Policy & Positions Manual
Provincial Issues - Energy and Mines
Electrical Energy Benefits for Business (2009)
In BC the electricity rates have been increasing recently and more increases are expected over the next several years. Inexpensive hydro electricity has been a key component of the competitiveness of BC industry and commercial businesses for many years. The competitiveness of our industries and businesses in world markets depends in part on maintaining competitive cost structures. In particular those industries and businesses involved in exports, which are vital to the economy and well being of the province, can be affected significantly by increasing electricity prices.
In order to maintain our attractive electricity prices, it is important to ensure that BC Hydro maintains the income streams developed either directly or indirectly from its electric system. These income streams can help to offset other costs and keep the level of rate increases lower. In particular, the income streams developed from trading power can and do provide an important source of income to keep electricity rates low and our industries and businesses competitive. It is important that electricity trading continue to grow and develop, and also that it continue provide the benefit of lower electricity rates. The following are a few of the issues which may limit or constrain BC Hydro’s ability to keep electricity rates competitive for the BC business community, along with recommended resolutions to the issues.
At the present time, BC Hydro’s subsidiary Powerex exports surplus power, if any, for the credit of BC Hydro and its customers under a Transfer Pricing Agreement between the two entities. When Powerex is involved in trade transactions, buying and selling power to and from third parties, the income becomes ‘trade income’.
In addition the Transfer Pricing Agreement provides Powerex the use of the BC Hydro integrated electric system for the cost of transmission charges for any power moved over the grid. This gives Powerex access to the capability of the BC Hydro system over and above transmission use without any other charges. The capacity and capability of the BC Hydro system to shape power trades and, therefore, to develop ‘trade income’ is available to Powerex without other charges, except that ‘trade income’ goes to the benefit of customers up to $200 million.
The BC Government under Special Direction HC2 to the BC Utilities Commission (BCUC), caps ‘trade income’ at $200 million per year, after which the trade income accrues to the BC Government. The $200 million level was supposed to, at the time it was put in place, be set at a level which would not be exceeded except in unusual circumstances such as when electricity markets spike and create trade income potential in the billion dollar range. This cap was put in place without being indexed to inflation and without recourse to change in changing circumstances.
BC Hydro’s subsidiary Powerex has been exceeding the trade income cap with regularity. The following are results for the last few years.
Trade Income ($ in Millions) |
||||||
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
$138 |
$158 |
$256 |
$179 |
$259 |
$83 |
$190 |
F2009 estimate as of October based on actual earned to September, 2008 |
||||||
Based on prior years quarterly performance for the later 2 quarters of the year it would appear highly likely that F2009 will again result in BC Hydro exceeding the cap
(Page 28, Commercial Energy Consumers ‘CEC’ Final Argument to BCUC in BC Hydro’s Revenue Requirements Application for 2008)
BC Hydro revised its estimates of trade income for 2009 from $136 million in its application to $197.1 million for the year, because it had already earned more than its application estimates on which it based customer rates. BC Hydro applied for ‘trade income’ of $156 million in its application for the year 2010 and did not change this amount. The BCUC sided with the CEC and increased BC Hydro’s forecast of trade income to $199 million for the year. This resulted in a significant lowering of rates to BC Hydro customers for the 2009 - 2010 period.
The risk that BC Hydro’s Powerex subsidiary will exceed $200 million is now approaching 50% or more.
This is particularly problematic because BC Hydro and its customers are now investing in massive capital expenditures in the billions of dollars to provide additional capacities on the integrated electric system. Projects like Revelstoke #5 and Mica # 5 are to be constructed or are being seriously planned for. In addition, major transmission lines such as the ILM (Interior to Lower Mainland) 5L83 are being planned and pursued for construction. The recently announced Section 5 inquiry into the Northern Transmission Line, and all BCTC transmission planning, is likely to have significant implications for the capacities and capabilities of the BC Hydro electrical system. The capital expenditures are in the billions.
Customers of BC Hydro will pay for the costs of the capital investments and the BC Government would benefit if Powerex is able to translate the additional capacities and capabilities into ‘trade income’. Powerex is exceptionally capable of generating ‘trade income’.
As well, in these challenging economic times, to the extent that BC Hydro customers are not utilizing the capabilities and capacities of the BC Hydro electrical system, this will result in Powerex accessing these assets and making every effort to earn ‘trade income’.
Powerex ‘trade income’ over and above the $200 million cap goes to the BC Government and displaces other sources of government revenue or becomes found revenue, because of its irregularity, and is spent as the government sees appropriate.
The $200 million cap is obsolete because of increased use of the BC Hydro system by Powerex, increasing BC Hydro and BCTC investment paid for by customers, increased inflation since the cap was put in place, and increased electricity market prices since the cap was put in place.
The problem with this potential displacement of taxes is that commercial customers, and small business customers in particular, are charged rates in excess of the cost of service and subsidize residential customers significantly.
Revenue to Cost Ratios |
|||
Rate Class |
F08 Forecast |
F08 Actual |
Change (%) |
Residential |
90.1 |
91.8 |
1.7 |
GS < 35 kW |
123.3 |
123.8 |
0.5 |
GS > 35 kW |
106.8 |
106.2 |
-0.6 |
Irrigation |
83.2 |
83.4 |
0.2 |
Street Lighting |
124.9 |
125.0 |
0.1 |
Transmission |
102.5 |
100.1 |
-2.4 |
Total |
100.0 |
100.0 |
|
BC Hydro FACOS study 2008
Small general service customers (small commercial customers) are charged 23.8% in excess of the cost of service, and larger general service customers (larger commercial customers) are charged 6.2% in excess of the cost of service. Residential customers are charged 8.2% less than the cost to service them. The spread between residential customers and the small commercial customers is over 30%.
Any income taken from BC Hydro falls disproportionately on the business community. The BCUC has ruled that this over charging is not fair, just or reasonable, but the BC Government has by Special Direction deferred any rebalancing of this until after March 31, 2010.
It would be useful for the ‘trade income’ cap to be increased now above the recent high levels of ‘trade income’ earnings and indexed in the future so that the cap keeps pace with the market.
BC Hydro is currently planning to file a Large General Service customer (Commercial Customer) rate restructuring to implement conservation rates. The rate designs are not yet complete and final, however, some early designs involved rate increases for some commercial customers increasing by over 40% over a number of years plus general rate increases, while other customer’s rates decreased. This is caused by the adoption of revenue neutrality at the customer class level instead of at the customer level. Industrial restructuring rate designs were implemented on a customer level revenue neutral basis.
If the above problems are not addressed, commercial business customers will be paying $100’s of millions in excess of the cost to serve them and will be unfairly treated with respect to other customer classes and with respect to each other within the class.
The following resolutions are proposed to redress these problems.
THE CHAMBER RECOMMENDS
That the Provincial Government:
- increase the $200 million cap on ‘trade income’ for BC Hydro immediately to $300 million;
- index the cap on ‘trade income’ to the BC Hydro rate increase percentages including the rate rider percentages from this year forward;
- ensure that the commercial customers’ charges for electrical service in excess of their cost of service after March 31, 2010 are properly redressed over time to eliminate the overcharging; and
- ensure that commercial customer rate restructuring designs are implemented on a customer revenue neutral basis, within a few percentage points.
