Financial Information Act Return - BC Hydro

Notes to Consolidated Financial Statements
For the Years Ended March 31, 2003 and 2002
Note 1: Regulation
BC Hydro is regulated by the Commission, and they are both subject to general or special directions
issued by order of the Province. Orders in Council from the Province establish the basis for determining
BC Hydro’s allowed return on equity, calculation of its revenue requirements, rates charged to customers
and the annual Payment to the Province.
Payment to the Province
BC Hydro is required to make an annual Payment to the Province on or before June 30 of each year, with
respect to the financial results of the most recently completed fiscal year. The payment equals 85 per cent
of BC Hydro’s distributable surplus provided the debt:equity ratio of BC Hydro, after deducting the
payment, is not greater than 80:20.
Distributable surplus is calculated as consolidated net income adjusted by deducting finance charges
capitalized during the year, net of depreciation charged on capitalized finance charges. Equity is calculated
as the sum of retained earnings, the Rate Stabilization Account, deferred revenue, contributions arising
from the Columbia River Treaty and contributions in aid of construction at the end of the fiscal year.
Debt is calculated as the sum of revolving borrowings, bonds, notes and debentures, net of related
sinking funds, temporary investments and repurchased debt at the end of the fiscal year.
Revenue Requirements, Return on Equity and Rates Charged to Customers
The Commission is required to ensure electricity rates are sufficient to allow BC Hydro to achieve an
annual rate of return on equity equal to the return allowed, on a pre-income tax basis, by the most
comparable investor-owned energy utility regulated under the Utilities Commission Act. The allowed
annual rate of return on equity calculated for 2003 is 15.47 per cent (2002 – 15.24 per cent). Average
electricity rate increases for each year are limited to the projected rate of inflation for British Columbia plus
two percentage points. For rate setting purposes, the rate of return on equity projected to be achieved by
BC Hydro is determined after taking into account any available transfer from the Rate Stabilization Account.
BC Hydro’s basic tariffs for all customers were frozen until March 31, 2003.
Rate Stabilization Account
The current Rate Stabilization Account was established on March 30, 2000, to mitigate the impact of
volatile earnings on ratepayers. Transfers are made to the Rate Stabilization Account during high-income
years to reduce the need for rate increases in low-income years.
Where consolidated net income, before any Rate Stabilization Account transfers, is greater than the amount
needed by BC Hydro to achieve the annual rate of return on equity allowed by the Commission, then
consolidated net income is decreased accordingly by an appropriate transfer to the Rate Stabilization
Account.
Where consolidated net income, before any Rate Stabilization Account transfers, is less than the amount
needed to achieve the allowed rate of return on equity, then consolidated net income is increased by a
transfer from the Rate Stabilization Account. Transfers from the Rate Stabilization Account are subject to
a positive balance existing in the account, provided BC Hydro’s debt:equity ratio, after the transfers, is
not greater than 80:20.