On February 20, 2024, the BCUC approved BC Hydro’s request to change a rates decision from 2023. As a result, BC Hydro customers can expect a 2.3 percent increase in their bills in fiscal year 2025 rather than the decrease of 5.9 percent that the BCUC had previously approved.
BC Hydro requested the reconsideration because of a forecast increase in bills of 12.1 percent in fiscal 2026, due in large part to the new Site C dam coming into service that year. BC Hydro requested that the BCUC allow it to delay paying customers the refund they were due to receive in fiscal 2025 as a result of profits from Powerex, the utility’s unregulated energy trading subsidiary, and to use the refund instead to soften the increase in fiscal 2026.
In its reconsideration decision, the BCUC agreed with BC Hydro that its rates in fiscal 2025 and 2026 would be unusually volatile, and noted “the importance of taking measures to alleviate the anticipated, significant bill volatility and provide rate stability for all customers.”
The BCUC approved the creation of BC Hydro’s Rate Smoothing Regulatory Account, a rate smoothing account which will hold the balance of the refund until it is repaid to customers. The account will accrue interest at BC Hydro’s weighted average cost of debt, which will also be paid to customers.
Analysis
Rate smoothing is a common practice for utilities, and is consistent with the Bonbright Principle that rates should be stable, “with a minimum of unexpected changes seriously adverse to ratepayers” (Principles of Public Utility Rates, Bonbright et. al., 1988, p. 383). BC Hydro’s bill increase of 12.1 percent in fiscal 2026 would almost certainly constitute “rate shock”, something the BCUC seeks to avoid.
Approving the Rate Smoothing Regulatory Account to retain the refund that would otherwise have been paid to customers in fiscal 2025 can therefore be seen as a reasonable decision to smooth the bill increase anticipated in fiscal 2026.
However, the BCUC didn’t direct that the balance of the Rate Smoothing Regulatory Account would be paid out to customers in fiscal 2026. In fact, the decision is silent on the repayment mechanism and timing; these are decisions that will, presumably, be made in future BC Hydro revenue requirements proceedings.
In its application, BC Hydro presented a forecast of its bill increases to fiscal 2029, with and without the rate smoothing account:
| (%) | F2024 Decision | F2025 Decision | F2026 Forecast | F2027 Forecast | F2028 Forecast | F2029 Forecast |
|---|---|---|---|---|---|---|
| Annual bill impact (before reconsideration decision) | 2.2 | (5.9) | 12.1 | 0.2 | 7.4 | 2.5 |
| Annual bill impact (after reconsideration decision) | 2.2 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 |
It’s reasonable to assume from this forecast that BC Hydro anticipates using the Rate Smoothing Regulatory Account beyond fiscal 2026. Is this a good idea?
Possible inequities
Keeping the balance in the Rate Smoothing Regulatory Account for an extended period raises the possibility of inequities between groups of customers. Residential customers may value bill stability, as BC Hydro’s evidence from a 2021 residential customer survey suggests, but industrial customers are different.
As the Association of Major Power Customers of BC noted, ”ratepayers in 2029 will continue to benefit from balances that accrued between April 2022 and March 2023 at the expense of current customers…Customers today whose consumption reduces over the next three to five years will be harmed, and new customers who come online in the interceding years will unduly benefit.”
Unfortunately, BC Hydro states it has not conducted research into the opinions of its industrial customers, but instead relies on its “interactions” with them. It could be problematic for the BC economy if BC Hydro’s industrial customers do not share residential customers’ enthusiasm for delaying receipt of their bill refunds, as the Association of Major Power Customers of BC’s submission suggests is the case. Electricity is a significant cost component for some industrial customers, such as mining companies, which have choices as to where they invest.
Forecast risk
If BC Hydro’s forecasts all come to pass, then it’s possible the Rate Smoothing Regulatory Account could be used as far out as fiscal 2029 to keep customers’ bill increases to 2.3 percent per year. This would likely be below the rate of inflation, and thus in keeping with BC Hydro’s 2021 Mandate Letter from the BC provincial government, which contained the expectation that BC Hydro’s rates would “not increase above inflation, on a cumulative basis, over the next decade” (the government’s recent changes to its energy objectives said something rather different to the Mandate Letter).
But what if BC Hydro has underestimated its future cost increases? There are several reasons to be concerned, not least the final cost of the Site C dam, but let’s consider another budget risk for the utility.
Public policy analyst and former Assistant Deputy Minister Richard McCandless believes BC Hydro’s 2024/25 budget makes a “heroic assumption” that water inflows into the utility’s storage basins will return to their five-year average, justifying an increase of almost $600 million in budgeted income from Powerex’s energy trading. If the current year’s weather does not cooperate, BC Hydro may have to import rather than export energy, putting the $600 million at risk, and leading to higher net costs to BC Hydro.
If BC Hydro’s costs turn out to be higher than forecast, its two most likely choices are to raise rates, or to build up a deficit in the Rate Smoothing Regulatory Account. The last time BC Hydro used a rate smoothing account to dampen rate increases, it ended up writing off $1.044 billion of costs accumulated between fiscal 2015 and 2019 (see previous article).
So far, the BCUC has only authorized BC Hydro to record a surplus in the Rate Smoothing Regulatory Account; BC Hydro would need permission from the BCUC to turn the surplus into a deficit. The Rate Smoothing Regulatory Account is definitely something to watch for in future BCUC decisions on BC Hydro rates.
Finality of decisions
Whatever the reasonableness of this particular reconsideration decision, there can be no dispute that it changes a previous BCUC decision. The BCUC does not change its decisions often, but it seems the number of requests from BC Hydro to change previous decisions has suddenly increased.
BC Hydro has filed what appears to be an unprecedented four reconsideration requests in the three months following September 14, 2023, when the BC government installed a new BCUC chair:
- F2025 DARR and TIRR and Reconsideration Related to the TIRR, submitted October 30, 2023 (the request discussed in this article);
- Westbank Station Upgrade Reconsideration of G-47-18, submitted November 21, 2023;
- Reconsideration of BCUC Order G-91-23 Directive 20, submitted December 18, 2023; and
- Reconsideration of PBR Report Order G-388-21, submitted December 21, 2023.
The BCUC may change its decisions when it discovers it has made a material error of fact or law. These four requests, however, allege no such errors. Instead, they rely on the argument that facts or circumstances have materially changed, or that there is “otherwise just cause.”
The Supreme Court of Canada has warned that “It is in the interests of the public and the parties that the finality of a decision [by an administrative tribunal such as the BCUC] can be relied on” and that changing previous decisions “may undermine confidence in this fairness and integrity by creating inconsistent results and unnecessarily duplicative proceedings.”
Changing its decisions without truly compelling reasons runs the risk of undermining public confidence in the BCUC. For instance, if businesses cannot rely on the finality of the decisions of the BCUC, they may be reluctant to make energy-related investments in the province.
How keen will businesses be to bid on BC Hydro’s upcoming call for 3,000 gigawatt hours of clean power, if they believe their investments may be at risk of a change of heart at the BCUC, which approves utilities’ energy supply contacts?
BC Hydro is now “1 for 1” in its four reconsideration requests; I shall be keeping score.