The new NDP government plans to ask the BC Utilities Commission to review the economic viability of the $8.8-billion Site C hydroelectric dam. With, presumably, the project’s shutdown a possible outcome.
Incoming premier John Horgan has said he wants answers within six weeks. If the utilities commission can provide a preliminary report that quickly, the recommendations will likely focus on tangible financial matters, like the relative costs of continuing or halting work.
The ultimate decision by cabinet will also consider issues like the province’s reputation in international financial markets and the likelihood of a credit rating downgrade.
With some assumptions, it is possible to construct a ballpark estimate of the financial costs of shutting down the Site C project, or going ahead. (More detailed information is available in my paper “Options for Financing Site C.”)
And it’s clear that either option means hundreds of millions in added annual costs for BC Hydro customers, taxpayers, or both.
The cost of completing Site C
Most regulated power utilities are expected to cover 30 to 40 per cent of the cost of a big capital project with shareholder equity — money that’s been stashed away from prior years accumulated surpluses.
But after years of financial manipulation by the Liberal government, BC Hydro has little equity. It has to borrow to cover all the Site C costs.
To lower the annual cost of interest and amortization on the $8.8-billion debt, BC Hydro has planned to pay back the money over 70 years.
Assuming a five-per-cent interest rate (rates are expected to rise during construction), the Crown corporation will face annual principal and interest payments of about $465 million. When provincial water rental fees (approximately $32 million) and other operating costs are included, the increase to BC Hydro’s annual expenditures would be approximately $500 million.
Estimating the potential sales revenue is more contentious, as many critics believe that all the new power will be surplus to domestic requirements for many years or even decades and sold at low rates to other utilities. BC Hydro has stated that the losses in the early years of operation will be recouped in the later decades, resulting in no return to the shareholder for the first 70 years.
Using BC Hydro’s vague numbers, my model suggests net operating losses of $3 billion in the first 10 years of operation, and a further net loss of $1.25 billion in the second decade. As domestic sales grow — generating much more revenue for BC Hydro than surplus sales — the $4.25 billion in losses are eliminated by year 70.
The cost of cancelling or suspending construction
The cost of this option depends on when the decision is made and the cost of cancelling contracts and remediating the site. BC Hydro would be forced to borrow all those funds. (Deferring the costs — pushing them into the future — would not be possible as there is no expectation of an income-producing asset.)
Assuming a total cost of $4 billion, borrowed at four per cent for 20 years, the annual increase to BC Hydro’s operating cost is $290 million. This is similar to the net cost of the proceed option for the first 10 years.
So whether Site C is suspended or goes ahead, taxpayers or customers are going to be paying some big bills.
In 2016, BC Hydro estimated a one-per-cent rate increase produced $43 million in revenue. So a $300-million increase in net operating costs would require a seven-per-cent rate increase for customers.
This rate surcharge would be in addition to the increase that BC Hydro would require to cover other operating cost increases, including payments on its existing large debt. The surcharge would be slowly eliminated if Site C goes ahead. If it’s suspended or cancelled, the surcharge would end after 20 years.
Such an increase would be contrary to the NDP’s promise to keep electricity rates affordable, and would probably result in the closure of some marginal mines and wood product plants. (Anticipated big rate increases for costly hydroelectric projects in Newfoundland and Labrador and Manitoba may cripple the economies in those two provinces.)
If the decision is to proceed with Site C, deferring the net losses of the first two decades would be in keeping with the previous Liberal government’s kick the can down the road approach to financial management at BC Hydro. However, this accounting legerdemain would place an unfair burden on future BC Hydro customers, and may trigger a downgrade to the province’s credit rating.
The government could provide a direct taxpayer subsidy to cover the operating losses of Site C, or lower BC Hydro’s government-mandated net income requirement. The latter option is not recommended, as it would reduce the government’s ability to reform the public power utility’s deteriorating financial condition.
Perhaps a more palatable option would see the government earmark a portion of the revenue from carbon tax increases planned to begin in April to avoid or reduce the Site C surcharge on electricity rates. A $300-million subsidy would equate to $7.50 of the announced $20 increase (over four years). This could be accumulated on BC Hydro’s books until Site C is commissioned sometime in 2024, or payment could begin in 2018 if the decision is to cancel or suspend the project.
The NDP had promised that a majority of the new carbon tax revenue would be returned to taxpayers in the form of a rebate. It also promised to tackle the growing financial problems at BC Hydro.
Dedicating a portion of the new tax revenue would help accomplish these objectives, and lessen the risk of a (provincial) credit downgrade soon after taking office.
Given the lack of information available about the contract cancellation costs and other unknowns, it is difficult to form a conclusion as to whether construction on Site C should proceed or be suspended. Clearly, the 2013 decision to proceed was at least a decade premature.
The Liberal government gambled that the decision to proceed with the Site C project would pay off. Now the NDP and the Green Party must find a palatable way to cover the gambling debt, while repairing the underlying financial damage at BC Hydro resulting from the Liberal years of financial manipulation.
Read more: Energy, BC Politics
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