An Economic Analysis of the Impact of the Campbell Private Power Policy on the Financial Health of BC Hydro
A vector gives information as to direction and the magnitude of a changing position. A series of financial statements can also provide vector information about the financial health or otherwise of corporations.
- The first vector is of the direction and speed of change for the operating net income at BC Hydro. In fiscal 2007 (financial year ending March 31, 2007) BC Hydro’s net operating revenues, less financing expenses, were $379 millions. By 2010 the recorded loss was $249 million. In the four year period there has been a $628 million reversal of net operating income.
- The vector for recorded demand is also instructive. Expressed in GWhs (what BC Hydro sells) total volume of domestic (inside BC) sales went from 52,440 in 2006 to 50,233 units by 2010. After five years at the 52/53 thousand levels, demand dropped away sharply in fiscal 2010.
- A handy vector is the ratio of debt-to-equity. A ratio of 0/100 is the extreme where the corporation or individual has zero debt. The opposite extreme is 100/0 where there is no equity. There can even be conditions where the debt is greater than 100. A ratio of 100/0 can be evidence of insolvency. At BC Hydro this ratio had traditionally hovered around the 70/30 mark. The 2009 Annual report showed a remarkable change to 81/19. After calling upon the “Regulatory Account” for the 2010 year the debt-to-equity ratio is now presented as 80/20. If the “regulatory account” transfers were stripped from the BC Hydro financial statements, the ratios for 2009 and 2010 respectively would be 87/13 and 89/11.
- Productivity vectors always help to illustrate if we shareholders are getting value for money. In fiscal 2007 about $236,000 of capital was used to produce one GWh. By 2010 it took 38% more capital to get the same quantity of energy for domestic customers. By this evidence it looks as though the system is becoming less efficient. Liabilities also mirrored this vector.
- The final vector of note is the immediate prospect of new and expensive contractual obligations associated with the call for power from Independent Power Producers (IPPs). From page 10 of the 2010 Annual Report BC Hydro states that “During fiscal 2010, IPPs provided 8,893 GWhs of energy to the BC Hydro system, which accounted for about 16 per cent of total domestic electricity requirements.” A December 2009 report from Price WaterhouseCoopers projects that existing and potential IPP projects will deliver 35,470 GWhs by 2020. The estimated total capital deployed would be $26.144 billion. That translates into $737,074 of new capital to produce one GWh or 126% greater than the already elevated 2010 level. Amazing!
Now what to make of this all? First off it was clear as long ago as 2006 that the growth in domestic demand for electricity was slowing and reversing. With this evidence it is hard to understand why the management and Board at BC Hydro embarked on the increased spending and aggressive contracting for energy from IPPs. From the 2010 Report it is manifestly clear that sales to outside of BC customers have collapsed. That leaves only the captive domestic customers to carry the growing financial burden.
As the evidence of need for more electricity in BC is not apparent, the aggressive borrowing/investing/contracting with IPPs is plain wrong. It is improbable that the BC Hydro team are “financial illiterates” so there must be some other explanation; hence the word “sinister”.
Some questions arising from my August 16, 2010 report re: BC Hydro that must be dealt with immediately
- Hydro borrowing/spending is at an unprecedented rate at the very time when there was at least 4 years advance notice of a slowing domestic demand. There is no credible projection of improved economic circumstances for at least the next 3 years. This is irresponsible by Hydro’s board and management as it has increased the risk of financial insolvency.
- The available evidence indicates that Hydro is paying IPPs more than double the open market rates prevailing in western North America. By the 2010 sales to others collapsed by 50% in 2009/2010.
- The best available consulting report indicates that from now to 2020 new IPP producers will use more than double the capital now used by Hydro to produce a single unit of saleable energy. This is the antithesis of improved productivity normally expected when large capital projects are begun.