Concentric Energy Advisors
The Concentric Connection • August, 2018 www.ceadvisors.com
Concentric Energy Advisors
Depreciation Expenses, A New Focus of Regulatory Scrutiny

Since the 1960’s and 1970’s, we have seen utilities undertake large build-outs of assets, e.g., generation plants, transmission infrastructure, etc. Moving forward to today, those same assets are reaching the age where replacement is required, and regulated utilities are experiencing the need to invest significant levels of additional capital to finance the asset replacement. As these new investments enter a utility’s rate base, the “return on” invested capital, and the “return of” capital, through depreciation, will cause significant increases in the overall revenue requirement. Therefore, even if the depreciation rates do not increase, the amount of depreciation expense included in revenue requirement is significantly more than prior to the capital expenditure related to the replacement.

Concentric has witnessed that, in many cases, the accumulated depreciation reserve accounts are significantly under-funded in periods following the large capital replacement programs. This is a result of the large capital programs undertaking the retirement of assets which are younger than the average service life estimate resulting in a shortfall of historic accumulated depreciation expense. The historic recovery of the cost of removal provisions (also known as “negative salvage”) have proven to be significantly understated and unable to fund the cost of removal programs. As such, accumulated depreciation rates following large capital expenditure programs are faced with only depreciating the new investment but also funding the deficient position of the accumulated depreciation accounts. As such, the depreciation expense component of the revenue requirement is now becoming much more significant and is facing much more regulatory scrutiny than ever before.

Depreciation studies can usually be completed through extracts of data files that are already existing in the accounting systems of most regulated utilities. Our depreciation study process specifically includes a meeting with the accounting group to fully understand the accounting data that are available. We are familiar with most of the accounting systems used by regulated utilities and can develop extract templates from most systems resulting in a minimal disruption to the day-to-day operations. Concentric approaches a depreciation study with accepted and recognized procedures designed to minimize the client burden of the study. On projects where Concentric is providing ratemaking support to other practice areas, we will also investigate if the data provided to the other practices can be leveraged for the depreciation study.

Concentric’s depreciation practice has provided expert testimony in over 100 proceedings. This testimony has related to the development of depreciation policy, depreciation parameters, regulated group accounting issues, account componentization, capital-related items related to accounting standards (Canadian GAAP, USGAAP, and IFRS), and asset valuation for both regulatory and property tax purposes. Our team is comprised of professional accountants, professional engineers, certified depreciation professionals, and experienced regulatory staff who are uniquely qualified to advise clients in the implementation of sound plant accounting and depreciation practices. Only through the implementation of sound policies and practices, combined with the wealth of experience in developing appropriate depreciation parameters, will the utility have a reasonable assurance of the timely recovery of invested capital as well as having made provision for the future costs of removal that will be required at the time of asset retirement.

Contact us for advice on whether a depreciation study would be beneficial for your utility.

By: Larry Kennedy, Vice President



Concentric's Utility Regulation Practice ›
Meet a Depreciation Expert
Larry Kennedy

Larry Kennedy, Vice President, has been in the pipeline, electric, gas utility, and municipal infrastructure business for 35 years. At Concentric Advisors ULC, Mr. Kennedy is responsible for depreciation studies for gas and electric utilities including generation facilities, high voltage transmission lines, large diameter transmission pipelines, railway systems, and municipally owned utility systems.



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Concentric Energy Advisors
Concentric Energy Advisors
2018 NYSEG and RG&E DSIP

Concentric recently supported AVANGRID’s two New York electric distribution utility subsidiaries, NYSEG and RG&E, in the development of their 2018 Distributed System Implementation Plan. The 2018 NYSEG and RG&E DSIP is a comprehensive five-year plan that presents investments, innovation activities, and changes in utility planning and operations that are designed to deliver value to customers, enhance grid performance, and contribute to a cleaner environment. As the lead consultant, Concentric collaborated over several months with a 100-member client team comprised of business area leads and subject matter experts to help prepare the report and a detailed technical appendix. To learn more about this effort, please contact Bob Yardley at ryardley@ceadvisors.com.

Who's Behind the Case Study
Concentric Energy Advisors
Bob Yardley

Robert C. Yardley, Jr., Senior Vice President, has been an advisor to private and public organizations in the energy industry on regulatory, operational, and strategic issues for 30 years. He relies on his in-depth understanding of the competitive challenges faced by regulated and unregulated energy firms and emerging policy trends to advise clients on business and regulatory matters in the electricity and natural gas industries.



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The Foster Report Featured Story of the Week
Tax Allowance for Enable MRT Rejected by FERC, Prompting Further MLP Examinations

In the first application of its final rule on income tax allowances, FERC rejected an allowance sought by Enable Mississippi River Transmission LLC (MRT), deeming the pipeline’s ownership by a master limited partnership (MLP) put it on the wrong side of the line the Commission drew on what entities will qualify for a tax allowance.

The final rule (RM18-11) modified a proposed rule to permit MLP pipelines opting to make a limited Section 4 Natural Gas Act rate filings to either eliminate their tax allowance and their accumulated deferred income tax from their cost of service or reflect only the tax reductions in the Tax Cuts and Jobs Act. It imposed conditions for what type of entities would be allowed to retain a tax allowance, and the July 31 order (RP18-923) on MRT provided guidance on how the rule will be carried out.



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A Special Offer for Friends of Concentric Energy Advisors

From production to distribution, The Foster Report covers all segments of the natural gas and oil industries. Subscribe today and use promo code FOSTER25 for 25% off a single subscription. Offer expires 8/24/2018.

Is an organization-wide membership a better solution for you? Contact gsmith@fosterreport.com for a customized subscription offer.



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Concentric is looking to hire a Securities Analyst who conducts research on various organizations within the Utilities and Energy industry in order to make recommendations regarding investment strategy. Are you interested in this position? Email your resume and cover letter to hr@ceadvisors.com today!



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About Us
Concentric Energy Advisors

Concentric Energy Advisors specializes in management consulting and financial advisory services with a focus on the North American energy industry. Through its subsidiaries, CE Capital, Concentric Advisors ULC, and Concentric Energy Publications, Concentric provides capital market advisory support, consulting services in Canada, and published The Foster Report. Information about Concentric Energy Advisors is available on the company’s website, Twitter, and LinkedIn pages, which can be accessed via ceadvisors.com.

 



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