Island deal leaves Hydro on the hook for $70m
Customers or taxpayers likely 'options' to cover Nanaimo project costs
Scott Simpson
Vancouver Sun
04 Nov 2004
BC Hydro customers could be on the hook for $70 million in corporate writeoffs that were incurred during a controversial, drawn-out process to address a looming electricity shortfall on Vancouver Island.
Hydro distribution vice-president Bev Van Ruyven announced Wednesday in Nanaimo that Pristine Power of Calgary will build a 252-megawatt gas-fired generating plant at Duke Point to provide Island residents with a reliable electricity supply.
Hydro originally spent $120 million developing the project, but will recover only $50 million of that amount in the deal it announced with Pristine.
Van Ruyven said it's up to the B.C. Utilities Commission to decide how Hydro will make up the other $70 million it spent.
Options include higher electricity rates for all Hydro customers, a reduction in the dividend that Hydro pays to B.C. taxpayers as a Crown corporation, or Hydro may have to slash its budget to make up the $70 million, Van Ruyven said.
Hydro estimates that without the Duke Point plant, Island residents could be facing brownouts by 2007 due to constraints on supply and aging undersea transmission cables.
Pristine estimates hard capital costs of the project at $280 million -- $90 million less than what Hydro was planning to spend -- and expects it will take 18 months to put the plant into production, pending regulatory approval.
For its money, the Calgary-based company gets a brand new gas turbine at a steep discount and inherits a project that has already received all regulatory approvals necessary to proceed.
Hydro set out in 1999 to take on the project itself at an estimated cost of $370 million -- investing $120 million for equipment, permits and land.
However, with the $120 million already spent, the B.C. Utilities Commission (BCUC) in September 2003 rejected Hydro's application to proceed with the project.
The commission said Hydro's project was too expensive, and ordered the Crown corporation to find a private-sector partner in order to cut costs.
The cash crunch isn't entirely Hydro's fault.
The Vancouver Island generating project was underway before the B.C. Liberals took power in May 2001.
At the time, Hydro was not under the jurisdiction of the utilities commission.
But the Liberals put Hydro under BCUC control as part of a new provincial energy plan that called for the private sector to develop all new electricity supply for British Columbia's steadily growing demand.
Hydro decided to keep pushing the project ahead with a promise to find a private-sector buyer when it was finished.
But Hydro was brought up short when the BCUC sided with Hydro critics -- including the province's largest industrial customers -- who were concerned that the Island generating project wasn't the cheapest possible option.
Van Ruyven expects Hydro will be called before the BCUC some time next year to defend its actions and propose options for recovering the $70 million.
"We had been directed by the government," Van Ruyven said. "We will argue that we were headed down a path to build that ... gas-fired plant and we incurred those expenses prudently.
"Now we've got an opportunity with a private-sector partner coming in who says that they can build it and operate it for less than we said we could.
"They are going to write us a cheque for $50 million too. That's a good thing."
It's up to the utilities commission to decide how long it will deliberate over the proposed deal between Hydro and Pristine Power.
Van Ruyven said Hydro is hopeful that the commission will render a verdict in the deal in about three months.
"They did say they would make a decision on an expedited basis," Van Ruyven said. "We're obviously pretty anxious to get going on this and they completely agree with our issues on security of supply and the aging cables. So they know we're up against a crunch here."
Pristine president Jeffry Myers described the company as a group of "power industry veterans" who are confident that they can start delivering electricity 18 months after start of construction.
Again, it's up to the BCUC to decide when that construction will begin.
Myers provided some details about the deal, but would not disclose the full cost of the project nor the rate that Hydro will pay Pristine to purchase its electricity.
"Our hard capital costs will be around $280 million. Then there are some soft capital costs, like the cost of carrying the interest on the debt during construction," Myers said.
"Then we look at getting a return on our money to satisfy our investors over a 25 year term of the contract."
The process Hydro undertook in its Vancouver Island call for tenders was reviewed and pronounced sound by PricewaterhouseCoopers LP.
Hydro's original plan also called for construction of a $320 million gas pipeline from Washington State to Vancouver Island, across Georgia Strait, to feed the Duke Point plant.
Hydro already has regulatory approval from the National Energy Board to construct that pipeline in partnership with a U.S. energy company, Williams.
But Van Ruyven said that project may be unnecessary because Terasen Inc., is pursuing a project that would increase the capacity in its existing gas transmission lines to Vancouver Island.
Terasen is currently before the BCUC with that project.
"They have provided us with a new gas tooling price which is significantly less expensive than the Georgia Strait Crossing," Van Ruyven said.
"If they are able to get regulatory approval and firm up that tolling price to us, it wouldn't be prudent for us to refuse it."
The deal was criticized by GSX Concerned Citizens Coalition, a group of Vancouver Island who have argued that Hydro should seek environmentally friendly alternatives to a project that will diminish air quality in the Nanaimo area.
"Gas-generated electricity just keeps going up in price because gas keeps going up in price," said GSX director Arthur Caldicott.
We are disappointed because it locks Vancouver Island into a gas-fired electricity solution. But we are encouraged by the unofficial indicators we got on Georgia Strait Crossing that that pipeline probably won't get built."
BC Citizens for Public Power executive director Mark Veerkamp said Hydro's decision overrides the concerns of the community that must play host to the project.
"Here's a community in outrage over a gas plant in their area, the thing gets killed at the B.C. Utilities Commission, and it comes back as a private project with less public accountability.
"So I think it's a bit of a lose-lose situation for people on the Island.
"Hydro says the project is going to be cost effective, but we don't get a chance to see what rates are going to be charged back to BC Hydro.
"We don't know what BC Hydro is paying for the power."
© The Vancouver Sun 2004
Posted by Arthur Caldicott on 04 Nov 2004