A rate smoothing account is a specific type of regulatory deferral account used by a public utility to mitigate “rate shock” or reduce volatility of their rates.

To smooth rates, the utility records in the rate smoothing account the amount of its costs that are being deferred and not collected in that year, thus reducing the amount of the increase in rates. The utility subsequently collects the balance in the rate smoothing account in future years, increasing rates from what they would otherwise have been.

Utilities should generally record their forecast costs being deferred into the rate smoothing account rather than their actual costs (see the BCUC’s filing guidelines). This is consistent with how rates are generally set for utilities; rates are based on forecast costs, and the utility is expected to manage to those forecasts (at least for controllable costs). Allowing utilities to record actual rather than forecast costs in a rate smoothing account would pass the risk of overspending from the utility to the ratepayer, who will eventually pay off the balance in the account.

Rate smoothing accounts should generally be repaid within a relatively short time to preserve “intergenerational equity”. If balances persist for a long time, future ratepayers may have to pick up the tab for costs they did not benefit from, and current ratepayers benefit from the costs without paying for them.

BC Hydro has experience with large balances building up in a rate smoothing account. In December 2018, BC Hydro wrote off $1.044 billion from a rate smoothing account that had accumulated between fiscal years 2015 and 2019, a loss borne by BC Hydro’s shareholder, the provincial government.