In addition to BC Hydro deferring billions of dollars in costs to pad its bottom line, the Crown corporation is also generating income out of thin air.
Auditor general John Doyle told Business in Vancouver that Hydro is using interest charged on its deferral accounts to effectively increase its net income.
?It?s a completely artificial transaction,? said Doyle. ?They?ve inflated their performance by $37 million out of interest that?s appeared out of nowhere, paid by themselves to themselves.?
Doyle made his comments hours after he released his latest report focusing on the utility?s use of rate-regulated accounting practices.
BC Hydro uses rate-regulated accounting to defer certain expenses to future years that would, under normal accounting practices, show up on the company?s annual financial statements. As of March 31 the utility had deferred a net total of $2.2 billion in expenses.
That number is expected to balloon to nearly $5 billion by 2017, a figure that taxpayers will eventually have to account for when BC Hydro begins to recoup the expenses.
The deferrals exist in 27 different accounts ranging from variances in electricity sales income to First Nations compensation and litigation costs and capital projects.
As the utility defers those costs, it also charges interest on them.
In fiscal 2011, the interest amount on 14 of the deferral accounts totalled $37 million.
Doyle said that figure stands to substantially increase in the coming years.
He added that the accounting practice not only means it will take longer for ratepayers to pay down the deferrals, but also that it increases Hydro?s net income.
That, in turn, influences return on equity calculations and increases the amount of money the provincial government receives from the utility in the form of dividend payments.
?I didn?t quite believe it when it was first explained to me,? said Doyle.
When asked if the practice was legal, Doyle said that decision is up to the BC Utilities Commission (BCUC).
?I?m not sure that it has its place in financial reporting,? he added.
On top of that, Doyle?s report pointed out that international accounting standards (IFRS) are being adopted Canada-wide in the coming year and they don?t allow for deferral accounts. But the provincial government has forced BC Hydro to adopt part of an American accounting standard that will allow it to continue using rate-regulation.
Worse yet, Doyle said the province has yet to show him its plan for eventually paying the deferrals off.
Yet, strangely, Doyle said if Hydro were to embrace IFRS standards the deferral liabilities would effectively disappear, solving the problem. He said IFRS would absorb the deferral costs into the equity area of BC Hydro?s balance sheet, and although that would significantly affect the utility?s equity standpoint, it would not impact profits, losses or rates.
?They?ve got a one-off golden opportunity to correct what?s going on ? I don?t know why government isn?t thinking of this option.?
BC Hydro and the provincial government were unavailable for comment by press time, though in a response to the report the province said Hydro would consider Doyle?s recommendations in its next application to the BCUC.
NDP finance critic Bruce Ralston said although there?s an argument to be made for using deferral accounts to ?smooth out? fluctuating power revenue, he believes the Liberal government?s political motivations have forced the utility to abuse the accounts. ?
