In the two years since the government fired the BCUC chair, the agency has lost most of its powers to regulate BC Hydro, the provincially owned utility. The BC Premier’s autocratic style has reduced transparency and independence and increased financial risk.
Introduction
We are getting used to hearing about a well-known political leader trampling over process rights, installing friendly faces in supposedly independent agencies and ruling by executive order. All rather shocking, and of course it could never happen here. Right? The last two years at the BCUC might make you wonder.
The BCUC’s role is to set public utilities’ rates and approve investments according to regulatory principles, using a fair and transparent process to assess the evidence. Decisions are made by independent commissioners, appointed by the government, who usually serve out their full terms.
But in September 2023, Premier Eby fired the BCUC chair before the end of his term. In doing this, he signalled that the appointments of commissioners could be at risk if their decisions displease the government.
This act seriously undermined the agency’s perceived independence. The particular worry was that when BC Hydro, the provincially owned electric utility, asked for something, the BCUC would dutifully deliver it, regardless of the public interest.
As we’ll see, this worry was justified. But it was just the beginning.
That was fast!
By October 2024, barely a year after the arrival of the new BCUC chair, BC Hydro asked for and was granted a reversal of four previous orders to BC Hydro, an unprecedented number. The most egregious reversal was to backtrack on a scheme to encourage BC Hydro to manage its cost increases.
None of the four reconsideration requests claimed that the BCUC had made an error, which if true would have been a solid reason for a reversal. Instead, BC Hydro raised issues such as the uncertainty surrounding the energy transition, all of which were known when the original decisions were made. BC Hydro was simply asking for another “kick at the can”, something the BCUC and the Supreme Court of Canada discourage. Regulatory stability is important for utilities, customers, investors and the economy as a whole.
I find it very hard to believe that the BCUC would have reversed these four decisions if the previous chair hadn’t recently been fired. BC Hydro simply presented the BCUC with an opportunity to change its mind, after a very loud warning shot had been fired.
The law giveth, the law taketh away
But there’s more to this than just the unravelling of efforts to regulate BC Hydro.
The BCUC’s independence only goes as far as the law allows, and the provincial government has been busy in the last two years taking powers away from the regulator.
The most glaring example is that the government is once again setting BC Hydro’s rates. No longer is the BCUC using regulatory principles to set a “just and reasonable” rate sufficient for BC Hydro to provide its service, a power that it had only regained in 2019 after a long hiatus.
It’s not just rates
Last July the government ordered that BC Hydro should be allowed to continue collecting $712 million a year in profit from ratepayers. Other utilities must justify their return, based on what they need to offer shareholders to attract investment capital. The BCUC had been expecting to regain the power to decide BC Hydro’s rate of return independently after many years of government control; this power was once again withdrawn.
Utilities are not guaranteed to earn their full BCUC-approved return – they are only given the opportunity to do so. For most utilities, if they don’t control their spending, the profit they end up with is reduced. Not BC Hydro, though.
To make sure it earned as much of that profit as possible, government directed BCUC to allow BC Hydro to create an “inflationary pressures” regulatory account. That way, any overspending in certain cost categories (labour, vegetation management and fuel) won’t reduce its profit.
This is just one example of a regulatory account that has been directed by the government without independent BCUC oversight. I’ve estimated that BC Hydro will put over a billion dollars of spending in the next three years that was not independently approved by the BCUC into regulatory accounts.
And there’s more
The Utilities Commission Act requires energy utilities to have approval from the BCUC before investing in new equipment. This enables the BCUC to look not only at the cost but also at other matters of public interest. Except, it seems, if the equipment is needed by the provincially owned BC Hydro.
You’re probably aware that the ten power projects arising from BC Hydro’s 2024 Call for Power were exempt from BCUC review thanks to a 2002 ministerial order, despite the previous minister of energy promising in the legislature that the agency would have “oversight” of them.
You may not be aware that the same minister issued her own order so that the BCUC would also not get to review a series of six new substation projects.
BC Hydro’s latest annual report to the BCUC does include some projects it intends to put forward to the BCUC for approval, such as improvements to the La Joie dam. But it also appears that two projects to provide increased transmission from Prince George to Terrace will be exempt from review. The trend continues.
Worst of all?
The Utilities Commission Act allows the government to order the BCUC what to do in advance, but expressly prevents the government from changing an existing decision. That didn’t seem to bother the government, who in a disturbing example of executive overreach undid a BCUC decision to make BC Hydro bills more transparent.
If someone thinks a BCUC decision contravenes the law, they can ask for it to be reconsidered, or take it to the BC Court of Appeal. I’m told the bar for overturning a government order is very high, which means this one will likely stand. It sets a worrying precedent.
What’s left?
After Premier Eby fired the BCUC chair in 2023, political commentator Vaughn Palmer was quick to observe that the new chair faced “a huge challenge in demonstrating the commission’s independence, given the circumstances surrounding his appointment”.
This was undoubtedly true, but I think the issue is now much broader. The BCUC has been stripped of so many powers to regulate BC Hydro that the independence of its chair and commissioners is no longer relevant.
The BCUC’s web site claims it is an “independent agency.” With the government telling the BCUC what BC Hydro’s rates and profits will be, what investments the utility will make, and what amounts to put into its regulatory deferral accounts, I don’t think we can say any longer that the BCUC is independently regulating BC Hydro.
Why this is important
There are several problems with the government’s current approach to regulating BC Hydro.
First, it’s hard to have faith that the government is acting in the public interest. Cabinet decisions are taken in secret, and any advice to cabinet is protected from freedom of information requests. Since we don’t know what evidence they considered, or who they listened to, government is open to accusations of favouritism and political expediency. This risk is particularly acute given that the government has expressly and deliberately chosen to bypass an existing regulator.
Second, decisions made for political expediency rather than based on sound principles and economics often don’t end well. Consider BC Hydro’s rates, which the government has fixed until March 2027.
The previous administration’s ten year rates plan ended in tears in 2019 when the incoming government wrote off $1.1 billion that BC Hydro had not collected because its rates were too low. The new Premier, John Horgan, then gave rate-setting responsibility for BC Hydro back to the BCUC so that rates would be set properly in future.
I strongly suspect that BC Hydro’s new government-set rates are too low – why else would the government have intervened? If the rates the government chose were sufficient to cover BC Hydro’s costs, the BCUC would have cheerfully approved them.
The government is almost certainly counting on BC Hydro’s energy trading subsidiary to come to the rescue. Fortunately, this year Powerex’s profits were considerably higher than forecast ($627.8 million versus $224.2 million), so the government has got away with it, for now. Just as well, because with an annual deficit now reaching $11.6 billion, the province no longer has the cash to bail out BC Hydro as it did last time.
The biggest risk may be the exciting topic of accounting standards (well, exciting for some of us, anyway). As I’ve said before, BC Hydro’s accounting standards require that any amounts put into regulatory deferral accounts require the approval of the BCUC (it’s not good enough for the government to direct the BCUC to make the decisions). Without independent approval, the amounts should be recorded like any other costs, which reduces profit (and increases the provincial deficit).
The previous auditor general criticized the government’s use of a BC Hydro deferral account to provide a $100 bill credit for customers, causing $340 million to be returned to the utility. His predecessor was even more forthright, qualifying the provincial accounts for two years in a row because of the lack of independent BCUC supervision of BC Hydro.
The current (acting) auditor general showed no interest in the government’s shenanigans with BC Hydro’s deferral accounts in her most recent annual report. This is a pity, but that’s not necessarily the end of the story. Bond rating agencies aren’t “acting”, and have already criticized BC’s ballooning provincial debt; Moody’s downgraded our debt rating in April.
Conclusion
Premier Eby may not be the most autocratic leader in the northern hemisphere, but that’s no great comfort. He has neutered the BCUC’s powers over BC Hydro, increasing government control over the utility while maintaining the outward appearance that it is independently regulated. We have lost transparency and public participation in energy decisions that affect everyone in the province.
Moody’s maintains its “negative outlook” on BC. I share that sentiment.