Date: November 16, 2017
To: Premier John Horgan,
Province of British Columbia
From: Robert McCullough and Harry Swain
Subject: Deputy Ministers' Inquiries Respecting Site C
We are writing you at the request of our clients, the Peace Valley Landowner Association and the Peace Valley Environment Association, regarding the questions raised in the attached letter dated November 15th, 2017.
At the outset, it is important to note that the British Columbia Utilities Commission’s (BCUC) Site C Inquiry Report is detailed and well documented. The final report represents the careful consideration and weighing of 10,000 pages of testimony, 2 days of expert presentations, 11 public input sessions, and hundreds of pages of consultant, preliminary and final reports.
Importantly, the BCUC has taken a conservative approach in their calculations – which is good - although industry experts would take a more pessimistic view of load forecasts and cost overruns, a more optimistic view of the savings from terminating Site C, and would factor in the non-treaty storage available from the Mica Dam.
The answers to the questions raised by your Deputy Ministers are set out below.
1. Did the Commission include sunk costs (the estimated $2.1 billion that has been spent to date on the project) and termination costs (the $1.8 billion determined by the Commission) in comparing the costs to ratepayers of completing Site C against the costs of pursuing an alternative portfolio of generation resources?
Yes, the existing investment for Site C ($2.1 billion) is included in both the Site C Case and the Alternative Portfolio since these costs have been spent and cannot be recovered. Termination (reclamation) costs have been charged to the Alternative Portfolio as well.
The BCUC treatment of these costs is consistent with economic theory and practice and concludes that there is no cost advantage to proceeding with Site C. It should be noted that the treatment of sunk costs is known as the Fallacy of Sunk Costs by the newly appointed Nobel Laureate Richard Thaler. Once costs have been spent, they do not exert a “thumb on the scales” for future investment decisions.
2. In the event that government elects to terminate the Site C project, has the Commission assumed that BC Hydro would develop and finance the projects included in the alternative portfolio (wind, geothermal) rather than independent power producers (IPPs)?
Not per se, but the difference between IPP and Crown Corporation should be minimal. It is a postulate of finance that the cost of capital depends on the credit support of the buyer. When an IPP approaches the financial markets, it is the quality of the Power Purchase Agreement (PPA) and the counterparty that determines the cost of capital. If the Province of British Columbia is the ultimate guarantor of the project (in this case with a Triple A credit rating), the cost of capital is virtually the same whether the Crown Corporation or an IPP builds the project.
3. Government will need to consider the total cost of potential demand side management initiatives (rather than just the utility's costs) as it considers the alternatives. Could the Commission advise how the inquiry Terms of Reference led to assessing demand side measures based on the Utility Resource Cost standard, when Total Resource Cost has been the standard for prior Commission proceedings?
Properly designed demand side programs are also advantageous to the consumer and produce more benefits than their costs. For example, time of use rates and curtailment programs allow the consumer to correctly time their use of energy and response to system exigencies. A good example is the operation of a paper mill with thermo-mechanical pulping (TMP). The opportunity to schedule TMP for off-peak hours is a significant advantage to the paper mill. And, appropriate curtailment opportunities can be profitable for both the utility (in this case BC Hydro) and the paper mill. During the California energy crisis of 2000-2001, Northwest Power Pool industries from Trail, British Columbia to Eugene, Oregon shifted their operations to gain the benefits of serving California loads during high price periods.
4. If the Site C project were terminated, the $4.0 billion sunk and remediation costs would need to be recovered, and the amortization period of that recovery would affect BC Hydro rates. Could the Commission please clarify whether it assumed that that these costs would be recovered over 10, 30 or 70 years?
The BCUC assumed that sunk costs as well as termination costs would be recovered over thirty years. This is unnecessarily conservative. Economic theory and practice does not require that recovery of a project’s costs be accelerated simply because a project was terminated. Logically, the termination of the project should have the same impact on ratepayers as proceeding with the project. Penalizing ratepayers for a bad utility decision is also inequitable. If the goal is to objectively compare the options, then the same seventy-year amortization schedule that is currently in effect should be employed.
The highly accelerated recovery of sunk and reclamation costs is inappropriate – and punitive. It should be noted that forcing the public to pay in advance of already financed costs makes little economic sense. Indeed, various costs could be recovered in one year if the goal is to alarm the public. The reality is that the costs were incurred on a seventy-year amortization schedule and should remain on that schedule. To my knowledge, based on almost 40 years of experience in this area, there is no overwhelming legal or economic purpose to raise rates immediately.
5. We are unaware of prior instances when anything other than BC Hydro's mid-load forecast has been used for planning purposes. Did the Commission assume lower demand for electricity (reflected in the low load forecast used in the report) because it is forecasting a period of lower economic growth? Does the Commission include in its load forecast the potential increased electrical power demand of meeting the province's stated objectives to reduce greenhouse gas emissions through greater electrification of our economy?
BC Hydro’s submissions contradict the experience of lower load growth experienced across the U.S. and Canada. BC Hydro was unable to justify their forecast, or, indeed, accurately explain the components that contributed to their high estimates. The record at the BCUC clearly proves that BC Hydro has over forecasted in virtually every case for many years.
In part, this reflects the decline of traditional industries like pulp and paper, but a more extensive impact is the shift to LED lighting and other energy efficiency measures.
Over more than half a century, for 77% of the time, BC Hydro’s forecasts have overstated reality. BCUC might have chosen a lower forecast than the BC Hydro low forecast had their terms of reference allowed. They have a better grasp of industrial evolution, and of price elasticity, than BC Hydro. The fact is that the old one-to-one relation of economic growth to electricity demand has been broken for 20 years all over North America. BC Hydro has just been slow to realize this.
The BCUC clearly weighed all the evidence before it and concluded that in these circumstances the low load forecast is the appropriate forecast. Importantly, the BCUC noted that if it were not outside the terms of reference it would likely/may have found that an even lower load forecast would be appropriate. It is important to remember that Deloitte found that BC Hydro has historically overestimated electricity demand by 30% on average.
BC Hydro has not addressed the issue of increased electrification in its submissions, nor did the mandate in the Order in Council directly address this scenario.
That said, there were expert submissions on this topic that indicated that the most important components of electrification – transportation – occur off-peak. The evidence is based on solid research from California and New York where electrification programs are more advanced.
The BCUC noted that increased DSM, consumer self help such as solar panels on houses, coupled with the decline in electricity demand in heritage industries like pulp and paper will very likely offset any increase in electrification demand.
In the event the actual level of demand exceeds the forecast, the alternative scenario utilizing renewables including wind can be expanded – resources that are largely unlimited in scope, low in cost, and readily deployable in response to increased demand.
Northwest Power Pool utilities (Washington, Oregon, Idaho, and Montana) in the United States currently have ten times the wind resources as British Columbia with more being sited and built every day. Most all forecasts suggest the cost of these resources will continue to decrease making the cost of Site C power even less competitive.
Finally, I was disappointed that the questions missed the most important finding of the BCUC – that the Canadian Entitlement – roughly the same size as Site C – is a dependable source of energy and capacity. Moreover, that the authors appeared to have missed the opportunity that I identified – and was positively received by the BCUC and the press – to use the large underutilized resource of the Non-Treaty Storage Agreement to serve the citizens of British Columbia rather than being rented to the Bonneville Power Administration.
I trust this memorandum provides helpful information and analysis that complements the information and analysis you receive from the BCUC. If you have any questions regarding the accuracy or applicability of the above commentary, please do not hesitate to contact me.
Please note that Harry Swain, former Chair of the Federal/Provincial Panel on Site C has reviewed and concurs with the above observations and analysis.
BC Government MLAs
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