Utility Depreciation: Undervalued and Overlooked
Depreciation expense is undervalued and overlooked by many utility commissions. Depreciation is responsible for one of the largest components of customer rates, accounting for one quarter of a customer’s utility bill. Utility commissions determine depreciation expense through evaluation and analysis of depreciation studies. A depreciation study is an expert report that estimates the remaining life for utility plant components, estimates the net salvage value for utility plant components to establish expected future depreciation accrual needs, and allocates future depreciation accrual needs over the expected life of the plant.
Depreciation experts combine statistical analysis, actuarial analysis, engineering knowledge, and utility specific experience into utility-specific forecasts of remaining life and net salvage. Aegis Insight advocates for transparency, thorough documentation, and reproducibility of depreciation rates in order to satisfy the need for expert judgement in forecasting. Aegis Insight offers the following depreciation services:
- Independant Depreciation Studies
- Critical Review of Third Party Depreciation Studies
- Expert Witness Testimony in Depreciation Proceedings
Our depreciation service team is lead by Dr. Lance Kaufman. Dr. Kaufman is a Certified Depreciation Professional and has an established track record as a utility economist.
Independent Depreciation Study
Aegis Insight’s team of statisticians and utility economists have developed proprietary depreciation analysis and reporting software to streamline the creation of depreciation studies. We can leverage this software to perform low cost depreciation studies for utility cooperatives, municipal utilities, and small investor owned utilities. This service is offered to water, sewer, gas, and electric utilities.
The scope of each study is tailored to the size, needs, and budgets of our clients. The standard study will include
- Analysis of the utility’s historical accounting data for plant additions, retirements, transfers, cost of removal, and gross salvage value;
- Statistical estimation of the remaining useful life of assets based on industry specific survival curves;
- Statistical estimation of the net salvage;
- Consultation with utility subject matter experts to incorporate expert judgement and future expectations;
- On-site review or review of utility submitted physical documentation of plant conditions;
- Calculations of annual depreciation accrual rates; and
- Supporting workpapers and digital tools to implement the findings of the depreciation study.
Critical Review of Third Party Depreciation Studies
Utility Commission staff, utility customer advocates, and other utility intervenors should rigorously evaluate the assumptions, modeling decisions, and results of any utility-filed depreciation study. Utility Companies can use depreciation rates as a cash flow tool to help meet operating needs and financial goals of the utility rather than to fairly and accurately allocate capital costs over time. We offer a complete independent depreciation study if the most extensive review is required. For parties with limited resources we perform a targeted review of third party depreciation studies. This review evaluates the assumptions and models used in the third party study and focuses on critical plant accounts. This approach will provide adequate coverage and provide a more cost effective alternative to a full independent depreciation study. Aegis Insight can custom-tailor a critical review of depreciation studies to meet client specific concerns and goals.
Expert Witness Testimony in Depreciation Proceedings
Depreciation analysis is often used as the basis for State and Federal commission proceedings. Aegis Insight offers Dr. Lance Kaufman as a credentialed and experienced testifying expert witness to present evidence in depreciation proceedings. Dr. Kaufman has received training from the top depreciation experts in the US, and developed Aegis’s custom depreciation software. Dr. Kaufman is a strong witness on the stand and has experience giving direct oral testimony, and defending his analysis and opinions in both depositions and hearings.
