The Great Green Shakedown

image by Tara Torossian, courtesy of http://www.piquenewsmagazine.com

Herein you’ll find a piece that took months to put together. I aimed to provide as comprehensive as possible an explanation of why the price of electricity is going up for British Columbians. I had to compress 1,525 pages of regulatory documents into a 4,000 word piece so there’s plainly a number of things that I missed.

Later today I’ll post some graphs that illuminate some of the more complex portions of the piece.

Why your hydro rates are going up, and who’s responsible

By Jesse Ferreras, Pique Newsmagazine

April 28, 2011

By now you know the bad news: your power rates are going up and there’s nothing you can do about it.

Through an application to the B.C. Utilities Commission, BC Hydro is seeking a rate increase of 32 per cent over three years to help it pay for upgrades to its power-generating facilities.

It’s a bitter pill to swallow for British Columbians. In a time of economic recession, residents already have to deal with rising prices for homes, food and fuel. And now they have to contend with the rising cost of electricity.

It’s worse yet for residents of Whistler and communities north of here, where the monthly home bill is far more expensive than in the Lower Mainland.

Rich Coleman, B.C.’s minister of energy, vows to bring them down after a review of the increase by a panel of three bureaucrats. More recently he halted an interim rate increase of 9.73 per cent to start on April 1. Arguing it down to 8.23 per cent, it is due to take effect on May 1.

That is surely good news for a family dealing with a higher cost of living. But the fact is, he’s merely prolonging power rates that are certain to rise beyond the 32 per cent BC Hydro has requested, an increase that Coleman’s government has helped trigger through its own actions.

Here’s how.

The Cause

BC Hydro’s rate increases can be laid at the feet of two main issues: aging infrastructure and rising demand.

Many of BC Hydro’s power-generating facilities were built 40 to 50 years ago and their bones are slowly disintegrating. One facility, the Ruskin Dam in the Fraser Valley, was built 80 years ago and is an elder to BC Hydro itself. Upgrades to projects such as this are estimated to consume about 44 per cent of BC Hydro’s expenses between 2012 and 2014.

It’s not the first time that expenditures in the billions have been made by BC Hydro. Revenue Requirements Application documents show that between 1967 and 1983, for example, capital investments

regularly exceeded $2 billion a year. It was during this time that BC Hydro built facilities such as the WAC Bennett Dam, the Mica Dam and the Revelstoke Dam and Generating Station.

Then, for almost two decades, capital expenditures for BC Hydro dipped well below spending in other years. The reason, says Mike Farnworth, a member of successive NDP governments from 1991 to 2001 and more recently a candidate for the party leadership, is that facilities built in the 1970s and 1980s hadn’t yet reached the point that they needed billions of dollars in upgrades.

“Many capital projects are built on the basis of a 40-year life span,” he says. “You would invest over time. It’s kind of like your car, you’re not investing a lot in repair and maintenance.”

Now an apparent necessity, BC Hydro expects to put just over $7 billion into various capital projects between 2011 and 2014.

$1.545 billion will go to transmission projects including the Northwest Transmission Line, which will build 340 kilometres of transmission lines near Terrace, a town in northern B.C. It’s

expected to cost anywhere from $364 to $525 million, with $180 million coming from industry and up to $130 million kicked in by industry and the federal government. The cost to ratepayers is estimated at $94 million.

Other projects include the Vancouver City Transmission Project, which will build a substation in Vancouver’s Mount Pleasant neighbourhood and two underground transmission lines to service growing demands in the area. The budget for that project is estimated at anywhere from $177 to $195 million.

Improvements to hydroelectric dams, meanwhile, are expected to cost ratepayers up to $1.449 billion. This includes as much as $800 million to add two more generating units at the Mica Generating Station; $30 million to add generating capacity at the GM Shrum Generating Station; and an undisclosed cost for installing a sixth generating unit at the Revelstoke Generating Station (the fifth unit cost as much as $250 million).

BC Hydro also wants to increase the capacity of the Cheakamus Generating Station in the Squamish Valley. In a project for which the Crown corporation has yet to generate a budget, BC Hydro expects to install a second turbine, completing an initiative to increase the station’s generating capacity.

Also included in BC Hydro’s capital expenditures is the Smart Metering and Infrastructure program (SMI), which will replace analog meters with digital ones that display your home’s consumption of electricity at a given time.

A smart meter essentially allows two-way communication between the meter and the power authority, capturing through a “secure connection” the amount of electricity being consumed at any one time.

The forecast cost of the Smart Meter program is $930 million in total, with costs staggered as follows: $30.4 million this year; $140.5 million in 2012; $326.4 million in 2013; and $458.7 million in 2014.

All of these expenditures come as BC Hydro expects demand by domestic customers such as residences, light industrial/commercial operators and large industries to grow for the foreseeable future.

A PowerPoint presentation compiled as part of BC Hydro’s Integrated Resource Plan shows demand climbing as high as 63,988 GWh in 2017, 65,939 GWh in 2020 and to 70,668 GWh in 2025.

BC Hydro depends on a number of economic factors for its demand forecasts and housing seems to be the chief factor influencing the Crown corporation’s forecasts. A Conference Board of Canada report shows that housing starts are expected to grow from 22,510 in 2010 to 26,160 in 2011, 26,897 in 2012 and 27,248 in 2013.

BC Hydro is working to curb demand using a tool called demand-side management (DSM), a series of programs aimed at energy conservation. Demand-side measures include Power Smart, an advertising campaign aimed at discouraging waste and promoting energy efficient alternatives.

The cost of energy

The cost of energy is another major factor behind BC Hydro’s requested rate increase. It’s projected to take up almost a third of Hydro’s expenses between 2012 and 2014.

The overall cost of energy climbs from $1.139 billion in 2011 to $1.287 billion in 2014. That includes a $196 million increase in the cost of purchases from independent power producers (IPP’s). Most of that cost is due to higher average prices paid for purchases of energy from such projects.

IPP’s are well known in the Sea to Sky region. They have popped up on rivers including Fitzsimmons Creek, Rutherford Creek and are slated for tributaries of the Lillooet River.

An IPP is, in short, a generator of electricity developed by the private sector. It can come in the form of wind, solar, biomass or, in Sea to Sky’s case, run of river hydro generation.

Companies such as Innergex, Plutonic Power or Run of River Power enter into contracts with BC Hydro through Requests for Proposals like the Clean Power Call.

A proponent must provide information such as creditors, auditors and financial statements. They must also submit a project description showing generation technology, interconnection with the power grid, a development schedule and community engagement, such as with communities and First Nations.

Once BC Hydro finishes reviewing individual proposals, the Crown corporation decides whether to enter into negotiations with proponents towards Electricity Purchase Agreements (EPA’s), which set out the price for which BC Hydro will purchase electricity from a private company.

The length of an EPA can vary but, for example, IPP proponent Innergex’s agreements with BC Hydro are expected to last for 40 years, which is the maximum amount of time that a company can hold a water licence on a river. Innergex, in partnership with Ledcor, is proposing the Upper Lillooet run-of-river project near Pemberton.

EPA’s are subject to confidentiality agreements in order to protect the proponent against disclosure of financially sensitive information, according to Jim Scouras, BC Hydro’s director of energy procurement.

“The non-disclosure obligations protect them from the disclosure of confidential, commercially-sensitive information which can undermine their competitiveness,” he says. “From the BC Hydro perspective they prevent the sharing of sensitive price information (or other terms) which can disrupt the competitive procurement process.”

While protecting the business interests of a proponent, the confidentiality clause also means that no one except for BC Hydro and the proponent knows precisely how much ratepayers are paying for electricity from a private project.

The essential function of independent power producers is to help meet BC Hydro’s growing demand for electricity, as well as provide a buffer supply when demand is higher than anticipated… but that can also be sold on the open market.

Whether intended for domestic use or export, the cost of private electricity is escalating for BC Hydro, which forecasts in its application that the costs of energy from IPP’s will grow from $567.4 million in 2010 to $939.8 million in 2014.

The majority of these cost increases are attributed to “considerably higher” deliveries from projects approved under the Clean Power Call issued in 2008.

BC Hydro has essentially locked itself into more and more consumption of electricity from IPP’s through the Heritage Contract, a provincially-mandated agreement between the Crown corporation’s Generation and Distribution departments.

Adopted in 2003, the contract sets out an amount of electricity to be produced by Heritage Assets such as the Revelstoke and WAC Bennett Dams.

The agreement sets 49,000 GWh of electricity per year as the maximum amount of power from Heritage Assets that can be used for domestic needs – that means residential, commercial and industrial customers within British Columbia.

The agreement guarantees that domestic energy needs will be met through low-cost sources like the WAC Bennett Dam… up to a point. The Heritage Contract also means that any demand for electricity beyond 49,000 GWh has to be made up by the private sector.

In years when domestic demand reaches above 49,000 GWh, any surplus electricity from Heritage Assets is sold on the market and IPP’s make up the balance.

In 2008, for example, total domestic sales reached 53,299 GWh. Heritage assets actually produced 52,140 GWh in that year and could, theoretically, have been used to meet domestic energy needs.

Instead, because of the Heritage Contract, any GWh of electricity from Heritage Assets that brought domestic consumption above 49,000 GWh was sold on the open market. That’s 3,140 GWh that could have been used by British Columbians. Instead it was sold for $31.9 million.

In the very same year, BC Hydro purchased 7,765 GWh of electricity from IPP’s even though it didn’t need to purchase that much for domestic needs. The cost to ratepayers? $480 million.

The Heritage Contract initially stated that the province could terminate it with five years’ notice, anytime after April 1, 2009. The government has since terminated that clause, allowing the Heritage Contract to continue indefinitely.

That ensures that the IPP industry, estimated by PriceWaterhouse Coopers at a future value of $26.1 billion, will continue to provide tens of thousands of gigawatt hours of electricity to British Columbians at rates that exceed the cost of energy from Heritage Assets.

The Heritage Contract might open up the argument that, to keep rates low, we should just build more dams because they’ll cost the same as the old ones.

Not so, says Paul Kariya, executive director of Clean Energy BC, whose job it is to lobby the provincial government on behalf of the IPP industry.

Kariya says that the reason electricity from Heritage Assets is cheaper is that they were built a long time ago and the price of their electricity hasn’t changed substantially except for escalation in the Consumer Price Index.

IPP’s, he says, are often locked into fixed prices for 40 years. If BC Hydro were to build a new dam, he says, there’s a possibility it would cost just as much to buy electricity as from an IPP.

“Certainly if you look at the price that we’re paying, that was amortized a long time ago,” Kariya says. “(BC Hydro) put before the Utilities Commission an upgrade to the Ruskin Dam. If you were to run through that and come out with a number, you’d end up very close. In fact, IPP’s might be cheaper than the Ruskin costs.”

That’s of little consolation to Doug Helmer, a farmer in the Pemberton Valley who has joined a province-wide movement against IPP’s.

He says BC Hydro needs to be more forthcoming about the costs of electricity from private sources like the Upper Lillooet project, which is slated for development on three separate rivers upstream from his property in the Pemberton Meadows.

“What I’d really like to know is how much they’re paying per megawatt hour,” he says. “It’s our resource, it’s a public resource, water, land and so on. They’re turning it over to private interests and I’d like to see some justification for it.”

The Clean Energy Act

Upgrades to infrastructure may do plenty to meet a growing demand for electricity. But the fact is, in a number of very expensive cases, BC Hydro need not justify those upgrades to anyone but itself.

That’s thanks to the Clean Energy Act, which was passed by the provincial government on June 3, 2010. It’s a policy that the provincial government introduced with much fanfare, saying it would set a foundation for “electricity self-sufficiency, job creation and reduced greenhouse gas emissions.”

Then-Premier Gordon Campbell pledged that the Act would “maximize the value” of Heritage Assets like the Revelstoke and Ruskin Dams and keep rates “competitive” while making British Columbia a leader in the development of green energy.

The Act sets out 16 objectives, including the achievement of “electricity self-sufficiency,” which means that by the year 2016, BC Hydro must have enough electricity that meets any demand figures cited in a rate application.

Electricity self-sufficiency also means that BC Hydro must acquire by the year 2020 the rights to 3,000 GWh of electricity, in addition to its energy needs by 2016. That could come through construction of a new dam such as the Site C project or purchasing more electricity from independent power producers. Nuclear power is outlawed as an option for meeting those obligations.

The Act also exempts a swath of projects from oversight by the Utilities Commission. (See lists at bottom)

With the Clean Energy Act in place, at least $7.423 billion worth of capital projects will not have to face an oversight process through the commission. That’s over $7 billion in spending that BC Hydro need not justify to anyone but itself.

That includes the $930 million Smart Metering and Infrastructure Program; the $404 million Northwest Transmission Line; and any projects extended agreements under the 2009 Clean Power Call. The public can’t be certain that any of that spending is necessary.

The Act also narrows, to a large degree, the Utilities Commission’s ability to limit a rate increase. It states that rates must permit BC Hydro to collect “sufficient revenue” in a fiscal year that will allow it to achieve “electricity self-sufficiency.”

Former Energy Minister Bill Bennett spoke eloquently about the Clean Energy Act at the Union of British Columbia Municipalities (UBCM) in Whistler last year. He called the Act one of the “most important” pieces of legislation passed in the decade that the BC Liberals have spent in government, adding it would guide economic activity in the province for years to come.

Only one participant at the session stood up to ask about the projects that have been granted exemptions from commission oversight.

Gwen Johansson, a soft-spoken councillor from the District of Hudson’s Hope, a small northern community that hosts power projects such as the WAC Bennett and Peace Canyon Dams, pointed out that her town would soon play host to Site C, a project that will back up an 83-kilometre long reservoir behind it, stretching a section of the Peace River to two or three times its width.

Johansson’s own home is located within the project’s impoundment area, where water will be stored to generate the dam’s electricity. If the project goes ahead, her home will be flooded.

The province expects that Site C will provide it with 4,600 GWh of electricity every year – more than enough to meet electricity supply obligations by 2020. Pegged at a preliminary cost of $5 billion to $6.6 billion, it too is exempted from commission oversight.

Johansson said at the workshop that her community already plays host to facilities that don’t produce any tax revenue for the municipality and Site C would do the same thing. It would flood land, generate electricity and, with the Clean Energy Act in place, deny residents the chance to offer input in a process to determine whether the project was in the public interest.

“The BCUC, I haven’t always agreed with it,” Johansson told the workshop. “I haven’t always agreed with their decisions, but I don’t think there was any doubt that they had the expertise, the mandate and the resources, and the commitment to making decisions that were in the public interest.

“I would urge the provincial government to place some of those projects back under the BCUC for scrutiny. I think that was an error, to take that scrutiny away.”

Bennett responded that the Site C project would not be exempt from all scrutiny – just the Utilities Commission. It would still have to pass an Environmental Assessment, which has a public comment period in which residents of communities such as Hudson’s Hope can offer feedback about a project.

“When I think back to WAC Bennett, and that cabinet’s decision to build various things in this province, there’s a really good chance, had there been a kind of scrutiny or oversight that there is today, they would have been told not to,” Bennett said. “They didn’t necessarily have a market for that electricity, it was visionary. Our desire to be self-sufficient and develop an export market is visionary.”

For Johansson, exempting the projects will be costly for the communities that host them.

“A healthy community is a community that has some influence over its own destiny,” she said in an interview. “The decisions being made in Hudson’s Hope are being made in Victoria, Vancouver, Calgary, Houston or China.”

The province simply believes that an environmental assessment is enough oversight for projects such as Site C. The Ministry of Energy, Mines and Petroleum Resources says that projects were exempted under the Clean Energy Act because they have a “broader provincial benefit than is reflected in the interests normally considered by the BCUC.”

The Act meets a critic in Mark Jaccard, an environmental economist at Simon Fraser University and chair of the Utilities Commission from 1992 to 1995.

He said the provincial government’s decision to exempt those projects from commission oversight probably had much to do with the commission’s decision on the 2008 Long-Term Acquisition Plan, in which the province sought to downgrade dependence on Burrard Thermal, a natural gas generator and producer of greenhouse gases, replacing it with run-of-river electricity generated by the private sector.

The exemptions essentially force the public to trust BC Hydro when it says it needs to spend their money on these projects. And there, Jaccard has a problem.

“I think it is very difficult to trust that something is necessary,” he says. “I think that all of these (projects) should be subject to commission regulatory approval, although I do believe that government should give strong direction to the commission with respect to its climate policies and how these fit in with that.”

Conclusion

June 2011 approaches. By the end of that month the rate review panel will report back with recommendations on how to reduce the impact of hydro rate increases on B.C. families.

Three bureaucrats have been tasked to look into BC Hydro’s financial performance, as well as rate structures, corporate structures and “any other matters” that may arise over the course of the review.

Absent from the review’s terms of reference are any references to actions the provincial government has taken that could increase rates.

There’s nothing about self-sufficiency. There’s nothing about the Heritage Contract. There’s nothing about the $7 billion that BC Hydro can basically spend unilaterally.

Pique has repeatedly requested an interview with Minister Rich Coleman about these matters but he hasn’t been available for comment.

There’s little question that British Columbians want to continue enjoying abundant electricity with a low impact on the environment. There also remains little question that they’ll soon have to pay more to access it.

What remains unclear is how much more they’ll have to pay. And who, ultimately, should really be taking responsibility.

Additional Information

B.C. Utilities Commission – Rate Application Process

To get its desired rate increase, BC Hydro must first ask permission of the B.C. Utilities Commission (BCUC). The commission’s role is to ensure that customers of energy providers like BC Hydro and FortisBC receive reliable energy services at fair rates.

A Revenue Requirements Application lays out the case for why BC Hydro needs a 32 per cent rate increase; spread over three years at 9.73 per cent each year.

Accounts vary as to how this will hit customers. Media have reported that rates are going up by 50 per cent over five years; that’s true if you consider a 6.11 per cent increase that took effect this year and a 6.95 per cent increase projected for 2015.

The more staggering figure is that BC Hydro expects rates to increase by 100 per cent over ten years. That means a $100 power bill for a single-family home in Whistler will climb to $200 by the year 2021. For Whistler Blackcomb it will mean higher overhead costs to operate ski lifts and heat the Roundhouse.

BC Hydro filed its application in early March and now it will go through policy workshops, evidentiary updates and other matters before a panel of three commissioners decides whether to grant the increase.

Various parties have also registered as intervenors in the application including include COPE 378, a union representing BC Hydro employees, and the BC Public Interest Advocacy Centre.

Like a civil trial, the plaintiff, here represented by BC Hydro, will approach the commissioners and make a case for raising rates by 32 per cent. The defendant, in this case ratepayers like you and me, will see groups like the BC Public Interest Advocacy Centre try to convince the commissioners otherwise.

The process is expected to take many months, with oral hearings commencing on October 20, 2011.

Projects Exempted from B.C. Utilities Commission Oversight

–       The Northwest Transmission Line – A 287 kilovolt transmission line between the Skeena substation and Bob Quinn Lake, and related facilities and contracts

–       (estimated cost: $404 million, with $180 million coming from AltaGas and the B.C. Transmission Corporation; $130 million through the Government of Canada’s Green Infrastructure Fund; and $94 million from BC Hydro ratepayers)

–       Mica Units 5 and 6 – Project to install two additional turbines and related works and equipment at the Mica Generating Station

–       (estimated cost: $700 million to $800 million)

–       Revelstoke Unit 6 – Project to install an additional turbine and related works and equipment at the Revelstoke Dam and Generating Station

–       (estimated cost: unknown, but installation of Unit 5 cost between $230 million and $250 million)

–       Site C – Project to build a third dam on the Peace River in northeast British Columbia to provide approximately 4,600 GWh of energy each year and 900 MW of capacity

–       (estimated cost: $5 billion to $6.6 billion, based on a historic design of the project from the 1980’s)

–       Bioenergy Phase II Call – Request for proposals to acquire up to 1,000 GWh of electricity per year through bioenergy

–       (estimated cost: unknown, but Bioenergy Phase I Call cost $221.5 million between 2010 and 2014)

–       2009 Clean Power Call – Request for proposals to acquire up to 5,000 GWh of energy per year from clean or renewable resources

–       (estimated cost: $211.7 million between 2012 and 2014)

–       Standing Offer Program – Ongoing program to acquire electricity from cogeneration, clean or renewable energy facilities with up to 10 MW of capacity

–       (estimated cost: $35.9 million between 2010 and 2014)

–       Smart Metering and Infrastructure – A program to install smart meters and related infrastructure in B.C. homes that will allow two-way communication between BC Hydro and customers reflecting how much electricity is being used at any one time

–       (estimated cost: $930 million)

Total Estimated Cost to Ratepayers: x > $7.423 billion

(Note: Total estimated cost takes into account lower estimates on all the projects mentioned above. Therefore, Revelstoke Unit 6 at $230 million, Mica Units 5 and 6 at $700 million. Site C at $5 billion. Costs were not available for exempted projects including the Feed-in Tariff or agreements with pulp and paper customers.)

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About jesseferreras

Sea to Sky-based journalist. Snowboarder, cyclist, cinephile, bon vivant.
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3 Responses to The Great Green Shakedown

  1. Hugh Thomas says:

    You said:
    “The Heritage Contract also means that any demand for electricity beyond 49,000 GWh has to be made up by the private sector.”

    Can you tell me where it says that?
    Thanks.

  2. It doesn’t, at least not directly in the Revenue Requirements Application. The best I can do is refer you to Appendix A, Schedule 3.5 of BC Hydro’s F12-F14 RRA, which you can download from the B.C. Utilities Commission website. Better yet, go straight to page 435, which gives a breakdown for the cost and volume of energy. You’ll see that “Heritage Energy” supplied to British Columbians only reaches up to 49,000 GWh in years that public assets are able to generate that much.

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