Opinion: NDP Government's Site C Math a Flunk, Say Project Financing Experts
By Sarah Cox, DeSmog Canada
The NDP government’s arithmetic on Site C cancellation costs is “deeply flawed,” has “no logic at all,” and is “appalling,” according to three project financing experts.
Eoin Finn, a retired partner of KPMG, one of the world’s largest auditing firms, said Premier John Horgan’s claim that terminating Site C would result in an almost immediate 12 per cent hydro rate hike is the “worst rationale I’ve heard since ‘the dog ate my homework’” excuse.
“I expected better when the new government came in,” said Finn. “They’ve just continued what [former premier] Christy Clark did to hide the true costs of Site C and hope that they get re-elected before the next generation finds out.”
“This is the stupidest capital decision ever made by a B.C. premier. I don’t know who is giving them accounting advice.”
Rob Botterell, legal counsel for the Peace Valley Landowner Association, representing 70 landowners who will lose homes and property to the Site C dam, called on the NDP government to disclose who advised Cabinet on hydro rate increases in the event that Site C were terminated.
“We call on you and your colleagues in Cabinet and Caucus to publicly release the detailed, un-redacted, information and advice and analysis on which you based this finding,” Botterell wrote to Attorney General David Eby and Environment Minister George Heyman.
On Thursday, the landowner association and the Peace Valley Environment Association hand-delivered a letter to B.C. Auditor General Carol Bellringer, asking her to launch an “urgent examination” of the government’s Site C termination and completion cost figures.
The letter also asked Bellringer to verify the cash impact of both scenarios on British Columbians.
The Auditor General’s office was in the midst of investigating Site C’s finances last summer when the new NDP government asked the watchdog B.C. Utilities Commission to review the project, which will flood the traditional homeland of Treaty 8 First Nations, violate basic human rights, force farming and ranching families from their homes, and destroy critical habitat for rare and endangered species.
The BCUC review disclosed that Site C is over budget, behind schedule, beset with geotechnical issues and embroiled in legal and financial challenges with its main civil works contractor, which lost its Canadian partner earlier this year when Petrowest Corporation slid into receivership.
NDP not following standard accounting practices, experts say
Horgan told reporters Monday that the only recourse if Site C were cancelled would be to hit BC Hydro customers almost immediately with a 12 per cent rate increase to cover the project’s $2.1 billion in sunk costs and $1.8 billion in reclamation costs.
But Finn, along with U.S. energy economist Robert McCullough and Harry Swain, a retired bank president with expertise in project financing, told DeSmog Canada that standard accounting practice for utilities like BC Hydro is to write off the costs of a discontinued project over many years.
“What’s appalling about this is that Cabinet has been advised by some people who simply don’t understand how the finance system works,” said Swain, the former CEO of Hambros Canada Inc. and a former board member of Hambros Bank Ltd. of London.
“I can’t believe that their arithmetic is that bad,” said Swain, who chaired the Joint Review Panel on Site C for the federal and provincial governments. “It’s all very depressing.”
McCullough, a former officer for a large hydroelectric facility in Portland, Oregon, said Site C’s sunk costs — mainly accrued as former Premier Christy Clark attempted to push the project past the “point of no return” — can be amortized over the 70 years that Site C was expected to produce electricity, in keeping with standard procedure for North American utilities.
“Ratepayers should not be punished for the utility making the correct policy decision, and nor would they be in any normal circumstance,” said McCullough, who was hired by the Peace Valley Landowner Association to provide expert testimony for the BCUC review.
“It’s not at all unusual for a project to stop and start for good reason,” McCullough said, adding that one common reason for terminating an energy project is a change in policy.
Swain said Site C’s sunk costs could be paid off over 30 years “without any heavy breathing at all.”
Finn called the government’s claim that terminating Site C would immediately incur up to $150 million a year in new debt service charges “pure financial fiction,” pointing out that BC Hydro has already borrowed the money and is paying interest on it so cancelling Site C will not make any difference.
What about Site C’s reclamation costs?
McCullough said the reclamation costs could be dealt with swiftly if the government declared the disturbed area of the Peace River Valley a park, making it a provincial asset and removing remediation costs from Site C’s books.
The cost of remediating the valley area already disturbed by clear cutting and bull-dozing for Site C is a matter of contention.
West Moberly First Nations chief Roland Willson has said the NDP’s stated $1.8 billion reclamation cost is greatly exaggerated. He urged BC Hydro and the government to make Site C’s construction site safe and “go home,” allowing natural regeneration of the boreal forest.
Even assuming that $1.8 billion in reclamation costs is factored into the equation, cancelling Site C will result in a 4.9 per cent hydro rate hike starting in 2024, McCullough said.
But that compares very favourably to the 12.4 per cent rate hike that will hit hydro customers that same year if Site C continues, he pointed out.
And that’s top of 30 per cent hydro rate increases already projected by the NDP government over the next 10 years, and also assuming that Site C’s cost does not escalate further.
Site C was announced as a $6.6 billion project in 2010. The price tag jumped to $7.9 billion by 2013, then to $8.8 billion in 2014.
On Monday, the NDP government revealed that the cost has soared to $10.7 billion just two years into a nine-year construction schedule, raising questions about whether Site C will become a boondoggle like Labrador’s Muskrat Falls dam, which will add an average $1,800 to the annual hydro bills of every household in that province.
What happened to that independent BCUC oversight?
The NDP continues to criticize the former Liberal government for failing to send Site C to the BCUC for review before it decided to proceed with the Peace River project.
Yet, according to the three project financing experts, Cabinet neglected to follow proper procedure and allow the BCUC — an independent regulator that makes decisions based on the best financial interests of hydro customers — to decide how Site C’s termination costs could be best distributed to avoid a rate shock.
Swain called the matter an “ordinary regulatory decision,” while Finn said it is “not the government’s business” to decide how Site C’s termination costs would be allocated.
“The government has no right to make that judgment,” said Finn, adding that the only way Cabinet can override BCUC oversight is to pass an Order in Council.
“They’re side-stepping the legal obligation under the Utilities Act to involve the BCUC. They never asked the B.C. Utilities Commission.”
Horgan’s office confirmed to DeSmog Canada on Thursday that Cabinet did not pass an Order in Council.
In puzzling logic, Eby said in a public statement on Thursday that the recovery period for Site C’s costs would only be subject to an independent BCUC review “if, and when these costs are incurred,” meaning that the BCUC would only be able to make that decision after Cabinet decided to cancel Site C.
McCullough, whose testimony to a U.S. Senate Committee helped spark the criminal investigation into Enron, said recovery of an energy project’s termination cost is “a very common practice in the utility business and is addressed in every utility’s annual report.”
What about BC’s credit rating?
McCullough also pointed out that B.C.’s triple A credit rating has just been confirmed.
Contrary to statements made by the NDP, cancelling Site C does not put the province’s credit rating in jeopardy because Site C’s sunk costs have already been financed with 30-year bonds, he said.
On the other hand, spending at least $8 billion more to complete Site C when its power can be replaced for only $4 billion, “may concern the bond raters,” McCullough wrote in a December 11 memorandum for the landowner association.
“Even if the inflated $1.8 billion in termination costs are added, cancelling Site C will save ratepayers at least $266 million [a] year or $123 [per] household in 2024,” McCullough wrote in comments the landowner association submitted to Bellringer’s office.