Discussion
of Issues
Issue 1:
Should the currently prescribed depreciation rates for St.
Joe Natural Gas Company be revised?
Recommendation:
Yes. The review of St. Joe’s plant and
depreciation-related information indicates a need to revise the Company’s
currently prescribed depreciation rates. (Higgins)
Staff Analysis:
St. Joe’s last depreciation filing was made on December
31, 2012. By Order No. PSC-13-0174-PAA-GU, the Commission approved revised
depreciation rates that became effective January 1, 2013.
The Company filed its current study in accordance with
Rule 25-7.045(4)(a), F.A.C. A review of the Company’s plant activity and other
relevant data indicates the need to revise depreciation rates. Staff’s
recommended depreciation rates and underlying components are specifically discussed
in Issue 3.
Issue 2:
What should be the implementation date for newly proposed
depreciation rates?
Recommendation:
If approved by the Commission, staff recommends January 1,
2018, for implementing the depreciation rates shown on Attachments A and B to
this recommendation. (Higgins)
Staff Analysis:
Rule 25-7.045(4)(d), 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 St. Joe match an implementation
date of January 1, 2018.
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 depreciation rates
applicable to St. Joe’s investments 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 $41,258 annually, or approximately 14.4
percent, from current depreciation rate levels. (Higgins, Wu)
Staff Analysis:
The purpose of this period depreciation review is to
ensure that capital prudently invested, as well as future costs of retirement
are recovered over the useful lives of the assets studied. To this end, staff’s
recommendations are the result of a comprehensive review of St. Joe’s depreciation
and plant-related 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 to become effective on
January 1, 2018, (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, 2017, investment levels.
2017 Study Overview
In general and with little exception, there has been relatively
minimal plant addition and retirement activity during the study period of 2013-2017,
with no property/accounts appearing to experience abnormal life
characteristics. Thus, St. Joe initially proposed to retain all of its previously
ordered average service life (ASL) durations, as well as net salvage (NS)
values.[6] Staff
notes that, in general, an ASL is the average expected life of all units of a
group of assets when new. NS represents the difference between the value of
salvage and cost of removal resulting from plant retirement and disposal. Both
are key considerations/parameters when formulating depreciation rates. Discussed
later in this recommendation, staff suggests to moderately lengthen the service
lives of three accounts. All else equal, the lengthening of service life will
ultimately reduce annual depreciation expense.
Staff observed that St. Joe’s as-proposed average
remaining lives (ARLs) were not calculated using retirement dispersion curves. To
address this, staff applied the last known Iowa-Type Survivor Curves applicable
to St. Joe’s plant on an account-by-account basis and derived new ARL values.[7] For
background, an ARL is the future expected service life in years of the asset-group
survivors at a given age, whereas the age of investments is the dollar-weighted
length of time that vintage assets have been in service. Overall, the effects
of using the newly-derived ARLs in calculating depreciation rates of St. Joe’s
plant were mixed, with greater rates of depreciation for some accounts, lesser
rates of depreciation for others.
Staff notes that many of St. Joe’s currently-approved
service lives were retained and used in the curve/life selection process.[8] Further,
staff accepted or agreed with the Company’s initial proposals for many proposed
net salvage values as well. An account-by-account analysis and discussion
concerning depreciation parameter formulation and rate development follows
below.
Account-Specific
Analysis
Account 375 – Buildings & Improvements
The age of this account is 33.6 years. Staff recommends
the S3 Iowa curve with a 40-year ASL (S3-40) curve/life combination. Based on
these parameters and a negative 5, or (5), percent NS level, a 10.8-year ARL
and remaining life depreciation rate of 1.6 percent are calculated for this
account.
Account 376.1 – Mains-Plastic
The age of this account is 21.2 years. Staff recommends
the S3-40 curve/life combination. Based on these parameters and a (30) percent NS
level, a 19.4-year ARL and a remaining life depreciation rate of 3.2 percent
are calculated for this account.
Account 376.2 – Mains-Steel
The age of this account is 26.2 years. Staff recommends
the S3-40 curve/life combination. Based on these parameters a 15.4-year ARL is
calculated. As Account 376.2 is in a theoretical reserve[9]
surplus position, staff also recommends that a reserve adjustment (transfer to
Accounts 378, 380.1, and 384 respectively) totaling ($63,019) be made in order
to reduce the account’s reserve surplus. The post-reserve transfer remaining
life depreciation rate with a (30) percent NS level is calculated to be 3.1
percent for this account.
Account 378 – Meas. & Reg. Equip. (Distribution)
The age of this account is 21.6 years. Staff recommends
the R3-35 curve/life combination. Based on these parameters a 15.6-year ARL is
calculated. As Account 378 is in a theoretical reserve deficit position, staff
also recommends that a reserve transfer of $256 be made (from Account 376.2 –
Mains-Steel) to correct the account’s theoretical reserve deficiency. The
post-reserve transfer remaining life depreciation rate with a (5) percent NS
level is calculated to be 3.0 percent for this account.
Account 379 – Meas. & Reg. Equip. (City Gate)
The age of this account is 25.2 years. Staff recommends
the S3-35 curve/life combination. Based on these parameters and a (5) percent NS
level, a 11.9-year ARL and a remaining life depreciation rate of 2.5 percent
are calculated for this account.
Account 380.1 – Services-Plastic
The account has an age of 17.1 years and an ASL of 40
years. St. Joe reports that inspections of plastic service lines (randomly
selected) are performed on a regular basis and all lines continue to be found
in acceptable condition with every indication of many years of service
remaining. Taking
this into consideration, staff recommends a moderate increase in ASL by 2
years. This will bring the ASL of the account to 42 years. Based on the S3-42
curve/life combination, a 25-year ARL is calculated. As Account 380.1 is in a
theoretical reserve deficit position, staff also recommends that a reserve
transfer of $57,246 be made (from Account 376.2 – Mains-Steel) as to correct
the account’s theoretical reserve deficiency. The post-reserve-transfer
remaining life depreciation rate with a (22) percent NS level is calculated to
be 2.9 percent for this account.
Account 380.2 – Services-Steel
This account has an age of 46.9 years and an ASL of 50
years. St. Joe reports that inspections of steel service lines (randomly
selected) are performed on a regular basis and all lines continue to be found
in acceptable condition with every indication of many years of service
remaining. Taking
this into consideration, staff recommends a moderate increase in ASL by 3
years. Based on the SQ-53 curve/life combination, a 6.1-year ARL is calculated
for this account.
The current-approved NS level of the account is (30)
percent which is at the highest end of the industry range.[12]
During the current study period of 2013 through 2017, the account experienced a
59.6 percent average cost of removal with no gross salvage.[13]
During the period of St. Joe’s last depreciation study, the account had
experienced an average 48 percent cost of removal with no gross salvage; and
the Commission ordered a decrease in the level of NS from the then-approved
(25) percent to the currently-approved (30) percent.
Given the trend of the account’s NS level in the past 10 years and considering
the industrial average, staff recommends to further decrease the NS level to
(40) percent. Staff notes that this degree of reduction does not fully reflect
the account’s actual experience and still leaves the NS level at the high end (least
negative) of the industry range. However, staff believes that whenever
possible, gradual rather than abrupt and/or incremental rather than
large-magnitude change is preferable.
With a 6.1-year ARL and a (40) percent NS level, the remaining
life depreciation rate is calculated to be 3.9 percent for this account.
Account 381 – Meters
The age of this account is 14 years. Staff recommends the
R4-25 curve/life combination. Based on these parameters and a zero percent NS
level, a 11.5-year ASL and a remaining life depreciation rate of 3.8 percent are
calculated for this account.
Account 382 – Meters Installations
The age of this account is 29 years. Staff recommends the
S2-40 curve/life combination. Based on these parameters and a (25) percent NS
level, a 15.3-year ARL and a remaining life depreciation rate of 3.0 percent are
calculated for this account.
Account 383 – Regulators
The age of the account is 18.8 years. Staff recommends the
R4-30 curve/life combination. Based on these parameters and a zero percent NS
level, a 12.0-year ARL and a remaining life depreciation rate of 3.1 percent are
calculated for this account.
Account 384 – Regulator Install
This account has an age of 22.3 years. Staff notes that
the account has experienced significant changes, with plant investment being
added and retired every year throughout the study period. Taken with the
account’s growth rate of 14.5 percent and retirement rate of 1.4 percent, staff
recommends the S3 curve shape with a 40-year ASL as it closely depicts this
account’s activity. Based on these parameters, a 18.4-year ARL is calculated. As
Account 384 is in a theoretical reserve deficit position, staff also recommends
that a reserve transfer of $5,517 be made (from Account 376.2 – Mains-Steel) to
correct the account’s theoretical reserve deficiency. The post-reserve-transfer
remaining life depreciation rate with a (40) percent NS level is calculated to
be 3.5 percent for this account.
Account 385 – Industrial Meas. & Reg. Equipment
The age of the account is 6.4 years. Staff recommends the
S4-30 curve/life combination. Based on these parameters with a (5) percent NS
level, a 24-year ARL and a remaining life depreciation rate of 3.4 percent are
calculated for this account.
Account 387 – Other Equipment
This account is near fully depreciated at the study date
of December 31, 2017. It has also experienced no activity (e.g. plant addition,
retirement, etc.) during the study period. The Company seeks to apply a
depreciation rate when new investment is added.
Due to the account’s current reserve position, staff believes that a whole life
rate, rather than a remaining life depreciation rate, should be applied to any
newly-added investments as an interim measure until St. Joe’s depreciation
rates are re-reviewed by the Commission.
This account has an age of 5.2 years, a currently-approved
10-year ASL and a zero percent NS.
Staff notes that a 10-year ASL is at the lowest end of the industry range of
Florida gas utilities for this account. Staff
believes an increase in ASL by 4 years is appropriate. Therefore, staff
recommends a 7.1 percent whole life depreciation rate be applied to any new
investment added to this account.
Account 390 – Structures & Improvements
The age of this account is 26.0 years. Staff recommends
the R3-40 curve/life combination. Based on these parameters and a zero percent
NS level, a 16.8-year ARL and 1.9 percent remaining life depreciation rate are
calculated for this account.
Account 391.1 – Office Furniture
The age of this account is 13.7 years. Staff recommends
the S2-15 curve/life combination. Based on these parameters and a zero percent
NS level, a 4.4-year ARL and 1.7 percent remaining life depreciation rate are
calculated for this account.
Account 391.2 – Office Devices
The age of this account is 4.9 years. Staff recommends the
S1-8 curve/life combination. Based on these parameters and a 5 percent NS level,
a 4.1-year ARL and 8.4 percent remaining life depreciation rate are calculated
for this account.
Account 391.3 – Office Computers
The age of this account is 8.3 years. Staff recommends the
S3-16 curve/life combination. Based on these parameters, a 7.9-year ARL is
calculated. As Account 391.3 is in a theoretical reserve deficit position, staff
also recommends that a reserve transfer of $5,190 (from Account 392 –
Transportation Equipment) be made in order to correct the account’s theoretical
deficiency. The post-reserve-transfer remaining life depreciation rate with a
zero percent NS level is calculated to be 6.3 percent for this account.
Account 392 – Transportation Equipment
The age of this account is 4.6 years. Staff recommends the
S2-7 curve/life combination. Based on these parameters, a 3.0-year ARL is
calculated. As Account 392 is in a theoretical reserve surplus position, staff also
recommends that a reserve adjustment of ($5,190) be made (transfer to Account
391.3 – Office Computers) to correct the theoretical reserve deficiency in
Account 391.3. The post-reserve-transfer remaining life depreciation rate with
a 10 percent NS level is calculated to be 9.3 percent for this account.
Account 394 – Tools, Shop & Garage Equipment
The age of this account is 4.2 years. Staff recommends the
S3-20 curve/life combination. Based on these parameters and a zero percent NS
level, a 15.8-year ARL and 4.9 percent remaining life depreciation rate are
calculated for this account.
Account 396 – Power Operated Equipment
The age of this account is 9.2 years. Staff recommends the
S4-15 curve/life combination. Based on these parameters and a 5 percent NS
level, a 5.9-year ARL and 0.6 percent remaining life depreciation rate are
calculated for this account.
Account 397 – Communication Equipment
The age of this account is 9.2 years. Staff recommends the
S3-12 curve/life combination. Based on these parameters and a zero percent NS
level, a 3.7-year ARL and 6.2 percent remaining life depreciation rate are
calculated for this account.
Summary Schedules
Complete
tabulations of staff’s depreciation parameter and rate recommendations, as well
as annual expense comparisons to St. Joe’s currently-approved depreciation
rates are contained in Attachments A and B to this recommendation.
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 the period ending December 31,
2018, as specified in Rule 27-7.1352, F.A.C. (Cicchetti)
Staff Analysis:
In Issue 2, staff recommended
approval of revised depreciation rates for the Company to be effective January
1, 2018, which reflect changes to most accounts’ remaining lives to be
effective January 1, 2018. 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),[18]
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 examine 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 regarding 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. Because 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 that 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,
2018, 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.
(Schrader)
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.
