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Progress' books could doom rate hike bid

As it asks the state to let it charge customers more, the utility admits it overestimated its depreciation expenses.

By LOUIS HAU
Published May 28, 2005

Progress Energy Florida's request for two rate hikes this year may be complicated by its bookkeeping.

Just as the company prepares to show state officials why it needs to raise its base rate for customers, and charge extra to recover its hurricane costs, the utility acknowledges it overestimated its depreciation expenses, which it has collected from customers, by $504-million.

The issue is rooted in complex accounting rules rather than anything nefarious, according to state public counsel Harold McLean, who represents utility customers.

For accounting purposes, power companies estimate the lifespan of power plants, poles, transformers and other capital equipment and calculate the running cost of that equipment depreciating over time. That depreciation cost is carried on the books as a noncash expense.

Because depreciation expenses are calculated to be collected over the projected operating life of an asset, a sudden change in that projected life can throw depreciation calculations out of whack. An example of such a change is Progress' planned relicensing of the Crystal River nuclear reactor, which would extend its projected life by 20 years.

Still, consumer advocate groups say the surplus is real and it's more than enough to cover the $206-million Progress seeks to collect with its requested base rate hike.

Progress officials say such a move would be short-sighted, given how quickly it says such surpluses and deficits can fluctuate. The company and consumer advocates are expected to wrestle over the issue during the Florida Public Service Commission's upcoming deliberations on the company's base rate hike request.

Calculating depreciation expenses is an imprecise science, which is why utilities frequently over- or under-charge customers for such costs. To keep depreciation expenses from straying too far off the mark, Florida utilities are required to recalibrate their depreciation calculations at least once every four years and then adjust customer rates accordingly. To adjust a surplus, a utility would not refund customers money. Rather, it would reduce the size of the expenses it is passing through to customers.

The unusually large size of Progress' depreciation surplus also stems from reductions in the projected removal costs for obsolete equipment and that its power plants are operating longer than expected.

How quickly the company flows this surplus back to customers is the key question. Progress has proposed returning the surplus during the projected life of existing assets, which could be about 10 to 20 years for some of its power plants and as long as 30 years for poles and wires.

But McLean said the surplus should be returned in about four or five years to ensure it is returned to the customers who were charged for those expenses.

Of particular concern is his desire to reduce the effect of the two rate hikes Progress seeks. One is an increase in its base electric rates, which cover a utility's cost of doing business, excluding fuel and environmental costs. The second is to cover Progress' recovery costs from last year's hurricanes.

For the typical household using 1,200 to 1,400 megawatt hours of electricity per month, the rate hikes could raise its monthly bill by about $9 to $10 a month. Progress charges a monthly residential rate $94.43 for the first 1,000 kilowatt hours of electricity, and charges a penny more for each kilowatt hour above that.

Progress regulatory services director Javier Portuondo said it would be more prudent to return the surplus to customers over a longer period since the depreciation accounts fluctuate so much.

"It would be a disservice to customers to give it all back just to have to recollect it again," he said.

Florida Power & Light of Juno Beach, the state's largest electric company, also has a large depreciation surplus, which it estimates totals about $1.4-billion.

While McLean agreed that depreciation expenses are accounted for as a noncash item on the books of the utility companies, utility customers don't see it that way.

"It's real money when people sit down to write checks to pay their electric bill," he said.

Louis Hau can be reached at 813 226-3404 or hau@sptimes.com

[Last modified May 28, 2005, 00:08:13]