Then-premier W.A.C. Bennett, BC Hydro boss Gordon Shrum and Highways Minister Phil Gaglardi view the Bennett Dam in a 1964 file photo.

Photo shows Arrow Dam construction at Castlegar in October 1966. Dam was renamed for B.C. Hydro chairman Hugh Keenleyside.

(Potential Power)

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First in a two-part series

British Columbia energy policy is nearing a historic crossroads as the province wrestles with dramatic changes from the economic engine envisioned 40 years ago by W.A.C. Bennett.

But the path to the potential privatization of the province's power grid is anything but smooth. From political fallout to impending brownouts, reforming the province's energy policy is fraught with difficulty.

In fact, the task is so daunting that after failing to meet a February deadline for the release of a widely anticipated blueprint for the reform of energy policy in British Columbia, Energy Minister Richard Neufeld has again backed off from any commitment to a timeline for its completion.

The final report of the B.C. Energy Policy Task Force was supposed to be released this month but a spokeswoman in Neufeld's ministry said Friday the release date is more likely to be September. The last electricity and energy report as portentous as the one now in development in Neufeld's office was issued at the conclusion of Gordon Shrum's 1958 Royal Commission into the activities of the B.C. Power Corporation -- one of Hydro's predecessors.

Neither Neufeld nor his deputy minister Jack Ebbels, who is heavily influencing the province's policy direction, were available for comment -- although The Vancouver Sun has been seeking an interview for three days.

A spokeswoman in the ministry's communications branch acknowledged Friday that there will be several months' further delay, saying the province wants to be sure it has the policy correct. "This is a huge undertaking, and government recognizes that sound energy policy is essential to the economy of the province and the quality of life for British Columbians, therefore it is going to take time to weigh all the implications," ministry communications officer Regan Hansen said.

Shrum's report prompted then-premier W.A.C. Bennett in 1962 to merge BCPC and B.C. Electric into a single province-spanning utility, BC Hydro, creating a legacy that has endowed us with the third-cheapest electricity rates in North America. This time around, however, the province is heading in the opposite direction.

The interim report recommended breaking Hydro up into smaller utilities, with generation, transmission and distribution systems controlled by separate private or public sector companies.

It said the convergence of energy markets across North America means British Columbia is "inextricably linked" to those in the western U.S. and B.C. can not sit in isolation of those markets which determine prices for natural gas, the next big source of energy for electrical generation in B.C.

It said that electricity reform in a free market involves financial risks which the private, not public, sector should shoulder.

One of the report's authors warns that such changes need to happen quickly because B.C.'s energy needs are beginning to outstrip the province's traditional supply of hydroelectricity, and that brownouts are a looming threat for consumers in the Lower Mainland and on Vancouver Island without action.

Released last December, the interim report drew a storm of outrage in British Columbia because it suggested throwing B.C. consumers upon the mercy of the free market in electricity trade in western North America.

Critics including important industrial consumers warned it could boost electricity prices overnight by 30 to 60 per cent.

It could shift as much as $1 billion worth of opportunity towards the private sector -- or alternatively, confirm BC Hydro's monopolistic and intimidating grip on this crucial sector of the provincial economy.

The former NDP government twice looked at energy reform, commissioning Simon Fraser University energy policy expert Mark Jaccard to write proposals for reform in 1995 and 1998.

"I think they have come to realize how complicated this is," says Jaccard in reference to the delay.

The NDP failed to act upon Jaccard's recommendations, although they helped shape a new energy policy in Quebec that is lauded by private sector operators anxiously watching deliberations in B.C.

This time around, however, the government is expected to take action, despite the misgivings of heavy industries that are B.C.'s biggest electricity consumers.

"W.A.C. Bennett created BC Hydro back in 1962 to provide low-priced electricity in B.C. on the Peace and Columbia rivers to attract industry to the province," said Dal Scott of Highland Valley Copper, chairman of the Joint Industry Electricity Steering Committee. "When you eliminate the advantage of that low-priced electricity to the province it could have the opposite effect."

Scott's group represents industries including mining, smelters and pulp mills that fear they could find themselves at a competitive disadvantage if electricity prices jumped overnight to reflect market prices across the western North American grid.

"We're waiting, sort of anxiously, to see what comes of the task force report," he said.

The steering committee wants the government to move only with extreme caution, if it moves at all, in the direction of policy reform.

"Last year when the Task Force was putting together their submission, it was in a period when the move to privatization or deregulation was accepted as maybe a good thing to do," Scott said. "Since then events around North America have maybe unfolded in a manner that has perhaps caused people to pause and reflect.

"People like Enron are the poster child of what's not the best thing to do, and just in the last couple of months many of the electricity marketing outfits have been disbanded or are in trouble for allegedly wash trading or whatever it is they call it in their business."

However, Scott said the steering committee agrees with energy sector participants and observers that B.C. energy consumers be billed a "blended price" that uses low-cost hydro power to dampen higher prices coming from gas-generated sources.

Hydroelectric energy comprises about 90 per cent of electricity in B.C., so it could take a decade or more for the incremental addition of gas-generated electricity to lift the price in this province close to what's paid in the hydro-poor markets that comprise most of western North America.

A blended price might push prices up two or three per cent a year, while ensuring B.C. of a potential electricity supply large enough to meet its needs.

Eventually the province could push B.C. into market pricing -- primarily as a means of encouraging energy conservation, which happens to be the cheapest way of all of ensuring that demand does not outstrip supply.

"The challenge for British Columbia is to recognize the mistakes that have been made in other jurisdictions, in undertaking reforms of the electricity sector," acknowledges Task Force member Erik Westergaard, an energy policy consultant with Cap Gemini Ernst & Young.

Westergaard says there are European jurisdictions, including Norway, where parts of the system were privatized while others remained with the government.

He points to California where an ill-conceived energy deregulation scheme caused electricity prices to skyrocket in 2000 and 2001.

Going into an election this fall, the state government is balking at paying back almost $8 billion in what it claims to be excessive charges during that period.

"California is interesting but it's not the future for British Columbia. I think there are better ways to do it and that is the challenge for the government, for BC Hydro and for the other parties that would wish to participate in the electricity sector in British Columbia," says Westergaard.

There is suspicion among some observers that the policy that will finally be delivered to the B.C. public will sound impressive -- but still leave BC Hydro in control of the province's resources.

Alberta companies warn that they'll be looking at the fine print.

The president of an Alberta transmission company notes that it's interested in running a major new transmission line through southeastern British Columbia.

The line proposed by AltaLink would run between new gas-generation plants in the Alberta oil sands region and the Bonneville system in Washington state.

That line would give B.C. access to low cost electricity but right now, AltaLink president Scott Thon says, Montana looks like a better route than B.C.

That's because transmission in B.C. is controlled by BC Hydro and the Crown corporation is not regarded as a fair player when it comes to potential rivals.

"We're definitely in the feasibility stage of that project on both sides of the border," Thon said.

"Our preference would be that it be integrated with British Columbia but the lack of independence in British Columbia is one of the barriers to integrating it.

"Clearly, having a transmission entity that is not independent makes it much more difficult for us to integrate it through the B.C. system."

Another Alberta company, Atco Power, expresses similar disinterest. Atco lost $4 million when its partnership with BC Hydro in a proposed gas-generation plant for Port Alberni collapsed.

The company won't talk about that deal, citing a confidentiality agreement, but Atco corporate services manager Len Landry says they've "made sure" that Neufeld and Premier Gordon Campbell are aware of the company's concerns.

"It's not that we're telling B.C. what to do. We're being asked, what does it take to get you to put your bucks here.

"From that perspective what we're looking for are three relatively simple things.

"One is, we want to know who can we sell to, and how. Right now BC Hydro is the [monopolistic] purchaser. You have no choice, no bargaining position at all.

"The second thing we need is a transmission system that is not controlled for the sole interest of one entity, that again being BC Hydro. It's got to act as a common carrier that sells transmission service to buyers and sellers of power.

"The third thing we've said to the government we'd need to be a player in B.C. is to know who we are competing against.

"If we are going to have to compete against a Crown agency, it's like a non-starter -- not that we feel we couldn't be more efficient and more effective at it."

"We've told the government and the task force we're very interested in investing in your province but under rules which result in a more level playing field for an independent power producer relative to the monolithic BC Hydro."

Landry says it's a "widely held misconception" that independent power producers need all generation to be priced at current replacement cost market pricing.

"If the government wishes to continue selling power from the endowment entitlement dam generation, at whatever price, that's fine. That doesn't effect us. That's the way it works right now. You just blend all the prices together at the end."

Jaccard, meanwhile, says W.A.C. Bennett's dream of using hydropower development as the key to economic development in B.C. is dead -- but his legacy will live on even if the Liberals chop up BC Hydro.

"I would argue that W.A.C. Bennett's legacy is major public hydropower development on the Columbia and Peace Rivers," Jaccard says.

Part 2 appears next Saturday