A report on the BCUC Site C Final Report

In its final report, the BCUC concluded that the overall costs of completing Site C would be roughly the same as terminating the project and pursuing an alternative portfolio of DSM, wind and geothermal projects as required. There would be a cost advantage to completing Site C if load grows more rapidly than the Commission assumed and a cost advantage to the alternative portfolio if Site C costs escalate higher than $10 billion.

It is important to note, however, that BCUC reached this conclusion based on a manifestly unbalanced set of assumption and an incomplete assessment of costs for its alternative portfolio. As well this conclusion about overall cost does not address the marked differences in the timing of the cost and rate impacts, in particular the immediate challenge of the large rate impacts required to recover termination and sunk costs with its alternative portfolio that would not occur with the completion of Site C.

Lack of balance in assumptions: BCUC concluded that conservative assumptions should be made with respect to Site C. It concluded that a $10 billion ‘P90’ estimate of the remaining costs to complete Site C should be assumed (an estimate with a 90% likelihood of being achieved), adding over $1 billion to BC Hydro’s latest cost estimate. It concluded a low load growth forecast should be assumed and no adjustment should be made for electrification policies and trends due to the uncertainty surrounding them at this time. It assigned a lower value to Site C surplus sales than trading experts and its own technical consultants forecast. It ignored the value that Site C can realize from storage and the dispatchability of its production. And it ignored completely the important social and potential market value surplus sales from Site C will realize by displacing thermal power production and reducing GHG emissions in other jurisdictions.

At the same time, it made a number of very questionable and arguably optimistic assumptions about the costs of its alternative portfolio. It did not address or make any adjustment for the uncertainty in impacts and per unit costs of DSM measures; it did not attempt to estimate the bid prices that BC Hydro would face if it acquired wind energy from IPPs; it used a very low estimate of wind integration costs; and it incorporated geothermal resources in the mid and high load growth cases even though it acknowledged that it is not certain this resource will in fact be commercially viable in BC.

All of this served to maximize the BCUC’s cost estimate for Site C and minimize its cost estimate for the alternative portfolio.

Incomplete assessment of costs: The BCUC did not include all of the costs customers and BC Hydro would incur with its alternative portfolio. It improperly excluded what in many cases can be the largest component of DSM costs – the costs that customers themselves incur to reduce requirements or to shift demand to off-peak periods. It included, for example, the cost of incentives to buy more efficient lighting, but not the costs of the efficient lighting itself.

Also, the BCUC assumed that Revelstoke 6 would be developed in the mid 2020’s without Site C. This has the effect of delaying what would otherwise be a more immediate need for additional peak generating capacity in its ‘without Site C’ alternative portfolio. However, BCUC did not include in its analysis the present value costs of advancing the timing and expenditures for Revelstoke 6 – expenditures estimated to total some $500 million – more in 2018$. The BCUC analysis captures the benefit of Revelstoke 6 for its alternative portfolio but not the costs.

Timing of rate impacts: - There are major differences in the timing of the costs and rate impacts if an alternative portfolio were pursued instead of completing Site C, but the BCUC did not address them. Most importantly, it did not address the timeframe over which the some $4 billion of sunk and termination costs would be recovered.

If Site C is completed there would be no termination costs and the sunk costs would properly be recovered over the expected economic life of the asset. Distant future as well as current customers would share in this cost because they share in the benefits it offers. On the other hand, if Site C is abandoned, there would be no justification for recovering the termination and sunk costs over anything other than a short period. Deferring cost recovery would simply add to (almost double) the rate smoothing and other regulatory accounts that most analysts believe are already far too high. It would impose an unfair burden on future customers.

Had the BCUC analyzed the annual cost and rate impacts of its alternative portfolio compared with completing Site C, assuming cost recovery in accordance with standard utility regulation principles, it would point to a very significant and immediate adverse consequence of terminating the project at this time.

One could argue that perhaps government should absorb these costs. But even if that were done it would not change the magnitude of the impact, just the manner in which BC residents would be affected. It would shift the burden of the recovery of the termination and sunk costs to taxpayers as opposed to ratepayers. There would be differences in the extent to which individual families and businesses would be affected but the impact overall would be the same.

Concluding Comments

The main issue with Site C has never been whether it is an attractive electricity supply resource. Operating in conjunction with the upstream Williston reservoir, it is a cost-effective and strategically valuable resource. As the Joint Review Panel concluded:

Despite high initial costs and some uncertainty about when the power would be needed, the Project would provide a large and long-term increment of firm energy and capacity at a price that would benefit future generations ... and provide a foundation for the integration of other renewable low carbon sources as the need arises.

From an electricity resource planning perspective, the issue with Site C hasn’t been whether, but when.

It is widely recognized that Site C should not have been started when it was. With considerable uncertainty over the load growth forecast, and DSM opportunities that could further delay the need for Site C energy and capacity, the start of construction on Site C could and likely should have been delayed a number of years. But circumstances are different now that over $2 billion has been spent and another near $2 billion would have to be spent to terminate the project and remediate the site.

There is no case in the BCUC report that ratepayers would be better off to abandon the Site C project at this time. One needs an unbalanced and incomplete costing of the alternatives just to conclude an alternative portfolio would be close in cost (within $300 million in present value cost in BCUC’s latest calculations). And as for suspending and restarting at a time that would have been more attractive before construction had commenced, the BCUC is very clear. It is the worst of the options available to the government.

Unless the government takes the position that Site C should be abandoned now and forever for environmental, First Nations or other such reasons, the best course of action at this time is to continue to complete the project, taking whatever steps are necessary to minimize remaining costs, to maximize the value of the surplus Site C will inevitably produce and to address as best as possible the issues that First Nations and local residents have in respect of the unavoidable impacts the project will have.