Discussion
of Issues
Issue 1:
Should the currently prescribed depreciation rates
for FPUC be revised?
Recommendation:
Yes. The review of FPUC’s plant and
depreciation-related information indicates a need to revise the Company’s
currently prescribed depreciation rates. (Higgins)
Staff Analysis:
FPUC’s last depreciation study was filed on July 2, 2014. By Order No. PSC-14-0698-PAA-GU, the
Commission approved revised depreciation rates that became retroactively effective
January 1, 2014.
The Company filed its Current Study in accordance with Order
No. PSC-2019-0067-PAA-GU. A
review of the Company’s recent plant activities and other relevant data
indicates a need to revise depreciation rates. Staff’s recommended depreciation
rates and their underlying components are specifically discussed in Issue 2.
Issue 2:
What are staff’s recommended depreciation parameters and
resulting rates?
Recommendation:
Staff recommends the Commission approve the lives,
reserve percentages, net salvage percentages, and resulting depreciation rates
applicable to FPUC’s investments shown on Attachment A. As shown on Attachment
B, the relevant corresponding total depreciation expense effect of staff’s rate
recommendations is a decrease of $893,899 or approximately 7.2 percent, from
current depreciation expense levels at December 31, 2018. (Higgins, Wu)
Staff Analysis:
The purpose of this review is to ensure that capital
invested, as well as future plant retirement costs, are recovered over the
useful lives of the assets studied. To this end, staff’s recommendations are
the result of a comprehensive review of FPUC’s depreciation and plant-related
data filed in this docket. Attachment A to this recommendation shows a
comparison of currently-approved depreciation parameters and rates to those
staff recommends becoming effective January 1, 2019 (Issue 3). Staff and the Company are in agreement on all
proposed depreciation parameters and resulting rates. Shown on Attachment B is
a comparison of depreciation expenses between currently-approved and recommended
rates based on December 31, 2018 investment and reserve levels.
2019 Study Overview and Highlights
Order No. PSC-14-0698-PAA-GU
Due to certain matters raised during FPUC’s
preceding depreciation study review in 2014, the Commission
wrote in Order No. PSC-14-0698-PAA-GU, “[t]he Company shall implement a
procedure of maintaining clear documentation on each gross salvage and [cost of
removal] booked so that we can verify these records through the Annual Status
Report reviewing process.”
Staff understands this issue is still present and that the causes continue
to be addressed. In response to a staff inquiry, the Company stated that it is currently
in the process of implementing standardized practices and procedures across all
business units regarding retirement-related bookkeeping. However, Company efforts
have been partially impeded by high employee turnover, communication issues,
and corporate-level restructuring. In spite of these challenges, newly-revised
policies regarding FPUC’s fixed-asset accounting, which aim to mitigate future
reoccurrences of similar issues, went into effect August 1, 2019.
Staff will monitor the effects of new Company policies
regarding retirement-related bookkeeping through its Annual
Depreciation Status Report (ADSR) review process, and report its
findings to the Commission as part of staff’s next depreciation study recommendation.
Vintage Year Accounting - General
Plant
The Company, through its 2019 Study, has requested
authorization to adopt vintage year accounting for certain General Plant
accounts. At a
high-level, vintage year accounting lessens the work involved in plant record-keeping
by simplifying accounting procedures for high volume, low value assets.
With the proposed adoption of vintage year accounting,
assets at the date of adoption that meet or exceed the average service life
(ASL) of the relevant accounts must be retired. Staff notes that, in general,
an ASL is the average expected life of all units of a group of assets when new.
The total amount of retirement dollars due to the adoption of vintage year
accounting is approximately $690,500. Further, all General Plant accounts that
are transitioned to vintage year accounting must do so at their theoretically
correct reserve level. This is achieved by comparing book reserves to
theoretical reserves to determine if an imbalance exists and correcting the
reserve if so. The resulting reserve imbalance for FPUC’s General Plant
accounts that are moving to vintage year accounting is a deficiency of
$1,350,980. Based on the Company’s proposal, staff recommends amortizing the
deficiency over 5 years resulting in an annual expense of $270,196.
Reserve
Transfers
When a reserve imbalance exists, which is the difference
between the theoretical reserve and the book reserve, reserve transfers may be
performed. The
Commission has approved reserve transfers to reduce or eliminate reserve
imbalances in the past. However, Rule 25-7.045(4)(e), F.A.C., does not require
that reserve transfers be performed, only that reserve imbalances be
identified. As a functional matter, the remaining life depreciation rate, which
is calculated using the reserve percentage as one of the input parameters,
corrects any reserve imbalance over the life of the account, thus
“self-correcting” any imbalance. However, when a significant reserve imbalance
is observed, a reserve transfer (or other treatment) may become necessary due
to magnitude.
For the 2019 Study, a reserve surplus of $2.3 million was
calculated using FPUC’s proposed life and salvage parameters. The most
significant reserve imbalances are found in the plastic and Gas Reliability
Infrastructure Program (GRIP) mains accounts (376.1 and 376G), which are $11.1
million surplus and $7.1 deficit, respectively; and plastic and GRIP services
accounts (380.1 and 380G), which are $2.6 million surplus and $3.1 million
deficit, respectively.,
However, FPUC proposed that the plastic and GRIP mains accounts be combined for
one depreciation rate, and the plastic and GRIP services accounts be combined
for one depreciation rate. Staff agrees with the Company. In so doing, the
reserve imbalances are reduced to approximately a $4 million surplus for
plastic mains and approximately a $0.5 million deficit for plastic services.
Given this situation, staff believes that it is reasonable to forgo performing
any reserve transfers in the current proceeding, but rather re-investigate the
matter during the Company’s next depreciation study review. Staff believes
there will likely be better information for determining the necessity of
reserve transfers in the future as GRIP concludes in 2020. Consequently, staff
recommends no reserve transfers be performed in this proceeding.
Account-Specific Analysis
Staff discusses its recommendations regarding FPUC’s 2019
Study on a select account-by-account basis below. Staff notes not all accounts
and/or underlying depreciation parameters used in developing the rates appearing
on Attachment A are discussed in the narrative below. Rather staff chose to
focus on apprising the Commission of what it believes are the more pertinent
developments and associated effects over the study period.
Account 374.1 – Land Rights
This account contains the investment associated with
easements, and it has an average age of 27.6 years. The current investment of
the account was made in 1990 and 1991, and FPUC has no plans for near term
retirement. Given these factors, the Company proposed an increase in the
account’s ASL from 30 years to 35 years. Staff believes the proposal is
appropriate. Using the proposed ASL value with the account’s average age and
its existing SQ retirement dispersion, an average remaining life (ARL) of 7.4
years is calculated for the account.[15]
For background, an ARL is the future expected service life in years of the
asset-group survivors at a given age. With respect to the net salvage (NS)
parameter, FPUC proposed to retain the existing value of zero percent. Staff
notes NS represents the difference between the value of salvage and cost of
removal resulting from plant retirement and disposal. Considering the nature of
the account and the industry averages, staff believes the Company’s salvage
proposal is reasonable. Staff recommends approval of an ARL of 7.4 years and NS
of zero percent for Account 374.1.
Account 376 – Distribution Mains
The mains accounts consist of plastic mains (376.1), steel
mains (376.2), and GRIP mains (376G). Collectively, these accounts comprise 64
percent of FPUC’s distribution plant investment and more than 60 percent of
FPUC’s total plant investment under study. In 2012, the Commission approved
FPUC’s GRIP initiative. GRIP
provides for the accelerated replacement of FPUC’s bare steel and cast iron
pipes. The program was initiated in response to concerns regarding aging
infrastructure reliability and safety. As a result, the GRIP-related plant
investment has increased by approximately 150 percent during the current study
period; correspondingly, the mains accounts have experienced increased
retirements. However, FPUC indicated that it “believes this situation will
return to normal once GRIP ends in 2020.”
Each of the mains accounts has a currently-approved ASL of
45 years. FPUC proposed to increase the ASL of all three mains accounts to 55
years. The Company believes that with the replacement of the problematic mains,
the new mains investment/technology should experience longer life. With the
current expectation that plastic mains will experience an average life of
greater than 55 years, staff believes the Company’s proposal is appropriate.
The currently-prescribed retirement dispersion for plastic
(inclusive of GRIP) and steel mains accounts is the S3 curve shape. FPUC
acknowledged that during this study period retirement activities in the mains
accounts indicated retirement dispersions with higher infant mortality (higher
number of earlier retirements) than the S3 curve shape provides. However, the
Company believes that the retirement dispersions used for estimating future
lives should be based on account expectations of a return to normalcy (with
less infant mortality), as the retirement activities are expected to go back to
normal when the GRIP ends. Thus, FPUC believes the current S3 dispersion remains
reasonable for the future study period. Staff considers this reasoning
appropriate. Consequently, for the combined plastic and GRIP mains account, an
ARL of 48 years is calculated by using a 55-year ASL with the account’s average
age of 7.3 years. For the steel mains account, an ARL of 37 years is calculated
by using a 55-year ASL with the account’s average age of 18.5 years. Staff
recommends approval of ARLs of 48 years and 37 years, respectively, for plastic
mains (inclusive of GRIP) and steel mains.
Currently, the plastic (inclusive of GRIP) and steel mains
accounts have prescribed NS parameters of negative 16 percent and negative 28
percent, respectively. During this study period, the plastic mains experienced
NS activities ranging from negative 24 percent to negative 668 percent with an
average of negative 147 percent; and the steel mains experienced NS activities
ranging from negative 56 percent to negative 1,228 percent with an average of
negative 172 percent. FPUC considers the recent NS activity to be atypical (due
to the GRIP replacements) and expects
the NS levels of these accounts to return to normalcy in the future as the GRIP
program concludes. As such, FPUC
proposed retaining the currently-approved NS parameters for plastic (inclusive
of GRIP) and steel mains accounts. Staff believes this is reasonable. Staff
recommends approval of the NS parameters of negative 16 percent for plastic
(inclusive of GRIP) mains account and negative 28 percent for steel mains
account.
Account 379 – Measuring & Regulating Equipment
(City Gate)
This account consists of pipes, controls, and other
equipment used at city gate stations. During the current study period, this
account has experienced an increase of approximately 72 percent in new plant
investment and no retirements. Acknowledging “[a]verage service lives for other
gas companies in the State range from 31 years to 35 years,” FPUC proposed a
slight increase in the ASL from 30 to 32 years. Staff considers the Company’s
proposal reasonable. This results in an ARL of 23 years calculated by using the
account’s average age of 9.5 years and existing R3 retirement dispersion. Staff
recommends an ARL of 23 years be approved for this account.
Regarding NS, FPUC proposed to retain the
currently-approved value of negative 5 percent. Recognizing there were no
retirement activities in the account during the study period, staff believes
this proposal is appropriate. Staff recommends that NS of negative 5 percent be
approved for the account.
Account 380 – Distribution Services
Services accounts consist of plastic services (380.1),
steel services (380.2), and GRIP services (380G). Collectively, these accounts
comprise approximately 20 percent of FPUC’s distribution plant investment and
19 percent of FPUC’s total plant investment under study. As with the mains
accounts, bare steel and cast iron services are being replaced as a result of
GRIP and in response to concerns regarding reliability and safety of the aging
infrastructure.
For the plastic services (inclusive of GRIP) account, the
currently-approved ASL is 45 years. For the steel services account, the
currently-approved ASL is 40 years. FPUC believes that all of its service
accounts’ investments now have longer life expectancies as a result of the
replacement of the problematic services pipes. FPUC proposed to increase the
ASL of all services accounts by 10 years, which brings the ASL of plastic
services to 55 years and the ASL of steel services to 50 years. Staff considers
FPUC’s average service life proposals reasonable. The age of the combined
plastic services account is 9.0 years, and the age of the steel services
account is 31.3 years. The existing retirement dispersion of the plastic
services is S3. FPUC believes, and staff concurs, that such dispersion may not
accurately reflect the current retirement pattern of the account, but is
reflective of future expectations. The existing retirement dispersion of steel
services is the S2 curve shape. Using these parameters, the ARLs of the plastic
services account and the steel services account is 46 years and 22 years,
respectively. Staff recommends approval of these two ARL parameters.
For the plastic services (inclusive of GRIP) and steel
services accounts, the currently-approved NS parameters are negative 22 percent
and negative 125 percent, respectively. Similar to the mains accounts, the
services accounts experienced a wide range of NS values during the current
study period: plastic services ranged from negative 58 percent to negative 341
percent with an average of negative 101 percent, and steel services ranged from
negative 49 percent to negative 357 percent with an average of negative 179
percent. FPUC considers these levels atypical and a result of GRIP-related
replacements. The Company expects the NS levels will return to normalcy in the future as GRIP replacements
decrease into the program’s completion. As such, FPUC proposed retaining the
currently-approved NS parameters for plastic services (inclusive of GRIP) and
steel services of negative 22 percent, and negative 125 percent, respectively.
Staff believes FPUC’s salvage proposals are appropriate.
Account 385 – Industrial Measuring & Regulation
Equipment
This account consists of measuring and regulating
equipment at industrial stations. The currently-approved ASL of the account is
30 years. FPUC proposed a modest increase to 35 years. Staff believes the proposal
is reasonable. Based on this, an ARL of 17.7 years is calculated using the
account’s average age of 18.9 years and its existing R3 curve shape retirement
dispersion.
For the NS parameter, FPUC proposes to retain the currently-approved
zero percent since there have been no retirement/salvage activities during the
study period. Staff believes the Company’s proposal is appropriate.
Account 390 – Structures & Improvements
The currently-approved NS rate for this account is 10
percent. The most recent 6-year analysis of actual NS is approximately 51
percent. In questioning this matter, the Company informed staff that the
unusually high net salvage over the study period was due to the sale of its
Winter Haven and Indiantown office buildings. These buildings were no longer needed
post consolidation of the FPUC gas companies. While staff is not currently
recommending a change from the 10 percent level based on only two data points,
it will monitor this account’s NS developments over the next study period for
determining if the trend towards higher NS persists and if a change should be recommended
to the Commission in the future.
Account 391.0 – Office Furniture
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 5.0 percent.
Account 391.2 – Office Equipment
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 7.1 percent.
Account 391.3 – Computer Hardware
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 10.0 percent.
Account 391.4 – Computer Software
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 10.0 percent.
Account 393 – Stores Equipment
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 3.8 percent.
Account 394 – Tools, Shop & Garage Equipment
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 6.7 percent.
Account 395 – Laboratory Equipment
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 5.0 percent.
Account 397 – Communication Equipment
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 7.7 percent.
Account 398 – Miscellaneous Equipment
Staff recommends the transition of this account to vintage
year accounting at an annual amortization rate of 5.9 percent.
Conclusion
Staff recommends the Commission approve the lives, reserve
percentages, net salvage percentages, and resulting depreciation rates
applicable to FPUC’s investments that are shown on Attachment A. As shown on
Attachment B, the relevant corresponding total depreciation expense effect of
staff’s rate recommendations is a decrease of $893,899, or approximately 7.2
percent, from current depreciation expense levels at December 31, 2018.
Further, with respect to Chesapeake,
staff reviewed the effect of the recommended depreciation rate reductions on
forecasted earnings for calendar year 2019.
Based on staff’s review, Chesapeake is projected to remain earning within its
authorized return on equity range of 9.8 percent to 11.8 percent for 2019.
Issue 3:
What should be the implementation date for newly
authorized depreciation rates?
Recommendation:
For the depreciation rates approved by the Commission
in Issue 2, staff recommends an implementation date of January 1, 2019. (Higgins,
Wu)
Staff Analysis:
The data submitted for the 2019 Study, including
actual plant and reserve balances, is as of December 31, 2018. Thus, the
underlying Company data and depreciation-related calculations appropriately match
an implementation date of January 1, 2019.
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, 2019, as specified in Rule 27-7.1352, F.A.C. (Cicchetti, Smith II)
Staff Analysis:
In Issue 3, staff recommended approval of revised
depreciation rates for the Company to be effective January 1, 2019, which
reflect changes to most accounts’ remaining lives also to be effective January
1, 2019. 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),[19] 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, 2019, 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. (Brownless)
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.
