The NDP government’s arithmetic on Site C cancellation costs is “deeply flawed,” has “no logic at all,” and is “appalling,” according to three project financing experts.

Eoin Finn, a retired partner of KPMG, one of the world’s largest auditing firms, said Premier John Horgan’s claim that terminating Site C would result in an almost immediate 12 per cent hydro rate hike is the “worst rationale I’ve heard since ‘the dog ate my homework’” excuse.  

“I expected better when the new government came in,” said Finn. “They’ve just continued what [former premier] Christy Clark did to hide the true costs of Site C and hope that they get re-elected before the next generation finds out.”

“This is the stupidest capital decision ever made by a B.C. premier. I don’t know who is giving them accounting advice.”

Rob Botterell, legal counsel for the Peace Valley Landowner Association, representing 70 landowners who will lose homes and property to the Site C dam, called on the NDP government to disclose who advised Cabinet on hydro rate increases in the event that Site C were terminated.

“We call on you and your colleagues in Cabinet and Caucus to publicly release the detailed, un-redacted, information and advice and analysis on which you based this finding,” Botterell wrote to Attorney General David Eby and Environment Minister George Heyman.

On Thursday, the landowner association and the Peace Valley Environment Association hand-delivered a letter to B.C. Auditor General Carol Bellringer, asking her to launch an “urgent examination” of the government’s Site C termination and completion cost figures.

The letter also asked Bellringer to verify the cash impact of both scenarios on British Columbians.

The Auditor General’s office was in the midst of investigating Site C’s finances last summer when the new NDP government asked the watchdog B.C. Utilities Commission to review the project, which will flood the traditional homeland of Treaty 8 First Nations, violate basic human rights, force farming and ranching families from their homes, and destroy critical habitat for rare and endangered species.

The BCUC review disclosed that Site C is over budget, behind schedule, beset with geotechnical issues and embroiled in legal and financial challenges with its main civil works contractor, which lost its Canadian partner earlier this year when Petrowest Corporation slid into receivership.

NDP Not Following Standard Accounting Practices, Experts Say

Horgan told reporters Monday that the only recourse if Site C were cancelled would be to hit BC Hydro customers almost immediately with a 12 per cent rate increase to cover the project’s $2.1 billion in sunk costs and $1.8 billion in reclamation costs.

But Finn, along with U.S. energy economist Robert McCullough and Harry Swain, a retired bank president with expertise in project financing, told DeSmog Canada that standard accounting practice for utilities like BC Hydro is to write off the costs of a discontinued project over many years.

“What’s appalling about this is that Cabinet has been advised by some people who simply don’t understand how the finance system works,” said Swain, the former CEO of Hambros Canada Inc. and a former board member of Hambros Bank Ltd. of London.

“I can’t believe that their arithmetic is that bad,” said Swain, who chaired the Joint Review Panel on Site C for the federal and provincial governments. “It’s all very depressing.”

McCullough, a former officer for a large hydroelectric facility in Portland, Oregon, said Site C’s sunk costs — mainly accrued as former Premier Christy Clark attempted to push the project past the “point of no return” — can be amortized over the 70 years that Site C was expected to produce electricity, in keeping with standard procedure for North American utilities.

“Ratepayers should not be punished for the utility making the correct policy decision, and nor would they be in any normal circumstance,” said McCullough, who was hired by the Peace Valley Landowner Association to provide expert testimony for the BCUC review.

“It’s not at all unusual for a project to stop and start for good reason,” McCullough said, adding that one common reason for terminating an energy project is a change in policy.

Swain said Site C’s sunk costs could be paid off over 30 years “without any heavy breathing at all.”

Finn called the government’s claim that terminating Site C would immediately incur up to $150 million a year in new debt service charges “pure financial fiction,” pointing out that BC Hydro has already borrowed the money and is paying interest on it so cancelling Site C will not make any difference.

“What’s appalling about this is that Cabinet has been advised by some people who simply don’t understand how the finance system works.” https://t.co/ExRvtuoFKn

— DeSmog Canada (@DeSmogCanada) December 15, 2017

What About Site C’s Reclamation Costs?

McCullough said the reclamation costs could be dealt with swiftly if the government declared the disturbed area of the Peace River Valley a park, making it a provincial asset and removing remediation costs from Site C’s books.

The cost of remediating the valley area already disturbed by clear cutting and bull-dozing for Site C is a matter of contention.

West Moberly First Nations chief Roland Willson has said the NDP’s stated $1.8 billion reclamation cost is greatly exaggerated. He urged BC Hydro and the government to make Site C’s construction site safe and “go home,” allowing natural regeneration of the boreal forest.

Even assuming that $1.8 billion in reclamation costs is factored into the equation, cancelling Site C will result in a 4.9 per cent hydro rate hike starting in 2024, McCullough said.

But that compares very favourably to the 12.4 per cent rate hike that will hit hydro customers that same year if Site C continues, he pointed out.

And that’s top of 30 per cent hydro rate increases already projected by the NDP government over the next 10 years, and also assuming that Site C’s cost does not escalate further.

Site C was announced as a $6.6 billion project in 2010. The price tag jumped to $7.9 billion by 2013, then to $8.8 billion in 2014.

On Monday, the NDP government revealed that the cost has soared to $10.7 billion just two years into a nine-year construction schedule, raising questions about whether Site C will become a boondoggle like Labrador’s Muskrat Falls dam, which will add an average $1,800 to the annual hydro bills of every household in that province.

What Happened to That Independent BCUC Oversight?

The NDP continues to criticize the former Liberal government for failing to send Site C to the BCUC for review before it decided to proceed with the Peace River project.

Yet, according to the three project financing experts, Cabinet neglected to follow proper procedure and allow the BCUC — an independent regulator that makes decisions based on the best financial interests of hydro customers — to decide how Site C’s termination costs could be best distributed to avoid a rate shock.

Swain called the matter an “ordinary regulatory decision,” while Finn said it is “not the government’s business” to decide how Site C’s termination costs would be allocated.

“The government has no right to make that judgment,” said Finn, adding that the only way Cabinet can override BCUC oversight is to pass an Order in Council.

“They’re side-stepping the legal obligation under the Utilities Act to involve the BCUC. They never asked the B.C. Utilities Commission.”

Horgan’s office confirmed to DeSmog Canada on Thursday that Cabinet did not pass an Order in Council.

In puzzling logic, Eby said in a public statement on Thursday that the recovery period for Site C’s costs would only be subject to an independent BCUC review “if, and when these costs are incurred,” meaning that the BCUC would only be able to make that decision after Cabinet decided to cancel Site C.

McCullough, whose testimony to a U.S. Senate Committee helped spark the criminal investigation into Enron, said recovery of an energy project’s termination cost is “a very common practice in the utility business and is addressed in every utility’s annual report.”

What About B.C.’s Credit Rating?

McCullough also pointed out that B.C.’s triple A credit rating has just been confirmed.

Contrary to statements made by the NDP, cancelling Site C does not put the province’s credit rating in jeopardy because Site C’s sunk costs have already been financed with 30-year bonds, he said.

On the other hand, spending at least $8 billion more to complete Site C when its power can be replaced for only $4 billion, “may concern the bond raters,” McCullough wrote in a December 11 memorandum for the landowner association.

He pointed out that the same issue was a factor in the downgrading of Newfoundland and Manitoba’s credit ratings as both provinces grappled with huge cost overruns on large hydro dam projects.

“Even if the inflated $1.8 billion in termination costs are added, cancelling Site C will save ratepayers at least $266 million [a] year or $123 [per] household in 2024,” McCullough wrote in comments the landowner association submitted to Bellringer’s office.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.

By Dermod Travis, executive director of IntegrityBC.

One of the last things anyone would ever imagine the B.C. government doing is adopting an old NDP program, but that's exactly what Energy and Mines Minister Bill Bennett did this month when he announced a five-year, $300 million hydro bill deferment plan for 13 B.C. mines owned by six companies.

Never mind that BC Hydro is grappling with its own deferral problems to the tune of $5 billion.

Make no mistake, there's a price to pay when BC Hydro becomes a political arm of government. The intertwining of self-interests gets complicated, and the interests of ratepayers can take a backseat to political interests.

Three of the six companies in Bennett's deal were highlighted in a December Financial Post article, “Debt risks mount as Canada’s base metal miners sink deep in the hole.”

One could argue that the headline alone justifies Bennett's move, except there's no guarantee — other than a hope and a prayer — that BC Hydro will be repaid.

The issue of what happens if metal prices don't rebound wasn't addressed in Bennett's news release.

Consider the “dire financial position” of one of the companies: Colorado-based Thompson Creek Metals.

Last year, Deutsche Bank analyst Jorge Beristain said the company is “quickly approaching an end-game” with debts of $832 million U.S.

According to the Financial Post, Teck Resources “has more than US$3.5 billion of debt coming due between 2017 and 2023 and lost its investment-grade credit rating last year.”

Taseko Mines, “has more than $260 million of senior notes coming due in 2019, while a US$30 million secured loan matures this May.”

It seems like only yesterday that the company sent Bennett off to lobby Ottawa on its behalf.

In January 2014, Bennett spent a day on Parliament Hill meeting with Natural Resources minister Joe Oliver and Industry minister James Moore to make Taseko's case for its controversial New Prosperity copper and gold project.

By then copper prices had already fallen 27.5 per cent off their 2011 high.

Taseko is also in the midst of a messy proxy fight with Chicago-based Raging River Capital over $26 million in management fees Taseko has paid Hunter Dickinson Inc. Taseko and Hunter Dickinson share three directors in common.

Imperial Metals owns three of the 13 mines in Bennett's deal, including Mount Polley, Red Chris and Huckleberry. In 2004, the government quietly forgave $3 million in liabilities owed it by Huckleberry Mine.

Imperial Metals's controlling shareholder — Murray Edwards — has a net worth of $2.69 billion.

The BC Liberal party has done well from them.

From 2005 to 2014, the six companies donated $2.8 million to the party. Key executives kicked-in another $380,000.

Three of the six companies donated $97,010 to the NDP, $75,300 of it in 2013.

BC Hydro's contractual obligations with private power producers have ballooned from $22.25 billion in 2009 for “2010 and beyond” to $56.2 billion for “2016 and beyond.”

It's the gift that keeps on giving for everyone involved, except ratepayers.

In a 2008 call for independent power projects, 75 proponents registered with BC Hydro.

Forty-three submitted proposals and, in 2010, BC Hydro signed purchase agreements with 18 of the proponents.

From July 1, 2008 to September 30, 2010 — when B.C. Hydro was making its decisions — 14 proponents donated $268,461 to the Liberals. One donated $1,000 to the NDP.

Ten of the 14 signed purchase agreements with BC Hydro. One of the 14 who didn't, never donated again.

Their before and after donations are interesting too.

For the 10 successful proponents, their donations more than doubled from $112,801 (January 2005 to June 2008) to $229,471.

After the deals were done, they settled back again. Seven donated $112,345 to the Liberals and five gave $16,225 to the NDP (2010 to 2014).

In 2008, the Mining Association of B.C. received a $295,188 grant from the Northern Development Initiative Trust (NDIT) to make the business case for the Northwest Transmission Line.

In turn, the association hired Australia-based Macquarie Bank to “determine the threshold of economic activity that would be required to make the construction of the (line) an economically viable infrastructure project.”

NDIT's Highway 37 Power Line Coalition has 22 private sector partners.

Excluding the six companies in Bennett's deferral program, independent power producers and those identified by BC Hydro as “potential future mines” for the transmission line, three trade associations and ten of the companies donated $962,220 to the Liberals and $10,320 to the NDP.

Macquarie has donated $17,050 to the Liberals.

The $404 million transmission line overshot its budget by more than $300 million, with a final price tag of $716 million. But who counts bills among friends?

There are the nine “potential future mines” that BC Hydro hopes will one day connect to the line.

With the downturn in metal prices, BC Hydro shouldn't hold its breath in anticipation.

Excluding donations from Imperial Metals and Teck, who have interests in three of the mines, the most generous companies were Goldcorp at $795,700, the Lundin Group of Companies ($112,145) and Copper Fox Metals ($93,130).

One of the founding directors of Copper Fox Metals is Hector Mackay-Dunn, who co-chaired the BC Liberal's 2009 election preparation efforts.

MacKay-Dunn is affectionately known in some party circles as Hector the Collector for his prowess at political fundraising.

The nine companies behind the potential mines have donated $1 million to the Liberals and $18,050 to the NDP ($10,000 of it from Copper Fox in 2013).

And at the same time the government was imposing hydro rate increases on schools and hospitals in 2014, Bennett announced a $100 million BC Hydro initiative for pulp and paper producers to “support investments in more energy efficient equipment.”

The forest industry has donated more than $4.2 million to the Liberals and $294,905 to the NDP.

Tidy haul.

Add it all up: more than $9.8 million in donations from interested parties to the Liberals and $417,185 to the NDP, not including their 2015 donations.

Guess who gets saddled with the bill?

Including operating and capital development agreements that have tripled to $3.3 billion since 2010, BC Hydro's contractual obligations now stand at $59.7 billion, not including their debt which has grown from $6.8 billion in 2004 to $16.7 billion last year.

They've had to borrow $3.2 billion just to turn around and give it to the B.C. government as so-called dividends.

Meanwhile, Hydro-Quebec cut a dividend cheque of $2.5 billion for the Quebec government in 2014.

They didn't have to borrow money to cover the cheque and still had $700 million in profits left over.

In 2014, it's rates were nearly two cents per kWh lower than B.C. From 2007 to 2015, its cumulative rate increase was 17.1. In B.C., it was 63.2 per cent.

Total donations from all of Hydro-Quebec's suppliers and contractors to the Parti Quebecois and the Quebec Liberal party in the last 30-years? Zero.

Quebec bans corporate and union donations. The maximum any Quebec resident can give to a political party is $100 annually.

Image: Crusher at the Red Chris mine via Imperial Metals

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.