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   the ECS report starting on page 65.  There are two
 11   aspects to that review.  First, we look at the
 12   characteristics in general of the proposed limited
 13   partnership relative to other business
 14   arrangements ranging from, for example, a royalty
 15   arrangement to a full corporation.  We look at
 16   that.  And second, the related business risks and
 17   how do these relate and affect the financial
 18   analysis in terms of the risk profile, the hurdle
 19   rate of the project, and that's at pages 69 and 70
 20   of our report.
 21               MR. WILLIAMS:  Thank you, Dr. Higgin.
 22   What are your conclusions on the proposed limited
 23   partner business arrangement and associated
 24   business risks?
 25               DR. HIGGIN:  In general, the strategic
05545
  1   rationale for a corporation to set up a subsidiary
  2   business structure such as a joint venture, which
  3   could take any form, from a business arrangement
  4   includes the ability to ring fence the new
  5   business in legal, financial, and sometimes tax,
  6   particularly tax if it's private sector, and also
  7   sometimes in marketing matters.
  8               And so we find at page 70 of the ECS
  9   report that there's a reason for concern that the
 10   protection provided to a participant in a limited
 11   partnership may, in Hydro's case, be diminished
 12   due to its multiple roles as the financier, the
 13   owner of the general partner, and the power
 14   marketer.
 15               There are no obvious other direct, the
 16   word direct benefits to Hydro that we can
 17   determine from the proposed partnership such as a
 18   tax reduction, a tax shelter, capital cost
 19   allowance, given that Hydro's tax status is as a
 20   Crown corporation.
 21               The main benefit clearly of the
 22   Wuskwatim limited partnership is a structure that
 23   allows for participation of NCN as a true limited
 24   partner, in a legal sense, and provides NCN with
 25   the protections of that legal and tax status.
05546
  1                   Hydro's position appears to be then 
  2   relating that structure to business risks is that 
  3   from a business risk perspective, well, it's no worse 
  4   off than if it did the project on its own rather than 
  5   through the partnership business arrangement.  We 
  6   don't agree on that point.  There are potential 
  7   business risks associated with the partnership and 
  8   these could include things such as financial default, 
  9   governance issues, legal, management disputes.  
 10               Now, Hydro may very well have undertaken 
 11   a comprehensive assessment of these risks.  We would 
 12   hope so.  But it's not on the record and we can only 
 13   comment at a high level as we have on page 70 of the 
 14   report and in response to questions from the 
 15   proponents and the Commission. 
 16               Absent an ability to review Hydro's 
 17   business risk assessment, we can only conclude that 
 18   there are significant potential risks compared to 100 
 19   per cent Hydro owned, financed and managed project.  
 20   And this pushes the risk of the project higher 
 21   towards a low to medium risk taking into account 
 22   other risk factors but not necessarily to the extent 
 23   that it would affect the hurdle rate that is 8 to 10 
 24   per cent as being no longer acceptable. 
 25               MR. WILLIAMS:  I wonder if you can 
05547
  1   summarize your understanding about how the proponents 
  2   have responded to your concerns about business risks?
  3               DR. HIGGIN:  Yes.  They respond in the 
  4   rebuttle evidence at page 4 of 34 and I summarize 
  5   that Hydro states the following.  First, the proposed 
  6   business arrangement, that is the limited 
  7   partnership, is not necessarily a model for the 
  8   future.  That's somewhat in contrast with the 
  9   statements in their business plan for Wuskwatim.  The 
 10   business risks are outweighed by other project risks 
 11   and that they have been assessed and found to be 
 12   manageable. 
 13               Third, the partnership arrangement is 
 14   structured so that NCN shares the operational, 
 15   financial and market risks. 
 16               Fourth, the governance, legal and 
 17   financial issues continue to be subjected to thorough 
 18   reviews by the corporation's managers and 
 19   professional advisors and general oversight by 
 20   Manitoba Hydro's board of directors.  
 21               And lastly, that any risks of the 
 22   business arrangement are outweighed by the benefits 
 23   of going forward with this positive new relationship 
 24   with NCN.
 25               MR. WILLIAMS:  Dr. Higgin, in terms of 
05548
  1   the comments summarized in Hydro's rebuttle evidence, 
  2   do you have any response?
  3               DR. HIGGIN:  Yes, we accept that Hydro 
  4   has and will comprehensively assess the business 
  5   risks and mitigation strategies that relate to those 
  6   risks.  
  7               Our recommendation that we make in the 
  8   report still holds that a full business risk 
  9   assessment should be a component of the material that 
 10   supports management's request to the Hydro board for 
 11   approval of the project development agreement and for 
 12   proceeding with the project. 
 13               MR. WILLIAMS:  Thank you.  Mr. Harper, as 
 14   well as individual risks, Hydro/NCN presented a 
 15   sensitivity analysis based on what's been called 
 16   "worst case" scenario.  Could you please comment on 
 17   this analysis?
 18               MR. HARPER:  First I should start off by 
 19   saying and explaining that there is a value to such 
 20   analysis and it goes beyond testing each event or 
 21   each risk factor individually and looks at the 
 22   implication of two or more of them occurring 
 23   simultaneously, even if the probability of them 
 24   occurring simultaneously is extremely small. 
 25               In this case, maybe the term "worst case" 
05549
  1   is really inappropriate.  The scenario captures three 
  2   of the project's major risks factors, export prices, 
  3   capital costs and water flows and yields an IRR of 
  4   6.6 per cent from a project perspective. 
  5               Now, the probability of those three 
  6   events actually happening together is very very very 
  7   small.  I don't know how many zeroes you have before 
  8   the decimal point before you actually got to that 
  9   number.  But it's clearly not the worst case.  
 10               The problem with worst case analysis or 
 11   defining it that way is any pessimist can always 
 12   define a more worst case than what you come up with.  
 13   So I think they are useful but you have to recognize 
 14   the probabilities associated with the events and 
 15   realize that you're testing the extreme outer bounds 
 16   by using such analysis.
 17               MR. WILLIAMS:  Thank you.  To Mr. Harper 
 18   or Dr. Higgin.  Based on the risks and sensitivity 
 19   analysis, what are your conclusions regarding the 
 20   risks that are associated with the Wuskwatim projects 
 21   and the overall risk adjusted hurdle rate that should 
 22   be used when assessing the economic viability of the 
 23   project?
 24               MR. HARPER:  Overall, we believe that the 
 25   risks associated with the project including the 
05550
  1   business risks, financial risks and market risks are 
  2   greater than portrayed by Manitoba Hydro or NCN.  As 
  3   a result, while we consider that under Manitoba 
  4   Hydro's investment policy, the project should be 
  5   categorized as a low to medium risk, we believe the 
  6   risk adjusted hurdle rate should be at the upper end 
  7   of that low to medium range, that is 8 to 10 per 
  8   cent.  We should also note that this conclusion is 
  9   similar to Manitoba Hydro's current view as we 
 10   understand it.  While their initial submission 
 11   suggested a hurdle rate of 6 to 10 per cent, this was 
 12   further refined during the course of their 
 13   discussions with the Commission to 8 to 10 per cent 
 14   while they were here.
 15               MR. WILLIAMS:  Thank you.  I may have 
 16   actually retained you for this purpose a long long 
 17   time ago, but based on this hurdle rate, is the 
 18   project, in your view, economically viable?
 19               MR. HARPER:  If you recall the IRR for 
 20   the project from a Manitoba Hydro perspective is 9 
 21   per cent.  Using the Advancement Case and 
 22   incorporating all of the updates that have happened 
 23   to date, that's the number we are settled on at this 
 24   point in time.  As a result, the IRR falls within the 
 25   recommended range for the hurdle rate and the project 
05551
  1   can be considered economically viable.  However, it's 
  2   fair to observe that the IRR is just comfortably 
  3   within that viable range.  Actually it's sitting 
  4   right in the middle.  And therefore, the economic 
  5   benefits may not be significant enough to offset the 
  6   importance of other considerations such as the 
  7   socioeconomic or environmental impacts.
  8               MR. WILLIAMS:  Mr. Harper, I'm going to 
  9   turn you to -- we have moved from the economic 
 10   analysis to the financial analysis but I wonder if 
 11   you can remind us why this type of analysis is 
 12   important when you are looking at a justification for 
 13   a project?
 14               MR. HARPER:  I think I touched on this 
 15   briefly but it's probably worthwhile going through it 
 16   again.  Economic analysis such as internal rate of 
 17   return tells us whether a project is economically 
 18   viable.  In simple terms, will it make a profit.  In 
 19   addition, when economic analysis includes the use of 
 20   a risk adjusted hurdle rate, it allows us to include 
 21   consideration as a risks associated project when 
 22   answering that question; ie, is it economically 
 23   viable given the risks associated with it?  
 24               Now in the case of Wuskwatim and Manitoba 
 25   Hydro, therefore, provided the cost of capital used 
05552
  1   in the analysis exceeds the cost of borrowing, then 
  2   it is reasonable to conclude that the project will 
  3   have rate benefits overall.  More or less, if the 
  4   cost of borrowing to Manitoba Hydro is less than the 
  5   expected rate of return, then they will be able to 
  6   finance this and overall there should be rate 
  7   benefits coming out of the project.  
  8               However, the study period for Wuskwatim 
  9   is fairly long, more than 30 years if you look at it 
 10   overall in terms of the analysis period.  And as a 
 11   result, there are still important questions to be 
 12   considered in terms of when rate benefits will occur 
 13   and whether rates might have to increase in the near 
 14   term before you get those benefits in the long term.  
 15   This will give rise to questions of intergenerational 
 16   equity which may be of particular concern to people 
 17   like the senior side of the house as opposed to 
 18   people like Dr. Higgin's grandchild who was just born 
 19   yesterday. 
 20               Furthermore, the internal rate of return 
 21   analysis did not capture any implications of the 
 22   project, due to its size, may have on Manitoba Hydro 
 23   overall.  Such implications relate to issues such as 
 24   the borrowing Manitoba Hydro may have to undertake in 
 25   order to finance the project and the implications 
05553
  1   that could have with the financial community.  Based 
  2   on a per cent, whether it be 9 per cent or 10.3 per 
  3   cent or whatever, that doesn't give you any 
  4   indication as to the amount of dollars involved.  
  5   That's what a financial analysis helps you to 
  6   understand.  
  7               In this regard, a large project with a 9 
  8   per cent IRR could create significantly more problems 
  9   than a small project in terms of borrowing and 
 10   financing and what it could do in the short term. 
 11               Finally when comparing two projects, a 
 12   higher IRR does not necessarily mean lower rates 
 13   simply because of the scope.  If I can have a very 
 14   small project where I'm investing $1.00 and getting a 
 15   100 per cent rate of return, it's not going to have 
 16   much impact on rates though.
 17               MR. WILLIAMS:  Mr. Harper, please briefly 
 18   review and comment on the financial impact analysis 
 19   which has already been presented by Hydro/NCN.
 20               MR. HARPER:  Manitoba Hydro and NCN 
 21   present a detailed financial analysis based on both 
 22   its low and high export price scenarios.  Similar 
 23   details were not provided on the expected prices due 
 24   to the concerns we talked about earlier on the 
 25   commercial value of the numbers.  The analysis was 
05554
  1   done assuming that the projects will be debt financed 
  2   and that customer rate increases will be the same as 
  3   those projected without the advancement of Wuskwatim 
  4   until the benefits from the project reduced the 
  5   debt/equity ratio of the company overall to what it 
  6   would have been in that year had we not proceeded 
  7   with Wuskwatim.  After this, rates were held in both 
  8   scenarios to maintain a target interest coverage of 
  9   1.15. 
 10               The results of this analysis indicated 
 11   that even in the low export price scenario, which is 
 12   the one with the lowest benefits overall, there are 
 13   beneficial impacts on net income in all but two years 
 14   of the forecast.  
 15               Under all export price scenarios, the 
 16   impact on the debt ratio is less than 2 per cent and 
 17   the debt ratio starts to improve sometime between 
 18   2015 and 2018 depending upon which export price 
 19   scenario you use.  
 20               Overall there are rate reductions in the 
 21   order of 2 to 3 per cent over the long term.  And the 
 22   present value of the rate or bill reductions is in 
 23   the order of $87 to $216 million.  
 24               The minimal impacts on Manitoba Hydro's 
 25   debt/equity ratio and net income when the project 
05555
  1   first comes into service are a result of the fact 
  2   that while the project costs are substantial, they 
  3   represent only a small portion of Manitoba Hydro's 
  4   overall asset base.  
  5               In its rebuttle, Manitoba Hydro and NCN 
  6   suggested we are concerned about the modest 2 to 3 
  7   per cent rate savings and I'd like to clarify our 
  8   position in this regard.  We are not concerned.  
  9   Indeed, projected rate reductions are always welcomed 
 10   provided the risks inherent in achieving the 
 11   reductions are manageable and there are no issues of 
 12   inter-generational equity.  And neither of these 
 13   appear to be issues in this particular case.  In the 
 14   same vein, it is argued that proposed rate increases 
 15   must be properly justified.  And this is an issue we 
 16   will soon be considering in another room before the 
 17   PUB. 
 18               What we were concerned about was the way 
 19   the submission referenced the $87 to $216 million in 
 20   customer bill reductions, which in anybody's books 
 21   sounds like a large amount of money.  Assuming the 
 22   project is approved this year and its spending starts 
 23   shortly thereafter, proceeding with Wuskwatim will 
 24   have financial impacts on Manitoba Hydro starting in 
 25   2004 and 2005.  So it will be roughly 10 years or 
05556
  1   more before the benefits start to accrue to customers 
  2   given the crossover dates mentioned are somewhere 
  3   between 2015 and 2018.  
  4               Furthermore, the net present value is for 
  5   rate benefits that extent from then on out to roughly 
  6   2035.  During the study period or the same study 
  7   period used by Manitoba Hydro, the net present value 
  8   of the bills customers would have paid without 
  9   Wuskwatim is in the order of $12 to $13 billion.  It 
 10   seems reasonable to us to put some context around the 
 11   projected savings by comparing the bill reductions 
 12   over the entire projection period with what the total 
 13   bills customers would have paid without Wuskwatim.  
 14   The result is a reduction of 0.6 to 1.8 per cent as 
 15   we indicate in our report.
 16               MR. WILLIAMS:  Overall, Mr. Harper, what 
 17   are your conclusions about the financial viability of 
 18   the Wuskwatim projects?
 19               MR. HARPER:  Over the long term, the 
 20   project should reduce customer rates.  In the 
 21   meantime, the financial impacts in terms of 
 22   debt/equity ratios are fairly small and should be 
 23   manageable in the short-term without the need to 
 24   increase rates.  As a result, the projects are 
 25   acceptable from a financial perspective.
05557
  1               MR. WILLIAMS:  Thank you.  To Mr. Harper 
  2   and Dr. Higgin, I wonder if you could wrap up these 
  3   discussions by summarizing your key conclusions and 
  4   recommendations for the Commission starting with the 
  5   need for Wuskwatim.
  6               MR. HARPER:  For Manitoba Hydro and its 
  7   rate payers, the need for an undertaking such as 
  8   Wuskwatim should be directly related to the 
  9   corporation's statutory purposes and objectives.  
 10               In the case of Wuskwatim, there exists an 
 11   opportunity and therefore a need consistent with 
 12   Manitoba Hydro's objectives to promote economy that 
 13   is lower rates by increasing the resources available 
 14   for export prior to the need for new generation.  
 15               We suggest that Manitoba Hydro's 
 16   performance in the management of the projects should 
 17   be reviewed as part of a regular rate proceeding 
 18   before the Manitoba Public Utilities Board.  This 
 19   will help ensure that the benefits from this 
 20   opportunity are achieved.  In particular, ongoing 
 21   regulatory oversight will help ensure that public 
 22   accountability with respect to the project costs, 
 23   which is one major risk factor, and ensure proper 
 24   ring fencing in terms of the cost of the partnership. 
 25               Finally, it is our view that the process 
05558
  1   we are going through here and the types of issues 
  2   that have been raised highlight the need for some 
  3   sort of ongoing public review of Manitoba Hydro's 
  4   resource plans. 
  5               MR. WILLIAMS:  Reminding you to keep the 
  6   pace moderate rather than speedy, I wonder if you 
  7   could turn to the alternatives considered and the 
  8   screening process used and provide your key 
  9   conclusions and recommendations.
 10               MR. HARPER:  At the screening level, 
 11   levelized energy costs or LECs are a reasonable 
 12   measure by which to initially screen the economics of 
 13   various options for increasing system resources 
 14   available for export.  
 15               For purposes of resource planning and 
 16   resource advancement by Manitoba Hydro, LEC should be 
 17   calculated from a Manitoba Hydro perspective.  
 18   Improving technical and end-use efficiency should be 
 19   considerations in the initial screening stage as 
 20   well.  Such considerations would give added emphasis 
 21   and priority to the development of supply-side 
 22   enhancements, DSM and non-utility generation options. 
 23               However, it is unlikely that the 
 24   additional gigawatt hours gained from these 
 25   alternatives will be sufficient to fully exploit the 
05559
  1   export opportunity that exists prior to 2020.
  2               DR. HIGGIN:  Developing the specifics of 
  3   the new DSM PowerSmart program should be a high 
  4   priority for Manitoba Hydro.  The appropriate forum 
  5   for the review of the expanded DSM PowerSmart 
  6   programs and associated costs and benefits would be 
  7   the Manitoba Public Utilities Board. 
  8               MR. HARPER:  Advancing Wuskwatim is the 
  9   preferred alternative for capitalizing on export 
 10   opportunities during the period prior to 2020 in 
 11   terms of new generation options.
 12               THE CHAIRMAN:  Slower.
 13               DR. HIGGIN:  Wind power developments 
 14   included in the resource plan for purposes of 
 15   establishing the export opportunity should be limited 
 16   to those undertaken by third party private developers 
 17   until economic viability from the Manitoba 
 18   perspective is established. 
 19               MR. WILLIAMS:  Thank you, Mr. Harper and 
 20   Dr. Higgin.  In terms of demonstrating that Wuskwatim 
 21   is the preferred alternative and is economically 
 22   viable, what are your conclusions and 
 23   recommendations?
 24               MR. HARPER:  Ideally the economics and 
 25   the financial implications short-listed alternatives 
05560
  1   should be assessed using a portfolio analysis.  In 
  2   the case of Wuskwatim, sufficient information was not 
  3   made available to undertake such analysis.  It is 
  4   unlikely that such an approach would have changed the 
  5   conclusions.  However, we suggest that the Commission 
  6   recommend that such approach be used in future NFAAT 
  7   assessments.  
  8               Internal rate of return analyses is an 
  9   acceptable methodology for establishing economic 
 10   benefits of a proposed project.  
 11               The Reference Case for purposes of IRR 
 12   analysis should reflect Wuskwatim with an inservice 
 13   date as required to meet current reliability planning 
 14   criteria.  The Reference or Base Case should also 
 15   include the impact of pursuing all economically 
 16   attainable DSM, SSE as well as private wind power 
 17   developments.  
 18               A key perspective from which the IRR 
 19   analysis should be performed is that of Manitoba 
 20   Hydro and its rate payers.  
 21               Adopting the recommended Revised Base 
 22   Case, updating the analysis for more recent events 
 23   and adopting a Manitoba Hydro perspective will likely 
 24   produce an IRR in the order of 9.0 per cent as 
 25   opposed to the initial 10.3 per cent found in 
05561
  1   Manitoba Hydro and NCN submission. 
  2               Turning to the risks.  There are 
  3   operational, financial, market and business risks 
  4   associated with the Wuskwatim projects.  The 
  5   operational risks associated with the project are not 
  6   significant, having impacts of 0.5 per cent or less 
  7   on the IRR. 
  8               Manitoba Hydro/NCN may have understated 
  9   the financial risks associated with the projects, 
 10   particularly in the areas of capital costs and 
 11   inflation and interest rate differentials. 
 12               While there appears to be no risk 
 13   associated with Manitoba Hydro's ability to market 
 14   all of the energy it can transmit to the U.S. over 
 15   the existing tie-lines, there is a significant risk 
 16   associated with the prices such sales will command.   
 17              Implicit in the expected export price used 
 18   by Manitoba Hydro/NCN are assumptions about the 
 19   implementation of future environmental regulations 
 20   and the evolution of electricity markets.  While 
 21   these events may be inevitable, their timing is 
 22   critical to the economics of the advancement of 
 23   Wuskwatim.  
 24               The low export market price forecast 
 25   assumed by Manitoba Hydro and NCN appears reasonable 
05562
  1   particularly since over 80 per cent of the output 
  2   will be marketed as firm sales.  When considering 
  3   using the Revised Base Case and Manitoba Hydro 
  4   perspective, variations in critical risk factors such 
  5   as capital costs or export prices could reduce the 
  6   IRR to less than 8 per cent. 
  7               Manitoba Hydro has not provided an 
  8   assessment of the business risks associated with its 
  9   unique partnership arrangement with NCN.  The 
 10   proposed business arrangement between Manitoba Hydro 
 11   and NCN requires further review as a model for the 
 12   future.  
 13               In terms of the overall risks and 
 14   Manitoba Hydro's hurdle rate policy, the project 
 15   likely still qualifies for a low to medium risk 
 16   categorization but the additional challenges and 
 17   uncertainties identified suggests the use of a hurdle 
 18   rate somewhere at the upper half of the 6 to 10 per 
 19   cent range, that is 8 to 10 per cent.  
 20               With an estimated IRR of 9.0 per cent, 
 21   the Wuskwatim projects fall within this range and are 
 22   economically acceptable.
 23               MR. WILLIAMS:  And finally, I wonder if 
 24   you could recap your conclusions and recommendations 
 25   with respect to the financial viability of the 
05563
  1   Wuskwatim projects?
  2               MR. HARPER:  Wuskwatim is a relatively 
  3   moderately sized project when measured against 
  4   Manitoba Hydro's planned capital expenditures and 
  5   small in terms of the corporation's overall asset 
  6   base.  As a result, the advancement of Wuskwatim does 
  7   not appear to have significant impact on the debt 
  8   ratio for the corporation.  
  9               Provided the project is properly 
 10   positioned with the PUB exercising public oversight 
 11   and the support of the financial community is 
 12   attained, it is unlikely to have any negative impact 
 13   on the rates or corporation's financial integrity.    
 14              Benefits do eventually accrue to rate 
 15   payers; however, only after some 10 to 15 years under 
 16   the low export price scenario.  But given the modest 
 17   scale of Wuskwatim, the intergenerational issues are 
 18   not a major factor.  
 19               Overall, rate benefits over the next 35 
 20   years or so will be less than 2 per cent.  
 21               Other options that should be accorded 
 22   higher priority as part of a preferred resource 
 23   development portfolio are supply-side enhancements, 
 24   demand-side management and NUGs.  They are even more 
 25   economic, lower risk and can reduce customer bills in 
05564
  1   shorter order.
  2               MR. WILLIAMS:  Thank you both, Dr. Higgin 
  3   and Mr. Harper.  Does this conclude your opening 
  4   remarks?
  5               DR. HIGGIN:  Yes, it does.
  6               MR. HARPER:  Yes, it does.
  7               MR. WILLIAMS:  Mr. Chair, members of the 
  8   panel, the witnesses presented on behalf of CAC/MSOS 
  9   are available for any further questioning by the 
 10   panel or others.  
 11               MR. GREWAR:  Mr. Chairman, at this point 
 12   just before we go into questions, if I might enter 
 13   the exhibits that had been tendered by the Consumers 
 14   Association of Canada assigned numbers.  The first 
 15   will be Summary of Manitoba Hydro Assessment Enhanced 
 16   DSM Potential versus Current Program Targets as 
 17   CAC/MSOS 1006.  
 18   
 19               (EXHIBIT CAC/MSOS 1006:  Summary of       
 20               Manitoba Hydro Assessment Enhanced DSM    
 21               Potential versus Current Program Targets)
 22   
 23               MR. GREWAR:  The next item will be 
 24   Reference application, Volume 1, Chapter 2, 
 25   Consolidated Revenue Requirements and Financial 
05565
  1   Schedules, CAC/MSOS 1007.  
  2   
  3               (EXHIBIT CAC/MSOS 1007:  Application,     
  4               Volume 1, Chapter 2, Consolidated Revenue 
  5               Requirements and Financial Schedules) 
  6   
  7               MR. GREWAR:  Number 3 would be Summary of 
  8   Manitoba Hydro Calculations of Wind Power Economics, 
  9   CAC/MSOS 1008.  
 10   
 11               (EXHIBIT CAC/MSOS 1008:  Summary of       
 12               Manitoba Hydro Calculations of Wind Power 
 13               Economics)
 14   
 15               MR. GREWAR:  CAC/MSOS Reference Export 
 16   Price Scenario as Exhibit number CAC/MSOS 1009.  
 17   
 18               (EXHIBIT CAC/MSOS 1009:  CAC/MSOS         
 19               Reference Export Price Scenario) 
 20   
 21               MR. GREWAR:  And finally, CAC/MSOS 
 22   Expected Export Price Scenario as CAC/MSOS Exhibit 
 23   1010.  
 24   
 25   
05566
  1               (EXHIBIT CAC/MSOS 1010:  CAC/MSOS         
  2               Expected Export Price Scenario) 
  3   
  4               MR. WILLIAMS:  Thank you, Mr. Grewar.
  5               THE CHAIRMAN:  Thank you, Mr. Grewar.  
  6   Questions?  Mr. Mayer.
  7               MR. MAYER:  Mr. Harper, I think I heard 
  8   for the first time today a term called rate payer 
  9   impact assessment.  Can you tell me exactly what you 
 10   mean by rate payer impact assessment?
 11               MR. HARPER:  I'm just trying to remember. 
 12   There's probably two contexts in which you could have 
 13   heard that during our presentation and I just want to 
 14   make sure I'm talking about the right one.  I believe 
 15   Dr. Higgin talked about rate impact measures as one 
 16   tool to be used in assessing DSM programs.  And I 
 17   think I also talked about rate impact assessment in 
 18   terms of looking at the rate impacts of projects in 
 19   general using financial analysis.  And I just want to 
 20   make sure I know which of those two you are talking 
 21   about.
 22               MR. MAYER:  I am most interested in the 
 23   second one.
 24               MR. HARPER:  This is the rate impacts?
 25               MR. MAYER:  Generally.  I want to know 
05567
  1   what that assessment actually shows us.  And let me 
  2   put my question in context.  We just went through, in 
  3   another place, hearings respecting rates in diesel 
  4   communities and we came up with what we thought would 
  5   be serious customer impacts of those rates.  So I'm 
  6   trying to determine from you what you mean what are 
  7   the parameters of a rate impact assessment?
  8               MR. HARPER:  Okay.  When we're looking at 
  9   projects in the context as we are here, which is sort 
 10   of more at a resource planning level, we're looking 
 11   at rate impacts in terms of what would be the impact 
 12   on the average level of rates for the company in each 
 13   year during the projection period.  And that's the 
 14   sort of information that's been filed by Manitoba 
 15   Hydro in those detailed financial analysis IFF for 
 16   projections that they provided.  
 17               So it's basically taking the project, in 
 18   this case Wuskwatim, incorporating the capital 
 19   expenditures into their financial projections, 
 20   incorporating the impacts on the operation of the 
 21   company and the operating statements into their 
 22   financial projections and seeing what does that mean 
 23   on a year over year basis in terms of our rates going 
 24   to go up or down.  
 25               And this is the average level of rate.  
05568
  1   It doesn't deal with the more detailed levels in 
  2   terms of how is that average going to be spread 
  3   amongst individual customer classes.  How much of it 
  4   might be picked up by the diesel community.  How much 
  5   of it might be picked up by residential.  It deals 
  6   with just the overall average level of rates.
  7               MR. MAYER:  So then a rate payer impact 
  8   assessment is merely a rate assessment?
  9               MR. HARPER:  Yes, right, yes.  It's the 
 10   impact on rates.  Are rates going to -- is the 
 11   average rate going to go up or is the average rate 
 12   going to go down.
 13               MR. MAYER:  I thought at one point you 
 14   said rate payer impact assessment and that would be a 
 15   different.
 16               DR. HIGGIN:  Yes.  Can I speak to that as 
 17   my experience as a regulator.  The overall level of 
 18   rates and how they will move in the future is 
 19   determined by the overall revenue requirement in 
 20   order to meet the costs and expenses or the cost of 
 21   service, if you like, of the utility.  So the next 
 22   other one is where you do what we call -- a rate 
 23   payer impact has got two elements.  It looks at how 
 24   the revenue requirement, how the change in revenue is 
 25   spread among the different rate classes.  That's the 
05569
  1   first thing.  
  2               And the next one is you often do a 
  3   customer bill impact which shows that within each 
  4   rate class, how much each customer, depending on the 
  5   level of consumption that they may use, is going to 
  6   see as a result of the general rate increase.  And so 
  7   you look at a customer bill impact analysis.  
  8               And that's routinely supplied in Ontario 
  9   at least by the main gas utilities and electric 
 10   utilities as part of their filing.
 11               MR. MAYER:  If that's all it is, then 
 12   that doesn't solve our problem.  I'm assuming that 
 13   you subscribe to what appears to be the common 
 14   regulatory theory that what really happens to the 
 15   customers as a result of that rate is none of the 
 16   regulator's business.
 17               DR. HIGGIN:  No.  I don't subscribe and 
 18   neither do most regulators.  Basically, the rates and 
 19   rate increases have to be just and reasonable.  
 20   There's always some requirement.  And therefore, 
 21   regulators routinely look at rate shock issues.  
 22   You've heard that term?
 23               MR. MAYER:  Yes.
 24               DR. HIGGIN:  And therefore, if there's an 
 25   increase in rates, then rate shock is a matter that 
05570
  1   is taken into account and regulators sometimes, to 
  2   mitigate that, may, for example, require some 
  3   phase-in or other mechanism to try to ameliorate the 
  4   impact of that on customers.  
  5               So that is a fact that is -- but absent 
  6   as a major rate shock type of thing, then regulators 
  7   tend to go the other way, right.  Rate shock is a big 
  8   flag for regulators.  
  9               MR. MAYER:  Assuming, however, that the 
 10   revenue requirements are reasonable and the cost of 
 11   service is properly assessed, the fact that it 
 12   creates an inability by some rate payers in some 
 13   communities to buy milk is generally considered not a 
 14   regulator's problem?
 15               MR. HARPER:  I would say that should be 
 16   taken into account by regulators.  Affordability with 
 17   respect to essential service is a fundamental aspect 
 18   of why regulators are there.  They are there to 
 19   protect the public and protect customers.  So I would 
 20   disagree.  I think they do and should take it into 
 21   account.  
 22               The problem is how can they -- what 
 23   solutions do they have such as life line rates, such 
 24   as government subsidies.  Or in the case of gas 
 25   utilities, there are even programs that are called 
05571
  1   "Keeping the Heat" where low income customers are 
  2   assisted to maintain their service by providing 
  3   subsidies to them.  You know, and my clients often 
  4   are low income clients.
  5               MR. MAYER:  Well, doctor, I firstly 
  6   apologize to the rest of the people in the room for 
  7   diverging and thank you very much for your answers 
  8   and I sincerely hope that I will see you again in 
  9   June in another room.  Thank you.
 10               THE CHAIRMAN:  Mr. Sargeant.
 11               MR. SARGEANT:  Thank you.  First of all, 
 12   I'd like to thank both of you for a very good 
 13   presentation.  Whether or not we accept your 
 14   conclusions remain to be seen but it is a pleasure to 
 15   have a well-organized and thoughtful and documented 
 16   presentation made to us. 
 17               I have a couple of questions in a couple 
 18   of different areas and I think they are both matters 
 19   that you dealt with, Dr. Higgin.  First of all, on 
 20   the matter of NUGs and co-generation, you suggest 
 21   that Hydro should consider more of this and you talk 
 22   about providing incentives may be a consideration 
 23   that Hydro should take.  And while I can understand, 
 24   for policy reasons, the attractiveness of that, I'm 
 25   not sure what financial benefits there are for Hydro, 
05572
  1   particularly if they are paying export prices to the 
  2   NUG or the co-generator and then selling it at export 
  3   or even a lower price?  I'm not sure that there's any 
  4   fiscal financial benefits for Hydro?  
  5               DR. HIGGIN:  I'll start but then I'll ask 
  6   Mr. Harper to give you his views.  I think that there 
  7   are other factors that go along with NUGs and that's 
  8   where I start from.  And that is I think it's a 
  9   general policy of the government and I hope of the 
 10   utility to encourage efficiency in the use of energy. 
 11   Non-utility generation is that way because, for 
 12   example, co-generation combine heat and power or the 
 13   use of waste fuels combined with other fossil fuels,  
 14   that's a consideration.  So there's this broader 
 15   public interest in co-generation.  
 16               As far as what price you should pay, then 
 17   yes, I agree there are limits to that.  And 
 18   therefore, you have to look at what the overall cost 
 19   benefit to Hydro and its rate payers is and you 
 20   shouldn't be subsidizing people or other things. That 
 21   would be my view.  But there are those broader I 
 22   think important public policy issues that you need to 
 23   address and that's why I think that in fact there is 
 24   a NUG policy.  But right now if it's not working, 
 25   then something needs to be done to fix it.  Money is 
05573
  1   not necessarily the only way to do it or a rate 
  2   solution.  Bill?
  3               MR. HARPER:  The other thing I could add 
  4   is that I believe you look at Manitoba Hydro and 
  5   NUG's policy.  For large projects, they say they will 
  6   keep a little bit back.  They won't pay the full 
  7   export price.  They will keep a little bit back in 
  8   order to do, as you said, provide some benefit to 
  9   themselves and to their rate payers.  You know, so I 
 10   think that's entirely appropriate, particularly when 
 11   you are getting into very large projects.  
 12               There are other benefits and I think some 
 13   of the evidence that was given by Mr. Torrie, which 
 14   you'll be hearing from tomorrow, in terms of 
 15   encouraging non-utility generation in local areas 
 16   often provides benefits on the transmission and 
 17   distribution side in addition to sort of the benefits 
 18   you'll get from being able to export the power.  So 
 19   there are other benefits besides just the export 
 20   revenues that you can attain from them.
 21               MR. SARGEANT:  Thank you.  Another 
 22   question in a different area, and I think it's also 
 23   something that you discussed, Dr. Higgin, is in 
 24   respect to the partnership between Manitoba Hydro and 
 25   NCN, did you consider or attach any value to policy 
05574
  1   reasons?  I mean it sounded like you looked at it 
  2   strictly from a business/financial point of view.  
  3   But there would seem to be considerable policy 
  4   advantages to such a partnership.
  5               DR. HIGGIN:  Your assumption is correct.  
  6   We looked at it strictly from a Business 101 
  7   perspective, okay.  It wasn't a mandate I felt from 
  8   the clients to get into the socioeconomic public 
  9   policy arena that relates to relationships between 
 10   the government, Manitoba Hydro and First Nations.  
 11   And so I recognize the importance of those and that, 
 12   in part, the business structure that was chosen, as I 
 13   said in chief, is that try to facilitate a 
 14   partnership between those parties, particularly First 
 15   Nations and Manitoba Hydro.  And that has broad 
 16   public policy and other implications and we hope 
 17   benefits.  But my remarks related to from a Business 
 18   101 perspective.  
 19               MR. SARGEANT:  Okay, thank you.
 20               THE CHAIRMAN:  Ms. Avery Kinew?
 21               MS. AVERY KINEW:  No, thanks.
 22               THE CHAIRMAN:  We are at basically at 
 23   lunch time I am reminded.  My watch is a few minutes 
 24   late so we're actually right there.  So we will 
 25   adjourn now until one o'clock and we'll come back to 
05575
  1   questions after that.  Thank you.  
  2   
  3          (PROCEEDINGS RECESSED AT 12:02 P.M.)
  4           AND RECONVENED AT 1:00 P.M.)
  5   
  6               THE CHAIRMAN:  Ladies and gentlemen,
  7   we can proceed with questioning on the
  8   presentation we heard this morning.  Mr. Abra.
  9               MR. ABRA:  Thank you, Mr. Chairman.
 10               Mr. Harper, Dr. Higgin, my name is
 11   Doug Abra, I'm the counsel for the Clean
 12   Environment Commission.  I have a few questions
 13   for you.  I will invite whichever one of you feels
 14   most comfortable in answering the questions to do
 15   so.
 16               Firstly, you do have with you, I
 17   understand, copies of the responses that you did
 18   to the information requests as part of the IR
 19   process?
 20               MR. HARPER:  Yes, we do.
 21               MR. ABRA:  In particular, I would ask
 22   you to refer initially to CEC/CAC/MSOS/NFAAT 1,
 23   page 1 -- or not page 1, but the first information
 24   request.  And I will take you to the second page,
 25   the paragraph second from the bottom, and I quote,
05576
  1               "MH/NCN's NFAAT submission does not
  2               present a comprehensive justification
  3               for the Wuskwatim.  It has performed
  4               an initial screening of the options
  5               and determined that Wuskwatim should
  6               be considered as one of the preferred
  7               alternatives.  However, it has not
  8               gone through the formal process of
  9               developing alternative portfolios and
 10               then assessing them against an
 11               established set of evaluation
 12               criteria."
 13   And if you go over to the next page, the last
 14   paragraph,
 15               "Given these shortcomings, Manitoba
 16               Hydro has proposed to develop in
 17               conjunction with Wuskwatim all
 18               economically feasible DSM, SSE, and
 19               alternative energy such as wind
 20               generation.  This approach assumes
 21               that there is sufficient available
 22               inter-tie capacity to economically
 23               accommodate all four.  As long as this
 24               assumption holds, and the overall
 25               financial and rate impacts are
05577
  1               acceptable, then the Manitoba Hydro
  2               approach is a reasonable and
  3               satisfactory approach to justifying
  4               the Wuskwatim projects.  However, if
  5               not, then a more comprehensive
  6               portfolio analysis approach would be
  7               required to properly justify the
  8               projects."
  9               Now, arising from those paragraphs, I
 10   have a couple of questions.  Firstly, this may
 11   be -- I may be the only one in the room that
 12   doesn't understand the term, but what is a
 13   portfolio and a portfolio analysis?
 14               MR. HARPER:  Maybe I can try and start
 15   on that, and Dr. Higgin can kick in if he thinks I
 16   have got it wrong.  Through the first screening
 17   process, what you are doing is identifying what
 18   you think are likely the possible alternatives,
 19   and there is likely to be a large range of those.
 20   You have got an opportunity which probably has a
 21   defined set of size, and this time you are talking
 22   about, in these terms you are talking about an
 23   opportunity, an export opportunity, which has a
 24   defined size limited by the inter-tie capacity.
 25   What you would do is you would take all of your
05578
  1   available alternatives and construct different
  2   portfolios of them, where each portfolio of
  3   alternatives would basically be one way of sort of
  4   filling up or taking advantage of that export
  5   opportunity.
  6               MR. ABRA:  What do you mean by
  7   portfolio?
  8               MR. HARPER:  I guess, you know, right,
  9   maybe --
 10               MR. ABRA:  Tie into a package?
 11               MR. HARPER:  It is a package, right.
 12   If their DSM potential study had identified that
 13   you could do 10 times the current DSM in the
 14   Province with no problem at all, then clearly you
 15   could have a portfolio that might have all DSM; or
 16   you might have another one that might have
 17   Wuskwatim, and maybe the most economic DSM, you
 18   know, that was left to make up the balance of the
 19   room.  It is different mixes of options, and it is
 20   a portfolio, because typically you find that one
 21   alternative can't do it all by itself, so the
 22   portfolio is a collection of options, and each
 23   portfolio is a different collection of options.
 24   Then you would sort of define, sort of probably
 25   major portfolios that had substantive differences
05579
  1   between them, like maybe a generation based
  2   portfolio and a DSM based portfolio.  And then you
  3   would assess each of them, looking at the
  4   economics of each and the financial implications
  5   of each, and come to some conclusions in terms of
  6   which one was best overall.
  7               DR. HIGGIN:  Maybe I could add,
  8   perhaps a good analogy is from investments.  You
  9   as an investor goes to see an investment --
 10               MR. ABRA:  I have a very small
 11   portfolio in that regard.
 12               DR. HIGGIN:  But in setting that up,
 13   they look at what are your objectives, they look
 14   at what type of investment risks you are willing
 15   to tolerate, and they then construct a portfolio
 16   that meets your needs.  And then they decide what
 17   particular stocks or other investments they should
 18   include to meet those.
 19               MR. ABRA:  So it has the same meaning
 20   then, as far as the analysis that you have done?
 21               DR. HIGGIN:  Yes.
 22               MR. ABRA:  You referred in your
 23   presentation this morning to Mr. Torrie's reports
 24   and the fact that he has taken the position that
 25   the load forecast for Hydro are too high, in
05580
  1   essence.  Did you do any calculation, or any kind
  2   of analysis of load forecasts yourselves in the
  3   preparation of your report?
  4               MR. HARPER:  In the preparation of the
  5   report, no.
  6               MR. ABRA:  Have you done any at all?
  7               MR. HARPER:  I was going to say, in
  8   the preparation of the report really what we did
  9   is we looked at Manitoba Hydro's load forecast and
 10   the fact that they had done a fair amount of
 11   sensitivity around -- they did some sensitivity
 12   around that load forecast and that was one of
 13   their sensitivity criteria that they used.
 14               Subsequent, when Mr. Torrie produced
 15   his report, and Manitoba Hydro has produced its
 16   rebuttal, we did spend time going through and
 17   trying to understand what the differences were
 18   between the numbers, you know, and sort of try and
 19   see, maybe based on the latest information that we
 20   had available, which ones seemed more reasonable.
 21               MR. ABRA:  All right.  You didn't do
 22   any analysis yourself to try and come up with a
 23   load forecast?
 24               MR. HARPER:  No, we did not.
 25               MR. ABRA:  Did you come to any
05581
  1   conclusion as to whether or not Mr. Torrie's or
  2   Hydro's was more appropriate?  If you don't want
  3   to go out on a limb, I understand that.
  4               MR. HARPER:  As I said in the opening
  5   statement, I think we read Mr. Torrie's evidence
  6   and believed some of the comments that he made
  7   about the Manitoba Hydro forecast had some
  8   validity to it, in terms of --
  9               MR. ABRA:  His comments had some
 10   validity?
 11               MR. HARPER:  Yes, in terms of maybe
 12   let's say in the general service sector, they seem
 13   to be relating growth in all of the individual
 14   segments to GDP, when there are clearly some of
 15   those segments that are perhaps more closely tied
 16   to population growth than to GDP growth.  The
 17   other thing -- we took that into account, we
 18   looked at the Manitoba Hydro rebuttal.  One of the
 19   compelling things that struck us in that is, where
 20   we currently are now in 2003 -- and clearly this
 21   wasn't information that Mr. Torrie had available
 22   when he did his -- what the loads are that we are
 23   starting at right now.  And if you look at the
 24   difference between sort of the 2017, 2018 end
 25   point that Mr. Torrie has and Manitoba Hydro has
05582
  1   in the load forecast, there is about 2000 GWh
  2   difference between the two.  That difference in
  3   starting point almost counts for half of that.
  4               The starting point -- we know where we
  5   are to start off, that is water under the bridge.
  6   Even if you accept some of the comments that
  7   Mr. Torrie has made about the reasonableness of
  8   their forecasting method, the fact that we have
  9   got that starting point to begin with means that
 10   we are somewhere between the two, but we are
 11   probably closer to Manitoba Hydro than to
 12   Torrie's.
 13               MR. ABRA:  As far as the load
 14   forecast?
 15               MR. HARPER:  Yes.
 16               MR. ABRA:  Now, the load forecasts, of
 17   course, are relevant to the tie line capability,
 18   and that is really what I want to get into.
 19               Would you agree that the determination
 20   of the amount of power available for export is
 21   dependent obviously on the tie line capability?
 22               MR. HARPER:  Yes.
 23               MR. ABRA:  Have you done -- did you do
 24   any kind of analysis to determine whether Hydro's
 25   calculations, or to substantiate Hydro's claim
05583
  1   that there is sufficient tie line capability for
  2   the purpose of the exporting that they want to do
  3   if the Wuskwatim project goes on line.
  4               MR. HARPER:  No, we did not.  To be
  5   frank with you, it would be beyond my capability
  6   from an engineering perspective to sort of look at
  7   the engineering aspects of their inter-ties and
  8   conclude whether or not 10,500 gigawatt hours was
  9   an appropriate or inappropriate number.
 10               MR. ABRA:  I assume from that then
 11   that you are really not in a position to give any
 12   opinion as to whether, not only is there not
 13   sufficient tie line capability with respect to
 14   Wuskwatim, but whether there is sufficient tie
 15   line capability for Wuskwatim, plus 250 megawatts
 16   wind, double DSM, and all of the committed SSE
 17   projects?
 18               MR. HARPER:  Maybe I can answer your
 19   question in two parts.  I think, one, we can take
 20   some comfort that there is 10,500 gigawatt hours
 21   of tie line capacity there, because they have
 22   managed to export that amount in the on peak
 23   periods.
 24               MR. ABRA:  Up until now?
 25               MR. HARPER:  Up until now -- from that
05584
  1   perspective, it didn't require us to do an
  2   engineering analysis sort of -- history sort of
  3   speaks to that point.
  4               And maybe if I could just ask you -- I
  5   was just trying to get the crux of what your
  6   question was there?
  7               MR. ABRA:  In essence, what Hydro has
  8   told us in their evidence, I am sure you are
  9   aware, is that what they are proposing initially
 10   is to export all 200 megawatts of Wuskwatim.
 11               MR. HARPER:  Yes.
 12               MR. ABRA:  In addition to which, they
 13   have been talking in terms of bringing on, or
 14   doing more DSM, doing 250 megawatts of wind, they
 15   want to double their DSM, and then they have
 16   committed SSE projects.  What we are wondering is,
 17   if the intent is to export all of that, in
 18   essence, is there sufficient tie line capability
 19   for all of that?
 20               MR. HARPER:  Yes, I think, given the
 21   information in front of you there is -- I guess
 22   maybe with one caveat from our perspective.  As
 23   you probably heard, we are not too sure that at
 24   the end of the day there should be 250 megawatts
 25   of wind in that particular portfolio.  I think you
05585
  1   have seen sensitivity analyses done by Manitoba
  2   Hydro that demonstrates that -- the committed SSE
  3   is already in the projections that they have got
  4   there, so that is in their resource plan, that is
  5   in the numbers that you are seeing.  So they have
  6   done analyses that indicates with two times DSM
  7   and Wuskwatim, you know, the rate of return you
  8   are looking at will still be in that economic
  9   hurdle range of 8 to 10 percent.
 10               MR. ABRA:  Okay.
 11               MR. HARPER:  I rely on them, but I
 12   have no reason to sort of suspect that the
 13   analysis is incorrect.
 14               MR. ABRA:  Okay.  Based on the
 15   analysis that the two of you did, in your view,
 16   does Hydro have the capacity, financially and from
 17   a human resource standpoint, to accomplish all of
 18   those projects together -- that being Wuskwatim,
 19   double DSM, and the 250 megawatts of wind, and the
 20   SSE?  Did you do any analysis in that regard?
 21               DR. HIGGIN:  No, I think we relied on
 22   Hydro's statements that they could do a financial
 23   and human resource, and going with that
 24   intellectual capacity, they were capable of
 25   handling all of those.  And we didn't analyze
05586
  1   that.  But we did make the statement very clearly
  2   that if competition developed, then where the
  3   priorities should lay, in our view, would be with
  4   SSE, DSM first.
  5               MR. ABRA:  Then Wuskwatim?
  6               DR. HIGGIN:  Yes.
  7               MR. ABRA:  As you said this morning,
  8   with wind going to the private sector, so to
  9   speak?
 10               DR. HIGGIN:  Yes, until the economics
 11   are justifiable for a utility investment.
 12               MR. ABRA:  I would like to go
 13   nextly -- and these again are basically the points
 14   that you made this morning in your presentation,
 15   but if you could go to CEC/CAC/MSOS NFAAT 1-16.
 16   And this relates to -- you gave quite a bit of
 17   evidence on this point this morning related to the
 18   limited partnership arrangement between NCN and
 19   Manitoba Hydro.  And I just quote from this
 20   particular response that you gave in that IR:
 21               "In general the business risk to
 22               Manitoba Hydro increases from the left
 23               to the right in the table, but there
 24               are unique features of the limited
 25               partnership arrangement that may make
05587
  1               it a higher risk than a more standard
  2               arrangement."
  3   Firstly, when you use the term standard
  4   arrangement, what sorts of organizations are you
  5   talking in terms of?
  6               DR. HIGGIN:  Well, standard
  7   arrangement could include a limited partnership
  8   arrangement.  They are usually structured among
  9   business entities, which then take advantage of
 10   the unique features of the partnership, for
 11   example, tax status.
 12               MR. ABRA:  They are usually structured
 13   for tax purposes?
 14               DR. HIGGIN:  Yes.  And in this case we
 15   don't see, from a Hydro perspective, why that is
 16   there.  In fact, there are risks regarding that
 17   for Hydro perhaps.
 18               MR. ABRA:  So when you used the term
 19   "standard arrangement," you are talking in terms
 20   of a standard limited partnership arrangement?
 21               DR. HIGGIN:  For example, the term we
 22   meant was as a broader joint venture arrangement,
 23   but, yes, it could encompass a limited
 24   partnership, as we said.
 25               MR. ABRA:  When you talk in terms of a
05588
  1   higher risk, is it Hydro that you are talking
  2   about?
  3               DR. HIGGIN:  We only looked at the
  4   risks from a Hydro perspective.  However, I just
  5   want to mention that we did, to be reasonable
  6   since there are two partners in this thing, look
  7   at the risks in table 12 from NCN as well, as to
  8   whether the risk would increase or not relative to
  9   other arrangements.  However, I think, as Hydro
 10   has said in its rebuttal evidence, maybe the
 11   business arrangements itself may not be the crux
 12   of where risk is.  There are risks through, we
 13   will call it the pioneering aspect of this type of
 14   joint venture, which may also encompass the
 15   business arrangement, that is the structure, but
 16   also there are individual risks which could be
 17   there regardless of whether the business structure
 18   was a limited partnership, or a business
 19   corporation, or anything else as well.
 20               MR. ABRA:  Now, you are saying that
 21   the risk that you are talking in terms of is
 22   primarily to Hydro, that you weren't looking at
 23   NCN, but presumably a risk to Hydro may have some
 24   impact on ratepayers as well, ultimately?
 25               DR. HIGGIN:  That was the perspective
05589
  1   that we took, and that was that if there are
  2   risks, they should be carefully reviewed and
  3   analyzed.  Because, I will just use as the example
  4   in the case of Brandon Five, which we mentioned,
  5   and the business plan with respect to that, those
  6   risks were obviously carefully looked at in making
  7   the decision.  I suspect that Hydro has looked at
  8   those risks, but maybe for reasons of
  9   confidentiality or -- they haven't filed them, so
 10   we can't look at them and assess whether they are
 11   material or not relative to the ratepayers'
 12   interests.
 13               MR. ABRA:  Did you take those
 14   potential risks that you have identified into your
 15   determination of the appropriate hurdle rate of 8
 16   to 10?
 17               DR. HIGGIN:  Yes.  We mentioned I
 18   think this morning that if you take as a
 19   100 percent Hydro owned project, and use that as
 20   your kind of reference case, then any joint
 21   venture would likely have additional business
 22   risks.  And therefore, the degree of those we are
 23   unable to assess.  So, directionally, it would
 24   move towards a slightly higher risk, and that
 25   might have some effect on the hurdle rate, or it
05590
  1   might not.  The hurdle rate that they are using
  2   right now, 8 to 10 percent, is probably still
  3   appropriate.
  4               MR. ABRA:  That was your hurdle rate
  5   of 8 to 10 percent, was it not?
  6               MR. HARPER:  Yes.
  7               MR. ABRA:  Theirs was 6, was it not?
  8               DR. HIGGIN:  I think we did say that
  9   they had moved towards a higher level.
 10               MR. HARPER:  I don't want to put words
 11   in Manitoba Hydro's mouth, but I think in the
 12   initial submission they were using the full range,
 13   6 to 10, and then subsequently in their
 14   presentation they used the range 8 to 10.
 15               MR. ABRA:  And that is the same one
 16   that you came up with, is it not?
 17               MR. HARPER:  Yes.
 18               MR. ABRA:  You are saying that the
 19   risk that you identified with respect to the
 20   limited partnership was considered as far as your
 21   hurdle rate of 8 to 10 percent was concerned?
 22               DR. HIGGIN:  Yes.
 23               MR. ABRA:  You also suggested, you had
 24   mentioned it at some length this morning, and you
 25   also mentioned in one of our IRs, which this time
05591
  1   was CEC/CAC/MSOS/NFAAT 1-22, and basically it was
  2   this point that, again, as I say you were making
  3   this morning, that Hydro should undertake a full
  4   business risk assessment, including mitigation
  5   strategy, and should provide this to its board of
  6   directors prior to requesting final approval of
  7   the projects.
  8               Firstly, arising from that, do you
  9   think that NCN should be doing a similar business
 10   risk assessment?
 11               DR. HIGGIN:  I think it would be
 12   prudent for any partner that is investing the kind
 13   of money that is here, the equity portion in that
 14   case, to have done that type of analysis.  And I
 15   would assume, going back to investment analogies,
 16   before you invest in anything, you would assess
 17   the full range of risks, financial, market, and
 18   business.
 19               Now, the market risks are things that
 20   are pretty common to both partners, the project
 21   related risks, the operating risks, and they are
 22   shared in proportion, if you like to the
 23   investment.  But each party has its different risk
 24   tolerance, risk profile, and therefore an
 25   assessment should be made taking into account each
05592
  1   party's own risk tolerance and profile and so on.
  2   It is rather like again using an investment
  3   analogy.  Do you want to invest in fixed income,
  4   or do you want to invest in penny stocks?  It is
  5   that type of thing that you take into account what
  6   your objectives are, and then you assess the
  7   risks.
  8               MR. ABRA:  As I am sure you are aware,
  9   ultimately, what the Clean Environment does is
 10   make a recommendation to the Minister with respect
 11   to the Wuskwatim project.  In your view, this
 12   recommendation that you are making of a business
 13   risk assessment being done, is that a
 14   recommendation that the Clean Environment
 15   Commission should consider making to the Minister?
 16               DR. HIGGIN:  I would think that it is
 17   one consideration that you may want to include.
 18   Where it sits in the spectrum of all of the large
 19   things, it depends on how long the list is.  I
 20   would rather hope that they are a prudent business
 21   cooperation, that they will do it and they don't
 22   have to be told that.  That would be my rather
 23   view.  If you feel that there is perhaps some
 24   merit to saying, well, because of the unique
 25   nature of this, that is something that might be
05593
  1   worth mentioning in the Commission's report.
  2               MR. ABRA:  Now, you have also
  3   indicated this morning, of course, and in your
  4   original filing in February, and in response to
  5   many of the IRs, that the nature of the
  6   relationship between Manitoba Hydro and NCN is
  7   such that other business risks such as financial
  8   exposure due to default, governance, or other
  9   dispute issues may arise during the course of the
 10   relationship.  These risks that you have
 11   identified, or potential risks that you have
 12   identified, have they also been included in your
 13   suggested hurdle rate?
 14               DR. HIGGIN:  Yes.  We have taken into
 15   account the potential for those in making our
 16   overall assessment of business risk.  Having said
 17   that, we don't have the details to be able to
 18   assess those except in a very broad way.  For
 19   example, let's deal with disputes, at the moment
 20   there is no explicit dispute resolution mechanism
 21   in the SOE.  It is an item, that it is identified
 22   that in the PDA something has to be put in place,
 23   and that is obviously fair to both parties.  So we
 24   can't assess a risk unless we know what the
 25   specifics of that are going to be, and how that
05594
  1   may speak to the question of the risk of both
  2   parties, for example, getting tied up in the
  3   courts for many years, for example.  If the
  4   mechanism has binding arbitration, for example, as
  5   being the mechanism, the risks are lower than if
  6   they can take an arbitrator's opinion but then go
  7   and appeal it to court.  So there are a whole
  8   bunch of reasons why we can't assess the level of
  9   risk at this point.
 10               MR. ABRA:  Okay.  You made the point
 11   this morning in your very thorough presentation at
 12   page 48, and also in the IR CEC/CAC/MSOS/NFAAT
 13   1-19, and this talks in terms of oversight by the
 14   Manitoba Public Utilities Board.  And what you
 15   said this morning, in particular, ongoing
 16   regulatory oversight is to ensure public
 17   accountability with respect to project capital
 18   costs, one of the major risks, and to ensure that
 19   there is appropriate ring fencing of the costs of
 20   the partnership.  And you made the point in the IR
 21   that I just referred to, the NFAAT 1-19, of the
 22   Public Utilities Board overseeing capital
 23   expenditures and so forth related to Wuskwatim
 24   once it comes on board, or comes on stream.
 25               You are aware, I am sure, that
05595
  1   generally the Public Utilities Board has no
  2   authority over capital expenditures.
  3               DR. HIGGIN:  We are aware.
  4               MR. ABRA:  But there have been
  5   numerous capital expenditures that have been
  6   referred to the Public Utilities Board by the
  7   Minister in past years; for example, when Hydro
  8   purchased Centra Gas, as you are probably aware,
  9   there were hearings held and that was on a
 10   referral from the Minister.
 11               Assuming for a moment that the PUB
 12   doesn't -- or we know it doesn't have the
 13   authority to review the capital expenditures, in
 14   essence, what you are recommending is that the
 15   Minister be told that there should be referrals of
 16   a nature, if required; or in the alternative, let
 17   me ask it another way, with the PUB having the
 18   restricted authority that it presently does, are
 19   you still recommending the project in the manner
 20   that you have?
 21               DR. HIGGIN:  I think that it doesn't
 22   affect our recommendations regarding the project.
 23   We just think that, particularly because of some
 24   of the rather unique features of this, it would be
 25   in the public interest to ensure there is
05596
  1   oversight.  And that is the body that we thought
  2   would be appropriate, because from a regulatory
  3   process and streamlining of that review, or
  4   oversight, the PUB would be well equipped to do
  5   that.  So, in essence, we think that would be a
  6   prudent thing for perhaps the Minister to ensure
  7   that that oversight happens every little while,
  8   not necessarily in every rates case, but
  9   periodically, or one or two times, to ensure it is
 10   on track.  And the benefits to ratepayers that are
 11   the real driver for this, because it is export
 12   driven, are going to be realized.
 13               MR. ABRA:  That is all of the
 14   questions that I have.  Thank you very much for
 15   your assistance, Dr. Higgin and Mr. Harper.
 16               THE CHAIRMAN:  Thank you, Mr. Abra.
 17               I will now invite some of the funded
 18   groups, in no particular order, to come forward --
 19   first one who comes, to proceed with their
 20   questions.
 21               MR. WILLIAMS:  Mr. Chairman, I am
 22   going to move from this position.  I was going to
 23   note that I had spoken to Dr. Miller before lunch
 24   and I think he was expecting to ask some
 25   questions.  I am not sure if I see him in the room
05597
  1   right now.
  2               THE CHAIRMAN:  I don't see him
  3   presently, but he should be appearing some time.
  4   So I will let the others, anybody else who wishes
  5   to proceed?
  6               I see no other members, maybe they
  7   will come forward.  In the meantime, I will let
  8   Mr. Bedford -- who I assume will have some
  9   questions.
 10               MR. BEDFORD:  Correct assumption.
 11               Dr. Higgin and Mr. Harper, my name is
 12   Doug Bedford, I am counsel for Manitoba Hydro.  I
 13   would first like to try and clear up what my
 14   client tells me may be some unfortunate confusion
 15   created by one of the exhibits that you put in
 16   this morning.  And that is your exhibit, I think
 17   it is CAC/MSOS 1008.  It is a summary of
 18   calculations regarding wind power economics.  And
 19   I believe that we communicated to Mr. Williams
 20   what our concerns are, so you will expect what the
 21   next question is.
 22               If you would look, please, at the
 23   second column, which has a lot of information in
 24   the heading "MH/NCN sub chap 6."  Run your finger
 25   down, please, to the capital cost reduction, 2002
05598
  1   to 2009.  Your exhibit indicates a reduction of
  2   5 percent for every year in that 7 year period.
  3   We know from the information that we submitted
  4   that it was a 5 percent reduction over the entire
  5   period, not each year.  Have we spotted what I
  6   would call a typographical error?
  7               DR. HIGGIN:  I would agree that is
  8   correct.  The source for that information, just so
  9   you know where I get the information, is from the
 10   Helen Marks (ph) report, and it is from table 4.3
 11   of the Helen Marks report, as being where the two
 12   scenarios, the BTM and the WF12 scenarios are set
 13   out for the different types of turbines.  But I
 14   would agree that an average over the period is
 15   5 percent.  However, there is a hell of a lot of
 16   variability, if we look at that table, which is
 17   your consultant's report, so you can't
 18   categorically say 5 percent, because it depends
 19   which of the five wind turbine types that are
 20   listed there that you choose to be the one, or you
 21   take the average, or what.  So that is -- but I
 22   agree with your thing, so we accept it should be
 23   corrected to 5 percent, approximately 5 percent.
 24               MR. BEDFORD:  Thank you.  The other
 25   concern that we had, if you will now run your
05599
  1   fingers straight across to the right-hand columns,
  2   your heading makes reference to one of the
  3   exhibits that Manitoba Hydro and NCN put in quite
  4   some time ago, exhibit 1004.  And you are correct,
  5   you have the 5 percent plus or minus under the
  6   250-megawatt option, and under the 450-megawatt
  7   option you have 2.5 percent.  And our puzzlement
  8   was that the exhibit that we put in suggests that
  9   the estimate should be 2.5 percent for each.
 10               DR. HIGGIN:  Right.  I think it would
 11   be helpful that we correct that, and we will
 12   submit it as a corrected exhibit with those
 13   changes.  If you have any others ones, then let us
 14   know, we would make -- we want to make sure it is
 15   accurate on the record.
 16               MR. BEDFORD:  Thank you.  I would like
 17   to turn now to the financial analysis that the two
 18   proponents have placed before the Commission at
 19   this hearing, and suggest to you that that
 20   financial analysis, which I do understand you have
 21   had an opportunity to review in quite some detail,
 22   looks at cost of borrowing for this project, looks
 23   at rate impacts to Manitoba Hydro ratepayers, but
 24   it also projects the incremental profits that are
 25   anticipated or predicted as a result of advancing
05600
  1   Wuskwatim.  Would you agree with that?
  2               MR. HARPER:  Yes.
  3               MR. BEDFORD:  Are you also able to
  4   agree that Manitoba Hydro and NCN have provided a
  5   number of risk sensitivities in analyzing that
  6   financial picture, such as -- and you have alluded
  7   to them in your own evidence this morning -- the
  8   low and high export prices, sensitivity for
  9   drought, sensitivity for increased capital costs
 10   incurred during the course of constructing the
 11   project.
 12               MR. HARPER:  Yes.  There weren't as
 13   many sensitivity analyses done on the financial
 14   side as there were on the IR side, but there were
 15   a number which included capital, different export
 16   price forecasts, and I think there was one on the
 17   low water flow conditions as well, yes.
 18               MR. BEDFORD:  Can you then agree with
 19   my conclusion that the financial analysis that is
 20   before the Commission does weigh risks and
 21   returns?
 22               MR. HARPER:  It gives you some sense
 23   of what the risks of the variations of the
 24   different factors are, yes.  But I guess the issue
 25   is, does it do that in a comprehensive and
05601
  1   integrated manner, as is suggested under the
  2   corporation's financial evaluation policy which
  3   deals with IRR and using that to assess risk.  It
  4   was the fact that, in our view, it is that IRR and
  5   the hurdle rate establishment there, in setting
  6   hurdle rates based on a comprehensive
  7   understanding of all of the risks and using that
  8   to judge against the IRR, that is a more
  9   comprehensive way of looking at the risk.  Yes,
 10   the financial analysis does give you some comfort
 11   and some understanding that the risks are
 12   manageable.  I think an economic analysis is a
 13   more comprehensive look at that.
 14               MR. BEDFORD:  Can I suggest to you,
 15   Mr. Harper, that the financial analysis is
 16   arguably more comprehensive than an economic
 17   analysis, because the financial analysis, as I
 18   understand it, takes into consideration all of the
 19   engineering and economic concerns that are in an
 20   economic analysis, but it adds to them,
 21   incorporates into the financial analysis what
 22   someone like me understands to be accounting rules
 23   and sources of the financing that is needed to
 24   build the project?
 25               MR. HARPER:  I think the easiest way
05602
  1   to answer your question is to sort of reiterate
  2   what I said in the introductory comments this
  3   morning.  I think financial analysis is equally
  4   important to do as economic analysis, they look at
  5   different issues.  Financial analysis looks at the
  6   type of issues that you just talked about, rate
  7   impacts, year to year accounting, what is the net
  8   income going to be at the end of the year?  The
  9   fact that it does that doesn't preclude the need
 10   to do economic analysis at all, but the two of
 11   them work hand in hand looking at different
 12   issues.
 13               MR. BEDFORD:  Can you agree with me,
 14   again looking at the financial analysis as
 15   distinct from the economic, that the financial
 16   analysis that is presented includes and has been
 17   done from a Manitoba Hydro perspective?
 18               MR. HARPER:  Yes, it has.
 19               MR. BEDFORD:  Unlike Mr. Mayer and Ms.
 20   Avery Kinew, it appears that I will not have the
 21   pleasure of seeing you a month from now, but I am
 22   aware that the company for which I work is seeking
 23   a rate increase for its ratepayers on average of
 24   2.5 percent and 3 percent, looking at the next two
 25   years.  So I noted with much interest your
05603
  1   description this morning of a proposed and
  2   predicted rate decrease as a consequence of
  3   Wuskwatim of 2 to 3 percent as being, in your
  4   words, modest.  And I also read in February, when
  5   I read the written material that you filed, what I
  6   detected to be an implication that a predicted
  7   rate decrease in the range of 2 to 3 percent was
  8   not very remarkable, not significant, and not
  9   something to get too excised about if one is
 10   trying to promote Wuskwatim.
 11               Can you tell me today whether, in
 12   fact, it is your opinion that a rate decrease or a
 13   rate increase in the 2 to 3 percent range is
 14   indeed modest, not significant to ratepayers?
 15               MR. HARPER:  You really should show up
 16   at the next hearing.
 17               MR. MAYER:  He may be there.
 18               MR. HARPER:  I think Dr. Higgin
 19   already has an invitation to appear actually, if I
 20   am not mistaken.
 21               I want to check the characterization
 22   that we made, because I know in the rebuttal that
 23   Manitoba Hydro used the word "modest."  In all
 24   honesty, I can't remember the description, it was
 25   a while ago that we wrote the evidence that we
05604
  1   did.  And I guess, as I was trying to say, any
  2   rate decrease is welcome, any rate increase really
  3   needs to be justified.  You know, justifiable rate
  4   increases are acceptable, unjustifiable rate
  5   increases are not acceptable, whether that is
  6   2 percent or 22 percent.  You know, I don't think
  7   the fact that we are dealing with small numbers --
  8   I guess what I was struggling with this morning
  9   was the characterization that you are talking
 10   about a 2 percent rate increase that doesn't come
 11   about for a number of years, and then we are
 12   looking at -- so you have 2 percent, it is over a
 13   very long time frame we are getting that.  And
 14   that, you know, the average bill reductions, they
 15   are a little bit less than that, but they are in
 16   the same order.  I guess as I was saying in my
 17   direct, it think it was a matter of just trying to
 18   put the millions of dollars into context.  For
 19   people with small portfolios, $200 million sounds
 20   like a lot of money, and it is important to just
 21   understand the context of it.
 22               MR. BEDFORD:  Thank you.  I have no
 23   further questions.
 24               THE CHAIRMAN:  Mr. Miller.
 25               MR. MILLER:  Peter Miller representing
05605
  1   TREE and RCM.  I want to apologize that a conflict
  2   delayed me, and thank you for allowing me to ask a
  3   couple of questions.  It should be fairly brief.
  4   And if you have already replied to it, you can say
  5   that too.
  6               I am concerned that you laid out what
  7   you think was a proper method for justification of
  8   a project, and examination of needs and
  9   alternatives, which you call portfolio analysis.
 10   And you note that that was not done in this case,
 11   and yet you are willing to give a qualified green
 12   light to the proposed project.
 13               I am wondering if you could indicate
 14   why you think that a green light can be given if
 15   the alternatives have not been examined in any
 16   depth?  Can you just elaborate on your reasons for
 17   that?
 18               MR. HARPER:  This was something that
 19   we struggled with too, to be quite honest with
 20   you, and I think where we gained some comfort with
 21   it was the fact that in this particular -- two
 22   things -- in this particular unique case, it
 23   appeared that the alternatives one would consider
 24   putting into the portfolio, MUGs, SSE, DSM and
 25   Wuskwatim, there appeared to be sufficient room to
05606
  1   manage them all.  That may not be the case the
  2   next time this question comes up.  You know, when
  3   we looked at this, I think, as Dr. Higgin was
  4   saying, we felt that there was room for more DSM
  5   than Manitoba Hydro was talking about, perhaps two
  6   or even three times, but the sensitivity analysis
  7   that had been done demonstrated that even at those
  8   levels of DSM, the project was economic, it would
  9   meet that hurdle range that we talked about.  So
 10   it was with some trepidation that we sort of said,
 11   yes, it looks okay in this case.
 12               It could eventually be that when the
 13   people go away and do the program design, they may
 14   find it is 5 times more or 7 times more DSM for
 15   some reason, but that is probably highly unlikely.
 16   So we felt some comfort with the fact that, given
 17   the information that we had, it was unlikely that
 18   the situation would arise whereby they all
 19   couldn't be managed at the same point in time, and
 20   still, based on the sensitivity analysis that we
 21   saw, come up with an economically attractive
 22   portfolio overall.
 23               MR. MILLER:  Is that based on
 24   accepting Hydro's load forecast?
 25               MR. HARPER:  As I said, one of the
05607
  1   areas that Hydro did do sensitivity analysis was
  2   with respect to their own load forecast, and I
  3   think at their medium load forecast, which was
  4   roughly equivalent to 5 times DSM, if I am not
  5   mistaken, the IR was still only a few tenths of a
  6   percent less than the 10.3.  Again, that would
  7   keep that 9 percent drop by a few tenths of a
  8   percent still within that 8 to 10 percent range.
  9   So it was accepting -- not totally accepting
 10   Hydro's load forecast, but recognizing that there
 11   was a potential for sensitivity around that, but,
 12   you know, using the results of their sensitivity
 13   analysis still giving us some comfort that we
 14   would be within the range.
 15               MR. MILLER:  Thank you.  My other
 16   question has to do with your recommendation on
 17   wind.  And perhaps you could summarize the
 18   reasons -- I guess one of them would be that a
 19   private concern, and you can confirm whether I am
 20   right or not on this, has certain tax advantages
 21   that Manitoba Hydro would not have, and therefore
 22   it might be economic for a private firm to do and
 23   not for Manitoba Hydro to do.  Is that correct?
 24               DR. HIGGIN:  Yes, that is one of the
 25   reasons that we feel that it would be more
05608
  1   appropriate for the private sector to take the
  2   lead in the development of wind power in Manitoba.
  3               The other reasons are risk related in
  4   terms of risk to ratepayers, given Hydro's
  5   economic evaluations of wind energy economics in
  6   Manitoba.  But I think there was an exchange -- as
  7   I recollect, I am just going to try and find it,
  8   on that particular question, if you just bear with
  9   me one minute, I will find the exchange.
 10   Mr. Williams was talking to Mr. Adams, and he was
 11   talking about that particular issue.  And this is
 12   at transcript 911, if you want to look at it.  And
 13   at transcript 911, Mr. Williams posits the idea
 14   that it may look better from the perspective of a
 15   private company as opposed to a Crown corporation
 16   and Mr. Adams of Hydro replied, yes, and gave a
 17   few reasons.  And those reasons are substantially
 18   the same reasons that we would point to as well.
 19   However, there are another two reasons why.
 20               I think that particularly in the case
 21   of a public entity like Manitoba Hydro, I would
 22   suggest that the first thing that should be done
 23   is to have a comprehensive wind power development
 24   plan, a multi-year comprehensive plan that sets
 25   out the steps and thereby will look at the risks
05609
  1   and the benefits of such a wind power development.
  2   Unfortunately, at this point we don't see that
  3   from the corporation -- it may be working on
  4   one -- but in the evidence that we had to review.
  5   So there is one other reason.  And absent that,
  6   and given the economics of wind, as Manitoba Hydro
  7   assessed, we think at this point that the risks
  8   are too high to make a major investment of
  9   ratepayer money in wind power in the period from
 10   2002 to 2009.
 11               I would like to give you another
 12   answer, because despite everything that I say, I
 13   am a fan of wind.  But basically I think those are
 14   the realities, and that is why we have taken the
 15   approach that we have in saying that we don't
 16   believe that wind should be included in a
 17   preferred development portfolio at this time.
 18               MR. MILLER:  Now, in at least one of
 19   these respects, DSM is comparable, i.e., they
 20   don't have a current development plan?
 21               DR. HIGGIN:  That's right.
 22               MR. MILLER:  Maybe you could compare
 23   those two?
 24               DR. HIGGIN:  Well, the difference is,
 25   250 megawatts of wind has been put into the power
05610
  1   resource plan.  The current power resource plan,
  2   the 2003, only contains the existing DSM program.
  3   We think that is -- again, going back to your
  4   earlier question -- doesn't allow for an apples to
  5   apples comparison of options in a portfolio.
  6   However, as Mr. Harper said, given other factors,
  7   we think that we can accept Hydro's idea of
  8   parallel development as being an okay way to go,
  9   but we would like to see that PowerSmart new plan
 10   as soon as possible.  We believe that, as we say,
 11   it should be given priority.  So if we wanted to
 12   construct a portfolio from what we think, two
 13   times or more DSM, SSE, and non-utility generation
 14   should be fundamentally given priority relative to
 15   any sort of new generation.  If new generation is
 16   required in order to exploit the opportunity, the
 17   export opportunity, then, yes, we agree with Hydro
 18   that Wuskwatim is the best alternative for new
 19   generation.  Does that answer?
 20               MR. MILLER:  Just to follow that up,
 21   with respect to the current resource plan, you are
 22   recommending that the wind be removed, and that
 23   DSM, NUG, and more SSE, more of these things be
 24   put in?
 25               DR. HIGGIN:  Yes.  SSE is already in.
05611
  1               MR. MILLER:  But maybe not at the
  2   level that it could be?
  3               MR. HIGGIN:  Yes.
  4               MR. HARPER:  I think maybe, we are
  5   always talking with the caveat that you are
  6   looking at opportunities that are economic, I
  7   mean, you are not just throwing them in because
  8   they are there -- with that caveat, yes.
  9               DR. HIGGIN:  The past, the LEC
 10   screening and the IRR is reasonable relative to
 11   Hydro's hurdle rates, those are pre-conditions
 12   before you would even include them into a
 13   portfolio analysis.
 14               MR. MILLER:  Do you attach any value
 15   to corporate learning of a new technology?
 16               DR. HIGGIN:  Absolutely.
 17               MR. MILLER:  And do you think that
 18   being a partner in wind development would be a way
 19   to do it?
 20               DR. HIGGIN:  Yes, I think that
 21   facilitating private sector development, being a
 22   partner, could be one way that Manitoba Hydro
 23   would go in.
 24               Our concern, frankly, relates to
 25   investing approximately $450 million of ratepayer
05612
  1   money in wind generation over the next seven
  2   years.  That is a concern.  But we clearly say
  3   that Hydro should facilitate this new technology
  4   in Manitoba.  And to do that, that may include
  5   partnering or a joint venture with the private
  6   sector.  In fact, as you know, there was a joint
  7   venture with Shell that was expected to proceed,
  8   but apparently is no longer going to happen.  So
  9   that was, in our view, a very appropriate way to
 10   go, to share the risks of wind development with
 11   the private sector.
 12               MR. MILLER:  Hydro is already
 13   committed to doing wind, I presume, they are in
 14   the final stages of negotiation with the -- is it
 15   Sequoia?
 16               MR. WOJCZNSKI:  The record shows a
 17   nod.
 18               MR. MILLER:  Basically, this is the
 19   model that you think should be pursued?
 20               DR. HIGGIN:  The distinction is the
 21   capital and equity going into that project is that
 22   of Sequoia.  Hydro will have, I am sure, costs to
 23   facilitate that development, related to the
 24   interconnection of the plant and so on.  And that
 25   is very appropriate.  They will probably assist in
05613
  1   marketing the power and all of those things.  That
  2   is what we call facilitation.
  3               Going beyond that then, I think
  4   individual investments would have to be looked at
  5   on an economic analysis basis, "a Hydro
  6   perspective," as being a partner in a development,
  7   if, for example, as we had expected, the Shell one
  8   seemed to be set up towards being a joint venture
  9   where each party would contribute some of the
 10   capital and/or equity.
 11               MR. MILLER:  Would you see more
 12   corporate learning of the new technology through
 13   that joint venture rather than the Sequoia model?
 14               DR. HIGGIN:  I honestly don't know
 15   that.  As I said earlier, I would prefer to see
 16   that there was, rather like the 2001 PowerSmart
 17   resource plan, an equivalent for wind energy that
 18   was available, would set out clearly what the
 19   corporation was going to do, how much it was going
 20   to invest, and what its policies were, and those
 21   type of things.  I think that would be a
 22   tremendous step and it would encourage, I believe,
 23   investors to come here and look at working with
 24   Hydro, if they had such a very explicit public
 25   document.  That would be my view as one way to
05614
  1   help facilitate as well.
  2               MR. MILLER:  So that would be a first
  3   step to achieving this.  That doesn't mean
  4   necessarily that you would remove the
  5   250 megawatts from the resource plan provided it
  6   was not Hydro's undertaking, in other words, when
  7   you are assessing what power, you know, is
  8   available, generated within the Province?
  9               DR. HIGGIN:  That's right.  So, for
 10   example, the 199 megawatts of Sequoia would be
 11   part of that 250 commitment.
 12               MR. MILLER:  So it could be in a
 13   resource plan --
 14               DR. HIGGIN:  It would be in that
 15   sense.
 16               MR. MILLER:  Just like you could have
 17   a NUG and another NUG --
 18               DR. HIGGIN:  It is not correct to say
 19   to remove 250, it is -- because there is 99, we
 20   hope, of committed private sector wind
 21   development.
 22               MR. MILLER:  Recommending conditions
 23   for achieving that?
 24               DR. HIGGIN:  Yes.
 25               MR. MILLER:  Okay.  I think that is
05615
  1   the substance of my questions, and I thank you
  2   again for the opportunity.
  3               THE CHAIRMAN:  Thank you, Mr. Miller.
  4   Ms. Avery Kinew.
  5               MS. AVERY KINEW:  Mr. Harper, I was
  6   trying to find where you both mentioned the
  7   assumption you made about environmental concerns.
  8   I really appreciate, as Mr. Sargeant said, your
  9   organized and clear presentation and
 10   recommendations, but we have to put together more
 11   environmental information than what you assumed
 12   here.  And I can't remember where I found the
 13   exact phrase that you used, but anybody reading
 14   the transcript should understand that you didn't
 15   really take into consideration climate change
 16   evidence that is put before this Commission, and
 17   other environmental concerns?
 18               MR. HARPER:  That's correct.  The
 19   focus of our work was on the economic and
 20   financial aspects of the NFAAT, and not -- we
 21   didn't deal at all with the environmental,
 22   socioeconomic, or cultural, which I believe are
 23   other pieces of the terms of reference that the
 24   CEC has.
 25               MS. AVERY KINEW:  Thank you.
05616
  1               THE CHAIRMAN:  Mr. Williams, you will
  2   re-direct, and this will be the end of the
  3   questions?
  4               MR. WILLIAMS:  I actually have no
  5   re-direct, Mr. Chairman, or members of the panel.
  6   I do have just two quick points.  For Dr. Avery
  7   Kinew, I think it is page 45 of the draft notes
  8   that you are looking for.  And we have what I
  9   consider to be one undertaking arising from our
 10   evidence, which is to re-file CAC/MSOS exhibit
 11   1008, the summary of Manitoba Hydro calculations
 12   of wind power economics, to correct some
 13   typographical errors, and also to clarify the
 14   wording just slightly.
 15               Subject to anything that the panel may
 16   have, I think I would ask that our witnesses be
 17   excused.
 18               THE CHAIRMAN:  Thank you.  That being
 19   the case, I also want to reiterate some of my
 20   colleague's comments about the clear, concise
 21   presentation -- very understandable, even to
 22   myself as non-initiated to the economics of Hydro.
 23   So we really appreciate your presentation, and the
 24   order, the way it was presented.  Thank you.
 25               Mr. Bedford.
05617
  1               MR. BEDFORD:  Mr. Chairman, with your
  2   permission, one further question that maybe it is
  3   a good time to clarify.
  4               THE CHAIRMAN:  You know we are very
  5   flexible.
  6               MR. BEDFORD:  Either Mr. Harper or
  7   Dr. Higgin, you had a question from the panel
  8   moments ago about the fact that it wasn't your
  9   mandate to look at climate change in terms of the
 10   economics or the finances.  You are familiar of
 11   course, because you have said so, that we ran a
 12   number of sensitivities on the financial analysis.
 13   One of the sensitivities was an extreme drought
 14   scenario -- on the economic, I am sorry -- was an
 15   extreme drought scenario, extreme drought which
 16   could be something that occurs because of climate
 17   change.  Would you accept that there is indeed
 18   something in the economic analysis that takes into
 19   account a scenario that could be triggered by
 20   climate change?
 21               MR. HARPER:  I should probably leave
 22   this for Dr. Higgin, because my knowledge of
 23   climate change is extremely limited in terms of
 24   what it could do in over the next 10 years or 15
 25   years in terms of triggering a drought.  I am not
05618
  1   too sure, we talked -- we not only did the
  2   analysis, but also talked about the probability
  3   associated with that event occurring, and whether
  4   those probabilities were reflective of past
  5   experience.  Whether those probabilities might
  6   actually reflect an increased probability because
  7   of climate change in the future, I don't know.  So
  8   I don't think that I can answer your question.
  9               MR. HIGGIN:  I have nothing to add.
 10   Obviously, it is a scenario, and I am sure that
 11   you have analyzed that as one of the possible
 12   worst case scenarios, and we have no dispute with
 13   that analysis, we haven't made any independent
 14   assessment.
 15               MR. BEDFORD:  Thank you.
 16               THE CHAIRMAN:  Ms. Valerie Matthews
 17   Lemieux, did you have -- that was included.  Okay.
 18   Thank you again.
 19               Ms. Gaile Whalen Enns, I gather you
 20   are here to proceed with the cross on the EIS?
 21               MS. WHELAN ENNS:  Thank you.  I am
 22   actually here to make a statement today, and my
 23   apologies that it is today, I could not do
 24   anything about being snowed in yesterday.  I did
 25   manage to get down the grid road today.
05619
  1               We would like to make a couple of
  2   comments and state a couple of concerns, and I
  3   will be short and brief.
  4               We have an ongoing concern about the
  5   balance expected and needed in these hearings,
  6   noting the importance of all of the participant
  7   presentations that are currently scheduled in May,
  8   and the importance of a complete set, and full set
  9   of the EIS cross questions being asked, given that
 10   we are working on an environmental license here.
 11               I think that we probably share, those
 12   of us who have been working on this for a long
 13   time and been in the hearing room, share a concern
 14   in terms of the schedule overall, and not starting
 15   on EIS questions until week six.
 16               We have now used -- well, far beyond,
 17   but we have now used all of our participant
 18   funding resources that were available.  This is
 19   then a situation where I personally am liable for
 20   those funds.  There is no trust account,
 21   foundation, or larger organization to handle that
 22   responsibility and that liability.  That makes
 23   then all 30 of us who have worked in one way or
 24   another on the Wuskwatim review over the last year
 25   volunteers as of now.  Many, of course, as you
05620
  1   know, were volunteers along the way, notably most
  2   of our presentations.
  3               So we have a bit of a problem with the
  4   disproportionate level of time for the EIS
  5   questions, a very real problem in terms of our
  6   capacity, and a concern overall in terms of the
  7   aim for these proceedings.  So we are not able to
  8   continue our EIS cross in the situation, as it
  9   currently exists.  And I wasn't, for instance,
 10   specifically aware on the financials in April --
 11   one had to look of course at the accounts for
 12   April to be able to look at the wall on this.
 13               We are a little bit concerned too, if
 14   I may, and this is secondary in terms of the
 15   current situation for us, concerned that the
 16   request from the transcript in the last day of the
 17   hearings in April, in respect to our ability to
 18   reduce our costs and have people here for the EIS
 19   cross questions, was not necessarily followed
 20   through.  Again, I know we are all in the same
 21   situation, including in terms of the length of
 22   these hearings.  We have found that a time when we
 23   were expressly not available was put into the
 24   schedule for the next stage of our EIS cross.  And
 25   that is again a secondary concern.
05621
  1               There is nothing in what I am saying
  2   at the moment that implies a criticism for any
  3   public or citizen participant's activity, or for
  4   instance the schedule in May or the important
  5   presentations that you are going to be hearing in
  6   May.  Otherwise, we will be here for closing
  7   statements.  That is basically the situation.
  8               THE CHAIRMAN:  Thank you.  Ms. Whelan
  9   Enns, I believe there were -- there was an
 10   undertaking on the part of Dr. Bayne, and I don't
 11   know, I think that if my recollection is correct,
 12   that there was something that was to be filed or
 13   that was to be forthcoming?
 14               MS. WHELAN ENNS:  I am under the
 15   impression as of today, but I can certainly look
 16   back, that Robert Hornung's travel schedule and
 17   work schedule has been an issue in terms of the
 18   undertakings from him.  I can certainly take
 19   another look in terms of Dr. Bayne.  I believe
 20   there were two items filed as evidence in the last
 21   day in April.
 22               THE CHAIRMAN:  I have got a page
 23   indicated, but I am not sure, I don't recollect
 24   the issue -- page 2513 on the record.
 25               MS. WHELAN ENNS:  Okay.
05622
  1               THE CHAIRMAN:  So you would like to
  2   research that?
  3               MS. WHELAN ENNS:  I will certainly
  4   take a look.  When our legal counsel are finished,
  5   there will be some correspondence from us also.
  6   And if I may anticipate a comment or question on
  7   what I just said, we have used the public
  8   participant funding in our efforts as an
  9   environmental organization, and I note the only
 10   environmental and conservation organization in
 11   Manitoba funded to participate in the EIS review
 12   for these projects.  We have -- sorry, that was a
 13   little segue, but what I was getting to is we have
 14   had the good fortune to have a little bit of
 15   additional funding in respect to our legal
 16   services.  Thank you.
 17               THE CHAIRMAN:  Thank you.  Are there
 18   questions in this regard?
 19               I would just ask if there are others
 20   in the room now who wish to proceed, who are
 21   prepared to proceed with EIS questioning, who
 22   haven't had that opportunity?
 23               That being the case, we will take a
 24   break now to try to readjust the cannons.
 25   
05623
  1               (PROCEEDINGS RECESSED AT 2:17 P.M. AND
  2               RECONVENED AT 2:35 P.M.)
  3               THE CHAIRMAN:  Ladies and gentlemen
  4   would you please find your seat.  Ladies and
  5   gentlemen, I would like to put a few comments on
  6   the record.  And it is subject to review of the
  7   comments made on the record by Ms. Gaile Whelan
  8   Enns.
  9               First of all, we have a problem
 10   accepting the fact that Ms. Whelan Enns did not
 11   appear yesterday, nor this morning, nor has
 12   advised us that she would not proceed with the
 13   cross of EIS.  We do not accept her comments and
 14   the terms, in her comments, to the effect that
 15   we've delayed putting the information on EIS on
 16   the record until the sixth week I think she
 17   mentioned.  We will remind Ms. Whelan Enns that
 18   she is not the only organization that has
 19   environmental concerns or environmental interests
 20   in this process.  We have heard a presentation
 21   made -- a presentation made on the record of the
 22   EIS as performed by the partnership of Manitoba
 23   Hydro/NCN.  We have listened to questions asked by
 24   quite a few other intervenors in this room.  We
 25   have personally as a Commission gone through
05624
  1   extensive questioning of the EIS.  I also want to
  2   put on the record that before we adjourned a
  3   couple of weeks back, that I personally advised
  4   Ms. Whelan Enns that we were requesting of her, in
  5   view of the fact that there will be time to more
  6   specifically review what she intended to do in
  7   terms of the EIS and to refine her process so that
  8   we could expedite things in the process in terms
  9   of time.  And she objected that this might not
 10   give her sufficient time.  We did indicate that we
 11   would give her all the time that she would
 12   require.
 13               This is the first that we hear today
 14   that she is not proceeding with any cross on the
 15   EIS, and that frustrates us to a certain extent in
 16   that we could have made good use of the time
 17   today.  The scheduling has been out for some time
 18   and the input provided today could have been
 19   provided some time ago.
 20               So, that having been said, and we
 21   shall, as I indicated before, review the comments
 22   that she has put on the record, but basically I
 23   have to characterize those comments to a large
 24   extent as being a falsification.  And to say today
 25   that there isn't sufficient funding, if that is
05625
  1   truly the case, then surely that was the case when
  2   we adjourned at the end of the -- at some time in
  3   April.  We will also have to review that.  I
  4   invite others from my colleagues who have
  5   additional comments to proceed to make them.
  6               MR. SARGEANT:  Just to add one thing,
  7   Mr. Chairman, I believe that Ms. Whelan Enns said
  8   that she had been scheduled into this current
  9   schedule at a time that was inconvenient to her.
 10   That is unknown to us, if that is the case.  And
 11   as you just said, Mr. Chair, this schedule has
 12   been out for approximately ten days to two weeks.
 13   She could have notified us earlier than that,
 14   earlier on that.
 15               THE CHAIRMAN:  There has been no
 16   indication of that and we have tried to
 17   accommodate those who wish to make presentations.
 18   Ms. Kinew.
 19               MS. AVERY KINEW:  We also dispute the
 20   fact that environmental issues haven't come up
 21   until the sixth week.  The EIS panel wasn't
 22   brought forward until then, but environmental
 23   issues have been part and parcel of the mandate of
 24   this Commission from the very beginning, and there
 25   have been people questioning, including the
05626
  1   Canadian Nature Federation and Manitoba Wildlands,
  2   questioning about environmental issues from the
  3   very beginning.  So we don't appreciate the
  4   characterization that she brought forward today.
  5               THE CHAIRMAN:  Mr. Mayer.
  6               MR. MAYER:  Frustration doesn't
  7   exactly describe how I think we all feel.  But it
  8   definitely doesn't describe how I feel.  And
  9   rather than say anything that could get me into
 10   trouble, I just want to harken back to the
 11   comments that Mr. Bedford made much earlier on in
 12   these proceedings and say I concur.
 13               THE CHAIRMAN:  Thank you.  That being
 14   the case, Mr. Grewar will attempt to do some
 15   rescheduling.  Would you comment on that, Mr.
 16   Grewar?
 17               MR. GREWAR:  Yes, Mr. Chairman, there
 18   are, of course, scheduled for tomorrow would be
 19   the presentation by TREE and RCM, Time to Respect
 20   Earth's Ecosystems and Resource Conservation
 21   Manitoba, to be followed by cross-examination.  We
 22   had allocated some additional time tomorrow for
 23   what we thought would be for the conclusion of the
 24   Nature Federation's cross on the EIS.  That
 25   appears that will not be necessary.  So we will
05627
  1   try and schedule some presenters in for the late
  2   afternoon for tomorrow to see if we can make
  3   better use of that time.
  4               I have just been asked the question as
  5   to whether or not there are any registered
  6   participants that remain outstanding for EIS
  7   cross.  I believe there may be.  I need to
  8   confirm.  They are not in the room today, but I
  9   believe one or two of the other parties are not
 10   yet concluded, but I will confirm that certainly
 11   this afternoon for tomorrow morning.
 12               THE CHAIRMAN:  Are there in the room
 13   any who have registered to make a presentation
 14   that haven't had that opportunity at this point?
 15               All right.  Mr. Grewar will contact
 16   these people by phone and we will attempt -- we
 17   will endeavor to use as usefully as possible the
 18   time available tomorrow afternoon.  Mr. Wojczynski
 19   or Mr. Bedford.
 20               MR. BEDFORD:  We have I think it is
 21   three undertakings that we could make use of at
 22   least five or ten minutes.  I will have to go and
 23   get one set of copies.  It will take me two
 24   minutes and I will be back.
 25               MR. SARGEANT:  Could we just add in
05628
  1   our discussions during the brief break, we did
  2   give an undertaking to Rory that when he is
  3   contacting groups to come tomorrow afternoon to
  4   make presentations, we are going to guarantee that
  5   they get on, so we may be sitting beyond five
  6   tomorrow.
  7   
  8             (OFF THE RECORD DISCUSSION)
  9   
 10               THE CHAIRMAN:  I gather you are ready
 11   to come forward with those undertakings that you
 12   mentioned, Mr. Bedford?
 13               MR. BEDFORD:  Yes.
 14               MR. WOJCZYNSKI:  I have three
 15   undertakings that are going back to the 13th of
 16   April, I think that was towards the end of our
 17   last series when CASIL was cross-examining the EIS
 18   panel, and they were related to greenhouse gases
 19   and greenhouse gas reporting.  It was transcript
 20   volume 19, all three are on volume 19, and the
 21   first one was undertaking number 67, which was
 22   related to confirming when the volunteer reporting
 23   for greenhouse gases will be replaced by mandatory
 24   reporting.  And our understanding, and there is in
 25   I think it is called the Gazette, there is
05629
  1   notification that there is a Federal mandatory
  2   requirement for applicable facilities to report
  3   emissions for the calendar year 2004 by June 2005.
  4   This includes the following six types of gases;
  5   carbon dioxide, methane, nitrous oxides, sulfur
  6   hexafluoride, hydroflurocarbons and
  7   perfluorocarbons, and I think there was a bit of
  8   concern --
  9               THE CHAIRMAN:  Would you repeat those
 10   for the reporter?
 11               MR. WOJCZYNSKI:  It would be easier if
 12   I gave her this.  There was a bit of concern, one
 13   of the reasons for the questioning was it was
 14   almost like there was an apparent gap, gee, the
 15   VCR reporting which is going to stop is going to
 16   stop before the mandatory is in place.  That was
 17   the impression that was there.  So what I can
 18   confirm is that the reporting is in 2005, but it
 19   is before the year 2004, so there is no gap in the
 20   reporting of greenhouse gas emissions.  So there
 21   will be, when one system ends the other will
 22   begin.  And I think that was the heart of the
 23   concern from the cross-examination.  So I think
 24   that clarifies that one.
 25               The next one, undertaking number 68
05630
  1   was to advise if nitrous oxide was included in the
  2   greenhouse gases that were analyzed by the Pembina
  3   Institute.  The Pembina Institute report being the
  4   one that we had commissioned regarding greenhouse
  5   gases.  And there was perhaps some concern that it
  6   was understating the Wuskwatim emissions.  So the
  7   information that we have now confirmed is that
  8   while Manitoba Hydro supplied information to the
  9   Pembina Institute with respect to Wuskwatim, such
 10   as how many tonnes of materials are estimated to
 11   use, for instance, steel and concrete, how much
 12   land will be cleared and how much biomass is
 13   affected, Manitoba Hydro did not supply any of the
 14   nitrous oxide information used in the study.
 15   Nitrous oxide was included in several components
 16   of the Pembina Institute analysis such as in the
 17   combustion of fuels.  For instance, when you burn
 18   certain fuels nitrous oxide is an output.  But
 19   that is information they got from standard
 20   scientific and engineering literature, not from
 21   us.  This was included in the Pembina report.
 22               Secondly, there had been some
 23   discussion about the reservoir emissions, and as
 24   you will recall, they are very low compared to
 25   that from thermal generation.  And what I had said
05631
  1   is that the Pembina Institute analysis of the
  2   reservoirs do not include nitrous oxide emissions,
  3   which actually the research in the boreal forest
  4   kind of reservoirs indicates that it actually can
  5   be a sink, meaning the reservoir actually can
  6   reduce nitrous oxides compared to the state of
  7   nature.  What I can confirm is the reduction in
  8   nitrous oxide emissions due to the reservoirs was
  9   not included in the Pembina analysis.  So nitrous
 10   oxide effects were included for the thermal
 11   generation, and it was a major component.  It was
 12   not included for the Wuskwatim ones, which
 13   actually means the analysis is conservative,
 14   because that means that if it had been included,
 15   the Wuskwatim emission from the reservoirs would
 16   be even less.  I think that deals with that
 17   undertaking.
 18               The third one is undertaking 69, and
 19   it was on transcript page 4519, and we have a
 20   package to hand out on that one.  And maybe I will
 21   wait a minute.  In the cross-examination by CASIL,
 22   their counsel had requested that Hydro check the
 23   number of tonnes of CO2 that will be displaced by
 24   Wuskwatim through exporting power to the U.S.
 25   There was a lot of confusion in our interaction,
05632
  1   and the impression was there that we had
  2   overstated the reductions and that there wasn't
  3   actually a reduction, or at least that could have
  4   been the interpretation.  The reference was to EIS
  5   volume 4, section 10, regarding discussion of how
  6   much CO2 will be displaced by Wuskwatim.  The
  7   intended comparison was for the output of CO2 from
  8   Wuskwatim to the amount displaced by Wuskwatim
  9   based on the Pembina Institute study.  The
 10   analysis that was provided by CASIL counsel was
 11   incorrect, as you can see by looking at the
 12   transcripts, because it ended up being that the
 13   comparison that was provided to us by the CASIL
 14   counsel was for the life cycle output of Wuskwatim
 15   comparing that to the figures for the annual
 16   displacement of CO2 by exporting Wuskwatim power
 17   to U.S. customers.  In other words, we were
 18   presented with two sets of numbers, and they
 19   seemed like they were very similar, so Wuskwatim
 20   couldn't be that good.  But the one set of numbers
 21   was all of the CO2 that Wuskwatim will produce
 22   over its 67 or 100 year life compared to one year
 23   of reduction of emissions from a gas turbine.  So
 24   it was very much an apples and oranges comparison.
 25               The Pembina Institute study calculated
05633
  1   that over its 100 year life Wuskwatim would
  2   produce 520,000 tonnes of CO2 or equivalent.  The
  3   EIS stated that the annual CO2 displaced by
  4   Wuskwatim was over 750,000 tonnes.  So even there
  5   in one year Wuskwatim displaced from gas turbines
  6   more CO2 than it would produce over its whole life
  7   cycle.  And so in CASIL's cross-exam of the EIS
  8   panel there was an attempt to net the two figures
  9   on an annual basis to make the point that the net
 10   gain from displacing thermal generation is not
 11   that great.  I think I probably made the point,
 12   and I don't suppose I have to read this whole
 13   thing.  If you go to the back there is a table
 14   that gives the calculations and details it out.
 15   And these numbers are the ones that are both in
 16   the NFAAT and in the Pembina Institute Report, and
 17   I don't think we need to take people's time on it.
 18   There is one slight confusion, in one case we use
 19   an 85 percent factor and the Pembina Institute
 20   used 87, that is why we have the different
 21   capacity factors, but in the end it makes a very
 22   small difference.  So, hopefully that clarifies
 23   the greenhouse gas emission issues and confirms
 24   that Wuskwatim would produce a vast reduction in
 25   greenhouse gases, and that Wuskwatim would produce
05634
  1   about two orders of magnitude, or in the order of
  2   100 times less CO2 than even the natural gas
  3   generation as an alternative.
  4               We have done a lot of work in the area
  5   of reservoir emissions of confirming this kind of
  6   information.  All of the details are not presented
  7   here because we didn't think it was that
  8   contentious.  But this is sort of the tip of the
  9   iceberg in terms of the work and the information.
 10   We hope that clarifies.  Thank you.
 11               MR. GREWAR:  Mr. Chairman, if we might
 12   enter this item, undertaking MH-69 from CASIL, or
 13   the request originating from CASIL confirming the
 14   number of tonnes that Wuskwatim will result in
 15   reduction of greenhouse gases, this would be
 16   exhibit number MH/NCN 1036.
 17   
 18               (EXHIBIT MH/NCN-1036:  Answer to
 19               undertaking MH-69, request originating
 20               from CASIL, confirming the number of
 21               tonnes that Wuskwatim will result in
 22               reduction of greenhouse gases)
 23   
 24               THE CHAIRMAN:  Thank you.  You have
 25   another undertaking that you want to file now?
05635
  1               MR. DAVIES:  I'm responding in regards
  2   to undertaking number 81.  I was asked yesterday
  3   to provide the definition of Manitoba
  4   sustainability indicator initiative.  And I have
  5   the definition from the document.  The purpose of
  6   the Manitoba sustainability indicators and
  7   reporting initiative is to establish a set of
  8   indicators for sustainability reporting that will
  9   provide information on the key vital signs of
 10   Manitoba's environment, economy, human health and
 11   social well-being, and discuss the linkages and
 12   interdependencies between these areas.  This
 13   information is intended to provide the basis for
 14   making better informed, wholistically based
 15   decisions to ensure that future generations have
 16   the same or better opportunities we do.  It will
 17   aid in benchmarking, as well as monitoring trends
 18   and determining progress towards established
 19   targets.
 20               THE CHAIRMAN:  Thank you.
 21   Mr. Bedford.
 22               MR. BEDFORD:  I can alert you that you
 23   may recall Mr. Cormie gave an undertaking to Ms.
 24   Phare, and this relates to conversion rates and
 25   the augmented flow program.  At present I
05636
  1   understand Mr. Cormie will be here on Friday for
  2   the purpose of answering that undertaking.  There
  3   was another undertaking that you asked of us to
  4   compare the summary of understandings between NCN
  5   and Manitoba Hydro with arrangements that have
  6   been made in the Province of Quebec.  I actually
  7   had that one ready yesterday, if time had
  8   permitted.  Someone has looked at it and requested
  9   a modest change and the change is being made
 10   today.  So I anticipate we will have that ready
 11   tomorrow.
 12               THE CHAIRMAN:  Thank you.  Mr. Abra.
 13               MR. ABRA:  It was just that
 14   undertaking that I was going to raise,
 15   Mr. Chairman, but Mr. Bedford indicated that we
 16   would have it tomorrow, so that is fine.
 17               THE CHAIRMAN:  Any other undertakings
 18   that have to be filed?  Seeing none, any other
 19   procedure or presentations?  Seeing none, we shall
 20   adjourn and reconvene tomorrow at 9:00 o'clock.
 21   Thank you.
 22   
 23               (ADJOURNED AT 2:55 P.M.)
 24   
 25   
05637
  1