From Policy to Power: Real Solutions for BC Hydro

8/3/2019 From Policy to Power: Real Solutions for BC Hydro

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FROM POLICY TO POWER:REAL SOLUTIONS for BC Hydro


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FROM POLICY TO POWER: REAL SOLUTIONS for BC HYDRO

TABLE OF CONTENTS

INTRODUCTION by David Black, President of COPE 378

BC ENERGY POLICY: THE NEED FOR CHANGEBy M. Shaffer, 2011

POWER SURGE: THE ROLE OF GOVERNMENT POLICY IN BC ELECTRICITY RATE INCREASES

By J. Calvert and M. Cohen, 2011

BC HYDRORATE REVIEW REPORT DECONSTRUCTED

By C. Fussell, 2011

talkingdog.ca


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FROM POLICY TO POWER: REAL SOLUTIONS for BC HYDRO

The future of our public power utility, BC Hydro, is intimately connected to thefuture of our province. For decades BC Hydro has efciently provided cleanaffordable power for communities across British Columbia and for export in orderto keep rates low for families.

But the provincial governments policy started to shift with the introduction ofthe 2002 Energy Plan. Government began pulling B.C.s crown utility back frombuilding new sources of electricity, leaving BC Hydro with only upgrades to existingdams and Site C, and handing the responsibility for the nearly all new powergeneration to independent or private power producers.

In 2008 the provincial government amended the Utilities Commission Act tosolidify this policy change, and to mandate the introduction of Smart Meters intoevery home and business in B.C.

With these policy changes and since the introduction of the Clean Energy Actin 2010, BC Hydro has faced some of its most serious issues, which wouldcompromise Hydros affordability and effectiveness and threaten the environment,workplace safety, and Hydros service to communities.

Through 2007-2010 COPE 378 joined with labour and community partners acrossBC, including environmental organizations, economists, and municipal politiciansin a large-scale campaign to push back against the governments drive to open ourrivers to private power projects. Nevertheless, many of these independent powerprojects have forged ahead.

BC Hydros challenges came to a head in late 2010, as the utility announced itintended to raise residential electricity rates by almost 30% over three years. With

a potential election looming, the government ordered a rate review. But instead ofseeking out an arms length, impartial panel who would examine the governmentsown policies, Premier Clark chose a panel of three Deputy Ministers from withingovernment.

When the Rate Review Report was released in August 2011, it found that the costof private power projects to British Columbians had been higher even on averagethan the cost of importing electricity from another area if needed. However, thepanel failed to make any strong recommendations on IPPs. The panel also failed toanalyze the $1 billion Smart Meter Initiative.

What the panel did recommend was cutting 1,000 jobs at BC Hydro, on topof the over 800 Meter Readers and other workers at Accenture slated to losetheir jobs as a result of Smart Meters and changing contracts. However, their

recommendations for job cuts were based on comparing todays workforcenumbers with an articially low year (2006), and comparing the utility with theMinistry of Transportation instead of utilities in other jurisdictions.

It soon became clear that there were expert perspectives not included in the BCHydro Rate Review Report. In order to ensure these perspectives are heard andthat the government and BC Hydro can make the changes needed for the future ofour public utility, we have compiled this alternative rate review report.

Inside you will hear from people who are experts in their elds:First, SFU Economist Dr. Marvin Shaffer argues a change in government policy atBC Hydro is required to remove the self-sufciency and insurance guidelines thatforce BC Hydro to purchase expensive and unneeded energy from private powerproducers. His report details recommendations to restore independent oversightof BC Hydro and to restore BC Hydros responsibility to meet British Columbias

electricity requirements in a reliable, cost-effective and environmentally andsocially responsible way.

Second, John Calvert and Marjorie Grifn Cohen have co-authored a paperanalyzing three main policy initiatives since 2002 that have dramatically impactedBC Hydro and the provision of electricity in BC. Calvert and Cohen contend the BCHydro panel report was a missed opportunity to look at the real cost-drivers behindthe application for a rate increase. Calvert is a political scientist and author ofLiquid Gold: Energy Privatization in British Columbia. Cohen is a professor of publicpolicy and a former board member at BC Hydro and BC Powerex.

Finally, Colin Fussell, formerly a regulatory manager at BC Hydro and expertwitness at the BC Utilities Commission, outlines why many of the Hydro reports

recommendations are unrealistic, taking a point-by-point review of the initialreports conclusions.

It is my hope that BC Hydro and the BC government will carefully review theconclusions of this alternate rate review in order to make the best decisions for thefuture of our public utility, and our province.

David Black, COPE 378 President

INTRODUCTIONThe Canadian Ofce and Professional Employees Union Local 378

2nd Floor, 4595 Canada Way, Burnaby, BC V5G 1J9

TEL 604-299-0378 TOLL FREE IN BC 1-800-665-6838 FAX 604-299-8211

www.cope378.ca


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BC ENERGY POLICY: THE NEED FOR CHANGE

By M. Shaffer, 2011


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SELF-SUFFICIENCY AND INSURANCEIn a hydroelectric system, a key issue in ensuring a reliable supply of

electricity over the course of the year is to be able to manage the risk

of low water conditions. The provincial governments self-sufciency

requirement dictates that this be done by BC Hydro acquiring or

developing long term rm supply of electricity from domestic sources

a rm supply that BC Hydro could use to meet its electricity

requirements when its own hydroelectric output is constrained by low

water conditions.

In determining the amount of power BC Hydro must acquire or develop,

the government legislated that BC Hydro must assume it cannot relyon the Burrard natural gas-red thermal power plant, even in drought

years. It also stated that BC Hydro must assume it cannot use the

governments entitlement to the downstream benets under the

Columbia River Treaty, a large amount of energy that is returned to the

province each year (at least until 2024) and managed by BC Hydros

trading subsidiary Powerex.

The provincial governments insurance provision dictates that by 2020,

BC Hydro must acquire or develop an additional 3000 gigawatt hours

(GWh) of long term rm domestic electricity supply in excess of what

self-sufciency itself would require.

With its 2007 Energy Plan and the detailed provisions im-

posed in the 2010 Clean Energy Act, the provincial govern-

ment abandoned the traditional mandate for BC Hydro,

namely to meet British Columbias electricity requirementsin a reliable, cost effective, and environmentally and socially

responsible way.

Most notably, the requirement for self-sufciency and insur-

ance and the legislated direction to aggregate private power

for export have a different underlying objective, as explained

below. Those measures, plus the heritage (average cost)

pricing policy that is effectively subsidizing new electric

intensive industry with rates less than half the cost of newsupply, are adversely affecting BC Hydro customers and dis-

sipating the value of BC Hydros unique and extraordinarily

valuable hydroelectric assets. A change in policy is required.


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Self-sufciency and insurance are not in fact needed to ensure

reliability; nor are they cost-effective measures; nor are they

environmentally responsible in all respects.

Self-sufciency and insurance are not needed for reliability. Not only do

these policy measures force BC Hydro to ignore the back-up potential

of the Burrard Thermal plant (which the BC Utilities Commission

concluded could provide up to 5000 GWh in a dry water year) or of the

government-owned downstream benets (another 4000 GWh), but also

they rule out any reliance on seasonal surplus or off-peak spot market

purchases of power even though Powerex buys large amounts of that

power on a regular basis for trading purposes. Annual gross imports

have exceeded 10000 GWh in the last few years.

In the past BC Hydro recognized, with the approval

of the BC Utilities Commission and support from

all consumer groups, both the back-up potential of

Burrard and its ability to import spot market power in

calculating how much rm supply it needs to acquireor develop to ensure a reliable supply. There is no

reliability reason why that well-proven and widely

supported practice could not continue.

Self-sufciency and insurance are not cost-effective.

The very fact these measures had to be legislated

indicates that BC Hydro would not otherwise do what

the legislation requires, nor would the BC Utilities

Commission approve it. To suggest they are cost-

effective is to say that the BC Hydro management and

Board and the Commission do not know what will best

serve customer interests.

One can create scenarios where it would be cost-effective to acquire

long term rm supplies to manage the risk of low water. If wholesale

spot market prices were to rise high enough, then the xed prices in

long term rm supply contracts would compare favourably with the

spot market prices BC Hydro would otherwise pay to import power in

low water years. However, that is not what BC Hydro nor any private

developer is forecasting at this time. BC Hydro forecasts and system

simulations consistently show self-sufciency and insurance to be

much more expensive than the alternative of relying on spot market

purchases when required.

What spot market prices will actually be in the future is ultimately a

market call. Self-sufciency and insurance is a market call to lock-

in. The cost-effectiveness issue is whether that is a good market

call not simply whether it makes sense to lock-in, but also at what

price and when. The cost-effectiveness of locking in is what BC Hydro

and Powerex experts would normally consider, and the BC Utilities

Commission would review. However, the requirement for self-sufciency

and insurance precludes such consideration and oversight. The market

call is simply made in the legislation regardless of current long term rm

prices, forecast spot market prices and other relevant

information.

Supporters of this government policy argue that even

if there is a net cost, self-sufciency and insurance

are benecial because they protect ratepayers from

the spot market price spikes that can occur becauseof combinations of unanticipated adverse events

(e.g., plant breakdowns, higher than forecast demand,

widespread sustained low water conditions). They

cite, for example, the California energy crisis of

2001, when spot market prices reached $1000 per

megawatt hour (as compared to an average $50 or

less in recent years).

The 2001 experience is interesting to consider

because what it clearly shows is that the best

protection against such price spikes is to maintain

and enhance the exibility of BC Hydro system to

import and store energy at off-peak periods and then

resell energy at peak periods. BC Hydro was a net importer of power

in 2001. Net imports were more than 3000 GWh that year. However,

despite the unprecedentedly high prices BC Hydro paid for that power,

Powerexs trading operations enabled BC Hydro to earn record prots

over $1.5 billion.

As prices rise, typically the spreads between off-peak and peak periods

do as well. That is why as long as BC Hydro maintains the system

SELF-SUFFICIENCY

AND INSURANCE ARE

NOT COST-EFFECTIVE.

THE VERY FACT THESEMEASURES HAD TO BE

LEGISLATED INDICATES

THAT BC HYDRO WOULD

NOT OTHERWISE DO

WHAT THE LEGISLATION

REQUIRES, NOR WOULD

THE BC UTILITIES

COMMISSION APPROVE IT.


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exibility to buy spot market power when prices are relatively low and

sell when they are relatively high, prices spikes can be more of an

opportunity more than a risk. A major problem with self-sufciency and

insurance is that they diminish BC Hydros system exibility and trading

opportunities because of the take-or-pay commitments BC Hydro enters

into and the seasonal and intermittent nature of much of the supply it

is acquiring. Rather than a benet in relation to the possibility of price

spikes, self-sufciency and insurance can impose a signicant cost.

Finally, while some argue self-sufciency and insurance are needed for

environmental reasons, there is in fact no clear environmental case.

The environmental argument in favour of self-sufciency and insurance

is that it will cause the development of more clean sources of power

generation in B.C. thereby reducing the greenhouse gas emissions

that would otherwise be generated by thermal sources of power.

Supporters commonly state that to rely on spot market power when and

if required to meet BC requirements is to rely on coal-red electricity in

neighbouring jurisdictions.

With respect to this environmental argument, it is important to

recognize the following:

There is no reason to believe that self-sufciency and insurance

would signicantly affect GHG emissions in B.C., or have any

material impact on B.Cs ability to meet its own GHG emission

reduction targets. Even if BC Hydro were allowed to recognize the

back-up capability of the Burrard Thermal plant it would seldom

operate that plant to make up for low water conditions. Spot market

purchases are generally less expensive than operating Burrard.

The spot market power BC Hydro typically imports is not coal-red

generation. Almost half of the spot market power BC Hydro and

Powerex currently import is hydro-electric power in the U.S. Pacic

Northwest, purchased during the spring run-off when prices are low

because of the surplus generation in that time period. The balance

of the spot market imports is most likely natural gas-red. FERC

reports that natural gas (and hydro) are the marginal sources of

generation in the U.S. northwest. Coal-red generation is limited

in that region and largely committed to long term supply contracts

with U.S. utilities. As for Alberta, it is a net importer, not net exporter

to B.C. and will likely to continue to be so because of the rapidly

growing demand for electricity there.

While there are GHG benets from reducing the demand for natural

gas-red generation in the U.S., they would be less than for coal-

red generation. In any event, it is not clear that BC Hydro has an

environmental responsibility to reduce GHG emissions in the U.S.,

nor is it reasonable to ask BC Hydro ratepayers to pay for that.

What is a clear environmental responsibility for BC Hydro is to

minimize its impacts on British Columbia terrestrial and aquatic

environments. That is something that self-sufciency and insurance

do not do. They cause more development of generating plants,

transmission lines, road access and other related facilities in highly

valued natural environments than is needed to cost-effectively meet

BC Hydros electricity requirements. It is interesting that among

the most vocal opponents of self-sufciency and insurance are

environmentalists concerned about the development impacts they

are unnecessarily causing.

In summary, there is no reliability, cost-effectiveness orunambiguous environmental case for self-sufciency and

insurance. Rather, the rationale, to the extent there is there isone, is the power project development it supports. These policy

measures in fact constitute a strategy to force the development

of more power projects in the province than BC Hydro needs or

could otherwise justify. The question is whether this is the best

way to promote economic development.

Some supporters liken this economic development strategy to the

two-river hydro policy that W.A.C. Bennett implemented some 50 years

ago a policy that in hindsight was greatly benecial to B.C. There are,

however, major differences between what was done then and what isbeing done now.

One major difference is that the power projects Bennett developed

are owned by BC Hydro, thereby providing benets to the public for

as long as the hydroelectric assets continue to operate. Much of the

power being developed as a result of self-sufciency and insurance are

privately owned, with no comparable long-term rights to the benets

they may offer beyond initial contract periods.


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Self-sufciency and

insurance are more of

a classic protectionist

measure than a repeat

of the Bennett two-

river policy leading to

the development of the

Peace and Columbia

River hydroelectric

systems. And, like

other protectionist

measures, they are

paid for by customers

and adversely affect

disposable incomes

and economic

development in other

sectors.

There is a supercial

appeal to protectionist

measures to promote local economic development. But that appeal

ignores the opportunity costs what is lost as a result of higher than

necessary costs. Ultimately, the economic development strategy

underlying self-sufciency and insurance is antithetical to the logic and

benets from trade.

AGGREGATING PRIVATE POWER FOR EXPORTIncluded in the 2010 Clean Energy Act were provisions requiring

BC Hydro to seek out opportunities to buy and aggregate private

sources of power for export, with BC Hydro acquiring and providing the

transmission, back-up, shaping and other ancillary services needed to

produce a marketable product.

Just as self-sufciency and insurance were not required or consistent

with BC Hydros traditional mandate to meet its electricity requirements

in a reliable, cost-effective and environmentally and socially responsible

way, this export policy

was not designed

to ensure BC Hydro

maximizes the value

of its hydroelectric

assets for the benet

of its customers and

the general public.

There is nothing

inherently wrong with

BC Hydro acquiring

new power supply for

export. The issue is

whether the export

price it can receive

will justify the costs

(and impacts) that

will be incurred. Theproblem with the

export direction in

the Clean Energy Act is that it does not recognize the full costs that

BC Hydro would have to incur to acquire, aggregate and export B.C.

electricity supply. In particular it does not recognize the value the

opportunity cost of the back-up, shaping and other services BC Hydro

would have to provide from it hydroelectric system.

The BC Hydro system is unique in its ability to provide back-up, storage,

shaping and other critically important and increasingly valuable

services. The demand for these services is growing throughout western

North America because of the seasonal pattern and intermittent nature

of much of the new sources of energy that are being developed.

What must be recognized in any export strategy is that the services

devoted to aggregating power for export from B.C. diminish the amount

of those services that could otherwise be sold. In other words, the

export of the aggregated energy supply would come at the expense

of the potential export of very valuable services. The Clean Energy

Act does not appear to recognize that. There is no provision requiring

that the exports BC Hydro pursues under the Act must offer a return

sufcient to offset the value of the services it could otherwise sell. Yet


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that is what is required to ensure BC Hydro maximizes the value of its

hydroelectric resources for the benet of British Columbians.

Again, the objective underlying this policy would appear to be to

support the development of more power projects than would otherwise

take place. In this case the power project development would be

supported by the provision of BC Hydro services without regard to their

opportunity cost. The effect however is the same as with self-sufciency

and insurance. BC Hydro, its customers and B.C. taxpayers would be

subsidizing the development that takes place.

HERITAGE (AVERAGE COST) PRICING

Government policy and legislation require BC Hydro to set its rates for all

new as well as existing customers based on its historic average costs of

supply. The government decided, despite the recommendations of its own

Energy Task Force in 2002, to use the benets of BC Hydros heritage

supply the low cost hydro-electric and other facilities built many years

ago to keep rates low.

The economic problem with this is that the low average cost rates attract

new electric intensive loads that impose costs on BC Hydro far in excess

of the revenues the rates generate. As the Energy Task Force concluded

back in 2002, it encourages inefcient, effectively subsidized demands for

power from BC Hydro.

The new liqueed natural gas (LNG) facilities proposed for Kitimat and

elsewhere illustrate clearly the major problem this gives rise to. The rst

phase of the Kitimat LNG project will reportedly consume 1.5 millionmegawatt hours (MWh) of electricity per year. Under BC Hydros average

cost rates, the LNG plant will pay less than $40/MWh for this power even

though BC Hydro will incur costs of $100/MWh or more to acquire new

sources of supply required to meet this load. In other words, BC Hydro will

lose over $60/MWh for each megawatt hour it sells. For just this rst phase

of the Kitimat LNG plant the nancial loss for BC Hydro will total over $90

million dollars per year a loss that other customers will have to pay for

with higher rates.

The basic problem is that the low average cost-based rates offer cheap

power to new loads like the Kitimat LNG plant that BC Hydro does not in

fact have. The heritage supply which keeps average costs so low is already

fully committed. New demands for power require new sources of supply

and new sources of supply are expensive. The heritage (average cost)

pricing policy is forcing existing customers to subsidize major new electric-

intensive industrial growth.

The rationale for this policy too is the economic development it generates

in this case both electric-intensive industry and more power project

development than would otherwise take place. However, again one must

ask whether this subsidized economic development strategy is in the public

interest. It certainly is not in the best interest of BC Hydro and its existing

customers.

AN ALTERNATIVE APPROACH

Economic development is an important objective of government.

However, there are far better ways to promote economic development

for the benet of all British Columbians than forcing BC Hydro: (i)

to acquire more power supply than it needs or can protably sell;

(ii) to arrange and support private power export sales regardless of

the opportunity cost of the services it must provide to make those

sales possible; and (iii) to subsidize new electric-intensive industrial

development with rates less than half the cost of the new supply that

development requires.

The economic development supported by those policies diminishes

rather than enhances the benets that British Columbians derive from

BC Hydro hydroelectric system. An alternative approach is to do the

exact opposite build on the unique and very valuable capabilitiesBC Hydro has rather than dissipate that value for the benet of private

power project developers and new large energy users.

A key principle underlying the maximization of social benets is

comparative advantage. You should not try to match what everyone

else is doing; rather you should concentrate on what you can do

comparatively best.

In British Columbia, we know what that is: providing the rm capacity,

shaping, storage and back-up services that is increasingly needed

throughout western North America with the development of ever


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increasing amounts of wind and other intermittent sources of electricity

supply. That suggests that what we should want BC Hydro to invest in

are those facilities that enhance the amount and value of the services it

can provide. That would include, for example, investing in:

additional dependable peak generating capacity at Mica and

Revelstoke;

increased transmission capacity between BC and Alberta, and BC

and the US Northwest;

rm dispatchable energy (like Site C for example) that adds to,

rather than diminishes BC Hydros capability to provide the very

valuable energy services that the market increasingly needs.

Of course British Columbia should be open to the development of

its own wind and other such renewable energy resources, but only

where it is economic and can add value, not be dependent on articial

requirements imposed on BC Hydro for the back-up, storage and

shaping services the BC Hydro system can provide at a price below their

opportunity cost

As for growing energy needs, certainly BC Hydro will have to acquire or

develop more domestic resources as the demand for electricity in the

province grows. But again, the need for those resources should not be

exaggerated by policy, nor should they be encouraged with rate policies

that encourage excessive, subsidized growth in BC Hydro demand.

In conclusion, the policy governing BC Hydro needs to be changed.

The Clean Energy Act should be repealed and replaced with policy and

legislation that accomplish the following:

The responsibility of BC Hydro to meet British Columbias electricity1.

requirements in a reliable, cost-effective and environmentally

and socially responsible way should be restored. Specically, BC

Hydros ability to manage the risk of low water conditions in the best

possible way needs to be restored.

BC Hydro should be allowed to recognize the back-up capabili ty of2.

the Burrard Thermal plant when calculating the amount of new rm

supply it needs to acquire. To address concerns about excessive

reliance or use of this plant, the government should impose

veriable offset requirements (or a sufciently high tax per MWh

of electricity produced at Burrard that would be dedicated to the

funding of such offsets).

BC Hydro should be allowed to recognize its ability to purchase3.

and import spot market power or use the Columbia River Treaty

downstream benets when calculating the amount of new rm

supply it needs to acquire.

BC Hydro should be encouraged to promote the export of power and4.

services provided such exports are expected to generate revenues

and other benets that outweigh the costs, including all opportunity

costs, and any adverse impacts such exports would entail.

BC Hydro should be encouraged to undertake investments and5.

other initiatives that will enhance the value of the power or services

it can sell, provided the incremental revenues and other benets

are expected to outweigh the costs and adverse impacts.BC Hydro should be required to develop rates for new large6.

industrial users that reect the cost of the new supply that BC Hydro

would have to acquire to meet the new user requirements. New

large industrial users should be given the alternative of acquiring

or developing their own electricity supply, with back-up and other

services provided by BC Hydro at rates that fully recover the costs,

including opportunity costs, that BC Hydro would incur in providing

such services.

The responsibility of the BC Utilities Commission to review BC7.

Hydros operations, investments and other initiatives as they may

affect nancial performance and rates needs to be restored.


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POWER SURGE: THE ROLE OF GOVERNMENT

POLICY IN BC ELECTRICIT Y RATE INCREASES

By J. Calvert and M. Cohen, 2011


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In an effort to respond to negative public reaction to proposed

large rate increases for electricity, the BC Liberal government

initiated a review of BC Hydro. BC Hydro had submitted a request

for rate increases to the BC Utilities Commission (BCUC) in

November 2010. The government directive, The Clean Energy

Act, which placed large new costs on BC Hydro, prompted this

new request for rate increases. This ling with the BCUC wasfor the largest rate increases for electricity in B.C. in living

memory, amounting to 55% over the years between 2011 and

2015.1 (Appendix 1) Such large rate increases ran counter to the

promises that the government made when it announced major

changes to the electricity system in BC.2

The 2011 Review of BC Hydro3 attempted to deect the role of

government policy in the rising costs of electricity by making the

parameters for the review very narrow. It looked almost exclusively

at the internal mechanisms of BC Hydro, placing the most signicantitems accounting for cost increases outside its terms of reference. The

1 In March 2011 the BC Hydro request was revised to three years at a 9.73% increase each year,

for a cumulative increase of 32%.

2 In the 2001 election campaign, the Liberals promised that a Campbell government would

Protect BC Hydro and all of its core assets, including dams, reservoirs and power lines under

public ownership A New Era For British Columbia: A Vision for Hope and Prosperity for the Next

Decade and Beyond.

3 Three Deputy Ministers headed the twenty-person team to examine BC Hydro. These were John

Dyble (Deputy Minister of to the Premiere, Cabinet Secretary, and Head of the BC Public Service),

Peter Miburn, (Deputy Minister of Finance), and Cheryl Wenezenki-Yolland (Deputy Minister of

Advanced Education). It completed its report in June 2011 and the report was released to the

public August 2011.

Reviews examination looked at two areas relating to BC Hydro: these

were the effectiveness of its governance framework and its nancial

performance. The Review concluded that the electricity utility industry

worldwide is facing increasing cost pressures due to population growth

and consumer demand. While it found that BC Hydro has done a

relatively good job of providing electrical service to residents of BC at

low rates, BC Hydros operating costs have been increasing over recentyears.4 It then detailed the ways that BC Hydro could reduce cost

pressures within the organization itself. Except for brief references to

the problems with the governments requirement for self-sufciency,

there was no examination of government policy itself or the extent

that its policies contributed to dramatic cost increases. Once again

the deection of government policies connection to the rising cost of

electricity was not part of public scrutiny. This followed a consistent

practice over the years of the Liberal government designing and

implementing energy policy without providing avenues for public debate

and scrutiny.

The following analyzes the three main government policies that radically

have changed the public utility, BC Hydro, and the provision of electricity

in B.C. It will show how government policy directives have a major

impact on the cost of electricity for residents and affect the need for

substantial rate increases long into the future.

4 A Review of BC Hydro. June 2011, p. 19.

INTRODUCTION


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MAJOR POLICY INITIATIVES RELATING TO ELECTRICITY

2002 ENERGY FOR

OUR FUTURE:A PLAN FOR BC1

Major Features:BC Hydro Service delivery

(administration and nance) to

be contracted to private provider

(Accenture)

New electricity generation to be

provided primarily by the private

sectorBC Hydro restricted to improvements

at existing plants and Site C for new

electricity generation

The use of coal-red electricity

projects encouraged

BC Hydro to adapt to US market

rules to allow private energy access

to transmission and to encourage

private exports

Break up BC Hydro so that

transmission is in a companythat is distinct and separate from

generation and distribution.

End Rate Freeze

Institute a temporary Heritage

Contract

Allow private electricity suppliers to

sell directly to industrial customers

1 Energy for Our Future:

A Plan for BC, November 2002.

2007 THE BC ENERGY

PLAN: A VISION FOR

CLEAN ENERGY

LEADERSHIP

Major Features:

Require BC Hydro to acquire privately

produced power to ensure energy

self-sufciency by 2016 with an

additional supply of insurance

power of 3,000 GWH by 2026.

Promote small power projectsthrough a Standing Offer Program at

a set purchase price for projects up

to 10 megawatts

Require BC Transmission Corporation

to build transmission lines to service

additional power from the private

sector

Require zero greenhouse emissions

from coal-red electricity generation

Require zero greenhouse emissions from existing thermal generation

plants by 2016

Discontinue using Burrard Thermal

for energy planning by 2014

Find 50% of BC Hydros new energy

needs through conservation by 2020

Extend Heritage Contract in

perpetuity

Begin consultations on Site C

2010 CLEAN

ENERGY ACT:

MAJOR FEATURES

Require self-sufciency plus

3,000 GWh of insurance by

2020

Province to become a net

exporter of electricity from clean,

renewable resources.

Exempt exports and major

electricity projects from BCUC

regulation including the following:

Northwest Transmission Line

Mica Unit 5, 6 and Revelstoke

Unit 6

Site C

Bio-energy call

Smart Meter program

Standing offer and Feed-in Tariff

Programs

Clean power request for proposals

Re-integrate BC TransmissionCorporation into BC Hydro

Install Smart Meters by 2012

Activate a Feed-in Tariff Program

Use Burrard Thermal for

emergency purposes only


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B.C. GOVERNMENT FRAMEWORK FOR

ELECTRICITY FROM 2002

Early in its administration the Liberal government set out its plans for

reshaping the electricity sector in BC in its 2002 document Energy

for Our Future: A Plan for BC. This document was the foundation for

the redesigned electricity sector. Up to this point BC Hydro had been

primarily responsible for the generation, transmission, distribution,

and services related to providing electricity in the province. This

redesign broke up crucial aspects of B.C. Hydro by separating its major

components. A signicant part of the administration and nancial

functions of BC Hydro were contracted out to Accenture, a private

company. The transmission system was separated from generation and

distribution functions to comply with the governments understanding

of demands from the US to allow more private power access to

transmission lines.1 In 2003 the BC Transmission Corporation was

formed as a wholly separate company from B.C. Hydro. Both of these

actions accounted for the removal of about one-third of the labour forcefrom BC Hydro. This was costly and resulted in structural changes that

ultimately proved to be inefcient.

A major change was also initiated to promote a massive increase in

private power production. The intent was to encourage private power

companies to generate electricity for domestic use, but also for export

to the U.S. To accomplish the rapid expansion of private electricity

production, BC Hydro was directed to limit new generation of electricity

to actions to create efciencies on its existing facilities or through

Site C, should that ever be built. BC Hydro was not allowed to invest

in the new forms of green energy that were assumed to be moreenvironmentally-friendly than large hydro projects. Rather, BC Hydro

was directed to buy its new energy requirements from private power

producers (Independent Power Producers (IPPs)). The government,

through this document, also encouraged the use of coal-red power

plants, noting that the abundance of coal in this province, if used for

electricity, could last well over a century.2

1 The Plan specically states that B.C. will need to adapt to evolving market rules in the United

States, if we want to continue earning the export revenues that contribute to our low power rates.

Energy for our Future, p. 6.

2 Energy for our Future, p. 14.

As might be imagined, the potential costs associated with these major

changes were alarming for both the business sector and households

in B.C. In order to allay these criticisms, the government instituted the

Heritage Rate to reassure people that the low rates associated with

historical hydro projects would continue for at least 10 years. As will be

seen in the section dealing with rates, the costs associated with the

separation (and later re-integration) of BC Transmission Corporation,

and buying power from the private sector were very large and inevitably

had a big impact on BC Hydros costs. The heritage contract would

mean little for most BC Hydro customers. Only two parts of the actions

associated with Energy for Our Future were enacted through legislation

and were therefore subject to debate. These were the Heritage Contract

and the creation of the B.C. Transmission Corporation.

The major problem with privatizing new electricity generation has been

the costs for BC Hydro customers. While all new electricity costs more

than that generated from older assets that largely have been paid

for, the public ultimately, over time, gets the benet from owning new

assets. This is why electricity prices in BC were among the lowest inNorth America. However, with no acquisition of new assets, electricity

prices would forever escalate with the continued reliance on purchasing

private power.

The second major government document related to BC Hydro was The

BC Energy Plan: A Vision for Clean Energy Leadership, which came out

in 2007. The major feature of this document was the requirement for

self sufciency by 2016 through acquiring private green energy. This

was an undisguised promotion of private sector power development,

with the hope that the excess power that BC Hydro was required to buy

could be exported to the U.S. It played on the idea of self-sufciencyin electricity, which most people in B.C. assumed already existed. But

the governments denition of self-sufciency was enormously inated

far beyond the provinces actual needs. This meant that private power

developers would have to generate massive amounts of new power in

order to ensure that B.C. would never, ever need to buy power on the

open market. The plan also demanded insurance of 3000 GWh above

what would be needed for self-sufciency, even in rare, extreme drought

years.


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The requirement for false self-sufciency received a great deal

of criticism at the time, mainly because this criterion would incur

enormous unnecessary expenses for BC Hydro customers.3 It forced

BC Hydro to buy high cost, and low-value run-of-river and wind

energy, energy that is not reliable and is not without considerable

environmental impacts.4 The encouragement of coal for electricity

production in the 2002 Energy for Our Future also would have

substantial environmental impacts and after considerable negative

public reaction, was modied in the 2007 Plan to require zero

emissions from coal-red electricity.5 Since zero GHG emissions from

coal is not possible to achieve with existing conditions, coal-red

electricity plants were essentially banned.

The drive for acquiring excessive amounts of electricity was based

on two major premises on the part of the government. One was the

assumption that substantial revenue would be generated from the

export of electricity to the U.S. This objective of both the 2002 and

the 2007 energy plans was rooted in what was perceived to be the

desperate need in California for electricity after the collapse of Enronand its shift to a deregulated market-based system. This was a serious

miscalculation on the part of the BC government, and basing its entire

energy plan on the assumption that exports to the US would generate

enough money to pay for the very expensive private power it was buying

was widely off the mark.

The second premise was that people would accept the privatization of

electricity in B.C. and the huge rate increases this would entail if these

changes were sold to them as green energy. In many respects this

3 Marvin Shaffer & Associates, Inc. Lost in Transmission: A Comprehensive Critique of the BC

Energy Plan (Vancouver: Canadian Ofce and Professional Employees Union Local 378, 2007).

4 See, for example, John Calvert, Liquid Gold: Energy Privatization in British Columbia (Halifax

& Winnipeg: Fernwood, 2007); Margin Shaffer & Associates, Is the Energy Plan Really Green?

The Supply Side: Targeting Low Value/High Cost Resources (Canadian Ofce and Professional

Employees Union Local 378, 2007), Marjorie Grifn Cohen, Electricity Restructurings Dirty Secret:

The Environment, Johnston, Jose, Michael Gismondi, and James Goodman. (Eds.) Natures

Revenge: reclaiming sustainability in the age of corporate globalism. (Peterborough, ON: Broadview

Press, 2006), pp. 73-95.

5 BC was planning to introduce coal-red plants at a time when they were being phased out in

Ontario. Two 30-year contracts were awarded for coal-red plants as a result of BC Hydros 2006

Open Call for Power.These were the Princeton Power Project and Wapiti Power Development

Project, but public protests led the government to demand zero emissions from coal projects,

effectively killing the use of coal in B.C. See Sunny Freeman, Power Struggle Over BCs First Coal-

Fired Plant, The Tyee, November 17, 2006.

was disingenuous because with the exception of Burrard Thermal, a

natural gas red plant that was not used regularly, BC Hydros electricity

generation did not produce GHG emissions. The only potential source of

GHG emissions would be from the new coal-red plants the government

proposed in its initial electricity plan in 2002 and the gas plants that

account for 25% of the total IPP energy BC Hydro buys.6

The third major government policy directive occurred through the

2010 Clean Energy Act. This Act accelerated the time for BC to have

insurance for its energy efciency. This requirement supports

the Liberal government demand that BC become a net exporter of

clean energy, since BC Hydro would need to buy more private power

even sooner. The Clean Energy Act exempted electricity exports and

major transmission projects (most notably the expensive Northwest

Transmission Line) from BCUC oversight and regulation and it also

legislated the Smart Meter Program by requiring that Smart Meters be

installed by 2012. The projected $930 million cost of Smart Meters

also was to be exempt from BCUC examination. In fact, the exemptions

from BCUC oversight were for some of the most costly features ofthe governments policy directives for BC Hydro itself. In addition to

exports and transmission projects, other exemptions included the

Standing Offer and Feed-in Tariff programs, clean power requests for

proposals, Site C, and the new units on the Mica and Revelstoke dams.7

This means that the most expensive projects in the near future will

have no cost reviews by BCUC to determine their viability and value to

customers.

In addition to these directives that would result in increased costs

for BC Hydro, the Act also required the re-integration of the BC

Transmission Corporation into BC Hydro. The articial separation of

6 Review of BC Hydro, Figure 3.4.5, p. 107.

7 Both the Standing Offer Program and the Feed-in Tariff Program are designed to encourage

small-scale private power that BC Hydro would be required to buy. The Standing Offer Program

mandates that power from any clean energy private project of between .05 and 15 MW would have

to be acquired by BC Hydro (BC Hydro, Standing Offer Program Rules, January 2011). The feed-in

tariff program guarantees access to the BC Hydro grid from producers of electricity, including

households, using any kind of green technology. This program is not yet in operation but ways

that those using renewable energy can recover their costs by selling power to BC Hydro are being

developed. http://www.bchydro.com/planning_regulatory/acquiring_power/feed_in_tariff.html.

Both of these programs are extremely expensive because of the cost of connecting the small

projects to the grid, and the high costs per unit of electricity generated.


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the transmission system into a separate corporation that occurred as

a result of the 2002 Plan proved to be as unworkable and expensive

as many believed it would be. It was also unnecessary, once again

indicating that the Government had seriously misinterpreted the

necessity to conform to US wishes. Reintegrating the BCTC labour

force into BC Hydro added to the expenses of the corporation. It also

contributed to a false sense of the escalation of the size of the BC

Hydro labour force, one factor that was raised as a reason for escalating

operating costs in the Review of BC Hydro.

THE RECOMMENDATIONS OF

THE 2011 REVIEW OF BC HYDRO

The Review clearly places the blame for rising electricity prices on

BC Hydros inability to contain costs, and as a result most of its

recommendations relate to BC Hydros operational processes,8 capital

spending, and approaches to procurement and project management.9While it notes that the primary drivers for operational costs relate to

increased maintenance on aging infrastructure and increased volume

of work resulting in increased stafng levels, it nevertheless is highly

critical of BC Hydros inability to effectively contain its costs.

The Review lists a number of problems with labour costs and an

escalating workforce size by comparing the 2006 levels of employment

with the 2010 levels. What it fails to point out is that in 2006 BC Hydro

had its lowest employment levels in more than a decade, primarily as

the result of losing about one-third of its workforce, or 1,800 workers,

who had been transferred to Accenture and the BCTC. It also failed to

note that many of the functions of these separate corporations could

not be disintegrated easily from BC Hydro so as a result, duplication

of efforts occurred. This was tacitly admitted through the requirement

in the 2010 Act to re-integrate BCTC into BC Hydro. These issues are

8 Costs for electricity purchase agreements with IPPs were reclassied as operating costs in 2011.

9 The Review provides 56 recommendations. Of these recommendations only two are directed at

the province, six are directed to both BC Hydro and the province and all of the rest are directed to

BC Hydro.

not considered in the Review; rather, it goes with the recommendation

that the current staff of 5,968 be reduced to 4,800. This means 1,186

fewer workers at BC Hydro, or about a 20% reduction in the labour

force.10 The Review suggests that while this might be a challenge

to the organization, it should be able to replace some of this work

with contract work. The Review is not clear why this would result in

any savings, however. It also faults the organization for various post-

retirement-related benets, such as extended health care, and for what

it considers to be excessive overtime. It also argues that BC Hydro has a

gold plated culture of excellence that is unwarranted and that it has

been more diligent than necessary in providing oversight on projects.

Since so many of the projects that require oversight are private projects,

this oversight is probably keeping BC customers from more serious

consequences of privatization of electricity than already exist.

The targeting of labour within BC Hydro for cost cutting is a

recommendation that has the potential to jeopardize BC Hydros

performance. Another recommendation that is also unwise relates

to the treatment of capital projects to save costs. The Review notesthat the availability of BC Hydros generation facilities is declining

and is not comparing favourably to Canadian Electrical Association

counterparts.11 This decrease in reliability is a result of aging assets

because relatively little new investment had been made since the

Revelstoke Dam was built. The result is that the aging infrastructure has

forced BC Hydro to aggressively increase its capital spending program

in the past ve years. The Review makes many recommendations to

reduce capital spending, including deferring projects, which simply

pushes the cost onto future years, or maintaining less control over

projects. It is this recommendation, which the Review says could be

accomplished by entering into Public-Private-Partnerships that wouldresult in the biggest changes.12 This would allow private rms to

become partners with BC Hydro in the work that a company does on

BC Hydros assets and could give these partners a stake in BC Hydro

itself. This is a form of privatization and the more it is used, the less the

utilitys assets will be owned by the province.

10 Review of BC Hydro, pp. 40-43.

11 Review of BC Hydro, p. 74.

12 Review of BC Hydro, Recommendation 30, p. 68.


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There is no doubt that some of the recommendations for cost-cutting

are reasonable. It would be an unusual organization that did not have

improvements to make. But on the whole, the expenses that appear

to be higher than warranted (e.g., the performance bonuses for senior

management and the small number of employees relative to managers),

are minor compared with the enormous costs that are being incurred

because of government directives to facilitate the privatization of

new electricity production in B.C. The only slight nod in this direction

is the admission in the report that the Governments policies

governing electricity, which focus on clean energy and self-sufciency,

were developed in an environment different from todays economic

context. Greater exibility may be required13 The Review specically

recommends that the province and BC Hydro review both the denition

and the timelines for self-sufciency in order to make it sustainable for

the long-term.14 While the Review is rm in its directives to BC Hydro, it is

rather vague in the recommendations regarding government policy. As a

result, there are no specic recommendations about either what self-

sufciency should mean, or how long B.C. Hydro will have to achieve it.

The Review gives BC Hydro the option to reduce the three-year rate

increases from 32.1% to either 18.9% or 16.6%.15 These would be achieved

through short-term cost reductions and would clearly take the government

beyond the next election. The short-term nature of the solutions does not

begin to deal with the serious cost problems that have been imposed on

BC Hydro. But other than the recommendation to review the timetable and

denition of self-sufciency, the other major government cost drivers were

not identied as issues that need to be xed.

THE REVIEWS EXPLANATIONS FOR BC HYDROS

PROPOSED RATE INCREASES ARE INADEQUATE

While the recent Review pointed the nger at BC Hydro management

for much of the increase in rates, both the government and BC Hydro

previously had been arguing that the most important factor for rising


14 Review of BC Hydro, Recommendation 46, p. 93.


costs is related to BC Hydros large capital investment program. In its

F20012 F2014 Revenue Requirement Application last fall to the

BCUC, BC Hydro maintained that a major reason for the proposed

expenditure increases lay in the utilitys need to upgrade major

components of its aging facilities, including installing new turbines in

several dams, modernizing its high voltage transmission lines to the

lower mainland and investing in other aspects of its infrastructure, as

well as the potential cost of Site C should it proceed. In its words:

BC Hydro plans to invest approximately $6 billion over the next three

years to renew, upgrade and expand capital infrastructure across

the province. The largest capital projects that are planned include

the Vancouver City Central Transmission Project, the Columbia Valley

Transmission Project, and the Interior to Lower Mainland Transmission

Project, the Northwest Transmission Line Project, the Smart Metering

and Infrastructure Program, the Mica Units 5 and 6 Project, the Ruskin

Dam and Powerhouse Upgrade Project, the John Hart Upgrade Project,

and the Site C Clean Energy Project.16 (BC Hydro F 2-12 F2014

Revenue Requirement Application)

A list of these upgrades taken from the more recent 2011 Annual

Report is in Appendix 2. Some of these major upgrades are needed and

are overdue.17 New turbines in existing dams and the refurbishment of

major existing transmission lines nearing the end of their service life

are important investments that preserve the value of the publics BC

Hydro assets and ensure reliable service in the future.

But a signicant part of BC Hydros capital spending is the result of

government policy directives, such as the highly controversial $930

million Smart Meter program and the $830 million BC Hydro paid forone third of the energy of the Waneta power plant to mining giant Teck-

16 BC Hydro, F2012 to F2014 Revenue Requirements Application Executive Summary, p. 1.

Submitted to the BCUC March 1. 2011. (BCUC Project No. 3698592)

17 The current Liberal government and the previous NDP government can be criticized for their

failure, over the past two decades, to encourage some of the investments required to upgrade

parts of the utilitys infrastructure. Both the NDP, during the 1990s, and the Liberals, during their

rst two terms in ofce, wanted to avoid raising rates. Postponing major investments was a way to

do this. However, even if the current Government can make the claim that BC Hydro should have

made larger capital investments during the 1990s, once it was elected in 2001 it was in a position

to address this issue and has had a full decade to do so.


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Cominco.18 Additionally, BC Hydro has spent approximately $250 million

on its costly initiative to carve out - and later re-integrate - the British

Columbia Transmission Corporation to accommodate the demands

of the private power industry to restructure BC Hydros operations in

line with the model promoted by the US Federal Energy Regulatory

Commission (FERC).19 The Crown Corporation has also had to absorb

the extra costs of its outsourcing contract with Accenture, which one

analyst calculated has amounted to an extra $250 million.20 To this we

can add the costs of the major transmission lines, sub-stations andrelated facilities needed to service the rapidly expanding mining and oil

and gas sectors.

BC Hydro is also incurring signicant costs for connecting, servicing and

monitoring the increasing number of private power projects that need

to connect to the main grid. While some of these costs are factored into

the price it pays for private power, a signicant part is absorbed in the

overall administrative expenses of the utility, but it is very difcult to get

a clear picture of just how much it is.

THE HIGH COST OF THE GOVERNMENTS

PRIVATE POWER POLICIES

While the Review raised concerns about the Governments self-

sufciency policy, it did not take the next logical step and assess

the very large potential losses to BCs ratepayers from this policy.

Fortunately, it does provide some numbers which show the enormous

gap between what BC Hydro is paying private power developers for their

energy and the price this energy is valued at on the international energy

market. In 2010, at the Mid-Columbia trading hub where BC Hydro can

18 BC Hydro (2009) BC Hydro Plans to Purchase One Third Interest in Waneta Dam Press

Release, June 17, 2009. While the cost of the 1,000 GWh of energy it will obtain from this facility is

less than what it is now paying for other private energy, there are still concerns about the price BC

Hydro paid and also the fact that it remains in a minority ownership position.

19 BC Hydro estimated that it cost $65 million to carve out its transmission system in 2003. When

it re-integrated the system, it claimed that the annual savings would amount to $25 million a year.

Assuming this was the annual loss over the 8 year experiment, and adding the start up costs, the

total amounts to slightly more than a quarter of a billion dollars.

20 Will McMartin The Tyee, June 21, 2010.

buy, or sell, energy, the wholesale electricity price ranged from $4.34

MWh to $52.43 MWh.21 The average price for the year 2010, according

to the US Energy Information Administration (EIA) was $35.96.22 In

contrast, the price BC Hydro paid to private power developers the same

year in its energy purchase agreements was $124.00 MWh. Thus

the gap between the market price and the price BC Hydro is currently

paying ranges from approximately $72 MWh to just under $120 MWh.

The 3,000 GWh self sufciency policy will guarantee that BC Hydro willhave a signicant surplus of energy every year. It will have to sell this

surplus energy on the market. If forced to sell, rather than spill water,

it might end up getting a price somewhere in the mid to high range of

the Mid-Columbia rate. Even if we use the highest gure cited by the

Review ($52.53 MWh) and compare it with the price BC Hydro is paying

in its recent energy purchases, ($124 MWh), we see that the loss could

be roughly $71.50 for every MWh it sells. For the critical (3,000 GWh

surplus), average (7,000 GWh 8,000 GWh) and favourable (14,000

GWh) water years, this would mean that BC Hydros ratepayers would

incur losses ranging from $214 million (critical), $500 - $572 million(average) and $1,000 million (favourable).

The annual losses could be much higher if BC Hydro were to receive

a price closer to the 2010 Mid-Columbia average wholesale electricity

price of $35.96 MWh.23 In reality, no one knows with certainty the exact

price of energy a decade or two from now, or how much energy BC

Hydro will end up selling on the market at that time. However, what the

Review failed to do was to provide the public with a clearer sense of the

extent to which BC Hydros ratepayers are nancially vulnerable as a

result of the Governments buy high, sell low policy.

A question that logically arises is why is it only recently that the public

has begun to voice concerns about the impact of the governments

21 Review, p. 92

22 Plentiful Water and Low Natural Gas Prices Cut Northwest Power Prices in Half. Today in

Energy. March 4, 2011. http://www.eia.gov/todayinenergy/detail.cfm?id=370. For the current

year it appears that wholesale electricity prices will be even lower. EIA data for the rst half of

2011indicate a fall of 26% in the Pacic Northwest wholesale price. Today in Energy Aug. 4,

2011.

23 These calculations are based on the numbers provided in the Review and cited earlier, namely

a 3,000 GWh surplus in low water years, a 7,000 GWh to 8,000 GWh surplus in an average year

and a 14,000 GWh surplus in a high water year.


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energy policies on rates? A key reason is that the costs of these

expensive contracts are not immediately felt by ratepayers. There is

a signicant time lag between the date a contract is signed and the

date the developer completes the project and starts delivering power

to BC Hydro. This can vary signicantly, depending on the project, but

normally is in the range of 6 to 8 years. Consequently, BC Hydro and

its ratepayers - do not start paying for the power until the utility begins

to receive it. It is only now that the full impact of private power contracts

signed half a decade ago, or more, are showing up in the bills of Hydrocustomers.

THE GROWING VOLUMES OF PRIVATE POWER

One of the key drivers of the projected rate increases is that a growing

volume of expensive private power is now coming on stream as a

result of energy contracts signed during the past decade. The size

of BCs nancial commitment to purchasing private power has risen

substantially in recent years. According to its F2012 F2014 Revenue

Requirements Application to the BCUC, BC Hydro now has 110 active

EPAs involving a commitment to purchase a total of 19,164 GWh of

energy, annually.24 (See Appendix 3 for details)

As we might expect, as the total volume of private energy has been

increasing, so has the total bill. In 2003, BC Hydro spent $290

million on private power contracts.25 Since then the bill has increased

substantially, with the projected cost for scal 2014 reaching just under

$940 million as the following chart illustrates.26 (See Appendix 4 for a

detailed break-down of these expenditure projections.)

24 BC Hydro, F2012 to F2014 Revenue Requirements Application. op. cit. Chapter 4 - Cost of

Energy, Table 4-5 p. 4 17.

25 BC Hydro, Revenue Requirements Application F2004/5 - F2005/6. November 15, 2004

Compliance Filing, Schedule A-9, p. 15.

26 As we note later in this paper, the Auditor General was extremely critical of how BC Hydro

reports its long term energy purchase agreements in his 2011 audit of the Provinces nances.

He noted that the impact of 20 and 30 year contracts was not being adequately documented by

the corporation in its published statements. Instead it only provided only short term projections

of future nancial impacts. The relevance of this point is that providing only short term estimates

of costs lacks transparency and makes it very difcult for the public to assess the overall impact

of such costs on future rates. Ofce of the Auditor General of BC. Report 6, September,2011:

Observations on Financial Reporting: Summary Financial Statements 2010/2011. www.bcauditor.

com.

Source: BC Hydro F2004/05 F2005/06 and F2012 F2014 Revenue Requirement Applications

The above table only illustrates costs up until 2014. However, many of

the recently signed contracts are not yet delivering power. Most will run

for between 20 and 30 years. One, with the Forrest Kerr 195 MW run-

of-river project, runs for 60 years. So the impact on rates will continue

to escalate as more and more of this private power is delivered to BC

Hydro.

THE IMPACT OF ENERGY INTENSIVE

RESOURCE DEVELOPMENT

In addition to rising energy costs, another major factor that is pushing

up the rates of residential customers is the Governments energy

intensive resource development strategy. This strategy is forcing BC

Hydro to plan for a signicant increase in future energy purchases to

service the rapidly expanding oil and gas sectors and the large number


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of new mines the government anticipates will be built over the next

decade. The issue is not only that these industries will raise demand for

new energy: it is that the price they anticipate paying for this energy is

far lower than what it will cost BC Hydro to acquire it.

Currently, the rate large industrial customers pay for their electricity is just

over $40 MWh under the transmission rate category. As we noted earlier,

the Review indicated that BC Hydro has been paying approximately $124

MWh for its new energy. While BC Hydros own electricity from its majordams is far cheaper, the problem is that it currently only has enough to

supply its existing customers. It does not have a signicant surplus that

it can draw upon to meet the projected needs of these energy intensive

industries in the future and the current policy framework severely limits

its options. Consequently, if the government achieves its policy objective

of encouraging the rapid development of new resource projects, BC Hydro

will have to acquire a very large volume of new electricity. 27

To the extent that these resource industries base their investment

decisions on the governments promise of cheap electricity, this willalso drive up the amount of energy BC Hydro will need to acquire in the

coming years. The promise of low cost electricity will affect the economics

of new energy intensive projects, making investments in BC comparatively

more attractive. In addition, because many of these resource projects

are located in areas currently not well serviced by BC Hydros existing

transmission system, it will also mean that BC Hydro will be making

large investments in new transmission lines, sub-stations and other

infrastructure, whose purpose is almost exclusively to service resource

extraction projects.

If the governments resource sector strategy only involved one or two minesor a small expansion of the gas sector, this would not be a major issue.

However, the number of energy intensive resource projects that are now

being developed and the amount of new electricity they will need makes

this a major issue, particularly as residential ratepayers will end up paying

for a signicant portion of its costs under the present pricing structure.

Three specic types of resource projects are of particular concern: the

rapidly growing natural gas sector; the construction of new LNG facilities;

and, the development of a signicant number of new mines.

27 This would be in addition to BC Hydros requirement to maintain the 3,000 GWh surplus.

THE PROJECTED ELECTRICITY DEMANDS

OF SUPPLYING THE DAWSON CREEK/

CHETWYND NATURAL GAS PROJECTS

The Government has enthusiastically promoted a major expansion of

shale gas production in the Dawson Creek/Groundbirch/Chetwynd

area of Northeastern BC. The Montney shale gas basin has one of thelargest pools of accessible natural gas in North America. New horizontal

drilling and multi-stage hydraulic fracturing technologies make this

gas comparatively cheap to extract. BC Hydro estimates that by 2020

the Montney basin will be producing at least 3 million cubic meters of

natural gas a year and possibly much more. Once extracted, the natural

gas must be compressed for shipment and this requires a great deal

of energy. Usually the gas itself provides this energy. But - somewhat

bizarrely - the government believes that it can offset the increased GHG

emissions associated with compressing gas by supplying electricity

to perform this function, as well as to meet some of the other energy

requirements of the gas industry. (Producing less gas would also reduce

GHG emissions. But this is an option the government has rejected.)

BC Hydros mid-range estimate of electricity load growth for gas projects

indicates that by 2027 it will need to supply 363 MW of power to

customers in the Montney gas eld area.28 However, if the gas sector

expands more rapidly it will need even more electricity. BC Hydros high

range estimate indicates that within a decade, it may end up supplying

over 500 MW of power annually. This is roughly half the projected

output of its proposed Site C dam.

BC Hydros mid-range estimate indicates that it will need to supply an

average of about 1,800 GWh of energy to the gas industry every year

in the period from 2016 to 2030.29 At the current price of $124 MWh

it is paying to private power developers, this translates into an average

annual cost of roughly $223 mil lion. However, if it ends up selling to

28 BC Hydro. Dawson Cree /Chetwynd Area Transmission Project (Project No. 3698640).

Application for a Certicate of Public Convenience and Necessity (CPCN). British Columbia

Utilities Commission (BCUC) Aug. 3, 2001. Appendix B, p. 19. http://www.bchydro.com/planning_

regulatory/regulatory.html.

29 Ibid. Appendix B, Table 1 Expected Annual Gas Production and Electricity Demand. p. 82.


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the gas industry at the current price of roughly $40 MWh, it would only

receive $72 million. This would result in an average loss to BC Hydros

ratepayers of about $151 million every year during the period.

The current transmission infrastructure supplying electricity to the

Dawson Creek/Chetwynd area is not capable of handling the volume

of electricity the gas elds will require in the coming years. To address

this issue, BC Hydro submitted an application to the BCUC for a major

upgrade to its transmission system. It estimates that it will spend $255

million between now and 2015 on this project which is needed only

because of the projected expansion of the gas industry.30 However,

when gas production diminishes in a little over 20 years time, BC

Hydros ratepayers may end up having funded an expensive and

arguably very overbuilt transmission line for which there will no longer

be a major need.

LNG PROJECTS WILL REQUIRE LARGE

AMOUNTS OF NEW POWER THAT BC HYDRO

CURRENTLY DOES NOT HAVE

Another major new energy project, the proposed $3.5 billion rst

phase of the Kitimat LNG terminal, will also result in a major increase

30 BC Hydro, Dawson Creek / Chetwynd Area Transmission Project ASP-2011-027.

in demand for BC Hydros energy. Once in operation in 2015, the

project will have the ability to process 5 million metric tons of liqueed

natural gas or roughly 20% of BCs natural gas output. Although

originally intended to allow imports of gas, the dramatic increase in gas

production within BC has led to a reversal of the plan. It is now being

built to facilitate gas exports to customers across the Pacic.31 The

proponents applied to the NEB on December 9, 2010 for a 20 year

export permit.

The rst phase of this facility, once completed, will need 250 MW of

power. It will use an estimated 1500 GWh of electricity annually. Using

the same cost and price estimates as in the Dawson Creek example of

the cost of new energy to BC Hydro and the sale price it will receive for

this energy, ratepayers could end up losing up to $125 million for every

year it is in operation.32 If the second phase proceeds, the total could

double. And the NEB has received at least one other application for anew LNG export facility on the BC coast.33

Even if BC Hydro is able to source new energy that is cheaper than the

31 David Ebner, EOG buys rest of Kitimat LNG project Globe and Mail Aug. 24, 2010. For a

description of the project see the proponents web site: http://www.kitimatlngfacility.com/. See

also: National Energy Board Hearing Order GH-1-2011 regarding KM LNG Operating General

PartnershipKitimat LNG Export Licence Application. December 9, 2010.

32 Marvin Shaffer, A Jobs for Jobs Strategy CCPA Policy Note Sept 23, 2011. http://www.

policynote.ca/a-jobs-for-jobs-strategy/.

33 Pipeline News, NEB Gets Another Application Proposing To Export LNG Off B.C. Coast. March

16, 2011. http://www.pipelinenewsnorth.ca/article/20110316/PIPELINE0119/303169976/-1/pipeline/neb-gets-another-application-proposing-to-export-lng-off-bc-coast.


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prices it is currently paying as a result of changes in the governments

electricity policies, ratepayer losses will still be very substantial unless

the industrial tariff structure is fundamentally changed. New energy will

still be considerably more expensive than what BC Hydro is currently

planning to charge industrial customers under its current tariff. Yet in a

recent media interview, Premier Christy Clark assured BC residents that

BC Hydro would be able to supply the power to the rst phase of the

LNG project and most likely to the second as well. In her words: We are

condent, absolutely condent that phase one will be powered up - noquestion - with existing resources34

THE IMPACT OF THE RAPID EXPANSION OF

POWER HUNGRY MINES

Turning to the additional electricity demand in the mining sector, the

governments recently released Canada Starts Here: The BC Jobs Plan

asserts that by 2015, eight new mines will be operational and nine

existing mines will have completed major upgrades.35 The governmentalso intends to reduce, signicantly, the various regulatory requirements

which it argues are unnecessarily delaying the approvals of new

projects. This may mean that even more mining projects will go forward,

with a corresponding increase in electricity demand over the coming

decade.

A study by Marvin Shaffer of the impact on BC Hydro of one proposed

mine, the Prosperity Gold-Copper Mine Project, found that BC Hydro

would lose heavily by supplying it with the 750 GWh of electricity

it would need, annually, once in full operation. In his words: The

estimated costs to BC Hydro and its customers, plus the GHG offset

costs imposed by this project total almost $38 million per year.36

Of this total, fully $35 million was the projected loss to BC Hydros

ratepayers. In making his calculations, Shaffer used BC Hydros earlier

cost of purchasing private energy - $88 MWh - and BC Hydros slightly

lower industrial rate at the time - $37.4 MWh. If we used BC Hydros

34 Malcolm Baxter, Kitimat Northern Sentinel Sept. 30, 2011.

35 Government of BC, Canada Starts Here: The BC Jobs Plan, Sept. 22, 2011. p. 15.

36 Marvin Shaffer and Associates, Benets and Costs of the Prosperity Gold-Copper Mine

Project, Report Prepared for the Friends of the Nemaiah Valley, March 11, 2009, p. 19. http://www.fonv.ca/media/report-shaffer-prosperity.pdf

current cost of energy roughly $124 MWh - and the current rate it

charges to industrial customers of $40 MWh, the potential loss every

year could be over $63 million. And this is just one mine.

As with the Dawson Creek/Chetwynd transmission infrastructure,

another major cost associated with mining development is transmission

upgrades. BC Hydro estimates that the Northwest Transmission Line

will cost $404 million to build, although this could be higher if the line

is extended further north as the Federal Government has indicated itwants in return for its promise of $130 mil lion to subsidize the project.37

BC Hydro estimates it will get some funding from the new mines,

although it is not clear how large this contribution will be. Nevertheless,

BC Hydro will end up paying the largest share of this project. And this

means all ratepayers will end up contributing to a new transmission line

whose benets will go almost exclusively to the mining sector.38

The cumulative impact of supplying new energy to eight new mines and

to another nine mines undergoing upgrades will be very substantial and

will force BC Hydro to acquire a great deal more energy in the comingyears. Under the current system for setting rates, the addit ional costs

of this energy, as well as the infrastructure needed to deliver it, will be

shared among all BC Hydro customers, even though the benets will

almost exclusively go to these resource projects. This means residential

ratepayers will be paying a signicant part of the cost of the energy that

BC Hydro will be acquiring for the resource sector.

In addition, the promise of cheap or, more accurately, heavily

subsidized electricity will not encourage conservation. Large volume

electricity customers are sensitive to the price they pay for their energy.

If the price is low and they believe the Government will guarantee thatit will remain relatively low over the term of their projects, they will

have less incentive to adopt energy saving technologies or methods

37 Pollon, Christopher, Northwest Power Line Grows, So Does Controversy: Govt says extending

grid beyond 2009 plan will lower greenhouse emissions. Critics see a boost to mining -- and

emissions. The Tyee. July 18, 2011.

38 The formula for determining the cost allocation for upgrades BC Hydro has to make to its

transmission system from connecting new industrial customers is set out in BC Hydros Tariff

Supplement #6. New customers are initially charged the extra costs BC Hydro incurs, but if they

purchase the agreed amount of electricity over the following 8 years, the full amount is refunded

to them. New customers are responsible for funding connections from their facility to the main BCHydro grid.


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of operation.39 Arguably, the price they should pay ought to be at least

what BC Hydro will be paying to supply them with new energy. If new

resource projects are only viable with highly subsidized electricity, it is

not clear why they should go forward in the rst place and even less

clear why other ratepayers should effectively subsidize them.

LACK OF TRANSPARENCY OF FINANCIAL DATA

One of the most serious concerns with the recent Review of BC Hydro is

its failure to comment on BC Hydros lack of transparency in reporting

its nancial obligations to the public. In a recent report, John Doyle,

BCs Auditor General, singled out both the government and the Crown

utility for failing to present a clear and understandable account of the

utilitys long term contractual commitments and for the increasing

use of deferral and regulatory accounts.40 Doyle indicated that in the

previous years audit he had agged these problems but they had not

been rectied.

Doyle noted that the province now had over $80 billion in long term

contractual commitments and that the total had increased signicantly

since 2010. He pointed out that most of the 2011 increase is due

to BC Hydro entering into long-term energy purchase agreements with

independent power producers.41 In BC Hydros most recent Annual Report,

the Crown utility includes a footnote indicating that it had outstanding

commitments of $43 billion in long term purchase agreements, of which

approximately $40 billion were for private power purchases.42

Doyle also complained that few of the details of these power purchase

agreements were available to the public. Consequently, he felt it was

39 The Clean Energy Act includes a provision that would enable BC Hydro to negotiate long term

xed price electricity sales contracts with major industrial customers. This is worrisome, as it

could result in these customers locking in current prices for many years into the future in order

to avoid sharing the cost of the inevitable rate increases BC Hydro will be implementing. The fact

that the legislation included such a provision is troubling. The relevant provision reads as follows:

Domestic long-term sales contracts. 9: The authority must establish, in accordance with the

regulations, a program to develop potential offers respecting domestic long-term sales contracts

for availability to prescribed classes of customers on prescribed terms, including terms respecting

price, for prescribed volumes of energy over prescribed periods.

40 Ofce of the Auditor General, Report 6: Observations on Financial Reporting: Summary

Financial Statements 2010-11.Victoria: Sept. 2011.

41 Ofce of the Auditor General, 2011. ibid. p. 28.42 BC Hydro. Annual Report, 2011.Note 16:Commitments and Contingencies , p. 80,

difcult for citizens to assess their future nancial implications or to

determine the long term consequences on rates and on future service

delivery. Consequently, he recommended that government provide

more complete disclosure of the anticipated payments to be made after

ve years so that stakeholders can fully appreciate the duration and

timing of these obligations.43

Another gap in the Review is that it does not attempt to focus on ways

to reduce the growth of energy demand in the province and thus reduce

the amount of power BC Hydro will need to purchase. There is stillconsiderable room to moderate the growth of demand from residential

and commercial customers through conservation initiatives identied

in BC Hydros 2007 Conservation Potential Review. And there is much

more potential in the industrial sector if the governments electricity

intensive resource strategy were to be signicantly modied.44

NOT-SO-SMART METERS

The Review also looked at the controversial issue of smart meters.

It concluded that (t)he business case rationale for the SMI project

appears reasonable.45 In support of this conclusion, it basically

reproduces the costing rationale provided by BC Hydro (and the

government) to justify the $930 million dollar price tag. However, its

evaluation does not question the assumptions on which the costing has

been made. Nor does it raise concerns about the haste with which the

meters are being introduced.46

43 Ofce of the Auditor General, op. cit., p. 28.

44 BC Hydro has introduced stepped rates for transmission rate (1823) customers who use large

volumes of energy. The lower rate which applies to the rst 90% of a customers bill is currently

$33.53 MWh plus a small demand charge. The remaining 10% is charged at a rate of $73.6

MWh plus the demand charge. But there are also special tariffs for Time of Use Customers and

for use during different seasons. The average is now about $40 MWh, but may vary signicantly

from one customer to another. However, thus far the stepped rates do not appear to have had a

major impact on increasing the average cost per MWh of the electricity BC Hydro is selling to large

industrial customers.

45 The Review, pp. 116, 117.

46 Almost a third of this amount is now committed as a result of a $270 contract with Itron, Inc.,

based in the state of Washington and two earlier contracts, one for $73 million with Corex to install

meters and another for $63 million with Capgemini for information technology. Scott Simpson, BC

Hydro goes ahead with $270m smart meter contract: Digital metering of two million customers has

From Policy to Power: Real Solutions for BC Hydro

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