It appears the government is considering subsidies for customers to use the line, which may not be fully used. The project should be funded by taxpayers rather than BC Hydro’s ratepayers.
Introduction
The provincial government announced last week that it wants to build a new transmission line to BC’s north coast to support new mining and liquefied natural gas (LNG) projects, among others. The line will be exempt from review by the BC Utilities Commission (BCUC), which I have already described as a poor decision. In bypassing the BCUC review, there will be no independent assessment of the project, including how likely it is to be used.
But the government also proposes overriding the BCUC-approved rate for industrial customers to connect to the North Coast Transmission Line. This raises the possibility that these new customers are being subsidized, but by whom?
Connection costs
Generally speaking, new customers pay at least some of the cost to get connected to BC Hydro. This is based on the cost causation principle – customers should pay the costs for which they are responsible – and is an important aspect of setting “just and reasonable” rates.
Connection costs are paid by all customers, not just large industrial users of electricity. BC Hydro’s tariff includes an Extension Fee for new residential customers on its low-voltage distribution system. While in practice most won’t pay it, because BC Hydro also provides a credit for some of the additional revenues it will earn, the Extension Fee protects existing customers from a single new customer costing a disproportionately large amount to be connected.
Transmission connections
The same principles apply to new industrial customers connecting to BC Hydro’s high-voltage transmission system: they are charged for the costs incurred to connect them, offset by a credit for some of the future revenues they will bring. Their connection costs are in addition to the standard industrial rates they pay for electricity once they’re connected.
Industrial connection costs are calculated according to a formula approved by the BCUC known as Tariff Supplement No. 6. In essence, customers pay for:
- The new transmission line from their plant to BC Hydro’s transmission system;
- BC Hydro’s Basic Transmission Extension (or “line tap”) to connect to the transmission line;
- A share of any System Reinforcements (i.e. upgrades) required to BC Hydro’s existing facilities.
BC Hydro grants new industrial customers a credit (“Offset”) to reduce their System Reinforcement costs, based on the new revenues they will be generating. The Offset is usually sufficient to cover all their System Reinforcement costs, but new customers must put up financial security to cover their Offset in case the new revenues don’t actually arrive.
Very large loads
This changes when the new customer’s load is very large. Customers who need more than 150 megawatts (MW) of electricity must also pay any cost of upgrading higher voltage transmission lines (500 kV or more) or adding new generation if BC Hydro is short of electricity (which it is).
While this 150 MW threshold is arbitrary, it protects existing customers from excessive rate rises, while still allowing new customers to get credit for the new revenues they will bring.
Many of the companies the government hopes will use the North Coast Transmission Line are very large loads. Thanks to some sleuthing by the Narwhal, we know for example that the second phase of LNG Canada would need 585 MW of power and Teck’s Galore Creek Mine 307 MW.
What we don’t know
The government said it will set a special rate for North Coast Transmission Line customers’ connection costs. Unlike Tariff Supplement No. 6, which was approved by the BCUC after extended negotiations between BC Hydro and its industrial customers, the new connection rate will be set with no independent scrutiny.
We are told that new customers will pay for their own transmission line and provide financial security for their connection. However, some important questions remain unanswered:
- There’s no mention of new customers paying for the “line tap” to connect their transmission line to BC Hydro’s. In a recent decision, the mining customer, Teck, is paying for their line tap. Will North Coast Transmission Line customers also pay?
- System Reinforcements aren’t mentioned at all, but the cost of the North Coast Transmission Line will likely be much higher than the BC Hydro “Offset” for customers. Will there be upfront payments by new customers to cover the cost of the line?
- Given that BC Hydro does not have a surplus of energy, will new customers also pay anything towards the cost of new generation to provide the electricity?
- Will the calculation of the Offset and the terms of the financial security be the same as for other industrial customers? If not, does this constitute a subsidy to North Coast Transmission Line customers?
Depending on the answers, there might be a considerable portion of the North Coast Transmission Line’s cost not covered by its users, even if it is fully subscribed. And if it isn’t, the cost that someone else has to pay will be even higher.
Who should pay?
Energy Minister Dix has observed that the Interior to Lower Mainland transmission line was “paid for by the whole rate base of B.C., paid for by ratepayers in Terrace, ratepayers in Smithers, ratepayers in Dawson Creek and ratepayers everywhere else to serve Metro Vancouver”. The implication is that viewing the North Coast Transmission Line any differently would be somehow discriminate against ratepayers in the north.
I respectfully disagree. The Interior to Lower Mainland transmission line project was an upgrade to BC Hydro’s integrated grid, used by all its existing customers. It was not necessitated by one or more new customers. In fact, it was needed in large part because of a previous government’s decision to shut down the Burrard Thermal gas-fired generating station, so BC Hydro needed to move more electricity from the interior of the province to the south coast.
By contrast, the North Coast Transmission Line is being considered solely for the purpose of adding new industrial customers. Giving them a break on their connection costs actually discriminates against all those customers everywhere in BC, including in the north, who have paid connection costs themselves, either in upfront costs or in “offsets” for future revenues.
Chicken and egg
There is still a problem, though, even if every new North Coast Transmission Line customer pays their fair share of connection costs. If too few customers sign up and the line is undersubscribed, the remaining cost has to be paid by someone.
This is relevant because I don’t believe the demand for the North Coast Transmission Line is nearly as “firmly established” as the government claims. In fact, the numbers being bandied about are rather flimsy. BC Hydro’s survey of possible demand in the north coast only asked for “expressions of interest” and does not appear to have required any commitment on the part of respondents. Despite the President of the Mining Association of BC claiming at last week’s press conference that the project was a “strategic and safe bet” I’m not aware of any company committed to buy electricity from the new line.
The smart decision would have been to delay the North Coast Transmission Line project until there are firm commitments from enough customers to make it economic. This is what private sector companies do, for example with proposed pipeline projects. However, yesterday the government rejected that idea.
We’re left with two outcomes if North Coast Transmission Line customers are not charged the full cost of their connections, and / or the line is undersubscribed: ratepayers or taxpayers will be on the hook instead.
Ratepayer option
It’s normal for ratepayers to take some risk that utility assets aren’t fully utilized. This risk is usually considered by the BCUC, when they assess the reliability of a utility’s demand forecast before approving an investment. But that ship has sailed.
If the government decides BC Hydro will pay for the North Coast Transmission Line, it will be all ratepayers who take the risk of paying for any unused portions of the line in rates. Plus, they will pay for any subsidy the government provides to new customers.
To give you a sense of scale, BC Hydro forecast that the $16 billion Site C Dam project coming online in 2025/26 would increase rates by 8.3 percent for all customers. With the forecast cost of the line to Terrace doubling to $6 billion in just two years and not including the northern extension, the eventual cost of the North Coast Transmission Line could be considerable. Plus, transmission assets are depreciated over a shorter period than dams, so the annual effect on rates will be higher.
The taxpayer option
Everything the Energy Minister has said suggests he expects ratepayers to be on the hook. But I think the case for taxpayer funding for the North Coast Transmission Line is stronger.
The government’s announcement gushed about the line’s benefits, from 9,700 direct full-time jobs and nearly $10 billion per year to GDP, to $950 million annually in public revenues and the prevention of two to three million tonnes of carbon emissions annually.
These benefits accrue to the public as a whole, not specifically to electricity ratepayers. For that reason alone, it should be taxpayers that make the investment and take the risk.
But there’s another reason. Even though almost everyone both pays taxes and uses electricity, there is a big difference between using the two groups to fund public policy initiatives. The income tax system is progressive, meaning people on higher incomes pay a higher rate of tax, while everyone pays the same electricity rate no matter what they earn. Raising rates to pay for a public policy decision means lower-income households would contribute proportionately more. I don’t think that’s fair.
The provincial government is branding this as a “nation-building project”, clearly hoping the federal government will contribute something. Even if it doesn’t, backing this project with provincial taxes is preferable to funding from ratepayers.
Conclusion
The Site C Dam project was approved by the previous government without an independent assessment by the BCUC of whether it was in the public interest. Now, with a looming electricity deficit, building Site C is starting to look like a wise and prescient decision. It’s possible we could feel the same way about the North Coast Transmission Line in a decade or two.
There are differences though. Site C is connected to the integrated network, so its energy can be used where it’s needed. The North Coast Transmission Line only goes to one place – if the demand doesn’t materialize there, it’s a white elephant (as a reader wrote in and warned me the day it was announced).
The case for taxpayer funding is that no private-sector company would be willing to make the investment, but the government could – and the future tax revenues and other benefits would outweigh the cost. If the government insists on building the North Coast Transmission Line without waiting for customer commitments, taxpayer funding would be the fairest approach.
Let’s hope the “If you build it, they will come” approach works beyond baseball fields.