Residents of British Columbia understand financial pain that follows when officeholders subvert public utilities to gain political advantage and reward special interests. BC Liberals aimed to privatize public assets and services. When it could not be achieved overtly, it was done by stealth.
After inevitable failures and disasters, legislators concealed them by employing a broad misinformation strategy. BC’s success in duping the public on utility matters encouraged Ontario Liberals to adopt accounting fakery in their own province.
Journalist Matthew McClearn wrote Bad books: How Ontario’s new hydro accounting could cost taxpayers billions. Details of Ontario’s “creative accounting” revealed in the Globe and Mail are familiar to westerners who follow BC politics closely, even though the subject never interested corporate media in BC, including the Globe and Mail’s western bureau.
Dr. Harry Swain, Associate Fellow at University of Victoria Centre for Global Studies, talked about how the BC Liberal government decided many years ago to employ accounting trickery to conceal the true state of BC Hydro finances.
Reporting about Ontario, Matthew McLearn wrote:
…a method known as rate-regulated accounting – violated government accounting standards. …it represented a radical departure in how the government of Premier Kathleen Wynne – not just the IESO – planned to disclose its future borrowing activities to the public.
…charging Ontarians less for electricity than it cost to produce meant the province would have to borrow billions of dollars to cover the shortfall.
“In order for that to not show up on the bottom line, they created creative accounting to take it off the government’s statements,” [Ontario Auditor General Bonnie] Lysyk said.
Using that new accounting, the government declared it had balanced the province’s books for the fiscal year ended Mar. 31, 2018, just months before a general election…
Ms. Lysyk said she’s worried that the Wynne government’s success in concealing its borrowing will encourage more aggressive bookkeeping, both in Ontario and in other provinces.
“If you get away with doing something that’s inappropriate accounting, the next time you’ll do it again and you’ll do it again,” she said. “Pretty soon they won’t have any numbers that will have any integrity behind them.”
We reached the point some years ago where BC Hydro’s numbers ceased to have any integrity behind them. One of the schemes was treating cost deferrals as regulatory assets.
Dr. Swain provides his explanation of deferrals:
He states that deferrals in the utility business are typically six or seven percent of a company’s equity. Since regulatory deferrals are “smoothing” devices, they typically rise and fall. But, not at BC Hydro where there is a continuous upward movement.
The Globe and Mail article continues:
The main criticism of the practice is that it can produce books bearing little resemblance to reality. When BC Hydro adopted it, that province’s auditor-general objected strongly, warning in a special report that “if overused, rate-regulated deferrals can mask the true costs of doing business, distort the financial condition of an enterprise and place undue burdens on future taxpayers.”
…Recording expenses as assets is perfectly legal in certain contexts, but the practice has been controversial in the private sector. In their book Easy Prey Investors, forensic accountants Al Rosen and Mark Rosen write that recording “fake assets” on corporate balance sheets is one of the “most common financial scams of the past 50 years.”
…Forensic accountant Al Rosen said that, generally speaking, it’s not difficult to hire consultants to provide favourable accounting opinions in Canada, in part because standards are so elastic. “You can go to any of the public accounting firms and get them to render an opinion on whatever you want,” he said. “The ethics have gone all to hell.”
Richard McCandless is a retired senior BC government public servant. He adds to Matthew McClearn’s report:
Perhaps another group of financial monitors will also be discredited by the fall-out of the regulatory accounting in Ontario and BC. The bond rating agencies have been relatively compliant in BC in retaining the province’s strong credit score despite the rapid growth in BC Hydro’s debt and the net balance of deferred costs and revenues.
…the [new BC] government may have succumbed to the lure of rate regulated accounting to boost current year results at the expense of the future ratepayers.
Outstanding work by Mr. McCandless’ can be found at BC Policy Perspectives. A recent paper is Contrasting Responses to Auditors General Opinions on Use of Deferral Accounting in Ontario and British Columbia:
REGULATED (DEFERRAL) ACCOUNTING AND ONTARIO’S “FAIR HYDRO” PLAN
The rapid increase in the price of electricity, and the outlook for even higher future rates, resulted in a significant erosion of public support for the government. In response, the Liberal government legislated the “Fair Hydro” plan in early 2017, which reduced the prices by 25%, and subsidized the increases for the next 10 years by increased borrowings.
Beginning in 2028, electricity ratepayers will pay a surcharge to recoup the principal and interest of the borrowed funds. The legislation created a special regulatory deferral account to record the future revenue surcharge as an asset, allowing it to avoid reporting the borrowed money as a deficit and debt on the government’s financial statements.
Auditor General Lysyk objected to the accounting slight-of-hand as the government’s legislated deferral account was treating the hypothetical future surcharge revenue as an asset, and that the approval of a deferral under the rules of the regulatory accounting standard requires an independent regulator…
The BC Public Accounts Committee Hearing
The provincial PAC met on 30 January 2018 to review Auditor General Carol Bellringer’s three qualifications to the government’s 2016/17 financial statements. Two of them were continuing disagreements with the government about the treatment of cost sharing revenue and the self-supporting status of a certain Crown corporation. The new qualification was based on Ms Bellringer’s opinion that the rate regulated accounting standard used at BC Hydro does not conform to public sector accounting standards because the regulator is not independent.
Rather than the battery of top public servants that attended the Ontario PAC, the government was represented by Carl Fischer, the acting comptroller general. Mr. Fischer defended the use of rate-regulated accounting at BC Hydro by saying, in effect, that cabinet was performing the role of the regulator envisioned in the accounting standard…
The approach to reviewing the qualification by the two auditors general to the financial statements is markedly different in Ontario and BC. This may be due to the importance of electricity pricing to the Ontario government that is low in the polls leading to an election, compared to the situation of a new government in this province that is still struggling to understand the full implications of rate-regulated accounting at BC Hydro for the government’s healthy financial position.
The fundamental issue is the same in both jurisdictions: should government ignore the opinion of the Legislature’s independent auditor and adjust accounting standards which result in electricity rates that benefit current customers (and by inference assists the government’s approval rating), or should government, including its Crown corporations, operate within the limits of generally accepted national public sector accounting standards?
Richard McCandless is an expert with broad experience in public administration. As citizens, we are fortunate that he contributes to our knowledge. I regret that corporate media doesn’t offer him a regular place.
A few years ago, after I drew attention to an item of inaccurate financial reporting concerning the province’s resource revenues, the Vancouver Sun’s Acting Business Editor said something like this, “I’m not an accountant. I can’t be expected to understand these issues fully.”
In downsizing, Postmedia rid themselves of many of BC’s most qualified journalists. Some would have understood and reported accounting mischief designed by government schemers. At the very least, they would have turned to experts like McCandless for details.
People of British Columbia are badly served by corporate media and there is a direct cost when citizens are poorly informed. Special interests who influence politicians gain financially and each resident pays the cost.
One disaster that BC Hydro iis covering-up is its program to purchase from independent power producers. In more than a decade of flat demand and low export prices, BC Hydro had to turn off its own generating capacity. #bcpoli https://t.co/yh3qjz8ryj pic.twitter.com/PPALTF9OGr
— Norm Farrell – In-Sights.ca (@Norm_Farrell) April 23, 2018
Categories: BC Hydro