DEPRECIATION AND AMORTIZATION EXPENSES

Transcription

1 Filed: September, 00 Exhibit C Tab Schedule Page of DEPRECIATION AND AMORTIZATION EXPENSES.0 INTRODUCTION The depreciation and amortization expense for Hydro One s Distribution business in its 00 test year submission in RP /EB-00-0 was supported by an independent study by Foster Associates. The Ontario Energy Board (OEB) accepted the costs flowing from the Depreciation Study for the purpose of supporting Distribution rates in 00. Hydro One retained Foster Associates to complete a similar study of its Transmission assets in 00. This Transmission study employed similar methodologies to the previous Distribution study. The report of Foster Associates on the Transmission assets is filed at Exhibit C, Tab, Schedule. Specifically, Foster Associates was asked to: 0 review corporate fixed asset and depreciation related accounting policies; collect plant and reserve data; reconcile data to corporate records; perform statistical life analysis of past retirement experience; discuss asset conditions with Hydro One personnel; review physical condition of assets; provide an estimation of projected lives and retirement dispersion patterns; perform analysis and redistribution of recorded depreciation reserves; and develop recommended accrual rates for each rate category.

2 Updated: February, 00 Exhibit C Tab Schedule Page of Key findings and recommendations can be summarized as follows:. Change the current depreciation rates to reflect the study findings as shown at Exhibit C, Tab, Schedule, Statement A, page for transmission plant.. Adopt a depreciation system composed of the straight-line method, vintage group procedure, remaining life technique versus the current straight-line method, broad group procedure, remaining life technique.. A redistribution of recorded reserves should be undertaken for each applicable plant account to bring the recorded reserves in line with the theoretical reserves calculated in the study.. Adopt amortization accounting for the following plant accounts: office furniture and equipment; computer equipment; stores equipment; tools, shop and garage equipment; measurement and testing equipment; miscellaneous equipment. 0.0 STUDY IMPACT ON DEPRECIATION EXPENSE The adoption of Foster Associates recommendations in 00 and 00 will result in a depreciation expense on fixed assets of $. million and $. million, respectively. The use of Hydro One Transmission s existing methodology would have resulted in depreciation expense of $. million for 00 and $.0 million for 00. A comparison of the results of the two methodologies is shown in Table, below. Revised to $.M in February 00 update. [Reference C--, page, line ] Revised to $.M in February 00 update. [Reference C--, page, line ]

3 Updated: February, 00 Exhibit C Tab Schedule Page of Table Transmission Depreciation Study Impacts ($ Millions) Description Test Test Proposed Methodology.. Existing Methodology..0 Reduction in Depreciation Expense.. Detailed depreciation schedules are filed at Exhibit C, Tab, Schedule. Hydro One has decided to adopt Foster s recommendations, subject to OEB approval, with respect to maintaining accumulation reserves by groups of accounts and the adoption of amortization accounting for certain general plant accounts. This will result in greater administrative efficiency with respect to the recording of future depreciation since detailed plant records for individual assets will no longer need to be maintained for depreciation purposes. Hydro One Transmission will implement the new depreciation system for GAAP purposes in 00, reflecting the Foster Associates recommendations. This will allow the time necessary to modify the accounting systems to reflect the new methodology. 0 Capitalized depreciation refers to depreciation on transport & work equipment and other minor fixed assets (eg. tools) that are used in capital work projects. Capitalized depreciation is deducted from annual depreciation expense, as it is charged to capital expenditures. Fixed asset removal costs are generally charged to operations on an as incurred basis. The increase in asset removal cost for the period of 00 to 00 is consistent with the increase in work programs in 00 and 00.

4 Updated: February, 00 Exhibit C Tab Schedule Page of.0 AMORTIZATION EXPENSE Amortization expense is the recovery of costs the OEB has allowed Hydro One Transmission to defer to a future date. The OEB has, in past decisions, approved the deferred balance and the prescribed method and time period for which the costs in each account may be recovered in rates from customers. Amortization schedules for test, bridge and historical years are filed at Exhibit C, Tab, Schedule and Table below reproduces this summary. Table Transmission Amortization Expense ($ Million) Description Historical Bridge Test Other Post Employment Benefits Environmental Assets and Other Total Amortization Expense Other Post Employment Benefits (OPEB) 0 Employee future benefits other than pension are recorded in Hydro One Transmission s financial statements using the accrual method as required by Canadian GAAP. The OEB has allowed for the recovery of past service costs, which arose on the adoption of the accrual method, in the revenue requirement on a straight-line basis over a -year period

5 Updated: February, 00 Exhibit C Tab Schedule Page of per the OEB s RP--000 Decision. Hydro One recorded a regulatory asset of $ million in to reflect the OEB s Decision and allocated to the Regulated businesses. Environmental Assets and Other Hydro One Transmission provides for estimated future expenditures required to remediate past environmental contamination and to comply with current environmental legislation. Since these expenditures are expected to be recovered in future rates, Hydro One Transmission has recognized the net present value of these estimated future expenditures as a regulatory asset. The balance is amortized on a basis consistent with the pattern of current expenditures expected to be incurred up to the year 0. Hydro One Distribution has received approval for this deferral account as part of the OEB s RP Decision and Hydro One Transmission s treatment is consistent with this decision. Other amounts primarily consist of legacy amortization expense related to Frequency Standardization. The last year for the amortization of the Frequency Standardization was 00.