Guest Post from John Kowalko on proposed DP&L Rate Increases

Filed in National by on November 1, 2012

In recent years I have voluntarily applied as an intervener in several cases involving DP&L rate increase requests filed before the Public Service Commission. The process itself is cumbersome and complex and requires resources and time that is not always available to me. Unfortunately the reality is that the public, the ratepayers’, and my constituents’ interests have been inadequately represented in many of these proceedings and my obligation and responsibility as an elected public servant is to ensure some semblance of fairness in the discussions and decisions rendered.

The most recent filing in which I have intervener status is identified as PSC Docket # 11-528 and involves a multi-pronged request for rate increases which includes but is not exclusive to recovery of depreciation values by Delmarva for obsolete meters that have been replaced with “smart-meters” for Delmarva residential customers. I have continuously and strongly objected to any ratepayer funding for new technology costs such as advanced metering purchase and installation since the provable economic benefit from these devices rests solely with the utility. I have specifically and adamantly opposed any recovery of “lost” depreciation for the obsolete equipment that is removed from service especially since there has been no verifiable breakdown of economic loss to the utility and no justification for the ratepayers to subsidize any such loss. I would advise that you read the excellent News Journal article in the business section of Sunday’s (Oct. 21st) paper for some startling exposure.

This request by the utility has caused me to take a long and arduous path to defend the ratepayers in a system that has major flaws that can obstruct due process. One identifiable flaw is that there has been a palpable lack of enthusiasm from the entities tasked with representing the consumer which leaves the average ratepayer at a huge disadvantage.

During the course of the evidentiary hearing I was allowed to cross examine the witnesses from DP&L, PSC staff and the Public Advocates office in an effort to determine how the $25 million figure allegedly representing lost depreciation value was calculated. I asked very specifically how the value was determined in light of the fact that the average age of the discarded meters was 22 years with a total life-expectancy of only 30 years. This amounts to over 73% of the life-expectancy being consumed and should be prorated into any calculation. I also asked for the original equipment costs 22 years ago.

Objections to my cross-examination were raised by both the attorneys’ for DP&L and the Public Advocates office. They wrongly asserted that it was already in evidence admitted. Although my queries were made in a legitimate attempt to ascertain vital information, the objections were sustained by the Hearing Officer. I also asked for the amount of recovered equipment costs garnered from ratepayers over that 22 year span and the amount recovered during that time-span from “depreciation” tax credit recovery and I was rebuffed with the same objections.

To date there have been no valid, statistical accumulation of numbers justifying a $25 million recovery of lost depreciation revenue owed to DP&L by its ratepayers who have paid many times over for the service of those meters in the prior 22 years. The rate increase approval process has many flaws that must be addressed and my colleagues in Dover and I will be working to assure corrective action moving forward.

The harm in allowing Delmarva to recover unproven and unsubstantiated expenses from the ratepayers is a matter of immediate concern and should be denied by the PSC Commissioners. Any action short of total relief from this asking amounts to an abdication of the government’s obligation to ensure fairness for its citizens.

John Kowalko

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Comments (11)

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  1. cassandra_m says:

    Here’s what I don’t understand about this issue — what are the rules for utilities to depreciate their equipment? For the industries I understand, depreciation is certainly not taken (at least for the tax man) over 30 years. Utilities could be different. But if the depreciation window is shorter, then I don’t get why they are trying to get any recover at all — they should have gotten it already.

  2. Linda says:

    I came home on Saturday (10/27) to find a young lady placing something on my gas meter. I asked her if I was getting charged for this and she had no clue what I was talking about.

    1. Was there an opt out for this equipment upgrade?

    2. I have been in my house 30 years so at what rate are they depreciating my meter?

    3. Who do I direct my query (complaint) too?

  3. John Kowalko says:

    Cassandra,
    Precisely the point of information I was trying to acquire when my “cross-examination” of the witnesses was objected to by the Attorney General’s appointed attorney for the “Public Advocates Office”. The transcript of the proceedings which I had to pay over $400 for shows the extent to which the “Public Advocates Office” does “not” represent the interests of the “public”. Very frustrating and very difficult work and I appreciate all supportive remarks and inquisitions.

    John Kowalko

  4. John Young says:

    Real property

    Many tax systems prescribe longer depreciable lives for buildings and land improvements. Such lives may vary by type of use. Many such systems, including the United States and Canada, permit depreciation for real property using only the straight line method, or a small fixed percentage of cost. Generally, no depreciation tax deduction is allowed for bare land. In the United States, residential rental buildings are depreciable over a 27.5 year or 40 year life, other buildings over a 39 or 40 year life, and land improvements over a 15 or 20 year life, all using the straight line method.

    Wikipedia

  5. John Young says:

    Capital Assets and Depreciation

    Almost every business must invest in some major equipment, vehicles, machinery, or furniture in order to operate. Some businesses will require assets such as land, a building, patents, or franchise rights. Major assets that will be used in your business for more than a year are known as “capital assets” and are subject to special treatment under the tax laws. Most importantly, you generally can’t deduct the entire cost of acquiring such an asset in the year you acquire it.

    Why not? Because one of the goals of accounting is to accurately measure a business’s gross income, expenses, and net income (earnings) during a given period of time, usually a year. If a business were allowed to reduce one year’s gross income by an expense deduction for the total cost of an item that will be used for several years, the result would be an understatement of earnings in the year the asset was purchased, and an overstatement of earnings during the following years.

    It follows that, for “capital assets” (assets that have a useful life of more than one year), the cost must be written off (that is, depreciated or amortized) over more than one year.

    Theoretically, the cost of an asset should be deducted over the number of years that the asset will be used, according to the actual drop in value that the asset will suffer each year. At the end of each year, you could subtract all depreciation claimed to date from the cost of the asset, to arrive at the asset’s “book value,” which would be equal to its market value. At the end of the asset’s useful life for the business, any undepreciated portion would represent the salvage value for which the asset could be sold or scrapped.

    Since the actual drop in value of each business asset would be difficult and time-consuming to compute (if indeed it could be computed at all), accountants use a variety of conventions to approximate and standardize the depreciation process.

    Taxguide

  6. kavips says:

    One of the most interesting facets of climbing up the ladder of success is that the further up one gets, whether in government, business, or non profits, they realize that when it comes to budgets, the hard lines which cannot be bent, are total income and total expense lines, and the soft lines are those in the middle which determine how the incomes and how expenses get diverted. If you can imagine a pie chart, the outside circle is the real constraint, and the inner lines can be shifted at will….

    First we need to celebrate our Democratic roots, in that we at least have this oversight. Republican driven states would never get this opportunity to question such a call…. That is what happens when you buy into Republican philosophy and believe “the market” should drive all pricing….

    Therefore, my take on all this is that Delmarva Power needs $25 million, period, or let us say, wants $25 million… This meter thing is just an excuse to try to weasel it out…

    First we need to decide if this $25 million getting sucked out of our economy would be reinvested right here… If so, then no matter how it gets taken, it eventually flows back into our pockets… If we decide that the $25 million is headed out of state, Pepco, Investors, etc, then we are simply being shucked out of $25 million period…

    When you run a business, you try to minimize your losses, and maximize your sales… In the power business, maximizing sales is difficult, so you juggle up the prices. Every other business, simply writes off the cost… Every other business. If Tom Carper’s local SuperFresh has old eggs, they throw them away, and it disappears off their inventory. It shows up exactly the same on their P & L as if someone had stuffed eggs in their pocket and slipped through the side door…

    Any SuperFresh operator who cried because he threw away eggs would be laughed out of his company… Likewise, getting paid for obsolete equipment is equally ridiculous… It is a loss, and simply goes on the P & L as lost equipment. The entity writing off the loss, just winds up with slightly less of way too much money left over….

    Until every American citizen can be guaranteed of having a healthy profit over their expenses at the end of each year, it is way too early to give any business, deserving or undeserving such an entitlement too…..

    Or better put: when every American is entitled to get reimbursed for everything they no longer need, then it might be acceptable for a company to do the same….

  7. Marcy says:

    Thank you Rep. Kowalko!!

  8. cassandra_m says:

    In 2008, it looks like meters could be depreciated over 20 years, with a new smart meter incentive accelerating that depreciation to 10 years.

    And it looks like some smart meters would have been eligible for bonus depreciation.

    So what does that mean? I don’t know. But it seems like they ought to have the accounting showing the depreciation taken on the equipment removed (some of it probably more than 20 years old — mine was) and the balance on the equipment still eligible. They should also be able to report what the incentive depreciation that they received on the smart meters and how they will return those incentives to ratepayers.

    So who do we contact to tell them they need to demand better information?

  9. John Kowalko says:

    The approx. 310,000 replaced meters had an average usage span of 22 years on a (testimony recorded) life expectancy of 30 years maximum. That computes to 73% of lifespan already spent. The number ($25m) depreciation value still to be recovered is intensely and intentionally inflated. When most businesses upgrade/replace equipment for more efficiency or production they forfeit any remaining unrecovered depreciation value the moment they remove the equipment. This asking by DP&L would be a laughably poor joke if it weren’t so clearly identifiable as a con being perpetrated with the acquiescence of the Public Advocates Office and the PSC staff.

    Write letters to the Public Service Commissioners demanding that they DO NOT approve the proposed settlement to PSC Docket # 11-528 ASAP.

  10. dogbert32 says:

    Some interesting figures deduced from the October 21st News Journal article referenced by Representative Kowalko.

    Meters were installed between 2008 and 2011 at a cost of $1.8 million. Delmarva is trying to recover $697,776 for them. So that would mean Delmarva is trying to recover 38.77% of the cost ($61.75 per meter), which presumably means they have depreciated 61.23% in 3 years.

    Now the larger picture. First, we need an estimated cost of the 311,000 total traditional meters that Delmarva removed, since Delmarva is refusing to provide the actual number. So using the figure for the recent meters (despite that meters 22 years ago would not have cost as much), that would be $1.8 million for 11,300 meters, or $159.29 per meter.

    So 311,000 meters at $159.29 per meter would be $49.5 million total spent. Now, the average life is 22 years out of an expected 30, so that means they were 73.33% of the way through their life, with 26.67% remaining.

    So 26.67% of the total cost of $49.5 million would be… $13 million.

    That seems like a lot less than $25.5 million. And that is also presuming that they depreciated at a constant rate for those 22 years, when clearly that is not the case, since the meters put in for only 3 years lost 61.23% of their value.

    So how in the world did this $25.5 figure come about? Or maybe more to the point, how in the world did the so-called “Public Advocate” decide this was so-called “fair”?

    They are trying to recover $61.75 per meter for those 11,300 meters installed between 2008 and 2011, but for the total 311,000 meters, they are trying to recover $25.5 million, or $82 per meter, even those those meters have been in for 22 years on average?

    Am I missing something, or do none of these numbers add up?

    Representative Kowalko, to where do we address these letters?

  11. geezer says:

    Dogbert: Thanks for doing the math.

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