Erik Andersen is a retired economist who practiced as a transportation economist with the Canadian Transport Commission; with Airports Branch, Transport Canada; with ICAO and at private corporations such as Pacific Western Airlines. He has been using his talents of late to expose the calamitous fiscal impact of private power companies on British Columbians.
"The Darkest Places in Hell are reserved for those who maintain their Neutrality in Times of Moral Crisis." - Dante Alighieri
The citizens of BC had a front row seat to an election outcome that remains almost impossible to comprehend. After a determined push back of the much reviled HST, it appeared very probable that the Liberal Party would go down to a well earned defeat. It would have been a defeat, not so much because a better option was thought to be on offer, but more because enough voters had lost their trust in those who seemed divorced from contemporary economic realities and who were not serving the public’s interests.
Standard & Poor’s issued a public report dated 15 April, 2011, titled “Canadian Provinces Face Tough Choices in Restoring Fiscal Balance”. The report directed provinces to curb rising debt levels and to correct the practices of deficit budgeting. It also recommended operating expense savings to be found in the budgets for health care and education. “Rising debt service burdens further limit financial flexibility because as these burdens increase as a share of total spending, they crowd out other program spending," claimed the report. "Debt service expenditures are contractually bound and as such cannot be easily cut.”
This was an unambiguous disclosure that provincial credit ratings were under negative scrutiny, over two years ago.
So what did the BC government appear to do, knowing this was like a warning shot across the bow? They did screw down on the budgets for education and health care. They did not seriously attempt to find more revenues but rather promoted the fiction that a natural gas industry would provide fiscal salvation, which it did not - nor is this likely to happen, despite election rhetoric. The government certainly did not curb its appetite for ever more debt.
At the end of fiscal 2012 (one year ago), total provincial liabilities reported by the provincial government were $70.358 billion, or 100% greater than when the Liberal government first came into power. What was even more distressing was the government’s deliberate non-disclosure of “Contingencies and Contractual Obligations”, which the BC Auditor General publicly reported to be $96.374 billion. This liability amount was separate from the $70 billion, as confirmed directly with the Auditor General’s office. These provincial liability values were directly supplied to the four party leaders just following the writ being dropped, so they all knew - but for what ever their reasons, they remained silent.
In a few words, BC voters were clueless about the province’s financial condition prior to voting because virtually all politicians and the mainstream media wanted to practice willful ignorance. It is not hard to understand why Premier Clark avoided this topic, but for the others to do so is a big mystery. A few people have suggested that the NDP avoided this issue because they did not wish to win the election and have to address the province’s financial mess.
Incoming MLAs will now be forced to confront BC’s fiscal and debt reality. There is no escape from the fact that global economic circumstances are not set to improve any time soon. More tax revenues will need to be found, along with a freeze on further borrowing, either directly or indirectly, via contracting (Public, Private, Partnerships). It is almost a certainty that BC is in for credit downgrades, which will add further to the difficulty of crafting budgets. Of course, selling public assets is another option the Liberals already have spoken of and doing that is, in effect, an admission of past poor management judgment.
Good luck, BC.
The following is an open letter by independent economist and Common Sense Canadian contributor Erik Andersen to the leaders of BC's four major political parties on the eve of the May 14 provincial election.
Dear Ms. Clark, Mr. Dix, Ms. Sterk and Mr. Cummins,
I am writing to all of you political party leaders in the midst of the BC provincial campaign, as a senior economist who is very concerned that the proposed construction of Site C dam on the Peace River may push our provincial indebtedness beyond its already critical level.
The disclosed total liabilities of the province a year ago, according to government’s own figures, were $70 billion. In addition, the Auditor General confirmed that as of a year ago BC’s “Contingencies and Contractual Obligations” totaled another $96.374 billion. By the time the dust settles, the fiscal year just ended (2012/13) will likely have the provincial total liabilities closing in on $200 billion. The bulk of the nearly $100 billion of contractual obligations come from the IPP contracts to which Hydro has committed us.
Site C represents the addition of at least $8 billion to the already seriously bloated debt load directly associated with BC Hydro and its exaggerated expectations from industrial “want-a-be’s”.
Over the course of the past four decades the need for a Site C generation facility has been part of the larger and exaggerated demand narrative BC Hydro has been telling. The demand exaggeration theme goes as far back as 1961. It is no different today.
Where is the evidence of future need? It is certainly not from residential and commercial customers in BC (which has actually decreased on average since 2008). The future need, as stated repeatedly by the Liberal government of late, is strictly industrial, specifically the proposed LNG plants.
But the irony, not missed by many, is that by the design of the rate structure, we are expected to shoulder the financial burden that is created when Hydro contracts/builds at costs of +$100,000 per GWhr per year yet plans to sell to their new “best friends” at $35,000 per Gwhr per year. This is not new for Hydro . Hydro’s narrative of greater future need is just as before, a fiction created to be the cover for a ‘borrow and build into financial oblivion’ strategy. Site C is one important element in this flawed narrative.
One must consider the “market” prices for electricity are in the western part of North America. These are the best indicators to determine whether electricity is currently in surplus or shortage. While Hydro has been buying electricity from IPPs at $100,000 per GWhr or greater, Powerex has reported selling, on average, at $20,000 per GWhr in the past three years.
In 2011, the volumes indicated a large regional imbalance between electricity generation capacity and regional demand. In such circumstances, it is a very high risk strategy to build more capacity until there is evidence of sustained higher prices, indicating demand has tightened. We are a very long way from this condition, making the Site C plan irrelevant for a long time to come if not permanently, as new energy technologies are integrated in the future.
On the evidence there seems no case for the development of Site C. Hydro is financially crippled because it not only produced fictional narratives about future demand, but worse, acted on these exaggerations with tens of billions in contractual long-term obligations with IPP’s. Secondly, to knowingly build a new generation facility that needs to sell at $100,000 per GWhr or more in order to break even - when the regional demand for electricity is decidedly weak and expected to remain so for a long while, is absurd. I don’t see Hydro customers, i.e., the voting public, thinking that is a good idea.
Clearly, it’s time to “draw a line in the sand” and say no to Site C.
Erik Andersen, Economist
BC Hydro audited reports for the past 12 years
Annual BC Hydro demand forecasts for the past 12 years
Annual Reports by the BC Auditor General
Personal correspondence between Erik Andersen and the Auditor General of BC, Feb 19, 2013
"White Gold: Hydroelectric Power in Canada," Karl Froschauer
BC Ministry of Finance, Provincial Debt Summary/ Debt Statistics
BC Ministry of Finance, Contractual Obligations Supplemental/Public Accounts/Summary Financial Statements
Links to data sources for total provincial debt:
Links to data sources for contractual obligations:
The Government of BC has been on a borrowing and spending spree for about eight years. A lot of this is being done using the “Public-Private Partnership” model (P3) of which the former Premier Campbell was exceedingly fond. In fact, he was such a leading proponent in Canada that the commercial interests behind the use of the P3 approach made him their honourary chairman.
The associated debt from all this activity has been shielded from the public’s view. It was and is about pretending that long-term contracts are not the same as long-term debt, hence not needing disclosure as such.
At the end of fiscal year 2003/04 (March 31, 2004), total provincial long-term debt was reported to be $37.735 billion and total liabilities $52.951 billion. The latter figure includes the long-term debt at the time, plus another roughly $15 billion in other contractual commitments such as current year payments towards P3 infrastructure projects like highways, bridges and public transit projects. By fiscal 2012 the two values were $50.193 billion and $70.358 billion, respectively. Since a liability is something we all easily understand, that means, according to the “unaudited” statements of our Government, our liabilities increased by 33% over the nine year period.
To be clear, the current year figure does not represent our total long-term non-debt liabilities. That would be akin to one's total credit card debt, while the current year figure would represent the annual interest payments due on that card. BC's total contractual obligations, for things like private river power projects (IPPs) and P3 projects, stood in 2011 at over $80 billion dollars (again, on top of the over $50 billion provincial debt) - a remarkable increase of $46 billion in just five years. In a 2011 report, the Auditor General highlighted this troubling figure, stating, "In our view, government should be providing better disclosure of these obligations."
Over the period of 2003/04 - 2011/12, our provincial GDP increased by 45%. Not too shabby, even after accommodating the “dead cat bounce” of fiscal 2011/ 2012. What about total revenues in the same period? They were reported to have increased by 41%.
So why the inability to achieve a balanced budget in the past four years and now?
The most obvious answer to this question is a problem of accounting and full disclosure. BC's Auditor General John Doyle reports to the Legislature annually. His task is to examine the proffered financial statements and judge them as to their being in compliance with the appropriate accounting standards or not. Non-compliance is signaled by his use of the term “qualified”. In his report dated December 2012, Doyle indicates, “While qualified audit opinions are rare in the private sector, government has had 13 audit qualifications in its summary financial statements in the last 17 years.”
Being such a polite person, the A G passes over the fact that since first coming into Government, the Liberals have never made an acceptable accounting report. It is exceedingly difficult understanding the public’s tolerance of this kind of devious behavior.
So where does that leave BC citizens? Somewhat ill-informed is the easy answer - and perhaps a bit nervous as well.
An example of the problem of non-disclosure is at BC Hydro. A consequence of the Government creating the impression of a pending electricity deficit has caused the corporation to contract with private interests (IPPs) to provide electricity. Supporting this has been energy demand outlooks that invariably proved themselves to be serious exaggerations with the passing years.
The provincial recorded domestic demand has hovered at about 50,000 GWhrs per year over the past decade. From IPP contracts, BC Hydro now takes in about 15,000 GWhrs that it previously provided from its own generation facilities. By this mandated program, the Government of BC has caused about 15,000 GWhrs of $25 per unit of electricity to be idled and replaced by 15,000 GWhrs of $90 per unit (and trending higher) from IPPs - a breathtaking example of private interests plundering the credit worthiness of BC Hydro and the Province.
In 2005, BC Hydro had no residual debt carried in their “Regulated Asset Accounts” (a contradiction in terms). These accounts - in theory only - allow the utility to borrow money for capital projects against planned rate increases for customers. The amounts in these accounts were meant to be short-term matters that would disappear each year as they became part of the long-term asset base. Against good financial judgment these deferred debts then started to increase. They are now about $3 billion and are estimated by the Auditor General to further grow to $5 billion by 2017.
But hold on here. Because the IPP contracts were declared secret by the Government, there is still the need to recognize these 20-40 year contractual obligations as hidden long-term debt. Various estimates abound with a general consensus that the total is about $40 billion. Making this business even more shameful is the absence of public evidence that BC Hydro is earning asset ownership in the course of paying out these contracts. And again, that roughly $40 billion in IPP contracts comprises only about half the over $80 billion in contractual obligations BC faced as of 2011.
The following chart prepared by the BC Auditor General captures the dynamics of debt and equity changes at BC Hydro in the past ten years. In one sense, the financial statements of BC Hydro are like icebergs, only disclosing a fraction of the full legal burden that has been loaded onto the unsuspecting shoulders of BC Hydro ratepayers and BC citizens.
What is shown here is a metaphor for what is possibly the financial condition of the Province as a whole, if full and honest disclosure were to prevail.
Who knew what and when?
Nearly two years ago, the credit rating agency Standard and Poor's delivered an analysis of the financial conditions of all Canadian provinces. The authors explicitly stated concern over the increasing debts of the provinces.
Just like BC's Auditor General, they were not fooled by “tricked out”, non-complying financial statements. The S&P folks went on to advise that provinces needed to do three things. For starters, they needed to reduce budgets for education and health care. The third thing needed was to increase revenues, hence the HST.
We hear nearly daily about how the BC Government is pressed to meet the needs of the first two categories. As to revenues, the BC Government deliberately reduced revenues from parts of the corporate sector, preferring instead to seek more “consumption” style fees and taxes from the general population. Even from these punitive measures, the province’s total revenues flat-lined after 2007 and that is why a balanced budget has been impossible to achieve. In fact, when non-cash revenues are stripped, the revenue vector is a diminishing one (see the Auditor General’s remarks on page 5 of his December 2012 report).
The BC Government has imprudently and willfully abused the credit worthiness of the Province to the point where there is simply too much debt for the revenues available. Many projects were done on the basis of want, not need or affordability.
In turn this means that those who have lent the money did so knowing that our publicly owned assets were to be collateral. When it came to financing the new Port Mann Bridge, the Government had its first taste of its maxed-out credit card condition.
Without quick action to find revenues, the situation can only deteriorate more rapidly as the servicing of the growing debt ramps up, concurrent with decreasing revenues, particularly in the form of natural gas production royalties.
Erik Andersen; Economist: December, 2012
BC Auditor General
BC Ministry of Finance; Office of the Comptroller General
S&P Canada; Credit Rating Services
Most of us, whether we live in Newfoundland, Ontario or on the North side of Burrard Inlet, are required to live in the world of financial reality and discipline; reality as to our incomes and debts.
In recent days, a number of articles have featured BC Hydro and its proposed increase in electricity rates. Perhaps it would be useful for readers to have additional context.
Prior to 2008, most citizens of our developed world participated in the biggest global credit bubble ever seen. In 2008, that financial fantasy ended.
One of the most dramatic indicators of that event, the collapse of international dry cargo shipping, was captured by the Baltic Dry Cargo Index.
The BDCI was designed to record international trade volumes in combination with shipping contract prices.
In June of 2008, the index showed a level of about 12,000 units. A mere six months later it was struggling at about 1,000 units and has not recovered since.
Prudent managers have known of this index for decades. They should also know it provides a leading indicator of international trade; not so at BC Hydro or in Victoria.
A corporate forecast can be considered the statement of investment intentions for its business and a credible forecast incorporates a sense of economic situational awareness.
In its 2003/04 forecast, BC Hydro managed to hit the forecast numbers for electricity sales in 2008; but the exaggeration of future demand included in its 2007/08 forecast showed corporate thinking was still contaminated by the bubble years.
As a result, despite the evidence of decreasing domestic demand for electricity from 2009 on, the 2010/11 forecast indicated that this bullish attitude continued to prevail. And despite the evidence of that shrinking demand, BC Hydro is planning for 14,000 units of new electricity by 2017 and for double that by 2031.
The amount of capital it takes to produce a unit of service or commodity is regarded as a good measure of operating efficiency. In the case of BC Hydro, the extent of its capital deployment is yet another indicator of trouble ahead for the corporation and for ratepayers.
Prior to 2008, Hydro managed to meet the electricity needs of its provincial customers with about $12 billion in deployed capital. The 2007 level of demand was about 53,000 units.
Since then, following directions from the provincial government, the corporation has increased its deployment to nearly $20 billion, to provide only 50,600 units.
In summary - BC Hydro used 67 per cent more capital to produce and deliver 5 per cent less electricity when it is normal to gain efficiencies from new investments, not lose them.
What have the bubble era and provincial policies produced in liabilities for BC Hydro?
Since 2007, liabilities increased by $6 billion. Additional liabilities for ratepayers reached $2.2 billion in 2011 and, according to B.C. Auditor General John Doyle it will not be long before that amount doubles.
The present value of the secret contracts BC Hydro has with independent producers is estimated to be a further obligation of more than $40 billion.
Using the costs and productivity of the proposed Site C dam as a metaphor for new power generation, to get 14,000 units of new electricity means a further $30 billion of liabilities.
It seems pointless to ask the perpetrators why this disconnect with the real world exists but perhaps the answer can be found elsewhere.
In 2006, President Bush granted a group of undisclosed people dominion over all electricity production in North America. The North American Electricity Reliability Corporation (NERC) was launched and immediately recognized in Canada with a Memorandum of Understanding between it and the National Energy Board. Since then NERC has secured enforcement status in several provinces including Ontario. Enforcement means the legal right to fine electricity producers large amounts of money for non-compliance.
This may help the reader understand why our government has pushed aside the BC Utilities Commission. NERC is about serving private interests ahead of the public interest of B.C. citizens.
It is way past time for BC Hydro to throw out the anchor but maybe it never was the game plan to curb itself before it was beyond saving as a public asset.
I leave it to you to judge whether this period of exaggerated demand forecasting and Hydro’s attendant spending was, or is by accident or design.
Whichever is your answer there is no avoiding the certainty that you will be called upon to pay up big time.
Mysterious foreign corporate interests are directing our provincial energy policy, as BC Hydro prepares to buy yet another round of discredited private power contracts.
Recent articles about some of the wrong-headed thinking by our government that has put BC Hydro in financial harm's way, suggest that it has just been a matter of over-enthusiasm and nothing more sinister. It is almost a description of our government as a victim that needs our sympathy not our ridicule - or worse.
Ask yourselves if it was prudent of BC Hydro to recently borrow and spend $10 billion, presumably increasing its capacity to do business, knowing that the global economy was in disarray?
Prior to 2008 publicly available indicators showed commercial/economic global affairs were in trouble. It is not unreasonable to expect those who we pay very well to know about these developments and rein in their more bullish instincts. This is called looking after the public interest. Out of the many such “situational indicators” we all have access to, take a moment to look at one - the Baltic Dry Cargo Index, the 5 year chart. The index plummeted by 94% between a record high in May 2008 and December 2008, when it hit its lowest point since 1986. This should have sent a powerful warning to the people forecasting our future energy demand.
BC Hydro’s most current forecast shows they expect the domestic need for electricity will become 64,000 GWhrs by 2017. GWhrs are the units of electricity their forecast uses so just think of them as units of useable electricity for discussion purposes. Now, most people I know, acting in a common sense way, would test this outlook against the best possible evidence of real demand available. Since the financial peak of 2008, BC Hydro’s record of sales shows demand collapsing, both in total and on a per capita basis. This reality has yet to be recognized by the “smartest guys in the room”. So for at least three years our Government and BC Hydro have been in denial of reality.
In fact, even as recently as this week, it emerges that BC Hydro is planning to buy even more private power contracts, through a 2,000 GWhr clean power call (see page 9 of Hydro's 2012 Draft Integrated Resources Plan); at the same time we learn that Alterra Power intends to take another run at its controversial mega-IPP in Bute Inlet, announcing a deal with the Sliammon First Nation to build transmission lines for the project.
So, over the last six to eight years how much new debt has BC Hydro taken on in your name, as a citizen and owner; do you know or care? Besides the formal amount of $8 billion in new total liabilities it has added $2.2 billion of receivables from the ratepayer’s category. BC's Auditor General reports that it looks like this category is programmed to balloon even more. These obligations do not take into account the present value of the secret IPP contracts that would probably add another $30-40 billion to total liabilities.
In the face of evidence that no new electricity generation is needed in the foreseeable future, BC Hydro is presenting a story where it sees the need for 14,000 new units by 2017, not that far off. In terms of new borrowing and spending what does this mean? If we use the values associated with the Site C project, each new unit of useable electricity comes with a capital requirement of about $2 million. Your government/public corporation is planning to contract for or directly finance new generation that will produce a new liability of about $30 billion by 2017 and double that by the end of the forecast period.
You may ask, where does this insanity stop? What motive could possibly explain this outrageous mismanagement of our public asset?
Perhaps the explanation lies outside of BC. In 2006, a new corporation came into existence in the US, dubbed the “North American Electric Reliability Corporation” (NERC).
This corporation has the legal mandate to impose its will on all North American electricity producers. This will is a legal right to levy fines of consequence on those producers not obeying instructions. This corporation is not beholden to any elected body, nor does it disclose its beneficial owners. Our federal government has accepted this reality by having the National Energy Board sign a memorandum of understanding with NERC, in the fall of 2006. NERC’s most recent annual report affirms it now has “ENFORCEMENT” powers in Ontario and New Brunswick. NERC has been and is active elsewhere in Canada, furthering its restraint of trade objective which certainly does not look as serving the public interest of BC citizens.
The forgoing is not something both the BC Government and BC Hydro would have been ignorant of, which makes knowing of an act of complicity.
Most people have memories of Enron Corporation that are generally uncomplimentary of the folks in charge of it. Some of the more prominent of these people are still around. It might amuse you to read what is essentially the Enron oath of office. It serves to illustrate the difference between the “talk and the walk” for some people.
The following quotation is taken from the 1998 Annual Report by Enron:
RESPECT: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t belong here.
INTEGRITY: We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it.
COMMUNICATION: We have an obligation to communicate. Here, we take the time to talk with one another … and to listen. We believe that information is meant to move and that information moves people.
EXCELLENCE: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.
Don’t for a moment think that juvenile insincerity is limited to the US when the smell of big money is in the air. The time has long passed for being apologists for the folks who are determined to help others get control of our best provincial asset and the business monopoly that is attached.
Why has BC Hydro gone so Big?
Over the past few years a number of us have puzzled over this question. The Crown Corporation, in most people’s minds, was given its natural monopoly status in the belief that the Board and Officers will prudently manage Hydro’s assets so as to deliver adequate electricity to British Columbians at the lowest rates possible. For decades this seemed to be what happened, making BC the place in North America with the lowest electricity rates. It was held to be an achievement to celebrate and certainly gave our province an energy edge when it came to attracting new businesses. This is fast becoming no longer the case.
Let’s take a look at the record. In 2000 total assets were $11.596 billion; by 2011, assets had ballooned to $19.479 billion. In 2000, total liabilities were $9.320 billion; by 2011 they too had ballooned to $16.599 billion. If one were to add the yet-to-be-collected amounts held in the “Regulatory Assets” accounts (money we owe as ratepayers) that BC‘s Auditor General discovered, BC Hydro would be negative equity, more liabilities than assets.
Had there been a matching increase in demand it would make some sense but in the chart below you can see that has never been so. For several years the unanswered question has been: How could financially literate people steer our crown corporation on such a perilous course? The enormity of this financial fiasco places the prized assets of BC citizens directly in harm's way with no credible explanation as to why.
Through the decades BC Hydro has consistently shown a passion to have more generation and transmission capacity than was ever necessary to fulfill its real purpose of satisfying its BC customers. In support of this assertion please consider the Chart below (credit: Sandra Hoffman, PhD.).
The forecasts for all businesses are corporate manifestations of a course to be navigated. Forecasts drive investment planning and by extension, borrowing.
In his 1999 book, White Gold: Hydroelectric Power in Canada, Karl Froschauer , writing about BC Hydro, stated “By the early 1980s, the ‘unplanned surplus’- the equivalent of the entire capacity of the $2 billion Revelstoke dam (1,843 MW)- became evident, and BC Hydro was called to account for its planning decisions. The statement of Robert Bonner, BC Hydro chairman at the time, was reported as follows: ‘ Hydro was merely responding to what its corporate customers thought they would need. He said those industries could not have forecast plant closings and the general slump in the economy that resulted in a drop in the demand of electricity.’”
It is worth borrowing a military concept at this point. The best commanders are those displaying “situational awareness”. It is part of the art of valuable leadership. Chairman Bonner was simply excusing himself and his management team from their dearth of “situational awareness”. There are numerous indicators to call upon plus more than a hundred years of formal economic literature that would provide “situational awareness” for those wishing to avoid making “stranded investments” - those investment that no longer can produce revenues but still must be paid for.
Mr. Froschauer goes on to write that “There is no evidence that these companies were held responsible for not purchasing the electricity for which they had made firm inquiries…Upon revising and reconfirming the inquiries made by potential industrial customers, BC Hydro found that its estimates were now less than half of the original forecast.”
BC Hydro forecasts have consistently being far too optimistic because the corporate leadership and Governments have sought to turn electricity into an export product, forgetting along the way to ask the ratepayers in BC if that is a good idea and at what cost. The most recent forecast is no different than what Mr. Froschauer critiqued.
Demand for electricity in BC is from three categories: residential, business and large industrial. According to BC Hydro’s forecasting manager, the first two categories are driven by population and economic forecasts obtained from provincial sources. It is the third category where the trouble arises, much as described above. BC Hydro’s corporate development officer, Warren Bell, is tasked with taking expressions of need from would be new customers. He has demand growth for this group increasing from 15,722 GWhrs in 2010 to 22,271 GWhrs by 2017. In this group would be the Northern Gateway Pipeline, which has yet to clear environmental hurdles and get the support of the Provincial Government. Mr. Bell is tasking the corporation to be ready to provide electricity to what history tells us are the most fickle people BC Hydro could want as customers.
So does an unblemished record of demand exaggeration and an explosion in new investing/borrowing bring one closer to understanding why? I doubt it. So what else is there?
The answer may be found in another location. Most readers will not have heard or read of a private US corporation, the “North American Electric Reliability Corporation” (NERC). This private enterprise came into existence in 2006 and has the stated intent:
a. to promote the reliable planning and operation of the electric bulk power systems of North America;
b. to act as the electric reliability organization for the United States as certified by the Federal Energy Regulatory Commission and for Canada and Mexico as recognized by applicable government and regulatory authorities in such countries, all pursuant to law;
c. to develop, implement, and enforce, consistent with executed agreements with regional entities and approvals by applicable regulatory authorities, standards that provide for reliable planning and operation of the electric bulk power systems of North America; and
d. to conduct such other lawful business and activities, not otherwise inconsistent with specific purposes set forth herein, in which a corporation subject to the New Jersey Nonprofit Corporation Act may engage.
Since 2006 our Federal Government has caused the National Energy Board to complete a memorandum of understanding with NERC. In its 2010 Annual Report NERC states that its “standards are mandatory and enforceable in Ontario and New Brunswick as a matter of Provincial law. NERC has an agreement with Manitoba Hydro, making reliability standards mandatory for that entity.” MOUs also existed with Nova Scotia, Quebec, Saskatchewan and Alberta. Learn about the nature of BC Hydro's obligations to NERC in this report.
So what has been taking place is the rearrangement of control of bulk electricity production in North America by a private US entity. NERC has the power to enforce its will on producers and looks to have the legal authority to by-pass local utility commissions. It is this development that might be the key to the understanding of why BC Hydro has indulged in its aggressive contracting with Independent Power Producers in BC when domestic demand increases are non-existant.
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.