BC Hydro introduced a residential inclining block rate in 2008 to encourage conservation, at a time when the utility was short of electricity and forced to buy from the market.
This article provides a history of BC Hydro’s residential inclining block rate, and the relevant BCUC decisions.
BC Hydro’s rate history
As the diagram below illustrates, BC Hydro’s rates have undergone quite a turnaround over the years. The utility started out with a declining block rate in 1962, presumably to encourage customers to use more electricity as its new dams were completed and were, initially, under-used. BC Hydro switched to a flat rate between 1994 and 2008.
(data for this graph was provided by BC Hydro’s media team)
The original conservation rate
BC Hydro filed an application for a residential conservation rate on February 26, 2008. This application was a response to the BC government’s 2007 Energy Plan (included in the application), which called for new rate structures “as a mechanism to motivate customers either to use less electricity or use less at specific times.” The government’s earlier 2002 Energy Plan had called for inclining block rates for BC Hydro’s industrial and large commercial customers.
On August 28, 2008 the BCUC approved a two-tier inclining block rate for BC Hydro’s residential customers, stating that it was “a conservation rate intended to show existing customers the cost of new supply and to offer an incentive to reduce consumption.”
By the time the rate was fully implemented on April 1, 2009, it consisted of:
- A bi-monthly threshold of 1,350 kWh;
- A Step 1 rate of 5.91 cents per kWh below the threshold; and
- A Step 2 rate of 8.27 cents per kWh above the threshold.
Customers also paid a basic rate of 12.64 cents per bi-monthly billing period.
The bi-monthly threshold of 1,350 kWh was set to approximate 90 percent of the median consumption of BC Hydro’s residential customers of 762 kWh per month.
The Step 2 rate and the long run marginal cost
The Step 2 rate tells customers what it costs BC Hydro to provide additional electricity. This is considered to be the “economically efficient” price because customers will only buy additional electricity themselves if it’s worth it to them at that price, and therefore BC Hydro should provide it.
The BCUC set the Step 2 rate of 8.27 cents per kWh to be BC Hydro’s most recent cost of purchasing electricity from the market (its long-run marginal cost, or LRMC), using evidence from the utility’s 2006 “Call for Tender”. This figure represented its “plant gate” cost of new generation, grossed up for line losses.
The Step 2 rate rose to 10.19 cents per kWh in April 2012, when the BCUC considered updated evidence from BC Hydro’s 2009 “Clean Power Call”, another set of market power purchases, which indicated that the utility’s long-run marginal cost could be as high as 13.2 cents per kWh.
How it worked
The new inclining block rate encouraged conservation in two ways. First, the Step 2 rate for the “last kWh purchased” was over 30 percent higher than the one-tier rate of 6.29 cents per kWh in April 2008. While this sounds dramatic, it only applied to a small portion of most customers’ bills, but it was certainly a “signal”.
Second, the Step 1 rate actually fell sixteen percent to 5.91 cents per kWh between April 2008 and 2009. As a result, the Step 2 rate was 40 percent higher than the Step 1 rate. It was this premium that was intended to give customers the incentive to reduce their electricity consumption. The premium rose to 50 percent by April 2012.
According to a study conducted for BC Hydro, in fiscal years 2013 to 2015 the inclining block rate was responsible for annual electricity savings of 23 GWh, 3 GWh and 13 GWh respectively. For context, the new Site C dam is expected to generate 5,100 GWh per year.
Rate stability
From 2012 to 2021, there were multiple BCUC decisions to approve BC Hydro’s “pricing principles”, the method by which BC Hydro’s general residential rate increase was applied to the basic rate, Step 1 rate and Step 2 rate. But these decisions for the most part applied the same increase to all three components, so the “Step 2 rate premium” (how much it exceeded the Step 1 rate) remained the same.
This can be seen in the following chart.
The holding pattern
Then, after holding the Step 2 premium at 50 percent for ten years, things started to change. In April 2022, BC Hydro submitted evidence that the two-tier rate was “no longer effective at generating new incremental savings.”
BC Hydro also stated that the Step 2 rate (then 14.08 cents per kWh) should be reduced to be closer to the utility’s long-run marginal cost (6.5 cents per kWh, according to BC Hydro) in order to encourage “a more efficient level of consumption.”
In its application, filed February 11, 2022, BC Hydro stated that it would file “a more extensive rate design application in late March 2022” which would “provide the opportunity for a broader exploration of residential rate design matters.”
The BCUC approved the first ever reduction in the Step 2 premium on April 1, 2022, which fell slightly from 50 percent to 47.6 percent. The BCUC declined to reduce the Step 2 rate, but instead held it constant.
The BCUC’s decision can be viewed as putting BC Hydro’s residential rates in a holding pattern, making the minimum changes consistent with the evidence, and awaiting the “more extensive rate design application” BC Hydro would file in March 2022. The BCUC found that the residential rate design application “would be the appropriate opportunity to consider more significant changes” to the Step 2 rate.
The holding pattern continues
BC Hydro did not submit a residential rate design application in March 2022.
In its decision to finalize BC Hydro’s rates on April 1, 2023, the BCUC maintained the holding pattern. The Step 2 rate remained at 14.08 cents per kWh, the Step 1 rate increased again, so the Step 2 premium slipped a bit further, this time to 44.4 percent.
In this proceeding, BC Hydro claimed it would “make best efforts to file an application [for a modified residential rate design] by no later than June 30, 2024.”
The BCUC directed BC Hydro to file a residential rate design application by June 30, 2024.
Slowly at first, then all at once
In its most recent pricing principles decision, the BCUC approved BC Hydro’s latest residential rates from April 1, 2024, dropping the Step 2 premium from 44.4 to 28.4 percent.
The BCUC appears to have taken BC Hydro’s residential rates out of their holding pattern.