The BCUC could disallow some of the forecast $16 billion cost if the project wasn’t managed prudently. It should review the project in an open and transparent inquiry.
Introduction
BC Hydro announced recently that the sixth and final generating unit of its Site C dam started operation in August. The press announcement focused on the engineering achievement, and the positive contribution that Site C’s electricity will make providing clean energy for BC’s economy.
But the final cost of the project is still unclear – the latest forecast from February 2021 is $16 billion, nearly twice the $8.335 billion figure approved by the government in December 2014. (The project was originally scheduled to be completed by November 2024, so don’t believe reports that say this was achieved “months ahead of schedule”.)
The BC Utilities Commission (BCUC) didn’t approve the Site C project – the previous government side-stepped this review in the Clean Energy Act in 2010. However, the BCUC still has the right to review the costs, and may disallow any that were not prudently incurred.
Background
Regulated public utilities are entitled to collect their prudently incurred costs from ratepayers. The BCUC reviews proposed costs in advance, and sets rates that should be sufficient to collect them.
It’s a bit trickier with capital investments. The BCUC usually approves utility projects in advance based on their estimated costs, not knowing what the final cost will be. But the utility doesn’t necessarily get to collect the final cost from ratepayers when the project is complete, even though it was approved.
When a utility asset goes into service, the BCUC can look back at whether the actual costs were prudently incurred (a prudency review). There’s a long history of regulatory and legal decisions on prudency, but I believe Enbridge Gas Distribution Inc. versus Ontario Energy Board, 2006 is a good example. In summary:
- Decisions by a utility’s management are presumed to be prudent unless there are reasonable grounds to challenge them, such as a significant cost overrun; and
- Decisions must have been reasonable under the circumstances prevailing at the time, not with hindsight.
Prudency reviews are not common, and the bar for disallowing costs is high – I’m not aware of any BCUC review that has actually disallowed costs from a completed capital project because of imprudent actions by a utility’s management.
Despite the difficulty in proving imprudence, it is important that the BCUC has these powers and uses them. BC Hydro itself has acknowledged that prudency reviews create a “strong incentive to avoid the disallowance of expenditures” because they will “impact the income statement of the shareholder” (i.e. the BC government).
If the BCUC is serious about regulating BC Hydro (something I have my doubts about), you would expect it to take a keen interest in the Site C project cost overrun.
Previous cases
The BCUC has reviewed several previous utility projects to the prudence of the expenditures.
FortisBC Alternative Energy Services (FAES) was challenged by the Delta School District, one of its thermal energy customers, when it overspent a capital budget of $5.5 million by $1.4 million, or 24.5 percent. Despite being over budget, the BCUC found that the degree of overspending didn’t overcome the presumption of prudency. The originally approved budget was accepted by the BCUC at the time knowing it to be accurate in a range of minus 20 percent to plus 30 percent.
In 2019, the BCUC recommended a prudency review of Creative Energy’s expenditures on an expansion of its thermal energy system to the Vancouver House development. The utility had appeared to overspend the budget by 45 percent, well in excess of the standard of accuracy of the estimate. In a subsequent review, the BCUC found that Creative Energy was guilty of nothing more than “careless reporting” (its project estimate had inadvertently excluded some costs), and that the expenditures were prudent.
FortisBC, the electric distribution utility in southeastern BC, completed a project in Kettle Valley that had been estimated to cost $21.48 million when it was approved. The final costs were $28.67 million, 33.5 percent over budget, which was sufficient for the BCUC to find that the presumption of prudence had been overcome, and order a review of the expenditures. However, it then found that FortisBC had not acted imprudently (although it managed to find just over $100,000 of expenditures that were disallowed for other reasons).
The BCUC reviewed two BC Hydro substation projects for prudency in 2020. Both the Campbell River and Big Bend substation projects had cost overruns, due in part to geotechnical issues uncovered during construction. At the time of the review:
- The Campbell River Substation Project was forecast to be $32.7 million, 28.7 percent over the budget of $25.4 million.
- The Big Bend Substation Project was forecast to be 70 percent or $5 million over budget.
The BCUC concluded there was no imprudence on the part of BC Hydro. Although BC Hydro did not anticipate the geotechnical issues that arose, the cost overruns would have been incurred even if BC Hydro had conducted geotechnical investigations before the projects had begun.
Dear prudence
Which brings us neatly back to Site C. Should we presume that BC Hydro’s actions in managing the dam project were prudent? There are at least two reasons why we should not.
First, the project is clearly well over budget. The latest forecast of $16 billion is 92 percent over the $8.335 billion figure approved in 2014, which exceeds any reasonable “contingency” or estimating range that might have been expected at the time.
It’s likely that unexpectedly high inflation and the COVID-19 pandemic both played a role in the project cost overruns, neither of which suggest imprudence on the part of BC Hydro. But BC Hydro’s December 2019 update shows the project went into the “red zone” as a result of “identified cost pressures” by December 2019, before the pandemic started.
Looking at previous BCUC decisions, a project cost overrun of this magnitude would be sufficient to overcome the presumption of prudence and justify a detailed expenditure review.
But there’s another factor too – the reluctance of BC Hydro and the government to come clean about the problems they faced. On a project like this, a degree of commercial confidentiality is understandable – it’s in the public interest for contractors not to know what BC Hydro’s negotiating position is, for example, as this might give them power to increase their costs. But there was more to it than that.
BC Hydro had been providing quarterly reports to the BCUC since the project started. But the December 2019 report wasn’t published until July 31, 2020, far later than the corresponding reports for previous years. The Narwhal reported shortly after that senior government officials knew as early as May 2019 about geotechnical issues (or “weak foundations”) at the dam site that would cause delays and cost overruns. This kind of secrecy doesn’t inspire confidence in the untested statements of BC Hydro or the government.
All of which indicates that a prudency review is justified. But where should the BCUC look for possible cost disallowances?
Areas to explore
One of the areas the BCUC should explore is how much BC Hydro knew in advance about the “weak foundations” on which it was building the dam, and whether it took prudent actions in its design and construction. If it knew, or should have known, that it would need to reinforce the area the powerhouse sits on, and these reinforcements cost more than doing the job right in the first place, there is scope for disallowing the additional costs.
(source: BC Hydro presentation to the Pacific Energy Innovation Association, December 2024)
And BC Hydro did know about this a long time ago. The BCUC’s report to government way back in 1983, which concluded that there was no need at the time for the dam’s electricity, shows that BC Hydro was aware of the issue. The report says that BC Hydro “provided extensive evidence on the foundation design for Site C which it indicated will require great care” and “testified that problems of weakening and softening of bedrock would be solved by sealing the bedrock faces in foundation areas as soon as they are exposed.”
There are similar questions about the stability of the slopes that lead down to the reservoir. In 1983, BC Hydro “testified that reservoir bank stability was a matter of on-going concern and that it had conducted extensive studies to predict areas most susceptible to instability.” And yet, despite this knowledge, stability of the left bank became another reason for project cost overruns.
And the questions go far beyond geotechnical issues. Did BC Hydro make prudent decisions in selecting and managing its contractors? What about its approach to First Nations consultations?
Conclusion
I have no doubt that the BCUC should review the prudency of BC Hydro’s Site C expenditures. A review would provide us with the facts of who knew what and when, and whether ratepayer money was spent wisely.
The BCUC has already requested that BC Hydro file a public “lessons learned” report on the Site C dam project by October 30. I’m sure this will make interesting reading, but it’s no substitute for an open and transparent inquiry where BC Hydro’s evidence can be tested. Anything less will be a whitewash.
The last time the BCUC initiated an inquiry into BC Hydro was in 2016. In response to a complaint, the BCUC reviewed $170 million spent on SAP software, concluding that BC Hydro’s management prevented “appropriate scrutiny by BC Hydro’s Board of Directors and the BCUC” and that the CEO and CFO “did not exhibit good business judgement.”
And who submitted the complaint that led to those highly critical findings? None other than Mr. Adrian Dix, now Minister of Energy. I wonder if he’ll be as keen to have the BCUC launch another inquiry into BC Hydro’s behaviour, now he’s in office?