Depreciation Study: Composite Rate Analysis. Rich Compton, CPA Jackson Thornton

Transcription

1 Depreciation Study: Composite Rate Analysis Rich Compton, CPA Jackson Thornton

2 Overview Significance of Depreciation Depreciation Concepts and Methods Issues and Impacts Depreciation Study

3 Balance Sheet UTILITY PLANT: 2017 Electric plant in service - at cost $ 124,997,114 Construction work in progress 535, ,532,668 Less: Accumulated provision for depreciation 40,271,621 Net utility plant 85,261,047 OTHER ASSETS AND INVESTMENTS 26,049,579 CURRENT ASSETS 4,644,424 DEFERRED CHARGES 845,911 Total assets $ 116,800,961

4 Statement Of Revenue OPERATING EXPENSES: 2017 Cost of power $ 38,246,973 Distribution - operations 2,885,674 Distribution - maintenance 3,720,187 Consumer accounts expense 1,543,601 Sales expense 276,223 Administrative and general 2,832,961 Depreciation 2,489,252 Taxes and licenses 397,189 Total operating expenses $ 52,392,060

5 Statement Of Revenue Depreciation is a significant component of operating expenses

6 Depreciation Concepts? What is Depreciation

7 Depreciation Concepts Is Depreciation just a made up number? It is an estimate a significant estimate

8 Depreciation Concepts As defined by The Federal Energy Regulatory Commission (FERC) and applied to depreciable electric plant, Depreciation is: The loss in service value not restored by current maintenance, incurred in connection with the consumption or prospective retirement of electric plant in the course of service from causes which are known to be in current operation and against which the utility is not protected by insurance.

9 Depreciation Concepts Among the causes to be given consideration are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in demand and requirements of public authorities.

10 Depreciation Concepts Accounting Purpose Match the cost of using plant assets with the revenue generated by these assets Include in ratemaking process so that these costs are appropriately covered by the members/customers

11 Depreciation Components Original cost Useful service life *** Net salvage value Salvage minus cost of removal *** *** Estimates

12 Depreciation Methods Straight-line Deferred Accelerated

13 Depreciation Methods Straight-line depreciation expense formula Original cost of plant Less net salvage value Divided by average service life Expense: (OC-NSV)/ASL Rate: Expense/OC

14 Example 10,000 overhead line 25 year service life 2,000 salvage 1,000 cost of removal (10,000-(2, )/25 = $360 annual depreciation

15 Example What if my cost of removal estimate is too low?

16 Example 10,000 overhead line 25 year service life 2,000 salvage 3,000 cost of removal (10,000-(2, )/25 = $440 annual depreciation $440 vs $360 simply on cost of removal

17 Factors That Could Impact Depreciation Cost of removal greater than estimated Environment/geographic location This should be reflected in the rate Technology changes

18 Do You Know? Are your assets being depreciated properly? Are you recovering all of your costs in a timely manner? Are you charging your customers the right amount?

19 Depreciation Study Objective of a study is To determine rates that allow full recovery of the cost of assets

20 Depreciation Study Data Collection Analysis Evaluation Calculation

21 Depreciation Study Data Collection Historical Numbering system Retirement Unit definition Depreciation methods and policies

22 Depreciation Study Key data collected includes: Plant additions Plant retirements Transfers Depreciation accruals and reserve balances Cost of removal Salvage value

23 Depreciation Study Historical Data The more data you have the more accurate the study

24 Depreciation Study Analysis Life Analysis Net Salvage Analysis

25 Depreciation Study Evaluation is critical Use information gained in historical life and net salvage analysis to determine future life and net salvage estimates Includes selection of mortality characteristics

26 Depreciation Study Calculation Utilize mortality characteristics Whole-Life Technique Remaining-Life Technique Proposed rates based on study

27 Why should we care? Things to Consider Financial statement impact Cash flow impact Service rate impact

28 Rich Compton, CPA Senior Manager

29 Disclaimer The information contained herein is general in nature and based on authorities that are subject to change. Jackson Thornton guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Jackson Thornton assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. Circular 230 Disclosure This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.