Why rates are so high

I am a retired 37 year electrical engineer with substantial utility experience and moved to this province in 2015.  I have several previous letters published here on this topic such as “Two-tier electrical rates” on March 14 and “Energy poverty in BC” on March 8.  I had said that the biggest problem is the two-tiered rate system that causes a cross subsidy that penalizes those using clean, renewable electricity for heating; but the underlying problem is that the equivalent flat rate would also be too high for a hydro province and I needed to learn why the cost here is so high.  I have been doing research into this and I will try to explain it here.

Independent power producer (IPP) projects became popular here in the 1980s (Social Credit), but it was in 2002 under the new Liberal government that their BC Energy Plan was legislated.  It mandated that BC Hydro (BCH) would no longer build its own generating facilities but would purchase its power directly from IPPs, both large and small.  This led to a boom in construction of IPP projects, with the predominant type being run-of-the-river small hydro projects.  BCH signed contracts of 20-40 years to purchase all power produced by these companies.

This may sound good on the surface, but it took away the free-enterprise aspect of it from the 1980s whereby companies wanting to be an IPP had to prove that their project would be economically beneficial, not just environmentally.  Now BCH had to go ‘hat in hand’ to companies with tenders, whereby BCH could not say no to all of them and do it themselves.  Of course these companies knew by the legislation that tenders had to be awarded or the province would fall short of generation capacity.  Another pitfall to this is that these river plants will want to sell as much energy as they can during the spring run-off when the rivers are swollen.  At the same time the legacy BCH stations have huge reservoirs bursting with water and can produce energy more economically.

In addition to the higher cost of purchasing energy from these IPPs is the higher cost of building many more small transmission lines to many more sites than building fewer large transmission lines to larger generation facilities.  There is also increased cost in building roads to the many IPP stations.  The Liberal government also did not do a strategic assessment to determine where IPP projects should be located to minimize the cost and environmental impact before forcing BCH into this requirement to purchase energy from them.

There are also several sources that claim that the IPPs have been generous donors to the current Liberal party and have been awarded contracts after making contributions.  It is also claimed that prices paid for energy are above fair market value.

In the 2007 Energy Plan, the Liberal government stated that 50% of BC’s increase in demand for electricity must be met through electricity conservation or demand side management (DSM) measures by 2020. The 2007 BC Energy Plan also stated that BC must achieve electricity generation “self-sufficiency” by 2016.  These policies of 2002 and 2007 entrenched BC’s future reliance on IPP projects.  They may have transferred the capital cost risks from BCH to private companies, but this has led to rapidly increasing rate hikes to consumers as more IPPs come on line and provide more of the provincial requirement at higher cost.

The Liberal government may now want to distance itself from this DSM policy in light of the upcoming election and blame it on the BC Utilities Commission (BCUC), but it was in 2008 (after the 2007 policy) that BCH introduced its Residential Inclining Block (RIB) rate that was supposed to fulfill this DSM purpose.  Then FortisBC (FBC) was forced into its Residential Conservation Rate (RCR) in 2012.  I’ve written before on how much of a failure these rates are and anyone can read the reports submitted by Mr. Nick Marty and me to the BCUC ‘RIB Rate Report’ on their website.  

Then in 2013 BCH replaced the Power Purchase Agreement (PPA) with FBC to reflect this two-tiered rate system in the energy that it sells to FBC.  In this agreement they call the rates tranche 1 and tranche 2 rather than tier 1 and tier 2, but it is designed the same with an apparent purpose of drawing more revenue from FBC.

Each year FBC cannot exceed 1752 GWh (unless another term makes it smaller – page 34) and on page 37 they give the maximum tranch1 threshold of 1041 GWh/year.  Using the FBC annual consumption provided in their report to the BCUC for the average all-electric home this 1752 GWh maximum would supply about 84,000 homes and so would not be effective to commercial or industrial customers (supplied by other sources’ cost).  On page 48 of the PPA it states, “The rate structure for RS 3808 is improved by providing a Tranche 2 price signal based on BC Hydro’s cost of new supply for FortisBC’s long-term resource planning decisions, and by aligning with the two-tiered rate structures applicable to BC Hydro’s other customers.”  The PPA does make a lame attempt to state that this rate structure has a different purpose from the intent to promote conservation because FBC is a utility, but the ‘in your face’ fact is that it is a two-tier structure; unless the real underlying reason is just to transfer more cost to FBC customers from the customers in Vancouver who do not have electric heating and so have an artificially low, subsidized rate that is used in cross-country comparisons.

The government policy for residential rates in BC has been to have postage stamp rates.  Postage stamp rates are a method of cost allocation where any rate class charge is the same anywhere on the interconnected system, regardless of the geographical region in the province. The underlying premise is that all customers jointly develop electricity resources and should equally share in the costs. This is the accepted approach to rate-making in the majority of North American jurisdictions.  If this province truly implemented postage stamp rates, then BCH and FBC would have the same residential rates; not FBC having much higher rates.  In fact the opposite was done in the revised PPA in 2013 introducing a higher second tier rate.

The underlying conclusion to all of this is that the electrical rate system pushes high cost onto FBC customers and provides artificially low rates to those in the Vancouver area where the vast majority live in natural gas heated homes or centrally heated apartments and have very low electrical requirements even if using high energy lights and electronics and leaving them on when not required.  Most are probably not even aware of a two-tier system.  This is the theory that I proposed in my March 14 letter.

Why are we people in the south central interior treated as second class citizens when we are closer to the larger generation stations and don’t have the cost of frequent coastal storm and ocean spray salt damage?  This election is the time to make this a major issue to end the unfair two-tier rate structure and have true postage stamp rates where we pay the same rate as in Vancouver (lower mainland).  Another alternative would be to open it to free enterprise where we could choose who we buy our energy from.  It works in Alberta.  If Vancouver paid the BCH equivalent flat rate then Edmonton and Calgary would be cheaper.

Jerrilynn DeCock