The Barbados Light & Power Company Ltd

• Jurisdiction: Barbados
• Judge: Sir Neville Nicholls,Mr. Floyd Phillips,Mr. Michael Thompson,Mr. Delisle Weekes,Mr. Andrew Brathwaite
• Judgment Date: 25 February 2009
• Docket Number: No. 1 of 2009
• Court: Fair Trading Commission (Barbados)

In the Matter of the Utilities Regulation Act, Cap 282 of the Laws of Barbados;

In the Matter of the Utilities Regulation (Procedural) Rules, 2003;

And in the Matter of the Application by the Barbados Light & Power Company Limited for approval of the Depreciation Policy;

The Barbados Light & Power Company Limited

Applicant

Before:

Sir Neville Nicholls Chairman

Mr. Floyd Phillips Commissioner

Mr. Michael Thompson Commissioner

Mr. Delisle Weekes Commissioner

Mr. Andrew Brathwaite Commissioner

No. 1 of 2009

FAIR TRADING COMMISSION

INTERVENORS

Barbados Association of Non-Governmental Organisations

Olson Robertson

DECISION

PART ONE – EXECUTIVE SUMMARY

The Barbados Light & Power Company Limited “the Applicant” in its application dated November 10, 2008 and which was modified by letter dated January 20, 2009 set out an application seeking approval of its Depreciation Policy. The specific nature of the Order applied for by the Applicant read:

• “ (a) the Applicant seeks regulatory approval of the capital balances, remaining lives and depreciation rates as shown in Exhibit A of the Depreciation Study prepared by Mr. Peter Huck of American Appraisal Associates Inc. so that the depreciation policies and rates used by the Applicant for regulatory accounting purposes are the same as those rates used for financial accounting purposes.

• (b) Accordingly, the Applicant hereby requests that the Fair Trading Commission approve the capital balances, remaining lives and depreciation rates in columns ‘A’, ‘B’ and ‘C’ as noted in the accompanying spreadsheet prepared by the Applicant based on pages 1 and 2 of Exhibit A of the Depreciation Study.” This is attached as Schedule 1 of this Decision.

The Application was accompanied by the Affidavits of Mr. Hutson Best, Mr. Mark King and Mr. Peter Huck and the Depreciation Rate Study dated December 2006 prepared by Mr. Peter Huck of American Appraisal Associates Inc. hereinafter referred to as the “2006 Depreciation Study”.

The evidence consisted of sworn Affidavits which were cross-examined along with additional evidence entered by way of information filings in response to information requests. The Commission determined this decision based on the evidence presented and on a deliberation of the issues agreed to prior to the hearing which included, among other things, consideration of the elements of computing depreciation, examination of the techniques and methodologies used in the 2006 Depreciation Study and examination of factors affecting the stability of the depreciation rates.

In considering the evidence and analysing the case the Commission agrees with the principle that depreciation should recover the capital cost of investment in assets over their useful life. During the course of its deliberation the Commission recognised that in the schedule of the Applicant's application dated December 31, 2008 which detailed the computation of the depreciation expense for 2007 based on rates approved by the Public Utilities Board (PUB), the calculation did not include the estimated costs of retirement/salvage. It may be argued that the depreciation expense as computed in this schedule is therefore understated when compared with the Applicant's other schedule that was based on the proposed depreciation rates.

The Commission believes that the remaining life technique yields depreciation rates that are appropriate and would ensure that the depreciation expense computed for the test year is fair and reasonable. The Commission has therefore determined that the use of the remaining life method in the 2006 Depreciation Study provided deprecation rates that will lead to the Applicant's timely recovery of capital cost over the useful economic life of its assets.

The Commission is of the view that the financial information submitted by the Applicant to substantiate this Application and which was relied upon to prepare the 2006 Depreciation Study appears reliable. It, for the most part provided a sufficient degree of information on the depreciation of the Applicant's assets. The Commission believes that the way the 2006 Depreciation Study is presented is reasonable and comparable to other depreciation studies done by Canadian International Power Services Inc. “CIP” in September 1989, Stone and Webster Consultants Inc. in November 1996 and E. Wotring Associates Inc. in December 2002.

The Commission therefore approves the Application for approval of the Depreciation Policy of the Barbados Light & Power Company Limited pursuant to Section 16 of the Utilities Regulation Act, CAP 282 of the Laws of Barbados.

The Policy using the straight-line method, remaining life technique and historic cost valuation is approved. Further, the capital balances, remaining lives and depreciation rates arising from the policy and set out at Schedule 1 of this Decision are also approved.

The approval of the depreciation rates proposed by the Applicant does not remove the authority from the Commission to set rates.

At all times the Applicant is required to apply to the Commission if it requires a change in the depreciation rates for regulatory reporting purposes. While the Applicant may at a later date choose to use different depreciation rates for its financial reporting, the depreciation rates to be used for regulatory reporting will be as determined in this Decision unless there is Commission approval of the change.

The Applicant shall submit to the Commission regulatory reports on an annual basis to show the regulatory financial results reflecting the depreciation rates that have been determined in this Decision. The content and format of these reports will be discussed and finalised with the Applicant.

The Commission in making its decision considers that the Intervenors' contribution has assisted the Commission.

Further details of the Commission's reasoning may be found in the body of this Decision.

PART TWO – BACKGROUND

THE APPLICATION

1 The Applicant made its application to the Fair Trading Commission “the Commission” by letter dated November 10, 2008 under Section 16 of the Utilities Regulation Act, CAP 282 of the Laws of Barbados seeking approval of a depreciation policy that results in a convergence of the depreciation policy used for regulatory purposes and setting electricity prices and that used for financial reporting purposes.

2 By said letter, the specific nature of the Order applied for by the Applicant is as follows:-

• “ (a) The Applicant seeks regulatory approval of the capital balances, remaining lives and depreciation rates as shown in Exhibit A of the 2006 Depreciation Study. If the depreciation rates are approved as requested, the depreciation policy used for regulatory purposes and that used for financial reporting purposes will be the same;

• (b) Accordingly, the Applicant hereby requests that the Fair Trading Commission adopt the depreciation rates which the Applicant uses for financial reporting purposes and which themselves have been based on depreciation studies prepared by independent consultants retained by the Applicant and that the Applicant be allowed to continue to calculate its depreciation rates using the remaining life method.”

3 On a clarification sought by the Commission during the Issues Conference on January 16, 2009, the nature of the Order applied for by the Applicant was modified by letter dated January 20, 2009 to read:

• “ (a) the Applicant seeks regulatory approval of the capital balances, remaining lives and depreciation rates as shown in Exhibit A of the Depreciation Study prepared by Mr. Peter Huck of American Appraisal Associates Inc. so that the depreciation policies and rates used by the Applicant for regulatory accounting purposes are the same as those rates used for financial accounting purposes;

• (b) accordingly, the Applicant hereby requests that the Fair Trading Commission approve the capital balances, remaining lives and depreciation rates in columns ‘A’, ‘B’ and ‘C’ as noted in the accompanying spreadsheet prepared by the Applicant based on pages 1 and 2 of Exhibit A of the Depreciation Study.” This is attached as Schedule 1 of this Decision.

4 The Application was also accompanied by the Affidavits of Mr. Hutson Best, Mr. Mark King and Mr. Peter Huck as well as the 2006 Depreciation Study.

THE NATURE OF DEPRECIATION

5 When setting depreciation rates a regulator must always be conscious of the interest of both the service provider and the consumer thus ensuring that the service provider is afforded an adequate return on investment to sustain its business and that the consumer receives service at a reasonable rate. In the landmark case of Lindheimer v. Illinois Bell Telephone Company 292 U.S. 151 (1934) depreciation is defined as:

“…the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property. These factors embrace wear and tear, decay, inadequacy and obsolescence. Annual depreciation is loss which takes place in a year.”

6 The Commission recognises that the determination of depreciation rates is a critical process. This is underscored by the National Association of Regulatory Utility Commissioners “NARUC” in its text “ Public Utility Depreciation Practices” August 1996 at page 22:

“Prescribing depreciation rates is one of the most important regulatory Commission activities impacting customer rates. The estimation of depreciation parameters is not, of course, a scientifically exact process, since it involves a large element of informed judgment. At the same time it cannot be an arbitrary figure selected for convenience because it must allocate the full cost over the life of the property in a rational manner. The depreciation rate is a calculated figure and there is a zone of reasonableness within which the underlying parameters may be expected to lie.

It is essential to remember...