BC Hydro > Financial Information Act Return (to March 31, 2007)

ManageMent Discussion anD analysis
For the year enDeD March 31, 2007
Regulation Updates
Rate Hearings
8 8
2 0 0 7 B C H Y D R O A N N U A L R E P O R T
F I N A N C I A L R E S U L T S
In regulating and setting rates for BC Hydro, the Commission must ensure that the rates are sufficient to allow BC Hydro to provide reliable electricity
service, meet its financial obligations, comply with government policy and achieve an annual rate of return on equity based on forecast consolidated
net income. The annual rate of return on equity is equal to the pre-income tax annual rate of return allowed by the Commission to the most
comparable investor-owned energy utility regulated under the Utilities Commission Act. The allowed annual rate of return on equity calculated for
fiscal 2007 was 13.10 per cent (2006 – 13.51 per cent). The actual rate of return in 2006 was 13.44 per cent.
On November 10, 2006, a Negotiated Settlement Agreement (NSA) was approved by the Commission with respect to the F07/08 RRA. The
Commission approved rate increases of 1.54 per cent for July 1, 2006 to January 31, 2007 and a further 2.1 per cent, effective February 1, 2007
onward, for a total increase of 3.64 per cent.
Included in the February 1, 2007 rate increase is a rate rider of two per cent for the purpose of recovering a portion of the current balances in the
Heritage Deferral Account, Non Heritage Deferral Account, Trade Income Deferral Account and BCTC Deferral Account. The rate rider has an
indefinite term. Recovery of deferral accounts in fiscal 2007 was $50 million.
As part of the NSA, the Commission approved the following regulatory accounts:
• Large Hydro Investigation Costs
• Depreciation Study Adjustments
• Contributions in Aid Amortization Variance
Major Storm Restoration Costs
During the period from October 2006 to January 2007, BC Hydro incurred significant costs in repairing the distribution system and restoring power
to customers after several severe storms swept through the Province of British Columbia. The Company has categorized five of these storms as major
and is currently applying to the Commission to recover maintenance expenses associated with these storms through future rates. The recoverability
of these expenses is subject to final approval of the application by the Commission.
Powerex Legal Proceedings
Since 2000, Powerex has been named, in some cases along with other energy providers, as a defendant in a number of lawsuits and U.S. federal
regulatory proceedings which seek damages and/or contract rescission based on allegations that, during part of 2000 and 2001, the California
wholesale electricity markets were unlawfully manipulated and that the energy prices were not just and reasonable. These proceedings are at various
stages. A number of issues and findings are presently on appeal and none have been the subject of final judicial action. The U.S. Court of Appeals
for the Ninth Circuit, in its Lockyer decision of July 31, 2006, told the U.S. Federal Energy Regulatory Commission (FERC) that it should reconsider its
remedial powers thereby opening up the possibility that refunds will have to be paid for the periods from May to October 2000. On August 2, 2006,
the Ninth Circuit ruled on certain issues in the FERC refund proceedings. One of those related to whether refunds should be paid for bilateral sales
[those that did not go through the California Independent System Operator (CISO)]. In its decision, the Ninth Circuit upheld FERC’s decision that
refunds should not be paid for bilateral sales but also said that FERC was wrong to conclude that it did not have power to award refunds
retroactively. The precise effect of these decisions on Powerex cannot be determined at this time.
At March 31, 2007, Powerex was owed U.S. $268 million (CDN $309 million) by the markets operated by the California Power Exchange (Cal Px)
and the CISO related to Powerex’s electricity trade activities in California during fiscal 2001. As a result of payment defaults by a number of
California utilities, the Cal Px and CISO were unable to pay these amounts to Po werex. That receivable will be offset against any refunds that
Powerex is required to pay.