Discussion
of Issues
Issue 1:
Should 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. (Smith)
Staff Analysis:
St. Joe’s last depreciation filing was made on December
21, 2017. By Order No. PSC-2018-0368-PAA-GU, the Commission approved revised
depreciation rates that became effective January 1, 2018.
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, 2023, 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 St. Joe match an
implementation date of January 1, 2023.
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 St. Joe that are shown on Attachments A and C. Staff
further recommends that St. Joe cease booking depreciation expense to Account
387 as of January 1, 2023, until the Company adds new investments to this
account, at which time the Company should use staff’s recommended whole life
rate reflected on Attachment B. As shown on Attachment B, the corresponding depreciation
expense effect of staff’s rate recommendations is an increase of $49,003
annually, or 16.6 percent, based on December 31, 2022 investments. (Smith)
Staff Analysis:
Staff’s recommendations are the result of a
comprehensive review of St. Joe’s plant depreciation data filed in this docket.
The Company provided plant addition and retirement data spanning 2018-2022. St.
Joe’s natural gas distribution and general plant accounts grew by approximately
21 percent over the 2022 Study’s timeframe.
St. Joe proposed retaining all of its currently-approved
Average Service Lives (ASL) except for Account 380.2 – Services – Steel. St.
Joe stated that regular inspections of these assets found them to be in
acceptable condition with many years of service left. The inspection results,
along with the average age of the assets in this account, indicate the need for
an increase in this account’s ASL.
Staff recalculated the average age for each of St. Joe’s
Distribution and General plant accounts using the data provided in the 2022 Study.
Staff’s calculations resulted in different average ages for two accounts, as
detailed in the “Account-Specific Analysis” section below. St. Joe did not
propose any Iowa-type survivor curves (Iowa curves) in their filing. Staff
would also note that St. Joe did not use any Iowa curves when calculating the
average remaining lives (ARL) for each of its accounts. Therefore,
staff applied St. Joe’s currently-approved Iowa curves to staff’s recommended
ASLs and average ages on an account-by-account basis in order to calculate each
account’s ARL.
St. Joe did not propose any changes to its
currently-approved Net Salvage (NS) values. Staff reviewed St. Joe’s extensive
gross salvage and cost of removal (COR) data, and found the need for a decrease
(more negative) in the NS values for four accounts, also detailed in the
“Account-Specific Analysis” section below. This is mainly due to an increase in
the COR over the years. Incidentally, staff would note that, all things being
equal, a more negative NS value results in a higher depreciation rate.
Attachments A and C to this recommendation show a
comparison of the currently-approved depreciation parameters and rates to those
that staff is recommending become effective January 1, 2023 (Issue 2). Displayed
on Attachment B is a comparison of depreciation expenses between
currently-approved and staff’s proposed rates based on December 31, 2022
investments. Staff and the Company are in agreement on all proposed
depreciation parameters and resulting rates.
Reserve Transfer
As part of reviewing St. Joe’s 2022 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.
Table 3-1
Accumulated Depreciation
Transfers
|
Acct. No.
|
Account Title
|
Staff Recommended Transfer
Amount
|
|
376.2
|
Mains - Steel
|
(91,320)
|
|
380.1
|
Services - Plastic
|
96,138
|
|
387
|
Other Equipment
|
(4,818)
|
Source: Staff’s
Calculations
As shown in Table 3-1, staff is recommending a reserve
transfer for Account 387 – Other Equipment due to this account being fully
recovered. Staff recommends transferring $4,818 to Account 380.1 – Services –
Plastic in order to bring Account 387 to the theoretically correct reserve position.
Staff is further recommending a reserve transfer between Account 376.2 – Mains
– Steel and Account 380.1 – Services – Plastic, the two accounts with the
largest surplus and deficit, respectively. These recommended transfers are
discussed in more detail below.
Account-Specific Analysis
Account 375 – Buildings & Structures
As reflected in Exhibit A of the 2022 Study, this account
has an average age of 7.3 years. The Company proposes retaining the
currently-approved ASL of 40 years and (5) percent NS. Using these parameters
with the S3 curve, an ARL of 32.7 years is calculated. This ARL value is then
used to produce a remaining life depreciation rate of 2.7 percent for this
account.
Account 376.1 – Mains – Plastic
This account has an average age of 19.8 years. The Company
proposes retaining the currently-approved 40-year ASL and NS of (30) percent.
Using these parameters with the S3 curve, an ARL of 20.6 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 3.2
percent for this account.
Account 376.2 – Mains – Steel
This account has an average age of 31.0 years. The Company
proposes retaining the currently-approved 40-year ASL and NS of (30) percent.
Using these parameters with the S3 curve, an ARL of 12.3 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 3.0
percent for this account. Due to the reserve surplus associated with this
account, staff proposes a reserve transfer of ($91,320).
Account 378 – M&R Equipment – Distribution
This account has an average age of 25.4 years for this
account. The Company proposes retaining the currently-approved 35-year ASL and
NS of (5) percent. Using these parameters with the R3 curve, an ARL of 12.7 years
is calculated. This ARL is then used to produce a remaining life depreciation
rate of 2.7 percent for this account.
Account 379 – M&R Equipment – City Gate
This account has an average age of 30.2 years. The Company
proposes retaining the currently-approved 35-year ASL and NS of (5) percent.
Using these parameters with the S3 curve, an ARL of 9.0 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 1.9
percent for this account.
Account 380.1 – Services – Plastic
This account has an average age of 12.0 years. The Company
proposes retaining the currently-approved 42-year ASL and NS of (22) percent. Based
on St. Joe’s property records, this account has experienced an average NS of (31)
percent. Also, the NS average for all Florida-based gas utilities for this
account is (39) percent. Based on these facts, staff believes a NS adjustment is
necessary and is proposing a (30) NS for this account.[6]
Using these parameters with the S3 curve, an ARL of 30.0 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 3.1
percent for this account. Due to the reserve deficit associated with this
account, staff proposes a reserve transfer of $96,138.
Account 380.2 – Services – Steel
This account has an average age of 51.6 years. The
currently-approved ASL is 53 years with a (40) percent NS. In the 2022 Study,
St. Joe stated that inspections of the steel services show all lines to be in
acceptable condition “with every indication of many years of service
remaining.” In response to staff’s data request, the Company stated that an
increase in the ASL was needed for this account due to the average age and
condition of the assets.[7] Staff
agrees with the Company and proposes extending the ASL for this account to 55
years. Based on St. Joe’s property records, this account has experienced an
average NS of (42) percent. In recent years, the Company has realized NS values
for this account in the range of approximately (70) to (135) percent. The
average NS for all Florida-based gas utilities for this account is (85)
percent. Given this, staff proposes a more negative net salvage percentage of (50).
Staff notes that this reduction in NS does not fully reflect the NS experienced
for this account. However, whenever possible, staff believes gradual
adjustments to the depreciation parameters is preferable over large, abrupt
changes. Based on these parameters, with a SQ Iowa curve, the resulting ARL for
this account is 3.4 years. This ARL is then used to produce a remaining life
rate of 8.0 percent.
Account 381 – Meters
This account has an average age of 14.8 years. The Company
proposes retaining the currently-approved 25-year ASL and NS of 0 percent.
Based on these parameters with the R4 curve, an ARL of 10.7 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 3.9
percent for this account.
Account 382 – Meter Installations
This account has an average age of 18.0 years. The Company
proposes retaining the currently-approved 40-year ASL and NS of (25) percent. Based
on St. Joe’s property records, this account has experienced an average NS of
(39) percent. The average for all Florida based gas utilities is (19) percent. As
a result, staff believes an adjustment to the NS is needed. Therefore, staff
proposes reducing the NS, or making the NS more negative, from (25) percent to
(35) percent, which is more in line with the Company’s average. This adjusted
NS also falls between the Florida-based gas utility average and the St.
Joe-specific average. Using these parameters with the S2 curve, an ARL of 22.9
years is calculated. This ARL is then used to produce a remaining life
depreciation rate of 3.9 percent for this account.
Account 383 – Regulators
This account has an average age of 16.7 years. The Company
proposes retaining the currently-approved 30-year ASL and NS of 0 percent.
Using these parameters with the R4 curve, an ARL of 13.8 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 3.3
percent for this account.
Account 384 – Regulator Installations
This account has an average age of 11.6 years. The Company
proposes retaining the currently-approved 40-year ASL and NS of (40) percent. Based
on St. Joe’s property records, this account has experienced an average NS of
(92) percent. The average NS for all Florida-based gas utilities for this
account is (18) percent. Given these amounts, staff believes a NS adjustment is
needed, and proposes reducing the NS for this account to (45) percent. Staff
notes that this reduction in NS does not fully reflect the NS experienced for
this account. However, as stated earlier, whenever possible, staff believes
gradual adjustments to the depreciation parameters is preferable over large,
abrupt changes. Using these adjusted parameters with the S3 curve, an ARL of
28.4 years is calculated. This ARL is then used to produce a remaining life
depreciation rate of 3.9 percent for this account.
Account 385 – Industrial M&R Equipment
This account has an average age of 11.5 years. The Company
proposes retaining the currently-approved 30-year ASL and NS of (5) percent.
Using these parameters with the S4 curve, an ARL of 18.5 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 3.7
percent for this account.
Account 387 – Other Equipment
In St. Joe’s 2017 Depreciation Study (2017 Study), the
Commission approved a 7.1 percent whole-life rate to any new assets booked to
this account. Staff notes that no new investments have been booked to this account
since the 2017 Study. However, St. Joe continued booking depreciation expense
to this account which has resulted in a $4,818 reserve surplus. As a result,
staff proposes a reserve transfer of ($4,818) to eliminate the reserve surplus.
Staff believes that the Company should be instructed to cease booking
depreciation expense to this account as of January 1, 2023, and until such time
as new investments are booked to this account. Staff proposes retaining the 7.1
percent whole-life rate for any new investments booked to this account. This
rate is based on a 14-year ASL with a 0 percent NS.
Account 390 – Structures & Improvements
Exhibit A of the 2022 Study reflects an average age of
25.8 years for this account. However, staff’s calculation resulted in an average
age of 29.75 years. The Company proposes retaining the currently-approved
40-year ASL and NS of 0 percent. Using these adjusted parameters with the R3
curve, an ARL of 16.9 years is calculated. This ARL is then used to produce a
remaining life depreciation rate of 1.8 percent for this account.
Account 391.1 – Office Furniture
This account has an average age of 13.7 years. The Company
proposes retaining the currently-approved 15-year ASL and NS of 0 percent.
Using these parameters with the S2 curve, an ARL of 4.4 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 6.6
percent for this account.
Account 391.2 – Office Devices
This account has an average age of 4.7 years. The Company
proposes retaining the currently-approved 8-year ASL and NS of 5 percent. Using
these parameters with the S1 curve, an ARL of 4.2 years is calculated. This ARL
is then used to produce a remaining life depreciation rate of 12.0 percent for
this account.
Account 391.3 – Office Computers
This account has an average age of 10.3 years. The Company
proposes retaining the currently-approved 16-year ASL and NS of 0 percent.
Using these parameters with the S3 curve, an ARL of 6.3 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 7.6
percent for this account.
Account 392 – Transportation Equipment
This account has an average age of 5.9 years. The Company
proposes retaining the currently-approved 7-year ASL and NS of 10 percent.
Using these parameters with the S2 curve, an ARL of 2.3 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 16.9
percent for this account.
Account 394 – Tools, Shop, & Garage
This account has an average age of 7.2 years. The Company
proposes retaining the currently-approved 20-year ASL and NS of 0 percent.
Using these parameters with the S3 curve, an ARL of 12.9 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 4.9
percent for this account.
Account 396 – Power Operated Equipment
In the current Depreciation Study, Exhibit A reflects an
average age of 4.5 years for this account. In response to staff’s data request,
the Company stated that this number is a typographical error.[8] St. Joe
confirmed the correct average age for this account is 10.7 years. The Company
proposes retaining the currently-approved 15-year ASL and NS of 5 percent.
Using these parameters with the S4 curve, an ARL of 4.6 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 6.4
percent for this account.
Account 397 – Communication Equipment
This account has an average age of 4.5 years. The Company
proposes retaining the currently-approved 12-year ASL and NS of 0 percent.
Using these parameters with the S3 curve, an ARL of 7.5 years is calculated.
This ARL is then used to produce a remaining life depreciation rate of 20.3
percent for this account.
Conclusion
Based on staff’s analysis and explanations, staff
recommends the Commission approve the lives, reserve percentages, net salvage
percentages, and resulting remaining life depreciation rates for St. Joe that
are shown on Attachments A and C. Staff further recommends that St. Joe be
directed to cease booking depreciation expense to Account 387 as of January 1,
2023, until the Company adds new investments to this account, at which time the
Company should use staff’s recommended whole life rate reflected on Attachment A.
As shown on Attachment B, the corresponding depreciation expense effect of staff’s
rate recommendations is an increase of $49,003 annually, or 16.6 percent,
based on December 31, 2022 investments. (Smith)
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 and any flow
back of EDITs should be revised to match the actual recovery periods for the
related property. The Company should file detailed calculations of the revised
ITC amortization and flow back of EDITs at the same time it files its earnings
surveillance report covering the period ended December 31, 2023, as specified
in Rule 25-7.1352, F.A.C. (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,
2023. Revising a utility’s book depreciation lives generally results in a
change in its rate of ITC amortization and flow back of EDITs 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,[10] Sections
168(f)(2) and (i)(9),[11] former
IRC Sections 167(l), and 46(f),[12] and
Section 203(e) of the Tax Reform Act of 1986 (the Act).[13]
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 an 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 ITCs 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.[14] 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 and EDITs to avoid violations of the provisions of IRC
Section 50(d)(2) for ITCs, and IRC Section 168(i)(9), former section 167(l),
and section 13001(d) of the Tax Change and Jobs Act for EDITs, and their
underlying Treasury Regulations. The consequence of an ITC or EDIT normalization
violation is the repayment of unamortized ITC balances to the IRS and inability
to utilize accelerated depreciation. Therefore, staff recommends that the
current amortization of ITCs and any flowback of EDITs be revised to match the
actual recovery periods for the related property. The Company should file
detailed calculations of the revised ITC amortization and flowback of EDITs at
the same time it files its earnings surveillance report covering the period
ended December 31, 2023, 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.
(Watrous)
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.
