US embassy cable - 03OTTAWA412

UNCLAS SECTION 01 OF 04 OTTAWA 000412 
 
SIPDIS 
 
STATE FOR EB/ESC (MCMANUS AND ERVITI), WHA/CAN 
(MASON AND RUNNING), OES/EGC (REIFSNYDER AND 
DEROSA) 
WHITE HOUSE FOR NSC (SAMMIS and BROCK), OVP 
(KNUTSON) AND EOP (MCNALLY) 
DOE FOR S (HUDOME), IA A/S BAILEY, PUMPHREY, DE 
VITO AND DEUTSCH 
 
E.O. 12958: N/A 
TAGS: ENRG, SENV, CA, Energy, Manitoba 
SUBJECT: MANITOBA: NEW ELECTRICITY OPTIONS 
 
THIS IS A PRODUCT OF AMERICAN PRESENCE 
POST WINNIPEG. 
 
1.  Summary and introduction.  The Province of 
Manitoba and its state-owned hydroelectricity 
utility, Manitoba Hydro, seek to greatly expand 
hydroelectricity exports to the United States 
from the already considerable level of 8.8 
terawatt hours, with a value of C$495 million 
per anum.  Officials estimate that an 
additional 5000 mw of electricity - equal to 
its total existing capacity - could be 
developed in Manitoba without significant local 
political, legal or social disruption.  Most of 
this new capacity could be made available for 
the U.S. market, helping to guarantee energy 
security for U.S. consumers from a close-by, 
clean, secure and relatively inexpensive source 
of power.  Two challenges have prevented this 
from coming to fruition: 1) A lack of 
transmission capability to get the electricity 
to the large U.S. markets of the Midwest, and 
2) The current uncertainty and price 
instability caused by industry restructuring in 
the United States and Canada, which makes 
Manitoba Hydro and outside investors reluctant 
to make the large capital investment in 
hydroelectricity infrastructure.  End Summary 
and Introduction. 
 
2.  Manitoba sees tremendous potential in the 
vast demand for energy in the U.S. Midwest. 
Chicago and Milwaukee are physically much 
closer to Manitoba than Ontario's industrial 
heartland, cutting down the distance required 
to transport the electricity, and the demand is 
far greater than in Manitoba's western 
neighbors of Saskatchewan and Alberta.  In a 
meeting with Embassy Energy Officer and 
Winnipeg Econ Assistant, Manitoba Hydro 
President and CEO Bob Brennan indicated that 
his company has estimated that Wisconsin alone 
will need close to 7000 mw of power in the next 
few years, an amount greater than all of 
Manitoba's potential development.  (Note: 
Medium-term in the construction of 
hydroelectric facilities means at least 10 
years). 
 
"Tell us what we have to do" 
--------------------------- 
 
3. Manitoba is clearly very interested in 
supplying new demand in the U.S. Midwest, but 
there is no way to get the power there. 
Manitoba Energy Minister Sale put it best when 
he said, "Tell us what we have to do."  The 
lack of east-west transmission capability in 
the upper Midwest is one of the most 
significant problems Manitoba faces in 
exporting large quantities of power to the 
United States.  The energy Minister explained 
that the North American electricity market is 
divided into largely self-sufficient clusters, 
with only a minimum amount of interconnection 
between them.  The upper Midwest (including 
Minnesota and the Dakotas) is one "cluster" 
while Wisconsin, Illinois and Indiana is 
another.  Interconnectivity is weak between the 
two, and as a result it is impossible to move 
electricity - in any great quantities - to 
Milwaukee and Chicago.  Manitoba Hydro began 
full operations in February 2002 with the 
Midwest Independent System Operator (MISO) 
organization, permitting open wholesale 
transmission access to the Midwest market. 
Although MISO holds out the promise of expanded 
access to Midwest markets, Manitoba is 
disappointed with the lack of any progress to 
date in expanding transmission facilities 
between the upper Midwest (Minnesota and the 
Dakotas) and the adjacent markets to the south 
and east. 
 
4.  Manitoba Hydro has been exporting 
electricity to the United States since 1970, 
and consistently ranks among the top three 
exporters of electricity among Canadian 
provinces (behind Quebec and British Columbia), 
exporting over 8.8 terawatt hours in 2001-2002. 
Currently, Manitoba Hydro has nine long-term 
export trade agreements with six electric 
utilities and numerous short-term agreements 
with more than 30 electric utilities and 
marketers in the Midwestern United States, as 
well as the Canadian provinces of Ontario and 
Saskatchewan.  In July 2002, Manitoba Hydro 
contracted with Northern States Power (Xcel 
Energy) of Minnesota to sell 500 megawatts of 
power over 10 years, beginning in 2006, which 
replaces a similar 12-year deal between the two 
utilities that expires in 2005. 
 
Kyoto - Fiasco to Some, Opportunities to Others 
--------------------------------------------- -- 
 
5.  Although Canada's petroleum industry in 
Alberta and Saskatchewan, and its manufacturing 
heartland of Ontario, stand to be hurt by the 
emission control measures likely to flow from 
GOC implementation of Kyoto, Manitoba sees 
opportunities.  The province views itself as 
having a natural advantage in its "clean" 
surplus hydro-generated electricity and in 
developing peripheral energy industries in 
ethanol - to capitalize on Manitoba's surplus 
of feed wheat - as well as an innovative 
proposal by the Ottawa-based Iogene company to 
derive ethanol from straw.  The GOM is also 
promoting development of hydrogen and wind 
energy sources, which it views as complementary 
to its hydro resources. 
 
6.  Manitoba's left-of-center New Democratic 
Party (NDP) government has been a staunch 
supporter of the Kyoto Accord for a number of 
years.  Manitoba Premier Gary Doer has 
consistently been the Prime Minister's 
strongest advocate among the Premiers for 
Canada's ratification of the deal.  Manitoba 
hopes to leverage the resulting goodwill into 
GOC support for a C$1 billion transmission line 
that would allow Manitoba to sell surplus 
hydroelectricity to Ontario, Canada's 
industrial heartland.  (Note: There is 
currently no large-scale transmission 
capability between Manitoba and southern 
Ontario). This possibility has been raised 
repeatedly in recent years, and Manitoba Energy 
Minister Tim Sale traveled to Ottawa in January 
to press the GOC on the issue.  Prime Minister 
Chretien has at times expressed interest in 
this idea, but his preference is a privately 
financed new north-south connection to the U.S. 
 
7.  Although as a government-owned utility 
Manitoba Hydro is exempt from taxation, the NDP 
government has increasingly turned to the 
utility as a revenue source, tapping it for 
C$354 million this year in fees, services 
charges, and a special "dividend" payment to 
help the government balance its budget.  The 
NDP government has given strong signals that it 
plans to build new generating facilities in 
northern Manitoba, but must secure additional 
export markets with long-term contracts to 
justify the capital expense. The province has 
also indicated a preference for building 
smaller projects like Wuskwatim (200 mw) or 
Gull (600 mw) before the large-scale Conawapa 
Dam (1400 mw).  The Wuskwatim project will cost 
about C$1 billion and take at least 10 years to 
build. 
 
 
 
Environmental Concerns Are Muted 
-------------------------------- 
8.  Manitoba Energy Minister Sale admitted to 
us that the hydro-electric generating 
facilities constructed in the 1960s were built 
too big and caused extensive environmental 
damage to traditional Indian hunting and 
fishing grounds in northern Manitoba.  One of 
the affected bands, Cross Lake, continues to 
fight a public relations battle with Manitoba 
Hydro, especially in the Minnesota market, even 
after Manitoba Hydro provided Cross Lake C$70 
million in compensation. Manitoba Hydro has 
settled with the other four bands that were 
affected by the flooding and the vast majority 
of Manitoba Indian bands are supportive of 
hydro-electricity development.  Minister Sale 
speculated that the Cross Lake band is being 
"used" by U.S. environmental groups who - he 
says - oppose any and all hydro-electricity 
expansion as a matter of principle.  He 
believes that Canadian environmental groups 
have more of a mixed reaction to the Cross Lake 
concerns, and he is confident that the smaller 
projects like Wuskwatim could proceed with 
little effective opposition from domestic 
groups. 
 
What next? 
---------- 
 
9.  Manitoba Hydro has immense hydro- 
electricity potential that could be developed 
with relatively little environmental impact. 
Even the construction of hundreds of miles of 
transmission lines from the remote northern 
generating stations to the U.S. border raises 
few eyebrows here.  Manitoba Hydro officials 
are aware of immense opportunities for sales of 
hydroelectricity in the United States, but have 
not had significant success in expanding beyond 
their relatively small base of supplying power 
to several upper Midwest states.  In addition 
to the limits imposed by existing transmission 
capacity, the partially de-regulated U.S. 
electricity utilities are not interested in the 
long-term contracts Manitoba Hydro would need 
to justify the construction of new dams or 
enhanced transmission cables. 
 
10.  Currently, Manitoba hopes that its support 
for the Kyoto Accord will result in a federally 
funded transmission line to take Manitoba's 
electricity to Ontario - replacing "dirtier" 
forms of energy generation there - but the 
federal government has made no commitment. 
Manitoba sees some opportunities for exports to 
Canada's western provinces, but the quantities 
are relatively small, and again the 
transmission lines are inadequate to handle 
much more traffic. 
 
Comment 
------- 
 
11.  Manitoba is committed to developing its 
hydroelectric generation potential and will 
ultimately find markets for it output, given 
its low cost of generation and relatively low 
barriers (compared to other jurisdictions) to 
transmission line construction.  The question 
that remains is who will get it.  There is an 
open window of opportunity for border states of 
the U.S. Midwest to work with Manitoba to 
overcome obstacles posed by transmission 
limitations and industry restructuring - and 
get a guaranteed supply of potentially low-cost 
electricity from a nearby source.  However, if 
American utilities miss this opportunity, 
Canadians will find a way to get Manitoba's 
abundant and inexpensive electricity to the 
Canadian heartland of Ontario where the 
appetite is equally large. 
CELLUCCI