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Letters to the Editor

Fortnightly Magazine - January 2006

but ignores its influence on revenue requirements. Rate-base regulation causes the initial revenue-requirement impact of any change in depreciation to reverse in the long-term, and it does not take very long for this to occur.

Majoros notes that accrual accounting for cost of removal can result in controversy in regulatory proceedings. This situation is due to accrual accounting, whereby estimated cost of removal expenditures are recorded as an expense ratably over the estimated life of the related assets. This typically results in annual cost of removal accrual amounts in excess of the current annual expenditure amounts, thereby causing some to assert there is something wrong and to propose deferral mechanisms for the recording and recovery of cost of removal. Such mechanisms conflict with commission accounting rules, and have the effect of increasing revenue requirements in the long term and shifting costs to future generations of ratepayers. Cost of removal having the effect of increasing depreciation rates is viewed negatively by those interested only in the short term, and may end up influencing regulators to emphasize the near term. Near-term emphasis is unfortunate for the ratepayers and the economic viability of the service territory, because inadequate depreciation rates causes inadequate book reserves that inflate rate base.

John S. Ferguson, Richardson, Texas

The Author Responds: John Ferguson’s response to my article is not surprising. Mr. Ferguson is a depreciation witness who always represents utilities and advocates for higher and higher depreciation rates. His response to my article attempts to defend the current practice of increasing depreciation rates for inflated future cost of removal estimates.

Excess depreciation is not the primary focus of my article. Its main thrust, as stated in the first sentence, is “the immediate need for state public utilities commissions (PUCs) to recognize a refundable regulatory liability for past charges to ratepayers for non-legal asset retirement costs.” PUCs should protect collections on behalf of ratepayers until they are used for their intended purpose. What’s wrong with that? It is pure common sense, but Ferguson strongly objects.

He objects because the protection I recommend precludes utilities the opportunity for exorbitant rate-base cleansings. Rate-base cleansings are rate-base increases resulting from transfers of ratepayer-provided capital into corporate equity accounts.

Ferguson is correct that the telecom industry’s most recent rate-base cleansing resulted from the implementation of SFAS No. 143 ( i.e., excess cost of removal charges), but he is incorrect about that industry’s first cleansing. The first telecom rate base cleansing was a component of the 1983 AT&T divestiture. Its operating subsidiaries transferred into their corporate equity accounts billions of dollars of ratepayer-provided capital in the form of deferred taxes and investment tax credits.

Additionally, as explained in my current article, electric utilities whose production plants have been deregulated already have cleansed that portion of their rate bases. In other words, regardless of Ferguson’s claims to the contrary, the problem does exist—it is real.

Finally, since Ferguson chose to address a recent proceeding in which I provided testimony (A.04-12-014), it is fair to set the record straight. First, Ferguson was not a witness in the proceeding.