Historically-low reservoir water levels are hitting B.C. Hydro where it hurts most -- on the balance sheet.

The Crown-owned utility reported yesterday that it earned $74 million for the first quarter ending June 30, 2001, but that was $232 million lower than the $306 million it earned for the same period last year.

The reason for the big drop in profits was the higher costs from increased out-of-province energy purchases Hydro has had to make to conserve the low reservoir levels due to record low snowpacks and subsequent lower inflows.

The poorer performance came despite a huge increase in export revenues. Hydro collected $1.9 billion is electricity export revenues during the quarter compared with $692 million for the same period last year.

"Export market prices remained extremely high for the first two months of this (fiscal) year until the decline in prices, due in part to the implementation of price caps in the western U.S. in June," said Hydro CFO David Harrison.

"Although we still continue to trade into the California market with credit-worthy customers, our focus is now on importing (electricity) to help meet domestic needs and preserve reservoir levels," he added.

Hydro's average reservoir levels are now running at 86 per cent of normal and the utility's quarterly report said snowpack levels for this year "are one of the lowest on record."

However, because market power prices have fallen dramatically -- since the end of the first quarter the average price has fallen from $376.5 per megawatt hour (MWh) to $200 per MWh -- Hydro may be looking at losses during some or all of the year's remaining quarters.

"It's a race to the bottom," says Vancouver energy lawyer David Austin. "For the rest of the year it'll be a race between how much money Hydro can earn from exports versus how much extra they have to spend on imported power to allow the reservoirs to repair themselves. It'll be touch and go on whether Hydro makes a profit or loss this year."

Hydro's financial performance this year won't impact customer rates because the B.C. government extended the current rate freeze to March 31, 2002. But a lower profit, or a loss, will reduce the substantial annual dividend Hydro pays to the provincial government, which is already forecasting a $1.5-billion deficit.