On March 15, 2024, the BCUC approved a request from BC Hydro to rescind the commission’s 2021 direction that the utility to file a performance-based rate application.
The BCUC had previously directed BC Hydro to file an application by December 31, 2023 for formula-based rates. In this scheme, BC Hydro would have been automatically compensated for inflationary cost increases, but would have had to make cost efficiency savings or face reduced profits.
BC Hydro satisfied the directive by filing a performance-based rates application on December 21, 2023, although the BCUC has not made the filing public. On the same day BC Hydro also filed a reconsideration request, stating that its current “drive towards electrification” made its future costs too uncertain to forecast, and the new method of rate setting would “draw resources away from various operational initiatives and regulatory activities needed to support the energy transition.”
The BCUC agreed with BC Hydro that “new facts and a change in circumstances have arisen as a result of the energy transition” and was “not convinced that the adoption of what would be a new and untested regulatory regime for a utility like BC Hydro is warranted at this time.”
The BCUC directed BC Hydro to file a report by December 31, 2028, “assessing whether its operating environment has changed such that [performance-based regulation] has become feasible.”
Analysis
This decision is disappointing, but not unexpected.
The BCUC is an economic regulator. When it sets prices for monopolies such as BC Hydro, it acts as a substitute for the competition that would otherwise put pressure on the utilities to become more efficient. Without the spur of competition, monopolies tend to charge more for poorer quality service, and to innovate less, if at all.
The BCUC pursued formula-based rates for BC Hydro in an attempt to solve the regulatory problem of “information asymmetry.” In rate applications, it’s virtually impossible for the BCUC to identify how utilities could become more efficient; only the utilities know how to do that, and they don’t disclose the information willingly.
The BCUC can probe with rounds of questions and hold oral hearings to examine whether a utility’s proposed expenditures are reasonable, trying to find opportunities for cost savings. This process is expensive, and rarely results in significant improvements. The best that can be said is that without it, utilities’ costs would probably be even higher.
Formula-based rate-setting provides an alternative. The BCUC has used this method for setting rates for FortisBC Inc. (Fortis Electric) and FortisBC Energy Inc. (Fortis Gas) for many years. As the BCUC noted, Fortis Gas saved expenses varying between $191 million and $246.9 million in each of the six years between 2014 and 2019, and returned a total of $76.8 million to ratepayers under a profit-sharing arrangement.
The BCUC’s interest in pursuing performance-based ratemaking for BC Hydro dates back to at least March 2018, when in the Fiscal 2017 to 2019 Revenue Requirements proceeding the BCUC ordered BC Hydro to investigate how to it could be implemented, noting:
“Expenditures have risen faster than revenues and this situation is not sustainable. Accordingly, a Performance Based Rate (PBR) setting mechanism could help BC Hydro accomplish its cost control objectives and provides incentives for utilities to improve productivity and create efficiencies to allow for rates to be more effectively managed, while maintaining service quality.”
After an extensive proceeding with submissions of expert evidence, the BCUC concluded that BC Hydro should come under a formula-based rates scheme similar to that used for the two Fortis companies. On December 21, 2021, the BCUC gave BC Hydro two years to file such an application.
Six years after first directing BC Hydro to investigate performance-based ratemaking, the BCUC has abandoned this approach. BC Hydro will file a traditional application for rates in fiscal years 2026 to 2028, and the BCUC will do its best to determine whether the proposed costs are just and reasonable. But BC Hydro will have no incentive to become more efficient.
Paths not taken
It is hardly surprising that BC Hydro opposed the decision to implement formula-based rates, as the utility would have had to make efficiency gains to maintain its profitability. What is harder to understand is the degree to which the BCUC has backtracked. There were alternatives to completely rescinding the original decision.
The BCUC could have continued to pursue formula-based rates more flexibly. It could have acknowledged the challenges of the energy transition, and allowed BC Hydro to spend more money specifically on electrification, so long as the utility could justify the extra spending.
Another alternative would have been to delay formula-based rates for one more rate-setting cycle, perhaps a delay of three years, but leaving BC Hydro in no doubt that it would come under the new arrangement eventually.
The BCUC did say that this decision “should not be construed as a commentary on or rejection of PBR as a regulatory incentive mechanism.” But there’s no escaping that the BCUC has rescinded the directive in its entirety, and BC Hydro no longer has any obligation to implement any form of performance-based rates.
The BCUC did demand that BC Hydro produce (another) report on performance-based ratemaking, but this won’t arrive until at least December 31, 2028, assuming no extensions are granted. Based on the recent exercise, we shouldn’t expect to see any formula-based rates for BC Hydro until at least the early 2030’s, if ever.
Performance-based regulation is no panacea, and is complex and controversial to implement. But the regulator has few enough tools available to impose cost efficiency discipline on utilities. The BCUC has thrown away a once-in-a-generation opportunity.
How level is the playing field?
The BCUC granted BC Hydro relief from the discipline of formula-based rates in recognition of the challenges of the energy transition. It recognized that future costs to increase electrification were uncertain. But BC Hydro isn’t the only utility in the province undergoing an energy transition.
Fortis Gas, which let’s not forget in the recent winter peak delivered twice as much energy as BC Hydro to keep homes and businesses warm, is transitioning to a decarbonized grid, and its sister company, Fortis Electric, faces similar challenges to BC Hydro in its service area.
The BCUC regulates both Fortis companies under a formula-based rates scheme; they must currently find half of one percent cost savings every year to maintain their BCUC-approved level of profit. It will be interesting to see if Fortis applies to the BCUC to change this arrangement when it expires at the end of 2024. And if they do, will the BCUC give them the same relief as it just gave BC Hydro?
Scoreboard
For those keeping score, this approval makes it “two for two” in BC Hydro’s series of four reconsideration requests filed in the three months since the government replaced the BCUC Chair in September 2023:
| Reconsideration proceeding | Application date | Outcome |
| F2025 DARR and TIRR and Reconsideration Related to the TIRR | October 30, 2023 | Approved February 20, 2024 |
| Westbank Station Upgrade Reconsideration of G-47-18 | November 21, 2023 | In progress |
| Reconsideration of BCUC Order G-91-23 Directive 20 | December 18, 2023 | In progress |
| Reconsideration of PBR Report Order G-388-21 | December 21, 2023 | Approved March 15, 2024 (the subject of this article) |
There are still two requests outstanding. Is anyone taking bets?