Opinion

BC Hydro: From Public Interest to Private Profits

W.A.C. Bennett created the Crown corp to build province; today it enriches special interests.

By Norman Farrell 12 Sep 2016 | TheTyee.ca

Norman Farrell is a retired small business accountant and native Vancouverite who has been blogging about public affairs at in-sights.ca since 2009.

Strip away the accounting tricks and political spin, and BC Hydro’s reality emerges.

The Crown corporation’s customers face a future of massive rate increases to guarantee cozy deals that produce inflated profits for private companies.

It’s an extraordinary betrayal of the Crown corporation’s original role of bringing electricity and opportunity to British Columbians.

How did we get here? To understand that, we need to look at BC Hydro’s history.

Premier W.A.C. Bennett created British Columbia Hydro in the early 1960s to improve electrical service in rural areas and extend hydroelectric generating capacity.

B.C. governments had been pursuing similar goals for years. In 1945, Premier John Hart, who headed a Liberal-Conservative coalition government, created the BC Power Commission to regulate the patchwork of private and public utilities operating in much of the province and expand service. The companies generally lacked the financial resources to improve generation and distribution.

But Bennett, premier since 1952 and an MLA since 1941, was unhappy with the power commission. He wanted faster expansion of the electrical grid — and he wanted greater control.

Bennett clashed with the commission in 1958, when he refused to approve its proposed rate increase and moved to shift electricity-related debt from the province’s books to the commission. BCPC general manager H. Lee Briggs denounced the premier’s plans and, encouraged by newspapers in Vancouver and Victoria, questioned Bennett’s integrity. He was promptly fired.

Bennett responded to the controversy by appointing Gordon Shrum, a University of British Columbia dean, to head an inquiry into Briggs’ allegations and examine the commission’s relationship with BC Electric. The company was the province’s largest private utility and had provided electricity to the Lower Mainland and Vancouver Island (and had operated railways, streetcars and electricity services) since 1897.

In her book The West Beyond the West, UBC historian Jean Barman observed that people had been penalized for daring to reside outside of B.C.’s southwest. “The privately run BC Electric company had ignored the hinterland in favour of urban areas where profits were easier to reap,” she wrote.

In contrast, Bennett’s vision included the furthest corners of B.C. In 1956, he offered Swedish-born industrialist Axel Wenner-Gren rights to develop resources in about 104,000 square kilometres of eastern and north-central B.C. Soon, Wenner-Gren’s focus shifted to power generation. An agreement authorized construction of what Bennett called “the greatest hydroelectric power project in the world” on the Peace River.

The improbable Wenner-Gren program never happened. But it had a lasting impact. In W.A.C. Bennett and the Rise of British Columbia, David Mitchell wrote that the failed project confirmed the Peace River’s tremendous power potential and was the genesis of Bennett’s Two Rivers Policy — a vision of hydroelectric projects on the Peace and Columbia rivers.

Bennett had already spotted the Columbia River’s potential when he signed a 1954 deal with Kaiser Aluminum. The corporation wanted to build a dam on the river to manage water flow so power could be generated downstream in the U.S. Kaiser was to pay taxes and water licence fees and return 20 per cent of the revenue from the projects in the U.S. — “downstream benefits,” as they were called. The federal government, citing its jurisdiction over international trade, quashed the agreement.

In 1959, the International Joint Commission, responsible for resolving Canada-U.S. water disputes, issued recommendations for Columbia development. Canada’s Conservative government signed the Columbia River Treaty in January 1961 despite an ongoing dispute with B.C. over control of projects within the province and the sharing of downstream benefits.

Bennett, a fierce protector of B.C. interests, still wanted to advance his Two Rivers Policy with dams on the Peace and Columbia.

But BC Electric wasn’t interested in building the hydro dams, and the company said it would not buy power from Peace River projects. According to Mitchell, Bennett believed the federal government, which regulated BC Electric, had told the company to shun power from northern B.C.

The birth of BC Hydro

Bennett acted decisively.

The provincial government took over the Peace River Power Development Company and BC Electric in 1961 and a year later they were merged into BC Hydro. After a legal battle, the government paid $200 million compensation and assumed $400 million in debt.

BC Electric was unpopular with the public anyway, and the opposition was hardly going to complain — a year earlier, the opposition Co-operative Commonwealth Federation party called for public ownership of the company. The bold move upset many in the business community, but was popular with voters.

Bennett finally had the tool he needed to advance his hydroelectric agenda. He believed a public utility, able to borrow at low interest rates, was the best vehicle for capital-intensive projects with long-term goals.

Bennett had another reason for pushing hydroelectric development on the Peace River. The projects would ensure supply for domestic markets without any hydro dams on the Columbia. That would allow Canada to hold out for a larger share of benefits and a bigger cash payment in negotiations with the U.S.

B.C.’s relationship with the federal government improved rapidly after Liberal Lester B. Pearson replaced John Diefenbaker as prime minister. The new prime minister and U.S. president Lyndon Johnson signed a revised treaty that won Bennett’s approval. B.C. received a lump sum payment for allowing enough water flow to allow downstream power over the next 30 years. Millions more were paid later for flood control benefits. The total, about $2.2 billion in 2016 dollars, financed dam construction in B.C.

Within eight years, the Bennett dam generated electricity on the Peace River, while the Duncan and High Arrow (now Keenleyside) dams provided water storage in the southeast. The Mica Dam north of Revelstoke opened in 1973. Today, 85 per cent of BC Hydro’s hydroelectric power is generated in the Peace and Columbia watersheds.

Not much thought was given then to damage done. Many residents were affected or displaced, but received minimal compensation. There is still a sense of loss today in some communities — and a belief the province is not returning a fair share of benefits from the dams.

Yet, there were rewards on both sides of the international border. The Columbia River Basin contributed 44 per cent of total hydroelectric generation in the U.S. in 2012. Water flow management in Canada remains important for both power generation and flood control.

BC Hydro construction stimulated the economy and provided secure, inexpensive power that enabled economic growth.

And extra generating capacity produced profits for BC Hydro. Between 1976 and 1996, BC Hydro’s annual power sales outside the province averaged 4,300 gigawatt hours and brought in $224 million a year in today’s dollars.

The politicians noticed those profits, and in 1989 then-premier Bill Bennett — the son of W.A.C. Bennett — decided government should get a share of the cash. Since then, the Crown corporation has contributed to governments about $20 billion in dividends, water rentals and grants in lieu of property taxes.

Private businesses also noticed BC Hydro’s cash flow, as well as the financial strength and stability that gave British Columbia power rates that compared favourably with most North American locales.

Private sector investors had refused to risk capital in developing electrical power in the province. But by the 1990s, they were hungry for a share of BC Hydro’s profits.

The BC Liberals embrace private power

And Gordon Campbell’s Liberals were sympathetic.

In the two fiscal years that ended March 31, 2002, BC Hydro had exported more than $12 billion worth of power.

The new BC Liberal government believed demand — and prices — were going to keep rising. And that private power companies were best able to supply new power for export and domestic markets.

BC Hydro’s transmission facilities were spun off into a new publicly owned company, with the goal of ensuring BC Hydro and private producers had equal access to high voltage power lines. Competition was supposed to ensure efficiency.

Then came the Enron crisis, and the revelation that unethical operators had been manipulating electricity prices after partial deregulation of California markets. By the end of 2003, the managers of some companies were facing indictments for gaming the energy markets and order was substantially restored. Record high wholesale power prices fell to normal levels.

Facing lower prices and greater risks, B.C.’s private power producers reconsidered. Instead of selling directly to customers — the vision when the separate transmission company was created — they asked government for deals that promised them profits and transferred almost all business risks to the public.

Under the plan, BC Hydro would buy all power the private companies produced, and try to resell it. Hydro committed to purchase prices that weren’t tied to market values and contracts that were decades long — as much as 60 years. The private producers were guaranteed that BC Hydro would pay more for power each year, as contracts said prices would be adjusted annually for inflation.

Some agreements required BC Hydro pay for the power even if it wasn’t needed or couldn’t be resold.

It could have worked for the public, if demand had increased, pushing up prices.

That was what BC Hydro had been forecasting, consistently predicting rising domestic power consumption and using those forecasts to justify adding capacity and buying more private power.

But for many years, the corporation’s forecasts have been wrong. Residential, commercial and industrial consumption in British Columbia has been flat for more than a decade.

The same pattern is true south of the border. The U.S. Energy Information Administration reports no significant demand growth over the past 10 years. And with new sources of power coming online, particularly wind and solar, wholesale electricity prices in western North America have remained soft.

Buying high, selling low

In the last year, BC Hydro’s external trade sales brought in three cents a kilowatt hour. It paid private producers nine cents a kilowatt hour in the same period, buying about the same quantity of power that it sold outside B.C. The provincial utility’s annual reports show that, since 2002, the company’s average price on trade sales has been slightly above three cents a kilowatt hour.

During those 14 years, BC Hydro paid independent power producers $9 billion. Had the purchases been at rates established by the marketplace - where the Crown corporation was selling surplus power - BC Hydro would have paid $4 billion less to private producers.

And because the average purchase price of private power is rising and the market value is not, losses are accelerating.

In 2005, BC Hydro forecast demand would grow 38 per cent over 20 years. In 2013, it estimated 40 per cent growth over the next 20 years.

This year, the company said a shift in commodity markets changed its growth estimate to “34 per cent before LNG and 39 per cent with LNG.”

In fact, annual reports show that BC Hydro sold more power to residential, commercial and industrial customers in the 2004-05 fiscal year than it did last year. Despite no increase in demand, the utility’s audited financial statements report assets grew from $12 billion to $30 billion in the same period.

NDP critic Adrian Dix said BC Hydro’s errors are a disaster for domestic customers and taxpayers.

“Both the government and BC Hydro misread the market years ago and are pushing ahead hoping no one notices,” Dix said. “The company failed to admit previous errors in demand forecasting and continues similar projections without explanation. Their approach demonstrates a lack of respect for B.C. citizens.”

Dix said BC Hydro’s recent performance is the worst by any Crown corporation in the province’s history. “The company’s political management has gone awry... yet nobody has stepped aside.”

Despite repeated requests to BC Hydro media relations officer Kevin Aquino, no officials would be interviewed or answer emailed questions.

And now BC Hydro is pushing ahead with construction of the $9-billion Site C dam, without any credible explanation of how it will sell the new power. It’s also bringing on new sources of private power.

And because the government has barred the BC Utilities Commission from reviewing the Site C plans and other practices, no independent review has been done to protect the public.

BC Hydro came into existence because private enterprise failed to meet power needs and a premier stood up for citizens who faced electricity prices set at punishing levels.

Now, badly managed BC Hydro is trending toward failure unless electricity prices are raised to punishing levels. Unlike W.A.C. Bennett, B.C.’s current premier is not standing up for citizens and small businesses.

With more than $50 billion in contractual obligations to private power producers, billions committed to Site C construction and billions in deferred expenses that will have to be covered in the future, BC Hydro faces a crippling financial crisis.

Special interests and private companies are benefiting. And the public will pick up the bill.

**Clarifications made Sept. 12, 2016 at 12:30 p.m.  [Tyee]

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