October 24, 2015 | Brady Yauch | Consumer Policy Institute
Why ratepayers in BC can expect their electricity rates to go in one direction: up.
Ratepayers in BC can expect dramatic electricity-rate increases for years to come.
Those rate increases will be needed to pay off B.C. Hydro’s soaring long-term debt and other costs the company has shunted to future ratepayers to make itself seem profitable and offset the impact of its spending on current customers.
Meanwhile, residential ratepayers — who have been cutting back on electricity consumption in recent years — will consume less, yet pay more each month.
B.C. Hydro has increasingly issued debt to finance its activities, with the company’s long-term debt having increased from $6.8 billion in 2004 to $16.7 billion last year — an increase of 146 per cent. The amount spent each year in interest payments alone has increased 35 per cent since 2004 and now amounts to $685 million, up from $507 million.
B.C. Hydro’s ability to take on ever-increasing levels of debt comes of the implicit guarantee of the province and its strong credit rating.
Across the private sector, utilities typically maintain a 60/40 debt-to-equity ratio. Yet, B.C. Hydro currently has a debt-to-equity ratio of 80/20, meaning it is more highly leveraged than private-sector utilities and uses the province’s credit rating to keep its borrowing costs lower than they would otherwise be. On a standalone basis, investors would require a higher interest rate when purchasing bonds from a highly leveraged company.
In contrast, in Ontario — where most of the electricity utilities are also publicly owned — the energy regulator has in recent years ensured that distributors move toward a 60/40 debt-to-equity ratio to better align with the private sector.
B.C. Hydro is also banking on future rate increases to support its current net income.
Since 2005, when the company established what are known as regulatory deferral accounts, “regulatory assets” have grown from $155 million to $5.4 billion.
“Regulatory assets” are funds that the company expects to earn from rates charged to future ratepayers. Each year, the company uses a portion of the money from these “regulatory assets” to boost its net income. The company argues that today’s spending should be pushed off to future ratepayers and so shouldn’t be deemed an expense — an accounting move which lifts its current net income.
The benefit of counting money today, but actually collecting it sometime in the future, is obvious: It makes the company more profitable and avoids the blowback it would receive from current ratepayers who would experience even higher monthly bill increases than they currently see.
If residential ratepayers were on the hook for moving B.C. Hydro to a debt-to-equity ratio of 60/40 and clear its deferral accounts over the next five years, it would cost them an additional $5,831, or $1,166 annually — on top of the rate increases that the company is already considering.
But even with the ability to kick the rate-increase can down the road, B.C. Hydro hiked residential rates by nine per cent in 2014 and six per cent at the beginning of this year. While the provincial government has set a “rate cap” of four per cent, 3.5 per cent and three per cent in 2016, 2017 and 2018, respectively, the company’s spending will likely be higher than what that cap will allow it to collect. The difference will be recorded in a deferral account and collected from future ratepayers.
Furthermore, the ability to charge those rates to future customers rests on the energy regulator, the B.C. Utilities Commission, signing off on the spending after an extensive review to determine whether those costs were “prudent.” The regulator hasn’t been allowed to complete a full rate review of B.C. Hydro for more than two decades.
Still, while the company maintains that it has a plan to deal with the “regulatory assets” — essentially get a handle on the rate hikes that it is planning for future ratepayers — the amount of money in the regulatory accounts has grown faster than B.C. Hydro’s own forecasts.
The current figure for regulatory assets is nearly $600 million more than the company predicted in 2013 that it would be at this point. The amount of money in the regulatory assets is already hundreds of millions of dollars more than the “peak” amount the company expected it to hit by 2020.
Meanwhile, capital expenses have grown faster than both inflation and electricity demand.
Annual capital expenditures have increased by 224 per cent, from $669 million in 2004 to $2.169 billion last year. Provincial demand for electricity over that time has grown by just two per cent from 2004 until 2014, or about 0.2 per cent on average per year. Demand last year was actually lower than it was in 2012. and has been declining for three consecutive years.
The combination of a dramatic increase in debt and capital spending, accounts brimming with IOUs from future ratepayers and a decline or flattening in demand will ensure that ratepayers will see their monthly bills going in one direction: up.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at)or by phone at (416) 964-9223 ext 236