Should the power industry adapt its approach to capital markets in this environment? The answer, of course, is yes. Multiple frameworks are necessary to establish a power company’s or project’s...
Fossil Plant Decommissioning: Tracking Deferred Costs in a Competitive Market
are trying to limit their exposure to a competitive marketplace by reorganizing to segregate generation from their other operations. I consider this strategy wise, since it appears that the past depreciation deferrals for transmission and distribution facilities are larger relative to recorded asset values than are the deferrals for power plants. Nevertheless, reduced exposure to competition may not affect asset impairment, because FAS 121 applies to both regulated and nonregulated businesses.
Increasing depreciation rates to eliminate past deferrals and preclude future deferrals may not be helpful for operating in a competitive environment, because depreciation expenses will rise. Future depreciation expenses can be decreased only if the other side of the depreciation equation is also addressed, such as by writing down asset values (em in other words, recognizing asset impairment.
Moreover, a competitive environment may effectively reduce the useful depreciation lives of utility assets. This life influence is not as easy to identify as the influence of deferral of decommissioning obligations, because decommissioning costs expressed as a ratio of depreciable values are quite sensitive to the age of the assets. Therefore, decreases in useful life that, by themselves, would cause depreciation rate increases will also bring about decommissioning cost changes that, by themselves, would cause rate decreases. The net effect of these opposing forces will depend on their relative rate of change. At some rate of change these two forces will exactly offset each other. Until proven otherwise by specific circumstances, an assumption of exact offset may be reasonable under depreciation accounting. However, this offset assumption will not be reasonable under liability accounting, because net salvage would no longer form a component of depreciation. Further, a shortened life means that revenues would cease, thereby affecting future cash flow and enhancing the potential for asset impairment.
Clearly, fossil station decommissioning raises significant accounting and regulatory issues. These issues are not new, but the rapid movement of power supply into a competitive environment makes them urgent. t
John S. Ferguson will retire this month as a principal of Deloitte & Touche LLP. He is a frequent contributor to PUBLIC UTILITIES FORTNIGHTLY.
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