BC Hydro's Amazingly Bad Deal for Ratepayers

On July 27 of this year, B.C. Hydro announced the outcome of its 2006 tender call for electricity from private energy developers. The results were startling. Not only had B.C. Hydro agreed to buy three times the power requested in the tender, it had done so at locked-in prices far above projected market rates.

According to its submission to the B.C. Utilities Commission, over the length of the contracts B.C. Hydro and its ratepayers will pour up to $15.6 billion into the pockets of private investors. Yet for all that money, the public gets no assets, no price protection once the contracts expire and no guarantee that private energy interests won't export the electricity in the future.

The 2006 tender call is part of a seismic shift in the way British Columbia produces, buys and sells electricity. It means a bonanza for private energy interests and an enormous financial liability for ordinary B.C. ratepayers.

The deals B.C. Hydro agreed to under the tender will cost between $400 and $500 million every year from 2012 to 2039. Which means higher electricity rates -- 8.1 per cent higher, according to BC Hydro's own calculations. And that's just from this tender. The 2007 tender "call" has already been announced for the purchase of even more private energy. The way the government's Energy Plan is structured, more tender calls are guaranteed to come as energy demand grows in the province.

BC Libs' push to privatize

Since its election in 2001, the B.C. Liberal government has moved to deregulate and privatize B.C.'s electricity system while integrating it with the U.S.-dominated energy market in the Pacific Northwest. The core of that policy was laid out in the 2002 Energy Plan, which prevents B.C. Hydro from building new generation assets, and transforms the Crown corporation from a generator of publicly-owned electricity to a purchaser of energy from the private sector.

The rational for this change is hard to fathom. The old policy worked very well. By generating its own power, B.C. Hydro ensured that ratepayers enjoyed, on average, the second lowest electricity prices in North America. This is because prices were based on the historic cost of production, not the current energy market price. At the same time, B.C. Hydro contributed about three quarters of a billion dollars, annually, to the provincial government from dividends, water rentals and taxes in lieu.

Under the new plan, B.C. Hydro has to buy virtually all its future electrical energy from private power developers. To do this B.C. Hydro has to enter legally binding contracts -- called Energy Purchase Agreements -- with private energy corporations. The agreements lock B.C. Hydro (and B.C. taxpayers) into financial commitments of up to 40 years.

Under the terms of the agreements, B.C. ratepayers have to buy a fixed amount of private energy every year throughout the contract. Because the price of the energy is indexed, meaning it goes up every year, energy investors are guaranteed escalating revenues. But those revenues have to come from somewhere, and in this case, it's the B.C. ratepayers.

But all of this we knew before the outcome of the 2006 tender call was announced in July.

What we didn't know was just how fast the changes were going to happen.

No public discussion

The 2006 energy call originally requested bids from private power developers for 2,700 gigawatt hours (GWh) of electricity. (A GWh is one million kilowatts.) This represents about four per cent of the total energy used in the province each year. But when the results were announced in July, the amount of energy on the table had risen dramatically. At the end of the day, B.C. Hydro had agreed to buy 7,125 GWh (plus an additional 226 Gwh from the Brilliant Expansion program of Columbia Power), three times the size of the original tender call.

B.C. Hydro's explanation for the huge change was simple: B.C.'s projected energy needs had risen significantly. The original call was based on projections made in December 2004. But new information, B.C. Hydro claimed, indicated that there could be a significant shortfall unless it acquired a much larger amount of energy, so the volume it purchased went up.

There are big problems with that rationale. One obvious question is whether it is appropriate to change the volume of energy after a tender call has gone out. But even if you put that one aside (and that's a big if), B.C. Hydro is still a Crown Corporation. When it embarks on a major policy shift, it should engage in widespread public consultation to ensure all options have been properly assessed. Given that the amount of private energy B.C. Hydro committed to purchase in July is so much larger than what was assumed by participants in its major stakeholder consultative process, the Integrated Electricity Planning (IEP) committee (of which this author was a member), only a few months earlier, such a major public discussion was fully warranted.

Options ignored

What's more, even if the forecasts changed, buying that much private energy was by no means the only option available to the government.

It could use the downstream benefits energy from the Columbia River treaty instead of selling it in the U.S.

It could stop private energy exports to ensure that energy produced in B.C. stayed in B.C.

It could expand energy conservation through PowerSmart.

It could review the policy of providing heavily discounted public energy at $37 per MWh to major industrial customers, a policy that dramatically reduces their incentive to conserve.

And, it could let B.C. Hydro build its own new generation plants as it did in the past.

But the size of the tender is only half the story. Because even though B.C. Hydro is buying big, it isn't getting a bulk discount. When B.C. Hydro started work on the tender process in early 2005, energy was going for between $50 and $55 per MWh in the Pacific Northwest market. Previous tender calls, which restricted purchases to private power facilities located in B.C., had resulted in prices in the $56 to $61 per MWh range -- still fairly high. But in the 2006 call, prices were up, way up.

According to B.C. Hydro, the average price over the term of the contracts -- at today's prices -- is $87.50 per MWh delivered to the Lower Mainland. But that number doesn't accurately reflect what ratepayers will pay. For the contracts are inflation indexed. In actual dollars, prices will rise during the term of the contracts to $124 per MWh by 2051.

Locked into double the market price

To put this price in context, B.C. Hydro told the B.C. Utilities Commission in 2004 that the cost of generating energy from its own B.C. Hydroelectric facilities was only $5.43 per MWh. That cost reflected investments made in the 1960s and 1970s and would obviously be considerably higher today if B.C. Hydro were allowed to make new investments again. But it underscores how cheap our public electricity is over the long term if we own the generation assets. And there's no reason it wouldn't be cheaper than private energy even in the short term.

During B.C. Hydro's Integrated Electricity Planning process, the Crown utility estimated the cost of energy from Site C (if it were built by B.C. Hydro) could be as low as $42 per MWh. It could also provide almost as much power as called for in the 2006 tender. Alternatively, if B.C. Hydro were to build the same kind of small B.C. Hydro projects it is now purchasing much of its private energy from, it would benefit from lower borrowing costs and significant economies based on avoiding the expensive duplication inherent in projects built by numerous private developers. But such costing is precluded by the government's Energy Plan because B.C. Hydro is not permitted to build such projects at all.

To understand just how much B.C. Hydro is overpaying, it helps to examine some independent numbers. The U.S. Energy Information Administration (EIA), part of the U.S. Department of Energy, predicts that energy prices will be about $50 per MWh at the B.C. border until 2018. Throughout this period, according to a table B.C. Hydro submitted to the BCUC on August 31, the indexed price to be paid under the B.C. Hydro contracts will average nearly $100 per MWh, or approximately double the predicted market price. Moreover, even if we go further into the future -- where predictions become more and more problematic -- the estimates show that B.C. Hydro will still be paying far more than the projected market price for at least another decade.

Confer Consulting, another well respected energy forecaster, provides estimates of future electricity prices that are even lower than the EIA estimates. If these forecasts prove accurate, it means that B.C. ratepayers will be paying more than double the market price for the next two decades.

Given this information, it is hard to understand how locking B.C. Hydro into long-term contracts at such high prices is justifiable public policy. The one thing it will do is make a lot of private energy developers rich.

Secret contracts

When B.C. Hydro built its own generation assets, British Columbians were ensured reasonable prices and a secure, self-sufficient supply of electricity. All that has been changed under the current Energy Plan. The contracts B.C. Hydro is signing give developers a guaranteed public revenue stream that they can use as collateral to finance their new power plants. That means B.C. ratepayers are effectively paying to finance them, like a tenant paying rent to cover the landlord's mortgage costs. Yet for all the money the public spends on these contracts, it gets no assets, no price protection once the contracts have expired and no guarantee that the energy they're paying for won't be exported in the future.

There is no "crisis" that would justify locking B.C. Hydro into such large future expenditures. Once the contracts have been signed, the public will be committed to buying the energy at the very high prices specified, regardless of whether changes in B.C.'s economic position, lower projected demand in the coming years, or energy prices in the Pacific Northwest energy market -- as predicted -- continue to remain far below the contracted prices.

In light of the huge amounts of public money involved, ratepayers might expect that the B.C. Utilities Commission -- the agency mandated to protect the public interest -- would be holding major public hearings to ensure that all other options are fully examined before allowing B.C. Hydro to proceed. But instead, it has chosen to give its approval to the contracts. And, it has also ruled that, for reasons of "commercial confidentiality," the actual terms of the contracts will not be open to public disclosure.

However you look at it, $15.6 billion in one tender call is a lot of money. And, at the very least, the huge sums now being committed should finally be generating a major public debate about the Government's energy policy.