The Site C dam exhibits many of the same traits afflicting other megaprojects: an undermining of the regulatory system, accounting tricks that mask the real cost of the project and an explicit guarantee of a taxpayer bailout.
This article originally appeared in the Vancouver Sun.
While the recently elected NDP government has kicked the controversial Site C hydro dam to the British Columbia Utilities Commission (BCUC) for review, the project is part of a larger disease afflicting public power utilities: megaprojects. If the track record of megaprojects is anything to go by, B.C. electricity customers should be very nervous.
The Site C dam exhibits many of the same traits afflicting other megaprojects: an undermining of the regulatory system that was explicitly put in place to protect consumers from reckless behaviour, accounting tricks that mask the real cost of the project and an explicit guarantee of a taxpayer bailout.
Like other megaprojects, the Site C dam never underwent a thorough review of its cost or need by the BCUC because the province explicitly exempted it. The province’s defence of that exemption was simply that it couldn’t allow a “a group of unelected bureaucrats and lawyers” at the BCUC to decide the fate of the project, even though it was that same regulator in the 1980s that ruled against Site C and led the government to shelve it.
A 2014 joint provincial-federal review panel that did have a long look at the project concluded it wasn’t clear that Site C was urgently needed. The panel also questioned whether Site C would be the best option of meeting future energy demand when it did arise, highlighting other forms of generation that are increasingly available at “competitive prices.” The chair of that panel, Harry Swain, has since become an outspoken critic of the megaproject.
B.C. Hydro also relies on a host of accounting tricks and cross subsidies to make the project viable. Most noteworthy is the province’s aggressive use of “regulatory accounts”, which allow it to keep rates low — as it was directed to do so by the province through legislation — in the near term and kick those costs to future customers. The auditor-general took B.C. Hydro and the province to task for such tactics, only to be ignored. The size of those accounts has grown by the billions in the intervening years.
B.C. Hydro’s long-term debt has also tripled over the last decade and grown faster than it forecast in its rate applications. The utility is now more leveraged — as measured by its debt-to-equity ratio — than any private utility could ever consider. Most regulators explicitly block utilities from taking on the kind of leverage seen at B.C. Hydro.
The only reason B.C. Hydro is able to take on that amount of debt is that investors know B.C. taxpayers will provide a bailout if needed. Debt ratings agencies have already warned that the utility’s debt binge could hurt the province’s credit rating, which would increase the cost of borrowing needed for hospitals, roads and other infrastructure.
Sadly, B.C. Hydro is simply following the formula used at other energy megaprojects in Canada.
In Manitoba, the $8.7-billion Keeyask dam is now nearly triple the first cost estimate. While the public was initially told that Manitoba Hydro would sell the dam’s output to power-hungry customers in the United States, it now admits power will be sold at a loss for more than 15 years and Manitoba ratepayers will be subsidizing cheap power for their U.S. counterparts. The utility now says it needs annual rate increases more than four times the rate of inflation to pay for the dam and other related capital projects.
In Newfoundland and Labrador, the $12.7-billion Muskrat Falls dam is more than double the original price. The province’s regulator was initially blocked from reviewing the project. When the regulator was eventually allowed a limited review, it called the process “torturous” and admitted it wasn’t given the time or resources to do it properly. Ultimately, it failed to support the project. The new CEO of the public utility has since repeatedly referred to the Muskrat Falls as a “boondoggle”.
And in Ontario, the province steadily dismantled the regulatory system that was explicitly put in place to protect customers from projects like the $12.8-billion refurbishment of the Darlington nuclear station. The province used the legislature to establish the “need” for the project, blocked it from a public review by the regulator and then forced the regulator to artificially lower rates in the near-term and kick the cost of the project to future ratepayers.
Site C is no different than other megaprojects. B.C. Hydro doesn’t face the discipline forced by competition and market forces. Only a public utility with the backing of a government willing to remove all road blocks would pursue a project of this magnitude and risk. Sadly, other megaprojects in Canada provide a cautionary tell on how that will turn out.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236