What You Need to Know About BC Hydro’s Financial ‘Mess’ and the Site C Dam

B.C. Energy Minister Michelle Mungall said Thursday that “there’s a mess” at BC Hydro. Mungall made the comment after the B.C. Utilities Commission denied the government’s request for a hydro rate freeze — putting the kibosh on one of the NDP’s campaign promises.

Instead, the commission approved a scheduled three per cent hydro rate hike for April 1, saying that the increase is not sufficient to cover BC Hydro’s costs. What’s going on? And what does it mean for you and your future hydro bill?

DeSmog Canada caught up with Eoin Finn, a former partner at KPMG, one of the world’s largest accounting and consulting firms, to find out. Finn is also a director of the Pacific Electricity Ratepayers Association.

Are you surprised by yesterday’s decision to increase hydro rates, after the NDP promised to freeze them?

Not at all. The financial condition of BC Hydro is dire. The $140 million — that a three per cent rate increase would give them — is the first step in trying to put BC Hydro back together again. For the government to make that promise was extremely rash and I think that they at this stage realize how dire the situation is at BC Hydro.

The BCUC said that even the three per cent rate hike won’t cover its cost. What does that mean for BC Hydro customers?

It means they have to raise the rates. To put hydro back in shape in any decent fiscal condition is going to require that BC Hydro double its rates in the next 15 years.

Minister Mungall said “there’s a mess” at BC Hydro. What does she mean?

BC Hydro owes $20 billion.

And in addition to that they have used these terrible deferral accounts to defer roughly $6 billion more of debt. Instead they call it an asset. It’s the craziest accounting system I’ve ever seen. This complies with no known accounting system in the world and is definitely not generally accepted accounting principles.

The debt to equity ratio — which is a common measure of the financial health of an organization — is the worst in BC Hydro of any public or private utility in North America.

How did we end up in this situation?

We had a government for 16 years that preferred to shut its eyes and tell Hydro to give it a fixed amount of money every year, and then didn’t let them up their rates in order to be able to afford it. They didn’t want people to get excited about big rate increases. [Essentially they said] we’ll keep taking the dividend from BC Hydro — about $3 billion in all — to pay for government programs, but we won’t let Hydro charge the rates that would keep them whole in that arrangement.

And then the government fiddled further with BC Hydro and said: ‘You will buy more power from these independent power producers (IPPs) and give them a rate that will cover their expenses and capital costs.’

BC Hydro’s gone ahead and done that with over 100 IPPs. It’s currently buying power from them at an average $93 a megawatt hour and then selling it back to the average customer for $88 a megawatt hour. Now there’s no retailer I’ve ever seen that can put stuff on the shelves and sell it for less than it’s buying it for that can last for very long. Since Hydro has only one thing on its shelf — power — basically it’s a money-losing proposition.

“The debt to equity ratio — which is a common measure of the financial health of an organization — is the worst in BC Hydro of any public or private utility in North America.” https://t.co/YmH9DxWJrF

— DeSmog Canada (@DeSmogCanada) March 2, 2018

How would you compare the situation at BC Hydro to what’s going on with ICBC?

They’re similar messes, for much the same reasons. Basically the government has moderated the rates in both organizations — required to keep revenues and expenses somewhat in line — for its own purposes. It has raided the reserve funds of ICBC to the point where it can no longer be solvent, and compliant with the legal requirement to keep reserves sufficient to cover claims.

It’s much the same situation with BC Hydro. They’ve been told to keep rates down but as expenses go up the government has said: ‘That’s your problem. If we cap your rates, your business is to get expenses down so we come out even-steven.’ But clearly ICBC cannot do that. Nor can BC Hydro. The government has meddled and removed the regulator’s ability to regulate so that expenses and revenue stay in line.

How does the $10.7 billion Site C dam factor into the mix?

It adds a surplus of power for no known customer. So BC Hydro is going to add $11 billion more of debt without any customer for the power.

Their alternatives are to sell it to a non-existent LNG industry at $54 a megawatt hour. Or they can sell it to Alberta at a wholesale price — again for way less than it cost to produce it. Or, sell it into the U.S. market at $25 to $30 per megawatt hour. All of which are money-losing propositions. And that’s for Site C power that’s going to cost $120 per megawatt hour [to produce]. Demand in B.C. has remained stagnant and flat for the last 15 years.

When do the bulk of Site C’s costs hit the books?

It doesn’t begin to leak into the operating costs until the switch is turned on in 2024. But it’s still accumulating debt. Hydro plugged in the debt at somewhere around three per cent for the next 70 years, the operating life of Site C. The problem is that debt interest costs are going up. Since Site C is 100 per cent debt-financed, it’s really sensitive to any increase in interest rates, which are currently destined to go up from historic lows.

What is that going to mean for Site C’s $10.7 billion price tag?

The capital cost is $10.7 billion. But over the next 70 years the interest cost on that is going to be huge. Although the capital cost left to go will be about nine and a half billion dollars — because they’ve already borrowed two billion — the interest costs alone on that borrowed capital will be over $20 billion on top of the $10.7 billion to build it.

You’ve got to pay back the capital costs over 70 years, you have to pay the interest on the money you borrowed over 70 years, and you have to pay the operating and maintenance costs of Site C. And then you’ve got to find a buyer.

What is the Pacific Electricity Ratepayers Association?

It’s a group of people who are very concerned about the future of BC Hydro. It was formed mid-last year as a society. It’s essentially a pressure group trying to force reality into the situation with BC Hydro. If we don’t improve it we will lose it. Its purpose is to critically examine the financial health of BC Hydro.

It also had a purpose in trying to stop the construction of the Site C dam. It still has that purpose; it is still worth stopping that project.

What needs to happen to fix the mess at BC Hydro?

The government needs to take their hands off the misuse of BC Hydro, and allow the regulator [BCUC] to do its job. Currently there are two restrictions on that. One is the famous direction 7, which the previous Liberal government issued, restricting the B.C. Utilities Commission’s powers to regulate BC Hydro.

And the second one is the Clean Energy Act, which ignores the fact that we have this ready-made power at much lower rates from the Columbia River Treaty. It forces B.C. to be self-sufficient in electrical energy no matter what the cost.

What is the first step that needs to be taken?

Repeal the changes that the Liberal government made to the Clean Energy Act that requires B.C. to be self-sufficient in electrical energy. That would allow all sorts of things.

I think they also have to take a long hard look at why we are buying power from IPPs at 93 bucks a megawatt hour and — because it’s surplus to our needs — selling it south of the border for $30 a megawatt hour. That’s not a sustainable situation. And the third thing is to repeal direction 7 of the previous Liberal government’s cabinet order, which places big restrictions on the power of the regulator.

Do you think they have the cojones to do all this?

No.

So where does that leave us?

The three per cent hydro rate increase is just the start. I figure that in the next 15 years they’re going to have to double the rates to keep the situation from getting to a bailout by the government, whereby the government takes BC Hydro’s debt and puts it on its books rather than BC Hydro’s books. And, if it does that, it really will be threatening its credit rating with Moody’s and Standard and Poor’s.

The BC NDP may not be in power for very long. BC Hydro is in dire danger of being sold piecemeal to the private sector. And then we will lose all control over our rates. We’ll be in an Ontario-like situation where they sold off Hydro One, and then look at their rates, they’re double what B.C.’s are. That’s what we’re facing.