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Powerex pay out doesn't add up

 Keith Baldrey, Vancouver Courier, August 22 2013

And that’s what the B.C. Liberal government did last week with a bolt from the blue announcement that it was ending its decade-long fight with the state of California and electrical utilities there over whether B.C. Hydro acted legally when it sold power to the state in 2000 and 2001.

It’s been a fascinating story since it first unfolded and the sudden end to it leaves a lot of questions unanswered. The way it has ended has also cost British Columbia a lot of money.

The out-of-court settlement cost B.C. Hydro $750 million (about $477 million in unpaid bills and $273 million as an actual payment). Considering the government’s fierce insistence for years that it would never back down because nothing illegal occurred, it’s extraordinary it is actually writing a cheque to the Americans (rather than walking away from unpaid debts).

The saga began in the winter of 2000-01, as California experienced an energy crisis brought on by a number of factors: a poorly-conceived deregulation plan, aging energy generation and distribution facilities used by utility companies in the state, and an explosion in energy demands (it was an unusually cold winter). Quite simply, California couldn’t generate enough electricity on its own to keep up with demand and so was forced to look outside the state for help. Rolling electrical blackouts were literally keeping the lights off, as well as the heat, in California homes.

One of the energy companies California officials called was B.C. Hydro, which sells surplus electricity it generates through its export subsidiary, Powerex. At the time, I interviewed the energy traders responsible for selling the power to California. They use a complex system that requires them to ensure that B.C. energy demands are met before they start moving power outside the province. They also are acutely aware of the price of electricity at any given moment. It is traded on an open “spot” market and the price can vary at different times of day. In this situation, because California was in such a desperate and precarious situation, the price on that open market had skyrocketed and that meant B.C. Hydro, through Powerex, made a lot of money selling its power to the state (roughly about $1 billion).

At the time, B.C. Hydro was viewed as a saviour by California for literally keeping the lights on in the state. In fact, the energy traders I talked to over the phone recalled how thankful their counterparts in the state had been. However, within months, the Americans’ view had dimmed considerably, as they began to suspect they had been “played” by an energy market that had been manipulated by outside interests, including Powerex.

The company was accused, in a lawsuit, of engaging in a lot of “Enron-like games” that effectively and illegally fixed energy prices through manipulation and deceitfulness. Enron, the notorious phony energy company, used schemes colourfully called Fat Boy, Death Star and Ricochet.

Enron would mislead California’s power grid operators on how much power was needed, in order to increase scarcity and boost prices, and then sell at the artificially high rate. It also created false “congestion” on the grid, and then charged huge prices to relieve it. Powerex was accused of being part of these schemes, although the company has strongly denied the allegations. It argued it was playing by all the rules and had simply taken advantage of the looseness of those rules.

Energy Minister Bill Bennett has argued that throwing in the towel in this fight fends off what could have been an even more expensive outcome (more than $3 billion) if U.S. courts had ultimately ruled against Powerex. He may be right, but his predecessors in that portfolio (most recently Rich Coleman) had adamantly maintained there was not a shred of evidence to implicate Powerex in any wrongdoing. So what’s changed? No real explanation has been provided, other than the claim that Powerex wants to “move forward and enhance (its) relationship with California” for future energy sales. But it is a bitter and expensive pill to swallow, particularly since B.C.’s energy helped the state at such a critical time. If California ever goes through another such energy crisis, perhaps Powerex may think twice before picking up the phone when the Americans come calling.

Keith Baldrey is chief political reporter for Global BC

Keith.Baldrey@globalnews.ca

© Copyright 2013

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