By Bill Andrews

December 12, 2021

The 1.9 million customers on BC Hydro’s Residential Inclining Block (RIB) Rate may be in for some changes. BC Hydro is finishing up “customer engagement” on what may well be a proposal to “flatten” the RIB Rate. BC Hydro will file an application with the BC Utilities Commission in February 2022.

This article describes the RIB Rate and the proposal to flatten it. The article also discusses two potential voluntary residential rate designs that BC Hydro has developed. Links to resources are at the end of the article.

The RIB Rate, Approved in 2008

The RIB Rate is designed to promote conservation and efficiency by charging customers a higher rate for electricity they consume above a base amount. The RIB Rate arose from BC’s 2007 Clean Energy Plan and was approved by the BC Utilities Commission in 2008, with BCSEA’s strong support. It’s called an “inclining block” rate design because the Step 1 price for the second block of power is higher than the Step 2 price for the first block of power. The idea is that the relatively high Step 2 price provides a correspondingly strong financial incentive for customers to reduce, and not to increase, any consumption in the second block.

Currently, the RIB Step 1 price is currently about 9 cents per kilowatt-hour, and the Step 2 price is about 14 cents/kWh. All customers on the RIB Rate pay the Step 1 price for up to 675 kWh of electricity per month (the “threshold”). Any customers who use more electricity in a billing period than the threshold pay the Step 2 price for their consumption above the threshold (and pay the Step 1 price for their consumption below the threshold.)

The amount of electricity consumed by BC Hydro’s residential customers varies widely. About one third of customers on the RIB Rate pay only the Step 1 price (because they never exceed the threshold of 675 kWh per month). Some 43 percent of RIB Rate customers pay the Step 2 price for power above the threshold in some but not all billing periods. And, 23 percent of RIB Rate customers pay the Step 2 price for power above the threshold all year round.

In contrast to the RIB Rate, a flat rate design would have a single price per kWh regardless of how much or how little power the customer uses. The flat price per kWh would be higher than Step 1 and lower than Step 2. Currently, a flat rate price would be about 11 cents/kWh. (See the discussion below about “revenue neutrality.”)

Why bother changing the RIB Rate to a flat rate?

Four main reasons are suggested for changing the RIB Rate to a flat rate. First, the conservation and efficiency impact of the RIB Rate is said to have worn off. Some evidence supports this conclusion, but it’s technically difficult to quantify.

Second, as BC Hydro puts it, “a flat rate removes a barrier to electrification.” A flat rate, being lower than Step 2, would make it somewhat easier financially for the two-thirds of customers who sometimes or always pay Step 2 to adopt “low-carbon electrification measures” such as charging an EV at home or installing an electric heat pump instead of using gas or oil for heating. This benefit would be more muted for the one-third of customers who never pay Step 1.

Third, a flat rate – again, being lower than Step 2 – would be a more appropriate “price signal.” In economic theory, if the price for a customer to buy additional electricity is close to the utility’s cost of acquiring the additional electricity, then a customer’s decision to buy more, or less, electricity at that price will make the best use of the scarce resource (i.e., electricity). In that line of thinking, the high Step 2 price made sense when the RIB Rate was introduced back in 2008. At that time, BC Hydro was keeping up with rising demand by purchasing electricity from new generation facilities at fairly steep prices. Now, however, BC Hydro has surplus energy: its electricity supply is bigger than the total load. As a result, BC Hydro sells the net excess into the wholesale electricity market at prices that are below the price that residential customers pay, even taking into account BC Hydro’s cost of distribution wiring and customer service. So, according to this economic theory, BC Hydro’s residential customers would make economically better decisions about increasing or decreasing their electricity consumption if the marginal price was closer to the current low market price rather than the old, high cost of new electricity generation. However, if you’re still with me, you might point out that flattening the RIB Rate means not only reducing the Step 2 price (improving the price signal for customers who sometimes or always see Step 2) but also increasing the Step 1 price (thereby worsening the price signal for the one-third of customers who only ever pay the Step 1 price). Nothing is simple when it comes to rate design.

The fourth reason for flattening the RIB Rate is the perception that the RIB Rate is not “fair” to customers who have high levels of electricity consumption. Like any rate design, the RIB Rate produces financial “winners” and “losers” depending on customers’ consumption patterns. Customers who have very high consumption have higher electricity bills with the RIB Rate than they would for the same consumption under a flat rate. Similarly, customers with average or lower consumption have lower electricity bills with the RIB Rate than they would for the same consumption under a flat rate. Reverting to a flat residential rate would reverse this bill impact. BC Hydro estimates that approximately 1.4 million customers would have a higher electricity bill under a flat rate than under the RIB Rate; and approximately half a million customers would have a lower electricity bill under a flat rate than under the RIB Rate (assuming no change in consumption).

The financial impact of retaining, or flattening, the RIB Rate on low-income residential customers is an important topic, but the impact is mixed. Low-income customers are more heavily represented in the average to low consumption ranks that would be financially better off retaining the RIB Rate (assuming no change in consumption). However, there are also low-income customers among the high-consuming customers who would be financially better off with a flat residential rate.

Not surprisingly, BC Hydro’s public engagement confirms that customers whose bills would be lower with a flat rate tend to support a flat rate, and customers whose bills would be lower with the RIB Rate tend to support retaining the RIB Rate. Generally, each perspective characterizes the outcome that coincides with their financial self interest as the “fairer” approach.

Transition to a Flat Rate?

If the RIB Rate is to be flattened to a single price for electricity, then the change could be made all at once or gradually over several years. For comparison, BC Hydro provides bill impact estimates by level of annual consumption for total bill impact, and for transition periods of 3, 5, 7 and 10 years. Obviously, a longer transition period has smaller annual bill impacts but over a larger number of years.

The Fine Print

BC Hydro’s proposed rate designs, both for the default rate and any optional rates, are subject to several broad constraints that I will briefly set out. These constraints are supported by various previous decisions of the BCUC, although theoretically the BCUC could change them. My wording here is over-simplified. Please contact me for more detail.

• The residential rates are only for customers connected to BC Hydro’s integrated system (“the grid”). Residential rates for customers in non-integrated areas may be addressed in a future proceeding.
• Rate designs are generally structured to be “revenue neutral” assuming no change in the amount and pattern of consumption. This means, for example, that a default flat rate has to have a cents/kWh price would yield the same amount of revenue as would continuation of the two-step RIB Rate. Another example is that an optional time-varying rate has to have higher-than-regular prices during peak periods as well as the attractive lower-than-regular prices during off-peak periods.
• BC Hydro’s rate designs are intended to comply with the “postage stamp” principle that rates (in this case, for residential customers on the integrated system who currently pay the RIB Rate) are the same regardless of the customers’ geographic location. The postage stamp principle is generally seen as excluding, for example, different rates for rural and urban customers, different rates for customers who have access to natural gas and those who don’t, different rates for customers with large premises and those who live in apartments, and so on.
• The BCUC has determined that it does not have statutory authority to approve a “life-line rate” – a lower rate for customers who can’t afford the regular rates. The Legislature could amend the applicable laws to allow the BCUC to approve a life-line rate. However, neither BC Hydro nor the BCUC can do this on their own.

One additional fine point is that BC Hydro proposes that the current residential “basic charge” of about 20 cents per day will remain the same in all the rate design options. This is not a legal constraint. The purpose is to simplify the comparison of different options.

Another fine point is that BC Hydro will not propose a time-varying rate design as the mandatory, default rate for residential customers. When the BC government required BC Hydro to install residential smart meters in 2008, the government of the day stipulated that the smart meters would not be used for mandatory, default time-of-use rates. This has remained the BC government’s approach and it is understood to be reflected in the government’s ongoing instructions to BC Hydro.

Two Voluntary Residential Rate Designs Proposed

The RIB Rate is the rate schedule that applies by default to almost all of BC Hydro’s residential customers. The BCUC’s upcoming decision whether to retain or to flatten the RIB Rate will directly affect some 1.9 million BC Hydro customers and their families. However, BC Hydro’s examination of residential rate designs is also focusing on two additional possibilities that would be “optional” rates that a customer could choose to opt into.

Both of the possible optional rate designs are “time varying” rates. One is for electricity for charging an EV at home using a customer-purchased meter in addition to the customer’s existing meter. The other is a “time of use” rate design applicable to the customer’s whole electricity load. BC Hydro settled on these two possible optional rate designs after exploring many other permutations and combinations.

The purpose of BC Hydro’s time-varying rate options is to reduce the utility’s cost of meeting peak load by incenting participating customers to shift their consumption away from times of peak demand. Time-varying rate options can be considered a capacity resource, similar to the RIB Rate having been considered an energy resource.

BC Hydro’s 2021 Integrated Resource Plan addresses the amount of capacity that BC Hydro proposes to get from voluntary time-varying rate designs. The final IRP won’t be public until it is filed with the BCUC by December 21, 2021. However, the Draft IRP released last June indicates that the IRP will call for substantial capacity savings — 220 MW by fiscal 2030 – from voluntary time-varying rates supported by demand response programs. In addition, the Draft IRP proposed a combination of marketing and a voluntary time-of-use rate to shift 50 percent of residential EV charging to off-peak periods by fiscal 2030. These are ambitious objectives.

The details of BC Hydro’s two voluntary time-varying rate designs are set out in the slides for a presentation on November 18, 2021 (link below). Optimizing aspects such as the pricing time periods and the ratio of peak to off-peak prices will be crucial to defining rate designs that attract participants and produce load shifting.

BCSEA Supports Innovative Rate Designs

BCSEA has been participating in BC Hydro’s consultation regarding residential electricity rates. BCSEA’s primary objectives for rate design are conservation/efficiency and low-carbon electrification. Affordability for low income customers is also an objective, although rate design is a limited tool in that respect. BCSEA intends to intervene in the BCUC’s proceeding on BC Hydro’s residential rates application in the new year.

By Bill Andrews, BCSEA’s lawyer in BCUC proceedings

Links:

• BC Hydro Residential Rate Design Engagement Session, November 18, 2021
• BC Hydro Draft 2021 Integrated Resource Plan, June 2021
• BC Hydro Residential Rate Design, Information Page
• BC Hydro Residential Rate Design Public Survey
• BC Hydro Zone II Rates