Ratemaking Trends and Industry Accounting · 2020-05-12 · Bits, Bytes & Barrels” webinar....

2019 Deloitte Power & Utilities ConferencePower is not staticDecember 3-4, 2019

Bits, Bytes & Barrels” webinar

Ratemaking Trends and Industry

Accounting

Bill Graf, Audit & Assurance Partner, Deloitte & Touche LLPTom Kilkenny, Audit & Assurance Partner, Deloitte & Touche LLPAmy Parker, Audit & Assurance Partner, Deloitte & Touche LLP

Copyright © 2019 Deloitte Development LLC. All rights reserved. 3

Ratemaking trends


Industry accounting


Scenario 1

• In the fourth quarter of 2019, a utility company that operates in an RTO decided to retire a coal fired power plant in October 2020

• That decision was driven primarily by the state commission and intervenor’s focus on expanding renewable energy, including a new solar plant that is currently under construction and expected to be in service in late 2020

• The plant’s book value is material, primarily due to significant capex from five years earlier

• The estimated remaining life of the plant, based on the most recent depreciation study, is fifteen years

• The company believes it is probable that all approvals needed to retire the plant will be received

• The company filed for approval to retire the plant in the fourth quarter of 2019 with its regulatory commission and the RTO

• The regulatory commission filing dealt solely with authorization to retire early; that filing did not deal with rate recovery

• The company plans to file a rate case in the third quarter of 2020 and plans to seek recovery of the cost of unrecovered book value over a seven year period

• The company, and other utility companies in the same jurisdiction, have had plant retirements in the past, and in all cases full recovery has been allowed

• As of 12/31/2019 and just prior to the 10-K filing, no orders had been issued by the regulatory commission or the RTO

Question: What are the accounting implications of the company’s decision to early retire this power plant?


Scenario 1A – Change in facts

• In a state commission hearing in January, the commission staff and interveners introduce testimony stating that the significant amount spent on capital spend only five years ago was not a prudent decision, and that the commission should disallow some of those costs

• The RTO approves retirement of the plant in February (prior to the 10-K filing)

• The commission issues an order in February (prior to the 10-K filing) approving the plant retirement. The order acknowledges the testimony about potential imprudent spending but states that recovery of costs must be dealt with in a rate proceeding, not the proceeding to evaluate the decision to retire the plant

Question: Should the company record an abandonment loss in its year-end 2019 financial statements?


Scenario 1B – Change in facts

• Continuing with Scenario 1A, the Company filed a rate case in 2020, and in December 2020, the Commission issues an order stating that all but $100 million of the remaining book value of the retired plant will be recovered with a return over seven years, but $100 million of the cost may not be recovered.

Question: What should the company record in the fourth quarter 2020?


Scenario 2

• Company W announced in September 2019 a goal of achieving a reduction in greenhouse gas (GHG) emissions by the year 2030 of 75% compared to a 2005 baseline

• The company currently owns 10 coal fired power plants with a total capacity of 5,000 MW

• To achieve the 2030 goal, the company would need to retire 6 of its 10 coal plants (about 3,000 MW) by 2030

• Current depreciation schedules reflect 2 plants with a retirement date prior to 2030, 3 plants with a retirement date between 2030 and 2040, and all other plants with retirement dates after 2040

Question: What are the accounting implications of the GHG announcement?


Scenario 3

• A significant storm occurred in Electric U’s service territory in spring 2019; the company incurred $200 million in costs to restore the system

• Electric U does not have a storm cost tracker

• This was the third major storm in the last 10 years; in the prior two storms, the commission allowed Electric U to recover the storm costs in rates over a three year period ($40 million and $65 million)

• Another utility company regulated by the same commission also has a history of commission approval to recover abnormal storm costs

Question: How should Electric U record the $200 million in incurred costs?


Scenario 3A

• Another utility company in the state incurred $125 million in costs to repair its system from the same storm, and had a rate case in progress in fall 2019

• In that rate case, the other utility company requested recovery of the $125 million in costs over a three year period

• On December 2, 2019, the commission issued an order for the other company, and did not allow recovery of any of the $125 million in costs

• The order noted that the cost of restoration was high, and that the company’s poor maintenance practices were a factor in the high costs

Question: When considering the decision in the other utility company’s rate order, how should Electric U treat the $200 million in previously incurred costs?


Scenario 3B

• In 2019, Electric U management asserted that its maintenance practices are superior to the other utility company, and continued to believe the $200 million of costs it incurred were probable of recovery in future rates

• Assume we are now in 2020

• Electric U files a rate case in spring 2020 requesting recovery of the $200 million over three years

• Late in 2020, the Commission issues an order in the rate case allowing no recovery of the 2019 storm costs

• Electric U management intends to appeal the order

• Electric U legal counsel prepares an analysis explaining how the commission erred in reaching its decision on storm cost recovery and provides an opinion that it is reasonably likely Electric U will prevail on this issue upon appeal

Question: At year end 2020, how should Electric U treat the $200 million in previously incurred costs?


Industry accountingPhase in plans


Phase in plan overview

• General rule under ASC 980 for regulatory assets: An incurred cost that is probable of recovery in future rates shall not be expensed, but must be recorded on the balance sheet as a regulatory asset

• Exception to the general rule: If the incurred cost relates to a major, newly completed plant, that cost must be expensed if the rate setting method is a phase in plan

• A phase in plan is simply a method of setting rates whereby costs related to major, newly completed plant (such as depreciation and O&M) are reflected in rates more slowly than when those amounts are expensed under GAAP

• When the method of setting rates is a phase in plan, and if the incurred costs are probable of recovery in future rates, the incurred costs cannot be reported on the balance sheet as a regulatory asset

The following scenarios include examples of rate setting, some of which are phase in plans, and some that are not


Scenario 4

• Utility company A put a large new capital project into service last year

• A has a rate case in process; its filing shows a 9% increase in its revenue requirement

• To moderate the rate increase, the commission issues an order that says depreciation should be deferred on the plant for the first three years, to be recovered over the remaining years of the plant

• The new rates are effective 1-1-2020

• A believes the depreciation expense incurred in 2020 is probable of recovery in future rates

Question: Does A qualify to record a regulatory asset in 2020 for the plant’s depreciation expense?


Scenario 4A

• Same facts as the prior slide, except the Commission order states that $50 million of general maintenance expenses for each of the next 3 years shall be deferred and subsequently added to rate base and recovered over the following 25 years

• The Commission has never had a history of setting rates with deferral of maintenance expenses

• The specific maintenance expenses being deferred are unrelated to the new capital project

• The annual depreciation expense on the new capital project is about $50 million

Question: Is this a phase in plan?


Scenario 5

• The Commission is requiring Utility Company B to have more solar power in its mix, either through the addition of a rate based plant or a long term PPA

• Utility Company B makes a filing with the Commission advocating that its proposed solar farm rate base project is better for its customers compared to a long term purchase power agreement with a solar farm developer

• The proposed PPA is based on a fixed rate per MWH for all power generated over a 20 year period

• In order to be as competitive as possible with the PPA alternative, B has proposed “levelized rates” for its rate based solar farm rather than the traditional ratemaking model where customer rates decline over time as the plant is depreciated (because the return on rate base declines over time)

Question: If B builds the solar plant and rates are set using a levelized rate over the life of the plant, is that a phase in plan?


Scenario 5A

• Same facts, but the Commission decides B should enter into the 20 year PPA

• B is involved in the site selection and equipment selection

• The PPA terms require a fixed monthly payment, and B receives all MWH generated up to a stated quantity

• B concludes the PPA meets the definition of a lease under ASC 842, and that it is classified as a finance lease

• At the in service date, B records a right of use asset and a lease liability



Scenario 5B

• Same facts as 2 or 2A, but the Company reviewed rate orders from 1986, 1988 and 1991

• In each of those rate orders, the Commission used levelized rates for major new plant investments

Question: Is the levelized rates for the new solar project a phase in plan?


Scenario 6

• C is a gas distribution company that is in the middle of its first rate case in many years

• C has had a variety of capital projects placed into service since the last rate case, that is the primary driver of its requested rate increase

• C has total rate base of $2 billion. The capital additions since its last rate case have been $300 million, but no single project has exceeded $25 million.

• The rate increase required is about 8%.

• The Commission, in order to moderate the rate increase, issues an order for a 3% rate increase in 2020, followed by additional 3% rate increases in 2021 and 2022.

• In 2020 and 2021, the Commission authorized a temporary use of lower depreciation rates for many categories of plant, with depreciation rates in 2022 to return to the current depreciation rates



Scenario 7

• D placed a large pipeline lateral into service on 7-1-19

• Without rate relief, D would not be able to earn its authorized ROE

• D had been planning to file a rate case, but the Commission staff strongly preferred that D wait until summer of 2020 to file its case

• The commission staff supported a Company proposal to defer the depreciation and return on the plant between 7-1-19 and the next rate case

• The Commission issued an order authorizing deferral and that the amounts deferred would be added to rate base and recovered over the life of the plant in the next rate case



Scenario 8

• Same as above, except the Company was in a full rate case proceeding in Spring 2019 before the plant went in service

• The Commission addressed the prudency of the investment, with no amounts disallowed

• The Commission issued a similar order---depreciation and return on the new investment is deferred until the next rate case


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Ratemaking Trends and Industry Accounting · 2020-05-12 · Bits, Bytes & Barrels” webinar....

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