April 15, 2011

635 Rollo Road, Gabriola Island B.C. V0R 1X3

Mr. John Doyle

Auditor General

8 Bastion Square

Victoria, B.C. Canada

V8V 1X4

Dear Mr. Doyle;

A recent news article made it known that you and your team is taking an interest in the financial affairs of BC Hydro. Since asking about this matter some while ago, this development, if true, is welcome. I say if true because the task does not get mentioned as a work in progress item on your web-site.

From what is stated in the article, your interest seems restricted to an examination of the “Regulatory Asset Account”. I know this issue has been of concern for a couple of years now and was featured in your August 2010 report to the Legislature. Specifically, you presented this topic on page 9 and stated “Under Canadian GAAP, the exemption that allowed rate-regulated enterprises to use this accounting method was removed in 2009.”.

My first question; why and by whom was BC Hydro allowed to use this accounting deception right into 2011? It is a question about a not so insignificant amount; $1.713 billion according to your remarks at the top of the same page.

While you have this examination underway would you please consider requiring BC Hydro to disclose the important financial features of each of the contracts with Independent Power Producers? Enclosed is a copy of correspondence from Sheila Frazer where she discusses accounting rules for contracts. In “Public Service; Private Profits” John Loxley discusses the distinctions between a “capital lease contract” and an “operating lease contract”. I think most citizens would see this as a semantic contrivance, too cute by-half. An “operating lease contract”, in the case of an IPP contract, is nothing but a device to hide financial distortions designed to grant excessive benefits to the Private Partner. So my second question is why the IPP contracts are not “capital lease contracts” thereby making disclosure mandatory? If the answer is that these contracts do not meet the three qualifying criteria, as set out by the Canadian Institute of Chartered Accountants, then please indicate why not.

BC Hydro borrowing and spending has recently been on a tear. From 2000 to 2005 the audited financial statements indicate the Corporation managed to operate with a “Short-Term Liabilities” account of between $3.1 and $3.5 billion. From 06 on this account moved higher to between $3.69 and $7.07 billion. In the corresponding periods “Net Long-Term Debt” remained flat at about $7 billion until 2010 when it increased by $3.6 billion. This financial pattern calls into question the notion of “value for money”. The product of BC Hydro is GWhrs produced and delivered to BC only customers. In 2000 the amount sold to domestic customers was 48,068 GWhrs; 2001 – 47,828; 2002 –48,397; 2003 –51,004; 2004 –50,718; 2005 –51,205; 2006 –52,002; 2007 –52,749; 2008 –55,234; 2009 –53,588; 2010 –50,233 of which nearly 9,000 GWhrs were taken up from IPP production; not from the Corporation’s owned generation assets.

Every indicator of productivity shows that much higher costs and investment amounts are being used by BC Hydro to produce and deliver decreasing amounts of electricity to BC customers. My third question is therefore; would you please explain this huge productivity contradiction and if you are unable, please indicate who you think can?

Sincerely;

Erik Andersen

Cc Rafe Mair