Paul Nettleton on BC Hydro

November 13, 2002

My dear colleagues:

As many of you know, we are in the process of preparing legislation which will permit the privatization of certain functions of BC Hydro, and Minister Neufeld has recently admitted that the government plans to take control of the transmission system from BC Hydro. I have reached the conclusion that these are only the opening moves in a strategy intended to completely dismantle the crown corporation. I believe the implications for British Columbia are huge, and disastrous, with a significant potential for escalating power costs to consumers, supply interruptions, and environmental degradation. I regret that I must oppose my government's plans to privatize BC Hydro, together with any form of deregulation (or "re-regulation", as it may euphemistically be called) which will advance this agenda.

What are our plans for BC Hydro?

I don't know the details of the proposed legislation. Neither the draft legislation nor the final report of the Energy Policy Task Force have been made available to the public, or to me, or to most of you I'll wager. My understanding is that the government has entered into a Memorandum of Understanding to transfer to Accenture, a private consulting company, all of BC Hydro's management/administrative operations, namely: customer services, information systems and services, network computing services, and business and office supplies. This represents one third of BC Hydro's total operations and personnel and, more to the point, control over its direction, policies and procedures. I would expect to see within the new legislation the authority for the transfer of these operations, and I believe there may also be some clarification or redefinition of the role of the Utilities Commission in overseeing the Utility, setting rates, etc.

I should be clear that my opposition is to the privatization of BC Hydro, under whatever guise. I have not seen the particular legislation we will be asked to consider. Taken alone, the substance of this particular first piece of legislation may well come across as relatively benign. However, following Minister Neufeld's announcement, I am firmly convinced that this legislation is only the opening move in a strategy whose ultimate goal is the wholesale privatization of the utility. Whether it will be done through the outright sale of core assets of BC Hydro (and I appreciate that the Premier is on the record as specifically rejecting this) or through incremental privatization, the result will be the same. Prior to Minister Neufeld's announcement, the government could still have plausibly denied that the deal with Accenture and the upcoming legislation had anything to do with privatizing the utility. I do not think British Columbians are so credulous that such a fiction can now be maintained. Perhaps we have not yet explicitly mandated further privatization of BC Hydro but, if the separation of the transmission function is actually implemented, we will have set out on a road from which there is no return. Once transmission is opened up, each next step will follow inexorably, with a kind of self-reinforcing logic.

What comes next?

I doubt that the rationale for the transfer of BC Hydro's management and administrative functions to Accenture has anything to do with cost reduction. Actual cost reduction will require finding some pretty significant savings, given that we will have introduced a middle-man into the system who must first pay itself out of those "savings". Furthermore, Accenture has a poor track record in terms of actually producing those savings. As just one example of the many which could be cited, Accenture was the firm contracted to privatize the welfare system in Ontario and you may recall that the Auditor General of Ontario was rather critical in its assessment of Accenture's performance (reporting that the cost of having Accenture perform the work rather than the public servants was 6:1 and that, while the Province saved $89 million (mostly from cutting welfare payments) it paid Accenture $193 million).

My principal concern however, is not with Accenture's integrity or competence but with the transfer of control over BC Hydro's operations to a private firm, accountable only to the government, under an agreement whose terms are confidential. I had surmised that the government understood the overt privatization of BC Hydro to be unpalatable to the public so that it could not at this time be mandated by legislation. This would be a reasonable conclusion given that 76.1% of British Columbians oppose the sell-off of BC Hydro assets, 68.1% opposition to privatization and deregulation. Hence, the lack of consultation, although in the same poll 83.8% supported full public consultation. (Poll of 500 British Columbians conducted by CGT Research in April 2002. Similar results were obtained by a McIntyre and Mustel Research poll in October 2002.) Proceeding in the face of such public opposition, betrays an extraordinary arrogance on the part of the government, the sort of arrogance I recall, now with some chagrin, denouncing from the Opposition bench.

Accenture will clearly be predisposed towards further privatization, will likely be more amenable to government suggestion than the existing crown corporation, and would be unlikely to jeopardize its own interests by prematurely leaking privatization plans or any ongoing involvement by Victoria in the development or implementation of those plans. Prior to the announcement in regard to BC Hydro's transmission capability, I had begun to think that the reason for beginning with the privatization of the control functions to Accenture is that Accenture could be directed to maneuver BC Hydro towards full privatization in such a way as to minimize the government's exposure to charges of political interference. However, if that were true, one would think the government would have waited for Accenture to take the helm and left it to them to engineer the severance of the transmission system.

Make no mistake: taking control of transmission from BC Hydro is the key move, the death knell of BC Hydro. In all jurisdictions in which public utilities have been privatized this has been one of the first steps. California began its privatization by separating their public utility's generation, transmission, and distribution systems and functions from one another. Ontario Hydro also began this way. The Federal Energy and Regulatory Commission in the U.S., in its drive towards privatization and deregulation, is considering dictating the break-up of generation, transmission, and retail sales in public utilities in the States.

Why is the isolation of the transmission system so key to privatization?

BC Hydro is presently an integrated whole, incorporating generation, transmission, and distribution functions, managed in such a way as to capitalize on the efficiencies of the integration of those functions. At any given time, BC Hydro is able to direct the generation of power from the most cost-effective location and move it through the transmission system, according to BC Hydro priorities. Although BC Hydro currently contracts with private power producers to allow access to its transmission system, that access is restricted and defined by the terms of specific contracts with individual producers. Private producers do not have "transmission rights": They may not demand equal call on the limited transmission system available in such a way as to interfere with BC Hydro's ability to operate in an efficient, integrated manner. By giving private producers equal call on the transmission grid, the government will have appropriated a large part of BC Hydro's competitive advantage for the benefit of its competitors. Without necessarily having sold any of the core assets of BC Hydro, we will nonetheless have set in motion the chain of events that must ultimately result in the wholesale privatization of BC Hydro. BC Hydro will no longer be able to generate power delivery as and when required or at a cost consistently less than its competitors, will become less profitable and no doubt lose some customers. And once BC Hydro is of less universal utility to the people of British Columbia, the reasons for maintaining a public utility of any kind begin to fade away. Only then will we look at privatizing the generation facilities.

Why should BC Hydro remain a public utility?

I am not against competition and free markets. I agree that the market place is generally the most efficient allocator of resources and that increased competition will usually result in cheaper rates for consumers, improved security of supply, and improved service. However, there are a number of reasons why competition and a free market is inappropriate to the power sector in B.C.:

1. BC Hydro is not broken and doesn't need fixing. It contributes in the order of $850 million a year to government. It offers electricity to all classes of customers at rates which are among the lowest in North America. Its cost of generation, and its cost of operations, maintenance and administration have been consistently lower than the average of the Canadian Electrical Association. Similarly, BC Hydro has consistently out-performed the CEA average for reliability. No doubt, a large part of BC Hydro's advantage over other power producers is derived from the fact that its energy is almost entirely hydro-electricity, the cheapest way to generate power. In addition, as I've mentioned, BC Hydro presently enjoys a huge competitive advantage over private producers through the efficiencies of its integrated generation, transmission and distribution operations.

   To open the market up to competition it is necessary to first destroy the integrated operations of BC Hydro, as now proposed. I'm all in favour of removing any regulatory or other impediments to any competition that has the potential to provide power at lower cost than BC Hydro. But it makes no sense to deliberately handicap BC Hydro to ensure it can only provide power at as high a cost as can its competitors.
    

2. Hydro electricity is cheaper than any alternative that the private sector could offer. In most jurisdictions in which privatization and deregulation has been pursued, the greater part of their Public Utility generated electricity was produced through traditional natural gas technology, coal-fired generation, and nuclear means, with their attendant high costs, environmental hazards, or environmental degradation. There was therefore some justification for opening up the market to competition in that the natural gas technology now available could conceivably result in savings, while at the same time satisfying the policy objective of relatively "clean" energy. Independent power producers could be allowed to enter the market to capitalize on the advantages they could offer over the Public Utility generated power, thereby (as the theory goes) increasing capacity. In the case of British Columbia, BC Hydro already has in place the reservoirs, generating stations, transmission lines, and local distribution and service systems necessary to provide electricity to British Columbians. Because of the prohibitive capital costs of these assets, and the new environmental sensibilities involved, no independent power producer is likely to be able to add any significant hydro-electric production capacity. Should additional capacity be created, it would have to be through natural gas or coal-fired generating plants. However, even the most efficient natural gas technology cannot compete with the low cost of hydro electricity and therefore, with BC Hydro. Private producers utilizing thermal generation would not be able to compete with hydro generation. Therefore, the only way to open the B.C. power generation business to competitors is to strip BC Hydro of its generation facilities and transfer that generation capacity to independent power producers.
    
3. There will never be true competition in the power industry. A true competitive market requires a large number of buyers and sellers, so that no one party may unduly influence the quality or price of the product or service. However, there will only be a few players in the power generation business after the transfer from BC Hydro is effected. Since upstream operations on any given river system need to be coordinated with downstream operations, all of the generation facilities on the river system will have to come under the control of one operator. There is only a handful of such systems in B.C., so the power generation business in B.C. will necessarily be restricted to the relatively few players who are given a piece of the hydro pie.

   In other jurisdictions in the U.S. or the U.K., where utilities have been privatized and the industry de-regulated, there has been a rapid corporate concentration in all aspects of power generation and delivery. This is to be expected. Producers will be strongly motivated to reach a critical size of operation, realize economics of scale, and reduce competitive pressure. Ironically, having de-integrated BC Hydro, the government would no doubt soon be under pressure from the private sector to allow these few generation companies to reintegrate transmission and distribution functions. In other words, the private sector would eventually morph into a monopoly in its own right, but without the mandate to provide the same universality of service to people throughout British Columbia, or to return profits to British Columbia for the benefit of its people.
    

4. Increased competition can NOT be relied upon to add capacity or stabilize prices. Although part of the official rationale for privatization is the need to ensure capacity into the future, it is actually very difficult to reliably predict the advent of a sustained demand increase sufficient to justify the capital cost of new construction. Our present depression/recession/recovery/double dip recession should be proof of that. Should any of the new independent power producers risk investing in new thermal generation facilities, that kind of additional capacity will still be more expensive to produce than the electricity generated by their existing hydro facilities. Their new thermal generation capacity will therefore be subsidized by their hydro generation capacity. Each new facility brought on-line will increase the proportion of their power generation produced at higher cost, and dilute the competitive advantage they have over the non-hydro producers. Producers will be facing a declining return on the dollar and increased risk of having excess capacity. Furthermore, producers are not ignorant of the relationship between supply and price. Adding capacity to meet the demand will not just be increasing their blended cost of production; it may just drive prices down.

   Were increased capacity to actually be required for the security of the B.C. supply, those whose motivation is maximization of return on investment should not be relied on to add that capacity. It should be noted that both California and Ontario privatized with the hope and expectation that private companies would be eager to build new generating capacity, but they were not. They preferred to buy existing plants, hoping for an increased demand to send prices skyward. In fact, the rolling brown-outs and outrageous prices in the California energy market in 1999-2000 were reportedly exacerbated by production cut-backs in the face of the urgent demand. I suspect that in the new privatized BC energy market, there will be few enough private producers generating electricity that there will be a real risk of collaboration between them for the purpose of restricting production and to drive up prices.
    

5. Policy objectives of government may be served by a public utility but would be discarded by independent power producers. I offer the following truisms:

   It is in the government's best interests to encourage the cleanest possible power generation. If the government determined it needed to add capacity, it would no doubt invest in the most efficient natural gas technology. The private sector will develop the cheapest possible power generation. If the private sector were to add capacity, we might find that the plentiful and cheap coal reserves of British Columbia would fuel the new thermal plants, despite the environmental cost.

   The government has an interest in reducing demand such that demand in B.C. can be met without increasing capacity: witness BC Hydro's successful Power Smart program. The private sector's interest is in stimulating demand to expand their revenue base, but in a way as to just outstrip supply to protect prices.

   Government should deliver power to the consumer at the lowest possible cost. This is especially true for those on limited or fixed incomes, but it is also true of business. Canada, including B.C., is a high tax jurisdiction. Most private industry in the province are on record as being opposed to the privatization of BC Hydro, with the possible self-interested exceptions of coal producers and Alcan, which stands to benefit by selling its "excess" hydro capacity in a competitive market. In spite of our efforts to reduce taxes in this province, we cannot compete with either the U.S. or Alberta in terms of offering a business friendly tax environment. Our one significant advantage, particularly with respect to energy intensive industries like ore and timber milling, is the low cost of power. If I recall correctly, we are supposed to be "open for business" now. The private sector on the other hand will desire to obtain the highest price possible for its product.

   The Government should insure hydro service throughout the province. The current "postage stamp" rate policy in which residents of B.C. pay the same hydro rate irrespective of where they live, needs to be protected. Obviously, it is more expensive to get power to the hinterland than it is to supply the major urban centres or our southern neighbors. If the private sector could not cover the costs of servicing remote or sparsely populated regions out of the local customer base, that power would instead be allocated to markets more efficiently served (i.e. U.S. markets). I suppose that the issue is debatable but I think it is important that the part of British Columbia outside the lower mainland and the Greater Victoria Regional District not be wholly uninhabited. I speak as the representative of a northern riding, a riding in which the people are becoming increasingly dissatisified with the urban preoccupation of the government.

What's re-regulation?

Don't ask me. I had understood re-regulation to mean the attempt to reimpose regulations on the power industry after market-based pricing had wreaked havoc in increased costs and decreased power security, significantly damaging the local economy. Re-regulation of this type will be impossible, by the way; prohibited by our international trade agreements. I would surmise that re-regulation as it is presently discussed either just means deregulation but with an "r" instead of a "d" or, perhaps it has something to do with communicating our good intentions or delegating the promotion of those intentions to the Utilities Commission. Perhaps we think that we can privatize and still control the rates and their standardization across the province, the amount and type of capacity brought on-line; environmental standards, that sort of thing. So far as rates go, were power to move to market-based pricing where B.C. customers were competing with U.S. customers, this would involve a 30% increase for residential customers, 40% increase for commercial customers, and a 60% increase for its industrial customers, this according to the interim task force report. This means that the government will eventually either have to cap rates at something much less than the market price as in California or introduce a rebate program as in Alberta or rebates and tax credits as in Ontario. But if rates are capped, will this mean that they will only be capped for B.C. consumers, in which case all the power will be sold south where rates are not capped, or does it mean everyone will be able to buy the power at the capped rate, in which case only most of the power will be sold south? Regulators in California couldn't keep up with the market manipulations of power traders in their de-regulated environment. Neither could Ontario. And if we do not, at the outset, anticipate every such contingency that flows from our sage re-regulation with other equally sage re-regulation, we will be unable to later rectify our oversight by re-regulation (in its traditional sense) or will such retreat be precluded by international trade agreement.

My Plea

This is an important issue. Every industry in B.C. and virtually every job, and every person needs affordable access to electricity. I hope that I am not the only member in the house alarmed by this road now taken towards the privatization of BC Hydro. I don't know the real reasons the government has for pursuing privatization at this time. I would speculate that a great deal of pressure being brought to bear on the Premier and cabinet by private producers looking for a piece of the action, by Alcan and other self-serving industries, and even perhaps by the U.S.'s Federal Energy Regulatory Commission (although it is untrue that FERC requires the de-integration of public utilities for access to the U.S. market). However, I retain a great respect for the integrity of my leader and my colleagues and I cannot believe that any such pressure would be sufficient to sway them in such a way as to prejudice the interests of British Columbia and its people. I do think the dire state of our finances and the need for cash infusion may be implicated.

In the final analysis, I think we have just become infected with the same sort of ideological blindness that once plagued the NDP, albeit on the opposite end of the ideological spectrum. It is our very commitment to the principle of the free market that has been distorting our view of the facts. Those facts do not support privatization. When it comes to hydro, the standard line about more competition being good for the consumer just does not hold water.

By being the first to speak against privatization, I hope I have made it a little easier for other members to express their own reservations, and I hope that there are other members who will stand with me in opposition to the Bill. At the very least, we should all take the time to study the draft legislation, the final Task Force report, and the terms of the Memorandum of Understanding with Accenture, and we should consult with our constituents, before we move to take any further action.

Sincerely yours,

(signed)

Paul Nettleton, MLA