Depreciate for Innovation

By Branko Terzic

The latest buzzword in the electric utility industry seems to be innovation. 

That's fine. The introduction of new technology is a historic fact, welcome and expected. 

Frequently overlooked is the effect of new technology on existing assets. This is because, at many regulated utilities, no one is minding the store.

Consider for a moment the four cost components making up the annual revenue requirement, the basis for utility ratemaking. They are:

Revenue Requirement=Operating and Maintenance Expense + Depreciation + Tax + Return

Now consider the number of expert employees involved in monitoring and estimating the appropriate level of expenses for each cost center at a typical electric utility:

Operating and Maintenance Expense: thousands of employees

Tax: dozens of employees

Return: dozens of employees

Depreciation: none, or one employee

The estimated number of experts assigned to monitor depreciation comes from my experience with national depreciation issues since founding the Society of Depreciation Professionals in 1987. SDP provides initial training, certification and ongoing professional upgrading for experts in depreciation analysis for regulated utilities. An inspection of the current membership list shows many utilities missing. 

It is highly unlikely that a utility depreciation expert would not be a SDP member. My conclusion is that many utilities do not have at least one expert dedicated to monitoring a significant piece of the revenue requirement. The same lack of certified expertise is apparent at state public service commissions.

The function of the depreciation expert is to estimate the economic service lives of the various utility assets. 

Functional obsolescence caused by innovation is one factor which needs to be monitored. If, in fact, innovation is now occurring at a more rapid pace than in the past - as claimed by many observers - then a periodic review of depreciation rates every four or six years by outside experts is inadequate for timely capital recovery. The risk of stranded investment has increased.

It's time to reintroduce the depreciation profession to many utilities.


Branko Terzic, former commissioner at FERC and Wisconsin PSC; former CEO, Yankee Energy System; presently managing director, Berkeley Research Group.


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