A whole new way to screw up hydro is underway in Ontario and B.C.

BC Hydro is following Ontario down a road where the price of electricity is political.

This article originally appeared in the Financial Post.

The B.C. government’s decision this month to freeze electricity rates is the latest move by governments to handcuff the rate-setting authority of energy regulators. It follows legislation passed this summer in Ontario that transfers the power of setting rates to the minister of energy and ends one of the last vestiges of regulatory independence in the province’s energy sector.

BC Hydro had requested a three-per-cent increase from the energy regulator, the British Columbia Utilities Commission (BCUC). The newly elected NDP government has instead decided it will set the rate increase — at zero.

While the rate freeze will “save” consumers $140 million over the next year, those savings are an illusion, since that money will be added to what are known as deferral accounts and collected from future ratepayers. B.C.’s auditor general has called this practice of kicking billions of dollars in costs to future customers “unsustainable.” The AG came to that conclusion in 2011, when BC Hydro had $2.2 billion in deferral accounts. It now has $5.9 billion.

The move marks further intervention by the province in the regulatory process and further undermines the independence and credibility of the BCUC. The NDP had promised on the campaign trail to improve the regulatory process and restore the independence of the BCUC. Instead, the decision to freeze rates — another campaign promise — only makes the situation worse.

In 2013, the government introduced a 10-year plan that directed what level of rate increases the BCUC was allowed to approve for BC Hydro over the first five years. Because those rate increases were below BC Hydro’s cost to generate and deliver power, the difference between rates and costs went into deferral accounts. The price that ratepayers now pay is largely a political determination.

Undercharging consumers will encourage wasteful consumption and lead to the overbuilding of the energy system. Megaprojects like the $10-billion (and counting) Site C dam — which a recent review by the BCUC concluded wasn’t needed, even though $2 billion has already been spent on construction — would be even more unnecessary if consumers paid a rate for power that reflected the cost of generating it.

And this same story has already been written in Ontario. This summer, the province passed the Fair Hydro Act, which allows the minister of energy to set electricity rates as he sees fit. Prior to the legislation, the province’s regulator, the Ontario Energy Board (OEB), forecast the cost of generating electricity and then set rates to fully recover those costs. The price consumers paid for power reflected the “real” cost of generating it.

The Fair Hydro Plan breaks that relationship and makes the OEB subservient to political whims. The minister of energy can now use any number of “methodologies” to set electricity rates, regardless of whether rates have any relationship to the cost of generating that power. Any difference between the price consumers pay for power and its actual cost is being deferred to future generations through the issuance of debt. Over the next decade this policy will artificially lower power bills by $26 billion while, over the next two decades, adding $21 billion — on top of that $26 billion — to pay it off.

BC Hydro is following Ontario down a road where the price of electricity becomes a political determination and the regulatory agencies, which were explicitly established to prevent this from happening, watch powerlessly from the sidelines.

Brady Yauch is executive director and economist, Consumer Policy Institute. bradyyauch@consumerpolicyinstitute.org

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