Hydro's $120-million Island power failure

Fri May 28 2004
08:37 AM
By Paul Willcocks
Vancouver Sun
Page C06
29-May-2004

VICTORIA - Thanks for the chance to come and talk to you about BC Hydro . . . and sorry about the $120 million we've probably lost on an ill-conceived power project and undersea pipeline.

Pity poor Bob Elton, barely six months into his job as Hydro CEO. That was the gist of his speech to a Nanaimo business crowd this week.

Mr. Elton spoke positively about BC Hydro's general direction. Then he revealed that the corporation's board had just approved a $120-million "provision" against earnings to reflect money spent on a gas pipeline and a Vancouver Island power plant that are unlikely to be built.

The term provision sounds benign. But it means the finance guys have decided that a big chunk of money is gone, and there is a high probability that it isn't coming back.

Mistakes happen. But a stumble that could cost the corporation's shareholders -- that's you -- $120 million seems remarkable, even by the corporate standards of the day.

Especially because the warning lights were flashing and the sirens were blaring as Hydro walked into this mess.

The appropriately termed "sunk costs" were spent on the Vancouver Island Generating Project and the Georgia Strait Crossing, two projects conceived by BC Hydro under the NDP.

The gas-powered generating plant was initially supposed to be built at Port Alberni, with a private partner. (It was linked to yet another NDP aluminum smelter dream.) The pipeline would be a partnership between BC Hydro and Williams Pipeline.

Hydro claimed a need for great haste, even warning that Vancouver Island could face brownouts by 2004. (No sign of them yet, despite some high demand during last winter's cold snap.)

So the Crown corporation started spending money on the projects, supported by an NDP government that had decided cabinet, not the B.C. Utilities Commission, should make decisions on whether new power projects delivered the best value to captive consumers.

But things kept going wrong. Atco was supposed to be a partner in the Alberni project, but was pushed out by Hydro. The city wouldn't rezone the site Hydro wanted, so the whole project was moved to Duke Point near Nanaimo.

A new private sector partner was found, and then dumped, convincing many that BC Hydro wanted to do this project by itself.

Caught up in its haste, Hydro went out and bought turbines just as prices spiked with the California energy crisis.

The turbines remain in storage. They're included in the $98 million that Hydro considers a potential writeoff. In addition, the Crown corporation estimates it may owe Williams $22 million if it backs out of the pipeline deal.

Hydro had been projecting earnings of $210 million for the year ending March 31, 2004. The provision will knock that down to $90 million. Down the road, it will result in higher rates for consumers.

Mr. Elton bravely defended the decisions. BC Hydro has to err on the side of caution in ensuring energy supply, he said, and the decisions all made sense at the time they were made.

That second assertion looks dubious. When the Liberals finally released their energy plan, 18 months after the election, they sent the whole project to the B.C. Utilities Commission for review. The commission found that the critics were likely right; it was probably not the most cost-effective way to meet Vancouver Island's power needs.

The commission ordered Hydro to call for proposals from other companies proposing to deliver the same power much more cheaply, a change that would benefit consumers. Eleven companies have successfully submitted proposals.

That process wraps up later this summer.

Who is to blame?

Mostly the former NDP government, for ending independent oversight of Hydro. Most of the money was spent on its watch.

But about $35 million was spent after the election. The Liberals could have -- and should have -- ordered an independent review at any time. What's clear is who will pay if this all unfolds as expected -- BC Hydro customers.

willcocks@ultranet.ca