DEPRECIATION, DEFERRAL, DENIAL. I have often discussed in Public Utilities Fortnightly the tendency for regulation to defer the recording and recovery of depreciation expenses. Therefore, Mr. William C. Schaeffer's discussion of this subject in the February 1, 1998 issue (see "Mail," p. 11) attracted my attention, especially his quoted claim of the Delaware public advocate that investors should be neutral to depreciation deferral on a present value basis.
My experience has been that present value arguments in regulatory proceedings relative to depreciation are in support of deferral. Regulators set tariffs based on nominal (undiscounted) amounts, so customers pay nominal amounts for service. Therefore, discounting does not provide a reasonable basis for determining the effect of depreciation deferral on customers.
Rate base regulation causes the effect of depreciation changes to reverse in the long-term, and to have more impact on return and related tax component of revenue requirements than on the depreciation expense component. Therefore, deferral of depreciation will provide a small near-term tariff decrease and a large long-term increase. It is clear that discounting serving as the basis for depreciation deferrals is detrimental to the long-term interests of customers, to the long-term competitiveness of the utility, and to the economy of the service territory.