Setting rates for public utilities is probably the single most important function of the BC Utilities Commission (BCUC). It is central to the BCUC’s core mandate: rate setting and protecting the supply system in a manner which safeguards the public interest.

This article provides an overview of public utility rate setting in BC.

Why?

Public utilities, broadly defined in BC to include all provincial energy companies, are often monopolies, either because of government legislation or because they are “natural monopolies.” In the absence of competition, monopolies might abuse their power and charge higher prices than a market would set.

To avoid such abuse, governments often set up a regulator such as the BCUC with the legal power to set prices for public utilities. In place of a competitive market, the regulator attempts to balance the interests of ratepayers and utilities, recognizing that they provide an essential service.

Legislative authority

The BCUC gets its authority from the Utilities Commission Act. This Act stipulates that a public utility may not provide a regulated service for compensation without a rate approved by the BCUC (section 63).

A rate is more than just the price of a service – it also includes the terms and conditions under which the service is provided. Utilities may not change their terms and conditions without BCUC approval.

The regulatory compact is a summary form of the provisions of the Utilities Commission Act, and a helpful way to understand the balance it attempts to achieve: A public utility is obligated to deliver, in its service area, safe and reliable service in return for a just and reasonable rate.

Test for approving rates

Public utilities may only charge rates that are just and reasonable, and not unduly discriminatory or unduly preferential. The BCUC is the sole judge of whether a rate meets this test.

In general, a rate is just and reasonable if it is a fair and reasonable charge for the service provided and provides a fair and reasonable return to the utility providing the service.

Rate-setting principles

The BCUC uses a number of principles when setting rates, including some that are based on the Bonbright Principles of good rate design. Others have emerged out regulatory practice and court cases over the years. Here are the commonly-used rate-setting principles.

Rates should allow utilities the opportunity, but not the guarantee, of recovering its total revenue requirement, including the return to its shareholders.

Under the cost-of-service principle, ratepayers should pay the cost of the service they receive. Ratepayers should not incur the utility’s cost to provide service to others, or costs that are not related to any regulated service.

Rates should seek to maintain inter-generational equity. To the extent possible, the current generation of ratepayers should pay the costs of the service they receive. Future generations should neither benefit nor suffer from the actions of prior generations.

Rates are set prospectively. A utility sets its rates in advance, based on forecasts of costs and sales volumes. The utility then uses those rates regardless of the actual costs or sales volumes that transpire, and takes the risk that it might earn more or less than its forecast return.

Rates may not be set retroactively. Utilities may not normally recover previously incurred costs in current rates.

Rates may only include recovery of expenditures on assets if they are used and useful. This generally excludes expenditures on assets under construction, for example.

Utilities should, where possible, avoid rate shock, an excessive increase in rates.

Methods for setting rates

The Act gives the BCUC the right to set a rate on any basis it considers advisable (section 60 (1) (b.1)). Most utilities in BC offer rates on one of the schemes described below, or a hybrid scheme.

Many utilities’ rates are set on a cost-of-service basis, where ratepayers are charged the utility’s prudently incurred costs plus a return to the utility’s shareholders for the capital they provide.

Alternatively, some utilities use performance-based ratemaking, which gives them an incentive to make cost savings which are often shared between ratepayers and the utility’s shareholders.

Some utility rates are negotiated between the utility and one or more customers.

The BCUC sometimes exempts a utility (or a class of utilities) from rate regulation, usually because the utility is providing a competitive service. A utility with an exemption from rate regulation remains a public utility and is still regulated by the BCUC in other respects.

Process for setting rates

A public utility makes an application to the BCUC for a new or amended rate before it can offer a regulated service for compensation. The BCUC then conducts a proceeding, and may approve, modify or reject the application.

Utilities submit the following types of rate application the BCUC:

• A revenue requirement is the total expenditures the utility wishes to collect from ratepayers, including the return to the utility’s shareholder;
• A cost-of-service allocation is how the revenue requirement is divided up between the utility’s different classes of customer (if any);
• A rate design is the method used to collect the revenue requirement of a particular customer class, for example a combination of fixed and variable rates.

A new service requires all these components to be approved before it can be offered.

Once a rate is established, it generally continues forever until it is amended. Amendments can consist of a new revenue requirement, cost-of-service allocation or rate design, or any combination of these components. The BCUC may require a utility to file a rate application (although not a rate rebalancing application).

A utility may apply for interim rates, pending approval of permanent rates. The utility is usually required to refund / collect any differences to / from ratepayers as soon as possible after permanent rates are set.

A utility may apply for a regulatory deferral account to defer costs and revenues for collection or recovery in future years. A regulatory deferral account must be approved by the BCUC, and allows a utility to avoid breaching the principle against retroactive rate-making.