BC Hydro’s Large General Service Rate Design (LGSRD) application

By Tom Hackney, BCSEA Policy Ctte. Chair

In October 2009, BC Hydro applied to the Commission to implement rates to stimulate conservation among its Large General Service customers, i.e. the larger of its commercial (and institutional) customers.

Hydro’s proposal is complex, reflecting the diversity of customers in this class and the difficulty of designing a rate to expose as many customers as possible to the cost of new energy supply while also avoiding catastrophic increases for some customers or all customers. (The marginal cost of new energy supply is estimated at around $0.12/kWh, as compared to the current rate for LGS customers of about $0.05-0.06/kWh.)

Hydro proposes to split the existing LGS class (roughly 24,000 customers) into two smaller classes: LGS (Large General Service) and MGS (Medium General Service). (The regular General Service customers – a much larger number of customers – are not affected by this application.)

For the new LGS class, Hydro proposes what is called a “two-part rate.” An HBL (Historic Baseline) of energy consumption is established for each customer, based on their last three years of consumption. Consumption up to the HBL is charged at the “Part One” rate. Consumption up to 20% above the HBL would be charged at the “Part Two” rate, which is set at the cost to BC Hydro of acquiring new energy supply. Consumption down to 20% below the HBL would be rebated at the cost of new supply. Thus, consumption above the norm would be charged a lot extra, and consumption below the norm would be rewarded. (The 20% upper and lower limits are meant to limit the extent of higher or lower rates, so that customers that are opening new operations or closing down with not be rewarded or penalized unduly.)

For the new MGS class, Hydro proposes over six years to eliminate the existing “declining block rate,” i.e. customers are currently charged $0.0926/kWh for the first 14,800 kWh of electricity consumed in a month, and only $0.045/kWh for energy consumed in excess of that. This is considered bad for stimulating conservation.

BCSEA and Sierra Club of BC evidence

BCSEA and Sierra Club retained Paul Chernick of Resource Insight Inc to prepare evidence. The main problem Paul found is that the 3-year rolling HBL system largely counteracts the effects of the Part Two rate. For example, for a customer that implements a conservation measure and reduces their consumption of electricity, they would initially receive a rebate at the Part Two rate. But then their HBL would decline, and after three years, they would no longer receive the benefit of the rebate. This would greatly reduce any incentive they had to invest in conservation. Likewise, a customer whose consumption increased would see their HBL rise, and in a short time, their extra consumption would no longer be charged at the high Part Two rate.

Ideally, we say the HBL should not change, and customers that consume more would always be subjected to the higher rate, while those that consume less would always benefit from a rebate. Or, the HBL might be allowed to change, but not based on the amount of electricity consumed; rather, on non-energy parameters like the number of additional people employed or the additional floorspace acquired. Thus, for example, customers who employed a lot more people could get a higher HBL and thus be allowed to consume more energy before being subjected to the Part Two rate. (Hydro would argue that this causes unacceptable administrative costs.)

Strategy in the LGSRD proceeding

BC Hydro and the other intervenors want to avoid a hearing and resolve the application in a Negotiated Settlement Process (NSP). Reason: they fear the Commission’s “wild card” factor. In the RIB application, the Commission insisted on last-minute changes to BC Hydro’s proposed rate design, and in the 2007 Rate Design Application, the Commission rejected much of Hydro’s work. In an NSP the stakeholders could to make an agreement which would then be difficult for the Commission to change.

Because BCSEA & Sierra Club filed evidence with a cogent critique of Hydro’s proposal, we can effectively insist on an oral hearing before the Commission; or we can agree to negotiate. This gives us leverage with Hydro and the other intervenors, and an interesting and exciting change. Usually, the interests of stakeholders representing traditional ratepaying groups are given more credence than ours.

We have determined that we should aim for some tangible improvements, even if modest, rather than insisting on an ideal rate design which is very unlikely to be accepted by Hydro or the Commission. Also, we will improve our credibility if we participate in a successfully negotiated outcome.

We can live with having the Two-Part rate applied to all the LGS customers, so that there would be no distinction between LGS and MGS. In addition, we will try to get the HBL set to a ten-year average, reducing the speed at which the Part Two rate ceases to be applied to increases or decreases in usage.

BC Hydro has now written to the Commission to request that an NSP be added to the proceeding schedule. If accepted, it would likely take place toward the end of March.

Meanwhile, our evidence has attracted a fair amount of interest, and five intervenors, including BCUC and BC Hydro have made Information Requests of us. We are busy preparing responses.

Background: BC Hydro’s recent history, and the principle of revenue neutrality

The BC Government Energy Plans of 2002 and 2007 both contain policies to encourage and induce BC Hydro and the Utilities Commission to implement electricity rates to encourage conservation.

In 2005, BC Hydro applied to implement a “TSR” inclining block rate for “transmission service” customers (i.e. industrial scale customers accepting electricity at transmission voltages). Consumption above a customer’s usual consumption (customer baseline; CBL) would be charged at the marginal rate to acquire new supply; consumption below that rate would be charged a much lower rate, reflecting the low cost of “heritage” electricity. The Commission accepted the application, and it was implemented.

In 2007 BC Hydro submitted its Rates Design Application, whose main objectives included: (1) rate “rebalancing”: eliminating cross-subsidies between rate classes (residential customers pay only about 96% of the cost of servicing them; industrial customers about 99%; commercial customers over-pay to compensate); (2) eliminate the “E-plus” residential rate by which some customers benefit from very low rates on the (realistically false) premise that their service is interruptible; (3) adjust the tariff for commercial customers so that they will not be charged lower rates when they increase their consumption. The Commission approved (1) and rejected (2) & (3). Government intervened for political reasons to prevent (1) (the rate “rebalancing”).

In 2008, BC Hydro applied for the Residential Inclining Block (“RIB”) rate. Residential customers would be charged a low rate for an initial block of energy, and a rate close to the marginal rate for new supply for consumption above that. The Commission approved the application, imposing some last-minute changes.

An underlying principle for all the rate design applications is that of “revenue neutrality,” i.e. the principle that any change in rate design must not result in BC Hydro collecting more money from its residential, commercial or industrial customers than it would in the absence of a “conservation rate.” In practice this means that when BC Hydro implements a high rate of energy for consumption above a given amount (e.g. the CBL for industrial customers), it must charge a correspondingly low rate to energy consumed below that amount. The principle of revenue neutrality is deeply rooted in utility practice throughout North America, based on basic notions of fairness: utilities are natural monopolies, and they should not be allowed to charge market rates; rather they should be limited to covering their costs and making a reasonable return. As important as this principle is, it creates a serious limitation to conservation rates because the conservation benefits of charging the marginal cost of supply for some of a customer’s consumption must be counterbalanced by charging extra low rates for the rest, such that the overall bill is not greatly affected.