Taking the politics out of power

Auditor general takes province to task for putting off the true costs of delivering electricity

Auditor general Carol Bellringer’s report on BC Hydro rates aligns with critics’ concerns that the utility has been pushing too much of its debt obligations into the future | Rob Kruyt

No one likes rate hikes. But playing politics with BC Hydro and its regulator, the BC Utilities Commission (BCUC), has meant that British Columbians have been paying artificially low prices for electricity at the expense of future ratepayers.

And commercial power users have been paying disproportionately higher power rates than residential customers.

Those are some of the key findings of a report issued last week by B.C. auditor general Carol Bellringer.

Bellringer’s report on BC Hydro’s practice of deferring costs through rate-regulated accounts confirms what critics have been saying for years now – BC Hydro has been pushing too much of its debt obligations into the future, in part to pay for politically motivated projects.

B.C. enjoys some of the lowest electricity prices in North America. Quebec has the lowest electricity prices in Canada, followed by Manitoba and then B.C. But it may be a bit of a mirage, since the true cost of electricity in B.C. has essentially been deferred.

When Bellringer began her audit, BC Hydro had $5.5 billion in deferral accounts. Last year, the new BC NDP government wrote off $950 million in BC Hydro debt, which lowers the future obligations to $4.5 billion.

And while BC Hydro has plans for eventually paying off most of it through rate changes, Bellringer said there is about $1 billion in those accounts for which there is no “recovery mechanism.”

In other words, there’s no plan for how that $1 billion will be paid. That includes $472 million associated with the $10.7 billion Site C dam currently under construction.

Rate-regulated accounting is a common and legitimate accounting practice for utilities. It’s a way of smoothing out costs so that current ratepayers aren’t subjected to rate hike shock.

It’s based on the principle of “intergenerational equity.” Since transmission lines, smart meters, wind farms and dams will benefit future generations, their cost is spread out so that future users help pay for them.

But BC Hydro has taken the use of deferral accounts to the extreme, according to Bellringer.

“While rate-regulated accounting is common practice in some sectors and industries, including utilities, the large amount in BC Hydro’s regulatory balance is not,” Bellringer says in her report.

BC Hydro has been using rate-regulated accounts since the 1980s, but it dramatically increased under the BC Liberal government – from $182 million in 2005 to the current $4.5 billion.

It might not have had to resort to deferrals on such a large scale, had the provincial government not interfered with the BCUC.

Bellringer cites instances where BC Hydro asked the commission to approve rate hikes, only to have the provincial government step in and cap the hikes. That sort of interference enjoys wide public support, but it has put BC Hydro in the position of having to push more and more of its debt obligations into the future.

“BC Hydro’s various customer classes have always been in favour of the deferral accounts because it means that they are effectively getting low-cost loans from BC Hydro,” said David Austin, a lawyer specializing in energy with Stirling LLP.

Bellringer suggests the previous Liberal government was overly meddlesome when it came to BC Hydro and the BCUC, which must approve rate hikes.

“It is not uncommon for government to establish some direction,” Bellringer said in a press conference. “That’s normal. We see that right across Canada.

“In B.C. they’ve controlled all three parts of the mathematical formula. So they’ve had controls over the rates, they’ve had controls over the bottom [line] – like how much can and should BC Hydro earn at the end of the day – and if you don’t get there, you are to put it into these various accounts.”

Marvin Shaffer, adjunct professor at the School of Public Policy at Simon Fraser University, said the previous Liberal government required BC Hydro to undertake expensive projects like the Northwest Transmission Line project and enter costly power purchase agreements with independent power producers to build wind farms and run-of-river projects, then balked at the rate hikes needed to pay for them.

“It included a lot of things that Hydro was told to do, and that clearly added to its costs,” Shaffer said. “All of those things were putting pressure on rates, and government didn’t want to bite the bullet and see it manifest in higher rates. Particularly, it intervened a couple of times just before elections. So it was quite political.”

The new NDP government has taken some steps towards addressing the concerns Bellringer raised over BC Hydro’s accounting practices. It has given BC Hydro direction to follow generally accepted accounting principles in its financial reporting.

This will require BC Hydro to more accurately report its debt obligations. But whether the NDP government will take a hands-off approach to future rate increases remains to be seen.

If BC Hydro can’t recover costs through rate hikes, Bellringer suggested the provincial government may have to continue covering BC Hydro deficits through general taxation.

BC Hydro rates have increased by 25% over a five-year period. Last year, the BCUC approved a 3% hike, which was not overturned by the NDP government.

Presumably, a liquefied natural gas (LNG) industry may provide BC Hydro with some new industrial power revenue to help address its future debts. BC Hydro is currently building a new transmission system, the Peace Region Electricity Supply project, which will provide power to natural gas producers in northeastern B.C.

“There’s some significant potential loads that could come from the pipeline compression,” said David Craig, executive director of the Commercial Energy Consumers Association of BC. “And the loads for serving the ancillary functions for an LNG plant that’s running on natural gas power certainly adds requirements to BC Hydro.”