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Perspective

Fortnightly Magazine - September 15 1998

none have involved tariff increases. Most have involved tariff decreases, through accepting lower rates of return or passing on to current customers the savings expected from downsizing, mergers and smaller rate bases expected in the future. In one case, the resulting low rate of return was cited as one reason for a voluntary decision to sell generating facilities.

If deregulation strips regulators of jurisdiction over depreciation, owners of deregulated generating stations would gain the option of switching from the "group" to "item" concept of depreciation. Either way, the costs currently recorded as depreciation are likely to increase.

Recorded costs would increase under the group concept as a result of the need to eliminate any existing deferral of recording depreciation that is a common consequence of regulation. Such deferral results from generating units with depreciable lives longer than expected by the owner, from backloaded depreciation rate calculation methods, and from inadequate allowances for terminal demolition costs. Recorded costs would increase under the item concept beyond eliminating any regulatory deferrals, because component replacements previously capitalized would now be expensed and depreciable lives likely would be decreased to minimize tax and book depreciation differences and the potential for recording losses due to underdepreciation.

Another depreciation consideration is that the Financial Accounting Standards Board is currently considering a new accounting standard, the first exposure draft of which would eliminate depreciation treatment and require backloading the recording of terminal demolition costs. How the deferrals under the proposed accounting standard compare with the regulatory depreciation deferrals of the prior owner, if any, will determine whether the demolition costs recorded by the new owner will be higher or lower than by the prior owner. Further, under the proposed standard, a significant portion of the terminal costs would be recorded after the facility ceases to be productive.

Does Plant Type Matter?

Specific comments are warranted with respect to peaking plants, nuclear units, and hydroelectric projects.

PEAKING CAPACITY. About 15 to 20 percent of the U.S. utility electric generating capacity is comprised of peaking units that are operated infrequently. A significant portion of this capacity is made up of steam-driven units that were originally installed to perform a base-load role. While the book value of such units should be quite low, it is the high incremental out-of-pocket cost that keeps them from operating. Therefore, these units may have little or no value to a new owner and are more likely to be replaced than to be refurbished sufficiently to change their mode of operation.

A change of ownership does not change the timing of customer demand for service, and so will not decrease the need for some generating units to perform a peaking function. However, peak shaving through distributed generation may reduce this need to some degree. This situation suggests that new owners of steam units currently serving a peaking function will quickly replace them with combustion turbines.

NUCLEAR. One hears of declarations of intent to sell nuclear units, but only two transactions had been disclosed by the parties as of the end of July.

Eastern Utilities Associates announced an agreement