“It concerns me that government is willing to override the due process that is involved in the setting of Canadian accounting standards, and instead legislate an accounting result that will have a significant impact on both the financial statements of BC Hydro and the province.”
NDP MLA Bruce Ralston said the report shows the B.C. Liberal government has used questionable accounting practices to create a “false picture of the finances of the province.”
Ralston said the deferrals have allowed Hydro to pay a substantial dividend to the province. “The government wants the dividend to reduce the deficit and balance the books so they’ve used an entirely artificial way of achieving that.”
He added that taxpayers could face a “day of reckoning” down the road. “At some point you are going to have to pay the piper and the impact on the bottom line of the province may be dramatic.”
The New Democrat said the report indicates how the provincial government has been “torquing the financial status of BC Hydro in a number of ways and so really it’s no wonder that Mr. [Dave] Cobb decided to bail out and head off to another job.” Former Hydro CEO Cobb quit his $550,000-a-year job at Hydro earlier this month to work for the Jim Pattison Group.
B.C. Energy Minister Rich Coleman defended BC Hydro’s accounting practices, saying deferral accounts are regularly used by utilities to finance large capital projects, such as the proposed Site C dam or smart meters.
The accounting procedure allows Hydro to stabilize rates, said Coleman, by deferring some of the expenses until later when they are balanced by revenues.
“It’s a question of whether people like deferral accounts or not,” Coleman told reporters, adding that the B.C. Utilities Commission has sanctioned deferral accounts and that the practice is also used by energy utilities in other provinces.
A decade ago, Hydro used deferral accounts to smooth out the bumps and drops that occur in its annual revenue as a result of year-to-year fluctuations in weather.
In years when it rains and snows a lot, Hydro enjoys a surplus of water in its reservoirs and has an opportunity to make money by exporting surplus electricity to the United States.
In dry years, Hydro becomes a net importer of power from the U.S. and ends up with a net loss on its books.
The most immediate way of dealing with the situation is to adjust rates each year to reflect the net profit or loss that the weather patterns create for Hydro.
But that could be financially challenging for Hydro customers, including large industrial operators and families on limited income, who rely on stable electricity rates.
Since March 2000, Hydro has addressed this problem by using deferral accounts – on the premise that over a period of about five years, there would be enough of a balance of wet and dry years to keep the debt in the range of about $300 million.
That’s no longer true. Over the past decade, Hydro has devolved into a chronic net importer of power, meaning there are fewer opportunities to rebalance the books.
Still, the practice persists. At last count, Hydro has created 27 separate deferral accounts.
Industrial customers warned in 2008 that Hydro was extending the use of deferral accounts beyond purposes related to fluctuating water volumes in reservoirs – notably, to pay the provincial government an annual “dividend” on Hydro’s earnings.
That dividend was $463 million in the most recent fiscal year, which ended March 31, 2011 – with Hydro reporting a net loss of $249 million for the year.
Not all deferrals are political. Hydro in 2008 deferred a onetime opportunity to purchase – at a relative bargain rate – some hydroelectric production capacity from cash-strapped Teck Mining in southeastern B.C.
Last year Hydro deferred about $500 million of expenses associated with its $900-million smart meter launch.
It also set up a $1-billion account for costs associated with its Power Smart energy conservation programs.
The problem is that there’s no apparent way to recover those costs without rate increases beyond the ones Hydro has already proposed.
In August, a government review chopped a proposed three-year, 29-per-cent rate hike to 16 per cent and called on Hydro to cut costs to make up the difference in revenue.
Doyle’s report notes that Hydro is paying interest on only 14 of its 27 deferral accounts, and that it’s piling up interest charges that exceed the amount of its annual payments.
For fiscal 2011, Hydro’s interest charge on 14 deferral accounts was $37 million – whereas interest payments were $32 million.
This could be a problem for B.C. once global accounting standards come into effect next year – and bond rating agencies which determine government credit ratings and interest rates determine the degree to which B.C. fails to comply with international expectations for bookkeeping transparency.
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