Energy costs and prices. We all think about them at frequent intervals. The reason is that energy is central to all that we do. It is the oxygen of modern economies. Whether it’s gasoline prices —Metro Vancouver has the highest prices in North America[1] — or electricity rates, where B.C. has some of the lowest, many people feel that energy costs too much. At face value, one could argue this is not true for electricity in B.C. But electricity is only one part of the larger energy picture.

For context: Electricity is a secondary form of energy. It is derived from a primary energy source such as burning fossil fuels, using uranium, or harnessing water, sun, and the wind to move a machine to generate an electric field, which itself is then used to move another machine to perform work. Electricity systems are generally monopoly ventures given the economies of scale and scope needed to build and operate the type of infrastructure required to generate, transmit, and distribute electricity, reliably, to consumers. The three main players in the sector are the utilities — who either build their own facilities or buy from independent sellers (mostly generation rather than transmission or distribution); consumers — who are divided into three broad categories of residential, commercial and industrial; and, regulators, whose role is to look out for the interests of the captive customers. Regulators are usually arms-length from and independent of government (albeit under some kind of ultimate political control).

What consumers pay for electricity is based on a public discovery process led by the regulator. Utilities have significant business costs. These are compiled and submitted as revenue requirements — the total amount of funding needed to provide electric service to customers. Regulators evaluate all the costs of business submitted by a utility according to a generally accepted set of accounting rules, and after testing them will approve those costs that they find to be prudent. The outcome is converted into a schedule of rates designed to recover the approved costs. Rates are typically expressed in cents per kilowatt hour paid by each class of customer. A simple framework in theory, but not always in practice.

How does B.C. stack up? The answer: at first glance, quite well, according to Quebec Hydro, which compiles a widely cited annual comparison of electricity rates in North America.[2] Since rates are the same in Vancouver as in the rest of British Columbia (except for non-integrated areas), we can say that British Columbia has the fourth lowest industrial power rates and the third lowest residential rates on the continent. Given the similarity of the rate regulation model used in OECD countries, we also looked at some European countries for comparison. Again, British Columbia appears to have some of the lowest electricity rates among advanced economies. However, this statement is misleading in some respects.

Figure 1

Industrial Rates (>3 million kWh) for Select Cities in North America
(excluding taxes), 2018

Source: http://www.hydroquebec.com/data/documents-donnees/pdf/comparison-electricity-prices.pdf.

Figure 2

Residential Electricity Rates for Select Cities in North America, 2018

Source: http://www.hydroquebec.com/data/documents-donnees/pdf/comparison-electricity-prices.pdf.

While B.C. ratepayers are not alone in facing rate increases,[3] at the crux of the concerns of British Columbia industrial (and some large commercial) power consumers is the combined effect of recent rate increases on top of a seemingly endless layering of tax and other government-dictated costs. Industrial electricity rates in B.C. rose by 17% between 2014 and 2018, or roughly 3.4% per year— much higher than the rate of inflation.[4] Importantly, however, electricity is but one of many factors of production for any enterprise. These rising power costs (and future liabilities from significant deferred assets and liabilities in the B.C. Hydro system) are added to the burden of continuously rising government-imposed taxes, fees, and regulatory requirements across multiple areas and sectors. Since 2013, business in B.C. has seen the return of the Provincial Sales Tax (resulting in an aggregate cost increase of more than $2 billion in added production and capital costs[5]), a two-point rise in the corporate income tax rate, escalating property taxes, and higher carbon taxes. The province’s once prized comparative advantage in electricity is eroding, at a time when other elements of the competitive landscape are deteriorating from the perspective of most of the industries that drive B.C.’s exports.

Meanwhile, electrification is seen by some as the answer to arresting the increase in global greenhouse gas emissions. Of course, electricity is only as clean as its fuel source, and it is not always the right energy input for some processes or activities – it depends. B.C.’s >95% clean generation resources are indeed an advantage. And yes, price matters, even if you have low rates in comparison to your peer jurisdictions. Unfortunately, we are slowly and surely chipping away at our historic comparative and competitive advantage in electricity, even as other aspects of the competitive environment are shifting in ways that make it harder for many companies to justify deploying capital here.

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[1] https://tradingeconomics.com/canada/gasoline-prices.

[2] http://www.hydroquebec.com/data/documents-donnees/pdf/comparison-electricity-prices.pdf.

[3] Over the same period industrial rates in Regina rose by 19%, in Winnipeg the increase was 14% albeit from a base on 4 cents/kWh, and rates in Calgary increased by 12%.

[4] Inflation by year: 2014: 1.0%, 2015: 1.1%, 2016: 1.8%, 2017: 2.1%, 2018:2.7 (January to November average).

[5] PST is being phased out on purchased electricity for business, but still applies to a wide range of other business inputs as well as many types of capital goods.