BC Hydro’s third quarter financial results are out. The promise of limiting bill increases to 2.3 percent for the next four years is looking distinctly shaky.
Editor’s note: Since this article was published, the government has announced that BC Hydro’s rates will increase an average of 3.75 percent annually for two years.
This article was edited on March 23 to remove an erroneous description of the trade income deferral account.
First, the good news
BC Hydro’s results for the nine months to December 31, 2024 show a profit of $324 million, down slightly ($20 million) on the previous year. A striking improvement was that electricity and gas purchases were down $580 million (26 percent), primarily due to lower electricity imports at lower average prices than last year. That’s the good news.
And then, the expenses
In BC Hydro’s previous fiscal year operating expenses grew by just over 8 percent. The main causes were personnel costs going up 7 percent, and materials and external services costs growing 22 percent. I said last September that this was too high, and would not end well.
It’s getting worse. In the last nine months, the personnel costs were 13 percent higher than the same period in the previous year, and materials and external services 23 percent higher.
And this year, there’s another concern with operating expenses: amortization costs went up 9 percent. This was primarily due to the first two generating units of the new Site C dam going into service, so expect this to make an even bigger difference when the dam is fully operational.
I’ve said it before, but I’ll say it again. These cost increases will eventually show up in higher bills for customers, whatever regulatory magic is used to make them disappear temporarily.
The grand illusion
And magic it is. The recent results show that BC Hydro really made a loss of $131 million, not a profit. However, thanks to the conjuring trick of regulatory deferral accounts, the utility was able to improve its net income by $455 million, turning the loss into a profit.
Improving net income by $455 million sounds like it would be a good thing, but in reality it’s not. This is just deferred pain – the money will have to be paid back by ratepayers eventually. And this is just the amount for the last nine months. The total outstanding bill in the deferral accounts is now $2.3 billion, up from $2.2 billion in December 2023.
So where did this extra $455 million of future customer bills come from?
It never rains…
The largest single factor is that, despite the lower import costs recently, BC Hydro still spent $141 million more than it had planned on market energy in the last nine months. Sure, that’s not as bad as the $583 million for the same period in the prior year, but it still adds to the total overspending on energy sitting on the books, which has now reached $1.4 billion. To make matters worse, BC Hydro also added $37 million of interest on the outstanding balance that will also have to be paid back.
This may not get better fast. The latest (March 2025) numbers from the government show that the BC snowpack is running 27 percent below normal, and we’re nearly at the end of the snow season. This could lead to increased imports over the next year, and higher-than-forecast costs.
A drought could also lead to decreased export revenues. BC Hydro’s recently-released service plan shows it expects to export 4,046 gigawatt hours (GWh) of electricity next year, even though in the drought-affected 2023/24 year it only managed to export 613 GWh. This may turn out to be a tad optimistic, to say the very least.
We should also keep an eye on the innocuously named “inflationary pressures” account, which contributed $83 million to the outstanding deferral account balances last nine months. I’ll have something to say about that in the not-too-distant future.
Trading places
And now that we have a trade dispute with the US, American customers for BC Hydro’s electricity may choose to buy elsewhere to avoid surprise tariffs being imposed, or even being threatened with their supply from Canada being cut off. There are already reports of reduced activity on the transmission lines between Quebec and New England.
Reduced exports of electricity would hurt BC Hydro directly, but Powerex, its energy trading subsidiary, stands to suffer too. BC Hydro is counting on Powerex’s profits, known as trade income, to subsidize customer bills for the next four years. Even without this trade dispute, the trade income projections were always too rosy.
BC Hydro forecast that trade income would be $475.3 million per year from 2025/26 to 2028/29, based on a five-year average of previous results. But those five years were a historical aberration (BC Hydro referred to the market conditions in 2022/23 as “extraordinary”).
The latest results show that only $17 million has been added to the trade income deferral account so far this year, well short of the $475.3 million assumed for the full year.
Unless Powerex’s income picks up significantly in the fourth quarter, there could be a $400 million plus gap in BC Hydro’s affordability plan this year, and quite likely for next few years too.
Conclusion
This might appear unduly alarmist. After all, BC Hydro’s new rate smoothing account, approved by the BCUC in February 2024, has a healthy balance of $316 million ready to give back to ratepayers in future. Plus, there is $1.8 billion of previous trade income from Powerex in reserve.
The problem is that these amounts have already been assumed when BC Hydro stated last year that it could limit bill increases to 2.3 percent a year until 2028/29. Whenever anything doesn’t go according to plan from now on, either bills will have to go up by more than 2.3 percent, or BC Hydro has to defer costs to its rate smoothing account, storing up more problems down the road.
The province, which owns BC Hydro, wrote off $1 billion of the deferral account balances in 2018, setting the rate smoothing account balance to zero. On that occasion, taxpayers picked up the tab so that ratepayers wouldn’t have to. With the provincial budget having moved from a surplus to a projected $10.9 billion deficit for 2025/26, that trick is unlikely to work again.