This
rule was filed as NMPSC 340.
TITLE 17 PUBLIC
UTILITIES AND UTILITY SERVICES
CHAPTER 3 UTILITIES
FINANCIAL ACCOUNTING AND REPORTING - GENERAL PROVISIONS
PART 340 AUTHORIZATION OF DEPRECIATION
PRACTICES TO BE OBSERVED BY PUBLIC
UTILITIES
17.3.340.1 ISSUING
AGENCY: New Mexico Public Service Commission [New
Mexico Public Regulation Commission]
[Recompiled
12/30/01]
17.3.340.2 SCOPE:
NMPSC Rule 340 [17.3.340 NMAC] shall apply to all electric, gas, steam,
and water utilities under the jurisdiction of the Commission including
municipally-owned utilities as provided by law.
[Recompiled
12/30/01]
17.3.340.3 STATUTORY
AUTHORITY:
[Recompiled
12/30/01]
17.3.340.4 DURATION:
[Recompiled
12/30/01]
17.3.340.5 EFFECTIVE
DATE:
[Recompiled
12/30/01]
17.3.340.6 OBJECTIVE:
The purpose of NMPSC Rule 340 [17.3.340 NMAC] is to formulate for the
State of New Mexico adequate requirements for determining depreciation accruals
and reserves for public utilities.
[Recompiled
12/30/01]
17.3.340.7 DEFINITIONS:
When used in NMPSC Rule 340 [17.3.340 NMAC] unless otherwise specified
the following definitions will apply:
A. "Accounts" means the accounts described or
recognized by the New Mexico Public Service Commission [New Mexico Public
Regulation Commission].
B. "Depreciation Accounting" means a system of
accounting which aims to distribute the cost or other basic value of tangible
capital assets less salvage (if any) over the estimated useful life of the unit
(which may be a group of assets) in a systematic and rational manner. It is a process of allocation not of
valuation.
C. "Amortization" means the gradual extinguishment
of an amount in an account by distributing such amount over a fixed period of
time, over the life of the asset or liability to which it applies, or over the
period during which it is anticipated the benefit will be realized.
D. "Commission" means the New Mexico Public
Service Commission [New Mexico Public Regulation Commission].
E. "Cost of Removal" means the cost of
demolishing, dismantling, removing, tearing down, or abandoning physical assets
including the cost of transportation and handling incidental thereto.
F. "Accumulated Provision for Depreciation" means
the summation of the annual provision for depreciation accruals recorded by the
utility under a predetermined plan of accounting including charges for
retirements and net salvage to recover the cost of the asset between the time
it is first devoted to public use and retired from service.
G. "Annual Provision for Depreciation Accrual"
means the annual amount charged to expense and/or clearing accounts.
H. "Group Plan" means the plan under which
depreciation charges are accrued upon the basis of the original cost of the
asset included in each depreciable plant account using the average service life
thereof properly weighed, and upon retirement of any depreciable asset its
original cost less net salvage is charged to the depreciation reserve whether
or not the particular asset has attained or exceeded the average service life.
I. "Net Salvage" means salvage of property
retired less the cost of removal.
J. "Original Cost" means the cost of property at
the time it was first devoted to public service.
K. "Property Retired" means assets which have been
removed, sold, abandoned, destroyed, or which for any cause have been withdrawn
from service and the books of account.
L. "Salvage" means the amount received from
assets retired less any expenses incurred in connection with the sale or in
preparing the assets for sale; or if retained the amount at which the material
recoverable is chargeable to materials and supplies or other appropriate
accounts.
M. "Service Life" means the period between the date
an asset is first devoted to public use and the date of its retirement from
service.
N. "Straight-line Method" as applied to
depreciation accounting means the plan under which the original cost adjusted
for net salvage of the asset is charged to operating expenses and/or to
clearing accounts and credited to the depreciation reserve through equal annual
charges as nearly as may be during its service life.
O. "Utilities" means Classes A, B, C, and D as
defined by the following table of annual operating revenues:
Class A Class B Class C Class D
Electric
and
Gas Exceeding $1,000,000 to $150,000 to $25,000 to
$2,500,000 $2,500,000 $1,000,000 $50,000.
Water
(annual revenues for 3 consecutive year periods)
Exceeding Exceeding $50,000 to Less than
$500,000 $500,000 $500,000 $50,000.
Sewer
(average annual revenues for 3 consecutive year periods)
Class A Class B Class C
$750,000 $150,000 but Less than $150,000
or more less than $750,000
Annual
operating revenues are those revenues recorded in the accounts of the utility
resulting from all sales of commodities or services or from other uses of
utility properties. For combination
utilities departmental operating revenues shall be used for classification
purposes. "Department" as
used in NMPSC Rule 340 [17.3.340 NMAC] shall mean a responsibility center
within a combination utility where revenues and costs are accumulated by
commodity or service rendered.
P. "Detailed Study" means a determination of
depreciation accruals, depreciation rates, and depreciation reserve
requirements.
Q. "Annual Review" means a cursory examination to
insure that no major changes have taken place which would call for a new
detailed study.
R. "Survivor Curve" means a curve that shows the
number of units or cost of a given group which is surviving in service at given
ages.
S. "Probable Life Curve" means a curve that shows
the probable average life of the survivors at any age from zero to maximum
life.
T. "Frequency Curve" means a curve that shows in
what manner retirements are distributed over the period from zero age to
maximum life.
U. "Units of Production Method" means the process
whereby an equal portion of an asset's depreciable cost is allocated to
operating expense or clearing accounts based on each unit of production from
the asset.
[Recompiled
12/30/01]
17.3.340.8 [TABLE
OF CONTENTS]
A. Purpose and Definitions
(1) Purpose [17.3.340.6 NMAC]
(2) Applicability [17.3.340.2 NMAC]
(3) Concept of Depreciation [17.3.340.9 NMAC]
(4) Definitions [17.3.340.7 NMAC]
B. Requirements for Records, Studies, Reviews, and
Reports [17.3.340.10 NMAC]
(1) General
(2) Depreciation Rates
(3) Periodic Studies and Annual Reviews
(4) Report to Commission
(5) Commission Action
C. Acceptable Methods of Estimating Service Lives [17.3.340.11 NMAC]
(1) General
(2) Actuarial Methods
(3) Simulated Methods
(4) Life Span Method
(5) Salvage Estimate
(6) Alternative Methods
D. Reserve Requirement Study [17.3.340.12 NMAC]
E. Hardship Provisions
[17.3.340.13 NMAC]
F. [TABLE OF CONTENTS - APPENDICES] [17.3.340.15 NMAC]
(1) APPENDIX A: Elements of a Survivor Curve
(2) APPENDIX B: Summary of Annual Depreciation Accrual and Rate Determination
Straight-Line Remaining Life Method
(3) APPENDIX
C: Summary of Annual Depreciation
Accrual and Rate Determination Straight-Line Average Life Method
(4) APPENDIX D: Life Span Calculation
(5) APPENDIX E: Computation of Estimated Straight-Line Remaining Life
Depreciation Accrual from a Survivor Curve-Group Basis
(6) APPENDIX F: Computation of Estimated Depreciation Reserve Requirement and
Annual Depreciation Accrual From a Survivor Curve Straight-Line Average
(7) APPENDIX G: Salvage Estimate
[Recompiled
12/30/01]
17.3.340.9 CONCEPT
OF DEPRECIATION: Depreciation as conceived by NMPSC Rule 340
[17.3.340 NMAC] is the process by which an equitable method of accounting will
permit the recovery of the original cost less net salvage over the service life
of a depreciable asset.
[Recompiled
12/30/01]
17.3.340.10 REQUIREMENTS
FOR RECORDS, STUDIES, REVIEWS, AND REPORTS:
A. General: All
Class A, B, C, and D electric, gas and water utilities and Class A, B and C
sewer utilities in New Mexico shall maintain adequate accounts and records
related to depreciation practices.
Annual depreciation accruals by account shall be reported for each
account. A separate reserve for each
plant account shall be maintained. The
cost of depreciable plant adjusted for net salvage will thus be distributed
over the estimated useful life of such plant in a systematic manner. The accounting entries must be made in a
manner consistent with applicable Uniform Systems of Accounts.
B. Depreciation Rates:
Each public utility company has the primary responsibility for
determining the depreciation rates that may be used for each account. Any public utility may make application to
the Commission and present justification for a depreciation method to be
approved by the Commission for the accounts as contained in the utility's
application as evidenced by order of the Commission. If no such application is made, a straight-line method or unit of
production method shall be used. Class
A and Class B utilities will determine service lives in accordance with NMPSC
Rule 340.10 through 340.15 [17.3.340.11 NMAC].
C. Periodic Studies and Annual Reviews:
(1) Class A and Class B utilities shall
annually make an internal review of all depreciation rates and other pertinent
depreciation factors by accounts to determine whether the current depreciation
rates are appropriate for the ensuing accounting year. As a result of each
utility's annual review and subject to Commission approval, depreciation rates
may be adjusted to reflect known factors which may affect depreciation rates.
(2) Subject to the Commission requiring or a
utility requesting a different analysis period, each Class A and Class B
utility shall, not less often than every five (5) years, conduct a detailed
study of all accounts as to the property of service lives, survivor curves,
recorded net salvage, and other pertinent factors affecting depreciation.
(3) Class C and Class D water, gas and
electric utilities and Class C sewer utilities shall maintain depreciation
records for each plant account but may determine average service lives either
in accordance with NMPSC Rules 340.10 through 340.15 [17.3.340.11 NMAC] or by
estimates based upon knowledge of local conditions, company policy with regard
to retirement, other factors influencing service life, and the experience of
other New Mexico utilities. When in the
judgment of the Commission and after hearings, Class C and Class D water, gas
and electric utilities and Class C sewer utilities may be required to use
actuarial or simulated plant record methods for specified depreciation
accounts.
(4) Class C and Class D gas, water and electric
utilities and Class C sewer utilities shall annually review all depreciation
rates by accounts. When required after
hearings, studies shall be made so that within a five-year period or such other
period as the Commission shall require all accounts shall have been
analyzed. As a result of the annual
review depreciation rates may be adjusted to reflect known factors which may
tend to lengthen or shorten average service lives.
(5) Nothing in NMPSC Rule 340 [17.3.340 NMAC]
shall prohibit the use of subaccounts for plant in separate geographic areas or
where an account is large to separate and distinguish between certain classes
of property. Where such subaccounts
have been established, they shall be carried separately on the books of the
utility and may be treated as separate accounts for depreciation purposes.
(6) The Commission may, after hearing,
require Class A utilities to maintain certain subdivision of primary accounts
for depreciation purposes.
D. Report to Commission:
In all rate case filings all utilities shall provide reports to the
Commission setting forth the depreciation rates. Class A and B utilities shall also file the results of the
detailed depreciation study required by NMPSC Rule 340.7(b) [Paragraph 2 of
Subsection C of 17.3.340.10 NMAC] with their next rate case following the
completion of this study. In addition
the utilities shall indicate on which accounts detailed studies have been
undertaken during the previous year, summarized on a form containing all of the
data which is contained on the sample enclosed in Appendix B and any other
applicable sample appendices. The
utility shall show proposed changes to depreciation rates it intends to use in
the future and shall provide a justification for each change.
E. Commission Action:
In the event the Commission should fail to issue an order approving or
disapproving such proposed rates within sixty (60) days after the filing of the
report, the utility may use the depreciation rates set forth in its report for
the ensuing year.
[Recompiled
12/30/01]
17.3.340.11 ACCEPTABLE
METHODS OF ESTIMATING SERVICE LIVES:
A. General:
(1) Utilities may use any reasonable
acceptable method for estimating service lives which includes the analysis of
plant mortality by group accounts. It is recognized that over the years many
such methods have been developed and used successfully. However, it is suggested that utilities
restrict themselves to the use of the recognized methods outlined in the
following section. The purpose of such
voluntary restriction is to minimize the number of methods to be reviewed and
to promote economy among the utilities and the regulatory agency in the review
of procedures.
(2) Determination of average service lives
involves the basic study of historical patterns by use of actuarial and/or
simulated plant record methods for group accounts together with engineering
estimates of the future effect of physical factors of wear and tear, decay,
depletion of supply, action of the elements, and functional factors of
inadequacy, obsolescence, and public requirement. In those cases where factors
such as anticipated changes to plant, additions of new or improved kinds of
plant, previously unanticipated requirements, specific changes in plans of
management, or other developments occur, they are to be given consideration in
adjusting the average future service life of utility plant in service. The weight to be given past experience shall
depend upon the extent to which conditions affecting service life in the future
are expected to be similar to or different from those for the historical study
period.
B. Actuarial Methods:
(1) Actuarial methods are generally similar
to those developed by life insurance companies for the study of human
mortality. The end result of the
modification and application of these methods to utility plant is to determine
estimates of average service life based upon the analysis of past plant
retirements. These methods require that
plant records be kept in sufficient detail so that the age of plant installed
in any one year can be determined at all times.
(2) Utilities are urged to confine their use
of actuarial methods to those which are discussed favorably in Public Utility
Depreciation Practices, published December 1968 by the National Association of
Regulatory Utility Commissioners, and any subsequent revisions. These methods include the
"Gompertz-Makeham" as well as the survivor curves developed by the
Engineering Research Institute of Iowa State University. These curves are
frequently referred to as "Iowa Curves."
(3) Included in Appendix A to NMPSC Rule 340
[17.3.340 NMAC] is a chart entitled "Elements of a Survivor Curve,"
which contains the various elements related to service life of utility plant in
service. The "Frequency
Curve" at the bottom of the chart indicates the frequency of retirements
related to annual additions. It is the
curve which is used in the "Brennan Method" described in the text
that follows.
(4) The second curve is the "Survivor
Curve" which indicates the percent of the original plant surviving at any
age throughout the life of the group account.
It is usually smoothed and extended by mathematical means from a
stub-survivor curve developed from actual observed experience.
(5) As early retirements take place the
overall service life of the survivors becomes longer than the total of the
group at the time of first installation.
Therefore the third curve illustrated on the chart is the "Probable
Life Curve" which always lies to the right of the "Survivor
Curve."
(6) The "Average Service Life" is
indicated by the vertical line which starts at the top of the "Probable
Life Curve" intersecting the "Survivor Curve" at a point where
the "age" of plant in service equals the average service life of the
plant.
C. Simulated Methods:
(1) Where utilities lack sufficient records
to develop actuarial data, the use of simulated methods such as those developed
by Mr. Alex E. Bauhan or by Mr. Joseph F. Brennan are recommended.
(2) The Simulated Plant-Record Method
developed by Mr. Bauhan analyzes an account to determine average service life
and dispersion by using annual gross additions and yearly plant balances. Through a process of iteration utilizing
survivor tables, such as those developed by the Engineering Research Institute
of Iowa State University, an attempt is made to duplicate the year-by-year
plant balances in the account by a series of simulated balances arrived at by
the assumption that each year's actual additions were subsequently retired in
accordance with the pattern demonstrated by a particular Iowa Curve being used
in the analysis. The use of electronic
computing equipment expedites this procedure.
(3) The method developed by Mr. Joseph F.
Brennan which was initially described in February 1957 in an article entitled
"Plant Mortality" in Electrical Engineering avoids iterations and
gives satisfactory results. The
calculations required are laborious if performed by hand; however, the method
lends itself to electronic computer operation.
It involves the parabolic relationships of retirements and relates them
to annual additions.
(4) For either of the actuarial or simulated
methods it is important that the plant balances, annual additions, and recorded
retirements accurately reflect the situation for the year in which the
accounting data was prepared.
Consequently any accounting adjustments or erroneous entries should all
be corrected in the appropriate year before the methods are employed.
D. Life Span Method:
In classes of property consisting of large units which are expected to
be retired at one time as a single unit, a method employing direct estimates
adjusted for interim retirements of portions of the large units is useful. This method is referred to herein as the
"Life Span Method". A form
entitled "Life Span Calculation" is attached as Appendix D. The method assumes that interim retirements
will take place at a relatively constant rate throughout the life of the major
unit. The tendency of these interim retirements
of small subunits of the major unit is to produce a shortening of the overall
life of the major unit for depreciation purposes.
E. Salvage Estimate:
A form has been included in Appendix G to aid in the preparation of
estimated net salvage. This form takes advantage of historical experience and
provides for the analysis by account of the dollars of plant retired in a
series of years, the amount of gross salvage received, the cost of removal of
the plant, and the resulting net salvage.
Because salvage is a condition to be realized in the future, the bottom
of the form provides for preparing estimates of future net salvage. It initially uses historical data together
with an estimate of gross salvage or scrap value of the surviving plant. By use of these data together with
consideration of cost of removal an estimate of future net salvage is
determined. With the ever increasing
cost of labor and subsequent increase in cost of removal it is recognized that
negative salvage may be a factor to consider in estimating the net salvage of
any account.
F. Alternative Methods:
In each instance where a method other than that covered by the foregoing
discussion is to be advanced by a utility, the utility shall first present its
proposal together with a justification for its use to the Commission for
review. In submitting its request for authorization to use alternative methods
the utility shall include specific reasons why it is unable to employ any of
the methods previously discussed in NMPSC Rule 340 [17.3.340 NMAC] and the
reason why the utility believes the proposed alternative method is superior for
the specific application.
[Recompiled
12/30/01]
17.3.340.12 RESERVE
REQUIREMENTS STUDY: Adjustments to Depreciation Reserve: With
the procedures outlined in NMPSC Rule 340 [17.3.340 NMAC] which require
frequent reviews of depreciation rates and accruals there should not develop
any serious over-or under-accruals of depreciation reserves. When a utility believes that at any time an
over-or under-accrual in the depreciation reserve exists, the utility shall
submit by formal application to the Commission a detailed reserve requirement
study and request for adjustment. This
reserve requirement study shall be reviewed by the Commission and the
Commission will subsequently issue its final order approving, disapproving, or
modifying the adjustment.
[Recompiled
12/30/01]
17.3.340.13 HARDSHIP
PROVISIONS: Application for Modification of Rule or
Exemption: If unreasonable hardship to
a Class C and Class D water utility or a Class C sewer utility would result
from the application of NMPSC Rule 340 [17.3.340 NMAC] herein prescribed, an
application may be made to the Commission for the modification of NMPSC Rule
340 [17.3.340 NMAC] for temporary or permanent exemption from its requirements.
[Recompiled
12/30/01]
17.3.340.14 [History: odified by NMPSC Case No. 2086, order dated
June 30, 1988; Amended by NMPSC Case No. 2232, order dated December 19, 1988;
Amended by NMPSC Case No. 2277, order dated December 29, 1989. Formerly NMPSC General Order No. 27,
superseded for purposes of rule reorganization and codification.]
[Recompiled
12/30/01]
17.3.340.15 [APPENDICES]
Appendix A, Appendix B, Appendix C, Appendix D, Appendix E, Appendix F,
Appendix G.
[Recompiled
12/30/01]
[HISTORY
OF 17.3.340 NMAC:
Pre-NMAC
History: The material in this part was
derived from that previously filed with the Commission of Public Records-State
Records Center and Archives.
PSC-GO
27, (Case No. 1082) General Order No. 27 Rules Applicable To The Authorization
Of Depreciation Practices To Be Observed By Public Utilities In The State Of
New Mexico Under The Jurisdiction Of The New Mexico Service Commission,
4-17-74.
NMPSC
Rule 340, Authorization Of Depreciation Practices To Be Observed By Public Utilities,
6-30-88.
History
of Repealed Material: [RESERVED]