On July 15, 2024, the BC government ordered the BC Utilities Commission (BCUC) to allow BC Hydro’s regulated net income to remain at $712 million a year for an additional two years – until March 31, 2027.
The government overriding the BCUC’s ability to regulate BC Hydro is becoming all too familiar. In fact, BC’s Auditor General has previously warned the government that net income directions are a “risk area” and has twice qualified previous financial statements. Is another qualification coming?
Background
One of the BCUC’s most important tasks is to determine the appropriate return that ratepayers must provide to a public utility’s shareholders for the services they receive. Section 59 of the Utilities Commission Act requires the BCUC to approve rates only when they are just and reasonable, including a “fair and reasonable return.”
The return to utilities’ shareholders is usually related to their rate base (the capital they have invested in providing service to ratepayers). For example, the shareholders of FortisBC Inc., the second-largest electrical utility in BC, are deemed to provide 41 percent of the utility’s rate base (the rest is deemed to be funded by debt), and earn a 9.65 percent return on that amount.
However, the BC government has been bypassing the BCUC’s normal regulatory process and dictating BC Hydro’s return since at least 2009. In 2014, the BCUC was directed to allow BC Hydro’s shareholder to earn 11.84 percent on its equity, which was deemed to be 30 percent of rate base. In 2016 the government started setting a fixed net income for the utility, and by 2019 that net income had reached $712 million.
Is this all about Site C?
By its action on July 15, the government has again prevented the BCUC setting BC Hydro’s shareholder return, this time until at least March 31, 2027. BC Hydro will continue to collect $712 million per year from ratepayers on behalf of its shareholder, the BC government.
At first glance this is just another example of the government bypassing the BCUC’s independent regulatory process. But the stakes are higher this time around, and not just because of the proximity to the provincial election in October.
BC Hydro’s new Site C dam will soon go into service, which will add significantly to the utility’s rate base. Site C is currently expected to cost $16 billion, almost twice the $8.335 billion budget when the government approved its construction in 2014, and this could have a significant impact on shareholder returns.
If the BCUC were to determine that BC Hydro’s shareholder should be entitled to, say, a return of 9.65 percent on 41 percent of $16 billion, the same calculation FortisBC Inc. would use, that would add $633 million to the amount collected in rates – an increase of 11.4 percent compared to the fiscal 2025 revenue requirement of $5,571 million. And that’s before any other increases in BC Hydro’s operating costs.
However, the BCUC is not obliged to use this formula to set a utility’s shareholder return. In a cost of capital hearing, the regulator should independently assess the appropriate return. BC Hydro or the government itself could have made the case that a lower return to the shareholder was appropriate. It is possible the BCUC would have determined that BC Hydro’s net income should be lower than $712 million, not higher; now we will never know.
Despite amending the Clean Energy Act to encourage the BCUC to keep BC Hydro’s rates below inflation, it seems the government doesn’t trust the BCUC to take the hint.
The BC Auditor General is watching
The government’s inclination to bypass or override the BCUC’s standard regulatory processes may be legal, but it is not necessarily advisable. BC Hydro’s financial statements rely on an independent regulator approving its regulatory deferral accounts; if the Auditor General decides that these BCUC approvals were not made independently, then both BC Hydro’s and the consolidated provincial financial accounts can be called into question.
BC’s Auditor General expressed concerns about BC Hydro’s accounts in March this year. It reminded the government that it had qualified the province’s financial results in 2016/17 and 2017/18 as a result of the “cascading impacts” of government directions to the BCUC limiting its ability to regulate BC Hydro. It then added, ominously:
“While we don’t consider BC Hydro to be offside with rate-regulated accounting standards this year, net income directions are a future risk area that government and BC Hydro should actively monitor to avoid losing the ability to apply rate regulated accounting.”
Despite this thinly veiled warning, the government has chosen again to direct the BCUC to set BC Hydro’s net income without an independent review. The government is surely taking a risk of some unwanted attention from the Auditor General.
Conclusion
If the Auditor General finds a pattern of actions that have “cascading impacts” sufficient to call into question the independence of the BCUC’s decisions regarding BC Hydro, it may qualify the province’s financial statements as it did in 2016/17 and 2017/18.
This could be costly for taxpayers. BC’s provincial credit rating has already been downgraded three times in as many years, most recently in April this year following the March budget. Any further qualifications could increase the government’s cost of borrowing.
In the next article I will consider how the Auditor General might evaluate the BCUC’s oversight of BC Hydro.