In a move supposed to “keep electricity rates affordable” for “B.C.’s families,” the BC government has dictated to the BC Utilities Commission the rates it must set for BC Hydro in the next couple of years. On 22 May, cabinet issued Direction No. 3 to the Utilities Commission, with a detailed set of instructions on the decisions it must make in the review of BC Hydro’s Revenue Requirements Application.
In March of 2011, BC Hydro filed its Revenue Requirements Application for approval by the BC Utilities Commission for the fiscal years (i.e. years ending in March) 2012 to 2014, seeking permission to increase electricity rates by 9.73 percent in each of those three years, for a total rate increase of thirty-two percent. The main drivers for the increase were increased capital expenditures to refurbish Hydro’s aging infrastructure and new power supply contracts coming into effect at rates much higher than the current cost of Hydro’s “heritage assets” (mainly dams built in the 1960s and 1970s, whose costs are now amortized).
Government responded to Hydro’s application by feigning surprise and ordering the government staff Review of BC Hydro, claiming that the rate increase was “too high.” But by law, BC Hydro’s rates are set according to its cost of providing electricity service, plus a prescribed “return on deemed equity” (a proxy for a profit margin), which is returned to the shareholder, the BC government. This rate of return had been set at 12.75%.
In response to government’s review, Hydro asked the Utilities Commission to adjourn the Review Requirements proceeding. The review duly found many instances of alleged over-spending by BC Hydro, and in November 2011, Hydro duly filed a revised Revenue Requirements Application with the Commission, with rate the proposed rate increases essentially halved, to 8.0%, 3.91% and 3.91% for F2012 to F2014, respectively.
BCSEA believes these reduced rate increases do not reflect the actual costs BC Hydro faces, and the actual rate increase should be close to what Hydro initially applied for. Government’s pressure to keep the rate increase low has caused several significant distortions:
1. Costs for current things like the purchase of energy are being put into “deferral accounts” where they accumulate as debt that ratepayers – or someone – must pay in the future. There is some justification for cost deferrals when the cost of a capital asset is spread over the years when its benefits will be felt. And there is some justification to smooth by deferral the fluctuating costs and benefits of hydro generation in high and low water years. But this must be carefully controlled to avoid the inappropriate deferral of present costs to future ratepayers, known as “intergenerational inequity.” Hydro’s deferral of some energy purchases and some smart meter capital costs appear not to be justified. Meanwhile, given BC Hydro’s aging infrastructure and current growth in demand, we can expect many expensive capital projects to come forward in the near future. BC Hydro forecasts that the total of its deferrals will balloon to $6 billion in the next few years, making the pressure on rates even higher that it is now.
2. Hydro has been persuaded to make overly optimistic estimates of trade revenue profits, exposing it to increased risk of a larger than expected shortfall of revenue – again, increasing debt and intergenerational inequity. (Direction No. 3 mitigates this, setting the expected trade profits lower than in Hydro’s revised application; however, in the current market situation of over-supply, it may still over-estimate revenues.)
3. Hydro has been persuaded to scale back and cut costs on plans to invest in energy conservation measures, which could be expected to put off the need for new generation resources and thus reduce costs to Hydro and ratepayers.
With its revised Revenue Requirements Application, BC Hydro made clear its intention to insist on the proposed reduction in rate increases. Normally, the Utilities Commission looks to cut back rate increases in order to counter budget padding and over-spending and protect ratepayers. The review process is not structured to force a utility to spend more money because the utility is supposed to be given the freedom to manage its own business. In this review, however, the BC Utilities Commission took the unusual move of making an interim ruling to raise BC Hydro's rate rider from 2.5% to 5%. (The rate rider is an amount charged on a customer's overall Hydro bill that is applied to paying down the deferral accounts.)
This action signals the Commission’s skepticism that BC Hydro’s rates will cover its actual costs and the Commission’s willingness to oppose the government-negotiated reduction on Hydro’s rate increase. Direction No. 3 imposes government’s superior might on the Commission.
- Government has dictated that BC Hydro’s rate increases will be approximately 17%, the same total as in Hydro's revised application, about half what Hydro had originally applied for to cover its costs.
- Government has allowed to stand the rate rider increase to 5%, speeding the rate at which deferral accounts will (hopefully) be cleared, but at the expense of other cuts that Hydro must make elsewhere to keep the overall rate increase down to 17%.
- Government has consented to relieve some of Hydro’s costs, reducing its return on deemed equity from 12.75% in F2013 and F2014 to 11.73% and 11.84%, respectively. BC Hydro calculates that the reduction to the dividend to government will be $75 million.
- Government has dictated some cost cuts and told Hydro to write off some items at shareholder expense (for example, the “Procurement Enhancement Initiative,” at some $34 million). The total of cost cuts is buried in the details of the Direction. While reducing BC Hydro’s costs, these measures will also reduce various useful services that Hydro was providing.
- Government has effectively killed the BCUC’s review of Hydro’s application. BC Hydro has just written to the Commission (23 May) recommending that the proceeding be ended. There is little left to do but issue the government-dictated decision. There will not be a public examination of BC Hydro’s costs or an opportunity to test Hydro’s numbers in a hearing.
What does this mean for the future?
In the short term, some may rejoice that electricity rates will be held down until after the provincial general election. This won’t last because the upward cost pressures are too great. The more government tries to mask the true costs, the more painful it will be when they must finally be paid: costs and debt will continue to increase, increasing pressure on credit ratings and BC Hydro’s low interest rates. The long-term picture includes much higher rates, especially with the big increases in industrial load that are forecast: new liquid natural gas processing plants, gas production in the northeast and mines in the northwest are forecast to claim a large part of BC’s cheap “heritage” power, driving up costs for all ratepayers.
In the short term, BC Hydro is deprived of the scrutiny by interested parties that, while doubtless uncomfortable, is essential to keep costs in check and ensure that Hydro’s plans reflect the needs and priorities of its customers.
Meanwhile, the role of the BC Utilities Commission to review BC Hydro’s operations and costs is seriously harmed, and with it, the public transparency and accountability that goes with an open and participatory process. The public interest will be seriously harmed if the Commission is not soon allowed to resume its role of overseeing BC Hydro and other utilities.