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