"The rationale for allowing BC Hydro to continue to defer and amortize its foreign exchange gains and losses on foreign exchange denominated long-term debt, using the straight-line pooled method, was to maintain the regulatory objective of smooth and stable rates for customers. This is consistent with deferral and recovery of many large or volatile expenditures by regulated utility companies. It is also consistent with the Public Sector Accounting Board proposed Recommendations for all levels of government which should form a section of the CICA Public Sector Accounting Handbook. BC Hydro's debt is guaranteed by the Government. We see no reason why the Auditor General would be concerned and the ongoing oversight of BC Hydro by the Commission should alleviate concerns that an Enron situation might develop."

September 18, 2002

BC Hydro: Higher Rates & Privitization by Stealth

The Campbell government has raided BC Hydro's rate stabilization fund. Could it be that it is setting the stage for privatization and higher electricity rates?

The February budget called for BC Hydro to contribute $283 million to the government (consolidated revenue fund). Hydro's 2002-03 profit before the transfer was estimated to be $345 million plus $5 million that would be added to Hydro's rate stabilization account.

A minor footnote on page 5 of Collins' First Quarter Report explains how the government is increasing Hydro's "contribution" by $59 million for fiscal 2002-03. The note says "The increased dividend payment is a consequence of an accounting policy change approved by the B.C. Utilities Commission for rate-setting and reporting purposes that resulted in a higher level of equity. The consequence of this change, given BC Hydro's allowed rate of return, is higher dividend payments to the Consolidated Revenue Fund." The increased "dividend payment" raises Hydro's contribution to central government operations to $342 million.

Page 30, table 2.6, of the First Quarter Report shows how Hydro is going to get the extra $59 million to pay to the government. Hydro's forecast profit is shown as $70 million higher, increasing from $345 million to $415 million. A couple of lines later one sees where the $70 million comes from, as the transfer from the rate stabilization fund is changed from a positive $5 million to a negative $65 million. (Accounting Note: Because of the raid on the rate stabilization account, this is not just a transfer between the summary and CRF accounts. The money is first added to the summary account from Hydro's rate stabilization account.)

BC Hydro released its first quarter report just two days before the Finance Minister released the report for the province. Hydro's first quarter report revealed that it would have to almost exhaust its rate stabilization fund in order to meet the demands of government (reducing it to $22 million). In Opposition Gordon Campbell attacked the NDP saying that it was using Hydro as a cash cow. In government Premier Gordon Campbell is milking harder! With the rate stabilization fund nearly exhausted the stage is set for charging you more for your electricity. Welcome to the New Era. Higher rates for electricity are part of the Campbell government's plan for privatization of Hydro. You can expect government's revenue grab to be disguised with rhetoric about higher rates being necessary to attract private sector investment.

It is possible to privatize a crown corporation, not by selling it, but by simply withdrawing from the field. BC Rail's withdrawal from passenger service with comments that a private operator may be interested in moving into the business provides a hint at how BC Hydro could be privitized. Presumably an operator like the one offering rail tours through the Rockies would lease the ability to operate on BC Rails tracks with much the same outcome as if the passenger service had been sold. To date no operator has expressed such interest, but comments from BC Rail make it clear that expressions of interest would be welcome.

Comments in Finance Minister Gary Collins' February budget documents suggest that the same kind of privatization could happen at BC Hydro. It is not a matter of selling the "core assets". Instead it is simply a matter of encouraging the private sector to build all new transmission and generation facilities so that over time they would occupy an ever larger share of the electricity market. Meanwhile BC Hydro could reap ever larger returns for the government by gradually abandoning its policy of a blended price and moving towards market pricing. A blended price averages low cost power from dams with higher cost power from gas turbines. Market pricing means charging whatever the market will bear. $1 billion per year or more in profits could be made from the lower cost dams.

February's budget documents say:

"The government established a task force to initiate a comprehensive review of BC's energy policy. An interim report was submitted in November 2001. On the electricity side, the report calls for:

The budget document didn't mention it but the interim energy policy report also called for private sector involvement in the construction of any new transmission lines. The budget document described that element of privatization by saying Hydro would "Participate in discussions with other utilities regarding the structure, ownership and management of electricity transmission in the Pacific Northwest to ensure continued access to U.S. energy markets." BC Hydro already has an agreement with other utilities to allow for transmission of their electricity in BC. It entered into that agreement so as to be able to export to the US. It is not necessary to have private participation in the transmission lines in order to maintain that agreement.

The budget document said that the final energy report "is due by March 15, 2002." That date has come and gone six months ago without the release of the energy report but Collins signaled more action on the energy front with his First Quarter Report. Raiding Hydro's rate stabilization fund is a bad prelude for the release of the long awaited energy task force report.