Removal cost is the expenditure involved with physical removal or safe abandonment of an asset, and is not a trivial matter, because it is not unusual for such expenditures for long-lived property...
An Indicator of Fairness
Ratable treatment of removal costs through depreciation should be favored.
half being accrued causes the extra cost to be higher than for the Expense scenario, and more than half being accrued causes the extra cost to be lower than for the Expense scenario.
A current Consumers Energy depreciation proceeding in response to a requirement that the six major energy utilities subject to Michigan jurisdiction file proceedings to address alternative treatments for removal costs, provides data that allow estimating the influence of the ongoing nature of property groups on a gas utility. In this proceeding, Consumers Energy and the Michigan Public Service Commission staff propose the Ratable scenario, an intervener proposes the Liability scenario, and another intervener proposes the Expense scenario. For the Liability scenario, the intervener’s removal cost allowance is 47 percent of what Consumers Energy and the staff propose, which leads the Ratable/Capitalize weighting to indicate an extra cost of $2.38 for each dollar of removal cost for 40-year property, as opposed to $0.85 for a single asset, and an extra cost of $3.58 for 60-year property, as opposed to $1.80 for a single asset. For the Expense scenario, the intervener’s removal cost allowance is 19 percent of what Consumers Energy and the staff propose, which leads the Ratable/Capitalize weighting to indicate an extra cost of $3.65 for each dollar of removal cost for 40-year property, as opposed to $2.25 for a single asset, and an extra cost of $5.47 for 60-year property, as opposed to $3.38 for a single asset.
These weighting calculations presume that regulatory decisions to require deferral mechanisms never are reversed. If later reversed in response to recognition of their detrimental impact on ratepayers, how much the reversal will save future ratepayers will depend upon how long the mechanism was in place and how quickly the accumulated shortfall is allowed to be recovered. For example, if reversed at the time of the removal expenditure, the Amortize scenario is substituted for the Capitalize scenario in the Consumers Energy weighting formulas, which for deferral through the Liability scenario would reduce rate-payer payments for each dollar of re-moval cost by $1.04 for 40-year prop- erty and by $1.64 for 60-year property, and for the Expense scenario would reduce ratepayer payments by $1.60 for 40-year property and by $2.51 for 60-year property.
These calculations per dollar of removal cost can be related to a real-world situation by multiplying by $3.5 billion the amounts shown here for 60-year property, because one of the interveners in the previously-mentioned Michigan proceeding asserts that Consumers Energy estimates its future removal cost expenditures for its $3 billion of depreciable gas property will be $3.5 billion, and because the other intervener asserts that Consumers estimates the average age of the property upon retirement will be 57 years.
Another aspect of deferral mechanisms in practice is that what a mechanism is named or appears to be might not be what it actually is. For example, the Pennsylvania method (the Amortize scenario) is not well understood, which leads to cash treatment (the Expense scenario) sometimes being referred to as the Pennsylvania method. Another example is that cash treatment often