On February 15, 2024, the BC Provincial government updated its energy objectives set out in the Clean Energy Act.
This article considers the impact the changes may have on BC Hydro’s rates (the government says nothing about rates of other electricity utilities in the province). A second article will consider the possible changes to government energy policy signaled by the update.
According to the accompanying press release also issued February 15, 2024, the government is “updating B.C.’s energy objectives in the Clean Energy Act to help ensure that people and businesses continue to have access to affordable, clean electricity” and is adding a new objective “to ensure that BC Hydro rate changes do not exceed cumulative inflation”.
Will these changes to BC’s energy objectives ensure that BC Hydro’s rate changes do not exceed the rate of inflation, as a casual reading of the press release might imply? They will not.
First, as the press release itself acknowledges, the energy objectives set out in the Clean Energy Act “do not obligate the [BCUC] or a public utility to undertake specific actions or guarantee a certain decision.” The Utilities Commission Act, the primary legislation that governs the BCUC, only requires the BCUC to “consider” the energy objectives, they are not rules to be followed.
The energy objectives’ effect on keeping BC Hydro’s rates under control is even more tenuous than that. The Utilities Commission Act only requires the BCUC to consider the energy objectives when reviewing utilities’ long term resource plans (section 44.1), infrastructure investments and expenditure schedules (section 46) and energy supply contracts (section 71). There is no obligation in the Utilities Commission Act for the BCUC to even consider the energy objectives when setting rates (section 60).
In practice, however, the BCUC will surely take note of the government’s intent here. As the press release states, the updated energy objectives are a “signal” to the BCUC regarding the government’s goals.
But what difference will the updated energy objectives actually make?
The government has indicated it wants BC Hydro’s rates to be “reasonably predictable” and “reasonably consistent” from year to year. There’s nothing new here, however. The BCUC has long used the so-called “Bonbright principles” when setting rates, including the principle of rate stability and predictability (Principles of Public Utility Rates, Bonbright et. al. 1988, p. 383).
The government also wants “to ensure that increases to [BC Hydro’s] rates do not exceed cumulative inflation,” where cumulative inflation is defined as the sum of inflation rates from 2017 to 2030. This is potentially more impactful, but there are devils lurking in the details.
First, according to the press release, BC Hydro’s rates are currently 15.6 percent lower than cumulative inflation from 2017 to the present. That means that BC Hydro’s rates could jump 15.6 percent tomorrow and still meet the government’s new objective of being below cumulative inflation. Anyone thinking that BC Hydro’s rate increases will be limited to today’s inflation rate of 3.89 percent (Statistics Canada CPI figure for 2023) could be in for quite a surprise.
This might explain why the government chose 2017 as the base year for the cumulative inflation calculation. Since 2017, BC Hydro’s rate increases have been relatively low, and inflation relatively high. Choosing a more recent starting point, such as 2022 or 2023, might not have given the government the same “headroom” to increase BC Hydro’s rates while keeping the promise of rates being “below cumulative inflation.”
Second, the government wants the BCUC to keep BC Hydro’s rates below cumulative inflation all the way out to 2030, using the BCUC’s estimate of future inflation. The BCUC will need a very shiny crystal ball for this one. In December 2021, the Bank of Canada forecast that inflation in Canada would ease from 4.8 percent to 2 percent by the end of 2022 – it actually ended up being 6.3 percent. If that’s the best that the resources of the Bank of Canada can do, it’s hard to see how the BCUC will do better.
The biggest dilemma for the BCUC might arise if BC Hydro needs to spend more money than the new “rate cap” allows for.
The BCUC sets rates that are just and reasonable (section 60 of the Utilities Commission Act). This is generally interpreted as meaning utilities must be allowed to recover their costs to provide safe and reliable service and to earn a return for the shareholder (the provincial government, in this case).
The government has, for the first time, helpfully indicated which energy objectives it considers most important: keeping BC Hydro’s rates below cumulative inflation and achieving greenhouse gas emissions reduction targets. However, there is no guidance as to how the BCUC should prioritize the energy objectives compared to the just and reasonable test.
There are two likely options. The BCUC could simply ignore the new “rate cap” and approve the rate increases BC Hydro needs. Alternatively, the BCUC could allow BC Hydro to record any extra expenditures it needs in a regulatory deferral account for later collection from ratepayers.
Regulatory deferral accounts are regularly approved by the BCUC to smooth out rate increases over multiple years. However, if not paid off promptly, a rate smoothing account may simply build up an ever-larger amount that someone will eventually have to pay. This has happened to BC Hydro in recent memory: 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 (and hence all taxpayers in the province).
This is not merely a historical or theoretical problem. There are significant cost pressures on BC Hydro as it seeks to ramp up its supply of electricity to support the government’s energy transition to reduce greenhouse gas emissions. For example:
- In its fiscal 2022 year, BC Hydro’s base operating costs increased by 12.2 percent, significantly more than the 6.3 percent rate of inflation in 2022 (Statistics Canada CPI), and BC Hydro now estimates its operating costs will rise by 22 percent between fiscal 2025 and 2026.
- The government announced that BC Hydro will be spending $36 billion on a new capital plan to build more capacity to electrify the province in the next 10 years. The government has not shared an estimate of the effect this investment program would have on rates, but for illustrative purposes, $36 billion of new assets, if amortized over 30 years, would increase BC Hydro’s costs by over $1.2 billion per year. That’s at least a 21 percent increase over BC Hydro’s $5.7 billion revenue requirement forecast for 2025.
- The Site C dam is expected to go into service in fiscal 2026, and is the “primary driver” of the 8.3 percent forecast annual rate increase in fiscal 2026. Final costs for Site C have yet to be determined and therefore additional rate increases could potentially be on the cards.
- BC Hydro recently announced it will procure, at an unknown cost, more electricity to meet upcoming shortages of energy.
There is a crumb of comfort for ratepayers in the government’s choice of formula for cumulative inflation, which is to sum each annual percentage change, unlike the more traditional approach of multiplying the percentage increases for each year. Thus, two years with 4 percent inflation would yield a cumulative amount of 8 percent, whereas most people would expect a cumulative figure of 8.16 percent. Every little helps these days!
Sadly through, if you hear claims such as “BC Hydro rates held to the rate of inflation until at least 2030!”, you should treat them with some skepticism.