Christy Clark’s cautionary tale for Horgan’s NDP regime

A new premier rides into office on a promise of improving affordability for ordinary families, but quickly finds the government’s agenda threatened by a looming financial crisis and massive rate hikes at B.C. Hydro and the Insurance Corporation of B.C.

No, it’s not just the story of John Horgan’s early days as premier, and his retreat last week on a promised Hydro rate freeze.

It was also the predicament faced by his predecessor, Christy Clark, when she assumed office in 2011. How she responded provides a cautionary tale for Horgan’s New Democrat regime, because her pursuit of “affordability” for taxpayers has only made the problem worse.

Clark rode to the premier’s office on a “families first” agenda in 2011, promising to lower fees and taxes. But once there, she found Hydro threatening to raise rates 50 per cent over five years and ICBC prepping for doubledigit basic auto insurance hikes because of crash claims rising at an alarmingly rapid pace. Clark had the populist touch. So she deployed a populist solution: Two scorching audits of the Crown corporations that pared back executive compensation, bonuses, managerial jobs and unnecessary spending to satisfy the public’s outrage at skyrocketing bills.

It played well at the time, the new premier riding in to find “operational savings” in the ballpark of $500 million to $1 billion between both Crowns.

But plucking the low-hanging fruit of operational savings didn’t come close to solving the structural problems that continue to threaten Hydro and ICBC. Especially because what the Liberal government saved with one hand, it took back with the other.

For years, successive governments have milked both Crowns, padding their provincial budgets with excess money ICBC and Hydro could have used internally to keep rates down.

For Hydro, it started under an NDP government in 1992 that determined 85 per cent of Hydro’s annual net income should be returned to the province as a dividend to help pay for health care, education and social services.

That worked fine in profitable years, but when Hydro’s finances were tight, the governments of Mike Harcourt, Glen Clark, Ujjal Dosanjh, Dan Miller, Gordon Campbell and Christy Clark still expected the dividend. And so Hydro was forced borrow.

Of more than $6 billion in dividends Hydro paid to government since 1992, approximately $3.8 billion was borrowed.

All the government pressure on Hydro filtered into its budgeting process. It started pushing off money into future deferral accounts so it could meet the ratios required to give government its annual dividend. B.C.’s auditor general tried to sound the alarm, saying the increasing reliance on deferral accounts “can mask the true cost of doing business, create the appearance of profitability where none actually exists, and place undue burdens on future ratepayers.”

There’s now almost $6 billion in Hydro’s deferral and regulatory accounts — basically, loans that electricity users will have to pay for one day in the form of higher rates. Hydro continues to spend roughly $2.4 billion annually to upgrade its aging transmission lines, seismically secure its hydroelectric dams and build the $10-billion Site C dam. As veteran energy analyst David Austin noted at a recent B.C. Utilities Commission hearing, you could fire all of Hydro’s staff, cancel all its private power contracts, and the corporation would still have to keep raising rates because its true cost pressures lie in paying for all its deferral accounts, building and upgrade projects.

To make matters worse, the Clark government straitjacketed Hydro with a 10-year rate plan that it said would raise rates slowly over time to cover costs. But in the BCUC ruling that rejected Horgan’s rate freeze Thursday, commissioners noted that even the three-per-cent increase called for by the Liberal plan this year did “not fully recover BC Hydro’s approved total forecast revenue requirement.”

It’s a similar story at ICBC. Whatever gains the previous government made with its operational review, it washed away in 2013 when it set a “rate smoothing ” policy that limited ICBC to average rate hikes of 5.5 per cent annually. As the number and cost of bodily injury claims began skyrocketing in recent years, ICBC needed double or triple the rate increases to stay afloat.

The Liberals ignored suggestions to reform ICBC’s insurance model to stave off the coming crisis, going so far as to erase independent recommendations from reports so the public wouldn’t see them. Instead, they tried to cover the losses, allowing ICBC to take surpluses from its more profitable optional insurance business and dump the cash onto basic rates to keep them artificially low.

But the jig was up last year when the optional business turned a loss, and cross-subsidization failed. Now ICBC is on track to lose $1.3 billion this year.

The new Horgan administration is certainly aware of how bad things are at ICBC and Hydro.

Last month’s provincial budget listed ICBC as one of the single biggest risks to the NDP’s fiscal plan. “The work for us on ICBC is pretty clear,” Attorney General David Eby said last week on Voice of B.C. with Vaughn Palmer. “They’re in a huge financial mess.”

Energy Minister Michelle Mungall is also on high alert. “There’s a mess at B.C. Hydro,” she said Thursday, reacting to the BCUC decision to reject her Hydro rate freeze. “It needs to be cleaned up and I hear that.”

Eby has brought in $5,500 caps on pain and suffering claims for minor injuries at ICBC, with more reforms on the way. Mungall has launched a nebulous “review” of Hydro’s operating expenses, with a good chance it will focus on the kind of cheap and easy savings Clark’s Liberal government already picked in 2012.

The NDP’s goal for both Crowns will be to keep rate increases as low as possible. Horgan stole a page from Clark’s playbook in the 2017 election, running on a theme of “affordability” that mimicked much of her early families first agenda. Now in office he faces the same conundrum Clark did: It may not be possible to truly fix the messes at ICBC and Hydro while at the same time honouring an election promise to keep rates down. The two goals aren’t compatible. One is good long-term policy, the other is good shortterm politics. Horgan will have to choose his path carefully.