On February 15, 2019, the BC government released its long-awaited report (the Report) on the first phase of its comprehensive two-phased review of BC Hydro (the Review). The Report delivers recommendations for further enhancement of the financial and regulatory oversight of BC Hydro, and provides a revised five-year electricity rates forecast, reflecting the cost savings, efficiencies, and new streams of revenue identified in the course of the Review. We have set out in this blog post notable actions the government and BC Hydro will undertake to implement recommendations set out in the Report.
For background, the government initiated the Review in June 2018 with the objective of developing a plan for BC Hydro to contain electricity rates in the long term and to ensure sound financial and regulatory oversight of the public utility. The work undertaken as part of the first phase of the Review focused on regulatory oversight and BC Hydro’s costs and electricity rates, while the second phase is expected to focus on the evolution of energy markets, new utility models, and emerging technologies. It is anticipated that the government will soon release the Terms of Reference for the second phase of the Review.
Enhanced Financial and Regulatory Oversight
As a result of the Review, the government and BC Hydro will take the following actions to enhance the financial and regulatory oversight of BC Hydro:
- Rate Smoothing Regulatory Account – The government will write off the entire balance of the Rate Smoothing Regulatory Account in Fiscal 2019, which is expected to reach $1.14 billion by March 31, 2019. The Rate Smoothing Regulatory Account was created to defer collection of revenues from ratepayers to later fiscal periods. The government will request the closure of the Rate Smoothing Regulatory Account, and going forward the British Columbia Utilities Commission (BCUC) will have authority to review the scope and amortization for most of BC Hydro’s remaining regulatory accounts.
- Deferral Account Rate Rider (DARR) – The government has repealed regulations which sets the DARR at 5% indefinitely, and restricts the BCUC’s ability to determine how the DARR is set and applied. The DARR is a surcharge on ratepayer bills that is used to pay down BC Hydro’s three energy deferral account balances; these energy deferral accounts capture variances between forecast conditions and what actually occurs during the applicable fiscal year. As a result of the Review, BC Hydro will be proposing that the DARR be set at 0%.
- Integrated Resource Plan (IRP) – The government will introduce legislation to restore the BCUC’s oversight authority to review and approve BC Hydro’s IRP. The IRP sets out BC Hydro’s 20-year projection of electricity demand in the province and its plan to meet this need. The government has also extended the deadline for submission of the next IRP to February 2021 so that the IRP can reflect the recommendations of the Review.
- Net Income – The government intends to allow the BCUC to set BC Hydro’s allowed net income for rate setting purposes following a transition period where the net income will remain set at its current fixed net income target of $712 million. The two year transition period is intended to provide time for the BCUC to review BC Hydro’s next Revenue Requirements Application and to determine an appropriate rate of return.
- Change in Accounting Rules – The government has removed BC Hydro’s legislated exemption from the requirement that electricity rates be set by an independent, third party regulator. BC Hydro will fully adopt International Financial Reporting Standards at the end of Fiscal 2019.
Revised Electricity Rates Forecast
As a result of the Review, BC Hydro has revised its cumulative electricity rates forecast downward to 8.1% over the next five years (Fiscal 2020 through Fiscal 2024). The rates forecast represents a cumulative decrease of 5.6% for the same period established under the previous electricity rates forecast. The government and BC Hydro expect to achieve this reduction in rates by undertaking the following key actions to reduce future costs and increase efficiencies:
- Rate Smoothing Regulatory Account - As noted above, the government will write off the entire balance of the Rate Smoothing Regulatory Account in Fiscal 2019. The reduction in the regulatory accounts balance will reduce costs that would otherwise be recovered from ratepayers, as the write-off will be covered by the government and BC Hydro.
- Biomass Electricity Purchase Agreements (Biomass EPAs) – BC Hydro will reduce energy procurement costs by phasing out Biomass EPAs. To reduce the impact of this decision on the forestry sector and to provide time to develop alternative uses for wood waste residuals, BC Hydro will launch the Biomass Energy Program (BEP) to permit BC Hydro for a limited time to acquire up to 80% of the aggregate volume of energy historically produced by biomass generating facilities under Biomass EPAs that are due to expire before March 31, 2022. BC Hydro will establish caps on energy pricing, volume and overall costs of the BEP.
- Standing Offer Program (SOP) – BC Hydro will reduce energy procurement costs by indefinitely suspending the SOP. The SOP, which we have covered in a previous blog post, is aimed at new, small scale, renewable energy projects with capacities of no greater than 15 MW. Current prices for energy from SOPs are significantly higher than the cost of generation from BC Hydro heritage assets. BC Hydro will continue to honour contractual commitments under valid EPAs issued under the SOP.
- Capital Assets – BC Hydro will reduce capital additions by $2.7 billion between Fiscal 2020 and Fiscal 2029, representing a reduction of capital additions from $18.5 billion to $15.8 billion for that period. BC Hydro expects its revised 10-Year Capital Plan to be released shortly. We note the Review projects that increased electrification demand stemming from the government’s greenhouse gas emissions reduction targets under the CleanBC plan, which we have blogged about here, will mostly be met with existing and planned capital projects although the second phase of the Review will consider this matter further.
- Operating Costs – BC Hydro will make further reductions to operating costs. As a result of the Review, BC Hydro expects it will be able to limit base operating cost increases below the rate of inflation. BC Hydro’s operating costs will be reviewed by the BCUC as part of the upcoming Revenue Requirement Application proceeding.
- Revenue – BC Hydro will consider additional revenue streams identified in the Review, including strategies to grow domestic electricity demand and real time market-based pricing. The government is also undertaking a review of the Low Carbon Fuel Standards Program which may result in an increased number of low carbon fuel credits available for sale, which would generate incremental revenues for Powerex and BC Hydro. BC Hydro will incorporate any additional revenue strategies approved by BCUC into future electricity rates forecasts.
The work undertaken as part of the first phase of the Review will inform BC Hydro’s next Revenue Requirements Application, which is expected to be filed with the BCUC in February 2019. The Revenue Requirements Application will be open to comment from stakeholders and the public.