DATE:	December 6, 2007
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Gardner, Bulecza-Banks, Springer) Office of the General Counsel (Jaeger)
RE:	Docket No. 070284-EI – Petition for approval of 2007 depreciation study and annual dismantlement accrual amounts by Tampa Electric Company.
AGENDA:	12/18/07 – Regular Agenda – Proposed Agency Action - Interested Persons May Participate
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		None
CRITICAL DATES:		None
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\070284.RCM.DOC

 

 Case Background

Rule 25-6.0436(8)(a), Florida Administrative Code (F.A.C.), requires investor-owned utilities to file comprehensive depreciation studies at least once every four years.  On April 27, 2007, Tampa Electric Company (Tampa Electric or Company) filed its regular depreciation study in accordance with Rule 25-6.0436, F.A.C.  By Order No. PSC-07-0657-PCO-EI, issued August 15, 2007, in this docket, the company was authorized to implement, on a preliminary basis, its depreciation rates, amortizations, recovery schedules, and fossil dismantlement accruals as of January 1, 2007, in accordance with Rule 25-6.0436(5), F.A.C.

This recommendation addresses the request for approval of new depreciation rates and fossil dismantlement accruals effective January 1, 2007.   Staff is recommending a decrease in annual depreciation expense and fossil dismantlement accrual in the amount of an estimated $13.6 million.    The basis for Tampa Electric’s request were changes made to its plant to address alleged violations of the Clean Air Act and Florida Laws.  Tampa Electric was required to shut down and repower units at the Gannon Station on or before December 31, 2004, pursuant to a Consent Decree (CD) and Consent Final Judgment (CFJ) entered by the U.S. Environmental Protection Agency (EPA) and the Florida Department of Environmental Protection (DEP), respectively.  The CD and CFJ included provisions for environmental controls and pollution reductions from its coal-fired power plants. Since the plant investment and reserve factors were updated through December 31, 2006, this recommendation addresses the approval of new depreciation rates and annual dismantlement accrual amounts effective January 1, 2007.

The Company’s effort to comply with DEP and EPA on the Clean Air Act and Florida Laws is not isolated to Florida utilities, but is also occurring in other states.  In other states, coal generating plants are being refurbished or repowered to meet the requirements of the Clean Air Interstate Rule (CAIR) and the Clean Air Mercury Rule (CAMR) requirements.  Staff reviewed the actions taken by other states with respect to the changing regulatory climate for coal-fired generating plants.  Staff reviewed a report prepared by the staff of the Michigan Public Service Commission entitled, “Michigan Capacity Need Forum: Staff Report to the Michigan Public Service Commission Report,” issued January 2006.  The Michigan group formed the following assumptions on plant retirements: “….units built since 1950 should expect to realize longer economic life than older units.  The group recommends a 65-year retirement age be used for modeling coal-fired generating units.  While it is likely that some will retire sooner than 65 years and some will retire later, 65 years is a reasonable modeling assumption.”[1]

The Commission has jurisdiction over this matter pursuant to Sections 366.04, 366.05, and 366.06, Florida Statutes (F.S).

Discussion of Issues

Issue 1: 

 Should the preliminary deprecation rates, amortizations, recovery schedules, and provision for dismantlement for Tampa Electric Company be changed?

Recommendation: 

 Yes.  Staff recommends the Commission approve the revised lives, net salvage reserves, resultant depreciation rates, and provision for dismantlement as shown on Attachments A and C.  The effect is a decrease in depreciation and dismantlement expenses, as shown on Attachments B and C, for an estimated $13.6 million annually effective January 1, 2007.  (Gardner, Springer)

Staff Analysis: 

 Order No. PSC-07-0657-PCO-EI authorized Tampa Electric to implement on a preliminary basis depreciation rates, amortizations, recovery schedules, and fossil dismantlement accruals for 2007.  Also, Order No. PSC-07-0657-PCO-EI approved an annual decrease in total depreciation and dismantlement expenses of about $13.043 million based on actual January 1, 2007 investments.  Staff is recommending an additional estimated $.6 million decrease in total depreciation and dismantlement expenses.  The primary difference between the preliminary approved 2007 annual expense and this current proposal are changes, subject to rounding, in the escalation factors and reallocation of depreciation reserves.  The reallocation of the depreciation reserves resulted in a change in depreciation rates for some transmission, distribution, and general plant accounts.

            Staff recognizes that the considerations of new factors, such as governmental actions on the federal, state, and Commission level, new technologies, and growth, will continue to impact the life patterns of various segments of major structures of plant. The Commission approved an increase in the life parameters of Gulf Power by Order PSC-07-0012-PAA-EI, issued January 2, 2007, in Docket No. 050381-EI, In re: Petition for approval of modification of depreciation rates and dismantlement study for Plant Crist, Plant Smith, and Smith Unit 3 Combined Cycle, by Gulf Power Company.

 

Staff has completed its review of the Company’s depreciation study and recommends for 2007 the revised depreciation rates, amortizations, recovery schedules, reserve allocations, and provision for dismantlement shown on Attachments A and C be approved.  The effect of this proposal would be to decrease total depreciation and dismantlement expenses as shown on Attachment B by an estimated $13.6 million annually beginning January 1, 2007, until the next depreciation and dismantlement study.

 

Issue 2:  What should be the implementation date for the new depreciation rates, amortizations, recovery schedules, and dismantlement accruals?

Recommendation: 

 Tampa Electric’s new depreciation rates, amortizations, recovery schedules, and dismantlement provision, as shown in Attachments A and C, should have an implementation date of January 1, 2007.  (Gardner)

Staff Analysis: 

 Rule 25-6.0436(6)(b), F.A.C., requires that data submitted in a depreciation study, including plant and reserve balances or company planning involving estimates, must coincide with the effective date of the proposed rates.  In this regard, Tampa Electric’s supporting data and calculations for revised depreciation rates, amortizations, recovery schedules, and dismantlement which are set forth in Attachments A and C, have been revised to match a January 1, 2007, implementation date.

Issue 3: 

 Should any corrective reserve allocations be made?

Recommendation: 

 Yes.  Staff recommends the corrective reserve allocations for the imbalances that affect Tampa Electric’s investment and reserves as shown in the table below in the Staff Analysis.  (Gardner)

Staff Analysis: 

   Staff’s recommended reserve allocations address the major imbalances that affect the Company’s investments and reserves between accounts of a given unit or function, or between accounts and units at the same site.  The allocations bring each affected account’s reserve in line with its theoretical correct position.  Also, this corrective action is necessary to eliminate the accruing of depreciation expense that may continue beyond the account’s current investment.

Account	Actual Reserves	Theoretical Reserves	Reserve Transfers	Restated Reserves
	($)	($)	($)	($)
Transmission
354.00	$   3,557,051	$  3,634,603	$     53,943	$   3,610,994
355.00	41,123,903	47,082,503	446,456	41,570,359
356.01	1,222,805	1,168,862	(53,943)	1,168,862
357.00	1,625,794	1,306,985	(318,809)	1,306,985
358.00	2,379,745	2,252,098	(127,647)	2,252,098
Totals	49,909,298	55,445,051	-0-	49,909,298
Distribution
361.00	448,977	488,795	39,818	488,795
362.00	54,319,261	45,329,139	(8,990,122)	45,329,139
364.00	82,360,137	88,989,416	6,629,279	88,989,416
365.00	105,830,760	95,929,031	(8,961,885)	96,868,875
367.00	46,208,745	53,395,106	7,186,361	53,395,106
368.00	142,016,214	143,292,264	1,276,050	143,292,264
369.01	29,964,863	21,219,400	(8,745,463)	21,219,400
369.02	32,594,673	32,737,864	143,191	32,737,864
370.00	10,499,252	21,922,023	11,422,771	21,922,023
Totals	504,242,882	503,303,038	-0-	504,242,882
General Plant
390.00	26,958,310	34,482,244	2,011,100	28,969,410
397.25	9,884,880	7,873,780	(2,011,100)	7,873,780
392.02	2,288,285	912,120	(572,412)	1,715,873
392.03	6,173,327	7,072,748	899,421	7,072,748
392.05	685,925	335,758	(350,167)	335,758
392.12	444,758	417,719	(27,039)	417,719
392.13	399,724	351,765	(47,959)	351,765
392.14	53,893	152,049	98,156	152,049
Totals	$46,889,102	$51,598,183	-0-	$46,889,102

Issue 4: 

 Should the depreciation rates, amortizations, and recovery schedules be changed?

Recommendation: 

 Yes. Staff recommends the Commission approve the lives, net salvages, reserves, and resultant depreciation rates shown on Attachment A.  (Gardner)

Staff Analysis: 

 Staff’s analysis represents an overall review of the Company’s proposed life, salvage and reserve factors, as well as the establishment of a fixed levelized annual accrual for dismantlement of fossil plants in accordance with Order No. 24741, issued July 1, 1991, in Docket No. 890186-EI, In re: Investigation of the ratemaking and accounting treatment for the dismantlement of fossil fueled generating stations.  The analysis of the Company’s data and resulting expenses reflects the impact of current planning and adherence to regulatory requirements to ensure that assets are fully recovered at the time of retirement as reflected on Attachments A and B.  Attachment A shows a comparison of rate components (lives, salvages, reserves).  Attachment B shows the estimated resulting annual expenses based upon January 1, 2007, investments.  A summary of the changes, subject to rounding, by plant account function is as follows:

 

In this study, the significant changes in expenses relate to the change in average service life, the increase in net salvage, and the resulting decrease in depreciation rates for production plant.  For the Big Bend Station, the Company’s life categories were 24, 50, and 65 years through the life of the plant.  The life categories were increased by 15 years through the life of the plant category and the remaining life increased by approximately ten years.  At this time, there is no change to base rates.  Also, the estimated $13.6 million expense decrease represents approximately 68 basis points on return on equity.

The Company’s activities are geared to adherence to the CD and CFJ requirements imposed by DEP and EPA for the Clean Air Act and Florida Laws.  Staff will continue to monitor the company’s life parameters for production, transmission, and distribution.

Issue 5: 

 Should the preliminary approved annual provision for fossil dismantlement be changed?

Recommendation: 

 Yes.  The Commission should approve a total annual provision for fossil fuel dismantlement of $1,336,986, as shown on Attachment C.  This represents a decrease in the annual provision for fossil fuel dismantlement of $2,539,917.  (Gardner, Springer)

Staff Analysis: 

 By the Fossil Fuel Dismantlement Order No. 24741, issued July 1, 1991, in Docket No. 890186-EI, In re: Investigation of the ratemaking and accounting treatment for the dismantlement of fossil fueled generating stations, the Commission established the methodology for accruing the costs of fossil fuel dismantlement.  The methodology depends on three factors:  1) projected inflation, 2) a contingency factor, and 3) estimated base costs of dismantling the fossil-fueled plants.

            The Dismantlement Order established the methodology for calculating the annual accrual.  The fixed accrual amount is based on a four-year average of the accruals related to the years between depreciation study reviews.  In addition, utilities are required to provide updated dismantlement studies at least once every four years in connection with their depreciation studies.

            Tampa Electric’s currently approved annual accrual for fossil fuel dismantlement is $3,876,903.  Its proposed annual accrual of $1,294,943 is based on inflation factors from Economy.com as of February 2007.  At the request of staff, the Company updated its accruals to reflect the most recent inflation factors.  The annual accrual, reflecting inflation factors as of September 2007, represents an increase from the proposed accrual of $42,043.  Staff believes it is reasonable for the accrual to reflect the most recent inflation estimates.  The Company agrees with staff’s recommendation that the revised annual accrual should be $1,336,986, which represents a decrease of $2,539,917 from the currently approved level.

The Company proposes reducing its existing 15 percent contingency factor to a proposed 10 percent contingency factor which is in the range of reasonableness with other Florida regulated utilities.  The contingency factor is designed to cover uncertainty in the dismantlement cost estimates.  The factor is comprised of pricing and scope of omission contingencies.  The pricing contingency provides a level of confidence that the estimates are reasonable.  The scope omission contingency gives consideration to the conceptual nature of the base cost estimates and the difficulty in obtaining quantity and weight records.  Rule 25-6.04364, F.A.C., titled Electric Utilities Dismantlement Studies, defines the contingency costs as a specific provision for unforeseeable elements of cost within the defined project scope.  Staff will continue to monitor the Company’s contingency factor with each fossil dismantlement study filing for reasonableness.

Attachment C compares the current approved dismantlement accruals to Tampa Electric’s proposed accruals.  The current approved annual dismantlement accrual is $3,876,903.  The Company’s proposed annual dismantlement accrual is $1,294,943, indicating a decrease of $2,581,960.  In the last study, the Company’s planning showed that the turbine-related assets for Gannon Units 3, 4, 5, and 6 would continue in-service as part of the repowering of Gannon into the Bayside Power Station.  The common facilities and Units 5 and 6 would be included with Bayside Common and Units 1 and 2.  Also, Units 3 and 4 would be placed in long-term standby as the Company continues to explore the possibilities available for repowering.  As the current study shows, the Company chose to retire the Gannon Common facilities and Units 3 and 4 turbine-related assets.  This is shown on Attachment C under the Company’s 2007 proposed dismantlement accrual.

            Since the last study, Tampa Electric’s base cost estimates for the various dismantlement activities have changed as shown below:

 

 

            This change in base cost estimates is due to the Company changing from Invirex Corporation, who prepared the 2003 estimates, to MARCOR Remediation, Inc., a specialty demolition contractor.  MARCOR Remediation, Inc. performed the current cost estimates for all of Tampa Electric’s generating units.  The dismantling activities base costs estimates includes salvage rates of current contracts, allowance for current trends, estimation of reusable equipment, actual quantities based upon property record data, and Tampa Electric drawings.  Also, Tampa Electric believes that since the completion of the decommissioning activities at Gannon Station, its level of confidence has strengthened in developing dismantlement estimates in conjunction with MARCOR Remediation, Inc.

            Based upon staff’s review of the Company’s current data and the change in capital recovery dates as discussed in Issue 4, the fossil fuel dismantlement cost estimates appear to be reasonable.  Staff recommends that the four-year average annual accrual for fossil fuel dismantlement should be $1,336,986.  Also, staff will continue to monitor the company’s base cost estimates and contingency factor with each fossil fueled dismantlement study.         

Issue 6: 

 Should this docket be closed?

Recommendation: 

Yes.  If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the order, this docket should be closed upon issuance of a consummating order.  (Jaeger)

Staff Analysis: 

  If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the order, this docket should be closed upon the issuance of a consummating order.

Attachment A

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Attachment A

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Attachment A

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Attachment A

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Attachment B

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Attachment B

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Attachment B

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Attachment B

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Attachment C

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