November 27, 2002

Setting Hydro Rates

The government is pretending that the BC Utilities Commission will determine how much you pay for electricity. The full truth is that the Commission will rule on applications by what remains of BC Hydro, subject to the policies set by the government.

On the day the new energy policy was announced, government's appointment as Chair of BC Hydro refused to say what level of increase he will apply for. He only said it will be less than 30% in one year, but how much will it go up over 5 or 10 years? The answer is, a lot more than it would if private power companies were not allowed to export directly to the US. A spokesperson for private power companies was quoted as saying he expects electricity rates to increase by 50% over the next 10 years.

Those concerned about the electricity rates will find it worthwhile to examine the operation of the BC Utilities Commission. One of the principles in rate setting is to allow a utility to charge a rate that will permit it to earn some specified rate of return on equity. Much debate ensues on how to determine the target rate of return and how to measure equity. On July 11, 2002, the Commission issued order number G-47-02 that allowed BC Hydro to increase its equity by changing the accounting treatment and amortization of foreign exchange gains and losses commencing April 1, 2002. Notice that the Commission's rule was made at a time when the government would have you believe BC Hydro was operating independently of the Commission. The Commission has continually regulated BC Hydro on all matters other than rate setting. Its ruling with respect to equity set the stage for Finance Minister Gary Collins to raid Hydro's rate stabilization fund in order for government to receive its specified return on BC Hydro's larger equity.

How can the public be assured that a cozy relationship between the Commission, BC Hydro and government won't result in higher electricity rates just like the equity decision that almost emptied Hydro's rate stabilization fund? The only input the public might have is for advocacy groups to appear as interveners in Commission hearings and beg on behalf of the public interest.

Government can pretend that rates will be independently adjudicated by the Utilities Commission but it cannot get away with the falsehood that BC Hydro acts independently of government instructions. The public deserves to know what instructions government will give to BC Hydro with respect to its application for a rate increase. Will those instructions be like the raid on Hydro's rate stabilization fund as government looks for every possible source of revenue to compensation for the mistakes in made with reckless tax cuts? It is probably a safe bet that Hydro won't appear before the Commission and apply for rate reductions based on enormous savings from its deal with Accenture.

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November 26, 2002

BC's Costly Energy Policy

The Campbell government's energy plan was to be released in February. Nine months late, its gestation is a sign of things to come. Like a child growing, it will take years to see the consequences of a few changes to fundamental rules. The energy plan consists of 26 "actions"; three of the key ones are:

IPP stands for independent power producer, and that means private power company. Gordon Campbell is privatizing BC Hydro by breaking up the crown jewel, freezing its growth and operating it for the benefit of private power companies.

Hydro as we know it will be gone when legislation is introduced in the spring of 2003 and implemented in 2004; however, residential consumers are unlikely to notice any substantial differences until Premier Campbell's energy baby is in its teens. Government is apparently relying on the maxim that voters have short memories, and some would say even shorter time spans when it comes to looking forward.

"Price signals" mean only one thing, higher costs. The BC government took a page from the strategy David Anderson used to beat Glen Clark in the fight over BC salmon. Anderson turned the tables by framing the debate as one of conservation. Gordon Campbell's government has done the same thing with its energy plan. Higher prices are described in terms of sending the right signals for environmental protection. In the words of the executive summary "It is possible to design electricity rates to give consumers the right signals for this energy saving activity." Using higher prices in order to encourage conservation may be a good thing IF government could capture the revenue from the higher prices and use part of it to compensate those who are harmed (cannot heat their houses). The Campbell energy plan makes reference to revenues from "heritage resources" (the dams) but it ignores the windfall profits that private power producers will make from their new role.

The Campbell government has a habit of making promises that are so vague that it has to turn to others to fill in the details. When government talked about making education an essential service, they handed the job of defining what they meant to the Labour Relations Board and then stepped in before the Board could finalize its ruling. When government promised to give municipalities more power, a committee was set up to study the "community charter" and define what Campbell meant by his promise. That work is still incomplete. Government promised electoral reform through a "citizens assembly" but it has had to hire Gordon Gibson to say what a citizens assembly looks like. The same trademark vagueness is stamped on a key piece of the energy plan.

The energy plan claims that " a legislated heritage contract will preserve the benefits of BC Hydro's existing generation." After stalling on the release of its energy plan for nine months, the government is not ready to say what will be in its "legislated heritage contract". Like other vague promises from the Campbell government, the heritage contract will be defined by others. In this case, government says "The BC Utilities Commission will conduct an inquiry and recommend the terms and conditions of the heritage contract legislation. " This is déjà vu all over again!

The difference in annual value between market prices and the power generated by the "heritage resources" is approximately $1 billion. That is $1 billion every year for decades to come. A lot is at stake for those who get the benefits of the heritage resources. The government's response, with its vague promise about a legislated heritage contract, is that the distribution arm of what is left of BC Hydro will "will obtain heritage energy from the generation business at a rate to be determined by the BC Utilities Commission." Keep in mind that over the years distribution companies, and the plan uses the plural, will acquire an increasingly large portion of their power from private power companies. The lower "heritage resource" price will be used to cushion the blow from the higher private power company price.

BC Hydro currently buys power from some independent power producers but the difference is it selects the producers based on low bid. Under the new scheme, private power companies will participate directly in US markets through the use of public transmission lines. If they produce power at one price, say 3.5 cents per kilowatt hour, and can sell it at another to the US, say 5.5 cents per kilowatt hour, why would they ever sell to BC Hydro at anything less than the US market rate? The new energy policy means that all new power will be produced by private companies, and BC consumers will pay US determined market rates for that power. The only offset will be the gradually diminishing role that the lower cost power from the dams has in averaging the price down. The energy plan changes the management of electricity so that private companies benefit at the cost of BC consumers.

The energy plan makes reference to other forms of energy including offshore oil and gas, but those details are even less clear than the yet to be written heritage contract. The energy plan is about the breakup of BC Hydro. Privatization by stealth, by phase out, or by stopping Hydro's growth, is still privatization.