Hydro review slams NDP's handling of Bipole III, Keeyask but opposes privatizing Crown corp

Failings in government oversight, incomplete analysis of projects and political stubbornness helped lead to costly overruns on two Manitoba Hydro megaprojects, says an independent review released on Friday.

Despite its scathing criticism of how the Keeyask generation project and the Bipole III transmission project were handled by the then-NDP provincial government, the report recommends against privatizing the Crown corporation.

Critics say, though, the report suggests a "piecemeal sale approach" that could see the public utility lose control of some of its business to the private sector.

"I think that utilities like power companies are well-served in the Crown corporation structure, where the profit motive is not necessarily the driving function, but rather service at an affordable cost is the driving function," former Saskatchewan premier Brad Wall said following the release of the report.

"In the case of an electrical company, it's foundational. It's essential for providing safe shelter for Manitobans and the ability to live."

The economic review of the two hydro projects, conducted by Wall, contains 85 findings and 69 recommendations addressing a broad range of issues.

It also offers recommendations regarding Manitoba Hydro's future and its relationship with the Public Utilities Board and the Manitoba government.

Recommends selling off subsidiaries

Though he endorses public ownership of Hydro, Wall said the corporation should be mandated to focus on its core mission of providing electricity in an affordable and reliable way and purge any subsidiaries or divisions that don't align with that.

When a corporation grows and becomes involved in various activities, it sometimes loses its focus, he said.

Selling off some of those unaligned subsidiaries would provide proceeds that could be used to pay down the debt.

"I think Manitobans would like the government and Manitoba Hydro to consider every alternative that might mitigate the need for rate increases," Wall said on Friday.

The report does not specify any particular divisions but earlier this month, Hydro announced it plans to wind down the international consulting part of its commercial branch.

Bipole III and Keyask will deliver new generation to the southern grid and in time there will be value, the report says.

"However, they were not needed when approved and have significantly eroded Manitoba Hydro's financial health."

Hydro officials and the NDP overestimated the potential for export sales and the NDP, focused on getting the projects completed, did little to prevent costs from spiralling, the report says.

"The commissioner saw no evidence of interest or proactive outreach on the part of the former elected government of Manitoba to provide oversight, accountability and overall leadership on the Keeyask and Bipole III projects," Wall's report says.

"As the costs of the projects grew and the potential impact on Manitoba Hydro became apparent, there is no evidence that the former government engaged with the [Hydro] board or provided any direction."

The case for the projects centred on the export case and the "Manitoba's oil" narrative — that hydroelectricity could do for Manitoba what oil had done for Alberta — but energy prices softened as the use of natural gas and fracking expanded in the United States.

Lack of government oversight: review

The two projects were built over the last 15 years and Manitoba Hydro's debt has tripled in that time to more than $23 billion.

Effective Hydro management in recent years has mitigated further fiscal deterioration related to the projects, Wall said.

The Keeyask generating station, which started producing electricity last week after nearly seven years of construction, was originally projected to cost $6.5 billion and expected to be in service by November 2019. In March 2017, Hydro revised the cost estimate to $8.7 billion.

The Bipole III transmission line was completed in 2018. The cost for the project was pegged at $2.2 billion in 2007. In its 2018 annual report, Hydro said the total estimated cost was $5.04 billion.

Wall was hired by Premier Brian Pallister's government in 2019 to probe the cost overruns on the projects. The cost of the review was about $1 million, significantly less that the $1.8 million budgeted for it.

The review found that, following approval of the projects, the government did not exercise "any identifiable oversight" or consider the impacts of the projects on the financial circumstances of the province.

There was no interaction, presentation, discussion or document that shows input from the Treasury Board secretariat or the Department of Finance was ever sought or heard in the planning or execution of the projects, Wall's report says.

"The incomplete analysis of the projects, driven by government endorsement, a construction contract that transferred construction risk to Manitoba Hydro, and a lack of effective project oversight at the corporate level led to project delays and significant cost overruns," the report says.

Bipole III, the transmission line to move the power generated at Keeyask, was one of several possible solutions to address the reliability issue facing Manitoba's electric system, but no independent review was carried out to determine which of the options was the best solution at the lowest cost, the report says.

In the end, Bipole III's route down the west side of the province was an unnecessarily costly and inferior option to a shorter route on the east side, the report says.

The shorter route would have reduced the exposure to outages and could also have been built without requiring expensive converters, which added at least $1.2 billion to the cost.

"Political considerations were more important than economic considerations in the choice of Bipole III West, which led to a $4.77-billion project that was not the most cost‐effective way to achieve reliability," the report says.

Bipole III East was effectively vetoed by the former government because of the NDP's concerns about opposition by some First Nations as well as a U.S. environmental organization, which opposed the route proceeding through a proposed UNESCO World Heritage site.

Neither of those reasons were justified, the report says.

Instead of exploring equity partnerships with Indigenous Peoples on the east side of Lake Winnipeg — which Wall says would have helped reduce or eliminate Indigenous opposition — the government cited Indigenous opposition in choosing the longer, western route for the transmission line.

As for the environmental concern regarding the east side route, that was undermined by the support for a road later built through the same area, the report says.

None of the documents Wall received included any evidence that the construction of Bipole III through the area would have nullified the achievement of a UNESCO World Heritage site designation, it says.

Hydro's massive development projects "put undue stress on Manitoba ratepayers," said Gloria Desorcy, the Manitoba executive director for the Consumers' Association of Canada.

"We argued that Hydro's push to build on such a grand scale was primarily to service the export market and American customers, not Manitobans, and that venture was risky," she said in a statement. "We are gratified that the Wall report reinforces that conclusion."

Recommends public-private partnerships

Wall's report makes many recommendations, including greater oversight by the provincial cabinet of major projects at Manitoba Hydro.

It recommends Hydro's capital expenditures get Treasury Board approval prior to going ahead and that an independent review process be used for any large projects to assess the financial implications on the province and taxpayers.

"The commissioner is of the view that this IRP [independent review process] should be developed through a public process involving independent experts and overseen by an independent regulator such as the Public Utilities Board, rather than by Manitoba Hydro alone," Wall's report states.

The PUB's review process should ensure that projects are not recommended to proceed unless they determined to be the best solution for the province, based on the available information, it adds.

Wall also strongly suggested the province and Hydro consider public-private partnerships for any future high‐value capital projects.

"Under a P3 model, the allocation of risk and cost overruns to the private partners on a project … may make this option more favourable than the classic design [and] build [your] own model," the report says.

A spokesperson for Manitoba Hydro said the corporation is reviewing the Wall report, but is not ready to comment on it publicly.

"We look forward to discussing its recommendations with government. The report is extensive and will take some time to review," the spokesperson said in an email.

'Smoke screen' for privatization: NDP

Manitoba Crown Services Minister Jeff Wharton released a statement on Friday, saying the review "confirms the former government directly interfered to ensure that these projects would conform to their preferences, rather than economic considerations and the clear recommendations of utility and environmental experts."

He said the Progressive Conservative government will review the findings, and "enact clear and transparent policies" to "ensure any future projects are both accountable and demonstrate value to Manitobans."

Opposition NDP Leader Wab Kinew called the report a package of contradictions.

While Wall says he's not calling for privatization, he also recommends Hydro "break off pieces of its business and sell it off to the private sector," Kinew said.

The review supports public-private partnerships "that would see Manitoba Hydro give up control of parts of its business to private companies," he said.

Kinew also said the report expresses support for Bill 35, "a piece of legislation that would allow Hydro rates to be set by cabinet decree rather than determined by the PUB."

Desorcy of the Consumers' Association of Canada is concerned that increased oversight of spending and capital projects by the Treasury Board and provincial government could lead to unwelcome government intervention in Hydro's decision-making.

Adrien Sala, the NDP critic for Manitoba Hydro, called the report "completely and totally lacking in independence," saying reviews such as this would typically be produced by a judge or an expert in the field, not a political ally.

Wall led the right-of-centre Saskatchewan Party from 2004 to 2018. 

The report is a "smoke screen" for further privatization and raising of electricity and natural gas rates, Sala said.

"This report is, frankly, a sham."

'Dark path' toward deregulation: CCPA

The Canadian Centre for Policy Alternatives also spoke out against the report on Friday, echoing the NDP's privatization warning.

"Manitoba legislation requires a referendum to privatize Manitoba Hydro, but it does not prevent the piecemeal sale approach currently underway, which is along the lines of how BC Hydro sold off assets to private companies," said Molly McCracken, director of the centre's Manitoba office.

"Manitoba is following the playbook of BC Hydro, from where its current CEO hails."

"Mountains of evidence" point to problems with public-private partnerships on cost and risk, McCracken said. She cited a report from the auditor general of Ontario, who found the partnerships cost the province $8 billion more than if the projects had been publicly financed and operated. 

"It is surprising after the tragedy of the complete failure of a privately run and unregulated energy system in Texas, that Wall would recommend steps that could take Manitoba down that dark path," McCracken said.