Edmonton Profits Big from BC Private Power

What is an appropriate profit margin for independent power producers (IPPs) who sell clean- or green-energy to BC Hydro and Power Authority?

The Tyee has learned that for one utility in Edmonton, a trio of B.C. IPPs generates annual profits of $15.7 million with net profit margins of 26.8 per cent.

By comparison, the other power producers owned across North America by the Edmonton company have net-profit margins of just 7.8 percent.

More about that company later, but back to the question that affects your pocketbook and quality of life if you live in B.C.: Are such big profit margins fair to tax payers who ultimately subsidize them?

The question has been raised recently in two of Canada's largest newspapers.

Writing in The Globe and Mail, columnist Margaret Wente blasted "the wacky world of green power, where misguided governments have sparked a massive corporate feeding frenzy (at taxpayers' expense) to achieve little or nothing of any social benefit."

Two provincial premiers, Gordon Campbell of British Columbia and Ontario's Dalton McGuinty, came in for especial Wente criticism. "The heart of their strategy," she scoffed, "is to pay massive subsidies to wind, solar and other renewable energy producers -- many of them large multinational corporations -- for the next 20 years."

Wente's derisive description of green-power providers and the governments that subsidize them was mild, even restrained, compared to observations by the Vancouver Sun's editorial-page editor, Fazil Mihlar.

An alumnus of the Fraser Institute, Mihlar scolded Campbell and McGuinty for "mollycoddling the pigs at the trough." And the Sun editor refused to exempt from criticism those business men and women who dream up green-power projects that siphon off millions of dollars in government assistance.

"I would choose to give a bear hug to those business folks who try to meet consumer needs without fleecing taxpayers," he wrote, "and dismiss 'entrepreneurs' who use the power of the state to get a slice of the pie and pig out on taxpayer subsidies."

Market with 'very high risks': Jaccard

Those views are not shared by Gordon Campbell's BC Liberal government and a green industry lobby group, the Independent Power Producers of B.C. (IPPBC). Both claim that construction and operation of electricity generating facilities is fraught with financial danger. And from that belief flows the argument that BC Hydro's role in building new electricity generation ought to be minimized, with responsibility for the task shifted to the private sector.

Mark Jaccard, a Simon Fraser University economics professor and green-power advocate, in 2008 penned a hard-hitting critique of two other SFU faculty members -- Marvin Shaffer and John Calvert -- who have been skeptical of British Columbia's clean energy policies.

"Highly uncertain markets, like electricity generation today, have very high risks" [emphasis added], Jaccard wrote in an IPPBC-commissioned "peer review" of writings published by Shaffer and Calvert. "This means that some firms may earn profits, but many firms will lose money and even fail."

He added: "In high risk markets, it is usually most beneficial for taxpayers if the responsibility for risky investments is allocated to private investors as much as possible" [emphasis added].

Which view is correct? Is it good public policy to move the financial costs and risks associated with clean-energy development to willing private-sector operators, or are the latter merely (as Mihlar wrote) "pigs at the trough" and (in Wente's view) the beneficiaries of "massive subsidies"?

To answer these questions, The Tyee examined financial statements for several publicly-traded companies that own and operate electricity-generating facilities in B.C. This column examines one such entity, Capital Power Corporation, a multinational (to use Wente's description) based in Edmonton, Alberta. (Future columns will look at the financial performance of other public IPPs.)

Who is EPCOR?

Each year, as required by the province's Financial Information Act, BC Hydro and Power Authority publishes the names of suppliers who received $25,000 or more from the Crown corporation in the preceding fiscal period.

The list for 2008/09 runs about two-dozen pages, features the names of nearly 2,800 entities, and adds up to nearly $3.3 billion in expenditures.

Over the past several years, a name unknown to most British Columbians, NW Energy (Williams Lake) Ltd., has appeared among the top ten private-sector suppliers on BC Hydro's annual Financial Information Act return. The company operates a waste-wood burning, biomass plant in Williams Lake, capable of producing 68-megawatts of electricity annually.

In 2008/09, NW Energy (Williams Lake) Ltd received $39.9 million from BC Hydro. A year earlier, in 2007/08, payments totaled $41.1 million, and in 2006/07, $42.3 million.

BC Hydro's filings also reveal the name of another little-known supplier, Coastal Rivers Power Limited Partnership. It was paid $17.6 million in 2008/09; $18.4 million in 2007/08; and $16.1 million in 2006/07.

Coastal Rivers Power operates two run-of-river hydroelectric facilities in B.C. The larger of the two, a power plant on the Mamquam River near Squamish, is capable of generating 52-megawatts of power annually. The smaller one, the Queen Charlotte Power Plant on South Moresby Island, is a six-megawatt facility.

(The two will be referred to hereafter as Mamquam and Moresby.)

If few British Columbians ever have heard of either NW Energy (Williams Lake) Ltd. or Coastal Rivers Power Limited Partnership (operator of Mamquam and Moresby), even fewer are likely to know that all share the same corporate parentage -- EPCOR Utilities Inc.

Founded in 1891 as the Edmonton Electric Lighting and Power Company, the energy and water utility became publicly-owned by the City of Edmonton in 1902. The name was changed to Edmonton Power Corporation in 1970, and finally emerged as EPCOR in 1995.

Over time, EPCOR (and subsidiaries) acquired five electricity-generating facilities in British Columbia. The first, a seven-megawatt operation at Brown Lake near Prince Rupert, was purchased in 2000. Miller Creek, a 33-megawatt power plant outside Pemberton, was added later. The trio of NW Energy (Williams Lake), Mamquam and Moresby were bought from the Calgary pipeline giant, TransCanada Corporation, in 2005.

Rise of Capital Power Corporation

Last May, EPCOR announced that it was going to do some financial engineering. All of the company's power generation assets were transferred to a newly-created entity, Capital Power Corporation, which then sold shares to investors through an initial public offering (IPO) intended to raise $475 million.

Capital Power Corporation set up a subsidiary entity, Capital Power Limited Partnership (Capital Power L.P.), in which it (through a different subsidiary) had a 27.8 per cent interest. The remaining 72.2 per cent was owned by EPCOR.

Capital Power L.P. took ownership of a number of power-generating facilities, including two -- Brown Lake and Miller Creek -- based in British Columbia.

Capital Power L.P. also retained a 30.5 per cent interest in another newly-created entity, Capital Power Income Limited Partnership (CPILP), which took over 20 power plants located across North America -- in B.C., Alberta, Ontario, New York, New Jersey, North Carolina, Colorado, California and Washington State. The B.C. facilities were NW Energy (Williams Lake), Mamquam and Moresby.

Because Capital Power Income L.P. is a publicly-traded entity, British Columbians can see just how profitable are the trio of Edmonton-owned, B.C.-based power firms that sell electricity to BC Hydro.

In CPILP's 2009 fiscal year, the company's 20 operating plants generated total revenues of $586.5 million. After deducting the power facilities' operating costs from that number, the company reported an "operating margin" of $211.7 million. (The operating margin also may be called "gross profit.")

After a further deduction of $154.9 million in central-office expenses -- depreciation and amortization (which are non-cash items), management and administration, foreign exchange and certain financial charges -- from the "operating margin," there emerged net income (or "net profit") of $56.8 million.

The above numbers produce an operating margin (or gross profit) of 36.1 per cent, and a net-profit margin of 9.7 per cent. While impressive, neither figure is unreasonable.

Capital Power's BC windfall

A closer examination of CPILP's numbers, however, reveals that a surprisingly large proportion of the company's net income came from its three power-generating facilities in British Columbia.

The Williams Lake wood-waste burning, biomass plant last year had gross revenues of $42.9 million, while the Mamquam and Moresby Lake run-of-river facilities generated $15.7 million. The combined total was $58.6 million.

(These figures differ slightly from BC Hydro's Financial Information Act returns because the Crown corporation's fiscal year runs from April 1 to March 31, while CPILP's fiscal year covers the calendar year, from January 1 to December 31.)

The B.C. generating facilities, therefore, contributed 10 per cent of CPILP's total revenues -- $58.6 million of $586.5 million.

Williams Lake's operating margin was $27.8 million, while that for Mamquam and Moresby was $11.1 million, for a combined total of $38.9 million.

That means the B.C. trio, which generated just 10 per cent of total sales, produced 18.4 per cent -- $38.9 million of $211.7 million -- of CPILP's operating margin (or gross profits).

Getting to 26.8 per cent net profit

Of course, CPILP's central-office expenses must be taken into account, and an appropriate amount apportioned to the B.C. operations.

In 2009, the company's 20 plants produced a total of 4,955 gigawatt-hours of electricity. Of that amount, the three British Columbia facilities were responsible for 744 gigawatt-hours (Williams Lake, 499; Mamquam and Moresby, 245) -- exactly 15 per cent of CPILP's total generation.

It seems reasonable, therefore, to apportion 15 per cent of CPILP's overhead costs -- $23.2 million -- to Williams Lake, Mamquam and Moresby. That means the company's British Columbia operations had a net profit of $15.7 million (by subtracting $23.2 million from the operating margin of $38.9 million). And that number represents more than a quarter, 27.6 per cent. of CPILP's net profits.

Looked at another way, the $15.7 million in net profits recorded in British Columbia represents a 26.8 per cent net-profit margin. By comparison, the remaining plants in CPILP's portfolio had a net-profit margin of a mere 7.8 per cent.

Excess millions flowing out of the province?

It is manifestly obvious that the trio of B.C. power generators were three-and-a-half times more profitable than all the rest of CPILP's plants -- in Alberta, Ontario, New York, New Jersey, North Carolina, Colorado, California and Washington State -- combined.

The math should concern British Columbia's taxpayers and BC Hydro ratepayers. In 2009, CPILP's three B.C. electricity generating facilities sold electricity -- which cost the plants $19.7 million to produce -- to BC Hydro for $58.6 million.

That left an "operating margin" (gross profit) of $38.9 million. From that figure must be deducted $23.2 million in central-office expenses, outlays largely incurred in CPILP's home-town of Edmonton (for managerial salaries and so on).

Net income -- the net profit that was sent from British Columbia to Edmonton -- was $15.7 million.

Risk and irony

It is impossible not to see irony in how the City of Edmonton has unleashed its publicly-owned utility, EPCOR (and its subsidiaries) to expand operations and generate profits across North America, while the Province of British Columbia -- under Gordon Campbell's BC Liberal government -- has stunted the growth of our publicly-owned utility, BC Hydro and Power Authority.

(Supporters of independent power production in this province often argue that BC Hydro staff do not have the skills needed to build and operate clean or green energy projects. Can it be true that Edmonton's public-sector possesses the requisite skill-sets, but British Columbia's does not?)

Clearly, Edmonton's elected officials have not been frightened by the financial "risk" associated with public-sector power generation, transmission and distribution -- the risk that Campbell, Jaccard and the IPPBC so loudly decry in our province.

Indeed, in BC Hydro's most-recent clean energy call, EPCOR and its related companies continue to seek profit-making opportunities in B.C.

On March 11, an EPCOR-related entity, CP Renewable Energy (B.C.) Limited Partnership won a new, long-term energy purchase agreement from BC Hydro for a wind farm near Tumbler Ridge.

Are we paying far too much?

Regardless of how one views the need for clean-energy and independent power production, the wisdom of having three B.C. power plants annually send $38.9 million in gross profits, and $15.7 million in net profits, to an Edmonton-based multinational should at least raise a few eyebrows.

Moreover, these three power producers -- NW Energy (Williams Lake), Mamquam and Moresby -- are just three of 61 companies with long-term energy purchase agreements from BC Hydro. Are the other 58 EPA contractors as profitable as EPCOR's trio?

One may not entirely agree with the harsh assessment of Fazil Mihlar and Margaret Wente that Gordon Campbell's BC Liberal government and its green energy policies have encouraged "pigs at the trough" and "sparked a massive corporate feeding frenzy."

But it's impossible not to think that something isn't quite right with the enormous net-profit margins BC Hydro and Power Authority is paying at least one non-B.C. independent power producer to generate clean energy in our own province.