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BC Hydro plays NAFTA Card in Bid to Win Green Energy Status in California by Gordon Hamilton Vancouver Sun, October 21, 2011

Energy-trading arm claims clean-energy exemption for U.S. power supplier is discriminatory

BC Hydro has accused California's cap-and-trade regulator of violating the North American Free Trade Agreement, saying the regulator's proposed rules on greenhouse gas emissions favour American power supplier Bonneville Power Administration.

In a Sept. 27 letter to the California Air Resources Board, Hydro's energy-trading arm Powerex lays out its complaint, urging the board to change its regulations "to avoid running afoul of NAFTA." The letter, signed by lawyer Nicholas van Aelstyn, cites a NAFTA clause that prohibits any measure affecting the transmission of energy that is applied to a NAFTA partner, but is not applied domestically.

The risk to Powerex -- likely the reason it is invoking NAFTA -- is that Powerex would then be required to purchase credits for its exports on the carbon market at a cost of $10 to $15 a megawatt, adding an additional burden that might make exports unprofitable.

In its 2011 annual report, Hydro stated it spent $565 million on energy imports. It exports reservoir-generated energy during periods of surplus to markets like California, generating $1 billion in sales revenue in the 2011 fiscal year.

Powerex bases its claim on the fact that the board gave special status to Bonneville that exempts it from reporting on greenhouse gas emissions.

"Electricity is considered an energy good under Chapter six of NAFTA and energy regulatory measures are thus subject to NAFTA's national treatment standard," van Aelstyn wrote. "Under NAFTA's national treatment standard, Powerex is entitled to parity treatment with BPA."

The board exempted Bonneville after it argued that it is owned by the U.S. federal government and is not subject to state regulation. Bonneville markets the power generated at federally owned dams on the U.S. side of the Columbia River. Its electricity is relatively carbon-free.

Powerex argues in the letter that it deserves equal status to Bonneville as it is government-owned as well; Powerex is a subsidiary of Hydro, which is a Crown corporation.

"It's like whack-a-mole now, with Powerex claiming if you are going to treat BPA differently, now you have exposed yourself on another front," said Alex Jackson, a lawyer for the Natural Resources Defense Council who specializes in energy issues.

Powerex is prepared to take the issue to NAFTA because the stakes for it are high. Despite claims that B.C. is a green energy exporter, Powerex buys dirty power from U.S. coal-fired plants to meet energy shortfalls in B.C. Without being exempted, it could run afoul itself of what the California board calls "resource shuffling."

"The idea is there will be no real reductions in emissions if all the program accomplishes is that entities deliver their clean power to California and shift their dirty power out of California," Jackson said in an interview. "That's clearly not in the interests of California or efforts to tackle climate change at all if we are not achieving any net reductions."

The board defines resource shuffling as any "plan, scheme or artifice to receive credit based on emissions reductions that have not occurred."

It has placed a prohibition on resource shuffling and would likely apply a penalty to any energy company caught doing it.

Hydro generates most of its energy for the domestic market from its own dams but has been a net importer of energy for at least seven of the last 10 years. In fact, in a March 2009 background paper titled For The Record, the ministry of energy, mines and petroleum resources clearly states that B.C. energy is not 100-per-cent clean.

"Many British Columbia residents are surprised to learn we rely on American power to keep our lights on or that the imported power comes from coal-fired plants," the paper states. "Citizens expect us to be self-sufficient and clean, considering the ample natural resources we have."

The paper describes the coal-fired sources as "not the clean, green sources that we enjoy."

Energy Minister Rich Coleman declined to be interviewed, but provided an email statement on the threat of trade action under NAFTA.

"BC Hydro has had a long-standing trading relationship with California and looks forward to that continuing moving forward," the statement said. "It is really a matter of fairness. BC Hydro wants to ensure the California Air Resources Board knows NAFTA requires equal treatment for government-owned entities. As a result, BC Hydro's clean, renewable hydroelectric resources should be recognized as GHG-free, just like Oregon-based Bonneville Power."

Powerex president Teresa Conway said in an email to The Sun that Powerex routinely files comments on proposed rules that could impact the value of BC Hydro's resources.

"Our intent was to ensure we receive fair and equitable treatment for BC Hydro's clean and renewable resources in the U.S. Powerex revenues help keep B.C.'s rates amongst the lowest in North America," she said.

The California Air Resources Board is expected to adopt its rules on cap-and-trade and on mandatory reporting of emissions by Oct. 28. The air resources board's regulations, highly controversial in the state, are targeted for a Jan. 1, 2012 startup. Compliance with cap-and-trade has been delayed, however, until 2013 over issues like resource shuffling.

The target is to reduce greenhouse gas emissions in the state to 1990 levels by 2020 by implementing programs like cap-and-trade and a requirement that 33 per cent of its electricity come from renewable sources by 2020.

Powerex is concerned that the way the proposed regulations stand now, Bonneville's status as a producer of renewable energy is clear, but Powerex's status is not.