The Profiligate BC Hydro
Most of us, whether we live in Newfoundland, Ontario or on the North side of Burrard Inlet, are required to live in the world of financial reality and discipline; reality as to our incomes and debts.
In recent days, a number of articles have featured BC Hydro and its proposed increase in electricity rates. Perhaps it would be useful for readers to have additional context.
Prior to 2008, most citizens of our developed world participated in the biggest global credit bubble ever seen. In 2008, that financial fantasy ended.
One of the most dramatic indicators of that event, the collapse of international dry cargo shipping, was captured by the Baltic Dry Cargo Index.
The BDCI was designed to record international trade volumes in combination with shipping contract prices.
In June of 2008, the index showed a level of about 12,000 units. A mere six months later it was struggling at about 1,000 units and has not recovered since.
Prudent managers have known of this index for decades. They should also know it provides a leading indicator of international trade; not so at BC Hydro or in Victoria.
A corporate forecast can be considered the statement of investment intentions for its business and a credible forecast incorporates a sense of economic situational awareness.
In its 2003/04 forecast, BC Hydro managed to hit the forecast numbers for electricity sales in 2008; but the exaggeration of future demand included in its 2007/08 forecast showed corporate thinking was still contaminated by the bubble years.
As a result, despite the evidence of decreasing domestic demand for electricity from 2009 on, the 2010/11 forecast indicated that this bullish attitude continued to prevail. And despite the evidence of that shrinking demand, BC Hydro is planning for 14,000 units of new electricity by 2017 and for double that by 2031.
The amount of capital it takes to produce a unit of service or commodity is regarded as a good measure of operating efficiency. In the case of BC Hydro, the extent of its capital deployment is yet another indicator of trouble ahead for the corporation and for ratepayers.
Prior to 2008, Hydro managed to meet the electricity needs of its provincial customers with about $12 billion in deployed capital. The 2007 level of demand was about 53,000 units.
Since then, following directions from the provincial government, the corporation has increased its deployment to nearly $20 billion, to provide only 50,600 units.
In summary – BC Hydro used 67 per cent more capital to produce and deliver 5 per cent less electricity when it is normal to gain efficiencies from new investments, not lose them.
What have the bubble era and provincial policies produced in liabilities for BC Hydro?
Since 2007, liabilities increased by $6 billion. Additional liabilities for ratepayers reached $2.2 billion in 2011 and, according to B.C. Auditor General John Doyle it will not be long before that amount doubles.
The present value of the secret contracts BC Hydro has with independent producers is estimated to be a further obligation of more than $40 billion.
Using the costs and productivity of the proposed Site C dam as a metaphor for new power generation, to get 14,000 units of new electricity means a further $30 billion of liabilities.
It seems pointless to ask the perpetrators why this disconnect with the real world exists but perhaps the answer can be found elsewhere.
In 2006, President Bush granted a group of undisclosed people dominion over all electricity production in North America. The North American Electricity Reliability Corporation (NERC) was launched and immediately recognized in Canada with a Memorandum of Understanding between it and the National Energy Board. Since then NERC has secured enforcement status in several provinces including Ontario. Enforcement means the legal right to fine electricity producers large amounts of money for non-compliance.
This may help the reader understand why our government has pushed aside the BC Utilities Commission. NERC is about serving private interests ahead of the public interest of B.C. citizens.
It is way past time for BC Hydro to throw out the anchor but maybe it never was the game plan to curb itself before it was beyond saving as a public asset.
I leave it to you to judge whether this period of exaggerated demand forecasting and Hydro’s attendant spending was, or is by accident or design.
Whichever is your answer there is no avoiding the certainty that you will be called upon to pay up big time.