BC Hydro’s operating expenses are rising considerably faster than inflation. This will work its way through to increased electricity rates.
The latest results
BC Hydro’s latest annual report (for 2023/24, or F2024) shows that the company’s operating expenses are 5 percent higher than the prior year. However, these are the consolidated figures for BC Hydro, which include the costs of unregulated businesses such as PowerEx, the trading subsidiary, as well as the regulated business that provides electricity to BC customers.
Go to the report BC Hydro files with the BCUC, and you see a clearer picture. Operating expenses for the regulated business increased from $1,444.0 million in F2023 to $1,561.4 in F2024, an increase of just over 8 percent. This increase is now considerably higher than inflation, which is running at only 2.5 percent.
What’s going on?
The report to the BCUC doesn’t explain the increase, but the annual report suggests two major factors: personnel expenses, and materials and external services, which have increased 7 percent and 22 percent, respectively, since last year.
While these consolidated numbers include non-regulated expenses, BC Hydro’s explanation of the increase all pertains to the regulated business. Reasons for the increase include vegetation management costs, rebates for electric vehicles and costs for “demand-side management” programs.
The increase in vegetation management costs is not a surprise, after the BCUC directed BC Hydro in 2020 to address “possible vegetation management issues.” Proper tree trimming is necessary to keep transmission lines operating safely and is a reasonable cost of service.
But it does seem that at least some of the increase, such as rebates for electric vehicles, is due to government policies rather than being necessary to provide electricity service to customers. The same is true for demand-side management, which includes energy efficiency programs, but may also include programs to encourage switching from other fuels to electricity (electrification).
If the government is really concerned about the affordability of electricity, it could stop imposing these policy costs on BC Hydro, which then passes them on to all ratepayers, including low-income customers. Taxation might be a more equitable (and transparent) way to fund these costs.
Lost opportunity
BC Hydro cannot continue to increase its operating costs, whatever the cause, without passing those increase on to customers. Eventually they will show up in higher rates, regardless of any temporary “rate smoothing” mitigations the BCUC might approve to soften the blows.
The BCUC warned BC Hydro in the F2022 revenue requirements decision that its “significant and potentially lasting” increases in controllable costs would cause future problems for affordability if not addressed by BC Hydro’s management.
Partially in response to this increasing cost trend, the BCUC decided to move BC Hydro to performance-based regulation (PBR), where the utility would take more of the risk of controlling its own costs, rather than passing cost increases on to ratepayers. This approach has been used to regulate the two FortisBC utilities for decades and has saved millions of dollars for ratepayers.
Sadly, after the government replaced the chair of the BCUC last September, BC Hydro was able to convince the BCUC to abandon the move to PBR, so the regulator’s opportunity to impose this cost discipline on BC Hydro’s management has been lost.
There may be worse news to come
The above-inflation increase in BC Hydro’s operating costs is certainly a concern, but the latest annual report may have revealed a much bigger problem lurking in the background. Next up: deferral accounts!