Analysis and commentary by Richard McCandless is incisive. He noted in a recent paper that public-sector pensions are generally well-funded.
However, there is one major exception.
You guessed it already didn’t you.
Yes, of course, it is BC Hydro.
Table 2 shows that on 31 March 2008 the BC Hydro pension plan had a solvency ratio of 97%, but by 2017 the ratio had dropped to 75.4%. The $1.1 billion deficit was offset by close to $1.1 billion in two regulatory (deferral) accounts; without the deferral accounts BC Hydro’s equity of $4.9 billion would have been reduced by $1.1 billion.
Beginning in 2009/10, …the BC Utilities Commission agreed to a new deferral account for the variance between the indicated (budgeted) and the actual pension liability. The scope of the deferral was widened for 2012/13 when the variance in other non-funded pension benefits was also allowed to be deferred…
It would appear that having access to a deferral account has allowed BC Hydro management to avoid reducing the pension solvency shortfall through raising the contribution levels or reducing the benefits.
It would also appear that the bond rating agencies have turned a blind eye to the large pension liability at BC Hydro…
The entire McCandless paper is linked here:
BC Auditor General Carol Bellringer explained deferral accounting as it should work:
Utility companies like BC Hydro often use rate regulated accounting to defer certain expenses and revenue to future years. That means customers using BC Hydro’s utilities pay rates that do not match all of today’s costs. Rather, some of those amounts can be deferred and will impact rates paid by tomorrow’s customers.
From an accounting perspective, these deferrals mean items that would otherwise affect today’s bottom line can be set aside and recognized later. Rather than increasing rates dramatically in one year (for example, to cover unusually high costs from a storm that damaged utility lines) and then lowering them in following years, rate-regulated accounting allows the company to smooth out the recovery of the costs over a longer period.
…The overall effect has been to limit rate increases, thereby increasing the deferred balance in BC Hydro’s net regulatory asset accounts. As a result, from an accounting perspective, the net earnings, equity and other comprehensive income in self-supported Crown corporations and agencies, as recorded in the Public Accounts, are overstated.
…customers will have to cover all of these deferred costs in the future…
This chart shows that under Liberals, BC Hydro stopped using regulatory accounts for rate smoothing and used them instead to hide the true state of the utility’s financial condition.
The main purpose of deferring expenses and recording non-existent revenues was to claim profitable operation. Executives could then be rewarded with additional remuneration and government could pull “dividends” from the utility.
In fiscal years 2012 through 2017, regulatory “assets” rose $3.4 billion. Claimed profits in that period were $3.5 billion and from those, government extracted $1.4 billion.
In FYs 2012 thru 2017, BC Hydro's liabilities increased $10.4 billion so every penny of the $3.6 billion paid to the province for dividends and water rentals had to be borrowed. #bcpoli
— Norm Farrell – In-Sights.ca (@Norm_Farrell) May 19, 2018
Categories: BC Hydro