Maintaining BC’s AAA Credit Rating while Protecting BC’s Ratepayers

Today in the legislature I was up during Question Period. I took the opportunity to probe the government’s thinking about taking on substantive public debt to construct Site C when there are more cost effective, and less financially risky options available. My concern is the effect burgeoning debt will have on our overall credit rating. If our credit rating drops, the cost of debt servicing will go up thereby affecting government finances. At the end of the day, the ratepayer will also be on the hook for any cost overruns.

MY QUESTION

On April 19 of 2010, I, along with numerous others, travelled to Hudson’s Hope to hear the then Premier, Gordon Campbell, announce that the proposed Site C dam project was moving to the environmental assessment stage. In 2010 the projected construction cost for the dam was $6.6 billion, but by May 2011, that cost had increased to $7.9 billion, a 20 percent increase.

There’s considerable upside uncertainty regarding these costs that could easily reach $10 billion to $12 billion. The final investment decision with respect to Site C now rests with cabinet.

In the past our government has appropriately celebrated the fact that B.C. has maintained a triple-A credit rating. However, in May of this year Moody’s downgraded our outlook from stable to negative, citing concerns about the increasing provincial debt.

My question to the Minister of Finance is this. Is the minister as troubled as I am that the approval of the Site C dam could lead to the downgrading of our credit rating that, in turn, would raise the costs of servicing of all of our provincial debt?

MINISTER DE JONG’s RESPONSE

The member correctly identifies the pride we do have for our triple-A credit rating. It’s a form of report card issued by international agencies, a comparative assessment of how we’re doing, and the marks they have given us the past number of years places us in very, very exclusive company.

Commercial Crowns, like B.C. Hydro, are assessed as self-supported debt rather than taxpayer-supported debt. The other thing I can say to the member is that B.C. Hydro has over the past number of years been assessed a flow-through rating, which means they have the same triple-A rating as the B.C. government. Now, some rating agencies are now extending their analysis to extend to total provincial debt, including self-supporting Crown corporations.

The Minister of Energy has — and will, if given the opportunity — continued to point out the basis upon which a final decision on this project will be made, but I can assure the member and all members that affordability of debt will be one of those considerations.

MY SUPPLEMENTAL QUESTION

We know there are affordable alternatives to Site C, and these alternatives would allow us to meet present and future energy needs without running the risk of incurring increased public debt and potentially damaging our triple-A credit rating.

The fact is that circumstances have changed since 2010. That’s why I no longer believe it’s fiscally prudent to move forward with this project.

In the last few years the costs of wind energy and solar PV have dropped dramatically. In addition, just last month the Canadian Geothermal Energy Association released a report outlining the unheralded potential of B.C.’s yet untapped geothermal resource.

My question to the Minister of Finance is this. Will the government consider expanding the mandate of B.C. Hydro to allow them to develop our geothermal resources? And will the government task B.C. Hydro with issuing new calls for power at a fixed price below the projected cost of power produced from Site C so that the market can prove up these cheaper alternatives — and, subsequently, protect the ratepayer from unnecessary rate hikes?

MINISTER BENNETT’s RESPONSE

Thank you to the member for the question. It’s actually, I think, a positive to be given the opportunity to talk about our electricity policy in the province and how we’re going to obtain the electricity that we’re going to need over the next 20 years. The estimate is that we’re going to need about 40 percent more electricity than we generate today over the next 20 years.

The province obviously has some choices. If you look at the ten-year rates plan that we announced a year ago, you’ll see that we’ve already made some choices in terms of priorities.

Our number one choice in terms of meeting that new demand is conservation. B.C. Hydro is going to attempt to meet the growth in demand through conservation, to the extent of 78 percent of the growth in demand by conservation.

In reference to that same plan that we announced a year ago, we are also going to meet that demand by reinvesting in assets that were built a long time ago on the Peace River system and the Columbia River system and try to generate as much electricity as we can with the current generation assets that we have.

The third thing that we’re going to do is to allow a number of IPP projects that are already in the pipeline to be finished, to be constructed, and we will acquire that electricity as well.

Even after those three responses to this growth and demand, we are going to need at least 1,100 megawatts of electricity over on top of that, and the government has not decided how we’re going to acquire that 1,100 megawatts. I can tell the hon. member that we are, in fact, carefully looking at all of the alternatives.

As a backdrop to this question, I sent the Minister a letter concerning the forthcoming cabinet investment decision on the Site C Hydroelectric project on October 16th 2014. In it, I expressed my profound concern regarding the economic ramifications of making an investment decision in Site C. The letter is reproduced below.

Honourable Mike de Jong
Minister of Finance
Parliament Buildings
Victoria BC V8V 1X4

Dear Minister de Jong,

I am writing to you concerning the forthcoming cabinet investment decision on the Site C Hydroelectric project.

I have serious reservations that this project is not economically competitive with other options and is ultimately not in the best interests of British Columbians.

As I’m sure you are aware, Clean Energy BC just released a new study entitled “Cost Effective evaluation of Clean Energy Projects in the Context of Site C.” In their commissioned report, serious questions were raised about BC Hydro’s project valuations. In particular, concerns were raised regarding the elevated capital cost assumptions that were applied to independent power projects, and the “artificially reduced” calculation for BC Hydro’s WACC. The National Energy Board’s Joint Review Panel (JRP) raised similar concerns including a note that BC Hydro’s cost of capital calculations “should not be allowed to drive choices that would affect the BC economy… for many decades.” The Clean Energy BC report written by London Economics International (LEI) provides clear evidence that alternatives are at par if not more competitive then this project.

Ultimately, the study was critical of the current evaluation that was done for Site C. They wrote: “To assure British Columbia ratepayers receive value for money, LEI recommends that costs for Site C be independently reviewed and market tested against the results of one or more clean energy procurements. Such an approach would be consistent with global best practice in procurement.”

The LEI study reiterates, and in many places substantiates, the concerns that the JRP tasked with reviewing the Site C hydroelectric project raised in their ruling. While the JRP ultimately gave a qualified recommendation to proceed with the project, they were highly critical of the economic forecasting that was used to justify its construction. On page 280 of the Site C Review Panel Report it is noted that “The Panel cannot conclude on the likely accuracy of the Project cost estimates because it does not have the information, time or resources.”

The suggestion that the JRP tasked with reviewing the project lacked the time, information and resources is a very worrying indictment of this project, and makes it all the more important that we take other analyses seriously – and all of them point to viable and economically competitive alternatives.

For example, it is my belief that wind power has been vastly underestimated as an economically competitive alternative to generating the same quantity of power. Globally, we have seen wind become increasing competitive as technological breakthroughs allow for energy to be generated at lower and lower wind speeds at increasingly lower costs. Not accounting for these changes in pricing and technology raise the potential for cost estimates for wind to be overstated. In fact, the economic analysis undertaken by BC Hydro specifically assumes that future costs for wind (and other renewables) would not change. Clearly, all evidence points to the contrary as costs of wind, solar and other forms of renewable energy have dropped dramatically in recent years.

I also want to point out that BC is the only jurisdiction along the Ring of Fire that is not generating power from its geothermal resources. A recent report from CanGEA highlighted the massive potential that this resource has for BC. Geothermal energy would support the creation of a more diversified, resilient power grid, while providing a stable base power source. Perhaps it is time to consider expanding BC Hydro’s mandate to allow it to produce power from geothermal sources.

The potential construction of Site C is rightfully considered a turning point for BC – although in my opinion it sends us down an undesirable path. Site C will crowd out the development of other renewable projects, putting at risk the further development of an industry that is among the fastest growing globally.

Ultimately, I share the your desire to see British Columbia’s economy managed in a way that ensures a sustainable approach that is not burdening future generations with the cost of decisions we make today. The government has in the past appropriately celebrated the fact that British Columbia has maintained a AAA credit rating. I am concerned that this rating would be in jeopardy if BC Hydro, a crown corporation, were to incur another 7.9 billion debt (with substantive uncertainty regarding cost over runs).

Finally, bringing other forms of renewable energy on stream incrementally will allow supply to keep pace with demand. We have our legacy dams that can be used as load levellers if they are viewed as rechargeable batteries with other intermittent energy source providing the recharging capacity. And the Clean Energy Act allows 7% of our electricity supply comes from non renewables, such as natural gas which can help firm up power.

Thank you for seriously considering the economic ramifications of making an investment decision in Site C. There may come a day in the future where Site C is needed, but I would argue that right now, it does not make economic sense to proceed with its construction.

Yours sincerely
Andrew Weaver
MLA Oak Bay Gordon Head