The rate increase was necessary to pay for service reliability improvements. But does Nelson Hydro really need to file a rates application every year?
Introduction
Municipal energy utilities are not usually regulated by the BC Utilities Commission (BCUC), but Nelson Hydro is unique because it serves customers outside its city boundaries (the “rural” customers). The BCUC sets the rates for these rural customers; Nelson’s elected council sets the rates for the “urban” customers within the city.
The BCUC recently approved a 7.54 percent rate increase for Nelson Hydro’s rural customers, of whom there are fewer than 5,000, according to its rates application.
Despite being a small utility, Nelson Hydro’s regulation by the BCUC is anything but trivial. In setting the utility’s rates over the last decade, the BCUC has dealt with such issues as its jurisdiction over municipal utilities; its role in regulating service reliability; and how costs are shared in an integrated electricity distribution system.
Nelson Hydro’s regulatory proceedings sometimes illustrate the larger issues in BC’s energy regulation. This one is no exception.
The rate increase
Let’s start with the magnitude of the 2025 rate increase. The BCUC reviewed Nelson Hydro’s proposed costs, and for the most part agreed they were necessary to provide service. There was one exception.
Nelson Hydro tried to argue that its 10.4 percent after-tax return should be increased to 14.25 percent “before tax” using a tax rate of 27 percent. The only problem with this, as the BCUC rightly pointed out, is that municipalities don’t pay tax! This request was denied, and Nelson Hydro’s ratepayers will pay slightly less as a result.
But still, 7.54 percent is considerably above the general rate of inflation (currently 1.7 percent in BC). It’s also quite a bit higher than the 5.65 percent increase approved for FortisBC, the electricity utility that serves most of the southeastern corner of the province. BC Hydro’s rates only went up 3.75 percent, but as they were set by the government rather than the regulator, it’s probably not a fair comparison.
This follows increases of 2.5 percent in 2022, 9.87 percent in 2023, and 4.21 percent in 2024, a cumulative growth of 26 percent over the last four years. While it may be of little consolation to Nelson Hydro’s customers, there are good reasons for these increases.
The utility appears to have kept its operations and maintenance costs well under control – these only rose 1.8 percent in 2025. Contrast that to BC Hydro, where 2024/25 personnel costs rose 12 percent, and materials and external services costs rose 19 percent.
The main reasons for Nelson Hydro’s rate increases are essentially two-fold: the increasing cost of electricity purchased from FortisBC, and spending to improve service reliability.
Power purchases
Nelson Hydro generates electricity at its Bonnington Falls power plant on the Kootenay river, but since 1956 has purchased any additional electricity it needs from FortisBC (formerly West Kootenay Power and Light). At certain times of the year, purchases (or “imports”) account for more than half of Nelson Hydro’s total demand:
As FortisBC’s rates have increased, so has Nelson Hydro’s cost to purchase that electricity. There’s very little Nelson Hydro can do about this. The situation for Nelson’s rural customers could have been a lot worse though.
In 2019, Nelson Hydro applied to the BCUC to increase rural rates faster than urban rates, after years of identical rises for the two groups. The utility argued that the purchased energy was mostly for the benefit of rural customers, but did not justify this with a cost-of-service analysis. The BCUC rejected the request, and after a long-running dispute, ultimately ruled that since the purchased energy was shared between all customers in one integrated network, the costs should be shared proportionately.
The BCUC continues to have no jurisdiction over Nelson Hydro’s urban rates, which are now lower than rural rates. But it did ensure that rural customers, who unlike urban customers have no vote in Nelson council elections, would only pay their fair share of Nelson Hydro’s costs.
Service reliability
Fair rates aren’t necessarily lower rates, though. Section 25 of the Utilities Commission Act requires utilities to provide adequate service, and the BCUC must set rates sufficient to allow them to do that.
The quality of Nelson Hydro’s service to its rural ratepayers took a turn for the worse after 2016. The graph below shows the “index of reliability” (IOR) for Nelson Hydro versus the Canadian Electricity Association (CEA) average:
One of the main causes of the reliability problem was insufficient tree trimming near its distribution lines. Despite increasing its 2019 tree trimming budget by 33 percent, Nelson Hydro’s service levels were not getting better. In 2021, the BCUC found that the level of service was “not adequate”, and encouraged Nelson Hydro to do more “even though this may increase rates.” It threatened to use its powers under the Utilities Commission Act to order service improvements, if none were made voluntarily.
Vegetation management budgets rose from $500,000 in 2021 to $885,000 in 2023, contributing significantly to the recovery in system reliability. Additional spending on protective guards around substations probably also helped (the July 2021 failure of Nelson Hydro’s Mill Street substation was apparently “wildlife-initiated”). As a result, service levels are back on track:
It’s not only small utilities that need to be reminded to spend money, even if it raises rates. In 2020 the BCUC expressed concern about whether BC Hydro was spending enough on tree trimming, given that vegetation-related outages almost doubled from 1,689 in 2014/15 to 2,920 in 2018/19, but the utility had not asked for a budget increase. BC Hydro was directed to ensure that it asked for sufficient funds in its next rates proposal.
Summary
Nelson Hydro’s rural and urban rates have recently diverged, with the BCUC’s blessing. The difference was justified in a cost-of-service analysis, which identified some utility assets and costs that really are applicable only to rural ratepayers. On January 1, 2025, residential rates were:
| Rural customers | Urban customers | |
| Basic charge per period | $21.56 | $19.74 |
| Energy charge per kilowatt hour | 13.97 cents | 12.79 cents |
Still, what the BCUC approved is considerably less than the difference proposed by Nelson Hydro. Rural ratepayers pay about the same as BC Hydro customers, and a little less than FortisBC customers:
Conclusion
As I hope I’ve demonstrated, there are benefits to regulation, but it would be nice if it could be done more efficiently. This is especially true for small utilities, for whom the effort to prepare BCUC applications and answer the regulator’s questions is relatively onerous and expensive. And these costs are ultimately shouldered by ratepayers, as the costs end up in rates.
To reduce regulatory costs, in 2019 the BCUC suggested that Nelson Hydro could file a multi-year rates application rather than having the BCUC review an application every year. However, Nelson Hydro then filed separate rates applications in 2021, 2022, 2023, 2024 and 2025. In 2024, and again this year, the BCUC suggested Nelson Hydro consider a more efficient way to set its rates.
Now that the BCUC has approved a fair split of costs between rural and urban ratepayers, it should be possible to have a much simpler annual rate-setting process, even if the utility isn’t comfortable with multi-year applications. Nelson Hydro really should try to do this, for the sake of all its ratepayers.