BC Hydro needs everything to go right for the next two years. Analysis of its latest annual reports suggests the early signs are not encouraging.
Introduction
Once upon a time (October 2023), BC Hydro thought it could keep bill increases to 2.3 percent a year. Customers would consume their electricity happily ever after (well, until 2029, anyway).
This fairy tale lasted until March this year, when the government stepped in, bypassing the “independent” regulator, the BC Utilities Commission (BCUC), and set BC Hydro’s rates for the next two years. Average bill increases will now be 3.75 percent for each year.
As I said at the time, the rates set by the government are probably still too low to cover BC Hydro’s ever-increasing costs.
We now have BC Hydro’s annual reports for 2024/25, how are things going?
Financial results
BC Hydro has published its annual service plan report for the year ended March 31, 2025 (F2025), and the lesser known annual report to the BCUC which contains some additional details.
BC Hydro’s net income for F2025 looks healthy enough – a profit of $587 million – but the figure is so heavily manipulated that the term “fairy tale” seems somehow inadequate. It started out as a loss of $15 million, but turned around thanks to a transfer of $602 million from “regulatory accounts.”
Since the net income figure tells us little about the utility’s financial health, we have to look instead at BC Hydro’s regulatory accounts (also known as deferral accounts).
Where the magic happens
BC Hydro has 25 regulatory accounts significant enough to be named in the annual report (see Attachment 1 below). Some of these have existed for years, many were properly approved by the BCUC (although some weren’t, as we’ll see later).
Given the amount of detail, it’s more helpful to look at the total balance to spot trends:
Ten years ago, the total balance was around $6 billion. That is to say, ratepayers owed BC Hydro $6 billion more than they’d paid in rates. You may recall that in 2019 the incoming Premier, John Horgan, used taxpayers’ money to write off $1.1 billion, which explains the sudden improvement in that year.
The Premier also gave back to the BCUC the responsibility of independently setting BC Hydro’s rates – realistic rates and the profits from BC Hydro’s energy trading subsidiary, Powerex, explain the steady improvement since F2020.
What’s clear, though, is that after some healthy declines, regulatory account balances are now growing again. The amount owed to BC Hydro has grown by $1.5 billion in the last two years.
DARR to be different
Given the esoteric and long-standing nature of some of these regulatory accounts, it helps to look more closely at a subset of them whose balances can change quite dramatically. This subset includes the six accounts which are paid off using the Deferral Account Rate Rider (known by the awful acronym DARR), plus two other closely related accounts (Inflationary Pressures and Rate Smoothing).
The balances in these accounts appear somewhat more promising:
Unlike the total regulatory accounts, the balances in the selected accounts have been negative since F2019, the year of the $1.1 billion write off. That is, they represent money that BC Hydro owes to ratepayers. The position has deteriorated since F2023, but still, BC Hydro is holding a $712 million surplus on behalf of ratepayers in these accounts.
The biggest drivers of these account balances are: Powerex profits; energy costs; and, more recently, operating costs. Two questions arise:
- Why has the situation got worse since F2023? and
- What do we think will happen over the next two years?
Last two years
Things have been pretty rosy for Powerex in the last few years, with what I believe is record trading income.
BC Hydro uses some of the trade income to subsidize rates every year, but any surplus profits are stored in the Trade Income regulatory account. Despite still being well above the historical average, trade income is now trending downwards. As a result, it’s not been sufficient to overcome BC Hydro’s unexpectedly high cost of energy.
Thanks to the recent drought, imports have added over $1.8 billion in energy costs since F2023. It’s not just imports though – the cost of BC Hydro’s own electricity has also been higher than planned, by some $170 million in the last two years.
This overspending has shown up in the two cost-of-energy regulatory accounts (Heritage and Non-Heritage), whose combined balances jumped in F2024, along with the system imports, and are still rising.
The new item in the last two years is the Inflationary Pressures account. This was ordered by the government in 2022, and allows BC Hydro to hold back certain unexpectedly high operating costs (including labour costs) incurred from F2023 to F2025, and to collect them from ratepayers in F2026 and F2027 instead.
And some of BC Hydro’s operating costs have been increasing dramatically, far faster than consumer price inflation:
As a result, the balance in the Inflationary Pressures account has risen by $171 million in the last two years.
Next two years
BC Hydro’s first quarterly report of F2026, for the quarter ending June 30, 2025 (Q1), is also now available. It suggests things are not exactly on track.
When setting BC Hydro’s rates, the government assumed much higher trade income in F2026 and F2027 than usual. Powerex needs to earn $547 million in each of these years, a figure higher than all but three years in its history, or BC Hydro will not be collecting enough revenues and regulatory account balances will rise.
Powerex trade income is not published quarterly, but there are some worrying signs already. BC Hydro’s Q1 trade revenue dropped more than 30 percent to $154 million this year, which suggests trade income is also declining. The report also shows that water inflows and reservoir levels are lower than average, suggesting fewer opportunities to sell surplus energy.
And energy costs still appear to be a problem. Although they are about 1 percent lower than Q1 last year, rates were set based on BC Hydro’s forecast that they would drop by about 33 percent in the next two years (from $2.86 billion in F2025 to $1.96 billion in F2027). If they don’t start to drop soon, regulatory account balances will build up. And the lower-than-average reservoir levels suggest we will continue to import electricity for one more year at least.
Rider on the storm
In setting BC Hydro’s rates, the government has also taken control of a key mechanism for collecting regulatory account balances. This has reduced flexibility just when BC Hydro may really need it.
For many years, the balances in selected regulatory accounts have been paid off the Deferral Account Rate Rider, a separate line item on the bill. In 2023, the BCUC insisted that BC Hydro recalculate the amount of this rate rider annually, to make it more responsive to changing conditions.
The government reversed this policy in March, locking in the rate rider for the next two years. What’s more, the rate rider is currently paying a refund to ratepayers, 4.5 percent this year and 1.5 percent next year, using the $712 million balance in the regulatory accounts.
That’s fine, as long as Powerex continues its run of record trading results, the years-long drought comes to a sudden end, and BC Hydro takes control of its spending. What could possibly go wrong?
The End
It could all come right, of course. I hope it does. But I remain convinced that the government set BC Hydro’s rates too low, and abandoning the process of setting the Deferral Account Rate Rider annually was a mistake.
The most likely outcome, in my view, is that the $712 million surplus will be exhausted before the end of F2027, and regulatory balances will build fast. The choices will then be a sharp increase in electricity rates in F2028, a taxpayer-funded write-off, or, with an election due the following year, kicking the can further down the road.
I think I can guess what’s going to happen.
Attachment 1 – Regulatory Accounts
Source: BC Hydro 2024/25 annual report