Response to Undertaking #12 from Clean Energy B.C’s presentation on December 10, 2013

Transcript Reference Volume 2, page 240 Background The Clean Energy B.C. (“CEBC”) provides the following background in response to the undertaking:

1. In its submission of November 25, 20131 (“Submission”) the CEBC said:

“Specifically, the cost of debt to IPP’s under construction today is routinely under 6.0% nominal. For example Kwagis Power (Brookfield Renewables and Namgis First Nation) just completed a 40 year term loan at 4.45%. The cost of equity for these projects ranges from 10% to 15% pre-tax and the debt/equity ratio is 80% or better. This yields a nominal, pre-tax cost of funds of 6.8% to 7.8% or a real cost of funds, rounded up, of 5.0% to 6.0%. After tax, these figures would be 4.5% to 5.5% real. These are not theoretical figures as suggested by BC Hydro’s analysis; these are the actual costs of funds for projects under construction today.”

2. In support of this equity figure, the CEBC provides the attached investor presentation (“Brookfield Material”) for Brookfield Renewable Energy Partners (“Brookfield”) the developer of Kwagis Power, that sets out an investor objective of 12 to 15%2. Combined with the term loan rate of 4.45% this yields on a debt to equity ratio of 80:20 a nominal weighted average cost of capital (“WACC”) of 6.8% and a real WACC of 4.8%.

3. The Chair’s request for the undertaking contains a reference to a “wind project”. Developers of renewable energy projects do not distinguish between the return on equity for wind and other types of renewable technology such as run of river projects. As noted in the Brookfield Material3, Brookfield has 5,900 megawatts of wind generating capacity in 12 markets in 3 countries and it deploys: “capital into hydroelectric and wind opportunities globally”4.

Analysis Equity investment for independent power projects and other infrastructure investments draw from a vast pool of capital across North America focused on low risk dependable investments. Canadian companies in this space include Fengate Capital, Fierra Axium, Brookfield, GE Capital, Teachers Pension Plan, OMERS, Corpfinance International etc. These companies or funds tend to focus on investing in projects at or near financial close when the key risks such as capital cost and permitting have been removed. Another group of companies such as Veresen, Capital Power, Atlantic Power, Algonquin, and GDF Suez also pursue the long term stable returns inherent in these projects but are more willing to accept development risk. All these companies share the common trait of assuring their investors of stable dividends in the 5 to 8% range, and are popular investments for pension funds or pensioners. In addition to the investment criteria for Brookfield Renewable, the criteria for Fierra Axium speak to a performance

1 Document number 1782, page 2 2 Attachment 1, Page 5 3 Ibid Page 4 4 Ibid Page 5

- 2 -

objective of 8% and a target yield of 5%5. The entities mentioned above are key participants in the British Columbia IPP renewable generation sector.

Although the CEBC was unaware of BC Hydro’s September 13, 2013 Evidentiary Update6 (“Evidentiary Update”) including BC Hydro’s reduction of its WACC from 6 to 5% and with IPPs now at 7% the CEBC continues to stand by its position that the cost of capital for IPP’s is in the 5 to 6% real range and hence for all purposes the same.

With BC Hydro alleging that the IPP WACC is 7% and 5% for Site C, then in percentage terms, BC Hydro is claiming the cost of financing an IPP project is 40% higher than the financing Site C. And this difference is being claimed with respect to the same credit – namely the Province of British Columbia which guarantees BC Hydro’s debt. If BC Hydro defaults on payment to an IPP, then after any defences have been exhausted then this guarantee will come into effect. At an IPP WACC of 6% and Site C at 5% the difference is 20%. There is a $20 million difference in the present value cost between the Clean + Thermal Generation Portfolio and Site C when the IPP WACC is 6%7.

The CEBC wishes to point to the recent change in BC Hydro’s WACC as evidence of yet another risk ratepayers face with Site C that they would not have with the Clean + Thermal Generation Portfolio8. IPP WACC is fixed for the term of its electricity purchase agreement. BC Hydro’s will vary over the life of Site C. The 6% that became 5% could become 6% or 7% or higher over the life of this project. This is not an academic concern because during the construction of BC Hydro’s last major hydroelectric project, namely Revelstoke, in the 1970’s and early 80’s sharply rising interest costs dramatically and unexpectedly increased the costs of the project.

This conclusion may seem surprising. BC Hydro borrows funds from the Government of B.C., and generally BC Hydro’s cost of debt is lower than IPP’s with exceptions such as Brookfield Renewable and other very strong balance sheet IPPs. The CEBC’s uses a debt rate of 5.5% to 6% vs BC Hydro’s of 4.8%.The equity component of BC Hydro’s WACC is not, however, the B.C. Governments cost of funds. It is set based on the return of equity of Fortis, a private company9, floats as this return is reset every 3-5 years or automatically10 and is virtually guaranteed11.

5 Attachment 2, page 1. As noted on page 2 of these materials, Fierra Axium’s investments in B.C. IPP projects include the Cape Scott Wind Farm, Toba Montrose Run-of-River Hydroelectric facilities and the Dokie Wind Power Project 6 Document 1574 7 Evidentiary Update, page 44 8 BC Hydro has also made numerous other questionable adjustments to the Clean + Thermal Generation Block 3 #1. See Evidentiary Update, Table 15, footnote 3, page 36. The details of these soft costs adjustments are set out in BC Hydro’s Integrated Resource Plan, Appendix 3A-34, 2013 “Resource Options Report Update, Firm Energy Cost Adjustments” and with respect to the impact of BC Hydro’s valuation of firm and non-firm energy, additional information can be found in BC Hydro’s “Clean Power Call Request for Proposals, Report on the RFP Process”, August 3, 2010. There are also no run-of-river projects in the Clean + Thermal Generation Portfolio. 9 See for example see BC Hydro Revenue Requirement Application 2004/05 and 2005/06, Volume 1, Chapter 10, “Rate of Return on Equity”, BC Hydro F2012 to F2014 Revenue Requirements Application, Appendix K, “Calculation of BC Hydro’s Allowed Rate of Return on Equity (ROE)”, Heritage Special Direction No. HC2 to British Columbia Utilities Commission, BC Reg 158/2005 and BC Reg. 105/2012/OIC 314/2012 10 British Columbia Utilities Commission, “Generic Cost of Capital Proceeding (Stage 1)” May 10, 2013 11 Although its intermittent regulator the British Columbia Utilities Commission could for example, through a prudency review deny BC Hydro its return on a Site C cost overrun, the resulting impact would be to its shareholder the Province of B.C. The ultimate impact would fall on BC taxpayers who are almost all customers of BC Hydro.

BC Hydroequity rati

As noted is to movreflected inot approhave on ittaking intrelatively No one IPprojects wevaluating

The detail

The discustandard fbe found a

1. htbc

2. htbc

It is impothe B.C. Columbia Contract aindustriescompelledhave beenIPPs. Othcompelledreduce ris

12 Utilities

o’s equity coio is lower th

in the attacheve to 66:34 iin any of BC

opriate for evats capital struto account thlow rate of re

PP will develwill be finang Site C.

led WACC ca

ussion on WAform electriciat the followi

ttps://www.bcc/acquiring_p

ttp://www.bchc/acquiring_p

ortant to note Utilities Com

a.

amendments s, particularlyd to make amn undertaken hers at the red to agree. Rask by adjustin

Commission A

sts are compaan that for IP

ed B.C. Govein the next teHydro’s calc

aluating a proucture on a fuhe cost of receturn relative

lop all the proced on a non

alculations ar

ACC is not comty purchase aing links:

chydro.com/epower/closed_

hydro.com/enpower/closed_

that the majommission12 (“

are normal any those wher

mendments. Thover the appr

equest of BC ather than a ring to change

Act, section 71

arable to thosPP’s at 70:30 v

ernment and Ben years withculations. Eveoject of this m

ull recourse bacourse to the

to its risks.

ojects in the Cn-recourse ba

re provided be

mplete withouagreements fo

energy-in-_offerings/cle

nergy-in-_offerings/op

ority of IPP c“BCUC”). Ex

nd natural comre long termhey do so basroximately 25Hydro but a

isk, the abilityed, unforeseen

- 3 -

se for the IPPvs 80:20 for I

BC Hydro bach an ultimateen without thimagnitude reasis for the nguarantor for

Clean + Therasis. A debt

elow.

ut reference toor IPPs in 200

ean_power_ca

en_call_for_p

contracts and xceptions are

mmercial behm contracts a

sed on their o5 year life ofall premised y to amend con circumstan

P’s at about 1IPPs which of

ckgrounder, Be ratio of 60is change BC

elative to the next 70 years.r a project th

rmal Generatito equity rat

o contractual 06 and 2008 w

all/documents

power.html

any amendme only made

haviour in theare used. Neiown commercf the B.C. IPPon mutual b

ontracts is a mnces. The one

12% but impffsets the low

BC Hydro’s d:40. This cha

C Hydro’s use$7.8 billion

. BC Hydro ihat will have

ion Portfolio tio of 60:40

risk transfer.with additiona

s.html; and

ments are subjby the Gove

e B.C. IPP secither BC Hycial interest. MP sector. Sombenefit becaumechanism the constraint th

ortantly its dwer debt cost.

debt to equityange has note of a 70:30 raimpact Site Cs also not prothis impact

and almost ais appropria

. BC Hydro’sal information

ject to approvernment of B

ctor and mostydro nor IPPMany amendm

me at the requse neither paat allows parthat BC Hydr

debt to

y ratio t been atio is C will operly and a

all the ate for

s n can

val by British

t other Ps are ments

uest of arty is ties to ro has

- 4 -

consistently placed on any such amendments is that they not increase the levelized cost of the electricity to be delivered.

Finally, it is not clear whether BC Hydro has included equity costs during construction in its Site C analysis. The only reference in the evidence appears to be to interest during construction. If the equity cost during construction has been omitted, it is very material given Site C’s long construction period and high capital cost.

AAttachment 1

- 2 -

- 3 -

- 4 -

- 5 -

- 6 -

- 7 -

- 8 -

- 9 -

- 10 -

- 11 -

- 12 -

- 13 -

- 14 -

- 15 -

- 16 -

- 17 -

- 18 -

- 19 -

- 20 -

- 21 -

- 22 -

- 23 -

- 24 -

Atttachment 2

- 2 -

Atttachment 3

- 2 -