Why electricity rates have to rise - and why little can be done to reduce the impacts

September 11, 2013
Tom Syer

For 50 years BC Hydro has been the jewel of BC's Crown corporations. A source of pride and a foundational source for much of the province's prosperity, BC Hydro provides an array of benefits to British Columbians – from comparatively low electricity rates to significant revenues for government. The tremendous benefits BC Hydro delivers underscore what can happen when big infrastructure planning is done right. However, such legacy assets operating in a dynamic, growing region such as BC eventually must be upgraded and augmented by new sources of electricity to keep pace with economic development and other changes. Failure to do so will result in the erosion of legacy asset benefits and, over time, an unacceptable degradation of the system along with a growing reliance on imported electricity.

From a rate perspective, the storyline that matches BC Hydro’s development trajectory is one of sharply rising rate increases during development phases, followed by a lengthy period of rate stability, and then back into a period of rate increases as upgrades and new supply are required once again. The chart below details the evolution of rates (blue bar is residential, grey is combined rate classes) over a 40 year period from 1973-2013.

Change in Electricity Prices Relative to Capital Expenditures

While there can certainly be debate around the extent and nature of rate increases, the reality is that electricity rates must increase in the coming years as capital expenditures increase and BC Hydro is required to pay for investments already made and various decisions already taken. What makes this most recent phase of needed electricity development more complex is the significant shift evident in the overall energy marketplace (in particular shale gas) that have impacted supply options. The Business Council’s forthcoming energy white paper goes into some detail on these issues, and BC Hydro’s recent draft Integrated Resource Plan (IRP) attempts to incorporate the most up-to-date information on the demand and supply options for electricity in BC. In the final installment of this three part posting on BC Hydro, I will take a closer look at the IRP.

Back to rates. So what can be done to mitigate the significant rate increases now facing BC households and businesses? Unfortunately, the short answer is not very much. The majority of the forthcoming rate increases are already baked into the rate cake in the form of planned and currently underway upgrades as well as signed IPP contracts. There is not a lot of room to make significant deferrals/cuts of capital or contract expenditures. Having said that, there are a number of measures that BC Hydro and the provincial government, as Hydro’s shareholder and the ultimate authority, should (and in some cases already have started to) consider to lessen the impacts of rising power costs.

First, any safe, reliable and reasonable ways to defer capital and contract expenditures should be pursued, so long as such deferrals do not have a negative/material impact on economic development opportunities. Second, as fiscal circumstances permit, the provincial government should reduce the amount paid by BC Hydro to general revenues by changing the dividend formula to limit increases during periods of significant capital expenditures. Third, BC Hydro should work with industrial customers to look at innovative partnerships to shape and alter electricity consumption in ways that benefit the system and that may partially offset rate increase impacts. Fourth, BC Hydro and the provincial government should carefully review supply options to consider the strategic use of natural gas for region- specific needs and peak use capacity. Finally, BC Hydro should continue to build on recent successes in reducing corporate overhead and looking at areas of service and infrastructure development that might be better undertaken by the private sector.

Over the long term, there are really only four ways to dampen the cycle of sharp rate increases after decades of low rate/low system-wide capital expenditures: First, innovation and cheaper new generation (relative to current generation) can sustain prolonged periods of low rate increases by reducing the need for capital outlays that immediately result in price escalation. Second, a utility can retain a portion of earnings and build a rate stabilization fund in low(er) capital expenditure periods to ‘smooth’ rate increases by drawing such funds down during periods of significant capital expenditures. Third, a utility can create deferral accounts that spread certain expenditures over longer periods of time to better correspond with when the benefits of the expenditures accrue. The fourth option is the unpalatable option of long term economic stagnation that results in no need for new infrastructure.

Of these four options, only the third option is readily available to BC Hydro. And to BC Hydro’s credit, the utility has made significant utilization of deferral accounts. In the next installment of this three part blog posting on BC Hydro, I will make the case for using and even expanding deferral accounts.

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