Brady Yauch is an economist at the Consumer Policy Institute (CPI), which identifies itself as “an independent think-tank dedicated to achieving lower costs and greater efficiencies for Canadian consumers, particularly in sectors run by government monopolies or those receiving large subsidies.”
Mr. Yauch published a powerful examination of mismanagement at utilities in four Canadian provinces.
I recommend reading the entire linked document but extracts follow that refer specifically to British Columbia. Regular readers of In-Sights will not be surprised at the stated facts but they’ve been routinely ignored by the province’s most experienced political pundits. The information doesn’t suit their political purposes.
Note: the following extracts are published with permission.
How megaprojects bankrupt public power utilities and leave regulators in the dark: report, Brady Yauch, Consumer Policy Institute:
Government-owned power utilities across Canada are pushing ahead with multi-billion dollar megaprojects, while undermining the regulators put in place to protect consumers from such reckless behaviour…
Power utilities in Manitoba, Newfoundland and Labrador, B.C. and Ontario are being pushed to the financial brink as a result of a series of megaprojects. The cost to electricity consumers – and taxpayers that will be forced to bail the utilities out if the megaprojects go bust – is $43 billion and counting for just four projects…
The megaprojects will produce, in some cases, triple-digit rate increases for electricity customers at a time of shrinking or little demand growth. In an attempt to shield consumers from the real cost of megaprojects – and shield themselves from public criticism over soaring hydro rates – provincial governments have resorted to using a combination of accounting sleights of hand, a massive deferral of costs to future customers and the backstop of provincial and federal taxpayers.
Provincial governments repeatedly ignored legislation explicitly put in place to protect ratepayers and taxpayers alike from this type of reckless spending. As detailed in the report, political leaders either ignored, shutdown or publicly disparaged the regulators tasked with finding out whether megaprojects offer good value for money. In the process, provincial governments have contravened their own laws requiring regulators to determine whether expensive capital megaprojects are in the best interest of ratepayers….
Site C – the megaproject that just won’t go away
Sometimes it takes many attempts for a particular megaproject to come to fruition. BC Hydro …has been trying to get the massive Site C dam built for decades. In each of its previous attempts, the crown corporation faced a critical utilities commission, less-than forecasted demand to justify the project, or such intense public scrutiny – or a combination of all three – that it had to shelve the endeavor and wait patiently for the right opportunity (or government) to again push ahead. Opposition to the dam has come from a range of groups, including environmentalists, politicians, First Nations, farmers and the province’s own regulator.
Yet the utility has never fully put the project to bed.
So, in 2016 when then Premier Christy Clark said she would get the project “past the point of no return,” it became clear that the public utility – backed by the province relying on the power of legislation to push the project along — was finally about to win the war.
Decades in the making
In the 1950s, energy planners proposed four dams to be constructed in the Peace River valleycin the northeast corner of British Columbia. Two of them — the W.A.C. Bennett Dam and Peace Canyon Dam — were built in 1967 and 1980, respectively.
Plans to construct Site C — the third of the four dams — kicked off at the end of 1979, with BC Hydro formally submitting an application to the province in 1980. By 1981, the application was referred to the British Columbia Utilities Commission (BCUC) for review, which established a special committee to oversee the process.
In 1983, the commission ruled against Site C. In its decision, the BCUC argued that BC Hydro was overestimating future demand, that it wasn’t clear that Site C “was the best possible project from a provincial point of view” and that, ultimately, the application didn’t clearly demonstrate that “construction must or should start immediately.” Later that year, the government — BC Hydro’s sole shareholder — formally pulled the application.
…By 2010, the province formally declared that it was directing BC Hydro to move ahead with the project, yet at the same time, admitting that the final cost of the project was undetermined. To avoid the thorny process of a detailed examination of the project by regulators, the province passed Bill 17 (2010), the Clean Energy Act, which exempted Site C from oversight and review from the BCUC. Energy Minister Bill Bennett scoffed at the idea of having “a group of unelected bureaucrats and lawyers” decide the future of the project…
Hidden subsidies, soaring debt levels and accounting tricks at BC Hydro
…In 2006, BC Hydro’s long-term debt stood at $5.7 billion. By 2016, that figure had increased to $15.8 billion — amounting to an increase of more than 177% and $2.6 billion more than it forecast in its 2014 application to the BCUC. BC Hydro now expects its long-term debt to increase by an additional $3.2 billion to more than $19 billion by the end of 2019.
By 2019, the total amount of BC Hydro’s short and long-term debt will total $21.8 billion, while the value of its regulated assets will be less than that at $21.6 billion. Every dollar of assets is backed by more than one dollar in debt.
…A highly leveraged balance sheet — backed by the province — isn’t the only financial maneuver helping BC Hydro. The utility is also relying on an accounting sleight of hand to make its balance sheet look better in the short-term through an aggressive use of what are known as “deferral accounts” or “regulatory assets.” These accounts, essentially, defer current expenses to later years in order to “smooth” rates — and keep them artificially low in the near term. A “regulatory asset,” then, is money that the company expects to earn in future years from ratepayers (through future rate increases).
The result is that current expenses are lowered by deferring them to future ratepayers — a move which ultimately boosts the utility’s current net income and increases the amount of dividends it can provide to its sole shareholder (the province).
Unlike most utilities, which rely on small deferral accounts to help offset minor variations in costs and revenues and are typically cleared within a couple of years, BC Hydro — at the behest of the province — has allowed its deferral accounts to grow into the billions of dollars. Doing so means that future ratepayers will be on the hook for the billions of dollars to cover the costs that the company has deferred — all in an effort to reduce rates in the short term and delay the day of reckoning for ratepayers.
…Rather than establish a clear plan to tackle the amounts in the deferral accounts — as the Auditor General recommended in 2011 — BC Hydro has allowed them to grow at a faster rate than previously forecasted…
The need for Site C is far from clear
Ignoring the impact of a highly leveraged utility and the billions of dollars in deferred accounts that future ratepayers will be left paying back, the question remains: is Site C even needed?
Ever since Site C was first proposed in 1979, BC Hydro has repeatedly tabled optimistic demand forecasts to justify its construction. In 1979, for example, BC Hydro expected that by 1991, domestic demand would total 54,770 GWh. Domestic demand in the province didn’t hit that level until 2005 and was at that same level in 2015. [emphasis added]
The last ten years have been no exception to the past when it comes to optimistic forecasts from BC Hydro. In its 2013-2023 load forecast, for example, the utility expected that by 2016, total energy sales in the province would amount to 56,315 GWh. Yet, in its most recent rate application to the BCUC, BC Hydro admits that domestic load in 2016 was 51,023 GWh — or nearly 10% lower than it expected and largely level with demand at the time…
…Peak demand — or the amount of power consumed during the busiest hours — has also remained flat over the last decade, coming in at 9,317 MWh in 2006 and 9,602 MWh in 2016. Looking back to 2004, peak demand was actually higher than it was in 2016, so over the last 12 years, it’s actually declined. [emphasis added]
Nonetheless, BC Hydro continues to adhere to its optimistic forecasts and is expecting demand in the province to increase by more than 8% over the next three years — a rate of increase that the utility hasn’t experienced for nearly two decades and is contrary to what is happening across North America where electricity demand is largely flat or declining.
Overly optimistic forecasts aren’t a new problem at BC Hydro. A recent study on the Site C dam found that 85% of the demand forecasts made by BC Hydro since the 1980s have been overestimates…
Review panel skeptical that Site C is needed
…Harry Swain, the chair of the review panel — and now outspoken critic of the project — said that while the panel originally feared BC Hydro’s forecasts were optimistic, those fears have “now come to pass.” Contrary to claims from BC Hydro that demand will once again pick up, Swain says there is no “indication that there is any huge load-growth lurking out there. In fact, quite the contrary.”
Exporting at a loss
The economics of exporting any surplus power from Site C — if the project turns out to be unnecessary to meet provincial demand — are also dire. While in the past BC Hydro has largely recovered the cost of exporting its surplus power (and at times profited from it), changing market conditions mean that exporting Site C’s power will be subsidized by the province’s ratepayers.
The utility admits as much, saying that in the first four years of operation, exporting Site C’s power will cost the company $800 million…
A “significant” impact on the environment
While the province repeatedly says that Site C will provide “clean” power for the next 100 years, the federal-provincial joint review panel offered a much more stark assessment.
One study found that the joint review panel noted that the Site C dam would have more “significant” negative impacts on the environment than any other project ever assessed by the Canada Environmental Assessment Agency (CEAA). The number of “significant” environmental impacts from the Site C dam are four times the level of those of another megaproject dam, the Muskrat Falls project in Newfoundland and Labrador.
The “significant” environmental impacts, according to the joint review panel are wide-ranging and affect fish, wetlands, plant life, migratory birds and birds of prey, among others.
The panel also found that the project would have a significant impact on the use of the lands surrounding the dam of First Nations and that some of these impacts “cannot be mitigated.”
This chart is updated with sales statistics reported in BC Hydro’s recently issued annual report for the fiscal year ended March 2017:
The CPI paper examines peak and total demand but it does not note that a growing surplus of power results from private power purchases. One of the first acts of the newly installed Chair of BC Hydro was to suspend consideration of new IPP projects.
In what must be one of the most idiotic programs ever implemented, ratepayers have paid billions for private electricity that caused BC Hydro to stop generating ts own cheap power or created surpluses the utility exported for prices about one third of rates paid IPPs. Even as the gap between the cost of private power and market value passed $5 billion, BC Hydro continued to add new supplies of private power. This continued until the new NDP Government mandated a change.
Demand Side Management (DSM) is the least cost method of ensuring consumers have power when needed. Conservation is readily achieved by employing more efficient technologies and that partly explains a dozen years of flat demand.
BC, by the way, is not alone in experiencing more than a decade of flat demand. Only the most optimistic of projections suggest this will change. And, if if does, new supplies will be produced mostly by solar and wind facilities.
Because North Americans are the world’s largest per capita users of electricity, we have greater opportunities to conserve. With rapidly rising prices, we become more likely to embrace conservation even more.
This is from an email by Brady Yauch:
I’ve been reading your blog for a long time and I really respect what you’re doing. Sadly, many of the criticisms you launch against BC Hydro could also be used against other public utilities. Those projects further along the construction schedule (Keeyask and Muskrat) should have BC Hydro ratepayers very nervous. I’m curious if the BCUC has the courage to squash the project (I doubt it). More likely, it will say the project is already too far along and it would be cheaper to stay on that path. This will give the government cover — “look, we don’t like it, but it’s too expensive to stop!”
I didn’t address your concerns about private power purchases, which I know is a big and important issue in BC. I only wanted to focus on megaprojects, but also think the move to buy power from private producers when there are cheaper alternatives available is another argument for why politicians shouldn’t be running the electricity sector.