3. That this is a Canadian issue, and one that can be best addressed through the Northern Flood Agreement.

The shareholders response to these is as follows:

1. Is Manitoba Hydro is "renewable" under Minnesota (MN) state law?

The MN renewable energy definitions are confusing because it is defined two different ways within the same document. The actual language is as follows:

MN statue 216B.1691

"Subdivision 1. Definitions. (a) 'Eligible energy technology' means:

(1) an energy technology that generates electricity from the following renewable energy sources: solar, wind, hydroelectric with a capacity of less than 60 megawatts, or biomass; "

MN statue 216B.2422

"Subdivision 1. Definitions. (a) For the purpose of this section, the terms defined in this section have the meanings given them.

(c) 'Renewable energy' means electricity generated through use of any of the following resources:

1. wind;
2. solar;
3. geothermal;
4. hydro;
5. trees or other vegetation; or
6. landfill gas"

So, while hydro is listed as renewable, it is also further defined as being renewable if it is under 60 MW. Manitoba Hydro's operations vary from 100 - 1200 MW. Xcel's annual report itself recognizes this as its energy supply graph (page 5) list Manitoba Hydro (4%) separately from its Renewables category (2%) which it classifies as "includes wind, hydro and biomass."

You may recall that last week I emailed you two articles that support the shareholders interpretation of this 'renewables' definition.. They were "U.S. 'Green' Energy Plan Threatens Canadian Power " and "Big Hydro Producers Could Miss Out in U.S." (they are also online www.proxyinformation.com).

Given the above, and at the risk of becoming too legalistic, let's apply this directly to Xcel's statement. The second to last paragraph in Xcel's opposition statement goes like this:

Xcel:

"In addition, the proposal implies that only 1% of our existing energy comes from renewable resources, which is misleading and incorrect. The Chairs of the Minnesota legislative committees have clearly stated that under Minnesota definition of renewable energy. Therefore, any policy that would limit our ability to contract with Manitoba Hydro would reduce our use of renewable energy. The proposal clearly misstates the facts and as such misleads shareholders."

Unfortunately, it is Xcel that is clearly misstating the facts and misleading shareholders.

First, Xcel claims shareholders are talking about its existing supplies when the shareholder proposal is clearly referring to the new regulations and renewable definitions that are to be applied to future contracts and even cites the state laws related to this (as described above).

The shareholder resolution states: "WHEREAS electric industry restructuring has led several states to establish mandatory standards for renewable energy content, and that that less than 1% of Xcel's existing energy supply will qualify under the Renewable Energy Objectives established by 2001 Minnesota law (Statutes 216B.1691)."

Secondly, the "Chairs of the Minnesota legislative committees" did define 'renewable', but in the broader sense, not in relation to Manitoba Hydro, and that was before MN statue 216B.1691 classified renewable hydro as less than 60 MW.

Third, Xcel's contention that limits to Manitoba Hydro contracts would limit their renewables simply makes no sense. Contracts with Manitoba Hydro have no impact on contracts for wind, biomass or other renewables. And as already proven above Manitoba Hydro does not meet the renewable definition and Xcel itself recognizes this and list it separately in their annual report.

2. Has the MPUC addressed the issue of Manitoba Hydro's impacts on the PCN

The MPUC received 'comments' on all the companies involved in the bidding process. The PCN comments identified a number of concerns with Manitoba Hydro, particularly its ongoing failure to address environmental and socioeconomic impacts of the projects, but no evidence was allowed to be presented.

A closer review of the MPUC order following the hearing (as opposed to the short excerpt in Xcel's opposition statement) shows that the MPUC did not feel that they had to further investigate environmental and socioeconomic impacts because a). a formal challenge to the MPUC was premature at that time since no bid had been decided upon and no contract completed, and b). the Northern Flood Agreement (NFA) was responsible for addressing these issues (our whole point, of course, is that these were not addressed).

If and when a contract between Xcel and Manitoba Hydro is actually approved, a formal court challenge against MPUC and Xcel will be started, and a contested case hearing in which full evidence can be presented and full cross examination of witnesses allowed, will be sought by PCN. Given that there is ample evidence that ongoing failure to honor legal obligations under the NFA has resulted in ongoing environmental and socioeconomic impacts, and given that Minnesota law requires consideration and weighing of such impacts, there is every likelihood that the court will ask the MPUC for a proper review of environmental and socioeconomic impacts.

Minnesota law requires the MPUC to quantify and set a range of environmental costs (and include other external factors such as socioeconomic cost), to give preference to renewable energy, and to apply economic and social cost even if the utility gets a bid from an outside supplier.

The actual language is:

MN statue 216B.2422

"Subd. 3. Environmental costs. (a) The commission shall, to the extent practicable, quantify and establish a range of environmental costs associated with each method of electricity generation. A utility shall use the values established by the commission in conjunction with other external factors, including socioeconomic costs, when evaluating and selecting resource options in all proceedings before the commission, including resource plan and certificate of need proceedings."

and

"Subd. 4. Preference for renewable energy facility. The commission shall not approve a new or refurbished nonrenewable energy facility in a integrated resource plan or a certificate of need, pursuant to section 216B.243, nor shall the commission allow rate recovery pursuant to section 216B.16 for such a nonrenewable energy facility, unless that utility has demonstrated that a renewable energy facility is not in the public interest."

and

"Subd. 5. Bidding; exemption from certificate of need proceeding. (a) A utility may select resources to meet its projected energy demand through a bidding process approved or established by the commission. A utility shall use the environmental costs estimates determined under subdivision 3 in evaluating bids submitted in a process established under this subdivision."

3. Is this just a Canadian issue?

There are two ways of looking at this.

a). The first is that regardless of where a company has its headquarters - when its overseas operations or suppliers present legal, financial, and reputational risk to the company - then it is the company's fiduciary responsibility to deal with it.

Some of Xcel's legal liabilities are:

Xcel will face a court challenge that the Public Utilities Commission did not consider environmental, socioeconomic and reliability, risks and costs associated with its proposed Manitoba Hydro contracts.

Xcel may be legally liable, under economic torts of inducement to breach contract and/or economic interference, for buying power from Manitoba Hydro when Xcel knows, or ought to know, that power is being produced in violation of Canadian treaty and Constitutional law.

Xcel may be joined as a defendant or sued in related actions for Manitoba Hydro exports that are subject to a trade challenge under US anti-dumping laws, and/or WTO subsidy laws for unfair subsidization (failure to internalize environmental and socio-economic costs ) .

As for reputational risks - Xcel's purchases from Manitoba Hydro have resulted in it becoming the target of consumer campaigns. This began last year when the Quakers organized weekly protest outside of Xcel's headquarters in Minneapolis. This has continued to expand to the point that Xcel is, at this very moment, the target of a radio and newspaper ad campaign in Minnesota. The text of the radio ad is below;

JustEnergy 60 Second Spot - KCCO

"Our families don't want Canadian hydropower that devastates people and the environment. Xcel Energy purchases approximately 40% of Manitoba Hydro electricity and sells to its customers. Manitoba Hydro's dams have destroyed millions of acres of fragile forest while causing erosion to 3000 miles of shoreline. Dam projects have negatively affected the people of Cross Lake Manitoba. Increased unemployment, alcoholism, and suicide rates have resulted from damage caused by flooding. The families of Cross Lake Manitoba pay the price and Minnesota families get the benefits of electricity- Is that good for business - Is that good for our families? Our families want to purchase clean renewable electricity such as, wind, solar, and fuel cells: that's smart business, and that's good for our families. Call Xcel Energy CEO Wayne Brunetti at 1-800-328-8226 and ask him to get Manitoba Hydro to clean up its mess and start providing our families with clean renewable energy! Learn more by visiting JustEnergy.org. -- Protecting people and the environment."

KCCO is considered the local Republican station and the one that people tune in to listen to "Lake Woebegone." Meanwhile, the Sierra Club is about a launch its own Xcel ad campaign in Colorado (Xcel's second main area of operations). And while the environmental groups are more likely to aggressively target Xcel, the religious community has been at the forefront of the criticism aimed at Xcel, and that too is growing. This is evidenced by the fact that the Interfaith Center on Corporate Responsibility has identified Xcel as one of its prime campaigns in the category of "environmental racism" and recently sent out an 'alert' to its entire membership about the upcoming shareholder vote.

Another legal/financial liability, is that Manitoba Hydro's own legal liabilities pose a risk to Xcel. Manitoba Hydro has already paid many millions in damages. In a recent single lawsuit alone, it was ordered to pay for an all-weather bridge ($22 million to construct) and for the costs to PCN society and economy for failure to build this bridge years ago as it was obligated to do (this latter amount is expected to be about $40 million to $50 million). That is but one lawsuit. Manitoba Hydro faces another 300+ lawsuits for its failure to implement the NFA. These could total hundreds of millions of dollars in damages/ settlements (potentially billions if the recent Quebec Hydro settlement is a precedent) and that if it loses these lawsuits the costs will have to be passed on customers like Xcel.

b). The second argument is Xcel's contention that the Northern Flood Agreement (NFA) is the right way to deal with this issue.

In an ideal world this would be true. And all PCN is asking is that the NFA be honored and implemented as intended. Yet the crux of this issue is that the NFA has not been implemented.

Evidence of failure to implement the NFA includes the significant lawsuits already won by PCN under the NFA, including one in which the court found Manitoba Hydro liable for death, and another in which the court of appeal found Hydro liable for significant accumulating social and economic costs of PCN for serious delay in building an all-weather road. PCN has a number of community-wide lawsuits (akin to class action suits) outstanding, including for liability for a suicide epidemic, loss of employment of PCN citizens, and a $100 million lawsuit regarding contaminated drinking water. In total, there are over 300 lawsuits outstanding. PCN has won virtually all of them to date.

Further evidence of failure to implement the NFA and the perpetuation of significant environmental and socioeconomic harm, may be found through a number of authoritative sources such as the Report of Auditor General of Canada, Report of Government of Canada, Department of Fisheries and Oceans, Aboriginal Justice Inquiry, the Royal Commission on Aboriginal Peoples, Cross Lake Environmental Impact Assessment Study, Commission of Inquiry into Manitoba Hydro, and the recent Inter-Church Inquiry into Northern Hydro Development which found in 2001 that the hydro project constituted an "ongoing ecological, social and moral catastrophe". All such official and quasi-judicial inquiries have heard much evidence before rendering their findings.

4. What is the relationship between CEO Brunetti and the PCN?

The first paragraph of Xcel's opposition statement implies that they are actively engaged in addressing this issue. Xcel CEO Wayne Brunetti went to visit the PCN in July 2001. At that time, and then again when he meet with shareholders in October 2001, Mr. Brunetti asked what the PCN wants Xcel to do. Both times the PCN sent him detailed replies asking the company to develop a set of energy purchasing 'standards' . The first he did not answer, and the second he rejected.

Below is an excerpt from a letter sent just last week by the PCN representative Tim Rudnicki to Xcel VP Dave Sparby on this very issue.

"April 1, 2002

Dear Mr. Sparby:

During our telephone conversation on Friday, March 29, 2002, you raised several issues I would like to further discuss with you. For instance, you said to me that Xcel Energy CEO and Chair Wayne Brunetti "has a good working relationship with the Chief" of the Pimicikamak Cree Nation (PCN) and that Xcel is working with PCN to resolve the issues PCN has brought forward in regard to Manitoba Hydro.

With respect to Mr. Brunetti's working relationship with the Chief, there have been no meetings or conversations between the Chief and Mr. Brunetti since Mr. Brunetti's trip to Pimicikamak territory last July. Further, there has been no correspondence between them except for the letter the Chief sent to Mr. Brunetti last October. Can you clarify for me what you meant by working relationship?

As for your statement that Xcel is working to resolve issues PCN has brought forward regarding Manitoba Hydro, what is it that Xcel has done to date in trying to address the issues and solutions presented by PCN? I am aware that during Mr. Brunetti's visit to PCN last July, and again when meeting with shareholders, he asked what PCN wants of Xcel. Both times PCN provided Mr. Brunetti with detailed information and, following a great deal of research, provided Xcel with a carefully structured and phased standards solution. To date Xcel, through your letters to and conversations with Kate Kempton, has rejected this solution and all its components and steps. If there are efforts by Xcel beyond this, please inform me so that I can more fully inform PCN.

Based on correspondence between you and Kate Kempton (lawyer for PCN), PCN proposed that Xcel adopt and apply standards to the significant amount of the Manitoba Hydro product Xcel is buying. These "environmental and human rights" standards closely parallel standards of the Federal Energy Regulatory Commission and other state and federal right-to-know laws that address environmental and human rights issues. They are designed to protect both PCN and Xcel, and its shareholders and consumers, against what are to date unassessed, unmeasured and unaddressed risks as well as the costs and harms that occur when those risks are realized through an economic, environmental, legal or other event."

As can be seen, Xcel and PCN have vastly different impressions of how their relationship is progressing. It is correct that Xcel proposed some undefined assistance with small biomass projects, and later proposed a 'stakeholders' group - although the group had no set goals or format, and was comprised of several organizations that PCN is already facing in legal challenges.

And on a different but related topic (in terms of 'good faith' dialogues), I personally called Xcel VP Dave Sparby and Corp Sec. Cathy Hart around Xmas and offered to withdraw the resolution if they gave us anything concrete to work with. I even asked them when their proxy printing deadline was so I knew what timeframe we were working with and could have a deal done before they went to print. They politely said 'we'll see' and never got back to me.

5. Is Manitoba Hydro is a reliable source of energy?

Xcel's opposition statement refers to the reliability of Manitoba Hydro and that if the proposal is adopted it may be "possibly endangering reliability for our customers."

Included below is part of a study by McCullough Research that identifies some key reliability risk posed by Manitoba Hydro to Xcel.

C. Reliability and Security

1. Xcel Itself Seems Concerned About Manitoba Hydro Reliability For the last two years, Xcel has been attempting to negotiate a power purchase agreement with Manitoba Hydro, but has been unable to finalize the agreement. In explaining this unanticipated delay, Xcel has indicated "[n]egotiations have been slow" due to the "type of product being provided", and the "operating risk of Manitoba Hydro's system" and that there are "significant risks and issues" associated with these negotiations.[1]
2. The California Energy Crisis Provides Important Lessons About Reliability Risks

   The recent crisis in California's electricity markets raises significant questions about the reliability of out-of-state contracts. When California entered the crisis, its system operator routinely interrupted scheduled contracts (where California was to supply electricity to other markets) on an emergency basis. With emergencies announced almost continuously from December 2000 through March 2001, these interruptions effectively gutted long term contracts between California and the Pacific Northwest. No financial recovery for such interruptions has taken place because recovery requires approval by the federal judge overseeing the bankruptcy of Pacific Gas and Electric -- approval which has not been forthcoming.

   The situation in the upper Midwest has some worrisome parallels with that in California. MAPP (Mid-Continent Area Power Pool, the electricity reliability council that includes Minnesota and Manitoba) has recently adopted an Regional Transmission Organization based in large part on the California model (which may be highly problematic).

   Manitoba Hydro's relationship with Xcel is complex and counter-intuitive. Manitoba essentially guarantees its exports to Minnesota through contracts, but part of that guarantee relates to the fact that Minnesota is supposed to sell power to Manitoba in times of drought or other emergency situations in Manitoba. There are two problems with this. First, because of the weather and geographic proximity between Manitoba and Minnesota, there may well be a true energy shortage in both areas at the same time. That means that it would be very difficult for Manitoba to deliver on its guarantees to Minnesota under a contract that provided that in such times Minnesota would deliver power to Manitoba. Second, it seems that Manitoba Hydro intends to rely on the spot market (outside of contracts) to get power in these situations from Xcel (and others). This seems a faulty assumption at best. If the worst were to happen, as it did in regard to California, then Manitoba Hydro may not be able to buy from Minnesota utilities on any market, and Manitoba may just breach contracts, as happened in California.

3. Reliability and Security Risks With Manitoba Hydro

   The information above is indicative of major underlying issues. There are five major factors that result in Manitoba Hydro being a serious risk to reliability and security:

   • a. Unreliable energy (reservoirs not large enough, making the system vulnerable to drought)
   • b. Manitoba Hydro misrepresents by counting as part of its reservoir system many reservoirs that are not in its territory or under its control
   • c. Manitoba Hydro requires long transmission lines to get its product to markets, and these are more vulnerable to attacks from weather and terrorism
   • d. Manitoba Hydro's existing projects have never been subject to any real environmental or socioeconomic assessment, and this lack of knowledge increases uncertainly and risk for purchasers like Xcel.
   • e. Manitoba Hydro has a history of secrecy and management and litigation problems.

    

   a. Unreliable Reservoirs (Storage Tanks)

   Manitoba Hydro is not a reliable source of energy because the manner in which its projects were built, and on which it continues to rely, is fundamentally flawed. The largest reservoir, Lake Winnipeg, an enormous natural water body (9,417 square miles or 24,390 square kilometers), is limited to only four feet of variation due to political concerns (especially in regard to property values in cottage country along the lake). South Indian Lake, the second reservoir, is "too small" to meet the export and other commitments entered into by Manitoba Hydro. Moreover, these problems have been known for a long time.

   Manitoba Hydro's reserves have often reached dangerously low levels (in one case had all else been equal, this would have resulted in a major power outage in the US Midwest). In its internal planning, Manitoba Hydro assumes that it can rely upon power imports from the United States, in times of low reserve levels in Manitoba. This calls into question the reliability of export contracts and Canadian domestic supply.

   b. Half of "Manitoba Hydro's" Reservoirs Are Not its Own

   Manitoba Hydro counts reservoirs as if part of its own system even when they are under the control of other provinces and the US Corps of Engineers. This includes reservoirs in Saskatchewan (Reindeer, Gardiner), Alberta (Brazeau, Abraham), and Ontario (Lac Seul, Lake of the Woods). In total, about 46% of what Manitoba Hydro calls its own reservoirs, are not its reservoirs at all. Thus Manitoba Hydro cannot guarantee power from what it doesn't control. Manitoba Hydro's representation regarding the "firmness" of its supply could be considered deceptive.

   c. Transmission Lines

   Another major reliability concern for hydropower imports from Manitoba relates to transmission. Such imports depend upon a highly (and perhaps uniquely) vulnerable transmission system. There are a number of characteristics that individually and collectively entail substantial risks.

   The distance involved in moving electricity to load centers in Minnesota is very large, on the order of 1000 miles, the rough equivalent of shipping electricity to Minneapolis from Texas or New York. There are only a few transmission lines connecting northern Manitoba and Minnesota, providing very limited redundancy and grave exposure to simultaneous outages.[2] These lines are mostly in very remote northern areas and are subject to extreme weather conditions (especially in winter), as well as electromagnetic storms.[3] Manitoba Hydro has only a small amount of generation in southern Manitoba close to its provincial demand centers and US export markets.

   The transmission system within Minnesota is heavily loaded, and there are currently constraints to bringing in additional power via North Dakota. The current transmission capability from Manitoba to Minnesota is already fully used, so any major expansion in imports would require a new transmission line to carry the power.

   Even if it were the case that the risks were acceptable in relation to Minnesota's traditional reliance on hydropower imports, these risks should now be carefully reconsidered in the light of proposals to further increase Minnesota's imports from Manitoba.

   Finally, this constellation of risks, which was already problematic, also warrants reconsideration in the aftermath of September 11. At a time when all infrastructure systems serving the US are being scrutinized with respect to their vulnerability to sabotage and other actions intended to cause disruption, the special risks associated with hydropower imports should be carefully considered.

   Hydropower imports from Manitoba are more transmission-intensive than any of the state's other major electricity supply options. In contrast to the 1000-mile transmission path needed for hydro, in-state energy efficiency and distributed generation can actually reduce the need for transmission and help to relieve existing bottlenecks. New wind would require some new transmission, but these requirements would not be as great as those to import electricity from northern Manitoba.[4]

   c. Risk of Lack of Information

   Another risk factor stems from Manitoba Hydro's existing hydro system having never been subjected to any real environmental or socioeconomic assessment. Manitoba Hydro did not even consult, or seek the consent of, PCN and the other four affected Cree Nations when it first built the northern Manitoba hydro projects in the 1960s and 1970s. And while there are many older hydro projects elsewhere in North America whose construction predates current laws requiring prior assessment, many such projects in the US (and in parts of Canada) have now been subjected to major reevaluations to determine hydro system impacts and implement actions to lessen adverse effects. By contrast, Manitoba Hydro continues to resist any such reevaluation.

   e. History of Manitoba Hydro Secrecy and Mismanagement

   More generally, contrary to the well-established laws and practices under which other North American utilities operate, Manitoba Hydro is an anomaly in that it has a long history of keeping vital information secret from its customers and ratepayers.

   Manitoba Hydro has consistently refused to meet the demands of the Freedom of Information Act and the Manitoba Ombudsman to release information about its plans and operations.

   Manitoba Hydro presented an internally inconsistent picture about the Brandon natural gas plant. To US regulators it said that the purpose of this plant was not for export; to Canadian markets it said that its purpose was for export. It is believed the former statement was proffered in order to avoid US environmental review that would apply to operations close to the US border (like Brandon). Manitoba Hydro presented false or contradictory information about plans to retrofit the Selkirk plant.

   Failure to release vital information, and misrepresentation of other information, prevents consumers in Canada and the US, and taxpayers, from being able to make accurate analyses and informed judgments about the environmental and human rights consequences of, and the economic viability and reliability of, this power.

   Finally, Manitoba Hydro has a history of poor engineering decisions cloaked within secretive and sometimes deceptive practices. A 1979 investigation revealed that the hydro project was not viable as built, as Manitoba was too flat (thus, too much flooding would be required) in order to produce the level of energy to which Manitoba Hydro had already committed. A proposed deal between Manitoba Hydro and its potential customer, Ontario Hydro, ended in litigation, with the deal being cancelled. In 1994, several years after this cancellation, one of the Manitoba cabinet ministers admitted that he had been leaking correct planning data to opposition members of parliament in an attempt to overcome the deceptive announcements at Manitoba Hydro.

   Taken together, there is more than ample reason to be concerned about the situation at Manitoba Hydro, and the risks to which Minnesota could be exposed. The recent bankruptcy of Enron is a strong reminder that secrecy and deception can help give rise to enormous and very costly problems.

[1] As part of its 1999 All Source Bid process, Xcel selected Manitoba Hydro to provide 500 MW of capacity and energy. On January 21, 2001, it filed with the Minnesota Public Utilities Commission the Petition of Northern States Power d/b/a Xcel Energy for a Variance from the Order Approving the Final Selection Report, wherein (Attachment A at 3) it provided the quoted information as to why negotiations with Manitoba Hydro could not be concluded in a timely fashion.

2] 75% of the electricity from the Churchill-Nelson hydro projects in northern Manitoba is delivered to the Winnipeg area via two DC lines that share the same right of way for over 500 miles. Manitoba Hydro acknowledges that the existing configuration is risky, since single events (such as a forest fire or an ice storm) could knock out both of these lines. The utility has investigated constructing another DC line through a remote area far separated from the existing lines, but has been unwilling to bear the cost of this transmission system upgrading absent major new hydro projects and export sales (www.gov.mb.ca/leg-asmb/hansard/4th-36th/punr_001/punr_001.html).

There are only three major transmission lines connecting Manitoba and the US. Another 230 kV line linking Manitoba and North Dakota has been proposed and is currently in the permitting process. [3] In January 1998, a severe ice storm left many parts of Quebec and Ontario without power for periods up to several weeks. [4] Depending upon size and location, new gas-fired generation could reduce or increase the need for transmission, but any increment would likely be modest since there is substantial capability to site gas plants so as to facilitate transmission.