12 the differential between future inflation rates 13 and interest rates, which will affect the hurdle 14 rates you're using for economic evaluation, and 15 variations in U.S. and Canadian exchange rates. 16 In terms of capital costs, Manitoba 17 Hydro/NCN indicate that considerable effort has 18 been put into firming up and confirming the 19 reasonableness of their capital cost estimates for 20 the project. They indicate they have a high 21 degree of confidence that the actual capital cost 22 will be within 11 per cent of the $678 million 23 estimate that they originally filed. During the 24 course of the proceeding, the capital cost 25 estimate was increased to $710 million. Part of 05520 1 this estimate increase was due to the in-service 2 date delays; however, we can tell roughly $15 3 million of the increase was due to further 4 updating revisions of the overall capital 5 estimates. 6 Furthermore, Manitoba Hydro has 7 indicated that capital cost estimates will be 8 subject to further updating and refinement in the 9 future. In our view, this suggests that there is 10 more uncertainty associated with the estimates 11 than perhaps suggested by Manitoba Hydro and NCN 12 in their original submission materials. 13 In our pre-filed materials, we also 14 expressed concerns about potential impact on the 15 capital costs from the preference that was to be 16 given to local suppliers. However, in their 17 appearance before the Commission, Manitoba Hydro 18 has indicated that allowances for this have 19 already been built into the capital costs that 20 they have used for their IRR calculations, and as 21 a result, this is no longer a concern from our 22 perspective. 23 Sensitivity analysis, using a 15 per 24 cent increase in capital costs, indicate that the 25 IRR could decline by 1.1 per cent. This result 05521 1 makes capital costs one of the more significant 2 risk factors. 3 In terms of future inflation and 4 interest rates, Manitoba Hydro and NCN have 5 assumed a differential of roughly 4 per cent 6 between the two over the study period. 7 Furthermore, they have suggested that since the 8 two rates tend to move in tandem, which is correct 9 as inflation rates go up, interest rates tend to 10 go up. And as inflation rates come down, interest 11 rates tend to come down. Changes in one are 12 likely to spark changes in the other such that 13 there will be no impact on the IRR analysis or the 14 hurdle rates. 15 However, if you look at the various 16 forecasts that Manitoba Hydro used in creating its 17 economic outlook, the different consultants or the 18 different agencies they used basically do call for 19 different differentials between interest and 20 inflation rates over the future. And there are 21 some calling for a differential as low as 3 per 22 cent, others call for a differential as high as 5. 23 At the extreme, a 1 per cent increase in the 24 differential could increase the real cost of 25 capital to Manitoba Hydro by 1 per cent and 05522 1 increase the hurdle rate accordingly. 2 Overall, based on these observations 3 with respect to capital costs and interest in 4 inflation differentials, we believe there may be 5 more financial risk associated with the project 6 than Manitoba Hydro and NCN initially 7 acknowledged. 8 In terms of Canada/U.S. exchange 9 rates, the risk arises from the fact that the 10 project's revenues will primarily be in U.S. 11 dollars while the costs will be denominated in the 12 mix of U.S. and Canadian dollars. However, it is 13 our conclusion that foreign exchange will not be a 14 major risk factor. 15 There is a policy issue here 16 associated with foreign exchange that arose as a 17 result of Manitoba Hydro's rebuttal. Reference is 18 made in the rebuttal to using Manitoba Hydro's 19 broader debt portfolio and to Manitoba Hydro 20 potentially increasing its U.S. debt held for 21 electricity customer operations in its own 22 portfolio in order to provide hedging services or 23 basically hedging for the partnership. 24 ECS has a concern about this as it 25 sounds like Manitoba Hydro is willing to provide a 05523 1 hedging type service to the partnership without 2 necessarily receiving any compensation. This 3 could lead to ratepayers indirectly subsidizing 4 the partnership. 5 Issues like this are one of the 6 reasons why at the end of the day we have 7 concluded there is a need for continued oversight 8 by the PUB with respect to the development of the 9 project to ensure there is a proper ring-fencing 10 of the partnership's costs and revenues. 11 MR. WILLIAMS: Mr. Chairman, and to 12 the panel, we're moving on to the subject of 13 market risks. And for the panel's benefit, there 14 will be two more exhibits referred to in the 15 course of Mr. Harper's direct. And the two 16 exhibits are titled "CAC/MSOS Reference Export 17 Price Scenario." And then secondly, "CAC/MSOS 18 Expected Export Price Scenario". So you may want 19 to have those at hand. 20 MR. MAYER: How many pages in each? 21 MR. WILLIAMS: Thank you for the 22 question, Mr. Mayer. Each document has two pages. 23 Mr. Harper, I wonder if you can 24 discuss the market risks associated with the 25 Wuskwatim projects? 05524 1 MR. HARPER: The market risks are 2 essentially related to whether there will be a 3 market for all the incremental power Manitoba 4 Hydro is able to export primarily to the U.S. and 5 what the price Manitoba Hydro will receive for 6 that power. 7 MR. WILLIAMS: Mr. Harper, what's your 8 view of the risks associated with Hydro being able 9 to find a market for the incremental production 10 from Wuskwatim? 11 MR. HARPER: Manitoba Hydro and NCN 12 have indicated that they see no difficulty in 13 finding a market for the incremental power 14 produced by Wuskwatim, and we agree with this 15 assessment. 16 MR. WILLIAMS: What about future 17 export market prices, what's your view of the 18 risks associated with those? 19 MR. HARPER: Manitoba Hydro has 20 acknowledged that future export prices are the 21 most significant risk factor facing the project. 22 We agree. And the reason simply is that there is 23 a high degree of uncertainty as to the future 24 price of electricity -- of what the future price 25 of electricity in the export market will be, and 05525 1 that all this production and all the benefit is 2 essentially coming from exports. 3 MR. WILLIAMS: I wonder if you can 4 elaborate on the issues you see in terms of the 5 high degree of uncertainty? 6 MR. HARPER: Yes. Probably the 7 easiest way to understand the uncertainties 8 associated with future electricity export prices 9 is to briefly go through the process Manitoba 10 Hydro uses to forecast those prices. Essentially, 11 the process involves two steps. First, there is a 12 reference price forecast which is developed 13 assuming business as usual from an environmental 14 perspective, but incorporates assumptions with 15 respect to how future electricity markets will 16 evolve and what will be the cost of new 17 generation, which essentially is the competition 18 that these exports will face. 19 To assist them in preparing this 20 forecast, Manitoba Hydro solicited input from four 21 different consulting firms with specific expertise 22 in forecasting electricity prices. As you've 23 heard, the cost of producing electricity from new 24 generation, and in particular new gas generation, 25 is one of the key considerations in establishing 05526 1 electricity prices. However, on this one key 2 factor alone, there is a 30 per cent variation in 3 the 2002 natural gas price forecast used by the 4 consultants in their work. Compounding this 5 uncertainty is the uncertainty as to how the 6 future markets for electricity themselves will 7 evolve and the extent to which utilities will rely 8 on short-term market purchases to meet ongoing 9 requirements as opposed to requiring long-term 10 firm contracts. 11 MR. MAYER: Mr. Harper, excuse me a 12 minute, you said, in referring to 30 per cent 13 variation, you said 2002. 14 MR. HARPER: I'm sorry, it's 2020. I 15 apologize, I misspoke myself. 16 MR. WILLIAMS: Thank you. 17 MR. HARPER: So basically, as well as 18 the gas prices, there are issues about how the 19 market will evolve and how the relative prices, 20 say for opportunity exports as opposed to 21 long-term exports, will move and the extent to 22 which they will converge. 23 Then the second step, various 24 environmental scenarios were developed in terms of 25 the premiums that might be assigned in the future 05527 1 to CO2 and other air emissions. To a large 2 extent, the scenarios are based on assumptions 3 regarding both political and economic events 4 outside of Manitoba, and indeed outside of 5 Canada's jurisdiction. These environmental 6 scenarios are then weighted based on their 7 judgment as to the probability of occurring, and 8 used to generate a forecast of expected 9 environmental premiums for each year which in turn 10 was added to the reference price forecast to 11 establish the expected export price forecast. 12 MR. WILLIAMS: Can you tell us what 13 this expected export price forecast is? 14 MR. HARPER: Actually, Manitoba Hydro 15 has indicated that for commercial reasons, it's 16 unwilling to basically reveal what its expected or 17 reference price forecasts are. As a result, 18 Manitoba Hydro has not provided details regarding 19 the 10.3 per cent IRR calculation associated with 20 expected price forecast, or the 9.6 per cent IRR 21 associated with the reference price. Instead, 22 what Manitoba Hydro has done is provided us with 23 fairly detailed electricity price forecasts for 24 both the high priced forecast and the low priced 25 scenario, along with the associated economic and 05528 1 financial analysis for each. 2 Under the low price scenario where 3 export prices remain roughly equal to what they 4 have recently experienced, the IRR faults to 10.5 5 per cent -- I'm sorry, 8.5 per cent in the 6 advancement case, and 8.0 if you look at it from a 7 Manitoba Hydro perspective, as opposed to 8.5 8 which is the project perspective overall. 9 In contrast, under the high price 10 scenario where real prices increase by 60 per cent 11 between now and the year 2020, the IRR increases 12 to 12.3 per cent on a project basis, and 11 per 13 cent on a Manitoba Hydro perspective basis. 14 MR. WILLIAMS: Thank you, Mr. Harper. 15 Before we move off the expected export price 16 forecast, I wonder if you could comment on 17 Manitoba Hydro's concerns about the need for 18 confidentiality regarding its export price 19 forecasts? 20 MR. HARPER: Yes, and this is 21 something I spoke to earlier. I am currently 22 involved in a proceeding with B.C. Hydro, and 23 actually within their proceeding they have filed, 24 and we have provided to the Commission here, a 25 copy of their forecast electricity prices through 05529 1 for the next 10 years or so. As a result, the 2 need for confidentiality is a matter that's not 3 universally accepted by all utilities. 4 I think having said that, I think one 5 of the reasons why there may be a bit of a 6 difference in B.C. is the fact that perhaps in the 7 western U.S. markets they are more fully developed 8 and, therefore, there's more price transparency 9 overall and people know more about the prices even 10 without the utilities having to tell them anything 11 about it. 12 MS. AVERY KINEW: Could it also be 13 because of California and overcharging and B.C. 14 Hydro being involved in that? 15 MR. HARPER: I think there's probably 16 been a lot more inquiry into price as well. 17 MR. WILLIAMS: Mr. Harper, in terms of 18 testing and assessing the reasonableness of the 19 export prices Hydro/NCN have used in their 20 sensitivity analysis, or its expected IRR 21 calculations, is it possible to attest or assess 22 them just in terms of the information that you 23 have? 24 MR. HARPER: Yes, it is, and there are 25 a couple of ways we can do this. First, if you 05530 1 look at the high and low export price forecasts 2 they provided, you start at about essentially the 3 same point in 2005. So one way to test the 4 reasonableness would be to look at what the 2005 5 export price forecast is for those two scenarios, 6 which are pretty close to each other, and try and 7 determine how reasonable that is. 8 In the case of the on-peak and 9 off-peak opportunity sale price forecast, Manitoba 10 Hydro/NCN have suggested that average export 11 prices over recent years provide a reasonable 12 basis for these values and ECS agrees. 13 In the case of firm export prices, the 14 average revenues received by Manitoba Hydro in 15 recent years are heavily influenced and actually 16 reduced by contracts entered into a number of 17 years ago prior to the opening of the market, and 18 gaining a level of broad transmission access that 19 they have right now. 20 There are numbers available from a 21 number of sources which would give you some 22 indication as to what the level of firm export 23 prices might be based on new generation being 24 developed. And they all tend to be in the $40 to 25 $45 range, which would generally also support 05531 1 Manitoba Hydro's position in terms of what's a 2 reasonable starting point for firm prices, for 3 export -- firm exports going forward. 4 MR. WILLIAMS: So I take it from your 5 perspective or your view, the starting point you 6 consider to be reasonable? 7 MR. HARPER: Yes, we do. 8 MR. WILLIAMS: Please go on? 9 MR. HARPER: Okay. And then as a next 10 step, one could actually look at the escalation 11 rates. Once you know what the starting point is, 12 you can then look at the escalation rates 13 underlying the export price scenarios to determine 14 if the overall projection was reasonable. 15 In the case of the low export price 16 scenario, firm export prices, after they are 17 converted to U.S. dollars and adjusted for 18 inflation, are relatively constant for the period 19 beyond 2005. This would be consistent with a 20 forecast for natural gas prices, that was also 21 constant in real terms, which is a reasonable and 22 perhaps -- which is a reasonable assumption to use 23 as a lower bound. It's hard to construct a 24 scenario where you'd see natural gas prices going 25 down in real terms in the future. So as a lower 05532 1 bound, the forecast price for firm export energies 2 appears to be reasonable. 3 As a test of reasonableness, we looked 4 at both the on-peak and off-peak opportunity 5 export prices in constant dollars using that same 6 U.S./Canada inflation differential suggested by 7 Manitoba Hydro in their information request to us. 8 And results yielded both on-peak and off-peak 9 opportunity price increases of roughly 20 per cent 10 between 2005 and 2012, and then the numbers were 11 reasonably constant from there on out. 12 MR. WILLIAMS: With a specific 13 reference to that 20 per cent escalation between 14 2005 and 2012, I wonder if you can provide your 15 interpretation of it and your views in terms of 16 its reasonableness? 17 MR. HARPER: Given the low escalation 18 in natural gas prices that we would assume to 19 underlie this scenario, about the only explanation 20 we can put for the increase would be an assumption 21 that as part of the low export price scenario, 22 there is also an assumption about the evolution of 23 day ahead or more functional electricity markets 24 in the map area, and that this would allow for 25 some convergence between opportunity and export 05533 1 prices. 2 This introduction of functioning 3 markets for electricity by 2012 is a reasonable 4 assumption, given that MISO has plans to introduce 5 a day ahead market later on this year. 6 Development of a functional and liquid day ahead 7 market would lead utilities to rely on opportunity 8 sales to meet load requirements that traditionally 9 might have been met by long-term firm sales. 10 This, in turn, would tend to increase the price of 11 opportunity sales and lead to some convergence 12 between opportunity prices and firm export prices 13 as forecasted by Manitoba Hydro. However, it's 14 difficult to predict what the impact of this will 15 be on opportunity prices. As a result, it's 16 reasonable to assume that there will be an 17 increase. Whether the increase will be exactly 20 18 per cent or not, it's really uncertain and we 19 can't say. 20 It should be noted, however, that in 21 the case of Wuskwatim, over 80 per cent of the 22 reduction will be marketed on a firm export basis. 23 And so really for Wuskwatim, what's the real 24 fundamental driver is what's your assumption on 25 firm export prices. And as a result, the low 05534 1 export price scenario suggested by Manitoba Hydro 2 looks like a reasonable one for the basis of doing 3 their sensitivity analysis. 4 MR. WILLIAMS: Let's turn to the 5 expected export price forecast. Do you have any 6 comments regarding them? 7 MR. HARPER: While Manitoba Hydro and 8 NCN have not indicated what their reference or 9 expected price forecasts are, it is possible to 10 escalate the price escalation underlying each. As 11 I said earlier, Manitoba Hydro has provided the 12 details of the IRR calculations associated with 13 the low export price scenario. And using the 2005 14 export prices as a starting point, one can alter 15 the escalation and the export prices assumed in 16 this analysis, and alter until you arrive at 17 either a project rate of return of 8.5 per cent or 18 9.6 per cent. And this would allow you to then 19 look at those escalation rates and determine 20 whether the numbers were reasonable. 21 MR. WILLIAMS: Mr. Harper, perhaps if 22 you could just go back over that last point 23 because I didn't follow it? 24 MR. HARPER: All right. Okay, right. 25 And actually this is the material that we filed. 05535 1 For anybody who is interested in sort of working 2 through the detail of the numbers, we tried to 3 provide some background. If you use this, this 4 links in with the types of tables Manitoba Hydro 5 filed in its submission. And if you use these in 6 conjunction with the balance of Manitoba Hydro's 7 IRR analysis, you can see where we came up with 8 the numbers. 9 But what you do is you take the 10 detailed tables they provided, let's say for their 11 low export price scenario, and you change the 12 escalation of the export prices in the analysis 13 that they provided until you come up with an 14 internal rate of return that is equivalent to 15 either the 8.5 per cent -- that increase is from 16 the 8.5 per cent which is the result from the low 17 export price scenario and what escalation rate is 18 required in the export prices in order to get you 19 up to the 9.6 per cent associated with the 20 reference export price or the 10.3 per cent 21 associated with the expected export price. So 22 really it's a matter of doing iterations and 23 putting in escalation and export prices, and 24 seeing what the resulting internal rate of return 25 is. And when you come up with the escalation that 05536 1 gives you the 9.6 internal rate of return they say 2 is consistent with the reference price, you say 3 ah-ha, that's 2.2 per cent, that's the implicit 4 escalation underlying that analysis. Or you do it 5 again and you increase the export prices further 6 until you get an escalation of about 3.2 per cent, 7 at which point in time the internal rate of return 8 is 10.3 per cent, the number which Manitoba Hydro 9 says is what they get with their expected price 10 forecast. 11 And as a result, you come up with a 12 conclusion that underlying the reference price 13 forecast must be an escalation rate of roughly 2.2 14 per cent per anum in real terms for export prices. 15 And underlying their expected price forecast must 16 be an escalation of about 3.2 per cent on an 17 annual basis in real export prices. 18 MR. WILLIAMS: Thank you, Mr. Harper, 19 for helping me with that, and hopefully the panel. 20 In your view, are those values reasonable? 21 MR. MAYER: Before you answer that, I 22 think I understood your last answer and I think 23 you told us that you were able to come to what you 24 believe to be Manitoba Hydro's expected price for 25 exports? 05537 1 MR. HARPER: For price escalation, 2 yes. 3 MR. MAYER: And then basically their 4 expected price. If you have the high and the low 5 and you know what the escalation is, I am assuming 6 you believe you have probably come fairly close to 7 their expected export price? 8 MR. HARPER: On average, over the 15 9 years, the actual -- how the time profile might 10 actually evolve in their assumptions would be 11 different than ours, because we assume the 12 constant escalation of either 2.2 per cent or 3.2 13 per cent. They may have an escalation that varies 14 over time, averages out at say 2.2 but varies 15 maybe faster in the short-term, longer in the far 16 term, and comes up with the same answer. So I 17 think we've estimated, we believe is maybe the 18 average, but we don't know the actual profile, if 19 I can put it that way. 20 MR. MAYER: Thank you very much. 21 MR. WILLIAMS: And we've got the 22 averages you have estimated. I wonder if you can 23 comment on whether you consider it to be 24 reasonable? 25 MR. HARPER: In the examination that 05538 1 was done by CAC/MSOS counsel of the Hydro Panel, 2 it was indicated that there was a link between 3 natural gas and electricity prices such that one 4 would expect that if natural gas prices were 5 increasing in real terms over time, that the trend 6 would be for electricity export prices to also 7 increase in real terms, but probably not as a 8 faster rate. The reason for this is that natural 9 gas based generation is expected to be one of the 10 major sources of new electricity supply. While 11 the fueling costs for such supply will therefore 12 likely track pretty close to the natural gas 13 prices, the capital cost component is likely to 14 remain relatively constant in real terms. 15 As a result, one would expect that if 16 one was trying to test the reasonableness of the 17 escalation of these rates, one could compare them 18 with natural gas price forecasts. And what one 19 might expect to see is escalations that are 20 slightly less than the natural gas price forecast. 21 The 2.2 per cent per anum leads to 22 roughly -- actually it's 38 per cent, roughly 40 23 per cent increase in export prices over the 15 24 year period from 2005 to 2020. This is higher 25 than the increase in natural gases prices 05539 1 suggested by any of the four consultants used by 2 Manitoba Hydro/NCN over the same period. It is 3 also higher than the escalation assumed in the EIA 4 outlook. That's probably the most recent 5 information included in our analysis. 6 This would suggest that the reference 7 price forecast for exports is high compared to the 8 associated natural gas price forecast that 9 underlie it. 10 As I talked about earlier, there's 11 this issue about convergence between opportunity 12 prices and firm export prices that would tend to 13 maybe push this up a little bit more. But since 14 firm exports is such a large portion of the 15 overall product mix being sold, I doubt if all of 16 this would have a large impact on the result. 17 MR. WILLIAMS: Mr. Harper, I'm going 18 to, in about two seconds, ask you to turn to the 19 expected export price but can you just remind me 20 what IEA stands for? 21 MR. HARPER: Actually, we may have 22 that backwards. It's the Energy Information 23 Administration. Again, it's that U.S. Department. 24 MR. WILLIAMS: Please discuss your 25 views in terms of the reasonableness of the values 05540 1 associated with the expected export price? 2 MR. HARPER: The ECS report notes that 3 the 10.3 per cent IRR resulting from the inclusion 4 of the environmental premium is reasonably close 5 to the 10.4 per cent IRR associated with export 6 prices based solely on a low environmental 7 premium. This would suggest that the expected 8 forecast reflects the introduction of some form of 9 carbon tax sometime shortly after 2010, and move 10 towards the medium export premium scenario 11 sometime after 2015. While this is not an 12 aggressive environmental scenario, it does require 13 a change from the current prevailing political 14 attitudes in the U.S. and the timing of this is 15 uncertain. Furthermore, it can be seen that the 16 assumptions about the environmental premiums have 17 the material effect on the IRR going from 9.6 to 18 10.3 per cent. 19 MR. WILLIAMS: Thank you, Mr. Harper. 20 What are your overall conclusions regarding export 21 price forecasts as they had been employed or used 22 by Manitoba Hydro/NCN? 23 MR. HARPER: First, we concur with 24 Manitoba Hydro that the future values for export 25 prices is probably the biggest risk factor facing 05541 1 a project due to their uncertainty and the impact 2 they have on the project economics. 3 Second, the expected price forecast 4 appears to be aggressive. However, having said 5 this, the low export price forecast appears to be 6 a reasonable basis in which to test the 7 sensitivity of the results. The implications of 8 this on the 10.3 per cent IRR are calculated from 9 a project perspective and the 9 per cent 10 calculated from the Manitoba Hydro perspective are 11 that those two numbers may be too high. However, 12 the Manitoba Hydro's 10.5 per cent IRR and our 13 estimated 7.6 per cent Manitoba Hydro perspective 14 IRR associated with a low export price scenario 15 are reasonable. 16 MR. WILLIAMS: Mr. Harper, just to go 17 back, you may have misspoke in terms of the 18 Manitoba Hydro's project IRR. I think you said 19 10.5. 20 MR. HARPER: It was 10.3. 21 MR. WILLIAMS: 8.5. 22 MR. HARPER: Oh, okay. 23 MR. WILLIAMS: Is it the notes or your 24 words you're looking to correct? 25 MR. HARPER: It was my words. And it 05542 1 depends on which one you're looking at, whether 2 you're looking at the expected price scenario or 3 the low price scenario? Under the low price 4 scenario, Manitoba Hydro has projected an IRR of 5 10.5 per cent and the estimate based on the 6 Manitoba Hydro perspective was for a 7.6 per cent. 7 I'm sorry, 8.5 -- 8 MR. WILLIAMS: Yes, thank you. 9 MR. HARPER: -- for the Manitoba Hydro 10 project perspective on the low export price, 7.6 11 for the Manitoba Hydro perspective that we've put 12 forward on the low export price. 13 MR. WILLIAMS: Mr. Harper, just to 14 clean up the record on this point, perhaps I can 15 get you to just go through that last paragraph of 16 your notes. 17 MR. HARPER: Right. And I apologize, 18 there's probably too many numbers coming at me at 19 one point in time here. 20 We were looking at both the expected 21 price, the IRRs arising out of the expected price 22 forecast and the IRRs arising out of the low price 23 forecast. And the conclusions we've reached that 24 for the IRRs out of the expected price forecast, 25 which are 10.3 per cent from a project perspective 05543 1 and 9 per cent on a Manitoba Hydro perspective, 2 may be too high. But that when you look at the 3 lower bound that's likely to come out, which is 4 based on the low export price scenario, the 8.5 5 per cent that Manitoba Hydro has projected based 6 on a project basis and our estimated 7.6 per cent 7 based on a Manitoba Hydro perspective are both 8 reasonable. 9 MR. WILLIAMS: Okay. Thank you. Dr. 10 Higgin, over to you. Did you review the proposed 11 business arrangements between Hydro and NCN and 12 did you consider the question of business risk 13 related to that arrangement? 14 DR. HIGGIN: Yes, we did with two 15 important caveats. First, we were cognizant of 16 the Commission's direction regarding the scope of 17 the review. And second, that Manitoba Hydro has 18 not filed a business risk assessment as I would 19 see what I would call a business risk assessment 20 based on my experience. 21 So our review of the business 22 arrangement and its relationship to business risk 23 can be found in the ECS report. First, I know 24 that we looked at the business plan for Wuskwatim, 25 the Agreement in Principle and then the Summary of 05544 1 Understandings or the SOU between Hydro and NCN. 2 We specifically reviewed the SOU in section 4.2, 3 which is pages 1517 of the ECS report, and 4 compiled a summary table to try and help us and 5 others understand the main features of it. But it 6 is a very long document and that summary is very 7 short. 8 We address the business risk with the 9 Wuskwatim limited partnership in section 6.2.2 of 10