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Responding to Minister Coleman about BC Hydro

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Well, my paper with John Calvert on BC Hydro certainly touched a nerve with the B.C. government. In a long piece for the Vancouver Sun, Energy and Mines Minister Rich Coleman lashes back. It is great to see the B.C. government engaging on the issues we raise, but Minister Coleman's lengthy denial suggests to me that our analysis has exposed a political liability: the government's mismanagement of BC Hydro that is driving up electricity rates in the province.

Let's start with crux of Minister Coleman's retort:

B.C. families are not subsidizing industry's growing power needs, contrary to the factually incorrect report on BC Hydro rates released this week by the Canadian Centre for Policy Alternatives. In fact, our government has a no-subsidy power policy, be it aluminium smelters or liquefied natural gas facilities.

Surely, this can only be a semantic argument about what is a "subsidy." Our paper goes into great detail to show that new mines, shale gas fracking and liquid natural gas compression plants expect to use cheap BC Hydro industrial rate power -- about $40 per MWh -- but that new power supply is costing us, according to the last call for power, $124 per MWh. Economists call the former the marginal cost, and the latter marginal revenue. But you don't need to be an economist to know that if you marginal revenue is below your marginal cost for prolonged periods of time, you will go out of business.

In the case of BC Hydro, as a Crown corp, it means other ratepayers must pay higher prices, and that is precisely what we have been seeing due to requirements that BC Hydro buy new supply at a premium from private providers. In Dec 2010, BC Hydro asked for an almost doubling of rates, prompting the B.C. government to launch a review of BC Hydro, which led to a weakening of the "self-sufficiency" requirement that BC Hydro buy a lot of extra power from the private sector. Just a few weeks ago, Premier Clark ordered that rates would rise only modestly (1.4 per cent) next year -- that being B.C.'s election year. In doing so, the government also over-rode the role of BC Utilities Commission to approve rates, just as it has removed the BCUC from approving BC Hydro's new infrastructure plans, which include building new transmission lines for industry.

Key factiod: electricity demand from the other two major customer classes, residential and commercial (small business and office buildings), is projected to fall slightly over the next few years, and efficiency and conservation measures down the road are sufficient to keep growing demand from population growth in check. There is no reason why their rates need go up at all given B.C.'s historic supply of hydropower.

Meanwhile, it is big industry -- mining and oil and gas -- that is driving up demand: a 17 per cent increase by 2014; and much more over the next decade-plus. This is acknowledged by BC Hydro itself in its planning documents. The Sun covered the release of BC Hydro draft Integrated Resource Plan, and reported it thusly:

A new forecast by BC Hydro shows electricity demand in the province is expected to grow by 50 per cent over the next 20 years as resource development moves into the northern half of the province. "There's the potential for some very substantial demand growth in the province," Doug Little, Hydro vice-president of energy planning and economic development, said of the conclusions in the utility's 2012 Draft Integrated Resource Plan.

The plan lays out where Hydro sees future demand growth: liquefied natural gas terminals in the northwest, the gas fields of the northeast and the mining sector. It also shows how Hydro intends to meet that demand: conservation measures, new capital projects, energy purchases from domestic renewable energy providers, and energy imports from outside the province. According to the plan, demand is expected to grow from 56,838 gigawatt hours a year in 2012 to 89,590 gigawatt hours a year by 2032, if two LNG terminals at Kitimat go ahead.

This November 2011 presentation made by BC Hydro to the Association of Professional Economists of BC lays out the growth of mining and oil and gas demand particularly well. Bottom line: meeting surging industry demand with a buy-high, sell-low strategy is already putting pressure on rates for households and commercial customers, and this will only get much worse if the BC Hydro attempts to accommodate all of the new demand from industry.

In fact, the B.C. government admitted as much yesterday when Premier Clark announced to a BC Business Council conference on oil and gas that it would allow the LNG plants to use natural gas to power their operations rather than BC Hydro electricity (alas, no public media release has been made). This will ease BC Hydro's future problems of getting new supply, at an additional cost of making the carbon-intensive LNG development project even dirtier.

An important aside: yesterday's announcement is tantamount to abandoning B.C.'s legislated greenhouse gas reduction targets. Minister Coleman and Premier Clark are breaking the law by going ahead with LNG, which all told will add 80-112 million tonnes (Mt) of CO2 to the atmosphere every year (just the carbon content of the fuel) within a decade. B.C.'s current emissions are 63 Mt, by comparison, and those new emissions will be put in the air by China, but powering the industry with natural gas will count substantial additional emissions in B.C.'s GHG inventory.

B.C. cannot be a climate action leader and a major natural gas exporter at the same time. This is as much a challenge for the NDP as for the Liberals, as energy critic John Horgan has been very supportive of the LNG developments, though I'm not sure this is official party policy yet.

Given all of this, Minister Coleman has the chutzpah to trumpet B.C.'s carbon tax in his response (which the government is secretly reviewing anyway). The Minister's counter-narrative tries to blame the NDP governments of the 1990s for today's situation. But the core problem will not go away: you cannot sell cheap power to industry, buy expensive power from private companies, and keep a lid on rates at the same time. And whoever wins the next election is going to have to deal with the mess arising from a decade of provincial government mismanagement of BC Hydro (documented in our report).

This article was first posted on Policy Note.

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