By John Calvert, Citizens for Public Power

Water is one of BC's most valuable public resources. Indeed, some would argue that it is the most valuable resource we have in the context of a continent whose useable supplies of fresh water are reaching their limits, especially in the US southwest and California. Our streams and rivers are also an important part of BC's cultural heritage, particularly for First Nations, and a source of enormous social and economic benefit for tourism, recreation, and enjoyment of nature. Water is a renewable resource whose value will remain for generations to come.

When the Provincial Government grants a water licence, it gives the recipient the ability to make use of the water for a variety of specified purposes. These include agriculture, municipal drinking water, mining and hydroelectric production. However, there is one type of water licence – a licence to use water for electrical energy production – that is especially valuable in the context of BC's future energy needs.

BC Hydro projects that the Province will require significant additions to its energy supplies (about 25,000 GWh over the next 20 years). Some of this will be achievable through improved energy conservation. But much of it will be in the form of new energy. Concerns about the negative environmental impacts of sources of electrical energy, such as coal, natural gas and nuclear power, make some small hydro projects very attractive, if built in a manner that takes full account of the social, cultural, community and environmental impacts of building run-of-the-river waterpower plants. It would therefore seem prudent for the Government to place a high value on opportunities to generate electricity using this renewable, non polluting energy source.

However, the Provincial Government has taken the view that BC's streams and rivers are not valuable public assets. Rather they are essentially a 'free good' to be given away at minimal charge to the first proponent who stakes a claim on them for the purpose of building a power project. Not surprisingly, the Government's policy has triggered what some have called a new 'gold rush' as private interests stake out claims for the most promising sites across the Province. As of November, 2005 the Province listed a total of 469 water licence applications under review. This total does not include licences already granted, which are the lowest cost sites and, understandably, the ones that private energy companies were first to acquire.

The number of prime sites for small hydro is limited due to geography, energy capacity, transmission access, First Nations land claims, environmental suitability and potential alternative community and public uses of the site location or the water resource. Thus the prime sites that are developed for power production will have value for generations, if not centuries, into the future. Because they are currently 'undeveloped' does not mean that they have no future value and, therefore, can be given away for the minimal cost of permitting and water license fees. Yet this is precisely what is happening.

Using a standard template based, in part, on the way water licences for other purposes have been awarded - and which ignores the future revenue that can be produced from these water systems, or the alternative uses which could be made of them - the Government is encouraging private energy interests to 'lock in' effective ownership of the most promising hydro power sites across the province for a minimal water licence fee, extremely low waterpower application costs and peppercorn water rental charges, currently in the range of 2% of the revenue of most small run-of-the-river projects at current energy prices.

The small hydro sites that private interests are acquiring across the province are not the result of risky, expensive and highly sophisticated exploration techniques such as drilling for oil and gas. The best sites are well known and their energy potential well documented. In 1983, the Ministry of Energy funded a major study of small hydro sites across the province, listing the location, the amount of energy that could likely be produced and various other data needed to estimate the cost per kilowatt hour of developing these locations. In 2000, BC Hydro received a detailed studies commissioned from Sigma Engineering that looked, more closely, at the viability of these and other small hydro sites around the province. This was followed up by another, more comprehensive study, two years later, again funded by BC Hydro and prepared by Sigma Engineering.

These various publicly funded studies have documented, in detail, the potential annual energy output – and corresponding revenues - from hundreds of small hydro sites across the province. All of this information has been freely shared with private interests that want to acquire promising sites on which to build run-of-the-river power plants. A quick review of approvals already granted and the 469 applications under review reveals, not surprisingly, that they include a significant number of the sites noted in the original 1983 Ministry of Energy study and the subsequent updates in 2000 and 2002.

While the current Provincial Government has spent significant amounts of public money to provide private interests with the information needed to 'stake their claims', curiously, it has not published estimates of the net present value (based on future energy revenues) of these sites. A small hydro site, for which a proponent has paid the $10,000 water licence fee, may generate $10 or $15 million in annual revenue at current energy prices - and much more if prices rise, as they likely will, over the coming decades.

By not providing appropriate estimates of the net present value of these sites, the Government is effectively concealing the value of the public assets being transferred to private interests. It is disposing of these sites as if they have virtually no economic value – at least until an entrepreneur builds a power plant on them. But if a future government were to try to buy back the water licences, it would quickly find that what was given away for virtually nothing is now valued by its owners as a gold plated investment of enormous value to shareholders.

In addition to its failure to capture the asset value of these sites, the Government has put in place a royalty structure that effectively denies the public virtually all the economic benefits arising from BC's water resources. To understand why this is the case, it is necessary to review the various kinds of payments the Government receives in compensation for giving water rights and Crown land to private energy interests. The Province receives several types of payments from small hydro generators. The most significant are the annual water licence fee and the volume-based water rental charge.

The cost of a water licence varies according to the size of the project. The Province's October, 2005 fee schedule required the owners of projects with less than 20 megawatt (MW) generating capacity to pay $5,000 for a water licence. The one time fee for larger projects is $10,000. The annual renewal fee for a licence is $200 annually. Water licences are awarded initially for a 40 year period, but can be renewed during their term by the owner of the power plant. Hence, once awarded, it is likely the licensee will have them in perpetuity. In addition, owners of private power plants are required to pay a small additional fee based on the capacity of the plant. The current fee is $3.62 per kilowatt of capacity.

The other type of water-related payment is the water rental fee. It is based on the amount of energy generated by run-of-the-river projects. The Government has deliberately set this fee at a very low rate to provide an incentive for private investors to build small hydro projects. It charges hydro facilities generating less than 160,000 MWh, annually, a water rental fee of only $1.086 per MWh (roughly one tenth of a cent per kilowatt hour – we pay just over 6 cents per kilowatt hour for our residential electricity or about 60 times more than the fee received by government for the use of public water). Large projects, such as Alcan or Cominco, pay the same rate as BC Hydro which is $5.069 per MWh for energy above the 160,000 MWh threshold.

The differential pricing is of enormous value to the new private energy developers who are focusing on small run-of-the-river projects. At an average price of $55 per MWh, the developer of a small generation plant can earn up to $8.8 million in energy revenues, based on the $1.086 rate, before having to pay at the higher rate. And the owner only pays the higher rate on the amount of energy produced above the 160,000 MWh threshold.

Increases in the water rental fee are regulated by the BCUC and – incredibly - are not tied to the market price of energy. Rather, they are based on the regulated price the Commission mandates for BC Hydro. Given that current electricity prices are, minimally, in the range of $50 to $60 per MWh, small projects pay roughly 2% of their revenue in water rental fees.. As noted, the few large projects pay only $5 per MWh which is still only about one tenth of the sale price of the energy produced. In addition the capacity fee of $3.62 per kilowatt may result in another 2% charge on the proponent's revenue stream.

In addition, the Province charges a $3300 Alternative Energy Project fee and other modest fees relating to approval to occupy Crown Land.(0.5 hectares or less - $100; above 0.5 hectares but less than 50 hectares - $500 and over 50 hectares - $2,000). Proponents also have to pay a fee based on the assessed value of the land they occupy. The amount varies according to the type of tenure they have. A 2 year provisional licence of occupation pays a 7% fee; a 10 standard licence of occupation pays 7.5% and a 20 year lease pays 8%. However, because the land is normally in remote locations and is treated like other Crown land, assessed values are extremely low.

Of course developers do have to fund other costs related to obtaining approvals for their projects such as municipal building permits and other fees levied by local governments, for permits or business services. But these are not major cost items, amounting in most cases to a few thousands of dollars.

Private power interests do incur other significant other costs in getting site approvals, including environmental studies to determine the effects on fish, wildlife and the ecology of the river system. And, they may have to spend money on community and First Nations consultations. But all these costs, in total, represent a tiny fraction of the future revenue stream. And most of them can be written off against future profits.

Indeed, when these various licence fees, useage charges and land occupancy permits are added together, the total the Province receives for its public water resource is, optimistically, only 4% to 5% of the gross revenue from small hydro projects and, perhaps, 9% or 10% from the few large scale projects already in place (or now being developed.) These calculations are based on current market prices: unlike oil and gas royalties which are based on the market price of the resource, water rentals are not. Consequently, if the market price of energy doubles or triples in the future, the Province does not receive any additional water rental revenue.

Moreover, the ability of a future Provincial Government to obtain a greater share of the revenue from these sites is likely to be constrained by both the highly favourable terms of the contractual, licensing and land tenure agreements that the present Government is awarding to the proponents. Water licenses have no sunset clause: they are given in perpetuity, as are the land occupancy tenures which allow private interests to acquire full ownership of the sites on which their power projects are located. The courts are likely to protect these 'property rights' from efforts by future governments to modify their conditions in the public interest. And future Governments are likely to be further constrained by the onerous investor rights provisions of NAFTA and other international trade agreements which will undoubtedly be used by US investors to maintain the enormous windfall profits that these power projects are likely to produce.

Thus major increases in water rentals to capture part of the revenue stream – which, short of taking back these sites, would be a logical way to recoup some of the windfall profits in the future - may well be seen as violations of the original commitments made by government. Similarly, efforts to require the owners to sell the energy within BC or to BC Hydro may be challenged, successfully, as unreasonable interference in the commercial freedom of the firms to sell to the customers of their choosing. Policies intended to keep energy in BC may no longer be possible, given that the Province has already committed to open access transmission for private companies, giving them the full right to export energy to the US market.

More disturbing, all of this is being financed by public money, through BC Hydro's energy purchase agreements. These agreements provide the cash flow proponents need to construct their power facilities, roads and transmission lines. Almost invariably, the decision about whether a private energy project is viable economically, or not, is determined by whether the proponent can get a long term purchase agreement in response to the periodic 'calls' for new energy by BC Hydro. If BC Hydro does not offer a purchase agreement, the project normally does not proceed, although the owner will normally choose to wait until BC Hydro's next 'call'.

In awarding such an agreement, BC Hydro provides a guaranteed revenue stream for between 15 and 40 years for the proponent – a revenue stream that the banks see as gold plated government security for the proponent's loan request. As long as the revenue stream is sufficient to cover the interest and loan repayment schedule for the capital required, as well as estimated annual operating costs, the proponent is able to arrange the financing. Moreover, it can do so at interest rates very much lower than would be the case without the guarantee of a public contract. Yet the public gets no assets, no long term security of supply and no protection from future price increases.

The Government has also 'sweetened' the package for private energy investors, but including a provision in the most recent energy call for BC Hydro to reimburse power producers for the property taxes they pay on their power plants. And the price it pays private developers for their energy is now partially indexed so it will rise every year during the term of the contracts, assuming Canada continues to experience inflation.

In response to complaints from the industry - and as part of its efforts to get rid of 'red tape' - the Government has also put in place a truncated environmental assessment process for facilities with less than 50 MW capacity. This significantly reduces opportunities for community members, First Nations and environmentalists to raise objections to new facilities. But once approved under these less stringent requirements, developers can raise the capacity of their waterpower plants to almost double the original approved capacity without having to go through what would otherwise be a full environmental assessment. Not surprisingly, there are a significant number of applications for power plants of 49 MW capacity.

In sum, the Government is virtually giving away the water rights to what is perhaps the most valuable of BC's renewable resources. The size of this give-away literally boggles the imagination. Assets worth future revenue streams involving literally billions – perhaps tens of billions - of dollars over the coming decades are being sold for a few tens of thousands to those who are first in line to acquire them. The ability of the public in the future to capture some of the huge revenue these sites will generate is being compromised by legal contracts and licensing commitments that will enable their private owners – most of whom are likely to be foreign in the near future - to challenge any effort to raise water rentals significantly. And this entire 'give away' is being paid for by the public. It is truly a modern 'gold rush'. And, when it is over, the public will be truly astonished at its scope and cost.

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