[Federal Register Volume 64, Number 149 (Wednesday, August 4, 1999)]
[Proposed Rules]
[Pages 42304-42307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20010]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 101
[Docket No. RM99-7-000]
Depreciation Accounting
July 29, 1999.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) proposes
to amend its regulations to set forth uniform standards based on the
straight-line method of depreciation and the assets' estimated useful
service lives for determining depreciation for accounting purposes.
DATES: Comments on the proposed rulemaking are due on or before October
4, 1999.
ADDRESSES: File comments on the notice of proposed rulemaking with the
Office of the Secretary, Federal Energy Regulatory Commission, 888
First Street, N.E., Washington, D.C. 20426. Comments should reference
Docket No. RM99-7-000.
FOR FURTHER INFORMATION CONTACT:
Gregory Berson (Technical Information), Office of Finance, Accounting
and Operations, 888 First Street, N.E. Washington, D.C. 20426 (202)
219-2603;
Amy L. Blauman (Legal Information), Office of the General Counsel, 888
First Street, N.E., Washington, D.C. 20426, (202) 208-2143
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission also provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in the Public Reference Room
at 888 First Street, N.E., Room 2A, Washington, D.C. 20426.
The Commission Issuance Posting System (CIPS) provides access to
the texts of formal documents issued by the Commission from November
14, 1994, to the present. CIPS can be accessed via Internet through
FERC's Home page (http://www.ferc.fed.us) using the CIPS Link or the
Energy Information Online icon. Documents will be available on CIPS in
ASCII and WordPerfect 6.1. User assistance is available at 202-208-2474
or by E-mail to [email protected].
This document is also available through the Commission's Records
and Information Management System (RIMS), an electronic storage and
retrieval system of documents submitted to and issued by the Commission
after November 16, 1981. Documents from November 1995 to the present
can be viewed and printed. RIMS is available in the Public Reference
Room or remotely via Internet through FERC's Home page using the RIMS
link or the Energy Information Online icon. User assistance is
available at 202-208-2222, or by E-mail to [email protected].
Finally, the complete text on diskette in WordPerfect format may be
purchased from the Commission's copy contractor, RVJ International,
Inc. RVJ International, Inc. is located in the Public Reference Room at
888 First Street, N.E., Washington, D.C. 20426.
I. Introduction
The Federal Energy Regulatory Commission (Commission) proposes to
amend the General Instructions of 18 CFR Part 101 to establish, for
those public utilities and licensees that are subject to Part 101,
criteria for determining depreciation for accounting purposes.
II. Background
A. Commission Authority
The Commission has authority under section 301 of the Federal Power
Act (FPA) 1 over the accounting practices of public
utilities and licensees. Pursuant to section 301, the Commission has
prescribed a Uniform System of
[[Page 42305]]
Accounts (USofA) 2 that must be followed by these
jurisdictional entities.
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\1\ 16 U.S.C. 825.
\2\ See 18 CFR Part 101.
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The Commission also has authority under section 302 of the FPA
3 over the depreciation accounting practices of public
utilities and licensees. This includes the authority to determine and
fix proper and adequate depreciation rates for accounting purposes.
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\3\ 16 U.S.C. 825a.
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The Commission believes it has a statutory obligation to ensure
that proper amounts of depreciation are charged to expense in each
financial reporting period. In order to fulfill this statutory
obligation, the Commission had required public utilities and licensees
to obtain Commission approval prior to changing their depreciation
rates for accounting purposes. See, e.g., MidAmerican Energy Co., 79
FERC para. 61,169 (1997), reh'g denied, 81 para. FERC 61,081 (1997).
However, a recent decision of the U.S. Court of Appeals for the
District of Columbia Circuit, Alabama Power Company, et al. v. FERC,
160 F.3d 7 (D.C. Cir. 1998) (Alabama Power), overturned the
Commission's action on procedural grounds.
In light of Alabama Power, we decide here to proceed with a
rulemaking to establish the principles that public utilities and
licensees subject to Part 101 must follow in determining depreciation
rates for accounting purposes.4 We are not proposing to
ascertain, determine, and fix individual company depreciation rates as
part of this rulemaking. Instead, we provide a regulatory framework for
monitoring depreciation accounting practices and for taking action in
individual cases if and when the need arises--to ensure that public
utilities' and licensees' 5 books reflect proper
depreciation amounts.
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\4\ The proposed rules would not apply to public utilities and
licensees that have obtained waivers from our accounting
requirements under 18 CFR Part 101.
\5\ Henceforth in this narrative preamble, our use of
``utilities'' is intended to encompass both public utilities and
licensees; we will refer to ``utilities'' for ease of reading. See
18 CFR Part 101 Definition No. 39.
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B. Utility Depreciation Principles
Expenditures for utility plant and other long-lived assets that
will be used in the production of utility products and services are
typically made in one year but are expected to produce benefits over a
number of years. These assets also have finite useful lives, and their
value will be substantially diminished at the end of their useful
lives.6 Depreciation represents the cost of using up the
assets' service potential during their useful lives.
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\6\ In some cases, assets have negative salvage value, i.e., the
utility will have to pay additional costs to remove the asset and
restore the plant site at the end of the asset's life.
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Depreciation is a process of cost allocation, not of
valuation.7 The primary objective of depreciation accounting
is to allocate the cost of utility property to the periods during which
the property is used in utility operations, i.e., over the useful
service life, in a systematic and rational manner.8
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\7\ See FASB Original Pronouncements, Accounting Research
Bulletin No. 43, Chapter 9, Section C, para. 5 (1998).
\8\ The Commission's Uniform System of Accounts for electric
utilities defines depreciation as follows:
Depreciation, as applied to depreciable electric plant, means
the loss in service value not restored by current maintenance,
incurred in connection with the consumption or prospective
retirement of electric plant in the course of service from causes
which are known to be in current operation and against which the
utility is not protected by insurance. Among the causes to be given
consideration are wear and tear, decay, action of the elements,
inadequacy, obsolescence, changes in the art, changes in demand, and
requirements of public authorities.
18 CFR Part 101 Definition No. 12.
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Generally, the amount of annual depreciation is determined by
multiplying the asset's depreciable base (original cost less estimated
salvage value) by a depreciation rate. The depreciation rate is a
function of the chosen depreciation method and the asset's useful
service life. The depreciation method (e.g., straight line, double-
declining balance, sum of the years digits, etc.) determines the timing
of the recognition of depreciation expenses. The asset's useful service
life, expressed in units of time or production, is based on estimates
of the physical, economic or productive life of the asset.
Depreciation accounting is not intended to achieve a desired
financial objective, such as an increase or decrease in reported net
income or an adjustment in plant costs to perceived market values.
Rather, depreciation accounting reflects the decrease in service value,
i.e., the using up of the productive capacity of the asset, over its
service life. The decrease in service value is estimated using a
systematic and rational method to allocate the original cost of assets
to the periods over which they are used in utility service--factors
that are independent of both an entity's profitability and asset market
values.
Recognition of depreciation expenses for accounting purposes is not
dependent on the rate recovery of the cost of utility plant. When
differences arise between accounting depreciation and rate recovery of
the cost of utility plant, the USofA requires utilities with cost-based
rates to account for the differences as regulatory assets and
liabilities.\9\ In this way, utilities can easily keep track of any
differences between accounting depreciation and ratemaking recovery of
plant costs in their various regulatory jurisdictions.
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\9\ See 18 CFR Part 101 Definition No. 30, Accounts 182.3 and
254.
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C. Reasons for This Rule
The Commission believes it must standardize depreciation accounting
practices in order to maintain its ability to determine just and
reasonable, cost-based utility rates and to ensure the reasonableness
and reliability of financial information used by regulators, investors,
consumers, and the general public.
Since depreciation is a significant portion of the total cost of
providing utility service, the determination of the appropriate amount
of depreciation is of concern to this Commission, State commissions,
utility management, investors, consumers and others who have an
interest in or are affected by the financial performance of these
entities. Because the Commission uses depreciation recorded on a
utility's books as a starting point for determining cost-based utility
rates,\10\ to protect consumers and to guard against abuses, the
Commission must have assurance that such depreciation expenses are
proper.\11\ Moreover, standardizing depreciation accounting practices
will better ensure that utilities' financial information, reported to
regulators, utility investors, utility consumers and the general
public, is reasonable and reliable.
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\10\ The Commission typically permits a utility to recover its
investment in utility property over its useful life through
inclusion of depreciation expense in the cost of service used to set
the utility's cost-based rates. The Commission also typically allows
a utility to earn a return on its undepreciated investment in
utility property.
\11\ For example, a utility could, through inappropriate
depreciation practices, over-recover the cost of utility plant,
inappropriately attempt to mitigate stranded costs or shift benefits
from asset sales to shareholders or particular customer groups. See,
e.g., Midwest Power Systems Inc., 67 FERC para. 61,076 at 61,208
(1994); South Carolina Electric & Gas Co., 76 FERC para. 61,338 at
62,616-19 (1996), reh'g denied, 79 FERC para. 61,083 (1997); accord,
Ohio Edison Co., et al., 84 FERC para. 61,157 at 61,860-63 (1998).
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Additionally, by establishing generally applicable rules relating
to depreciation accounting, this rulemaking is intended to satisfy the
procedural prerequisite of FPA section 302 that the Court, in Alabama
Power, supra, found necessary to enable the Commission to set
individual utility
[[Page 42306]]
depreciation rates for accounting purposes.
Therefore, we are proposing here that utilities subject to Part 101
follow uniform standards in determining depreciation rates for
accounting purposes. This will ensure that depreciation for accounting
purposes is recorded in accordance with sound depreciation principles
and thus, in particular, meets this Commission's regulatory needs.\12\
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\12\ Standardizing utilities' depreciation accounting practices
will, for example, provide a greater level of assurance that
depreciation accounting will not be used to achieve inappropriate
ends. See supra note 10.
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We invite interested parties to present their views on this
proposal through the written comment procedures outlined below.
III. Discussion
The current USofA for utilities contains limited guidance on
depreciation accounting. The USofA defines depreciation and its related
components,\13\ and provides various accounts for the recording of
depreciation,\14\ but does not state how utilities are to determine the
rates used to calculate the amount of depreciation to be recorded in
the accounts.
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\13\ See, e.g., 18 CFR Part 101, Definition Nos. 10, 12, 19, 34-
36 (1999).
\14\ See, e.g., 18 CFR Part 101, Accounts 108, 110, 119, and 403
(1999).
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In light of the foregoing, the Commission proposes to revise its
USofA to require uniform and consistent determinations of depreciation
rates for accounting purposes. We also take this opportunity to outline
how we intend to oversee utility depreciation practices in the
foreseeable future.
A. Regulatory Framework
The Commission proposes to require utilities subject to Part 101 to
use depreciation rates for accounting purposes that are based on the
straight-line method of depreciation and the assets' estimated useful
service lives.\15\
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\15\ The USofA defines service life as ``the time between the
date electric plant is includible in electric plant in service, or
electric plant leased to others, and the date of its retirement. If
depreciation is accounted for on a production basis rather than on a
time basis, then service life should be measured in terms of the
appropriate unit of production.'' 18 CFR Part 101 Definition No. 35.
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A straight-line method of depreciation is one that allocates the
service value \16\ of depreciable property to expense in equal monthly
charges over the property's useful service life. It is the method
typically used by utilities today.\17\
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\16\ The USofA defines service value as ``the difference between
original cost and net salvage value of electric plant.'' 18 CFR Part
101 Definition No. 36.
\17\ See, e.g., J. Suelflow, Public Utility Accounting: Theory
and Application 96 (1973) (``Straight line is the predominant method
used by utilities and sanctioned by most regulatory bodies.'');
Deloitte Haskins & Sells, Public Utilities Manual 23 (1980) (``[T]he
straight-line concept is applied almost universally for both
accounting and rulemaking. * * *''); C. Phillips, The Regulation of
Public Utilities: Theory and Practice 272 (3d ed. 1993) (The
straight line method * * * is the simplest and most commonly
used.''); L. Hyman, America's Electric Utilities: Past, Present and
Future 292 (5th ed. 1994) (``The book depreciation rate is a
straight line rate for most utility companies.''); accord
Depreciation Subcommittee of the NARUC Committee on Engineering,
Depreciation, and Valuation of the National Association of
Regulatory Utility Commissioners, Public Utility Depreciation
Practices 12 (1968) (``In the two decades, since the Report of the
Committee on Depreciation of the NARUC was published in 1943, the
use of the straight-line method for accounting and rate-making
purposes has became almost universal for public utilities.'').
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The Commission proposes that the depreciation period for utility
property be its estimated useful service life. The current practice of
estimating useful service lives of assets based on engineering or other
studies of the expected physical, economic, or productive lives over
which the assets will provide utility service, would continue.\18\
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\18\ Changes in estimated useful service lives would be based on
updated depreciation study results that demonstrated different
service lives (shorter or longer) were appropriate.
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Where composite depreciation rates are used, they would be based on
the weighted average estimated useful service lives of the assets
comprising the composite group.
The Commission believes that computing depreciation on a straight-
line basis over assets' estimated useful service lives will produce
more relevant and reliable financial information for regulatory and
financial reporting purposes than other depreciation techniques (e.g.,
accelerated depreciation, retirement method, sinking fund depreciation,
etc.) that do not ratably allocate plant costs to each accounting
period. Because of the relatively consistent operation of utility plant
over time, the use of the straight-line method and estimated useful
service lives appears to provide the most practical way to measure the
amount of depreciation consumed each year in producing utility products
and services. The straight-line method is also simple in its
application in contrast to other depreciation techniques. It is, as
well, the standard method for business in general, conforms to
generally accepted accounting principles (i.e., systematic and
rational) and, as noted, is the method typically used by utilities
today.\19\
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\19\ See supra note 17.
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B. Future Commission Action
We also take this opportunity to explain how the Commission intends
to exercise its authority over depreciation accounting in the
foreseeable future.
On a case by case basis, e.g., in conjunction with audits,
complaints, etc., it may become necessary, as a result of these
proceedings, for the Commission from time to time to ascertain and
determine, and by order fix, the accounting depreciation rates for
individual utilities pursuant to FPA section 302. However, unless
otherwise ordered by the Commission, individual utilities will not be
required to file their accounting depreciation rates with us for our
approval. This approach is consistent with our efforts to reduce
regulatory burdens to the degree possible and facilitate the transition
to competition in the electric utility industry.
IV. Environmental Statement
The Commission excludes certain actions not having a significant
effect on the human environment from the requirement to prepare an
environmental assessment or an environmental impact statement.\20\ The
promulgation of a rule that is procedural or that does not
substantially change the effect of legislation or regulations being
amended raises no environmental considerations.\21\ The instant
proposed rule amends Part 101 of the Commission's regulations to codify
prevalent utility practice and does not substantially change the effect
of the underlying legislation or the regulations being revised.
Likewise, approval of actions under section 301 of the FPA, relating to
accounting orders, also raises no environmental considerations. The
instant rule fundamentally involves accounting matters, establishing
standardized depreciation accounting practices. Accordingly, no
environmental consideration is necessary.
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\20\ 18 CFR 380.4.
\21\ 18 CFR 380.4(a)(2)(ii).
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V. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, requires
rulemakings to contain either a description and analysis of the effect
that the proposed rule will have on small entities or a certification
that the rule will not have a significant economic impact on a
substantial number of small entities.
[[Page 42307]]
In Mid-Tex Elec. Coop. v. FERC, 773 F.2d 327 (D.C. Cir. 1985), the
court found that Congress, in passing the RFA, intended agencies to
limit their consideration ``to small entities that would be directly
regulated'' by proposed rules. Id. at 342. The court further concluded
that ``the relevant `economic impact' was the impact of compliance with
the proposed rule on regulated small entities.'' Id. at 342.
The Commission certifies that, given the entities subject to this
proposed rule and their current depreciation accounting practices, this
proposed rule will not have a significant economic impact upon a
substantial number of small entities.
VI. Public Reporting Burden and Information Collection Statement
The Commission proposes to amend 18 CFR Part 101 by standardizing
the method for determining depreciation rates for accounting purposes.
Because the proposed rule simply standardizes the method of calculating
depreciation rates, without adding or changing any reporting
requirements, it does not impose any additional public reporting
burden.
Interested persons may obtain information on the reporting
requirements by contacting the following: Federal Energy Regulatory
Commission, 888 First Street, NE, Washington, DC 20426 [Attention:
Michael Miller, Capital Planning and Policy Group, Phone: (202) 208-
1415, Fax: (202) 208-2425, E-mail: [email protected]].
To submit comments concerning collections of information and
associated burden estimate(s), please send your comments to the contact
listed above and to the Office of Management and Budget, Office of
Information and Regulatory Affairs, Washington, DC 20503, [Attention:
Desk Officer for the Federal Energy Regulatory Commission, Phone: (202)
395-3087, Fax: (202) 395-7285].
VII. Public Comment Procedures
Prior to taking final action on this proposed rulemaking, we are
inviting written comments from interested persons. The Commission also
is notifying each State commission having jurisdiction with respect to
any public utility involved and is giving reasonable opportunity to
each State commission to present its views for our consideration. All
comments in response to this notice should be submitted to the Office
of Secretary, Federal Energy Regulatory Commission, 888 First Street,
NE, Washington, D.C. 20426, and should refer to Docket No. RM99-7-000.
An original and fourteen (14) copies of such comments should be filed
with the Commission on or before October 4, 1999.
In addition to filing paper copies, the Commission encourages the
filing of comments either on computer diskette or via Internet E-Mail.
Comments may be filed in the following formats: WordPerfect 8.0 or
lower version, MS Word Office 97 or lower version, or ASCII format.
For diskette filing, include the following information on the
diskette label: Docket No. RM99-7-000; the name of the filing entity;
the software and version used to create the file; and the name and
telephone number of a contact person.
For Internet E-Mail submittal, comments should be submitted to
``[email protected]'' in the following format. On the subject
line, specify Docket No. RM99-7-000. In the body of the E-Mail message,
include the name of the filing entity; the software and version used to
create the file, and the name and telephone number of the contact
person. Attach the comments to the E-Mail in one of the formats
specified above. The Commission will send an automatic acknowledgment
to the sender's E-Mail address upon receipt. Questions on electronic
filing should be directed to Brooks Carter at: 202-501-8145, E-Mail
address: [email protected].
Commenters should take note that, until the Commission amends its
rules and regulations, the paper copy of the filing remains the
official copy of the document submitted. Therefore, any discrepancies
between the paper filing and the electronic filing or the diskette will
be resolved by reference to the paper filing.
All written comments will be placed in the Commission's public
files and will be available for inspection in the Commission's Public
Reference room at 888 First Street, N.E., Washington D.C. 20426, during
regular business hours. Additionally, comments may be viewed, printed
or downloaded remotely via the Internet through FERC's Homepage using
the RIMS or CIPS link. RIMS contains all comments but only those
comments submitted in electronic format are available on CIPS. User
assistance is available at 202-208-2222, or by E-Mail to
[email protected].
List of Subjects in 18 CFR Part 101
Electric power, electric utilities, reporting and recordkeeping
requirements, Uniform System of Accounts.
By direction of the Commission.
David P. Boergers,
Secretary.
In consideration of the foregoing, the Commission proposes to amend
Part 101, Chapter I, Title 18 of the Code of Federal Regulations, as
set forth below.
PART 101--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR PUBLIC
UTILITIES AND LICENSEES SUBJECT TO THE PROVISIONS OF THE FEDERAL
POWER ACT
1. The authority citation for Part 101 continues to read as
follows:
Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7102-7352, 7651-7651o.
2. In Part 101, General Instructions, paragraph 22 is added to read
as follows:
General Instructions
* * * * *
22. Depreciation Accounting
A. Method. Utilities must use the straight-line method of
depreciation. The straight-line method allocates equal amounts of the
service value of utility property to expense during each year of the
property's useful service life.
B. Service Lives. Estimated useful service lives of depreciable
property must be supported by engineering or other depreciation
studies.
C. Rate. Utilities must use percentage rates of depreciation that
are based on the straight-line method and the estimated useful service
lives of depreciable property. Where composite depreciation rates are
used, they should be based on the weighted average estimated useful
service lives of the depreciable property comprising the composite
group.
[FR Doc. 99-20010 Filed 8-3-99; 8:45 am]
BILLING CODE 6717-01-P