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Letter from BC Hydro President & COO to BCUC on Interior to Lower Mainland Transmission Line arbitration decision

Mr. David Morton
Chair
British Columbia Utilities Commission
Suite 410, 900 Howe Street
Vancouver, BC, V6Z 2N3

Dear Chairman Morton

RE: British Columbia Hydro and Power Authority (BC Hydro) Interior to Lower Mainland (ILM) Project Arbitration Decision

I am writing to you today to provide you with an update and further information regarding BC Hydro’s completed Interior to Lower Mainland Transmission Line project, and in particular, the arbitration process that BC Hydro has been engaged in since 2014 with our prime contractor on the project, Flatiron Graham Joint Venture (FGJV). The arbitration decision was released on March 29, 2018.

As you know, the Interior to Lower Mainland Transmission Line is a 247 kilometre long, 500-kilovolt power line that stretches from Merritt to Coquitlam. The line is the largest expansion to B.C.’s transmission system in the past 30 years. BCHydro awarded a design build contract for the line in 2011 to FGJV and construction began in the spring of 2012. FGJV was to complete the line by October 2014 and the forecast in-service date for the project was January 2015. However, the in-service date was pushed back to late 2015, a year later than planned.

The new line was built through challenging and diverse terrain in B.C.'s southern interior on Crown and private land and crosses mountains, grasslands, major rivers and highways.

The portion of the line running through the area of the Fraser Valley near Spuzzum was particularly challenging. An alternate route alignment was explored as part of an arrangement with a local First Nation group. Ultimately, we decided to return to the original route alignment and to construct the Spuzzum portion of the line ourselves, rather than using FGJV. The arbitrator found that changes in the Spuzzum portion of the line delayed FGJV’s work and that BC Hydro is responsible under the contract for certain costs associated with this delay.

There were also disruptions to FGJV’s construction schedule due to issues related to access to private land and archaeological sites that were identified. The arbitrator determined that BC Hydro is required under the contract to compensate FGJV for some costs due to lost productivity because of these disruptions.

The contractor’s claim against BC Hydro was substantial, ranging in value over time from $285 to $360 million. While the arbitrator dismissed a number of elements of the FGJV claim, he determined that the contractor was entitled to additional payments under the contract, largely attributable to the Spuzzum portion of the line and the disruption costs as discussed above. We have calculated these additional costs payable under the award to be approximately $84.7 million. In addition, BC Hydro has held-back $17.4 million from amounts we owed to FGJV as compensation for liquidated damages payable to BC Hydro under the contract. However, based on the arbitrator’s award, BC Hydro must now pay out approximately $13.1 million of the hold-back amount because we are not entitled to all the liquidated damages we claimed. We also must pay interest on some of these award amounts.

Based on our calculations, the total award, including interest and the payment of hold-back amounts, is in the range of $95 to $105 million. BC Hydro and FGJV have asked the arbitrator to clarify certain aspects of the Decision and his clarifications may affect the final award amounts. We anticipate that the clarification process will conclude in May or June, at which time we should be able to determine the total value of the award with more certainty. It is also possible that BC Hydro or FGJV may appeal the award.

The final construction cost of the ILM transmission line was $723 million, which is slightly less than the budgeted amount of $725 million in the BCUC’s decision approving the Certificate of Public Convenience and Necessity (BCUC Order No. C-4-08). Based on our calculations, the arbitrator’s award to FGJV increases the forecast cost of the Interior to Lower Mainland transmission project to approximately $818 million to $828 million, subject to the outcome of the clarifications and any appeals.

While the arbitration decision isn’t the outcome we were hoping for, there are lessons learned we can take forward, several have already been implemented. These lessons include potentially different contractual arrangements on linear-impact projects as compared to point-impact projects and management of interfaces between project activities and third parties. BC Hydro has also made significant investments in systems and staff to improve contract management and understanding of contractor performance to allow better project management on all BC Hydro projects. Those lessons and final project costs will be more fully described in our final Project Completion Report, which we expect to file in summer 2018.

Sincerely,

Chris O'Riley
President & Chief Operating Officer, BC Hydro