Government of British Columbia, June 2011
Excerpt from the Executive Summary
On March 1, 2011, BC Hydro filed its most recent application with the British Columbia Utilities Commission, seeking approval for rate increases of 9.73% for each of the next three years (a cumulative increase of 32%). Significant concerns were expressed regarding the impact the rate increase would have on BC families and other power consumers. As such, the Premier and the Minister of Energy and Mines on behalf of the Province of British Columbia, as the sole shareholder of BC Hydro, requested a review of BC Hydro in order to provide recommendations and options for minimizing the rate increase.This was to be accomplished by examining both the operating and capital requirements for the corporation.
A comprehensive financial and administrative review has been completed, which includes examining the governance structure of the corporation, the business planning process and a series of areas critical to BC Hydro’s financial performance, including forecasting, procurement of goods and services, general operating costs, capital assets and the rate structures themselves. The review also examined a number of key initiatives underway within the Crown Corporation and the impact of government policy on the effective operation of BC Hydro.
Throughout the review it was apparent that BC Hydro has had a very strong customer service focus, with core objectives of safety and reliability. While the panel believes that BC Hydro has done a relatively good job of providing reliable and safe electrical services to the residents of BC at low rates, BC Hydro’s operating costs have been increasing over recent years. The panel would like to acknowledge the initiatives and efforts of BC Hydro on worker safety and feels these steps are appropriate. The panel’s recommendations included in this report are not intended to detract from BC Hydro’s safety initiatives.
During the review, the panel noted BC Hydro still has inefficient processes and practices and considered some expenditures generous at the expense of ratepayers. The extent to which BC Hydro’s current initiatives address the short term cost pressures is not enough to impact the immediate rate increase; BC Hydro requires a more aggressive approach to achieve cost savings including a review of all significant costs within the organization. Cost savings are required to reduce the planned rates and proposed costs savings must be realized soon.
The panel has determined that BC Hydro can reduce costs by achieving efficiencies in a number of areas, including paying greater attention to operational processes, capital asset planning and management, utilizing stronger procurement approaches and project management. As well, the panel discussed with BC Hydro the setting of specific targets to reduce administrative costs.
The operational cost savings are the most immediate way to reduce short term rates for ratepayers and their families. Longer term rate reductions will be achieved through operating cost efficiencies, long term capital planning and policy decisions. Postponing capital projects and deferring costs in regulatory accounts may maintain or reduce short term rates but could put upward pressure on future rates.
It is the panel’s opinion that, due to the regulatory environment and the corresponding corporate culture in BC Hydro, "being the best” and the resulting desire to have the gold standard is not necessarily for lowest cost or greatest value for money. The corporation is focussed on justifying incremental rate increases and associated costs rather than employing a zero-based operating budget development methodology to understand its underlying cost structure. Understanding the base costs will provide BC Hydro greater opportunity to challenge the current costs and improve overall cost effectiveness.
Also, the corporation has traditionally operated by silo, reducing efficiency and hampering the synergies from a more collaborative working environment.
As a result of the regulatory environment and corporate culture BC Hydro has become very risk adverse, increasing both operating and capital costs and limiting the potential effectiveness of the organization. We observed many examples of excessive planning, over engineering of projects and the use of multiple layers of contingencies and reserves in order to satisfy various stakeholders and regulatory agencies.
BC Hydro’s strong focus on service, safety and being the best are very good objectives, however, they need to be pursued in the context of balancing need and costs. The panel found that there is a general need to improve the communication between the province and BC Hydro, specifically, in regard to the examination of policy options to improve information available for decisions. BC Hydro also needs to more effectively manage its relationship and utilization of the vendor community with a view to optimizing efficiencies and cost effectiveness in service delivery.
With new executive leadership in place at BC Hydro, the panel acknowledges change has occurred and is confident that further positive steps will be made to transform the organization.
