The BCUC's Interim Report on Site C

The BCUC gives few clues as to what it will ultimately conclude with respect to the merits of completing, suspending or terminating Site C. It certainly did not provide any interim assessment of the key question that the BCUC was asked to address – what would be the impact of the different options on ratepayers. Nevertheless, buried in the two hundred plus page report are some very interesting issues that warrant careful consideration in the analysis and conclusions that are ultimately made.

It is not clear from the Interim Report whether the failings of the previous government’s energy policy, which forced BC Hydro to buy run of river, wind and other IPP supply BC Hydro didn’t need at prices far in excess of its market value, are fully understood. The problem wasn’t just the high price for this energy; it was its low value. Run of river supply is generated disproportionately during the springtime and other water run-off periods when it is least needed to complement BC Hydro’s own hydroelectric system. Wind supply is generated when the wind blows, not necessarily when most required or valuable, and offers virtually no dependable peak generating capacity. It does not meaningfully assist in ensuring reliable supply during cold snaps or other time periods when all available resources must be used to meet the peak loads.

The rationale for constructing Site C was that it would be a far more valuable source of supply than the IPP energy BC Hydro had been buying. It not only would provide energy, it would provide dependable peak capacity and storage – key attributes of increasing importance and value the more run of river and wind energy BC Hydro acquired and, from a trade point of view, the more that wind and solar projects were being developed in neighbouring jurisdictions.

The BC Clean Energy Association (the IPP lobby) and a number of prominent critics of Site C dismissed or disregarded the peak generating capacity and other attributes that would give Site C significantly more value than wind or solar supply. And in its report the BCUC raised questions about the value ‘adders’ BC Hydro estimated in its analysis of Site C relative to alternative renewable sources of supply.

It is a key issue that hopefully will be clearly addressed in the BCUC’s final report. Given the sad history of the forced purchase of low value IPP energy in recent years, it is critically important to understand the full implications and cost of abandoning the project.

Related to the issue of the relative value of different sources of supply is the issue of the relative cost and risks of different ownership and financing arrangements. The previous government took the position that all but large hydro projects should be developed and financed by the private sector. In its view, private ownership and financing would reduce risks of government debt for taxpayers.

One of the ironies in the debate about Site C is that it isn’t just IPP industry lobbyists raising the alarm about the hidden cost of government debt. Left-leaning opponents of Site C have also stated that among other concerns they have with Site C, it would increase government-guaranteed debt.

This issue is manifested in the Interim Report by questions the panel raised about the cost of capital one should assume when assessing the relative cost of BC Hydro-financed Site C as compared to privately financed alternative sources of supply.

Proponents of IPPs, like their counterparts who argue for P3 financing of public sector infrastructure, assert that the lower cost of capital BC Hydro can secure through debt financing (backed by government guarantee) is illusory. It simply transfers risk and hidden costs to taxpayers. They want all projects to be assessed at the same weighted average cost of capital the private sector would require to develop and finance the project. And in any present value calculation they want future costs and benefits to be discounted at that same relatively high rate.

The problem, however, is that assuming a private sector cost of capital ignores the actual cost saving that government financing provides. And the underlying rationale about the risk private developers assume ignores the transfer of that risk to BC Hydro when it enters into long term contracts to buy the IPP supply whether needed and economic or not (as the large losses that BC Hydro is currently incurring on IPP purchases clearly illustrates).

One can make the expected impact of Site C on ratepayers appear greater than it would in fact be by assuming a higher cost of capital than BC Hydro would in fact incur and be allowed to recover in rates. But a more accurate and transparent assessment would be to use, as BC Hydro has done in its submission, the cost of capital it would be allowed to recover in rates. Differences in risk for financing and other reasons could then be separately assessed.

It will be interesting to see what BCUC does in its final report –  whether it provides its best estimate of the actual impacts of Site C on ratepayers, or an estimate of what the impacts would be if one assumed a private sector cost of capital.

Of course, if one assumes a private sector cost of capital it is unlikely any large hydro project with an operating life of 60 years or more would be undertaken. That is why BC Hydro was established in the first place.  The private sector would not undertake the large hydro projects on the Peace and Columbia River -- projects that wouldn't provide the immediate returns the private sector required but that have proven immensely valuable to ratepayers over the very long term.