BC Hydro and natural gas:
Fast ferries II?

By MARK JACCARD
The Vancouver Sun, March 7, 2001
www.vancouversun.com

Energy market instability is providing a media opportunity for advocates of a centrally planned energy sector. One hears arguments that high natural gas prices and high electricity prices in California prove that competitive energy markets don't work.

But volatile commodity prices - whether lumber, copper or energy - are no reason to replace markets, warts and all, with something worse. A look at our central planning monopoly, BC Hydro, makes the point.

BC Hydro intends to build a massive, 600 megawatt natural gas plant on Vancouver Island - its major system addition for the next decade. This will require a new natural gas pipeline, which Hydro would also build.

The economic risks of this project are enormous. First, pipeline construction costs are highly uncertain. The original Vancouver Island pipeline, built a decade ago, had huge cost overruns.

Second, natural gas prices are unpredictable. While Hydro assumes relatively low prices into the future, consumers are painfully aware of the real risks.

Third, liability for greenhouse gas emissions is uncertain. Over the plant's life, the world must surpass dramatically the Kyoto commitments if it is to stabilize atmospheric greenhouse gases. Just achieving Kyoto is estimated to cost Canada up to $120 per tonne of carbon dioxide emissions, which translates into high costs for polluting fossil fuels like natural gas.

Fourth, reduced electric connection with the Mainland - maintaining and renewing the undersea transmission lines is the alternative to this project - will leave electricity supply to Vancouver Island less secure, vulnerable to failure of the pipeline or plant.

Combine all these factors and you find substantial risk that the plant's electricity cost could exceed, perhaps significantly, the cost of electricity from Hydro's smaller, greener alternatives, on and off Vancouver Island (even when you include the renewal costs of one or more of the undersea transmission cables). The ultimate losses could dwarf the fast ferry cost overruns.

If such a calamity occurs, who pays? With the current, central planning monopoly, B.C. taxpayers (owners of BC Hydro) must pay - as with the fast ferries. In contrast, were the misinvestment by a private company, in a competitive market, the shareholders would pay - and the managers would be fired.

Needless to say, this outcome in competitive markets explains why those managers are hypersensitive to risk. This also explains why BC Hydro's risky project is not the kind being developed in jurisdictions with competitive markets.

The energy sector will remain uncertain. Central planning cannot change that. The sector is dominated by fossil fuels, nonrenewable resources that must be found and consumed at the same rate to keep markets in balance.

These fuels pollute local air and the atmosphere, incurring costs we are unsure of, Numerous unpredictable factors - weather, global politics, technological advances, environmental concerns or economic growth - affect energy markets. Indeed, the only certainty is continued uncertainty. In this climate, some electricity generation investments, perhaps many, will be colossal mistakes.

We need to ask ourselves which model is better for this situation: the central planning model - where all society gets to live with the consequences of risky mistakes made by people whose job and personal investment are not on the line, or the competitive model - where bad investments mean shareholder losses with customers free to shift to successful suppliers.

If given this choice, I think British Columbians would choose markets over central planning, even for the volatile electricity and natural gas sectors. But, in the case of electricity they would want to keep the benefits of the existing low-cost hydro facilities.

This can be done easily with entitlement contracts linking the price for BC consumers to the production cost of our hydro facilities.

Reform of the electricity sector - not deregulation or privatization - could provide a system where consumers and taxpayers retain the benefits from the past hydro power investments without being subject to either the full volatility of competitive or the misinvestments of a monopoly. And our low-rate advantage will be ensured rather than squandered by ill-considered megaprojects.

As master of BC Hydro, the government is ultimately responsible. It needs to show it can avoid Fast Ferry II. Even if it refuses to enact electricity reform, it should at least make BC Hydro stop now and engage British Columbians in an open process to assess our electricity options and their risks

Mark Jaccard is a professor of resource management at Simon Fraser University and former head of the B.C. Utilities Commission