AGA IDPU-2013 Introduction To Depreciation For Public Utilities and Other Industries (A42013).pdf

1、IntroductIon to deprecIatIon For Public Utilities and Other IndustriesINTRODUCTION TO DEPRECIATION For Public Utilities and Other Industries April 2013 NOTICE AND COPYRIGHT The Edison Electric Institute (EEl) and the American Gas Association (AGA) coordinated the creation and maintenance of this doc

2、ument. While EEI and AGA provided administrative support for the development of this document, neither EEI nor AGA tested, evaluated or verified the accuracy of any information or the soundness of any judgments contained herein. EEI and AGA disclaim liability for any personal injury, property or oth

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10、ts for revisions, or other communications relating to this document should be sent to: Introduction to Depreciation for Public Utilities and Other Industries, Comments c/o Edison Electric Institute, 701 Pennsylvania Avenue, N.W, 4th Floor, Washington, D.C. 20004 and c/o American Gas Association, 400

11、 N. Capitol St., N.W, Suite 450, Washington, D.C. 20001. Copyright 2013, Edison Electric Institute and the American Gas Association, All Rights Reserved. This book, or parts thereof, may not be reproduced in any form without permission of the Edison Electric Institute or the American Gas Association

12、. ISBN: 978-0-931032-55-4 Introduction to Depreciation for Public Utilities and Other Industries iii TABLE OF CONTENTS Acknowledgments v Preface vii! Chapter 1: Introduction 1! Chapter 2: Fixed Asset Accounting for Depreciation 7! Chapter 3: Ratemaking and Financial Considerations 21! Chapter 4: Det

13、ermining Depreciation Expense and Accrual Rates . 35! Chapter 5: The Depreciation Study 49! Chapter 6: Life Analysis 57! Chapter 7: Gross Salvage and Cost of Removal 111! Chapter 8: Tax Depreciation 131! Chapter 9: Accounting for Asset Retirement Obligations (AROs) 137! Chapter 10: Depreciation in a

14、n IFRS Environment . 147! Appendix A: Glossary of Terms 165! Appendix B: Iowa Curves 173! Appendix C: Life Analysis (Additional Topics) 205! Appendix D: Listing of Diagrams, Charts and Tables . 229! Appendix E: Resources 231!Introduction to Depreciation for Public Utilities and Other Industries v AC

15、KNOWLEDGEMENTS The process of refreshing a book of this nature is a daunting task. The Edison Electric Institute (EEI) and the American Gas Association (AGA) would like to offer our thanks and profound gratitude to the individuals listed below who participated on the task force created for that purp

16、ose. They are all active members of the EEI Property Accounting and Valuation and AGA Accounting Services Committees. These individuals devoted considerable time and effort to apply their industry expertise to update the existing text and create completely new chapters in response to the changing en

17、vironment in the electric and natural gas industries. Task Force Members Doug Allen - American Gas Association Ned Allis - Gannett Fleming, Inc. Jan Anderson - Consumers Energy Richard Bennett - Southern California Edison Tony Biacci - Florida Power and Light Richard Clarke - Gannett Fleming, Inc. J

18、ason Cone - PowerPlan, Inc. Carl Council - Duke Energy Jim Dahlby - PowerPlan, Inc. Richard Fisher - Southern California Edison Tammi Goldstein - Pacific Gas and Electric Isetta Harmon - Edison Electric Institute (retired) Randall Hartman Edison Electric Institute Joe Holt - PowerPlan, Inc. Jamie Ke

19、nt Edison Electric Institute Terry McKeighan - Portland General Electric Lisa Perkett - Xcel Energy Karen Ponder - Alliance Consulting Group Aaron Smith - PowerPlan, Inc. Jerry Vineyard - Southwest Gas Corporation Dane Watson - Alliance Consulting Group This last update could not have been completed

20、 so thoroughly without the talent and leadership of “Chief Editor” Dane Watson and the invaluable contribution of time, energy, and expertise from Jan Anderson and Tammi Goldstein. Their participation from first outline to final manuscript provided a unified, comprehensive voice to a project from ma

21、ny sources. Last, we would be remiss if we failed to acknowledge those who came before us. The information contained here is built on many years of experience and expertise both of the current editors and the people who contributed to previous versions of the text. We especially hold a debt of grati

22、tude to the 15 people who contributed to the original edition of this text completed in 1972, in particular, to George D. Porter, Chairman of the “Introduction to Depreciation Project Committee.” Introduction to Depreciation for Public Utilities and Other Industries vii PREFACE What is depreciation?

23、 This question seems easy enough to answer. Many of the readers of this book have taken an accounting class where depreciation was explained as a fairly straight forward concept. The reader might have heard depreciation defined as the process of allocating the cost of a plant asset to expense over i

24、ts service (useful) life in a rational and systematic manner. An accounting class then might have gone on to explain that the allocation of cost is designed to provide for the proper matching of expense with revenues in accordance with the matching principle. But what does this mean, and what is the

25、 relevance for a public utility and other capital intensive industries? Why all the debate and enthusiasm over depreciation for these companies? This interest in depreciation is mainly due to their capital intensive nature and the resultant large impact fixed assets and depreciation have on the annu

26、al operating cost of a utility. This significant impact is of interest to many different groups including management, the investment community, regulators, and customers. Public utilities and their regulators and customers may have different estimates of depreciation, as well as other items contribu

27、ting to the cost of providing service. The analysts representing the public utility need to determine, through their depreciation study, the validity and appropriateness of their estimates. Likewise, the analysts representing regulators and customers need to have expertise to evaluate the reasonable

28、ness of these estimates. What is the average life of electric transmission towers? How long do meters last? What is the average service life of gas distribution mains? What is the annual depreciation rate of our distribution poles? How much has a 20-inch gas transmission main which was installed 25

29、years ago depreciated? What happens to the life of assets when a new technology renders the current technology obsolete? These are common questions that arise for those working with depreciation in public utilities. Similar questions may arise for those in other capital-intensive industries such as

30、the steel, glass, paint, and petrochemical as well as other businesses who invest heavily in plant and equipment in relation to annual revenues. This text will be referring to public utilities, but the information contained here is relevant to any capital intensive company. In an accounting class, a

31、 simple formula to calculate depreciation is often given as (original cost less salvage value)/useful life = annual depreciation. Cost of removal, which is an important concept for public utilities, is generally not even explicitly mentioned (although it may be inferred to be part of “salvage value”

32、). For public utilities and other capital-intensive industries, the calculation of depreciation can be quite complex. Most utilities use the group depreciation concept which bundles similar types of assets into the same group (as authorized by FERC). This group concept leads to advanced statistics a

33、nd actuarial analysis to understand how long assets will live, similar to the actuarial analysis used to determine the life expectancy of people. Given the complexity of depreciation, a course of study leading to the attainment of the professional designation of certified depreciation professional (

34、CDP) has been developed for those with an interest in mastering this topic. Determining depreciation expense and proper depreciation accrual rates involves both data analysis and professional judgment. An understanding of the nature of fixed assets, the accounting for fixed assets, various depreciat

35、ion systems, management policies, capital recovery concepts, industry trends, the operations of a company and equipment, and other subjects are all within the scope of information gathered and analyzed in order to perform a depreciation study that leads to depreciation parameters, rates, and the app

36、ropriate allocation of depreciation over asset lives. As with any forecast and estimation process, the Preface viii answer is sometimes not completely clear but can have multiple shades of gray. Thus, the art and science of depreciation is one of the more robust topics in utility regulation. This bo

37、ok will cover many of the topics associated with the synthesis of the many factors inherent in the selection of appropriate lives and net salvage parameters for a utilitys fixed assets. The purpose of this book is to give the reader a basic understanding of these fixed asset and depreciation concept

38、s, and a glimpse into how the many questions surrounding these topics can be answered. The text presents the fundamentals of depreciation, providing the necessary foundation for advanced studies if desired. The book is primarily intended for those new to the area of depreciation although it is techn

39、ically accurate for use by those with more experience in depreciation. Its orientation is towards depreciation accounting as a cost allocation concept, rather than a determinant of value, using the methods of historical life and net salvage analysis for electric and gas utility property. The basic u

40、nderlying principle of utility depreciation accounting is intergenerational equity, where the customers/ratepayers who benefit from the generated service of assets pay all the costs for those assets during the benefit period which is over the life of those assets. The following list provides an over

41、view of each chapters content. Chapter 1 - Introduction This chapter details the various accepted definitions of depreciation, and provides a brief history of depreciation in the public utility industry, the purpose of depreciation, and an introduction to the various systems used to determine deprec

42、iation expense and accrual rates. Chapter 2 - Fixed Asset Accounting for Depreciation This chapter explains the effects of the underlying property accounting transactions on the data used to estimate equitable depreciation rates. Chapter 3 - Ratemaking and Financial Considerations This chapter expla

43、ins how depreciation is connected to ratemaking and the impact of ratemaking on corporate finance and financial reporting. Recovery mechanisms are discussed, including the return of capital and its impact on the return on investment, as well as the importance of the proper allocation of depreciation

44、. Chapter 4 - Determining Depreciation Expense and Accrual Rates This chapter describes the various methods, procedures, and techniques used in the determination of annual depreciation rates. Chapter 5 - The Depreciation Study This chapter describes the process of conducting a depreciation study inc

45、luding how asset data is collected, analyzed, and evaluated to determine future service lives and retirement experience that is used to calculate annual depreciation rates and accruals. Chapter 6 - Life Analysis This chapter introduces the statistical methods applied to historical patterns of asset

46、retirements to estimate the lives of utility assets. Introduction to Depreciation for Public Utilities and Other Industries ix Chapter 7 Gross Salvage and Cost of Removal This chapter discusses the determination of net salvage that is included in the allocation of asset costs and in the calculation

47、of annual depreciation rates. Chapter 8 - Tax Depreciation This chapter provides an overview of the differences between book and tax depreciation methods, depreciation differences, treatment of cost of removal and salvage, and deferred taxes. Chapter 9 - Accounting for Asset Retirement Obligations (

48、AROs) This chapter details the differences between cost of removal for legal obligations and traditional utility cost of removal accounting, and the impacts on recovery and reporting. Chapter 10 Depreciation in an IFRS Environment This chapter discusses the potential issues and concepts surrounding

49、IFRS. More resources and information are provided in the Appendices, including a glossary, resources, additional life analysis techniques, and the Iowa Curve tables. Introduction to Depreciation for Public Utilities and Other Industries 1 CHAPTER 1 Introduction The concept of depreciation can have many different meanings depending on ones point of reference. Economists, engineers, accountants, and laypeople may all have different concepts of what depreciation represents. The most basic understanding of depreciation is that the older an asset is, the less it is worth. A good exampl