Light & Power reviewing FTC decision on depreciation rates

The Barbados Light & Power Company (BLPC) says it will be seeking clarity from the Fair Trading Commission (FTC) on its recent decision to deny a request for depreciation rates for its generation plant.

In a decision handed down on March 25, the FTC said it had approved three of the four components of the BLPC’s Application for a Review of Depreciation Rates and Approval of the Depreciation Policy.

Chief Executive Officer of the FTC Marsha Atherley-Ikechi, in her summary on Monday, said the FTC had determined that, pursuant to Section 19 (1) of the Utilities Regulation Act and based on analysis, the use of the straight-line remaining life method as employed by the applicant in determining the asset lives was approved.

“The net salvage values of the assets as determined by the Applicant for Transmission and Distribution (T&D) and General Plant are considered justifiable and verifiable and are therefore approved [and] the T&D rates and the General Plant rates derived from asset service lives calculated in the 2017 Depreciation Study, adjusted for December 31, 2019, are approved,” she said.

However, Atherley-Ikechi said, “based on the information provided by the applicant, the depreciation rates for generation plant as set out in the Application are not approved”.

The FTC said in its 43-page decision that in making its determination, it considered all evidence submitted by the BLPC, intervenors and responses from BLPC to respective interrogatories.

“The Commission also considered the elements of computing depreciation and an examination of the techniques and methodologies that were utilised in a Depreciation Rate Study dated December 31, 2017 submitted by the BLPC,” it added.

“It is important to ensure that in the assessment of a utility’s depreciation rates, the interests of both the utility and the rate payers are fairly balanced. Therefore, the service provider is afforded the opportunity to earn an adequate return on investment to sustain its business and the consumer receives service at a reasonable rate,” said the FTC.

According to the regulator, the determination of depreciation rates requires assessing the appropriate average service lives and net salvage for each plant account or groups of assets within an account. The annual depreciation accrual reflects the allocation of unrecovered cost of a tangible asset over its useful or service life and is calculated by applying a depreciation rate stated as a percent of original cost plant balances.

The updated depreciation rates submitted by the BLPC on June 9, 2020 were higher than the rates currently in existence, with a weighted average of 3.37 per cent, compared to the current weighted average of 3.28 per cent.

In comparison, the depreciation rates that were submitted in the 2017 Depreciation Study were lower than the rates currently in existence, with a weighted average of 2.91 per cent, compared to the existing 3.28 per cent.

The FTC said: “The increase in proposed weighted average rate is reflective of the bigger increase in life span of generating units and the slower growing generating plant growth, especially when compared to T&D plant growth. Additionally, net salvage for generation plants remains about the same as in the prior 2012 study, while the average net salvage for the T&D plant has increased”.

The FTC said having reviewed and analysed the application, the evidence submitted by the utility company, the positions put forward by the intervenors and the applicable methodologies related to depreciation, it maintains that depreciation should recover the capital cost of investment in assets over their useful life.

“The Commission acknowledges that, subsequent to the Depreciation Study of 2017, the Applicant became guided by the changing policy directives of the Government of Barbados as outlined in the Barbados National Energy Policy, resulting from the Government of Barbados’ vision of attaining 100 per cent of energy produced from renewable energy. However, the Applicant failed to revise the 2019 Update to reflect the Policy Directive. Therefore, the Commission is unable to approve the composite rates for generation assets as requested by the Applicant,” it explained.

The regulator’s decision seemingly will have an impact on the utility company’s request for a review of electricity rate.

In its response, the BLPC said it was currently “reviewing and seeking to understand the FTC’s decision, especially as it relates to the Company’s application filed in October 2021 for a review of customer electricity rates”.

According to Director Customer Solutions and Regulatory Affairs Kim Griffith-Tang How, “following our review, we will further engage the FTC to clarify aspects of their decision”.

“As always, we will commit to working with the Commission to ensure that there is full understanding and acceptance by all involved. We will provide any further information if required,” she added.