This month (October 2011) The Auditor General of British Columbia presented his report to Government titled “BC Hydro: The Effects of Rate-Regulated Accounting”. For most folks this is not be a gripping story they will want to master. That of course is exactly what your Government is counting on.
 
To get everyone’s attention here are in his words the financial dimensions of the issue. "As of March 31, 2011, a net total of $2.2 billion in expenses had been deferred and, by government’s own estimate, the balance is predicted to grow to nearly $5 billion by 2017". Since this is a total of deferred expenses one could add current total liabilities and get per capita liability for everyone in BC in 2017 of $4,600 at a minimum. That is for BC Hydro liabilities alone.
 
The Auditor General’s Report describes what the "Regulatory Asset Account" is about. Theoretically it is about smoothing large incomes and expenses across several years. As used by BC Hydro it has been about exaggerated use of credit to fund questionable expenditures.
 
Perhaps a personal analogy might help. Let’s say that in 2006 your house was assessed at $124,840 and you were carrying a mortgage of $65,420 plus credit card/overdraft debt of $42,350. Your real job produced $27,270 before income tax and HST. Your creditors knew that your dad was a good credit risk and in fact had co-signed your mortgage and credit lines.

Now fast forward to 2011. Your house has an assessed value of $194,790 and you have used your new equity and your dad’s credit standing to re-mortgage to $106,320 plus you now have $59,000 of short term debt. In that 5 years you have managed increase your income from your day job to $34,380. Over the five years you have also managed to run up extra expenses of $22,000 which your dad is on the hook for and you have to tell him the amount will increase for certain by $30,000 more 5 years out. Your creditors are okay with this because you have convinced them that the $22,000 and extra $30,000 of future income will materialize because you own a business that is in fact a monopoly.
 
The above values are taken from BC Hydro’s Annual Reports, only the decimals are moved. The guarantor (AKA dad) in BC Hydro’s case is every citizen of BC.
 
Since 2005 when the “Regulatory Asset Account” was zero, about $4.4 billion of expenses have been designated as accounts receivable from rate payers in BC. As the Auditor General mentioned about $2.2 billion remains today. Brace yourselves for higher rates needed to pay this off and more.
 
Erik Andersen; Economist
 

Forward by Rafe Mair

We now know that the BC Campbell/Clark government has deceived the public hugely in their financial statements. Below is a blog from our expert independent economist, Erik Andersen. BC Auditor General John Doyle has exposed this deceit and Mr. Andersen sums it up thusly:

“This is serial lying and a practice regular financial institutions would be fined and/or go to jail for. In your personal life you would not tolerate receiving financial statements that are either deliberately incomplete or deliberately misleading."

Mr. Andersen writes below, “The burning issue here is why should taxpayers expect or tolerate anything less from those who collect and disburse those taxes?”

Supporters of the Liberals continue to plead the case that the NDP government of 1991-2001 were horrible managers of our money and that they, the Campbell Government, being great managers of business, have put things right - so, they say, don’t let the NDP get in and ruin us ahead.

Erik Andersen is too polite a man to say it but I will: This is a goddamned lie, for the facts released by the Auditor General show that since the Liberals came to power they have tripled the provincial debt!

How have they been able to do that?

By hiding debt in Public-Private Partnerships, a system that both Premier Campbell and then-Finance Minister Colin Hansen - in a conflict of interest that takes the breath away - helped to manage and who received honours from these same private sector partner organizations. That amount plus the hidden costs of private power contracts has enabled the government to hide its debts in a manner that the Auditor General has roundly criticized.

It is of interest and importance that Erik Andersen has been talking about this and been in touch with the AG for several months on this and related issues.

Erik Andersen has no political ties whatever.

Now, over to Mr Andersen...

------------------------------------------------------------------------------------------

For those in government responsible for causing the Auditor General to have to write his recent damning report, "Observations on Financial Reporting: Summary Financial Statement 2010/11", it must be embarrassing. What he and his team have written is a documentation of deliberate acts by folks we think are working in the public's interest and who even sometimes think they are entitled to bonuses and great pensions.

The following quotations from the full report have been selected to illustrate two conditions. First is that the government's financial statements are deceits. Second is that these deceits are deliberate.

From his letter of transmission to the Speaker of the House, Bill Barisoff, the AG writes the following:

"This report explains why I had to qualify my opinion on government's Summary Financial Statement, as well as why I removed two of the three qualifications that were in my prior year's audit report, despite the fact that government has not corrected these errors."

Just to not have the reader miss the point, "qualify my opinion" is a polite way of describing a condition that is quite unacceptable to a person with high professional standards - you know, the kind of person you want looking after your personal financial affairs.

From page 5 one can read the following remarks as to how matters financial came to be in such a sorry state in BC:

“My audit opinion for the 2010/11 fiscal year contains one audit reservation, indicating that the financial statements are not in compliance with Canadian generally accepted accounting principles (GAAP). This is one of the three audit reservations that featured in my 2009/10 opinion."

Mr. Doyle goes on to write, "Government had amended the Budget Transparency and Accountability Act (BTAA). The amendments set the stage for the B.C. government to depart from reporting its financial statements under Canadian GAAP. Recently government took the next step by amending the BTAA to change its future definition of GAAP for BC Hydro's rate regulated balances, which are very significant. I remain very concerned that government is choosing to override the independent standard-setting process."

So to rephrase, government has used its legislative power to redefine accounting standards to accommodate its deceit. The principal beneficiary of this accounting trickery is BC Hydro. I hope no one is prepared to suggest that by this deliberate act of deception the people of BC, who own and guarantee the debts of BC Hydro, are better off - because if there is such a person out there we all want to know of you.

On page 7, the "recommendations" to government are presented.

It starts off asking for honesty in disclosure of debts. Featured further on is a concern about contracts that need full disclosure.

Featured on page 15 is a discussion on the use of International Financial Reporting Standards (IFRS). The AG points out that IFRS does not permit the use of rate-regulated accounting as has and is being done at BC Hydro. In fact the rate-regulated assets at BC Hydro in Mach 2011 totaled a breathtaking $2.160 billion! This account was zero as recently as 2005.

To put the cap on what is so horribly wrong with BC and BC Hydro's finances, read page 17:

"As a result of this legislation, government has taken it upon itself to define GAAP, rather than following the standards set by the Canadian Accounting Standards Board. It concerns us 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 effect on the financial statements of BC Hydro and the Province's Summary Financial Statements."

Our Auditor General has given us "smoking gun" evidence that proves our government is addicted to deception. What are you going to do about it?

Perhaps now folks will take seriously the representation that government has crafted a design to take BC Hydro private. How much more legislation needs to be presented as evidence in support of such an assertion before the media and public finally deal with what is so obviously occurring right under our noses?

The Government of British Columbia, has for the past 8 years, directed BC Hydro to increase provincial power generation (contracting with IPPs) and transmission capacity to serve a yet-to-materialize provincial demand. The official forecast by BC Hydro in 2006 indicated domestic demand would be almost 25% greater in 2010/11 than is actually the case. A resolve to stick with this exaggeration continues to this day despite multi-year evidence of a gross over-supply condition throughout the Pacific Northwest. Because BC Hydro did follow orders, the generation and transmission capacity in BC has been and will continue to have large financial consequences for ratepayers and citizens, the guarantors of the BC Hydro’s debt. 
 
In the Fiscal year 2006 BC Hydro generated and delivered 52,002 GWhrs of electricity which was what its BC customers required. BC Hydro used $9.610 billion of fixed assets (property, plant and equipment) to do this work. It also used over $1 billion more in total liabilities.
 
By Fiscal 2011 the demand for electricity from BC customers had decreased to 50,607 GWhrs.

Next is the worrying part. BC Hydro had by this time increased its investment in fixed assets to $15.211 billion and taken total liabilities to $16.599 billion. In the course of this period BC Hydro managed to invest and borrow 60% more money to get a smaller amount of product output and delivery than in 2006. This change is a breathtaking example of loss of productivity of capital.

Just to reiterate, BC Hydro's "Fixed Assets"(real) total is now surpassed by "Total Liabilities" by nearly $1.4 billion. This real asset shortfall is covered by fictional assets such as "Goodwill" and the "Regulatory Asset Account" (receivables from ratepayers from pending rate increases).

So how is this reckless use of capital showing up as pain? For a natural monopoly it always is translated into what we all are forced to pay. To ensure independence the data that follows is taken from an annual report prepared by Quebec Hydro carrying the title “Comparison of Electricity Prices in Major North American Cities”. This report covers 22 major cities and is prepared in the 4th quarter annually. The values are as at April 1st in each year and do not include “rate-rider” amounts nor taxes.

For Vancouver:             Residential (1,000 Kwhs)    Small Power (10,000)   Medium (up to 400,000)   Large (above)                                           
(CDA cents per KWhr)
 
2006                                6.41                                      7.02                                 4.92                                   3.53
 
2007                                6.65                                      7.27                                 5.10                                   3.65
 
2008                                6.98                                      7.63                                 5.35                                   3.84
 
2009                                7.13                                      8.02                                 5.62                                   4.03
 
2010                                7.79                                      8.76                                 6.15                                   4.40

The data above shows that over the 5 years rates have risen by between 21% and 24%. According to the latest BC Hydro Annual Report they are seeking rate increases of 9.73% in each of the years 2012, 2013 and 2014. If BCUC and the Government accommodate this request then residential rates in 2014 would be over 10.1 cents or nearly 60% above those in 2006.
 
These rates also show small businesses in BC are penalized just for being small. As to “Large” (industrial) customers, they enjoy rates that are about a third or less what BC Hydro is currently proposing to pay new IPPs and less than half what is estimated for Site C costs of production.

This summary provides evidence that our Government has pursued policies that sabotaged the energy competitiveness we used to enjoy. BC had an energy "edge" that has been and is being lost because of policy mistakes. Command economics, as practiced in BC, will never bring financial and social optimization just because this approach is always designed to serve narrow self-interests ahead of all others.

Editor's Note:  Despite the criticism of BC Hydro's big-dollar infrastructure plans by the BC Liberal Government following its handpicked panel review of the utility's proposed rate hikes, Energy Minister Rich Coleman maintains it's full steam ahead for the $8 Billion-plus proposed Site C Dam.

So what is a "command economy"?  Most readers will immediately think of examples like North Korea, the former USSR and China. The term is used as a put down by smug westerners dismissing socialist, centrally-planned states that generally suppress freedom and private ownership.
 
Well sorry to disappoint but it is not at all about politics but about control of public assets by an individual or a small group who usually have self-interest as their principal reason for all they do and say. There are many definitions of the term and here is one:
 
"An economy in which business activities and the allocation of resources are determined by government order rather than market forces."

There are several places to begin but a good start is to consider the government's directions given to establish a power generation facility on the Peace River, known as Site C Dam. The place to begin is at "Bill 17- 2010: Clean Energy Act", followed by "The BC Energy Plan".

By these and supporting directives our Government is giving its commands. In the words of West Coast Environmental Law, the Clean Energy Act "eliminates independent oversight of the BC Utilities Commission for the Site C dam." This act also establishes a mandate that "BC must achieve energy self-sufficiency, that it must have an electricity surplus of 3,000 gigawatt hours by 2020, and that it will become a net exporter of electricity." (These self-sufficiency and insurance requirements were criticized in the recent panel report on Hydro's finances).

Now we know who is giving commands and that these commands are not based upon any credible and independent market information. To illustrate the measure of propaganda being used by our government I refer you to 1 of 7 policy action statements presented in the "2010 Energy Plan". It is written that BC will "Maintain our competitive electricity rate advantage".

Starting in 2006 Quebec Hydro has produced an annual report showing electricity rates for various places in North America. In 2006 BC was the place with the lowest rates for almost all customer categories. By 2010 we had slipped to being the 4th or 5th from the lowest. The Minister had to have known of this report and of the vector for BC rates before writing the above drivel in "The BC Energy Plan" he signed.
 
Besides giving commands to borrow, spend and build, our government has also decided it knows just how much electricity we will need in the foreseeable future, regardless of costs. In 2006 the official electricity demand "forecast" for BC customers started with a number of 58,159 GWhrs which was 14% greater than the previous year's recorded sales. By 2011 this exaggeration had increased to a 23% differential with further widening all the way out to 2025.

Being so wrong would be of little consequence if these purposely generated errors were free of costs, but unfortunately acting on mistakes of this type become terribly expensive. Deciding to build generation plants like Site C and to contract for energy from private power companies (IPPs) - using this exaggerated outlook as the justifying rationale - only means unnecessarily high and fast rising rates. Even without the burden of Site C it now takes 60% more asset value to generate and deliver the same unit of energy to BC customers than it did just 10 years ago.

The associated debt has the same vector. It is without exaggeration that BC Hydro has presented the citizens of BC with the best possible example of how not to get efficiencies from new investments. The notion of failing to gain efficiencies from new investments is thought to be evidence of the worst feature of a "command economy" and is rightly the subject of ridicule.

In a recent public presentation, David Conway from BC Hydro proclaimed that Site C would produce electricity at about $90 per megawatt. He was also reported to have said that "BC Hydro can't keep up with peak demand." The reporting journalist refrained from giving the $90 figure and peak demand any context. Traditional BC Hydro generation assets produce electricity at about $35 per megawatt. During recent periods, up to and including recently, the Pacific Northwest futures trading prices per megawatt for the most expensive electricity (firm delivery) was between $35 and $45, or less than half of what he thought was so great about Site C costs.

Also missing from the article was any recognition of the declining per capita consumption of electricity in BC, a not unexpected reaction to rising rates in a quiet economy. David should have mentioned that in recent years BC Hydro has been blending IPP contracted energy with energy from legacy assets. Of the total annual amount consumed in BC, 50,000 GWhrs, about 10,000 comes from the IPP group.

This means in turn that traditional generation assets are being partially placed on standby. More importantly, this reserve of generation capacity does provide the insurance needed to meet unpredictable periods of peak demand. The further irony here is that with the introduction of the controversial new "smart metering" technology (also apparently proceeding, regardless of the recent Hydro report), BC Hydro is giving itself a new tool to manage demand peaking.
 
The "Command Economy" model has been the style in BC for the past decade. About $80 billion in contracts have been signed by your government outside the legislature and Site C will be an addition to this total.

A "Command Economy" is invariably one that uses the public's assets to make very poor investments that are nowhere close to being in the public interest. That is the reality with Site C. It is not needed by any independent evidence and certainly not at the projected cost of production, nor the cost to the environment.
 
We in BC desperately need to recover our democracy before our government signs us into debtor's prison.
 

Editor's Note: The Common Sense Canadian presents a second in-depth report from economist Erik Andersen on the troubling trajectory of BC Hydro's finances. After first exposing Hydro's increasingly shaky financial position in these pages last year, Mr. Andersen now delves into the numbers to show the inevitable consequences of this situation for the province's ratepayers: skyrocketing power bills for years to come. On the bright side, we are making real headway in terms of domestic energy conservation - and yet, Hydro continues to commit us to more private power contracts we simply don't need.

---------------------------------------------------------------------------

January news releases by BC Hydro indicated the intention to alter the “Standing Offer Program” (SOP) by giving new Independent Power Producers (IPPs) higher contract purchase prices for the electricity they generate. “The SOP pricing has been increased between 14 and 29%, depending upon the location of the project.” The SOP is a special private power purchasing program - separate from the "clean power call" tendering process - for "smaller" projects, which are entirely exempted from any public review process or environmental assessment. In addition to raising the purchase price for this power, BC Hydro intends to up the maximum size from 10 to 15 Megawatts.

What follows is a presentation about declining productivity at BC Hydro and why it is folly to be promoting more generation capacity in the circumstances of 2011.

It is instructive to look at the BC Hydro record when making a judgment as to their intention to contract for more IPP generation capacity. BC Hydro presented a ten-year outlook “for new resources” in their 2000 Annual Report. By 2009 the “probable forecast” of demand was to be 65,000 GW hrs. It was not made clear if this included demand from other than BC customers but it should not have as the corporation is only directed to serve the interests of BC customers ("domestic" customers in their language).

The actual energy sale to domestic customers in 2009 was 53,588 GW hrs - and by 2010 it had fallen to just 50,233 GW hrs.

This exaggerated outlook at future demand was in error by 21% (and 29% by 2010). From 2000, when the outlook was presented, there were 9 years of records that should have prompted a major revision of this inflated projection.
 
What would have been a better way to look at “planning for the future"?

Graphic 1 below shows the annual domestic and trade (export) revenues from each of the past 11 years. Only minor changes in total domestic revenues have occurred. A slight increase in later years is explainable, not by volume of sales increases, but rather by rate increases. By comparison, revenues from sales to others have been very volatile and sharply lower in the most recent years. This record is indicative of a fickle market and one that should be avoided, not one to chase after. Planning for the future is therefore relatively straightforward. The strongest positive correlation is between the province’s population and per capita demand.


Graphic 2 is a demonstration of this relationship. It is divided to indicate the record up to 2010 and a projection to 2025. Because there has been a recorded  drop-off in per capita electricity consumption in the past 2 years, it is reasonable to think of this continuing. Per capita consumption will decrease as citizens are forced to make accommodation in their budgets for higher food prices, taxes such as the HST, etc. There will also be substitution in response to higher rates, as is now occurring. Lastly, more people will try to lower consumption using an array of conservation methods such as more insulation, etc.


Graphic 3 is an extrapolation of the per capita consumption rates combined with the official projection for provincial population numbers, expressed in gross electricity demand for the province. As this graphic illustrates, the zone of highest probability indicates that by 2025 the domestic demand would range between 45,000 and 60,000 GW hrs.


For the reader to appreciate the preceding outlook, it is instructional to look at BC Hydro’s financial record. With most businesses it is usual to expect increasing capital investment will produce improved productivity. The exact opposite has occurred at BC Hydro.
 


Graphic 4 below is an expression of asset and debt amounts, per GW hr of domestic production and sales, in each of the 11 years. At a glance it is easy to see that for a unit of energy, the needed financial resources remained remarkably constant until 2008 when we see the “Hockey stick” curve develop. In a few short years it suddenly took about 40% more financial resources to produce the same or less GW hrs of energy needed by domestic consumers.
 


So what does this record indicate?

BC Hydro is using vastly more financial resources to produce and deliver the amount of energy the domestic customers will need into the foreseeable future. This divergence in cost versus demand can only be managed by much higher electricity rates to its captive customers. Seeking greater returns from other than domestic customers is akin to pushing on a rope.

Promulgating a call for more IPP generated energy, at even higher than previous prices, suggests a situational awareness deficit at BC Hydro and is an insult to its customers.
 


Erik Andersen, Economist
 February 13, 2011

Article by Erik Andersen in the North Shore News. "All indices that have not been politically contaminated continue to reflect a weakening economy in B.C. and, by extension, a lessening of the demand for electrical energy. My invitations to other experts to explain or justify Hydro's massive increase in borrowing, spending and productivity on the basis of domestic "need" have gone unanswered." Read article

An Economic Analysis of the Impact of the Campbell Private Power Policy on the Financial Health of BC Hydro

A vector gives information as to direction and the magnitude of a changing position. A series of financial statements can also provide vector information about the financial health or otherwise of corporations.

• The first vector is of the direction and speed of change for the operating net income at BC Hydro. In fiscal 2007 (financial year ending March 31, 2007) BC Hydro’s net operating revenues, less financing expenses, were $379 millions. By 2010 the recorded loss was $249 million. In the four year period there has been a $628 million reversal of net operating income.
• The vector for recorded demand is also instructive. Expressed in GWhs (what BC Hydro sells) total volume of domestic (inside BC) sales went from 52,440 in 2006 to 50,233 units by 2010. After five years at the 52/53 thousand levels, demand dropped away sharply in fiscal 2010.
• A handy vector is the ratio of debt-to-equity. A ratio of 0/100 is the extreme where the corporation or individual has zero debt. The opposite extreme is 100/0 where there is no equity. There can even be conditions where the debt is greater than 100. A ratio of 100/0 can be evidence of insolvency. At BC Hydro this ratio had traditionally hovered around the 70/30 mark. The 2009 Annual report showed a remarkable change to 81/19. After calling upon the “Regulatory Account” for the 2010 year the debt-to-equity ratio is now presented as 80/20. If the “regulatory account” transfers were stripped from the BC Hydro financial statements, the ratios for 2009 and 2010 respectively would be 87/13 and 89/11.
• Productivity vectors always help to illustrate if we shareholders are getting value for money. In fiscal 2007 about $236,000 of capital was used to produce one GWh. By 2010 it took 38% more capital to get the same quantity of energy for domestic customers. By this evidence it looks as though the system is becoming less efficient. Liabilities also mirrored this vector.
• The final vector of note is the immediate prospect of new and expensive contractual obligations associated with the call for power from Independent Power Producers (IPPs). From page 10 of the 2010 Annual Report BC Hydro states that “During fiscal 2010, IPPs provided 8,893 GWhs of energy to the BC Hydro system, which accounted for about 16 per cent of total domestic electricity requirements.” A December 2009 report from Price WaterhouseCoopers projects that existing and potential IPP projects will deliver 35,470 GWhs by 2020. The estimated total capital deployed would be $26.144 billion. That translates into $737,074 of new capital to produce one GWh or 126% greater than the already elevated 2010 level. Amazing!

Now what to make of this all? First off it was clear as long ago as 2006 that the growth in domestic demand for electricity was slowing and reversing. With this evidence it is hard to understand why the management and Board at BC Hydro embarked on the increased spending and aggressive contracting for energy from IPPs. From the 2010 Report it is manifestly clear that sales to outside of BC customers have collapsed. That leaves only the captive domestic customers to carry the growing financial burden.

As the evidence of need for more electricity in BC is not apparent, the aggressive borrowing/investing/contracting with IPPs is plain wrong. It is improbable that the BC Hydro team are “financial illiterates” so there must be some other explanation; hence the word “sinister”.

Some questions arising from my August 16, 2010 report re: BC Hydro that must be dealt with immediately

1. Hydro borrowing/spending is at an unprecedented rate at the very time when there was at least 4 years advance notice of a slowing domestic demand. There is no credible projection of improved economic circumstances for at least the next 3 years. This is irresponsible by Hydro's board and management as it has increased the risk of financial insolvency.
2. The available evidence indicates that Hydro is paying IPPs more than double the open market rates prevailing in western North America. By the 2010 sales to others collapsed by 50% in 2009/2010.
3. The best available consulting report indicates that from now to 2020 new IPP producers will use more than double the capital now used by Hydro to produce a single unit of saleable energy. This is the antithesis of improved productivity normally expected when large capital projects are begun.