BC Hydro needs to close gaps in its GAAP: auditor general

Government interference has resulted in artificially low power rates

Auditor General Carol Bellringer:

(This story has been updated to clarify when BC Hydro started using rate-regulated accounts.)

BC Hydro needs to stop pushing the cost recovery for today’s expenses into the future, says BC’s auditor general, and the provincial government needs to stop dictating to the BC Utilities Commission (BCUC) what rate increases it should approve

Those are some key takeaways from a special report by Auditor General Carol Bellringer’s on BC Hydro’s use of deferred cost recovery.

But if the provincial government and BC Hydro follow Bellringer’s recommendations, British Columbians may one day be donning yellow vests, like the French, and taking to the streets in protest, because it would mean BC Hydro customers would be hit with much higher increases for power than they are accustomed to.

And residential customers might end up sharing more of the burden because currently they are “underpaying” while commercial customers are overpaying.

Bellringer’s audit, released February 6, examined BC Hydro’s “atypical” use of rate regulated accounting, in which the cost recovery of current expenditures are pushed into the future.

BC Hydro currently has $5.5 billion in deferred costs in its various rate regulated accounts, although as Bellringer points out, the NDP government last year wrote off $950 million in BC Hydro debt, which should bring it down to $4.5 billion.

The amount of future costs that BC Hydro pushes into the future with rate regulated accounting is irregular, compared to other Canadian utilities.

“While rate-regulated accounting is common practice in some sectors and industries, including utilities, the large amount in BC Hydro’s regulatory balance is not,” Bellringer says in her report.

But it appears to be more the fault of the provincial government than BC Hydro that it has increasingly pushed more cost recovery into future accounts.

Past governments have dictated to the BC Utilities Commission (BCUC) what rate increases it could approve.

“BC Hydro was not allowed to charge its customers enough to cover its operating costs each year,” Bellringer says in her report.

Worse, under the Liberal government, while it was constrained from charging its customers what it needed to pay for things like dams, independent power and transmission lines, BC Hydro was also forced to pay hundreds of millions in dividends to the provincial government.

"It is not uncommon for government to establish some direction," Bellringer said. "That's normal. We see that right across Canada.

"In B.C. they've controlled all three parts of the mathematical formula. So they've had controls over the rates, they've had controls over the bottom – like how much can and should BC Hydro earn at the end of the day – and if you don't get there, you are to put it into these various accounts."

As Bellringer points out, the use of rate smoothing deferrals is a common and acceptable practice for preventing rate shock.

If a bad winter storm causes hundreds of millions of damage to transmission lines, it can use deferral accounts to smooth out the cost recovery over a longer period of time. But BC Hydro has taken the practice to extremes.

In a review of other Canadian rate-regulated utilities, Bellringer found that BC Hydro is the only one that does not follow generally accepted accounting principles (GAAP). Rather, it uses “prescribed standards” for its rate-regulated accounting.

BC Hydro has been using rate-regulated accounting since the 1980s, but it dramatically increased under the Liberals – ballooning from $182 million in 2005 to the current $4.5 billion.

Under power purchase agreements, private companies financed the construction of wind farms and run-of-river projects. So while BC Hydro did not have to borrow to cover the capital of building these new wind farms and run-of-river projects, it was obliged to pay the developers for that power over a period of decades.

BC Hydro’s use of rate regulated accounting has increased since then.

Bellringer describes the over-use of regulatory accounting as “intergenerational inequality,” since future ratepayers end up paying disproportionately more than they should so that current ratepayers enjoy artificially lower rates.

There is also inequality according to what the various classes pay for power. Residential customers have been underpaying and commercial customers have been overpaying, Bellringer’s report notes.

The NDP government has already taken some steps to address the concerns Bellringer has raised. Starting this year, BC Hydro will begin using the GAAP guidelines Bellringer has recommended in its accounting.