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Rate-Base Cleansings: Rolling Over Ratepayers

State PUCs should recognize a refundable regulatory liability for past charges to ratepayers.

Fortnightly Magazine - November 2005

it has recognized that it is not even reasonable to assume that it will incur these future removal costs.

Given these facts, the only reasonable conclusion is that the industry likely never will incur all of the non-legal AROs that it has charged to ratepayers. That is not to say that the industry will not spend money; indeed, it will spend, but only a small portion will go for future removal costs.

Where the Problem Started

The significant magnitude of these regulatory liabilities is the product of the traditional inflated future cost approach (TIFCA), used by utilities to estimate future removal cost. TIFCA marks up depreciation rates for inflated removal-cost estimates. When applied to an ever-expanding gross plant, these marked-up rates yield enormous estimated future removal costs accruals vastly exceeding actual removal expenditures. 7

FERC adopted most, but not all, aspects of SFAS No. 143 in its Order No. 631. Although FERC identified non-legal AROs and recognized the need for transparency, it did not require reporting of non-legal AROs as regulatory liabilities. Instead, it required specific identification and separate accounting for these amounts.

FERC Order No. 631 requires that jurisdictional entities maintain separate subsidiary records for cost of removal for non-legal retirement obligations included as specific identifiable allowances recorded in accumulated depreciation. This separately identifies such information to facilitate external reporting as well as for regulatory analysis and rate-setting purposes. Therefore, the commission amended the instructions of accounts 108 in Parts 101 to "require jurisdictional entities to maintain separate subsidiary records for the purposes of identifying the amount of specific allowances collected in rates for non-legal retirement obligations included in the depreciation accruals." 8

Although FERC recognized the need for segregation of the non-legal ARO amounts to facilitate external reporting, regulatory analysis, and rate-setting, it left specific recognition of the regulatory liabilities for non-legal AROs up to state PUCs.

It's Up to the PUCs

During its deliberations, FERC considered the comments of several parties. The National Association of State Utility Consumer Advocates (NASUCA) and the accounting firm of Deloitte & Touche suggested that "the commission should make certain modifications to the USOA … to include the amount of cost of removal for non-legal obligations as regulatory liabilities in account 254, other regulatory liabilities, instead of accumulated depreciation." 9 The Edison Electric Institute (EEI) and the Southern Co., however, requested, "the commission specify that any cost of removal for non-legal retirement obligations remain in accumulated depreciation." 10

FERC followed the latter advice, but required separate subsidiary records of these accruals. 11 It concluded, "The issue of whether, and to what extent, a particular asset retirement cost must be recovered through jurisdictional [service] rates should be addressed on a case-by-case basis in the individual rate change filed by public utilities, licensees, and natural-gas companies." 12 It "declined to make policy calls concerning regulatory certainty for disposition of … adjustments to book depreciation rates…; these are matters that are not subject to a one-size-fits-all approach and are better resolved on a case-by-case basis in rate proceedings." 13

Thus, FERC left the responsibility for recognition of