BC Hydro Caves in to Uncle Sam

Hydro’s $750-million settlement with California is just the latest instance of a trade relationship unfairly tilted toward the States

BC Hydro’s decision to offer California a $750 million out-of-court settlement over allegations of price gouging during the 2000-2001 power crisis is just the latest evidence that Canada desperately needs to diversify its trading relationships away from the U.S.

Hydro, through its export subsidiary Powerex Corp., did nothing wrong when it participated in a chaotic power supply-demand imbalance in 2000-2001; it simply provided needed electricity to a state that had badly bungled a deregulation policy. That chaotic supply-demand imbalance was entirely of California’s making, and the state was warned well in advance that the chaos (complete with stratospheric spot-market prices) was inevitable.

But fast forward to 2013, and Hydro (with the blessing of the provincial government) clearly decided that paying out $750 million now was a better option than risking a potential judgment of $3.2 billion (with interest growing annually), should the U.S. Federal Energy Regulatory Commission agree with California’s entire claim. Hydro could not thumb its nose at such a ruling because it still wants to make money selling surplus power in the U.S. market, including to California.

But what this sorry episode illustrates, and not by any means for the first time, is that trading relationships between a small country like Canada and a behemoth like the U.S. are always going to be unfairly tilted toward the behemoth.

The last time this happened in a big way was when Canada agreed in 2006 to settle the intractable decades-long softwood lumber dispute with the Americans. Washington had collected $5.3 billion in illegal duties on Canadian lumber (illegal because Canada won virtually all of the NAFTA/WTO challenges). Canada not only agreed to impose restrictions on its ongoing lumber exports (through a pricing mechanism), but it left more than $1 billion of that illegally collected loot in the U.S. treasury.

There is an important message in these two major trade issues (and a host of smaller ones too). The U.S. is not a free-trader, and the U.S. does not play fair. When things go wrong down there, they look for a scapegoat—preferably a foreign one. In California’s case, it went after the suppliers that it argued had price-gouged for power. It is no accident that BC Hydro’s settlement is the biggest of all of them—bigger than any of the U.S.-based suppliers the state went after.

In the lumber case, it was a U.S. forest industry that had a fanatic, faith-based belief that Canada’s provinces subsidize their forest industries—never mind that the Americans have never made that charge stick before any independent adjudicator. A combination of fanaticism and a very powerful and supportive (many would also say unprincipled) government created a war that Canada can’t possibly win.

What does it mean? It means Canada needs to stop sending more than 70 per cent of its exports to the U.S. Tough job for Hydro since you can’t bottle up electricity (build a big battery?) and ship it to China. But you can ship lumber (kudos to B.C. for actually achieving this one) to Asia, and you can do likewise with oil and liquefied natural gas (LNG).

The writing is on the wall for Canada’s trading relationship with the U.S.—and the evidence keeps piling up. A Vancouver Sun story this week documents a bid by a couple of Washington state senators to restrict (through an import tax) U.S.-bound containers from moving through Vancouver and that brand new (and very successful) container port in Prince Rupert.