In bypassing the regulator, the government has set rates for BC Hydro that are probably too low. This will create big problems down the road, just like it did last time.
Introduction
On Monday, the BC government announced that rates for BC Hydro, the provincially-owned electric utility, would rise by an average of 3.75 percent a year for the next two years (2025/26 and 2026/27).
Most disturbing was not the size of the increase, but the way the rates were set. The government issued a press release, simultaneously ordering the BC Utilities Commission (BCUC) to rubber stamp the decision within ten days of an application by BC Hydro.
Back to the future
BC Hydro rate-setting by the government has a long and inglorious history.
In 2013, the previous administration announced a ten-year rates plan to “keep electricity rates as low as possible while BC Hydro makes investments in aging assets and new infrastructure.” For the first two years, government set BC Hydro’s rates; and for the following three years, BCUC-approved rates were capped.
The intention was that, after five years, the government would have got BC Hydro’s spending under control, and it would hand responsibility back to the BCUC to set the rates based on the utility’s actual costs.
The government recognized that the rates it was imposing would not be sufficient to cover the utility’s costs, so it ordered the creation of a regulatory deferral account to record the unrecovered costs “in the earlier years of the plan” and promised that this would be paid back before the end of the ten years.
Well, it didn’t quite work out as planned. The unrecovered costs built up in the deferral account, and I’ve found no evidence that BC Hydro got its spending under control.
The swing of the pendulum
The government lost the 2017 election and the incoming administration realized that huge rate increases would be required in order to pay off the accumulated amount, so it wrote off the $1.1 billion balance that had built up in the deferral accounts. It no doubt helped that the 2019 budget was forecasting a surplus for the next three years.
Along with the taxpayer-funded write-off, the new government sought to allay public fears that this would happen again. In another announcement the same day, it returned oversight of BC Hydro to the BCUC. The announcement is worth quoting at length:
“Step one in fixing this problem is to take the politics out of decisions around BC Hydro — the problems we’re seeing today are the result of 16 years of political choices by the previous government,” said Mungall [then the BC energy minister]. “The best way to keep BC Hydro on the right financial path, while protecting the interests of customers is to enhance BCUC’s independent oversight of the Crown corporation as we move forward.” (emphasis added)
The incoming government was as good as its word – responsibility for setting BC Hydro’s rates and approving the use of deferral accounts returned to the BCUC.
The golden age
These decisions ushered in what in retrospect looks like a golden age of utility regulation in the province.
BC Hydro applied for new rates based on its forecast expenditures and electricity demand, and the BCUC conducted open and transparent processes that enabled public interest groups to have their say. Rates were set based on the amount BC Hydro actually needed to provide safe and reliable service.
The BCUC even warned BC Hydro in 2021 that its “significant and potentially lasting” increases in controllable costs would cause future problems for affordability if they were not addressed.
To help mitigate this risk, the BCUC directed BC Hydro to adopt performance-based regulation, where the utility is given incentives for making productivity improvements. This arrangement has been used for decades to set rates for private-sector utilities in the province, saving ratepayers hundreds of millions of dollars.
To be sure, the government continued to interfere with the BCUC’s independence. It set BC Hydro’s profit level without letting the BCUC determine whether the amount was fair, and it refused to let the BCUC examine the contract between BC Hydro and Powerex (who knows what’s lurking under that rock). But in the main, the BCUC was allowed to determine BC Hydro’s rates according to regulatory principles, allowing the utility to recover its costs.
All good things come to an end
And then, suddenly, it was all over. In September 2023, the government fired the BCUC chair. The new premier, who had taken over in November 2022, doesn’t appear to have the same respect for independent regulation as his predecessor.
BC Hydro then set about undoing the regulatory changes made under the previous chair, for example reversing the move to performance-based regulation.
With this latest order taking back control of setting BC Hydro’s rates, we have come full circle. There will be no independent review of whether the new rates are sufficient, and with only ten days to approve the application, the BCUC won’t be able to hold a hearing. That way, BC Hydro won’t need to answer any pesky questions from public interest groups on its spending plans or future energy forecasts.
The government has now fully repudiated its pledge in 2019 to “take the politics out of decisions around BC Hydro.”
Conclusion
If the BCUC had been allowed to do its job and set rates BC Hydro actually needs, they would likely have gone up considerably more than 3.75 percent.
As long ago as October 2023, BC Hydro was forecasting it would need a rate increase of 8.3 percent in 2025/26 to cover its costs, and more recent data suggest the required increase would now be even larger. BC Hydro’s third quarter results show even higher increases in operating costs than last year, and a decrease in the Powerex trading profits available to subsidize them. Plus, the utility’s forecasts of future trade income and electricity sales were in doubt well before the current trade dispute made things even worse.
It doesn’t help that the BCUC has been ordered to approve BC Hydro spending more than half a billion dollars on energy efficiency in the next two years, also with no review.
But higher rates to pay for all this would have conflicted with the government’s promise that rates would remain affordable, prominent in the new minister of energy’s “mandate letter”. Politically, the government didn’t want to let the BCUC set BC Hydro’s rates at a realistic level.
The result? Denial. BC Hydro’s rates are to be kept artificially low for the next two years, while the government has repeatedly failed to rein in the utility’s costs.
These costs aren’t going away, though. Just like last time, they will build up in deferral accounts until the balances are too big to ignore. There are only two ways out – rates will finally have to rise to pay off the balances, or taxpayers will have to bail out BC Hydro yet again. And with the provincial deficit running at $10.9 billion, that isn’t such an easy option this time.
For another day
Another issue with this politicization of utility rates is that the Auditor General might take a dim view. BC Hydro’s accounting standards require that deferral account use is approved by an independent regulator. Previous government directions to the BCUC have caused the provincial accounts to be qualified (in 2016/17 and 2017/18), meaning that they did not fairly represent the financial performance of the government. Has the current government order crossed that line?
Stay tuned.