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. (Smith)
Staff Analysis:
Sebring’s last depreciation study was filed on July
20, 2016. By Order No. PSC-16-0574-PAA-GU, the Commission approved revised
depreciation rates that became effective January 1, 2017.
Rule 25-7.045, F.A.C., 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 or pursuant to Commission order.
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, B, and C.
Issue 2:
What should be the implementation date for newly
proposed depreciation rates?
Recommendation:
Staff recommends January 1, 2022, for implementing newly
proposed depreciation rates as shown on Attachments A, B, and C to this
recommendation. (Smith)
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, 2022.
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 Attachments A and C. As shown
on Attachment B, the corresponding depreciation expense effect of staff’s rate
recommendations is an increase of $4,342 annually, or 1.8 percent, based on
December 31, 2021 investments. (Smith)
Staff Analysis:
Staff’s recommendations are the result of a
comprehensive review of Sebring’s plant depreciation data filed in this docket.
Attachments A and C to this recommendation show a comparison of certain
currently-approved depreciation parameters and rates to those staff is
recommending become effective January 1, 2022 (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, 2021 investments.
The Company provided plant addition and retirement data
spanning 2017-2021 (2021 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.
Plant
Additions
Sebring’s total plant investment experienced moderate growth
over the current study period. In its last depreciation study filing, the
Company experienced substantial growth (almost 89 percent) mainly due to
initiating gas service to two state correctional institutes in Hardee and
Desoto Counties. The Company stated in 2016 that it did not foresee similar
levels of investment growth and believed that its system would revert to more
typical growth patterns for this study period. In
keeping with the Company’s expectation, during the 2017-2021 period (2021
projected), the Company’s system grew by approximately 22 percent, or from
approximately $5.8 million to approximately $7.1 million. Over half of this
system growth is attributable to the additions within Account 376.2 – Mains – Plastic
and Account 380.2 – Services – Plastic.
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 approximately three percent from 2017-2021.
Average
Service and Remaining Lives
Neither Sebring, nor staff, propose any changes to the
Company’s currently-authorized, account-specific, average service lives. Consistent
with its review of the Company’s prior depreciation study, and as mentioned
above, staff computed account-specific average remaining lives (shown on
Attachment A) by first aging Sebring’s projected plant investments at December
31, 2021, then applying the results to the Company’s Iowa Curve and service
life selections on an account-by-account basis. From this review, staff
determined that no changes were necessary to the average service lives. However,
staff does 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.
Net
Salvage
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. With the exception of
Account 392.1 – Transportation – Trucks, staff believes Sebring’s
currently-authorized/proposed net salvage values remain in line with those net
salvage values currently being estimated by its industry peers and should
continue to be used for applicable ratemaking purposes.
In its filing, the Company did not request any changes to
its currently authorized net salvage levels. However,
in response to the Staff Report
and discussions between staff and Sebring’s accountant, the Company provided
staff with information that substantiates the need for a lower net salvage
percentage for Account 392.1 – Transportation – Trucks. Sebring stated that over
the last five years, net salvage related to this account was between five and
ten percent. The Company also explained that at the time of retirement, these
trucks had very high mileage, which lowered the resale value.
Staff compared Sebring’s net salvage level for this
account to the approved net salvage levels of three other natural gas companies
in Florida. The average net salvage level for those three companies is eleven
percent. Based on the above, staff recommends a ten percent net salvage value
for Account 392.1 – Transportation – Trucks.
Iowa
Curves
Sebring did not request any changes to its
currently-approved application of Iowa curves to its plant accounts. As part of
our review, staff evaluated each account’s projected net book value five years
into the future. This timeframe matches the timing of the filing of Sebring’s
next depreciation study, when staff would next have a chance to adjust
Sebring’s depreciation rates. Two accounts, Accounts 380.1 – Services – Steel
and 386 – Property on Customer’s Premises, indicated a negative net book value by
the end of 2026 if no further investments were made in these accounts. Staff’s
analysis shows that applying the S1 curve to both accounts more appropriately
matches each account’s life characteristics and would prevent the probable over-depreciation
issue found with maintaining the currently-approved S2 curve. Therefore, staff
is recommending the application of the S1 curve to both accounts as shown on
Attachment C.
Reserve
Transfers
As part of reviewing Sebring’s 2021 Depreciation Study,
staff calculated the book reserve balance of each plant account. Staff also
calculated the associated theoretical reserve balance of each plant account, using
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 considered,
and if warranted, should be performed.
The specific depreciation reserve transfer proposals are
presented in Table 3-1, and explained further below:
Table
3-1
Accumulated
Depreciation Transfers
|
Acct.
|
Account Title
|
Transfer
|
|
No.
|
Amount
|
|
380.1
|
Service - Steel
|
(100,184)
|
|
380.2
|
Service -
Plastic
|
108,283
|
|
386
|
Property on
Customers’ Premises
|
(8,099)
|
Staff evaluated each account’s reserve imbalance as a percentage
of its book reserve. Accounts 380.1 and 386 had the largest imbalance on a
percentage basis. Therefore, staff made transfers to reduce those accounts to
their theoretically correct levels. Staff then used the total from those two
transfers to increase the reserve of Account 380.2 – Service – Plastic. Staff
notes that its current rate recommendations incorporate all proposed reserve
transfers discussed in this section.
Conclusion
Staff recommends the Commission approve the lives, net
salvages, reserves, and resulting depreciation rates for Sebring that are shown
on Attachments A and C. The expense effect of staff’s plant depreciation rate
recommendations, which is shown on Attachment B, is an increase of $4,342
annually, or 1.8 percent, based on December 31, 2021 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 the period ended
December 31, 2021, as specified in Rule 27-7.1352, F.A.C. (Osorio, D. Buys)
Staff Analysis:
In Issue 3, staff has
recommended approval of revised depreciation rates for the Company, which
reflect changes to most accounts’ remaining lives to be effective January 1, 2022.
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 Federal
Tax Regulations under the Code sections, Sections
168(f)(2) and (i)(9),[10] former
IRC Sections 167(l), and 46(f),
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 ended December 31, 2021,
as specified in Rule 25-7.1352, F.A.C.
Issue 5:
Should this docket be closed?
Recommendation:
Yes. If no protest is filed by a person whose
substantial interests are affected within 21 days of the issuance of the Order,
this docket should be closed upon the issuance of a Consummating Order. (Sandy)
Staff Analysis:
If no protest is filed by a person whose substantial
interests are affected within 21 days of the issuance of the Order, this docket
should be closed upon the issuance of a Consummating Order.
