Published: February 14, 2025
How can utilities ensure that the collection of depreciation expense remains accurate without the expense and rigor of a complete depreciation study?
Depreciation guidelines recommend conducting depreciation studies periodically to confirm that the depreciation rates in use remain appropriate, and to recognize the inherent variability in depreciable service lives and net salvage estimates. For these reasons, Concentric recommends that most utilities complete a full depreciation study every three to five years.
Usually, depreciation studies are performed as part of a utility’s rate case. However, there are instances when general rate applications may occur outside the three-to-five-year cycle of depreciation studies. This can create unique challenges in instances where, for example, a significant technological change requires the retirement of the majority of assets in an account or an account has been fully depreciated. The key question then becomes: How can utilities ensure that the collection of depreciation expense remains accurate without undertaking a full depreciation study?
A beneficial alternative for utilities to explore is a technical update or depreciation review. This option allows for the recalculation of depreciation expense based on the assets in service at the time of the update, without re-evaluating the underlying depreciation parameters. In practice, this means that the estimates of average service life and net salvage parameters remain unchanged, while the total depreciation expense is updated to ensure accuracy.
Since technical updates do not require a re-examination of depreciation parameters, they can be completed relatively swiftly and cost-effectively, requiring less labor from the utility. Many utilities choose to perform these updates annually to ensure that the book depreciation reserve aligns with expectations. This proactive approach empowers utilities to quickly identify any emerging issues and resolve questions about the underlying data without the pressure of an impending rate case.
With the significantly lower costs for technical updates, and the subsequent savings that are often realized in full depreciation studies, annual technical updates are highly recommended for many utilities. This strategy is particularly applicable for utilities using the Equal Life Group procedure; however, even those using the Average Life Group procedure typically benefit from annual technical updates.
Why Choose Concentric for your Depreciation Technical Update?
- Our depreciation practice has nearly a century of combined technical experience.
- Our lead team members are Certified Depreciation Professionals by the Society of Depreciation Professionals.
- Concentric staff have successfully completed dozens of technical updates and more than 125 depreciation studies for clients across North America.
To learn more about Concentric’s proactive approach to a Depreciation Technical Update, please contact Amanda Nori.
— All views expressed by the author are solely the author’s current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, related companies, or clients. The author’s views are based upon information the author considers reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.