Discussion
of Issues
Issue 1:
Should currently prescribed depreciation rates for
Sebring Gas System be revised?
Recommendation:
Yes. The review of Sebring’s plant depreciation
information indicates a need for revising the company’s currently prescribed
depreciation rates. (Higgins)
Staff Analysis:
Sebring’s last depreciation filing was made on July
22, 2011. By Order No. PSC-12-0043-PAA-GU, the Commission approved revised
depreciation rates that became effective January 1, 2011.
The company has filed its 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 from the
submission date of the previously filed study. A review of the company’s plant activity
and data indicates the need for revising depreciation rates. Staff’s
recommended depreciation components and rates are discussed in Issue 3 and shown
on Attachments A and B.
Issue 2:
What should be the implementation date for newly
proposed depreciation rates?
Recommendation:
Staff recommends January 1, 2017, for implementing newly
proposed depreciation rates as shown on Attachments A and B to this
recommendation. (Higgins)
Staff Analysis:
Rule 25-7.045, F.A.C., requires that the data
submitted in a depreciation study, including plant and reserve balances or
company estimates, “shall be brought to the effective date of the proposed
rates.” The supporting data and
calculations provided by Sebring match an implementation date of January 1,
2017.
Issue 3:
What are the appropriate
depreciation parameters and resulting rates?
Recommendation:
Staff recommends the Commission approve the lives, reserve
percentages, net salvage percentages, and resulting remaining life depreciation
rates for Sebring that are shown on Attachment A. As shown on Attachment B, the
corresponding depreciation expense effect of staff’s rate recommendations is a
decrease of $6,980 annually, or 3.8 percent, based on December 31, 2016
investments. (Higgins)
Staff Analysis:
Staff’s recommendations are the result of a comprehensive
review of Sebring’s plant depreciation data filed in this docket. Attachment A
to this recommendation shows a comparison of certain currently-approved
depreciation parameters and rates to those staff is recommending become
effective January 1, 2017 (Issue 2). Staff and the company are in agreement on
all proposed depreciation parameters and resulting rates. Displayed
on Attachment B is a comparison of depreciation expenses between currently-approved
and proposed rates based on December 31, 2016 investments.
This filing was essentially a staff-assisted study. The company
provided plant addition and retirement data spanning 2011-2016 (2016 projected),
proposed net salvage values, proposed average service lives, and proposed Iowa-type
survivor curves. With
this information, staff determined the average age of investments on an
account-by-account basis, then applied the results to Sebring’s proposed curve/life
combinations for determining account-specific average remaining lives. Sebring’s
proposed account-specific average service lives are unchanged from its prior
study.
As a result of the review and analytical process, staff
and Sebring agree on lives, net salvage values, and resulting depreciation
rates for all accounts as shown on Attachments A and B to this recommendation.
Plant
Additions
Sebring’s total plant investment has grown substantially
over the study period. During the 2011-2016 period (2016 projected), the
company’s system grew by approximately 89 percent, or from approximately $2.9
million to approximately $5.6 million. Over two-thirds of this system growth is
attributable to initiating gas services in 2013 to both the Hardee and Desoto
Correctional Institutes. Specifically, Sebring invested in the construction of two
new gate stations (Account 379.00 -
Measuring & Regulating Station Equipment – City Gate) which were
required in order to fulfill its newly acquired service contracts with the
Florida Department of Corrections. Staff notes that these two special service
contracts were approved by the Commission in 2013. The
two new gate stations tapped both the Gulfstream (serving the Hardee
Institution), and Florida Gas Transportation pipelines (serving the Desoto
Institution).
Additional investments attributable to newly-serving the
correctional institutes include the installation of mains and meters placed
downstream from the gate stations. The investments were recorded in: Account
376 - Mains – Plastic, and Account 382 - Meter Installations. The total investment
required to initiate service to the correctional institutes was approximately
$1.5 million. This investment is net of the approximate $250,000 refund paid to
Sebring by Gulfstream and Florida Gas Transportation companies from mandatory
prepayment of engineering and construction costs. In addition to the
correctional institutions, over the study period Sebring also installed new
plant/extending mainlines in Sebring, Florida, for serving businesses, a fire
department, and a residential community.
In response to a staff data request, the company stated it
does not foresee similar levels of investment growth as it experienced in 2013
and believes its system will revert to more typical growth patterns over the
next study period.
Plant
Retirements
The company’s plant has experienced minimal retirement
activity over the study period. Expressed as a percentage of study period additions,
plant retirements total under 2 percent from 2011-2016. Staff notes the refund associated
with tapping the two transmission pipelines discussed in the Plant Additions section was initially
recorded as retirement in 2014 (year of refund), but later correctly revised as
a “reduction of plant addition,” thus accurately reflecting the final
investment amount.
Average
Service and Remaining Lives
Neither the company, nor staff, propose any changes to Sebring’s
currently-authorized, account-specific, average service lives.
Staff does, however, recommend the company closely monitor the life
characteristics of all its investments for evaluating if any average service
life adjustments are warranted as part of future depreciation studies.
As similarly performed in the company’s last depreciation
review and mentioned above, staff computed account-specific average remaining
lives (shown on Attachment A) by first aging Sebring’s projected plant
investments at December 31, 2016, then applying the results to the company’s
Iowa Curve and service life selections on an account-by-account basis.
Net
Salvage
The company has not requested any changes to its currently
authorized net salvage levels. Without
experiencing meaningful levels of retirement over a period of time, company
specific net salvage investigations may prove inconclusive. Thus, staff compared
the company’s currently-authorized/proposed-for-continued-use net salvage
levels to those experienced by other natural gas distribution companies. Staff
believes Sebring’s currently-authorized/proposed net salvage values remain
in-line to those currently being estimated by its industry peers and should continue
to be used for applicable rate-making purposes.
Reserve
Transfers
As part of reviewing Sebring’s 2016 Depreciation Study,
staff calculated the book reserve position of each plant account. Staff also
calculated the associated theoretical reserve positions of each plant account,
which are based on the current recommended life and net salvage inputs. The
difference between an account’s book and theoretical reserve amounts may be
described as an imbalance, either positive or negative, or as a surplus or
deficiency. When imbalances are present, corrective transfers among accounts
should be evaluated, and if warranted, recommended to be performed. Staff
discusses its recommended reserve transfers below.
Over the study period of 2011-2016, Sebring carried
depreciation reserves of $9,788 in Account 399 – Prior Period Adjustment. This
amount was associated with a prior rate case audit finding related to the
appropriate level of accumulated depreciation. This audit finding was
ultimately identified by Commission Order PSC-04-1260-PAA-GU. As
part of the data request process, the company was asked if it has any specific
treatment proposals for this reserve amount and responded it did not.[10] Staff further
inquired if the company was amenable to the Commission allocating this reserve to
other plant accounts in a rational manner. The company was supportive of both
staff’s suggestion and transfer results/proposals. The specific depreciation
reserve transfer proposals are presented in Table 3-1.
|
Table 3-1
Proposed Accumulated Depreciation
Transfers
|
|
Acct.
No.
|
Account
Title
|
Reserve
Transfer
Amounts
|
|
376.1
|
Mains – Steel
|
2,357
|
|
379
|
Meas. & Reg. Station Equip.(City Gate)
|
2,129
|
|
380.2
|
Services - Plastic
|
2,058
|
|
382
|
Meter Installations
|
119
|
|
387
|
Other Equipment
|
153
|
|
394
|
Tools, Shop & Garage Equipment
|
2,972
|
|
399
|
Prior Period Adjustment
|
(9,788)
|
Staff’s methodology was to first bring any account with a
theoretically negative reserve position to its theoretically correct level.
However, after bringing all accounts with theoretically negative reserve
positions to their correct levels, $2,058 of the original $9,788 remained. For
this remainder, staff proposes allocating the entire amount to Account 380.2 –
Services – Plastic, due to this account having an approximate 31-year average
remaining life in which the surplus is spread over/amortized, as well as
mitigating the minor expense increase associated with this account. Staff
believes any effects resulting from the transfer are minimal due to the account’s
long remaining life, as well as the small transfer amount relative to overall
investment.
Staff also recommends the Commission approve transferring
$180, from Account 392 – Trans. Equipment – Other Vehicles to Account 392 –
Trans. Equipment – Light Trucks, as the former account has no corresponding
investment. Staff notes that its current rate recommendations incorporate all
proposed reserve transfers discussed in this section.
Other
Matters
For natural gas utilities, the Commission observes $500 as
being the appropriate minimum threshold for capitalization of property, while minor
items costing less than $500 are recorded as maintenance expense.[11] Staff in
its review of Sebring’s 2016 Depreciation Study became aware of a small number
of capital entries which were below the $500 minimum threshold. However, staff
notes the vast majority of capital items/plant entries are appropriately above
the minimum threshold. Staff consulted with the company concerning these
specific entries. The company claimed it ceased making capital entries below
$500, and will only capitalize property valued at $500 or greater going forward.
For calendar year 2012, the company recorded ($4,250) of
plant retirements to Account 381 – Meters, while only recording ($330) to the
account’s corresponding reserve. For calendar year 2014, the company recorded
($20,647) of plant retirements to Account 392.1 – Transportation – Trucks,
while only recording ($14,955) to the account’s corresponding reserve. Staff
proposes to correct accumulated depreciation levels by matching the reserve
entries to the corresponding plant entries. This proposal results in reducing account
381’s reserve by ($3,920), and account 392.1’s reserve by ($5,692). Staff notes
its current depreciation rate recommendations incorporate these proposed
reserve reductions.
Conclusion
Staff recommends the Commission approve the lives, net
salvages, reserves, and resultant depreciation rates for Sebring that are shown
on Attachment A. The expense effect of staff’s plant depreciation rate
recommendations, which is shown on Attachment B, is a decrease of $6,980 annually,
or 3.8 percent, based on December 31, 2016 investments.
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 amortization schedules?
Recommendation:
Yes. The current
amortization of ITCs should be revised to match the actual recovery periods for
the related property. The company should file detailed calculations of the
revised ITC amortization at the same time it files its earnings surveillance
report covering period ending December 31, 2017, as specified in rule
27-7.1352, F.A.C. (Cicchetti, Wolmers).
Staff Analysis:
In Issue 2, staff has
recommended approval of revised depreciation rates for the company, to be
effective January 1, 2017, which reflect changes to most accounts’ remaining
lives to be effective January 1, 2017. Revising a utility's book depreciation
lives generally results in a change in its rate of ITC amortization 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),[13]
former IRC section 167(l),[, ]
former IRC Section 46(f),[, ]
Federal Tax Regulations under the Code sections,
and section 203(e) of the Tax Reform Act of 1986 (the Act).
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.
Former IRC Section 46(f)(6) of the Code indicated 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.
While, Section 46(f)(6) was repealed, under IRC Section 50(d)(2), the terms of
former IRC Section 46(f)(6) remain applicable to public utility property for
which a regulated utility previously claimed ITCs. 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
50(d)(2), and its underlying Treasury Regulations. The consequence of an ITC
normalization violation is a repayment of unamortized ITC balances to the IRS. Therefore,
staff recommends the current amortization of ITCs should be revised to match
the actual recovery periods for the related property. The company should file
detailed calculations of the revised ITC amortization at the same time it files
its earnings surveillance report covering the period ending December 31, 2017,
as specified in Rule 25-7.1352, F.A.C.
Issue 5:
Should this docket be closed?
Recommendation:
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. (Leathers)
Staff Analysis:
At the conclusion of the protest period, if no
protest is filed, this docket should be closed upon the issuance of a
consummating order.
