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 Case Background

Rule 25-7.045, Florida Administrative Code (F.A.C.), requires natural gas companies to file a comprehensive depreciation study once every five years.  Peoples Gas System (Peoples or Company) filed its 2011 depreciation study in compliance with this rule.  The Company’s last depreciation review was filed in 2006, with the Commission’s approved revised depreciation rates and components effective January 1, 2007.  The Commission has jurisdiction pursuant to Sections 350.115 and 366.05, Florida Statutes (F.S.).

Discussion of Issues

Issue 1: 

 Should currently prescribed depreciation rates of Peoples Gas System be revised?

Recommendation: 

 Yes. A review of the Company’s plans and activities indicates a need for a revision to the currently prescribed depreciation rates.   (Ollila)

Staff Analysis: 

 Peoples’ last comprehensive depreciation study was filed in 2006.  By Order No. PSC-07-0125-PAA-GU[1], the Commission approved revised depreciation rates and components, effective January 1, 2007.  The Company has filed this current study in accordance with Rule 25-7.045, F.A.C., which requires natural gas companies to file a comprehensive depreciation study at least once every five years.  A review of Peoples’ activity data indicates the need to revise the depreciation rates.

Issue 2: 

 What should be the implementation date for new depreciation rates?

Recommendation: 

 Staff recommends approval of the Company’s proposed January 1, 2012, date of implementation for revised depreciation rates.  (Ollila)

Staff Analysis: 

 Rule 25-7.045(6)(b), F.A.C., requires that the data submitted in a depreciation study, including plant and reserve balances or company estimates, “should be brought to the effective date of the proposed rates.”  The supporting data and calculations provided by Peoples match an implementation date of January 1, 2012.

Issue 3: 

 What are the appropriate depreciation rates?

Recommendation: 

 The appropriate depreciation rates are contained in Attachment A.  Staff recommends retaining Account 386.00 – Other Property Customer Premise with a 15-year average service life.  Staff recommends closing Account 392.02 – Airplanes.  (Ollila, L'Amoreaux)

Staff Analysis: 

 Staff’s recommendations are the result of a comprehensive review of Peoples’ study, including staff-issued data requests.  As a result of the review and analytical process, staff believes the Company-proposed lives, net salvage percentages, and the resulting depreciation rates for all accounts are appropriate. Attachment A contains a comparison of current components and rates to staff’s recommended components and rates. Attachment B contains a comparison of current and proposed depreciation expense. Staff’s recommended rates result in a decrease to depreciation expense of $139,198.  

Account 386.00 – Other Property Customer Premise

            There is no investment in this account.  Peoples proposed retaining the account in case it might be needed.  The Company also proposed an increase in the average service life from 10 to 15 years.  Staff believes that if it is possible that this account might be needed, then the account should be retained at least until the next depreciation study.  Staff believes that it is reasonable to increase the average service life to 15 years.  Staff recommends retaining this account and increasing the average service life to 15 years. 

Account 392.02 – Airplanes

            Peoples stated in its study that its airplane was retired in 2009.  Currently, there are no assets in this account and the Company apparently has no plans for additional investment.  When questioned about this account in the December 1, 2011 staff report, the Company agreed that it is appropriate to close this account and discontinue any depreciation parameters.  Staff agrees with Peoples and recommends closing this account.

Reserve Transfers

In early 2011, the Commission approved a stipulation and settlement agreement (agreement) between Peoples and the Office of Public Counsel for possible overearnings in 2010.[2]  That agreement included a provision that any overearnings in excess of $3,000,000 “shall be used to correct or mitigate deficiencies in the Company’s depreciation reserves as may be agreed to by PGS and Staff.”[3]  The amount of overearnings in excess of $3,000,000 was calculated by the Company to be $6,150,000.[4]  In its proposed reserve transfers in this proceeding, Peoples has included the $6,150,000 as ordered. 

Staff has thoroughly reviewed Peoples’ proposed reserve transfers (including the $6,150,000), as well as its explanations as provided in response to staff’s data requests.  The proposed reserve transfers, contained in Attachment C, are acceptable to staff. Staff notes that it monitors the Company’s reserve activity (additions, retirements, and adjustments) on an annual basis.  The annual review includes preparation and submission of data requests as necessary

Conclusion

Staff recommends that the appropriate revised depreciation rates are contained in Attachment A.  Staff recommends retaining Account 386.00 – Other Property Customer Premise with a 15-year average service life.  Staff recommends closing Account 392.02 – Airplanes.

Issue 4:  Should the current amortization of investment tax credits (ITCs) and flow back of excess deferred income taxes (EDITs) be revised to reflect the approved depreciation rates and capital recovery schedules, if any?

Recommendation: Yes.  The current amortization of ITCs and the flowback of EDITs should be revised to match the actual recovery periods for the related property.  The Company should file detailed calculations of the revised ITC amortization and flowback of EDITs at the same time it files its surveillance report covering the period ending December 31, 2012.  (Cicchetti)

Staff Analysis: 

As shown in Attachment A, staff has recommended approval of revised depreciation rates for the Company which reflect changes to most accounts’ remaining lives to be effective January 1, 2012.  Revising a utility's book depreciation lives generally results in a change in its rate of ITC amortization and flowback of EDITs in order to comply with the normalization requirements of the Internal Revenue Code (IRC or Code) set forth in sections 168(f)(2) and (i)(9), IRC sections 167(l) and 46(f),[5] Federal Tax Regulations under the Code sections,[6] and section 203(e) of the Tax Reform Act of 1986 (the Act). [7]

Staff, the Internal Revenue Service (IRS), and independent outside auditors look at a company's books and records, and the orders and rules of the jurisdictional regulatory authorities to determine if the books and records are maintained in the appropriate manner.  The books are also reviewed to determine if they are in compliance with the regulatory guidelines in regard to normalization.  Therefore, staff recommends the current amortization of ITCs and the flowback of EDITs be revised to reflect the remaining useful lives that underlie staff’s proposed depreciation rates.

            Section 46(f)(6) of the Code states that “the amortization of ITC should be determined by the period of time actually used in computing depreciation expense for ratemaking purposes and on the regulated books of the utility.”[8]  Since staff is recommending changes to the Company’s remaining lives, it is also important to change the amortization of ITCs to avoid violation of the provisions of IRC section 46 and its underlying Treasury Regulations.  The consequence of an ITC normalization violation is a repayment of unamortized ITC balances to the IRS.

            Section 203(e) of the 1986 Act prohibits rapid flow back of depreciation-related (protected) EDITs to the utility’s customers.  Further, Rule 25-14.013, F.A.C., Accounting for Deferred Income Taxes Under SFAS 109, generally prohibits EDITs from being written off any faster than allowed under the Act.  The Act, ASC 740,[9] and Rule 25-14.013, F.A.C,  regulate the flowback of EDITs.  Therefore, staff recommends that the flowback of EDITs be adjusted to comply with the Act, ASC 740, and Rule 25-14.013, F.A.C.

Issue 5: 

 Should this docket be closed?

Recommendation: 

 Yes.  If no person whose substantial interests are affected by the Commission’s 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.  (Brown)

Staff Analysis: 

 If no person whose substantial interests are affected files a timely request for a hearing within 21 days, no further action will be required and this docket should be closed upon the issuance of a consummating order.