From Showcase to Basket Case:
Before Gordon Campbell became Premier in 2001, British Columbians were concerned that he would privatize BC Hydro. The Liberals’ New Era platform was small consolation with its promise to “protect BC Hydro and all of its core assets … under public ownership.” Voters could “be confident that [a Liberal] government will protect [their] interests,” and would not “play politics with BC Hydro.” Sure thing.
The First Energy Plan
Campbell wasted no time carving up BC Hydro, without quite breaking the New Era commitment. His first energy plan, Energy for Our Future, issued in 2002, was laid out as 26 “Actions,” many of which changed BC’s wild rivers, BC’s energy landscape, and BC Hydro forever. If he didn’t completely privatize BC Hydro, the effect of his policies were to destroy it as a viable economic entity.
Some Actions in the energy plan were expensive flops: plenty of money was thrown at coalbed methane and off- shore drilling. A few actions deserved praise: energy conservation and efficiencies, emission standards for coal-fired generation, and reduced greenhouse gases. At least one was a flat-out lie: “Strengthen … the BC Utilities Commission (BCUC)” – a promise which heralded a decade of directives and legislative changes that reduced BCUC’s regulatory scope and discretion with respect to BC Hydro.
Action #4: Whole departments and 1,600 employees were outsourced to Accenture in a $1.27 billion, ten year deal that was to save BC Hydro $250 million. At the end, Accenture had been paid $1.8 billion, a half billion dollar overrun. This is one of many costly overruns that Hydro has incurred under Liberal energy policies.
Action #15: Transmission was carved out of Hydro to become the new BC Transmission Corp. Eight years later and $65 million lost in transmission, this unnecessary action was undone, and BCTC was reintegrated into BC Hydro.
A single transmission project – the Northwest Transmission Line – cost at least $716 million, compared to the $395 million original budget. Add three more transmission projects, and overruns total $516 million.
It was in Action #13 that Campbell sabotaged BC Hydro from within and screwed British Columbians: “The private sector will develop new electricity generation, with BC Hydro restricted to improvements at existing plants.” Although BC Hydro had been contracting for power with independent power producers (IPPs) since the 1980s, Action #13 would transform the role of private power such that it would dominate BC Hydro’s electricity costs and cripple it with debt.
By 2015, BC Hydro had 105 operating projects on contract, nominally capable of 18,902 gigawatt hours (GWh) of energy, with 3,098 GWh to come from 23 IPP projects still in development. In 2015 it purchased 13,377 GWh of energy at a cost of $1,064 million. That is 24 per cent of BC Hydro’s domestic supply at 76 per cent of its cost of power; $79.54 per megawatt hour (MWh), compared to $8.11 per MWh for power from BC Hydro’s dams. This describes the haemorrhage of cash which is now flowing out of ratepayers’ pockets through BC Hydro to IPPs. The contractual commitments add up to $54 billion over 56 years.
Revenues don’t match costs
These costs must be paid for in energy sales. From 2002 to 2016, government has continued to interfere with rates, keeping them low enough not to antagonize voters, fettering the BCUC’s discretion to approve or impose rate increases sufficient to cover BC Hydro’s ever-mounting costs and obligations.
BC Hydro’s trading subsidiary, Powerex, is active in the western provinces and the western states, especially California. During the winter of 2000-2001, deregulation in California’s wholesale electricity markets exposed California to price and supply manipulation on a massive scale – as much as $45 billion. Enron was the greatest offender, but Powerex was also implicated in price gouging, and California sued Powerex for $3.2 billion. Howls of outrage and protestations of innocence from British Columbia couldn’t make the lawsuit go away, and in 2013 the BC government agreed to a $750 million out-of-court settlement. It was yet another unbudgeted BC Hydro overrun, and a very expensive way to avoid having to demonstrate innocence.
California continues to be a reliable customer, but it shows little interest in buying more power from BC, at any price and most definitely not as eligible power under the state’s renewable portfolio standard (RPS). None of BC’s “clean energy” projects qualify under the RPS and the state is buying no more BC power than in previous years.
Electricity exports not viable
Electricity exports from BC trade mainly through the “Mid-Columbia” (Mid-C) price hub. The Mid-C average through 2015 was $26.06 per MWh, and for the first six weeks in 2016 has been $22.73. It’s not a winning business proposition when the power BC Hydro is selling costs $79.54 per MWh.
At times in recent years, spot prices have dropped below zero, into “negative pricing,” in which a seller of energy will deliver power to the customer, and pay him to take it. This situation will occur when demand (and prices) are low, and a seller of power cannot or will not curtail generation. It will also occur when a seller of power, BC Hydro in this instance, has “take or pay” agreements with IPPs, which require it to pay the IPP the agreed-upon rate for electricity whether or not it takes delivery of the power. BC Hydro does find itself with more energy than it has demand for.
In 2011, 80 instances of negative pricing were recorded in the Mid-C market. In 2012 BC Hydro curtailed production at its own heritage generation facilities, spilling water instead of using it for generation, while taking all the unneeded high-priced power IPPs could churn out.
The entire BC government energy scheme rested on the flawed premise that revenues from electricity sales could match the cost of purchases. Yet government would not let domestic rates rise enough to pay for the costs incurred, and export markets have not materialized.
From the beginning, there were critics of the Liberal energy plans. Some had jobs to preserve, others were concerned about public ownership and destruction of streams and habitat. Many could see the economic danger inherent in the energy plans.
Gordon Campbell maintained tight control over his caucus, and during his entire term as Premier only one person broke ranks. Paul Nettleton, as Liberal MLA for Prince George-Omineca, claimed in 2002 that the government had secret plans to privatize BC Hydro. He was quickly removed from the government caucus.
Industrial customers of BC Hydro are represented by the Association of Major Power Consumers of BC, which in 2007 was the Joint Industry Electricity Steering Committee (JIESC), and before that the Council of Forest Industries. The biggest industrial users are the pulp and paper and wood/wood products sectors, followed by mining. With the release in 2007 of The BC Energy Plan: A Vision for Clean Energy Leadership, industry feared that “the British Columbia government’s pursuit of green energy and self-sufficiency is causing the price of electricity to accelerate to a degree that could drive industry out of the province.” Dan Potts, Executive Director of JIESC, said, “It looks … very depressing for some of our electric power intensive businesses. If you double their power costs … they are no longer competitive. They are out of business. We have three of those [pulp] mills in BC [and] a similar … situation with … newsprint. The only question is who is going to shut down next?”
There’s no getting around the debt crisis
The Liberal government set BC Hydro on more than a decade of spending beyond its means, entering electricity purchase agreements it couldn’t pay for, and being unable to obtain the revenues it needed to meet its spending obligations. It was only following orders. A private company would have been bankrupt, and have liquidated its assets. Crown corporations have taxpayers to keep them afloat.
Government created a mechanism to delay the inevitable – deferral accounts, or regulatory accounts by which BC Hydro could shift costs out of its current operating books, to be cleared at some point in the future when electricity rates would be increased. Two Orders in Council were made effective April 1, 2004 (no joke), in which the BCUC was directed to allow BC Hydro and BC Transmission Corp. to create the first of the deferral accounts.
Roll forward to the present. The financial damage to BC Hydro and to the BC economy is laid out with painful clarity in BC Hydro’s 2015 Annual Report. Deferral accounts total $5,433 million; long term debt $16,896 million; long term energy purchase commitments $53,817 million. That adds up to 76 billion dollars. We won’t even get into the $8.335 billion Site C in this article except to note that it has its own deferral account with $441 million in it already.
BC Hydro needs a series of significant rate increases to repair this economic disaster. But fearing the electoral consequences, and ignoring the economic consequences, Premier Christy Clark has put a lid on rate increases until well after the 2017 election, allowing 9% in fiscal 2015, then dropping to 6%, with subsequent caps of 4%, 3.5%, and 3%.
In the meantime, as continuous as the stream flows that produce it, expensive IPP electricity flows into BC Hydro, and unrecovered cash flows out.
Arthur Caldicott is an independent energy analyst.