Since 2008, BC Hydro’s residential customers have paid a two-tiered inclining block rate for their electricity consumption: a Step 1 rate until they reach a threshold (1,350 kWh per bi-monthly billing period) and a higher Step 2 rate thereafter.
In a recent decision the BCUC narrowed the gap between the Step 1 and Step 2 rates. Does this signal the end of the two-tier rate? And if so, what’s next for BC Hydro’s residential ratepayers?
The need for conservation
The gap between the Step 1 and Step 2 rates provides an incentive for residential customers to conserve energy (the rate was put in place at a time when BC Hydro was short of electricity and had to buy it from the market). By 2012, the Step 2 rate was 50 percent higher than the Step 1 rate.
This appears to have worked. According to a study conducted for BC Hydro in 2018, in fiscal years 2013 to 2015 the inclining block rate was responsible for annual electricity savings of 23 gigawatt hours (GWh), 3 GWh and 13 GWh respectively (for context, the new Site C dam is expected to generate 5,100 GWh per year).
The Step 2 rate remained 50 percent higher than the Step 1 rate from 2012 to 2021.
The holding pattern
But then things started to change. In 2022, BC Hydro submitted evidence that the two-tier rate was “no longer effective at generating new incremental savings” and that the Step 2 rate should be reduced, since the utility no longer had to purchase market energy.
BC Hydro also stated that it would file “a more extensive rate design application in late March 2022” which would “provide the opportunity for a broader exploration of residential rate design matters.”
The BCUC then went into a holding pattern, making only minimal changes to the gap between the rates while it waited for BC Hydro’s residential rate design application.
The holding pattern continues
Well, March 2022 came and went, and BC Hydro’s residential rate design application never arrived.
In its decision of June 2023, the BCUC was compelled to maintain the holding pattern; the gap between the Step 2 and Step 1 rates reduced marginally, to 44.4 percent.
In this proceeding, BC Hydro claimed it would “make best efforts to file an application [for a modified residential rate design] by no later than June 30, 2024.”
However, the BCUC appears to have been losing patience as fast as BC Hydro was losing credibility. The BCUC directed BC Hydro to file a residential rate design application by June 30, 2024. This order to BC Hydro still stands today.
Slowly at first, then all at once
2024 arrived, and the BCUC came out of its holding pattern. The BCUC approved the biggest ever reduction in BC Hydro’s Step 2 / Step 1 gap; the Step 2 rate is now only 28.4 percent higher than the Step 1 rate.
(data for this graph was provided by BC Hydro’s media team)
I criticized the BCUC’s 2024 decision on procedural grounds; this rather impactful change to BC Hydro’s rates was made without public input and no reasons were provided. But there’s more than inadequate process at issue here. The BCUC had choices; it did not need to accept BC Hydro’s proposal to close the Step 2 / Step 1 gap, but could have left the gap unchanged pending the utility’s upcoming residential rate design application.
There has not yet, in my view, been an adequate examination of the issues associated with abandoning BC Hydro’s two-tier rate structure. For example, I don’t think it’s a given that the conservation effects of the current rate design are no longer needed. After all, BC Hydro is now back in the market for electricity, having realized that it won’t have enough as early as late fall 2028. This is an eerie echo of the circumstances in 2008 that let to the two-tier rate in the first place.
BC Hydro’s next residential rate design application, expected in June 2024, is the venue where these issues can be properly examined. This is sure to be a critical proceeding for BC Hydro, and for the province’s electrification strategy.
Where do we go from here?
Here are some of the issues that should be addressed in BC Hydro’s next residential rate design proceeding.
First, as I mentioned above, how will BC Hydro continue to encourage conservation? FortisBC Inc., another electric utility, has already phased out its residential inclining block rate, and BC Hydro appears to be going the same way. But what will BC Hydro do instead to manage energy demand?
Running counter to conservation, however, is the desire to encourage more use of electricity to support the transition to a lower carbon economy. But for that, the right economic incentives need to be in place. Could we end up where BC Hydro started, back in 1962, with a declining block rate to encourage more use?
There is sure to be discussion on the effect of any rate changes on low-income customers. In its evidence to a 2017 BCUC inquiry, BC Hydro estimated that 87 percent of its low-income customers were better off under its inclining block rate than they would be under a flat rate. But this means they will be worse off under the flat rate that we seem to be heading for. Is this the time for a low-income rate, something the current legislation does not allow the BCUC to approve? And if so, who should pay for that, other ratepayers or taxpayers?
And how will BC Hydro’s recently introduced time-of-use rate for residential customers fit into the picture? This is currently optional, and seeks to move demand to times when BC Hydro’s system is not constrained, but does nothing for energy conservation.
Let’s do this
With the increasing electrification of BC’s economy, BC Hydro’s rates are sure to rise. How these rate increases are managed will go a long way to determine public acceptance of the energy transition.
Given the importance of these issues, we must hope that BC Hydro delivers its residential rate design application by June 30, 2024, and we don’t have a repeat of the cost of capital application delay that BC Hydro recently begged forgiveness for.