Today’s rate design is being phased out to encourage the transition to a cleaner economy. Most BC Hydro residential customers, especially those on low incomes, will pay more as a result.
Introduction
Rate designs are among the most important and influential decisions made by the BCUC. They don’t happen often (BC Hydro’s last comprehensive rate design application was in 2015, and that was only the third in its history), and when they do, they usually signal a major shift in thinking. This one is no exception.
A utility’s rate design sets out how it will collect revenue from its customers. Common rate structures for residential customers include a fixed charge and a charge that varies with usage, but other schemes include a demand charge based on the maximum amount of energy consumed in a month, for example.
On February 24, the BC Utilities Commission (BCUC) approved a new rate design for residential customers of BC Hydro, the province’s largest electrical utility. The most significant change will be that by 2028, there will be just one rate for electricity usage rather than the two rates we have today. There are some other changes, such as abandoning the different rates for “non-integrated” (i.e. off grid) areas, but those are for another day.
Conservation rate
Since 2008, BC Hydro has had a fixed Basic Charge (currently 22.53 cents / day) and a two-tier energy charge based on usage. Customers today pay 10.97 cents for each kilowatt-hour (kWh) of electricity they use up to a threshold of 675 kWh per month (the Step 1 rate), and 14.08 cents / kWh for any usage above that threshold (the Step 2 rate).
The two-tiered rate (also known as the “residential inclining block” or RIB rate) was introduced to encourage customers to conserve electricity. The higher Step 2 rate gave customers more of an incentive to reduce their usage, for example by investing in more energy efficient appliances.
It appears to have had some success. According to BC Hydro, median residential consumption has dropped from 762 kWh per month to 673 kWh per month (a drop of around 12 percent) since 2008, and the two-tier rate alone is estimated to have saved up to 479 GWh in that time.
However, a 2018 report concluded that the two-tier rate “appeared to yield little or no energy savings” in fiscal 2016 or 2017, and BC Hydro stopped evaluating the conservation results after that.
Electrification policy
More recently, the government’s priority has switched from trying to conserve electricity to encouraging us to use more of it. The 2018 CleanBC Plan, updated in 2023, called for using more electricity to reduce greenhouse gas (GHG) emissions in the economy, for example by replacing natural gas boilers with heat pumps for building heat, and switching to electric vehicles.
With BC Hydro’s two-tier rate structure, additional electricity use could push people over the 675 kWh per month threshold, after which they would start paying the higher Step 2 rate on the incremental consumption. Hence BC Hydro’s request to “flatten” the rate, i.e. to merge the Step 1 and Step 2 rates into one, to avoid a disincentive or barrier to using more electricity.
Rate flattening
Ever since 2015, BC Hydro’s Step 1 and Step 2 usage rates have increased in unison. If the BCUC approved a 4 percent overall rate increase, both usage rates would rise by 4 percent, preserving the gap between them.
However, this changed in 2021, when the Step 2 rate was fixed at 14.08 cents / kWh. Because BC Hydro still needs to collect enough revenue to pay for its total costs, a fundamental principle of rate design, it had to increase the Step 1 rate faster than its overall rate increase to compensate for not increasing the Step 2 rate.
As a result, the gap between the Step 1 and Step 2 rates has been closing ever since, and the Step 1 rate is forecast to catch up to the Step 2 rate by F2028, as shown in the graph below:
The cost of flattening
Rate design changes can be controversial, as they create winners and losers. For every customer who pays less under a new scheme, someone else has to pay more. Who wins and who loses here?
Just about everyone loses, it turns out. According to BC Hydro’s application, 71 percent of its residential customers consume 12,000 kWh per year or less, and will pay more as a result of losing the lower-priced Step 1 rate.
Consider some illustrative examples. The table below shows the effect on different customers of switching from today’s two-tier rate to BC Hydro’s existing flat rate (a service that BC Hydro offers to just a few customers).
Median-use customers will see an increase of 10.9 percent in their cost of electricity, and an average customer an increase of 5.7 percent. Only customers over 1,150 kWh per month would gain from the switch. The detailed calculations are in Attachment 1.
Bear in mind this is just the effect of moving from the two-tier rate to today’s flat rate. The total increase in the cost of electricity by F2028, when the transition is complete, will be considerably higher.
It’s worse for low-income households. BC Hydro estimates that around 81 percent of low-income customers have average consumption levels below 12,000 kWh per year, all of whom will pay more under a flat rate.
Fortunately, BC Hydro says that no customer will experience “rate shock”, by which they mean an increase of 10 percent or more in their annual bill. Profits from Powerex, BC Hydro’s trading subsidiary, continue to subsidize the majority of BC Hydro’s cost increases, despite reduced electricity exports caused by the current drought. Also, the BCUC has approved a deferral account to allow BC Hydro to smooth increases over several years.
Risks
Another aspect of the BCUC’s decision is that BC Hydro residential customers who don’t want to wait until 2028 will be able to choose a flat rate (currently 12.21 cents / kWh from April 1) any time they want. This has the potential to cause the Step 1 rate to increase even further.
BC Hydro estimates that a considerable number of customers could benefit from switching early to the flat rate (46.5 percent of customers in F2026 and 70 percent in F2027). This is great news for those customers, whose savings could be nearly $26 million over the two years, but would not be so great for everyone else. BC Hydro would have to recover the lost revenue with yet more increases to the Step 1 rate, beyond those described above.
One sharp-eyed intervener also spotted that customers could game the system by switching backwards and forwards between the stepped rate over the summer, when their usage would all be at the lower rate, and the flat rate over the winter, when heating would cause some of their usage to be in the higher Step 2 rate. BC Hydro estimates this will only cost them around $2 million over the two years before the rate flattens out; let’s hope they’re correct, otherwise there will be yet more increases in the step 1 rate.
Conclusion
Most BC Hydro customers, especially those on low incomes, will pay more for their electricity as a result of this change to the rate design.
That doesn’t necessarily make it a bad decision by the BCUC. All rate design decisions involve trade-offs, and at least there are mechanisms in place so that customers will (probably) avoid rate shock.
But it’s clear that BC Hydro’s preference is to prioritize electrification over affordability, despite the new Minister of Energy having affordability front and centre in his marching orders for 2025.
It seems that if the majority of electricity customers have to pay more for a cleaner economy, then so be it.
Attachment 1
Here are the calculations to compare the cost of electricity consumption under the current BC Hydro two-tier rate and flat rate schemes. These costs do not include other elements on customers’ bills, such as the Powerex subsidy.
