Feb 23, 2011

An Interesting Spin


In its latest planning document, BC Hydro is forecasting a rate increase of 50% over the next five years. In fact, earlier BC Hydro submissions to the BC Utilities Commission revealed that rates are expected to increase at that pace for the next ten years, with rates forecast to more than double over that period. Not surprisingly, though disappointingly, recently appointed BC Hydro CEO Dave Cobb decided to blame a lack of investment in the system from the mid 1990s as the cause of this remarkable upward surge in rates.

I suppose there is no current issue that Liberal supporters and appointees could not link to the last NDP administration (and perhaps with some creativity to the Barrett government of over 35 years ago). Though good political sport, the problem with this backcasting of responsibility is that it ignores the policy issues of today that underlie the upward pressure on rates — it ignores the policies that could be changed today to mitigate unnecessary increases in BC Hydro costs and rates.

The most fundamental policy issue is the series of government orders (and legislation overruling the independent BC Utilities Commission) that force BC Hydro to buy more power than it needs at prices more than double their market value.

  • BC Hydro cannot rely on any imports of electricity (even of hydro or wind energy) to help restore reservoir levels in very dry years
  • BC Hydro cannot rely on the Burrard Thermal plant to back up its hydroelectric system, even in the most extreme drought years
  • BC Hydro must assume it cannot use any of the large amount of power that the province receives each year under the Columbia River Treaty.

In short, BC Hydro is not allowed to manage its hydroelectric system efficiently; it instead is being forced to buy high cost, low value IPP supply that in most years it will resell at a significant loss. By BC Hydro’s own calculations this is unnecessarily adding billions of dollars to its costs —  clearly adding to the upward pressure on rates.

Exacerbating the downgrading of BC Hydro’s supply, are the policies that attract new electric-intensive loads at what are essentially subsidized prices. BC Hydro will lose tens of millions of dollars per year on the sales it makes to each new mine it connects as a result of the transmission lines it has been directed to build and the pricing policies it is legislated to follow.This too is driving up rates. Someone has to pay for the multi-million dollar shortfalls in revenues from each new mine connected to the system.

And then there are the policies designed to exaggerate the cost of BC Hydro’s own investments. Government directives require BC Hydro to deem that it has a higher proportion of equity to debt than it actually has. This in turn is causing BC Hydro to build into its revenue requirements a return on capital (and an artificially high one at that) on roughly 110% of its own investment. The need for refurbishing the system indeed will contribute to higher rates. However, current policy causing BC Hydro to earn a return on 110% of the investment is making that impact greater than necessary.

In past BC Utilities Commission rate hearings, BC Hydro has refused to calculate what the cost and rate impact of these and other current policies are. Without a doubt, however, they are very significant.

Mr Cobb could have been more transparent. The problem, he could have said, is not ‘them’ — the policies of an NDP administration of over a decade ago. He could have acknowledged and started to address that a large part of the problem is ‘us’. Maybe then a sensible debate could follow and reasonable improvements made.

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