Government taking action to keep rates affordable for BC Hydro customers

Press Release

Feb. 14, 2019

VICTORIA – After years of rate hikes and billions in deferred costs at BC Hydro piled up by the previous government, the B.C. government is taking action to keep electricity rates affordable for customers by cutting costs and developing new revenue streams at the Crown corporation.

These actions come out of an internal review of BC Hydro. They follow news that the previous government pushed through contracts with independent power producers, beginning in the early 2000s, that will cost Hydro customers more than $16 billion over 20 years. In addition, the exponential growth of BC Hydro’s deferred debt shows that the old government continually passed BC Hydro’s financial problems on to future generations.

“The previous government made choices that put their own interests ahead of what’s best for the province and BC Hydro customers,” said Michelle Mungall, Minister of Energy, Mines and Petroleum Resources. “They ignored the professional advice, they ignored the auditor general, and they ignored the growing debt — and instead chose to make British Columbians pay the price for their choices, today and for decades to come.

“Following this review, it’s our government’s job to fix what’s broken, put BC Hydro onto a sustainable path and make sure rates stay as affordable as possible for customers.”

Mungall said that as part of making sure BC Hydro works better for customers, the government will be expanding oversight of the Crown corporation by the BC Utilities Commission (BCUC).

“Step one in fixing this problem is to take the politics out of decisions around BC Hydro — the problems we’re seeing today are the result of 16 years of political choices by the previous government,” said Mungall. “The best way to keep BC Hydro on the right financial path, while protecting the interests of customers is to enhance BCUC’s independent oversight of the Crown corporation as we move forward.”

“BC Hydro is committed to working with our customers, Indigenous peoples, stakeholders, the BCUC and government as we build on the work of the review to limit rate increases, enhance regulatory oversight and support the Province in its social, economic and environmental priorities,” said Chris O’Riley, president and chief operating officer, BC Hydro.

Affordable rates:

Subject to BCUC approval, electricity bills for ratepayers are forecast to increase by 1.8% effective April 1, 2019, and 0.7% effective April 1, 2020.

This is part of a cumulative rate increase of 8.1% over the next five years, which is:

• almost 40% lower than the 13.7% cumulative increase for the same period under the previous government’s 10-year rates plan, and
• 20% lower than the 10.7% forecast rate of B.C. inflation over the same period.

As part of transitioning to enhanced oversight, government has accepted a recommendation from the review for BC Hydro to stop using the rate-smoothing regulatory account and to write off its balance to zero in 2018-19. This will limit rate increases and relieve ratepayers of the burden of directly paying off $1.1 billion in deferred costs over the next five years.

In addition, BC Hydro will implement a number of measures that will lower costs and increase revenues, including managing future energy purchases from private power producers. This includes indefinitely suspending BC Hydro’s Standing Offer Program, effective immediately. No change will be made to electricity purchase agreements that are already signed and in place.

Recommendations to reduce costs were informed by the independent report on BC Hydro’s energy purchases from private power producers that was commissioned by the minister as part of the BC Hydro review. The report concludes that BC Hydro bought too much energy, the wrong type of energy and paid too much for it.

“Due to the decisions of the previous government, ratepayers will overpay billions of dollars for power they did not need,” said Mungall. “While costing the average household an extra $200 per year, 80% of that money did not stay in the province. This was just not a good deal for British Columbians.”

Government recognizes that many Indigenous Nation communities have seen small-scale private power as economic development opportunities. That is why the Ministry of Energy, Mines and Petroleum Resources will be engaging with Indigenous Nations to discuss the extent to which the suspension of the Standing Offer Program may affect individual Nations.

Enhanced independent oversight:

The review has identified areas where BCUC oversight is more appropriate than government oversight to ensure ratepayers’ interests are best protected.

Government intends to introduce regulatory and legislative changes to roll back past government directions that have restricted the BCUC’s oversight of BC Hydro. Under this new framework, the BCUC will make decisions on rate increases, deferral accounts and capital projects, as well as other decisions that affect British Columbians.

Government intends to return oversight of BC Hydro’s net income to the BCUC in 2021-22, following a two-year transition period to enable the BCUC to complete its review of BC Hydro’s next two-year revenue requirements application, and to undertake a process to determine an appropriate rate of return. Government also intends to restore the commission’s authority to review and approve BC Hydro’s Integrated Resource Plan, its 20-year plan to meet electricity demand, starting in 2021.

BC Hydro plays a unique role as both an electrical utility and an implementer of government policy. To minimize past policy impacts on ratepayers and the Province’s fiscal plan and advance social, economic and environmental priorities, government anticipates that, on occasion, it will be required to provide direction to the BCUC to guide decision making in proceedings that have implications for government policy.

Policy guidance could be conveyed by having the Province participate in certain BCUC proceedings as an intervener or by providing a letter of comment, or by issuing directions. In keeping with its commitment to respect the independence of the BCUC, government will limit the use of these directives as much as possible.

“Our new approach for BCUC oversight of BC Hydro is clear, fair and transparent and recognizes the importance of independent utility regulation,” said Mungall.

Looking forward:

The measures flowing from Phase 1 of the BC Hydro review will inform BC Hydro’s next revenue requirements application to the BCUC (for 2019-20 – 2021-22) to be filed in February 2019 and will allow the BCUC greater independence in reviewing the application.

During the BCUC’s review of the application, stakeholders and the public will have a further opportunity to see and comment on how the outcomes of the first phase of the comprehensive review have influenced BC Hydro’s finances and proposed electricity rates.

The Province remains committed to reconciliation with Indigenous peoples of British Columbia. The Ministry of Energy, Mines and Petroleum Resources will be engaging with Indigenous Nations to discuss the extent to which the indefinite suspension of the Standing Offer Program may affect the economic interests of individual Indigenous Nations.

Phase 2 of the BC Hydro review will begin in 2019. It will be informed by government’s CleanBC plan and focused on ensuring that BC Hydro is well positioned to maximize opportunities flowing from shifts taking place in the global and regional energy sectors, technological change and climate action.

“The problems at BC Hydro didn’t appear overnight, and they can’t be fixed overnight,” said Mungall. “We’re going to keep working to build on BC Hydro’s strengths and the skills and dedication of its workers and build a strong, sustainable and innovative BC Hydro for today and future generations.”

Learn More:

To view the final report on Phase 1 of the BC Hydro review and the independent report on BC Hydro’s purchase of power from independent power producers, visit: https://www2.gov.bc.ca/gov/content/industry/electricity-alternative-energy/electricity/bc-hydro-review

To learn more about the Province’s engagement with Indigenous Nations on the indefinite suspension of the Standing Offer Program, visit: https://engage.gov.bc.ca/sopengagement/

Three backgrounders follow.

BACKGROUNDER 1

• Electricity rates in B.C. have risen by over 70% in the past 10 years.
• BC Hydro’s total regulatory (deferral) accounts balance increased from $116 million in two accounts in 2001 to $5.5 billion in 29 accounts by March 31, 2018. These accounts defer certain costs for refund to, or recovery from, customers in future years.
• BC Hydro’s debt grew from $6.2 billion in 2001 to over $20 billion by March 31, 2018.
• In its 2002 Energy Plan, the previous government prohibited BC Hydro from developing its own generation (except upgrades to existing facilities and Site C) and mandated that all new power generation opportunities be reserved for private power producers.
• The 2007 Energy Plan further required BC Hydro to achieve electricity self-sufficiency by 2016 (which eliminated BC Hydro’s ability to plan to purchase electricity from the market to meet demand). The plan also required BC Hydro to replace the energy supply from the Burrard Thermal natural gas generation plant with other resources.
• To meet the direction in the two Energy Plans, BC Hydro ramped up its procurements from private power producers. Today, BC Hydro holds more than 130 long-term contracts with private power producers for the purchase of a large supply of mostly intermittent power, at far higher than current market prices or the cost of BC Hydro’s own generation.
• Today, these contracts represent future financial commitments of $51 billion that will need to be recovered from ratepayers over time, and account for about 25% of BC Hydro’s energy supply and about 32% of BC Hydro’s total costs.
• Energy costs paid to private power producers are forecast to increase from $1.4 billion in 2017-18 to $1.7 billion by 2023-24.
• On average, BC Hydro’s payments to private power producers are over $100 per megawatt-hour (MWh). By contrast, power generated by BC Hydro’s heritage hydroelectric assets costs $33 per MWh and, prices for power in export markets are forecast to range between $25 and $40 per MWh for the foreseeable future.
• An independent report commissioned by the Minister of Energy, Mines and Petroleum Resources, as part of the BC Hydro review, found that BC Hydro bought too much energy with the wrong profile and paid too much for this energy, all due to the direction of the previous government.
• BC Hydro is currently projecting it will be in an energy surplus situation (with more power than it needs) until the mid-2030s, even with new customers coming online and accounting for increased demand to support electrification measures in the Province’s CleanBC plan.
• In 2010, the previous government introduced the Clean Energy Act which exempted a number of BC Hydro projects and energy procurement activities from independent review by the BCUC.
• Under the 10 Year Rates Plan announced in 2013, the previous government set, or capped, BC Hydro’s rate increases at specific levels for the first five years of the plan, further interfering with the BCUC’s ability to regulate BC Hydro.
• The previous government also issued a direction which required the BCUC to approve a rate-smoothing regulatory account and the deferral of specified revenues into it. This account was created as part of the 10 Year Rates Plan to spread out the rate impact over a multi-year period.
• In 2010, the previous government also issued a regulation directing BC Hydro to follow accounting standards that deviated from generally accepted accounting principles, and instead prescribed its own standards that waived the requirement that rates be established by an independent, third-party regulator (in B.C., the BCUC).
• In audits of the Province’s public accounts in 2017 and 2018, the auditor general issued qualifications related to how government consolidated BC Hydro’s regulatory accounts, expressing concern that previous government directions to the BCUC have prevented the commission from setting rates and providing the proper independent oversight over the creation and maintenance of BC Hydro’s regulatory accounts under generally accepted accounting principles.
• In response to the auditor general’s 2016-17 qualifications concern, in August 2018 the provincial government made a $950-million write-down adjustment against its 2017-18 summary accounts bottom line surplus. This was done because the auditor general could not previously estimate the financial effects of the previous government’s directives. Consequently, the provincial comptroller general made an estimate, leading to an adjustment of $950 million.
• The auditor general’s February 2019 report on rate-regulated accounting at BC Hydro found that independent regulators (such as BCUC) are critical to rate-regulated accounting, and that the government had restricted the BCUC from regulating BC Hydro. The auditor general recommended that BC Hydro prepare its financial statements in accordance with Canadian generally accepted accounting principles, and not the principles prescribed by the previous government. The action that government took in November 2018 to repeal a past regulation regarding the accounting rules BC Hydro is required to follow has addressed this issue.

BACKGROUNDER 2

In the first phase of the BC Hydro review, the ministries of Energy, Mines and Petroleum Resources, and Finance, along with BC Hydro, examined various aspects of the utility’s costs under terms of reference that are public. Key areas of focus included, but were not limited to:

• affordability and rates
• regulatory accounts
• cost of energy acquisition
• revenues
• operating costs
• 10-year capital plan
• payments to Government, including net income and dividends

As part of the BC Hydro review, the Minister of Energy, Mines and Petroleum Resources also commissioned an independent review of BC Hydro’s energy purchases from private power producers.

As a result of the review, BC Hydro is forecasting rate increases for the next five years that would have the following impacts on customer bills:

• April 1, 2019: 1.8% increase
• April 1, 2020: 0.7% increase
• April 1, 2021: 2.2% increase
• April 1, 2022: 0.0% increase
• April 1, 2023: 3.2% increase

This represents a cumulative increase of 8.1% over the next five years (2019-20 — 2023-24), which is:

• almost 40% lower than the 13.7% cumulative increase for the same period under the previous government’s 10-year rates plan
• 20% lower than the 10.7% forecast rate of B.C. inflation over the same period

Under the enhanced regulatory oversight for BC Hydro, actual rate increases will be determined by the BCUC in future revenue requirements applications. That means actual rates may be lower or higher than the rates forecast.

As part of the transition to new enhanced regulatory oversight and to achieve the rates targets set out in the forecast, the following measures will be implemented at BC Hydro:

• Government has accepted a recommendation from the review for BC Hydro to cease using the rate-smoothing regulatory account and to write off the balance in the account in 2018-19. BC Hydro has written off $1.04 billion as of Dec. 31, 2018, and the remaining approximately $0.1 billion that would have been deferred for the remainder of this fiscal year will be expensed and further reduce BC Hydro’s net income. This means that none of these costs will be recovered from ratepayers.
  • This is also expected to reduce BC Hydro’s overall regulatory account balance at March 31, 2019 by 24%, from $4.7 billion (as at Sept. 30, 2018) to $3.6 billion by March 31, 2019.
  • As the cost of the write-off will be borne by BC Hydro and the government, there will be a resultant $190-million negative net impact to the fiscal plan in 2018-19. This is in addition to the $950 million that was already written off by the government at the summary level in its own books for 2017-18.
• BC Hydro’s Standing Offer Program will be indefinitely suspended.
  • Effective immediately, BC Hydro’s Standing Offer Program is indefinitely suspended, with the exception of electricity purchase agreements for five First Nations-related projects which are part of impact benefit agreements with BC Hydro and/or mature projects that have significant Indigenous Nations involvement as announced March 2018.
  • BC Hydro will not accept new applications, advance any applications or execute any new electricity purchase agreements to purchase power under the Standing Offer Program.
  • No change will be made to electricity purchase agreements that are already signed and in place.
  • The Ministry of Energy, Mines and Petroleum Resources will be engaging with Indigenous Nations to discuss the extent to which the indefinite suspension of the Standing Offer Program may affect the economic interests of individual Indigenous Nations, and to explore options for mitigating significant impacts where they exist.
• BC Hydro will further minimize energy costs related to biomass energy by:
  • Acquiring biomass energy from facilities with existing electricity purchase agreements due to expire prior to March 31, 2022, but at a lower volume than has been historically delivered and at a lower price than current contract terms.
  • BC Hydro will procure this energy through a combination of load offset and/or energy purchases. Load offset is energy generated by a BC Hydro customer that offsets the energy the customer currently purchases from BC Hydro to serve its own needs.
  • Most biomass energy generators are in the pulp and paper sector. The holders of these expiring biomass agreements are largely forest companies that are important economic anchors and play an important role in the environmentally sound disposal of wood waste from sawmilling operations and other sources.
  • As a separate initiative, government will work with industry to develop to transition over time to production of renewable energy products, such as renewable natural gas and biocrude, from wood waste to develop longer-term economic opportunities and contribute to achievement of CleanBC climate action targets.
• BC Hydro will reduce its planned 10-year capital expenditures by $2.7 billion (from $18.5 billion to $15.8 billion). BC Hydro will continue to focus on projects required to maintain the reliability and safety of its electric system. Investments to meet minimum legal, regulatory or tariff compliance requirements will not be reduced.
• Despite cost pressures, BC Hydro expects to limit its base operating cost increases below the forecast rate of provincial inflation over the five-year rates forecast period (2019-20 – 2023-24).
• The Ministry of Energy, Mines and Petroleum Resources is undertaking a review of the Low Carbon Fuel Standard credits program. As part of this review, regulatory and legislative changes could increase the number of credits available for sale which would generate incremental revenues for BC Hydro’s energy trading subsidiary Powerex.
  • Powerex’s trade activities earn income to help lower BC Hydro’s customer rates.
• BC Hydro will continue to pursue strategies to increase domestic demand for electricity.
  • Increasing domestic sales of electricity reduces the amount of surplus electricity that must be sold on the export market.
  • Switching from fossil fuel-based energy products to electricity is also key to achievement of B.C.’s greenhouse gas emissions reduction targets under the CleanBC plan.

Taken together, these measures to reduce BC Hydro costs and develop new revenue streams will help BC Hydro to keep rates affordable for its residential, commercial and industrial customers.

BACKGROUNDER 3

Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 886-5400ILR5

As a result of the comprehensive review, government is enhancing the BCUC’s oversight of key aspects of BC Hydro’s business, including in respect of costs, proposed rate increases, net income, regulatory accounts and long-term plan to meet electricity demand on a go-forward basis, while mitigating impacts to the Province’s fiscal plan and keeping rates affordable.

To strengthen BCUC oversight of BC Hydro, the Province has:

• repealed the provincial regulation which waived requirements for an independent, third-party regulator in setting BC Hydro’s rates, thereby enabling BC Hydro to follow Canadian generally accepted accounting principles and adopt international financial reporting standards without exception, as recommended by the auditor general.
• repealed past government regulations that significantly restricted the BCUC’s authority to review and/or make decisions on BC Hydro rates, costs, regulatory accounts, capital projects and program expenditures, including regulations under the Utilities Commission Act that, among other things:
  • established rates increases, rate caps or targets for the 2014-15 — 2023-24 period,
  • set BC Hydro’s allowed annual net income, and
  • required the BCUC to approve creation of the rate-smoothing regulatory account and the deferral of specified amounts into it.
• restored BCUC oversight of the scope and amortization periods of almost all of BC Hydro’s regulatory accounts on a go-forward basis with a few limited exceptions related to past and currently confirmed policy commitments.
• reinstated the BCUC’s authority to determine how BC Hydro’s Deferral Account Rate Rider (currently a 5% surcharge that applies to all charges on customer bills) is set and applied.

In addition, through future legislative action, the Province intends to restore BCUC’s authority to review and approve BC Hydro’s 20-year plan to meet electricity demand, known as its Integrated Resource Plan (IRP), starting in 2021. Through a separate regulation, the Province has also extended the deadline for BC Hydro to submit its IRP to February 2021 to ensure that the IRP can incorporate BC Hydro’s expected role in implementing the CleanBC plan.

Regulatory and legislative changes to enhance BCUC oversight of BC Hydro will inform BC Hydro’s revenue requirements application to the BCUC for the 2019-20 — 2020-21 period (to be submitted in February 2019), and give the BCUC greater independence in reviewing and deciding on the application.

Government recognizes that the BCUC is first and foremost an economic regulator, and that from time to time policy guidance from the Province may be required, and is appropriate, to ensure that rates remain affordable and to support the continued implementation of government’s social, economic and environmental priorities.

This guidance is particularly important in the short term as the BCUC, BC Hydro, stakeholders and government transition to this enhanced regulatory oversight model.

As such, government will:

• Re-empower the BCUC to set BC Hydro’s allowed net income following a two-year transition period during which BC Hydro’s current allowed net income of $712 million will remain in place for 2019-20 and 2020-21.
  • The two-year transition period allows time for the BCUC to review of BC Hydro’s next revenue requirements application and undertake a separate process to determine an appropriate return for the shareholder prior to resuming the regulation of BC Hydro’s allowed net income in 2021-22.
• Provide clear policy guidance, in select circumstances, to guide decision making in BCUC proceedings that have implications for government policy.
  • Policy guidance could be conveyed by having the Province participate in certain BCUC proceedings as an intervener or by providing a letter of comment, or by issuing directions.
  • As an example, government intends to provide a direction to the BCUC with respect to the approval of the biomass energy program documentation and to require the costs associated with the program to be recovered from ratepayers.
• Continue to direct the BCUC:
  • To continue to prohibit “retail access,” which allows customers to purchase electricity from the open market via a third-party provider, unless requested by a public utility.
  • Not to rebalance BC Hydro’s rates, meaning changing the revenue-to-cost ratios between BC Hydro’s customer classes. Government intends to introduce legislation in spring 2019 to prevent rate rebalancing unless otherwise requested to do so by a public utility.
  • Not to calculate “expenditures for export” when determining BC Hydro’s rates. Government intends to introduce legislation in spring 2019 to repeal the concept of expenditures for export, which are no longer relevant today.
  • Not to regulate Powerex, BC Hydro’s energy-trading subsidiary that operates in competitive wholesale markets outside of B.C. where it is subject to regulation by other entities.

Contact:

Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 886-5400

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