BC Hydro Management Process Flawed: Internal Audit

Weak oversight on $842 million worth of BC Hydro contracts led to work being started before agreements were even in place, and contracts being extended without bids.

Those were amongst the findings of a September 2011 internal audit of BC Hydro's "core financial process," obtained by The Tyee under the freedom of information act.

NDP MLA John Horgan, the party's critic for energy and BC Hydro, says he plans to question the energy minister and Hydro's president about the audit during the legislative estimates later this month. He wants to know if money might have been lost, and if so, whether the losses might have an impact on Hydro users' rates.

The Tyee asked Hydro if any funds were lost due to these problems. "The findings do not suggest there was necessarily a financial loss or gain," replied Hydro's procurement director Trish Pekeles. "It wouldn't be accurate to assume there is a financial loss since managers who manage the contracts have the flexibility to make decisions that will save money and are in the best interest of the ratepayer."

$842 million in 'medium-sized' contracts

BC Hydro spends over $1.2 billion a year on goods and services. The Crown corporation had about 4,600 "medium-sized active contracts" worth $842 million, and such contracts ranging from $50,000 to $500,000 were reviewed from May 2010 to June 2011.

Of these contracts, 47 per cent were in transmission and distribution, 23 per cent in corporate, 20 per cent in power generation, and 10 per cent in blanket orders.

The contracts ranged for items such as construction, goods and services, equipment rental, inspections, consultants, information technologies and communications.

In such audits the level of urgency rises from green to yellow, then orange, and red -- and these problems were placed in the orange zone. Amongst the report's findings:

Responsibility was not established to oversee contract management for BC Hydro, which was very decentralized.

Work was starting before a contract was in place, which placed BC Hydro at risk to liability and/or legal exposure in the event of a safety incident, performance issue, or contract default.

Contract change orders were used extensively, and in some cases inappropriately. There was a need for better planning and more thought given to the full scope of the services required.

Contract files were not always being kept current, and there was little guidance on the current requirements.

Only one-third of change orders were appropriate and followed correct procedures, as identified by detail testing of the sample 55 change orders.

Work was performed and paid beyond the original scope of contracts. Some contracts were extended rather than going out to bidding.

Contract payments did not always agree to the terms of the contract, and were often delayed.

Contract extension options were exercised for significantly higher dollar amounts without a breakdown or forecast of the additional work to be performed.

There was no indication of how many years the problems have been ongoing, or the amount of possible losses.

Beyond these medium sized contracts studied for the audit, Hydro now has 967 large contracts of more than $500,000 and with a total value of $5 billion -- excluding contracts with independent power producers -- and these were not part of the audit. The authors did not assume the same compliance problems apply to large contracts, and it performs separate reviews on capital projects and IPPs.

Pekeles said the large contracts are well managed because they have designated contract managers who oversee the entire process.

She added that of the six audit recommendations, three of them are affected by ongoing initiatives and therefore will be completed after October 2012. The rest are either completed or will be finished by then.