Vancouver Island Generation and Georgia Strait Crossing Projects

From BC Hydro's 2005 Annual Report

Note 18: Vancouver Island Generation and Georgia Strait Crossing Projects

In fiscal 2005, BC Hydro completed an evaluation process for providing additional supply to its customers located on Vancouver Island. The evaluation process included the assessment of competing tenders submitted under the Vancouver Island Call for Tenders for Capacity and Associated Energy (Call for Tenders). This included assessment of various tenders that would require the purchase and use of the Vancouver Island Generation Project (VIGP) project assets that are owned by BC Hydro.

In November 2004, BC Hydro awarded and executed an Electricity Purchase Agreement (EPA) and associated VIGP Transfer Agreement (VTA) to Duke Point Power Limited Partnership (DPP) pursuant to the Call for Tenders. The EPA was filed with the British Columbia Utilities Commission (the Commission) for approval as an “energy supply contract” under section 71 of the Utilities Commission Act. The VTA required that BC Hydro sell, and DPP purchase, the VIGP assets for $50 million. These assets would then be used in the development of a gas-fired plant at Duke Point, near Nanaimo, British Columbia from which BC Hydro would purchase electrical capacity and associated energy over a 25-year term. The Commission convened a public interest review hearing relative to the EPA and issued an order on February 17, 2005 accepting the EPA for filing subject to certain conditions including a requirement that BC Hydro and Terasen Gas (Vancouver Island) Inc. enter into a long-term gas transportation agreement to service the project at Duke Point as well as the Island Cogeneration Project, also located on Vancouver Island. Two intervenors subsequently filed applications in the British Columbia Court of Appeal for leave to appeal the Commission's order to that court. Those applications were dismissed in April 2005. Further applications were filed seeking reconsideration of that dismissal and the Court of Appeal granted leave to appeal on June 14, 2005.

BC Hydro announced on June 17, 2005 that it will exercise its contractual right to terminate the EPA and VTA, without liability to DPP, apart from the obligation to return performance security and a deposit. As at the date of termination, the total amount spent by BC Hydro on VIGP totalled approximately $70 million and the carrying value of these assets after provisions is nil.

During the planning for VIGP, BC Hydro also anticipated the need for gas supply utilizing the Georgia Strait Crossing Pipeline (GSX) which would transport natural gas from Huntingdon/Sumas on the Washington state/British Columbia border to Vancouver Island via Washington state. The GSX project was owned jointly by BC Hydro and Williams Gas Pipeline Company, LLC (Williams). During fiscal 2004, as a result of the regulatory uncertainty whether the VIGP and GSX projects would proceed, BC Hydro and Williams agreed to curtail spending on GSX. In December 2004 BC Hydro and Williams cancelled GSX and this project is currently subject to windup of its activities. As at March 31, 2005, BC Hydro had spent approximately $50 million by way of loans to the GSX project entities owned by Williams and project expenditures by BC Hydro. Under the project agreements, Williams is excused of any obligation to contribute funds toward repayment of these loans, which remain outstanding. The carrying value of these project assets after provisions is nil.

During fiscal 2004 BC Hydro recorded a $120 million provision for the VIGP and GSX projects to reflect the uncertainty as to the projects proceeding or the costs being recovered. Of this amount, $98 million was charged to amortization with the balance included in operations and administration. BC Hydro believes the provision is adequate with respect to any potential losses related to these projects including any related contingencies. During fiscal 2004 BC Hydro also obtained approval from the Commission for the establishment of a designated regulatory account with respect to the costs of VIGP and GSX. BC Hydro management has determined that it will not pursue regulatory relief with respect to any unrecovered costs related to the VIGP or GSX projects.

Posted by Arthur Caldicott on 01 Feb 2006