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Letters to the Editor

Fortnightly Magazine - January 2006

a manner that is cost effective.— Gordon van Welie, CEO, ISO New England


To the Editor:

The article of Michael J. Majoros Jr. (“Rate-Base Cleansings: Rolling Over Ratepayers ,” November 2005) attracted my attention, because I perceive it to propose a solution—PUCs’ need to recognize refundable regulatory liabilities—for a problem that does not exist.

Majoros’ basic premise is that regulated entities have no obligation to incur costs to remove or safely abandon assets in place, which he refers to as “non-legal AROs” (asset retirement obligations). Regulated entities may not have a legal obligation as is defined by Statement of Financial Accounting Standards (SFAS) 143, Accounting for Asset Retirement Obligations. However, this does not mean that such entities have no obligation to incur costs to remove or safely abandon assets in place. I have long observed such costs being incurred on a regular basis by regulated entities for purposes of public safety and to assure their ability to continue to provide service, even though there is no “legal obligation.” An example is the Southern California Edison Co. (SCE), for which Majoros’ testimony in California Application 04-12-014 shows that during the period 1994 through 2003, SCE incurred cost-of-removal expenditures of $448 million for distribution plant alone. Contrary to Mr. Majoros’ assertion, regulated entities recognize an obligation to incur removal costs and incur such costs on a regular basis.

This obligation is not trivial, as is evident for SCE and from the tabulation on p. 60 of Majoros’ article of the cost of removal that has been accrued by a dozen utilities, and whether it is recorded as a component of the accumulated provision for depreciation (book reserve), as FERC dictates, or as a component of Account 254, Regulatory Liabilities, as Majoros suggests, does not change anything.

Majoros asserts that SFAS 143 “identifies an immediate need for state public service commissions (PUCs) to recognize a refundable regulatory liability for past charges to ratepayers for non-legal retirement costs.” SFAS 143 addresses only legal obligations, and its reference to regulatory liabilities is limited to recognition that entities qualifying for SFAS 71, Accounting for the Effects of Certain Types of Regulation, can include such obligations in depreciation on their income statements and show the amounts therein as regulatory liabilities on their balance sheets. Therefore, Majoros’ assertion about the implications of SFAS 143 is false.

Majoros asserts “the telephone industry has cleansed its rate base twice.” The first event he refers to is when the telephone industry recorded asset impairments during the 1990s, which was accomplished through recording large increases to book reserves. These transactions were in response to recognition that the depreciable lives imposed by regulators were excessive and that this situation meant that the enterprises no longer qualify for the special accounting allowed by SFAS 71. The reserve increases were recorded for financial accounting purposes, but not for regulatory accounting and ratemaking purposes, so contrary to Mr. Majoros’ assertion, rate base was not affected by these transactions.

The second “cleansing” event Majoros refers to is when the cost of removal that had been accumulated in