08/16/2013 12:41 EDT | Updated 10/16/2013 05:12 EDT

BC Hydro Deal With California Saves Taxpayers Millions, Minister Says

AP File
VANCOUVER - Powerex, the for-profit arm of British Columbia's Crown-owned power utility, has reached an out-of-court settlement, unplugging a 12-year-old, potentially multi-billion-dollar lawsuit with the state of California.

The province's energy minister, Bill Bennett, said Friday there was little joy in the decision to agree to a US$750-million settlement, but he said it was a necessary measure to protect taxpayers from potentially skyrocketing costs that could have included a $3.2 billion judgment if the province lost in court.

"Someone asked me this morning, if I was happy about this, and I can't say that I am happy about it," Bennett told a news conference.

"There's $50 million more that could be spent on legal fees if we wanted to duke it out, and at the end of the day, there's at least a 50 per cent chance that B.C. would be on the hook for up to $3.2 billion."

California alleged Powerex, a subsidiary of BC Hydro, and other power producers engaged in price gouging during the 2000-2001 power crisis that gripped the state, which forced rolling blackouts as electricity prices reached record-high levels. The state's lawsuit against Powerex originally sought US$3.17 billion.

Powerex has now agreed to pay California utilities, the state's attorney general and several others US$750 million, but Bennett insisted the settlement won't affect B.C. taxpayers.

The settlement includes forgiving US$477 million that California still owes British Columbia, with interest, for its power purchases during the 2000-2001 power crisis.

That leaves US$273 million. Powerex has already booked US$68 million in legal costs associated with the case, and C$113 million will come from Powerex's predicted net income for the year.

After all that, Powerex must come up with an additional C$101 million.

In 1998, the California government deregulated its electricity market in an effort to provide more competition and lower costs for consumers.

But by 2000-2001, a so-called perfect storm of circumstances — a drought that impacted hydro generation, heat waves, constraints on natural gas pipelines and increased demand for energy — sent power prices skyrocketing, opening the door for power companies to earn massive profits as California struggled to keep the lights on.

The market was declared broken by the U.S. Federal Energy Regulatory Commission in 2003, leaving 63 power suppliers — including Powerex — accused of price gouging. This past February, the commission ruled California could recover the money.

Powerex said at the time the company would appeal the ruling and prepared for the long-running legal battle to last another five years. While Powerex acknowledged it took advantage of extraordinary market opportunities, it maintained it did not engage in price fixing.

Rich Coleman, who was B.C.'s energy minister when the U.S. commission issued its decision earlier this year, said at the time the province would maintain it did nothing wrong and was prepared to go through the courts for many more years.

NDP energy critic John Horgan supported him then.

But on Friday, Powerex became the 48th power company settle, a decision that mystified Horgan.

"Why they would back away from defending our right to be traders in a free, open market is a surprise to me and I think not in the interests of Powerex going forward," Horgan said.

"Now, your trading partners know you can be pushed around — then why wouldn't they try to push us around again?"

Horgan said B.C.'s power helped California out of a crisis and the province did so in good faith, but British Columbians are now paying the price for it.

He also dismissed Bennett's assertions that the settlement wouldn't eventually have to come out of taxpayers' pockets.

"This $250 million of free money that we have just given to the United States," Horgan said, referring to the approximate portion of the settlement that still must be paid to California, "could have gone to a dividend, to the Crown for Community Living B.C., for reducing wait lists. Instead, it is going to shareholders of U.S. companies that were in court because they thought they might get away with it and they did."

Powerex had a surplus of $98 million in the most recent fiscal year.

B.C. Hydro's most recent service plan notes Powerex "operates in complex and volatile energy markets," which can cause its revenues, and consequently its profits, to fluctuate significantly.

The service plan document predicted yearly net income for the next several years to range from $112 to $135, but also cautioned those numbers could change significantly.

The dispute is reminiscent of the mammoth trade struggle between Canada's softwood lumber industry and its trading partners in the U.S. Despite frequent wins at various trade panels, Canadian manufacturers always come out with bruises.

But Teresa Conway, chief executive officer of Powerex, said it's extremely crucial for the company put the dispute behind it.

"In business, you always take risk and that's part of the normal way of doing business," she said. "But we've earned $3.5 billion in revenue since the California power crisis."

Bennett added: "Why would we want Powerex to back away from that?"


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