Sep 14, 2013

Deconstructing BC Hydro’s Rate Increase


When the government imposed its Energy Plan on BC Hydro it never bothered to estimate the costs (or for that matter the benefits) of what it hoped to achieve. Ardent supporters of that Plan, like my good friend Mark Jaccard, constructed scenarios under which it would make sense to force BC Hydro to buy more power than it needed, but no one was forecasting those scenarios to materialize — certainly not BC Hydro, the BCUC, the union representing BC Hydro workers or any ratepayer group.

And so it is not surprising that BC Hydro now has to raise its rates. Had the government  bothered to forecast what was likely to happen, it would have predicted that BC Hydro would incur major losses on the purchases it was forced to make, at least in the short to medium term, and rates would have to go up.

There are, without doubt, many factors contributing to the rate increases the government now acknowledges BC Hydro needs to cover its costs. There are unavoidable factors, like the refurbishment of aging infrastructure. But much of the increase is the result of ill-considered policy.

It is difficult to calculate the effect and relative importance of all of the government’s interventions in the planning and operations of BC Hydro. However one can make an estimate of the costs of the energy purchases BC Hydro was forced to make under the Energy Plan and Clean Energy Act.

In its last rate hearing (before the government shut it down), BC Hydro reported that in 2013 it would be purchasing over 5 million megawatt hours of electricity from run-of-river and other IPPs under contracts that almost certainly were driven by the self-sufficiency and other provisions of the Energy Plan. That is roughly equivalent to the output of Site C. BC Hydro didn’t need that energy to reliably meet its forecast requirements.  Nor did it purchase that energy because it appeared economic. The average cost of that supply is well over $100 per megawatt hour. The average value based on the price of the exports it enables or imports it displaces is less than $4o.

So BC Hydro was forced to buy the equivalent of a Site C at a price that is some $60 per megawatt hour more than it is worth at current and forecast market prices. The total loss on the purchases BC Hydro was forced to make will be over $300 million in 2013 alone. That in itself represents over 7.5 percentage points (over one quarter) of the 26% increase BC Hydro reportedly said it needed.

There are other ways in which policy has contributed to the required rate increase. There are the billions of dollars of investments that government directed BC Hydro to undertake without any benefit-cost justification or independent BCUC oversight and review. There are the transmission and system back-up investments BC Hydro has been forced to undertake to accomodate the large amount of run-of-river and other renewable energy it was directed to acquire. There was the directive requiring BC Hydro to earn a return on equity it does not have.

I suppose most ratepayers care more about how much they will have to pay than why. But the ‘why’ matters. Costs of electricity supply will inevitably go up. But they don’t have to go up dramatically more than necessary.