Is This Any Way to Finance Clean Energy?

"Those who cannot remember the past are condemned to repeat it," wrote George Santayana, the Spanish-American philosopher.

He might have had in mind electricity generation in British Columbia, for the lesson taught by W.A.C. Bennett, our 25th premier, has been either forgotten or ignored by Gordon Campbell, the 34th person to occupy our province's highest elected office.

Bennett well understood two things.

First, that the costliest element of electricity-generation is interest on capital expenditures incurred during construction of a power-producing facility.

And second, that government-backed borrowings are far cheaper than private-sector loans.

For W.A.C. Bennett, those two facts meant that it was far less expensive for British Columbia's public sector to build electricity-generating facilities than it was for the private sector. And that view directly led to Bennett's decision in 1961 to create the British Columbia Hydro and Power Authority.

Interest rates in Canada today are at historic lows. And BC Hydro, the province's publicly-owned utility, is paying an average interest rate of about one per cent per annum on its short-term, "revolving borrowings" of $1.691 billion.

In contrast, many of the independent power producers (IPPs) -- the companies that have been directed by Gordon Campbell and his BC Liberal government to build the province's clean-energy infrastructure -- currently pay sky-high interest charges of 12 per cent and more.

This explains, in part, why British Columbians face enormous increases in electricity rates -- and why private-sector lenders are laughing all the way to the bank.

Bennett's undeniable math

A little history reveals just how much has changed in B.C. government policy over the last half-century.

It was 49 years ago this month, in May 1961, that a self-described "chief expediter" for B.C. premier W.A.C. Bennett travelled to England to review financial analyses of the province's so-called Two Rivers Policy.

That was the then-controversial scheme whereby hydro-electric dams were to be built simultaneously on both the Columbia River -- by the publicly-owned B.C. Power Commission -- and the Peace River -- by a private company owned by a Swedish industrialist Axel Wenner-Gren.

The chosen emissary was Gordon Shrum, physicist, dean of graduate studies at the University of British Columbia and head of the B.C. Energy Board.

Bennett was fighting a no-holds-barred battle with Ottawa, where John Diefenbaker's Progressive Conservative government argued for hydro-electric power development on the Columbia River alone and rejected B.C.'s proposal for concurrent construction of a dam on the Peace.

For Bennett, who dreamed of the development of B.C.'s northern resources, Ottawa's one-river strategy meant that the hydro-electric potential of the Peace never would be realized.

Among Ottawa's arguments against the Peace dam was that it would cost far more than the one on the Columbia. Bennett disagreed, and directed Shrum and the B.C. Energy Board to determine if this was true. Shrum retained a pair of firms in England -- "the best consultants in the world," he later wrote -- both of which sent researchers to B.C.

Those experts concluded the Peace project was indeed going to be much more expensive than its southern counterpart. And the reason was the higher interest rates to be paid by the private builder of the Peace dam, in contrast to the Columbia project, backed by government borrowing.

If Bennett was to achieve his dream in the Peace, Shrum informed him, he would need to make it and the electricity it produced cheaper by financing it publicly rather than privately. (See Shrum's account in the accompanying sidebar.)

Bennett saw the logic clearly and acted quickly. On Aug. 1, 1961, B.C.'s Legislative Assembly opened for a special summer session. Lieutenant-governor George Randolph Pearkes read the speech from the throne speech. Later described as "the shortest on record," it took barely 50 seconds for Pearkes to deliver.

Moments later, the premier, W.A.C. Bennett, rose and introduced five bills, the latter of which was entitled "the Power Development Act, 1961." The government intended to expropriate two privately-owned firms, the giant B.C. Electric Company and Wenner-Gren's fledgling Peace River Development Co., and merge them with the B.C. Power Commission to create a new entity: the British Columbia Hydro and Power Authority.

Record lows today for interest rates

What relevance does the foregoing have today? To repeat a point made earlier, the major cost-determinant of electricity generation is interest on capital expenditures during construction of the generating facility.

And to reiterate another point, interest rates in Canada today are at historic lows. In March 2009, the Bank of Canada lowered its overnight lending rate to 0.50 per cent and then the following month cut it further to 0.25 percent. It remains at that latter level today.

Also in April 2009, the so-called Bank Rate was dropped to 0.5 percent. This is the lowest level it's been since the Bank of Canada was created in 1935.

BC Hydro borrows short-term at one per cent

BC Hydro is the province's largest Crown corporation. And, as is stated in its most-recent annual report (see pp. 80, 97, 98 and 112 here, the utility's "debt is either held or guaranteed by the province."

In fiscal 2008/09, BC Hydro had short-term loans, called "revolving borrowings" -- think of it as a line of credit -- that paid an average interest rate of just one percent. The total outstanding at the end of the year was $1.691 billion.

That same year, the Crown corporation issued long-term bonds -- that is, it borrowed capital for periods of up to 20 years -- with a total value of $352 million. Those bonds had a "weighted average effective interest rate" of just 4.6 per cent. That interest rate was a reduction from an average of 4.9 per cent in the previous fiscal period.

(It is almost certain that BC Hydro paid an even lower effective interest rate, or yield, on its long-term bonds or borrowings in the latest fiscal period, 2009/10, but the annual report for that year will not be published until the summer.)

With regards to all of the outstanding debt issued (or monies borrowed) by BC Hydro in the last few decades, long-term debt (bonds and debentures) totaled $7.485 billion at the end of 2008/09, and had a weighted average interest rate of 6.6 per cent.

Private power builders paying 10 to 20 per cent

Now let us look at borrowings by B.C.'s independent power producers. At least three Vancouver-based firms, Pristine Power Inc., Finavera Renewables Inc. and Sea Breeze Power Corp., have issued news releases this year regarding recent borrowings.

Pristine Power has a 25 per cent interest in EnPower Green Energy Generation Inc. (the majority owner is Calgary-based Enmax Corp.), which operates two waste-heat facilities in B.C. located at Savona and 150 Mile House.

(Pristine got bad news last week when B.C. Environment Minister Barry Penner squashed the company's bid to build a massive 600 megawatt, run-of-river facility -- called the Kleana Power Project -- on the Klinaklina River, which flows down from the Chilcotin into the Pacific Ocean at Knight Inlet.)

On January 7, Pristine announced that it had borrowed $5 million from a Vancouver investment firm, Deans Knight Capital Management Ltd., to provide working capital. The one-year loan bears an interest rate of 12 per cent.

On March 9, as was mentioned last week in The Tyee, Finavera Renewables -- which has four electricity purchase agreements (EPAs) from BC Hydro for windfarms in the Peace region -- secured a $1.5 million loan from one of the company's largest shareholders. The annual interest rate on that loan also is 12 per cent.

On April 22, Sea Breeze Power Corp., whose subsidiary, Sea Breeze Energy, in March won a 20-year BC Hydro EPA for its Knob Hill Wind Farm Project on northern Vancouver Island, confirmed that it had raised $700,000 through the sale of five-year debentures that pay 12 per cent interest per annum.

A further examination of Sea Breeze's annual report shows that the company has outstanding loans from members of the board of directors, or companies they control, totalling $835,000. Interest rates on these loans are 10 and 12 per cent.

Sea Breeze, which, in addition to its Knob Hill project, also wants to lay an electricity transmission cable between Vancouver Island and Washington State (the Juan de Fuca Cable Limited Partnership). The company's annual report shows that on this project the partnership has secured a $8 million loan that bears an eye-popping annual interest rate of 20 per cent.

General Electric charging 10 per cent

Remember, the Bank of Canada's current over-night lending rate is just 0.25 per cent per annum, and BC Hydro pays just one per cent on its short-term borrowing.

And yet here we have three IPPs that have recently concluded loans that require annual interest of 12 per cent.

They are not alone. Let's go back to the summer of 2006, when Plutonic Power Corporation first announced its partnership with General Electric on the massive East Toba/Montrose Creek run-of-river project. Plutonic's news release disclosed that GE Energy Financial Services had invested $100 million in the partnership, on top of which it lent another $400 million for construction.

Plutonic also revealed that it was borrowing another $9.7 million from "a private group of investors." GE and the investors, the news release stated, would be paid "an annual interest rate 10 per cent for the first 60-day period and 12 per cent thereafter."

Who pays for sky high interest?

How much of the cost of electricity from IPPs is for sky-high interest charges? British Columbians may never know, for on April 28 the Campbell-Liberal government unveiled its new Clean Energy Act, which specifically exempts IPP contracts through BC Hydro's Clean Power Call and Standing Offer Program from review by the B.C. Utilities Commission.

The government's news release that announced this change even went so far as to describe the BCUC's oversight as "unnecessary," "lengthy" and "costly."

The cost to B.C. ratepayers of the enormous interest charges paid by IPPs was not addressed.

One only can imagine W.A.C. Bennett's reaction as Gordon Campbell and the BC Liberals appear determined to ignore the lessons of the past, learned by British Columbians 49 years ago this month.