When B.C. Hydro reported a profit of $447 million last year, you probably thought the Crown corporation took in more money than it spent.
Nope. On that basis, Hydro lost $249 million.
But the corporation took $696 million it had actually spent off the books. The money would be deferred, counted as an expense in some future year.
Presto, a loss become a profit. Managers get their bonuses — an average of more than $100,000 each for the five highest-paid execs.
And the government claims its $571 million dividend from B.C. Hydro.
Energy Minister Rich Coleman says this kind of bookkeeping is fine. B.C. Auditor General John Doyle says it isn’t. You decide who to believe.
Coleman would like to characterize this as an accounting dispute. But the auditor general, more convincingly, argues that the government and B.C. Hydro are abusing the use of deferral accounts, and British Columbians are going to pay a steep price in the future.
B.C. Hydro has already pushed $2.2 billion worth of expenses off into the future. It plans to increase that to almost $5 billion by 2017.
But at some point, the Crown corporation has to find that money. It has three options. Slash spending, not likely giving the rising costs of new electricity. Get a big contribution from government, also unlikely.
Or raise electricity rates sharply, a damaging choice for families and the economy
Deferral accounts have been accepted under Canadian accounting standards. The theory is that utilities can avoid rate shocks by smoothing things out over the course of a few years.
If profits increase one year because there’s a lot of rain and B.C. Hydro can rely on cheap hydro power, then it might defer some revenue for a tougher year. If spiking natural gas prices mean power costs more, it might defer some of the expense until prices fall.
But that’s not what B.C. Hydro has been doing.
If the goal was to smooth rate increases, then the total of deferred expenses would rise and fall over time. Instead, the total has just risen steadily. There was just $182 million in deferred expenses in 2005. Today, the total is over $2.2 billion and increasing. B.C. Hydro has no plan to reduce the huge balance.
Other utilities use deferral accounts. But the auditor general includes comparisons with Hydro Quebec and Manitoba Hydro in his report, which show that the amount deferred by those Crown corporations rises and falls as they use the accounts to smooth rates. Hydro Quebec, relative to its size, has deferred one-sixth as much money as B.C. Hydro.
The executive bonuses based in part on what the auditor general said were non-existent profits made headlines.
But the government has been using the same justification to take money from B.C. Hydro to cover its expenses — $3.2 billion since 2000. The auditor general reported that in six of the last 10 years, the government has collected a larger dividend from B.C. Hydro than the corporation’s net income before the deferrals.
Doyle points to a number of problems with the practice. For starters, the whole purpose of financial reporting is to provide an accurate, transparent account of the corporation’s performance. That’s not happening.
The information is also used to make decisions on investment, power purchases and other issues, and those are distorted when inaccurate information is being presented.
The government is setting itself up for future financial hits, as it is becoming dependent on revenue from B.C. Hydro that has been created through an accounting measure the auditor general says is misleading.
And B.C. Hydro will eventually have to deal with the multi-billion deferral accounts — likely by increasing rates sharply.
Doyle says the government should quit using the deferral accounts and present a plan to reduce the $2.2-billion balance, instead of continuing to increase it.
That’s good advice.
Footnote: The use of deferral accounts will become unacceptable under Canadian accounting standards after this year. But the government, which has committed to living up to the standards, plans to opt out of this provision and continue using the accounts despite the auditor general’s concerns.