Issue 1:
Should FCG's currently prescribed depreciation rates be revised?
Recommendation:
Yes. A review of FCG’s account activity and current capital recovery position indicates a need for a revision to the currently prescribed depreciation rates. (Wu)
Staff Analysis:
FCG’s last depreciation study was filed in 2008 and revised in 2009. By Order No. PSC-09-0835-PAA-GU, the Commission approved revised depreciation rates and components, effective January 1, 2009. 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 FCG’s activity data indicates the need to revise the depreciation rates.
Some of the notable changes to FCG’s plants include significant expansion of the Company’s service within its service territory. In 2011, FCG acquired and activated a natural gas Jet Fuel Line which represented 25 miles of 6-inch high pressure steel main that runs from Miami International Airport to Homestead Air Force Base. The Company also installed 3.5 miles of 8-inch steel main to serve an industrial customer in the Miami area as well as 2 miles of 6-inch steel to serve an industrial customer in Belle Glade. In 2012, FCG installed nearly 30 miles of 6-inch underground transmission pipeline from Palm Beach to Hendry County to serve two industrial anchor customers and the city of Clewiston. In 2013, FCG installed 3.5 miles of 6-inch and 1 mile of 4-inch plastic main to service several industrial and commercial customers in the Town of Fellsmere. In addition, FCG installed 2 miles of 4-inch plastic to serve Cape Canaveral Air Force Station as well as 7 miles of 2-inch plastic to various residential developments in the Brevard area. The Company also operated three projects in Miami which consist of 6-inch and 2-inch plastic installed to serve the Homestead Housing Authority, 3.5 miles of 6-inch plastic extended to serve Florida International University, and 2 miles of 6-inch plastic installed along Miramar Parkway to serve the commercial corridor.
In 2013, FCG replaced its PeopleSoft Asset Management System with the PowerPlant Asset Management System. This new system is used primarily to manage capital projects, create and retire assets and calculate depreciation along with other activities. FCG also purchased an office in Doral, Florida that will become the new headquarters for the Company. This office will replace the current office located in Hialeah, Florida. Renovations are expected to be completed by 2014.
The total plant investment in FCG’s depreciable plant accounts was $295,708,550 at the end of this study period, which has been increased by $64,722,992, or 28%, since the last depreciation study.
In summary, the development
discussed above, as well as other changes in account activity and the Company’s
planning indicate the need to revise currently prescribed depreciation rates.
Issue 2:
What should be the implementation date for the new depreciation rates?
Recommendation:
Staff recommends approval of FCG’s proposed January 1, 2014, date of implementation for revised depreciation rates. (Wu)
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 FCG match an implementation date of January 1, 2014. Based upon staff’s analysis, staff recommends approval of this date as being the earliest practicable date for utilizing the revised depreciation rates.
Issue 3:
What are the appropriate depreciation rates?
Recommendation:
Staff’s recommended remaining lives, net salvages, reserve amounts, and the resultant depreciation rates are contained in Attachment A. Attachment B shows an increase in annual expenses of $386,226 based on December 31, 2013, investment. (Wu)
Staff Analysis:
Staff’s recommendations are the result of a comprehensive review of FCG’s depreciation study, including the Company’s responses to four sets of staff-issued data requests; a noticed informal meeting between the Company, Commission staff, and interested persons to the docket; and responses to a staff report. As a result of staff’s review and the Company’s responses to staff’s questions, staff believes the proposed lives, net salvage percentages, and the resulting depreciation rates for all accounts, contained in Attachment A, are appropriate. Attachment B contains a comparison of current and proposed depreciation expense. The Company proposed a set of depreciation rates in its originally filing which would result in an increase to depreciation expense of $787,591. Staff’s recommended depreciation rates result in an increase to depreciation expense of $386,226, an increase of about 3.4 percent. The Company agrees with staff’s recommendations, including the resulting depreciation rates.
A depreciation study provides an opportunity to review the present position of the investment recovery and determine whether any changes should be made to the existing pattern of recovery (depreciation rates). The remaining life depreciation rate is a fallout of several inputs including the average service life (ASL), age, remaining life, reserve percentage, and net salvage. The average service life refers to the overall period the account is expected to serve the public and is projected based on experience or estimates. The average remaining life is the remaining period of service which can be expected from the equipment or the plant asset under study. As part of the review process, staff considered the prudence of company planning, including additions and retirements, technological impacts, salvage practices, and other related activities.
FCG’s filing in this depreciation study provided aged retirement data and average age distribution of the surviving investments for each account for the study period 2009 through 2013. The Company also provided each study year’s net salvage for each account and a narrative explanation for each category of depreciable plant. Using these data together with individual account’s plant activities and reserve activities provided by the Company, staff calculated the account-specific growth rates, retirement rates and net salvage rates. Based on these, staff verified the appropriateness of the combination of depreciation components (i.e. age, average service life and curve shape) proposed by the Company, and calculated the remaining life to determine the fallout depreciation rate for each account.
The staff-recommended changes to depreciation rates can be attributed mainly to two factors: (1) updated account age to reflect activity since the last represcription, such as new investment and retirement, and (2) changes in the associated reserve position. The accounts with substantial changes are discussed below.
Account 376.1 Mains – Other than Plastic
This account has experienced significant changes, with net plant investment increasing by approximately $11.2 million. Taken with the account’s growth rate of 14.5% and retirement rate of 0.5%, an S3 curve shape[2] with a 45-year ASL would most closely depict the account activity. Staff notes that the average net salvage rates of this account was negative 123% (due to cost of removal and zero gross salvage) for the last five years, and negative 138% for the last eleven years. However, in order to promote a smooth rate transition, staff recommends an S3 curve shape with a 42-year ASL, rather than a 45-year ASL which represents the best fit, and decreases the net salvage from negative 20% currently to negative 25% for this account to closely depict the account activity. The resulting remaining life is 21 years, and the fallout depreciation rate, which includes a recommended reserve transfer, is 3.0%. FCG has agreed to staff’s recommendation.
Account 378 – M&R Equipment - General
This is a new account from the last depreciation study. As part of the Company’s various expansion projects, three new regulator stations were installed in the Town of Fellsmere and in the City of Vero Beach, two new stations were installed in Hendry County, one station was placed at the Southern Gardens Citrus Plant, one was placed in the City of Clewiston, and six were added in Miami. Account 378 was established to record the general measuring and regulating equipment resulting from these expansion projects. Since the new account includes measuring and regulating equipment, as does Account 379 M&R Equipment – City Gate, staff concurs with the Company’s use of a 30-year ASL and S3 curve, which the Commission prescribed for Account 379 in the last depreciation study, as the parameters of Account 378. Taken with the current average age of 2.5 years, the resulting remaining life for the account is 28 years, and the fallout depreciation rate, which includes a recommended reserve transfer, is 3.3%. FCG has agreed to staff’s recommendation.
Account 380.1 Services – Other than Plastic
This account has experienced changes with net plant investment increased by approximately $1.9 million, which represents a growth rate since the last depreciation study of approximately 15%. The retirement rate of this account was 1.2% during the study period. Taken with the current average age and the retirement rate, staff recommends an S6 curve shape with a 35-year ASL, which are within the industry norm, to more closely depict the account activity. The resulting remaining life is 6.6 years, and the fallout depreciation rate is 6.5%. FCG has agreed to staff’s recommendation.
Account 390.0 Structure & Improvements
This account has experienced an increase in net plant investment of approximately $2.1 million. Taking into consideration the account’s 89.2% growth rate and 4.9% retirement rate, staff recommends an R1, rather than the current R3, curve shape, with a 40-year ASL to more closely depict the account activity. The resulting remaining life is 34 years, and the fallout depreciation rate is 2.6%. FCG has agreed to staff’s recommendation.
Account 391.1 Office Furniture
The net plant investment in this account decreased by approximately $0.7 million since the last depreciation study. However, FCG indicated that, in 2014, the Company plans to have significant expenditures due to the relocation of its headquarters, which will result in increased activities of addition and retirement in this account. The retirement rate of this account was 24.3% during the study period. Taken with the projected higher growth and higher retirement rates, staff recommends an S2 curve shape with a 19-year ASL to more closely depict the account activity. The resulting remaining life is 5.5 years, and the fallout depreciation rate is 7.7%. FCG has agreed to staff’s recommendation.
Account 391.3 Enterprise Software
The Company reported that the net plant investment in this account increased by approximately $2.3 million since the last depreciation study. Taken with a near zero retirement rate and a 40.2% growth rate of the account, staff recommends an R4 curve shape with an 11-year ASL to more closely depict the account activity. The resulting remaining life is 5.4 years, and the fallout depreciation rate including proposed reserve transfer is 9.1%. FCG has agreed to staff’s recommendation.
Account 392.0 Transportation Equipment – Combined
The current net salvage rate of this account is 10%. In its response to staff report, FCG stated that the actual net salvage rate of the account was 12.4% for the study period, rather than 5.18% as the Company reported in its depreciation study. Staff notes that during the last depreciation study period the actual net salvage rate of the account was 13.3%, and over the last ten years the average net salvage rate of the account was 12.8%. Recognizing the trend of the account, staff recommends a net salvage of 12%, which is also within the industry norm, to more closely depict the account activity. The fallout depreciation rate, which includes a recommended reserve transfer, is 11.5%. FCG has agreed to staff’s recommendation.
Account 395.0 Laboratory Equipment
This account has been fully depreciated. Staff recommends that the depreciation rate should be set to zero before the account experiences any new additions. Staff also recommends that if new investment is added to the account before the next depreciation study, the current Commission-approved depreciation rate of 4.0% with a 25-year ASL and S4 curve should be used. FCG has agreed to staff’s recommendation.
Account 396.0 Power Operated Equipment
This is a new account from the last depreciation study. The net plant investment of the account increased by approximately $0.05 million due to acquiring new equipment and reclassifying equipment. Since the new account contains similar equipment as does Account 398 Miscellaneous Equipment, staff concurs with the Company to use a 15-year ASL and S3 curve, which the Commission prescribed for Account 398 in the last depreciation study, as the parameters of the new account. Taken with the age of 3.9 years, staff recommends the remaining life of 11.1 years, and a depreciation rate of 8.3%. FCG has agreed to staff’s recommendation.
Account 397.0 Communication Equipment
This account has been fully depreciated. Staff recommends that the depreciation rate should be set to zero before the account experiences any new additions. Staff also recommends that if new investment is added to the account before the next depreciation study, the current Commission-approved depreciation rate of 8.3% with a 12-year ASL and R2 curve should be used. FCG has agreed to staff’s recommendation.
Reserve Transfers
Staff reviewed the reserve position for each account. Based on staff’s recommended lives and salvage inputs for this study, staff determined FCG’s theoretical reserve. The difference between an account’s actual and theoretical reserve may be described as a positive or negative imbalance, or as a surplus or deficiency. When significant imbalances occur, corrective transfers among accounts should be made unless this action prevents the Company from earning a fair and reasonable return on its investments.
Overall, FCG’s actual reserve is less than its theoretical reserve. Staff recommends approval of the reserve transfers listed in Table 3-1 in order to help mitigate certain imbalances. FCG has agreed to staff’s reserve transfer recommendation. Table 3-1 displays the actual and theoretical reserves for each account, staff’s recommended transfers, and the resulting restated reserves.
Issue 4:
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. (Young)
Staff Analysis:
If no person whose substantial interests are affect files a timely request for a hearing with 21 days, no further action will be required and this docket should be closed upon the issuance of a consummating order.
