What can be done about BC Hydro rates?

September 26, 2013

The leak of the BC Hydro Rates Working Group paper, with its estimate that rates need to increase by 26.4 % in the next two years, has triggered major questions about the government’s stewardship of BC Hydro. Ratepayers are outraged by the size of the increase. What they should be even more concerned about is the longer term impact of the government’s ill-advised electricity policies.  

These problems began with a new government policy in 2002 that changed the nature of electricity generation in BC. It required BC Hydro to acquire almost all its new power from the private sector, reversing the role BC Hydro had played since its establishment as a public corporation. The government imposed this change without legislative oversight or review, a lack of transparency magnified by new restrictions on the role of the BC Utilities Commission that prevented it from reviewing most of the major cost drivers of BC Hydro.

The 2013 BC Hydro Annual Report notes that it now has a total of $52.4 billion in future contractual commitments, of which about $51 billion are for long term purchases from private power developers. Over the next five years, this means an average of just over $1.1 billion a year in payments with the remaining $45 billion to be paid in future years.

The energy purchase agreements are like a post-dated cheque. In 2006 when BC Hydro committed to $15.6 billion in private power purchases, there was no immediate impact on rates because the private run-of-river power plants still had to be built and most would not deliver until 2013. But now ratepayers are starting to pay — and it hurts.

Yet, unlike in the past, when BC Hydro made major investments in new public generation facilities, BC Hydro gets no assets for all the money being spent — it’s going to private power developers.  BC Hydro’s over-priced and inflation-adjusted contracts have provided private developers with the collateral to borrow the money to build the power plants. And they get to keep the assets and continue to charge BC Hydro forever. In addition to a bad economic deal, the private power projects are responsible for serious environmental damage to the province’s rivers.

Run-of-river power projects are not well suited to BC’s electricity needs. Their energy is produced during the spring run-off when the Pacific Northwest is awash in hydro power and when prices are low. They provide almost no energy in the late fall and winter when needed. Run-of-river power is not firm power. Accordingly its price is low on the energy market, but BC Hydro has been paying top dollar for it through the generous energy contracts the government forced it to sign.

How did we get into this mess?

The government claims BC Hydro’s cost pressures are because the system is aging and needs major upgrades and that all new power costs a great deal more than power produced in older facilities that we own. These claims are true, but not the whole, or even the main story. The government’s three main electricity initiatives started with the 2002 Energy Plan, which put major restrictions on BC Hydro’s ability to generate its own power and directed it to buy new power from the private sector. The 2007 Energy Plan accelerated the private power purchases by creating an artificial demand for more private power. And the 2010 Clean Energy Act accelerated the private buying by requiring unnecessary “insurance” requirements. Most of this power comes at the wrong time, so is dumped on the energy market at a time when prices are very low.

There are other factors pushing up BC Hydro’s costs, including the Smart Meter program and the expensive policy of separating the transmission arm of BC Hydro into a separate company, and, when that didn’t work, reintegrating it into BC Hydro.

One of the other major cost drivers is the government’s decision to use BC Hydro’s electricity to support resource sector development. It has directed BC Hydro to make major investments in new transmission and related infrastructure, such as the Northwest Transmission Line costing $736 million. BC Hydro is also expanding its grid to service new mines and fracking operations and will provide maintenance and operating power for the proposed LNG plants. These projects expect to benefit from BC Hydro’s existing low-cost public power even though BC Hydro is now paying more than double what it charges them for the new private power it is purchasing.

Since the cost of new investments are to be shared among all ratepayers, much of this cost will fall on the household and small business sector. Since resource development is inherently risky, BC Hydro could end up with major stranded assets — transmission lines to service abandoned projects.

Ratepayer outrage over proposals to increase the price of electricity are well founded. However, the important issue is not how to avoid increases now, which would mean even larger rate increases in the future, but rather how to rectify a major policy failure so this problem does not worsen.   

BC Hydro’s mandate is to provide affordable electricity for its customers in a manner that is environmentally responsible and sustainable. It is not to promote the creation of a private power industry or to offer subsidized power to resource projects as part of the government’s overall economic policy agenda. It is time it got back to its basic purpose.

The government should allow BC Hydro to provide all new electricity generation in the province and should get out of as many of the private contracts as it can. It should make the resource sector pay the full price of providing new transmission lines and generation facilities for its projects. And it should accelerate BC Hydro’s investments in electricity conservation.

The BC Hydro fiasco underlines the difficulty that is created when governments implement policies without legislation or public debate that only impact the public six or eight years later, often when the politicians responsible for the policies can distance themselves from the initial decisions.

John Calvert is a professor of Health Science at Simon Fraser University and the author of Liquid Gold: Energy Privatization in BC. Marjorie Griffin Cohen is a professor of Political Science at SFU and former board member of BC Hydro, BC Power Exchange and NewGrade Energy. Both are research associates at the BC office of the Canadian Centre for Policy Alternatives.