Case Background
On November 13,
2024, Peoples Gas System, Inc. (PGS or Company) filed a Petition for approval to create a new regulatory subaccount with a new amortization
rate and to reclassify the plant and reserve balances associated with certain
customer software. (Petition). The Company’s request is in accordance
with Rule 25-7.045(2)(a), Florida Administrative Code (F.A.C.), which provides
that “[n]o utility shall change any existing depreciation rate or initiate any
new depreciation rate without prior Commission approval;” and Rule
25-7.045(3)(a), F.A.C., which requires gas utilities to “maintain depreciation
rates and accumulated depreciation reserves in accounts or subaccounts in
accordance with the Uniform System of Accounts for Natural Gas Companies.”
As stated above,
pursuant to Rule 25-7.045(3)(a), F.A.C., gas utilities are required to maintain
depreciation rates and accumulated depreciation reserves in accounts or
subaccounts in accordance with the Uniform System of Accounts (USOA) for Public
Utilities and Licensees, as found in the Code of Federal Regulations, which is incorporated by reference in Rule
25-7.014(1), F.A.C.
The Company’s
current depreciation and amortization rates became effective January 1, 2024,
pursuant to Order No. PSC-2023-0388-FOF-GU, issued on December 27, 2023, in
Docket No. 20230023-GU.
PGS currently
records its capitalized software in Subaccount 303.01 – Custom Software, which
is a subaccount of FERC Account 303 – Miscellaneous Intangible Plant.
Subaccount 303.01 – Custom Software has a Commission-approved 15-year average
service life for depreciation and amortization purposes. According to the Petition, this existing
subaccount is used to record software that serves various functions within the
Company and also includes the Company’s Work and Asset Management system (WAM).
PGS states that,
after its recent review of the expected life of the WAM software, the Company
determined its investment in the WAM software should be amortized over a
20-year period instead of the 15-year period associated with the Company’s
custom software subaccount. As a result, PGS filed the instant Petition for
approval to establish a new subaccount titled subaccount 303.02 – Customized
Software - 20 Years, as a subaccount for FERC Account 303 − Miscellaneous
Intangible Plant, with a proposed 20-year amortization period.
Additionally,
PGS has proposed an effective date of January 1, 2025, for commencement of the
new subaccount, amortization period, and transfers of investment and reserve
for the WAM software (as of December 31, 2024) from Subaccount 303.01 to the
newly-created Subaccount 303.02.
The Commission has jurisdiction over this
matter pursuant to Sections 366.04, 366.05, and 366.06, Florida Statutes
(F.S.).
Discussion
of Issues
Issue 1:
Should PGS’s request to establish a new subaccount
with a new applicable amortization rate for the WAM software be approved, and
if so, what is the appropriate account classification and the associated
amortization rate?
Recommendation:
Yes. Staff recommends approval of PGS’s petition for
establishing a new subaccount for FERC
Account 303 − Miscellaneous Intangible Plant: Account 303.02 – Customized
Software - 20 Years, with a 15-year amortization period (annual amortization
rate of 5.0 percent). Further, staff believes the Commission should approve
PGS’s request to reclassify its customized software systems/platforms-related
plant and reserve, in the amounts of $40,634,908 and $4,087,761, respectively, from Account 303.01 to the
newly-created Account 303.02. (Kunkler)
Staff Analysis:
PGS’s Work and Asset Management System, referred to
as WAM, is software that manages the company’s assets. In its petition, PGS
explained the WAM software consolidates “the management of new construction,
system reliability, maintenance and compliance into a single interconnected
system.”
PGS further explained that the WAM software, consisting of 13 work types
(modules), was initially planned to be deployed in two phases.
The first phase, consisting of 6 modules, addresses the
needs of the Company’s Engineering, Construction and Technology team, and was
successfully implemented in November 2022. The second phase, consisting of the
remaining 7 modules, addresses the needs of the Company’s Gas and Safety
Operations teams. However,
prior to the release of the second phase, after a readiness review and risk
assessment, PGS identified two modules that were not ready to be implemented –
the Compliance module and the Damage Billing module. The Company decided to
defer the implementation of these 2 modules and deploy the other 5 modules in
May 2023. The Company then made additional modifications and improvements to
the WAM’s Compliance and Damage Billing modules, which were implemented and
placed into service in September 2023, completing the full deployment of the
system.
PGS explained that the WAM’s current 15-year service life
(amortization rate of 6.7 percent per year) is based on the most appropriate
approved depreciation account classification at the time of the Company’s most
recent depreciation study, filed April 4, 2023. PGS stated that at the time of
the aforementioned depreciation study, the WAM software was not yet an “evaluated
and analyzed” asset but rather a “2024 forecasted addition.”
Additionally, according to PGS, the WAM developer’s previous version of its
core enterprise resource planning (ERP) system was on the market for 33 years
(scheduled to end December 31, 2027) and PGS expects the newer version to have
a similar lifespan.
Therefore, in its instant petition, PGS is requesting the Commission’s approval
to create a new subaccount, titled 303.02 – Customized Software – 20 years,
with an amortization rate of 5.0 percent and to transfer the associated plant
and reserve balances of the WAM software to the newly created subaccount,
effective January 1, 2025. PGS maintains this action will “better align cost
recovery for the WAM software investment with the expected life of the
software.” Further,
this plant asset classification and the associated amortization rate are
consistent with the Commission’s prior orders for two other Florida utilities
(Florida Public Utilities Company and Florida City Gas).
When the Company filed its current petition, the expected
amount of plant investment and amortization reserve of the WAM software on the
requested effective date of January 1, 2025, is $40,634,908 and $4,087,761,
respectively. If
approved, the longer amortization period will reduce the Company’s annual
amortization expense by approximately $650,000 per year as detailed in Table 1
below. PGS claimed that using a 20-year, instead of a 15-year, amortization
period for the WAM software will have the benefit of decreasing the Company’s
revenue requirement when the Company’s base rates are next set.[12] Staff
notes that the Company has submitted a test year letter indicating it plans to
file a petition for a general base rate increase on March 31, 2025, seeking an
effective date of customer rates of January 2026.
Staff also notes that PGS is not required, per Rule 25-7.045, F.A.C., to file
its next depreciation study until April 4, 2028.
Table 1: Change in Amortization Expense – WAM Software
If approved, PGS will book amortization expense for the
WAM software in the newly created Account 303.02 – Customized Software at 5.0
percent annually, with an effective date of January 1, 2025. Staff notes that
PGS’s customers will continue to pay an embedded amortization expense for the
WAM software at the current (higher) rate of 6.7 percent until new customer
base rates are set. PGS acknowledges this fact but maintains that the
over-collection will only occur for a short period (one year), since it has
submitted a test year letter as stated above, requesting new customer base
rates effective January 1, 2026. PGS
does not propose to reduce customer rates or to offer a credit to reflect the
proposed reduction in amortization expense before January 1, 2026, so the amortization
expense reduction in 2025 is expected to help stabilize the Company’s earnings.
PGS stated that it’s expecting to earn below the authorized ROE band in 2025,
and changes such as this amortization reduction will serve to mitigate the need
for interim rates in its rate case filing.
Staff believes, in general, a company’s
depreciation/amortization rates should reflect the most accurate information
available. However, staff also has concerns about significant changes to
the depreciation/amortization rate and
expense for an isolated account, absent consideration of a corresponding change
to customer base rates. Staff requested that PGS calculate what the credit
amount on a residential customer bill at 20 therms would be to recognize the
reduction in amortization expense in 2025 if PGS’s petition were approved and
the Commission required such a credit to be made. PGS’s calculations resulted
in an approximate credit of $0.08 per month, applied during the months of April
2025 to December 2025, or $0.72 total, to account for the expected reduction in
depreciation expense. Given the Company’s primary reason for revising the WAM
asset amortization rate (i.e., the matching of the assets service life with the
cost recovery period), the relatively minor, short-lived customer credit
potential to recognize the reduction in amortization expense, and the various
earnings considerations cited above, staff does not believe a customer credit
in this instance is well-supported.
Staff agrees that
PGS has demonstrated a revision to the amortization rate for WAM software is
supported by the material change in the asset’s estimated service life, thereby
providing an improved match of expected service life to the cost recovery of
the asset. Further, this plant asset classification and the associated
amortization rate are consistent with the Commission’s prior orders.
Therefore, to ensure the most accurate estimated useful
life and associated amortization expense is recorded for the Company’s WAM software,
staff believes the Commission should approve PGS’s petition for establishing a new subaccount for FERC Account 303 −
Miscellaneous Intangible Plant: Account 303.02 – Customized Software - 20
Years, with a 15-year amortization period (annual amortization rate of 5.0
percent). Further, staff believes the Commission should approve PGS’s request
to reclassify its customized software systems/platforms-related plant and
reserve, in the amounts of $40,634,908 and $4,087,761, respectively, from Account 303.01 to the
newly-created Account 303.02.
Issue 2:
If the Commission approves staff’s recommendation in
Issue 1, what is the appropriate implementation date for the new Account 303.02,
as well as the reclassification of PGS’s WAM software from Account 303.01 to
Account 303.02?
Recommendation:
Staff recommends January 1, 2025, as the effective
date for the new Account 303.02, and the transfer of the associated plant and
reserve balances of the WAM software. (Kunkler)
Staff Analysis:
Depreciation and/or Amortization is the recovery of
invested capital representing equipment that is providing service to the
public. This recovery is designed to take place over the related period of
service to the public, which begins with the equipment’s in-service date.
If approved in Issue 1, PGS’s WAM software that is currently booked in Account 303.01, would
be reclassified to newly created Account 303.02, with a 20-year amortization period. Also, based on such approval, the unrecovered
balance of the WAM software would take place in Account 303.02. PGS proposed January
1, 2025 as the effective date for the
new Account 303.02 and the reclassification of the plant and reserve
balances of the WAM software from Account 303.01 to Account 303.02.
Staff believes
that the Company’s proposal of a January 1, 2025 effective date is appropriate
as it is in consistent with the purpose of the amortization.
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 closed upon the issuance of a
consummating order. (Bloom, Crawford)
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.
