Minimizing the inevitable rate hike: What is best for BC Hydro - to be run by its review panel or independent regulation of the past three decades?

By Mark Jaccard
Originally published in the Vancouver Sun August 23, 2011

The recent report by the panel reviewing BC Hydro's electricity rates triggered a predictable flurry of conflicting comments from entrenched ideologues. One side blamed private power producers for rising rates while the other blamed the utility's mismanagement and government environmental policy. With the rampant distortions, it gets confusing. Here are a few things to keep in mind.

First, throughout the world, new supplies of electricity cost more. In British Columbia, some increase in electricity rates is inevitable as we blend new higher-cost supplies with the low-cost power from our hydropower legacy. This is true whether that new supply is provided by private companies or a Crown corporation like BC Hydro.

Second, evidence from around the world shows that for small projects private power tends to be cheaper than public power, but for large projects there is little difference. With small projects, there are substantial costs associated with preliminary assessments of potential sites and, since only a tiny fraction of these are finally developed, many private investors incur losses.

If only BC Hydro was allowed to develop small projects in B.C., ratepayers would pay for these losses, just as ratepayers paid for BC Hydro's write-offs of more than $100 million on Site C two decades ago and over $100 million on a failed Vancouver Island natural gas plant a decade ago. In spite of these past costly mistakes by Hydro, the global evidence generally indicates that well-managed crown corporations can develop large projects just as cost-effectively as private companies.

Third, environmental policy is a factor in rising electricity rates everywhere. B.C.'s zero-emission electricity policy reflects our willingness to join many jurisdictions around the world (the US, Europe, China) in incurring higher electricity rates to reduce greenhouse gas emissions. If we cared only about having more money in our pockets today, and not for the future of the planet, we should build nothing but coal and natural gas plants. Only a few extremists, who arrogantly deny what scientists are frantically saying, still make this argument.

Fourth, electricity self-sufficiency also increases rates in the shortrun, but this extra cost may be justified as an insurance premium to reduce the risk of higher prices during regional shortages in future, and also the amount of power B.C. must purchase from polluting coal plants in Alberta. To ensure self-sufficiency when our hydropower production is low (because of low water flows), Hydro can build extra capacity or sign additional long-term contracts with independent producers. In both cases, Hydro
will have to sell surplus power at (usually) lower spot prices in years of medium and high water flow. We can have lower rates for awhile by not being self-sufficient. But like any decision not to insure, it may backfire and result in much higher rates and more pollution if we guess wrong. People who pretend away this trade-off are being disingenuous.

Fifth, regulated monopolies manage their costs better than unregulated monopolies. BC Hydro has long been regulated by the BC Utilities Commission, but the Clean Energy Act last year removed much of its expenditures from that independent control. As I argued on these pages at the time, this alone can increase upward pressure on rates. (When I chaired the commission in the '90s, our executive director, Bill Grant, liked to say: "The only thing better in life than being a regulated monopoly, is being an unregulated monopoly.")

The BC Hydro review panel has essentially taken over the commission's function. But one has to ask why this ad hoc, politically driven oversight is preferable to the systematic, independent regulation of Hydro of the past three decades. The review panel's suggestion that Hydro's rate application be cut in half - from annual increases of 10 per cent down to five per cent - is probably what the commission would have ordered anyway. It reminds me of the mid-'90s, when the panel I chaired rejected a Hydro rate application, even though Hydro's witnesses testified the increase was crucial for sustaining reliable service. A few years later, Hydro's CEO testified that our disciplining of the company had been the correct decision, forcing it to find efficiencies without compromising reliability.

What conclusions do I draw? The public versus private power debate is mostly a red herring. Acquiring new power, protecting the environment, and energy self-reliance all increase rates. But these rate increases can be minimized if we re-establish independent regulation of BC Hydro by the commission. 

Finally, above all, ignore the ideologues.

BC’s Clean Energy Act: Balancing government control and independent regulation

By Mark Jaccard
Originally published in the Vancouver Sun June 4, 2010

BC’s proposed clean energy act has triggered extreme statements pro and con. “Great, because our elected representatives are taking responsibility for electricity policy.” “Disastrous, because it reduces utilities commission control over BC Hydro.”

While the new act covers many issues, the key controversy is its proposed replacement of the utilities commission with the provincial cabinet for approving major BC Hydro projects and programs. These include turbines at existing dams, electricity from independent power producers, mass replacement of home meters, extensions of the transmission grid and, most importantly, the Site C dam on the Peace River. With the Site C dam as the heavyweight, the cabinet-approved bill to BC Hydro customers approaches $10 billion.

Supporting the act is the argument that our elected representatives should make these big financial commitments, not the unelected technocrats at the utilities commission. If BC is to meet its energy security and environmental challenges, it needs policy consistency throughout government. The counter argument is that only the utilities commission has the expertise, the opportunities for public input, and the distance from short-term political pressures to make sound decisions having such long-term implications.

Today, the governing Liberals argue in favour of cabinet control while the opposition NDP argue in favour of the commission. But both parties have been on both sides of this issue over the past two decades.

Indeed, both perspectives competed within the NDP government of the 1990s. Premier Mike Harcourt and his energy minister, Ann Edwards, believed the utilities commission offered the best means of providing a check on BC Hydro. They appointed me in 1992 to chair the commission, which I did for five years, introducing intervener funding, an integrated resource planning process with obligatory public involvement, and a negotiated settlement process involving key interests including environmentalists and consumer groups. These reforms are still integral to the commission’s operation, whether applied to Hydro or other utilities.

Within the NDP government, however, Glen Clark questioned why unelected commissioners, who never face the electorate to defend their decisions, should determine major investments by BC’s largest crown corporation. When Clark became premier in 1996, he effectively removed Hydro from commission oversight and the corporation ceased its open planning process. To everyone’s surprise it unveiled a new strategy to build a natural gas pipeline to Vancouver Island and several natural gas-fired plants, which would dramatically increase greenhouse gas emissions. Political control over Hydro had clearly become paramount.

When Gordon Campbell campaigned for premier, he promised to re-instate commission control over Hydro, which he did in 2003. Subsequent open reviews and commission decisions finally convinced Hydro to abandon natural gas and return to its earlier pursuit of renewable electricity for Vancouver Island and the rest of the province. This approach meshed with Campbell’s climate policy initiatives of 2007, which included a requirement that Hydro acquire zero-emission sources of electricity, be these from independent power producers or a future BC Hydro project like the Site C dam.

Recent frustrations, however, have convinced Campbell to once again liberate Hydro from commission control, at least for the projects and programs listed in his new act. The commission’s processes are slow and its decisions can act against government policy goals, an example being its decision (since overruled) that Hydro should continue using its greenhouse gas-emitting Burrard Thermal plant.

Thus, Campbell and the NDP have now been on both sides of this debate. So which approach is better?

There is no easy answer and, indeed, one should mistrust anyone who argues vociferously for either extreme. It is important that the commission, which is after all unelected, not thwart legitimate government policy objectives. At the same time, the commission has demonstrated through the years the value of an arms-length agency that provides a check on major electricity investment decisions, restricting the influence of short-term political considerations. In fact, I have been invited over the years to explain the commission’s regulation of Hydro to other jurisdictions that ended up emulating the BC model, including Hungary (1993), Brazil (1997) and Quebec (1999).

In the case of Site C, the decision is too monumental, in my view, to be delegated to unelected officials. That decision must be made by cabinet. But I am not convinced, however, that these other projects and programs should be exempt from commission oversight. I think government can achieve its policy objectives with language it has in the new act directing the commission to be “guided by” government climate and energy security policies. And it can require the commission to accelerate its procedures. When I chaired the commission, for example, we limited every hearing to two weeks and allowed ourselves only one month to issue a decision.

While quick actions are needed to transition BC toward a cleaner, more electricity-intensive economy, we must be careful not to jettison oversight mechanisms that have served us quite well.