FEI-FEVI 2010 EEC Report filed March 31, 2011 - FortisBC

16. Depreciation Study
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CONFIDENTIAL
NEGOTIATED SETTLEMENT AGREEMENT
TERASEN GAS (VANCOUVER ISLAND) INC.
DATED THURSDAY, NOVEMBER 5
The Parties agree that the depreciation rates specified in the Gannett Fleming study
included the Application under Appendix H-2 for Parts I-III, and in the Supplemental filing
dated July 8, 2009 for Parts IV and V, will be implemented effective January 1, 2010, with
the exception of:
(a) incorporating the correct updated rates from the depreciation study results in a change in
the rate for asset class 475 from 1.62 per cent to 1.94 per cent, and a change in the rate
for asset class 477 from 4.92 per cent to 4.60 per cent (BCUC IR 1.146.3); and
(b) the component of those rates that represent recovery of negative salvage (see item 17
below).
Adjusting for the Distribution Asset Classes, negative salvage, and overheads capitalized
and capital expenditures changes yields total depreciation expense of $21.8 million in 2010
and $26.0 million in 2011, of which approximately $1.2 million results from the updated
Gannett Fleming depreciation study.
The Parties agree that TGVI will undertake an updated depreciation study to be included as
part of TGVI’s next Revenue Requirements Application. This study will address the
methodology and rates for net negative salvage to be included in cost of service for future
periods. TGVI will work with Commission staff and a depreciation rate specialist in
determining the requirements of the study.
17. Negative Salvage Values
APPENDIX A
to Order G-140-09
Page 14 of 102
On an annual basis, TGVI includes a provision for estimated net negative salvage value
(removal costs less proceeds) in its depreciation rates. This treatment, which was approved
as recently as 2004, along with an estimate of the salvage amount to be included in
depreciation rates recognizes that net negative salvage value is a cost of providing service
using the asset and should be recovered from customers over the useful life of the asset. An
alternative treatment is to recover the net negative salvage values at the time they are
incurred resulting in future customers paying for the removal costs, which TGVI views as
inappropriate. The inclusion of a provision for estimated net negative salvage value in
depreciation rates is a practice that has been followed by TGVI historically, and with this
RRA TGVI had proposed continuation of this treatment. This treatment is consistent with the
BCUC Uniform System of Accounts and is generally followed by other investor-owned
utilities in British Columbia and across Canada.
The Parties agree that for the purposes of the two year period covered by this Agreement,
the provision for net negative salvage (net removal costs) will be removed from the
depreciation estimates. Instead, an estimate of the amount of net removal costs to be
incurred in each of the years 2010 and 2011 ($0.343 million and $0.344 million) will be
included in the cost of service and recovered from customers in each of those years. Any
variances between the actual amount of net removal costs realized and the estimated
amounts included in cost of service will be recorded in a new deferral account created for
this purpose that will be called the “Removal Cost Deferral Account”. The amount