Discussion
of Issues
Issue 1:
Should the Commission approve TECO's requested
accounting treatment related to its AMI meters?
Recommendation:
Yes. Staff
recommends that the Commission approve TECO’s requested accounting treatment
related to its AMI meters. (Brownless, Higgins)
Staff Analysis:
Background
On April 23, 2019, TECO filed a petition effectively
requesting authorization to suspend and reverse the depreciation expense on
assets comprising its AMI program and recommence the depreciation expense on
those assets on January 1, 2022. TECO first
began installing and recording depreciation expense for AMI meters in 2016 and is
in the process of replacing all of its current AMR meters with AMI meters. TECO estimates that AMI meters will be
deployed system wide by year-end 2021 along with all of the back-office
functions and communication systems necessary to make the AMI meters fully
functional. Once the AMI meters are fully
functional, the system will be able to provide customer service tools, remote
connection/disconnection of service, and information regarding an individual
customer’s energy usage.
TECO is currently depreciating
AMI meter investment for both regulatory and federal income tax purposes from the
point of purchase. The specific
accounting treatment TECO is proposing is to remove current AMI meter
investment from Plant in Service Account 101 and place it into Construction
Work in Progress (CWIP) Account 107.
Future AMI meter investment made from 2019 through 2021 would also be
placed in CWIP Account 107 where such assets would not be depreciated. On
January 1, 2022, the date that TECO estimates the AMI infrastructure
will be fully functional, AMI meter investment would be booked to plant and depreciation
expense would begin anew.
The depreciation expense
associated with the 2016 through May 2019 AMI meter investment that TECO is
proposing be reversed totals approximately $460,000. TECO states that reversing the prior AMI
depreciation would be “immaterial to the presentation of its financial
statements as a whole.”
The accounting method by which
meters are depreciated is addressed in Rule 25-6.0142, Florida Administrative
Code (F.A.C.). Rule 25-6.0142(1),
F.A.C., incorporates the Uniform System of Accounts prescribed by the Code of
Federal Regulations, Title 18, Chapter I, Subchapter C, Part 101, into the
rule. By this incorporation, meters are
given “cradle-to-grave” accounting treatment.
“Cradle-To-Grave Accounting” is defined in the rule as “[a]n accounting
method which treats a unit of plant as being in service from the time it is
first purchased until it is finally junked or disposed of in another manner.” Further, meters that are in the “shop for
refurbishing or in stock/inventory awaiting reinstallation [are] treated as
being in service.” Applying this rule to
the present situation, TECO must begin depreciating its AMI meters from the
date of purchase.
IRS Reg. Sec. 1.167(a)-(11)(e)(1)
treats the depreciation of plant assets differently. For purposes of depreciation for federal
taxes, an asset is placed in service when it is “first placed in a condition or
state of readiness and availability for a specifically assigned function.” Applying this regulation to the present
situation, TECO concludes that it does not have to begin depreciating the AMI
meters until the date that they are fully functional, i.e., until the
back-office functions and communications systems necessary to allow the AMI
meters to fully perform are in place, currently estimated to be by January 1,
2022.
For tax years 2016 and 2017, TECO
depreciated both AMI and AMR meters for federal tax purposes. TECO has not yet filed its 2018 federal tax
return which is due between October 1 and 15, 2019. TECO intends to claim zero tax deprecation
for AMI for 2018 and to true-up for the cumulative tax depreciation it took for
years prior to 2018, thus aligning the federal tax treatment with the treatment
requested here.
The depreciation of AMR meters is
also addressed in Section 8 of TECO’s 2017 Settlement approved by Order No.
PSC-2017-0456-S-EI. Section 8(b) states as follows:
(b) Notwithstanding the non-deferral language in
Paragraph 4, unless the company proposes a special capital recovery schedule
and the Commission approves it, if coal-fired generating units or other assets
are retired or planned for retirement of a magnitude that would ordinarily or
otherwise require a special capital recovery schedule, such assets will
continue to be depreciated using their then existing depreciation rates and
special capital recovery issues will be addressed in conjunction with the
company’s next depreciation study. If the company installs Automated Meter
Infrastructure (“AMI”) meters and retires Automated Meter Reading (“AMR”)
meters during the Term, such assets will continue to be depreciated using their
then existing depreciation rates and special capital recovery issues will be
addressed in conjunction with the company’s next depreciation study.
[Emphasis added.]
TECO takes the position that
Section 8(b) requires it to continue depreciating its AMR meters even if
replaced by AMI meters. TECO also takes
the position that Section 8(b) does not address the depreciation treatment of AMI
at all. TECO acknowledges that the language
of Section 8(b) can reasonably be read to mean that both AMI and AMR meters
will be depreciated concurrently during the term of the 2017 Settlement. However, TECO argues that the signatories to
the 2017 Agreement did not intend that result.
TECO states that the use of the term “assets” in Section 8(b) “refers to
the AMR meters that would be replaced by AMI meters resulting in an unrecovered
net book value amount.” TECO also states that the use of the term
“rates” was a “scrivener’s error” and should have been “rate” to “reflect the
fact that there is only one approved rate for meters in Account 370 - Meters.”
TECO’s response to Staff’s First
Data Request No. 22 in the 2017 Settlement docket indicates that, at the time
that the 2017 Settlement was signed, the Company did intend to depreciate both
its AMI and AMR meters concurrently at an annual rate of 7.2 percent from 2017
through 2021 (the 2017 Settlement term).
[Attachment A]
The Office of Public Counsel
(OPC) agrees that TECO’s request “does not violate the terms of the 2017
Agreement and does not object to the relief requested in the Petition.” The Florida Industrial Power Users Group
(FIPUG) and the Florida Retail Federation (FRF) “do not object to the relief
requested in the Petition.” The West Central Florida Hospital Utility
Association (HUA) does not have a position on the Petition. Likewise, the Federal Executive Agencies
(FEA) do not have a position on the Petition.
The reasons given by TECO for
approval of the requested AMI accounting treatment are as follows:
·
Every
signatory to the 2017 Settlement either supports the proposed treatment of AMI
depreciation or does not object to it.
[Staff First Data Request No. 15, revised on June 17, 2019]
·
The
change in depreciation treatment of AMI meters will match IRS Sec.
1.167(a)-(11)(e)(1)’s treatment since they are not currently providing their
“specifically designed function.”
[Petition at 7; Staff Second Data Request No. 1]
·
Allowing
depreciation of AMI meters when all AMI installations
and back-office system integration are complete, estimated to be January 2022,
prevents any intergenerational inequities.
[Petition at ¶ 14]
·
The
continued depreciation of AMR meters will decrease the undepreciated net book
value of those assets which will in turn reduce, or may eliminate, the amount
of a capital recovery schedule for those assets in TECO’s next depreciation
study filed with its next base rate case.
·
Per
Section 9 of the 2017 Settlement, as implemented by Order No. PSC-
2019-0234-AS-EI,
due to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) TECO is required
to make a one-time bill credit of $11,500,000 in January of 2020.
·
The
passage of the TCJA in December of 2017 also resulted in the loss of bonus
depreciation on additions to utility plant which has a negative impact on
accumulated deferred income taxes in the Company’s capital structure. This negative impact will increase in the
future as less income tax is deferred.
[Staff’s First Data Request No. 5; Staff’s Second Data Request at No. 6]
·
As
of the March 2019 Earnings Surveillance Report, TECO’s rate of return (ROR) is
6.14 percent and its return on equity (ROE) is 10.18 percent. TECO’s current return on equity earnings
range is 9.25 percent to 11.25 percent with a mid-point of 10.25 percent. [Staff’s Second Data Request No. 6] The proposed accounting treatment for AMI
would result in approximately a $233,000 higher net operating income and 1
basis point increase in return on equity in the March 2019 Earnings
Surveillance Report. [Staff’s Data
Request No. 7] TECO projects that by
2021, if this petition is not approved, AMI depreciation expense will have a
19.2 basis points negative impact on ROE.
[Staff Data Request No. 7]
Analysis
The first issue to address in
determining whether TECO’s petition should be granted is to determine the
procedural nature of TECO’s request to delay depreciation of the AMI
assets. In short, is this: 1) a de facto request for a waiver of Rule
25-6.0142(3), F.A.C., or 2) an addition to, or clarification of, the 2017
Settlement?
A request for waiver of a rule is
controlled by Section 120.542, F.S., and Chapter 28-104, F.A.C., which require
that the petition for waiver be so named and filed with both the agency and the
Joint Administrative Procedures Committee (JAPC). Further, the request must state: 1) the rule
or portion of the rule for which waiver is requested; 2) the statute the rule
is implementing; 3) the type of action requested; 4) the “specific facts that
demonstrate a substantial hardship or violation of principles of fairness that
would justify a waiver or variance for the petitioner”; 5) the “reason why the
variance or the waiver requested would serve the purposes of the underlying
statute”; and 6) whether the waiver is temporary or permanent. TECO’s petition does not meet these
requirements. While some of the facts
plead by TECO could demonstrate why the variance would serve the purposes of
the underlying statutes,
there is no argument developed on this point.
Additionally, TECO has not filed its petition with JAPC nor asked the
Commission to follow the procedures set forth in Section 120.542(6), F.S. Thus, in its present form, the petition does
not contain the required information for processing it as a rule waiver even if
the procedural filing requirements had been followed or could now be initiated.
At the most basic level, TECO’s
request seeks to supplement Section 8(b) of the 2017 Settlement by addressing
the depreciation treatment of AMI meters both during and at the end of the
settlement term thereby allowing AMI meters to be treated differently than they
otherwise would be under Rule 25-6.0142, F.A.C.
For this reason, staff recommends that TECO’s request be treated as an
addition to, or clarification of, Section 8(b) of the 2017 Settlement.
The standard for determining
whether TECO’s request to supplement the 2017 Settlement should be granted is
whether the requested accounting treatment is in the public interest when the
2017 Settlement is taken as whole. This
is the same standard the Commission applied when initially determining whether
the 2017 Settlement should be approved.
Upon review of TECO’s response to
Staff’s First Data Request No. 22 in the 2017 Settlement docket, staff is of
the opinion that TECO and the other signatories to the 2017 Settlement intended
to depreciate both the AMR and AMI meters during the 2017 Settlement term. This treatment is consistent with Rule
25-6.0142, F.A.C., and the plain language of Section 8(b). It appears that the parties to the 2017
Settlement were concerned about leaving as small an amount as possible of
undepreciated AMR expense at the end of the settlement term. This goal is
reasonable given that TECO was receiving bonus depreciation under
federal tax provisions at that time. The
loss of bonus depreciation is a significant change in circumstances. Further, staff agrees that TECO’s proposal to
reverse all depreciation entries associated with AMI meters will have a very
small impact on its financial statements.
Additionally, the Commission’s
approval of the 2017 Settlement was based, in part, on the fact that the
parties negotiated a “stay out” provision of four years during which time base
rates would not change, for reasons other than those provided for in the 2017
Settlement, unless TECO earned above or below its authorized range of 9.25 to
11.25 percent. The passage of the TCJA, which took place
after the execution of the 2017 Settlement, has had an unexpected negative
financial impact on TECO by eliminating bonus depreciation and thereby
effectively decreasing the amount of TECO’s zero cost capital. If no change is made to the depreciation
treatment of AMI meters, the greater level of depreciation expense will further
depress TECO’s ability to earn within its authorized rate of return range at
current base rates.
OPC does not consider TECO’s
proposal to violate the terms of the 2017 Settlement nor does any other
signatory to the 2017 Settlement oppose TECO’s request. It is clear that TECO’s proposed treatment of
the AMI meters will have the effect of decreasing pressure on its ability to
earn within its authorized range and increase the likelihood that TECO can
maintain its current base rates until December 31, 2021. Given these factors, it is staff’s recommendation
that the 2017 Settlement, using TECO’s proposed treatment of the AMI meters, when
taken as a whole, continues to be in the public interest.
Conclusion
Staff recommends that the Commission approve TECO’s requested
accounting treatment related to its AMI meters because TECO’s proposed
treatment of AMI meter depreciation expense, when evaluated in light of the
whole 2017 Settlement, continues to be in the public interest.
Issue 2:
Should TECO continue recording depreciation expense
on existing AMR meters during the term of the 2017 Settlement?
Recommendation:
Yes. The
continued depreciation of existing AMR meters is consistent with the 2017 Settlement. (Brownless, Higgins)
Staff Analysis:
It is staff’s opinion that the terms of Section 8(b)
of the Company’s 2017 Settlement, approved by Order No. PSC-2017-0456-S-EI,
require TECO to continue recording depreciation of its AMR assets if replaced
by AMI assets during the term of the settlement. As such, this issue has already been addressed
and ruled upon. Further, if AMR assets are still in use or
in-service as defined by Rule 25-6.0142(2)(d), F.A.C., after the 2017
Settlement period, those assets should continue to be depreciated at the then
Commission-approved rate.
Conclusion
Staff recommends the Company
continue to follow the terms of the 2017 Settlement, specifically Section 8(b),
as it relates to the bookkeeping of AMR meters during the settlement period.
Issue 3:
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 administratively closed upon the
issuance of a consummating order.
(Brownless)
Staff Analysis:
At the conclusion of the protest period, if no
protest is filed, this docket should be administratively closed upon the
issuance of a consummating order.
