May 23, 2012

From Bad to Worse — The Latest in BC Energy Policy


It is, I suppose, not surprising that the government would step in and effectively terminate the BC Utilities Commission’s hearing on BC Hydro’s rates. The issues and the evidence were getting embarrassing.

In its rate application, BC Hydro reported that by 2014  it will be purchasing over 5000 GWh of private power that it acquired in recent years at prices averaging well over $100/ MWh. This is power that BC Hydro didn’t need to acquire to ensure reliable supply, nor did BC Hydro consider that the purchases would be economic. It was power that BC Hydro was forced to buy because of the government’s exceptionally misguided Energy Policy — something the government itself now recognizes, unfortunately too late, with its planned changes to the self-sufficiency requirement it imposed in directives and legislation.

BC Hydro forecasts that the value of these power purchases will be less than $50/MWh in 2014, meaning that they will result in losses of over $250 million in that year alone. These are losses BC Hydro didn’t have to incur and would not have incurred except for government policy. There are reasons why BC Hydro needs major rate increases and this is clearly one of them.

Government policy underlies the need for rate increases in other ways. The government increased the water rental rate — a tax on hydroelectric production — in a way that affected BC Hydro but no private producer of power in the province. As well as biasing the economics of public versus private production, that increased the amount of revenues BC Hydro has to recover in rates. The government also issued a special direction that deemed BC Hydro to have more equity than it in fact has. Because BC Hydro revenue requirements include a return on equity, that too requires increases in rates.

Then there have been the government-directed major investments by BC Hydro with no business or well-documented public policy justification. The so-called business case for smart meters rested mostly on identifying grow-op operations, albeit a unique, but nonetheless very expensive policing technique. And the Northwest Transmission line was built at great expense to enable new mine operations to proceed with BC Hydro-supplied power — subsidized power through a subsidized line. As one BC Hydro executive expressed it, the financial plan for that line was simple: we will lose money on the first MWh we deliver, and we will lose more money the more we sell.

It was, of course, very predictable that all of this would put severe pressure on rates. Even excessive use of deferral accounts, a practice of postponing the recovery of certain costs until  future years that was sharply criticized by the Auditor General and about to be scrutinized by the BC Utilities Commission, could not mask the need for major rate increases.

What to do, what to do? The latest answer from government is to pretend that the need for major rate increases does not exist. Forget the evidence of BC Hydro, ignore the advice of the Auditor General, prevent the BC Utilities Commission from doing its independent work. The government’s latest action won’t reduce costs.  It will only add to the already unacceptable deferral of cost recovery to future years. Politically expedient perhaps, but from a public policy point of view it just makes what has already been incredibly bad energy policy that much worse.