What is a deferred expense?
The term “deferred expense” is used to describe a payment that has been made, but will not be reported as an expense until a future accounting period.
In 2002, WorldCom, a company with a peak net worth of $100 billion, submitted the largest bankruptcy filing in United States history. The action followed an accounting scandal that created billions in illusory earnings. Edmonton born Bernard Ebbers, WorldCom’s former CEO, is now in Louisiana, serving the tenth year of a 25-year sentence.
Fraud at WorldCom
WorldCom was accused of having inflated profits by $3.8 billion over a period of five quarters. The company undertook the massive fraud by capitalizing costs that should have been expensed. Capitalization of these costs allowed the company to spread the expenses over several years instead of recording all the costs as expense in the current period. Such deferral of costs allowed the company to report lower expenses and therefore inflated income.
But, beyond its flawed financial reporting, WorldCom was spending huge sums to add capacity when the market was already oversupplied. Similarly, BC Hydro, despite 10 years of flat domestic demand, is proceeding with unprecedented additions to its power capacity. In addition, the utility has contracted for so much high-cost power from private producers that it has at times been forced to turn off its own low-cost generators.
What is the driving force between BC Hydro’s style of operations? Clearly, it not a desire to meet needs of the province’s electricity consumers.
Not to be forgotten is that term-debt of BC Hydro is rising rapidly. With current capital projects estimated above $10 billion and with British Columbia’s record of exceeding initial estimates by 100% and more, long term-debt of the utility may exceed $30 billion within five years.
That borrowing is in addition to the more than $50 billion in long term energy purchase commitments.
Since Liberals assumed power, BC Hydro has paid $10.8 billion to the provincial and local governments. In the same time period, the utility’s long term-debt rose by $9.4 billion. Consequently, it is a simple argument to say that every dollar transferred to government was a borrowed dollar.
Justine Hunter at The Globe and Mail provided BC Hydro preps for rate review. It contains this statement:
Because rates haven’t kept up with Hydro’s real revenue requirements, the corporation has been amassing debt in what it calls “deferral accounts” – those accounts will reach more than $5-billion by 2018.
It an analysis that is less than honest. First, the deferred charges already exceed $5-billion by hundreds of million of dollars and that would have been apparent to Ms. Hunter if she’d read the 2015 annual report of the public utility. Secondly, the idea that debt and deferrals are caused because “rates haven’t kept up” – as if prices have some animate existent of their own – is errant nonsense.
Readers here will know the reporting tricks are there to disguise actual results and facilitate transfers of “surplus equity” to government accounts. Thee Liberal Government defers BC Hydro expenses, then skims its pretend-profits to create pretend-surpluses. However, revealing that inconvenient truth would not serve groups the media wishes to serve.