Letter from Economist Erik Andersen to the BC Utilities Commission re Site C

September 30, 2014

BC Utilities Commission Core Review;

This process is clearly clouded by the several participants having conflicting but not necessarily fully disclosed interests. If the theme of seeking “net social benefit” drives everyone then it could mean all will come to the same place as to the how.

It may be useful to be mindful of what is presently happening elsewhere. The outcome of a buildup of too much debt is leading to “asset stripping”. No one is going to publicly say this is a deliberate design, but for certain it is the current financial process. The Bank for International Settlements (Central Bank of all central banks) has taken the measure to make the municipal bonds in the USA ineligible for purposes of making up reserves at US commercial banks. The effect of this measure is to create heavy selling pressure and the blocking some new Muni bond issues in the US. Municipalities will now be facing an empty financing cupboard and be forced to go to the vulture folks where they will be looking at 30% financing expenses. A likely inability to handle this extortion will lead to asset stripping as the preferred option for those looking to settle debt. This process is now unfolding in Ontario.

It is entirely possible that the BC “Core Review” is the first step in going to the same place. We know BC Hydro has built up some very formidable financial obligations.

BC Hydro Integrated Plan

This planning process employs a number of projections to make up the story that supports future provincial need. First off is a projection of population growth that supports the out looks for residential and light industrial/commercial customers. What the planners should be recognizing is that at the turn of this century the population growth rate for BC plummeted from about 20% in the pre-2000 decades to about 12% per decade since. BC Statistics is using about 1.2/1.3 % per year growth in their current projections, which maybe on the high side. Secondly, the economic outlook used is a projection of GDP growth. Since the record of accuracy by the Government has been one of being consistently wrong since 2008, one would be correct to discount what is being incorporated now.

The evidence of a slowing of economic growth in BC can be seen in the latest reported energy sales by BC Hydro (page 49 of the Fiscal 2014 Annual Report). In 2013 reported total GWhrs sold to domestic customers was 57,012 but in 2014 it dropped to 53,018 GWhrs. The largest drop in volume of sales occurred in the “Others” category where the reported total in 2014 was 2,558 GWhrs, down from 7,417 GWhrs. Since this category of customers seems unpredictable and disconnected to the province’s population and GDP it should be removed from any projection of “Domestic demand” in this planning process unless a credible disclosure of who are “Others” and why they get included in the report of total domestic sales. The drop in sales to “Others” is effectively the equivalence of what Site C is to produce.

The idea of powering the LNG industry with electricity, that comes with very long-term financial commitments for the supplier, is extremely asymmetrical and therefor a gamble not suitable for the public to undertake, as happened with coal in the 80s. The volatility of international markets’ pricing of commodities is evident in every chart one cares to look at. Every private sector producer of a commodity knows this and is therefor always searching for ways to shift risk. Recent reports about the LNG folks asking for more concessions are demonstrations of this reality. It is a complete financial/economic mismatch to make an energy producer ramp up productive capacity, using borrowed money, to serve the unpredictable requirements of a commodity producer/processer.

BC Hydro Revenue Requirements

There is little doubt that BC Hydro is in financial distress that can only be fixed by raising its rates and that is exactly what has been set to happen by Government order. Whether that will be enough remains to be seen. The one thing that is certain, the normal customer reaction to higher prices is a reduction in demand. It would be interesting to know how large is the price elasticity value BC Hydro’s forecasting group is using in this “Core Review”?

BC Hydro Rate Design

The “postage stamp” approach to rate setting in BC has been in force since to middle of the last century and was seen re-affirmed as recently as in an Energy Ministry letter of a year ago. This “fairness” model seems to now under attack. The “radio-on/radio-off” directive is one small example. In current circumstances it is a certainty that rate design proposals will have, first and foremost, the collection of much more revenues. It then becomes how this need gets translated into the degree of increase for each category. The likelihood is those with the strongest voices and access to people of influence will come out the best.

From experience in the 70s, when the federal government imposed “wages and price controls” on federally licensed corporations, success was secured by the openness of the process. The need of finding revenues to offset the increases in fuel costs was a transport industry imperative. Honest but simplified presentations, in front of the Government panel in Ottawa and equally in front of customers in their respective communities, enabled the navigation through what was a very financially challenging time.

From the description of the current BC Hydro process, one is not too hopeful when it should be otherwise.

Best regards;

Erik Andersen
Acredited as an economic and financial expert witness by the BCUC in 2013
Member of the Professional Economists Association of Canada sinse 1968
Invited to be an expert witness by the Finance Committee, Government of Canada, 2009 on the topic of suitable and unsuitable investments for the CPP IB.

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