The Barbados Light & Power Company Ltd Application for a Review of Depreciation Rates and Approval of the Depreciation Policy

• Jurisdiction: Barbados
• Judgment Date: 25 March 2022
• Docket Number: Document No.: FTCUR/DEC/BLPCDP/2022-01
• Court: Fair Trading Commission (Barbados)

The Barbados Light & Power Company Limited Application for a Review of Depreciation Rates and Approval of the Depreciation Policy

Document No.: FTCUR/DEC/BLPCDP/2022-01

FAIR TRADING COMMISSION

DECISION

Table of Contents

SECTION 1 — SUMMARY	4
SECTION 2 – BACKGROUND	6
THE APPLICATION	6
LEGISLATIVE FRAMEWORK	10
BURDEN & STANDARD OF PROOF	11
REVIEW PROCESS	13
SECTION 3 – DEPRECIATION	14
SECTION 4 – ANALYSIS OF EVIDENCE	19
Transmission & Distribution Plant & General Plant	22
Generation Plant	30
ADDITIONAL ISSUE RAISED BY INTERVENORS DURING THE DEPRECIATION HEARING	37
SECTION 4 – DETERMINATION	41

SECTION 1 — SUMMARY

1 On April 30, 2019, the Barbados Light & Power Company Limited (the “BLPC” or the “Applicant”) submitted to the Fair Trading Commission (the “Commission”) an Application for the Review of the BLPC's Depreciation Rates, and the approval of a Depreciation Policy, pursuant to Section 16 of the Utilities Regulation Act Cap 282 of the Laws of Barbados (the “URA”) (the “Application”).

2 On September 26, 2019, the BLPC also submitted an Addendum to the Application which reflected the policy position of the Government of Barbados (“GoB”) as it relates to renewable energy in Barbados, as set out in the Barbados National Energy Policy 2019 – 2030 (the “BNEP”) (the “Addendum”).

3 On June 9, 2020, the BLPC submitted Supplemental Information, to that filed during 2019, specifically, the additional Affidavits of Mr. Ricaido Jennings and Mr. Peter Huck together with updated Depreciation Schedules and 2030 Scenario with 2019 financial data.

4 In making its determination, the Commission considered all evidence submitted by the BLPC, which included sworn affidavits from BLPC's company personnel and an affidavit from its consultant, along with evidence entered by the BLPC in the form of responses to the respective interrogatories from the Commission and approved Intervenors.

5 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 (the “2017 Depreciation Study”) 1.

6 The Commission has determined that the use of the remaining life technique results in depreciation rates that are appropriate, thus leading to fair and reasonable annual depreciation expenses. Additionally, the use of the remaining life method in the 2017 Depreciation Study would calculate depreciation rates that lead to the Applicant's timely recovery of capital costs over the useful economic life of its assets.

7 Pursuant to Section 19(1) of the URA, and based on its analysis, the Commission approves the following components of the Application for the Depreciation Policy of the BLPC:

Table 1 Depreciation Rates by Plant Type

• — The use of the straight-line remaining life method as employed by the Applicant in determining the asset lives.

• — 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.

• — 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 as follows in Table 1.

• — The Commission does not approve the depreciation rates for generation plant as set out in the Application.

Plant Type	2019 Update Depreciation Rates
T&D	3.10%
General	4.09%

8 The depreciation rates approved herein will become effective concurrent with the rates to be approved on the effective date ordered in the ongoing Rate Review 2.

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

SECTION 2 – BACKGROUND

THE APPLICATION

10 Pursuant to Section 16 of the URA, the BLPC filed the Application with the Commission requesting a Review of its Depreciation Rates which were approved by the Commission in 2009 3. The BLPC specifically sought a review to allow for the approval of a Depreciation Policy that results in a convergence of rates used for regulatory purposes and setting electricity prices and that used for financial reporting purposes”. In the Application, the Applicant requested that:

• a) With effect from January 1, 2019 the Commission approves and adopts the remaining lives and the depreciation rates set out in the Depreciation Study and the unrecovered amounts as reported in the audited financial statements as at December 31, 2018 for regulatory purposes. These are the rates which the Applicant uses for financial reporting and which themselves have been based on depreciation studies;

• b) It be allowed to continue to calculate its depreciation rates using the remaining life method; and

• c) There be an early hearing of this Application.

11 The Application was accompanied by the affidavits of the BLPC's representatives, namely, Mr. Ricaido Jennings – Director, Finance, Mr. Johann Greaves – Director, Operations, Mr. Rohan Seale – Director, Asset Management and Mr. Tyrone Alexander – Corporate Controller and the affidavit of Mr. Peter Huck, a consultant engaged by the Duff & Phelps, LLC, the Applicant's external consultants.

12 The Applicant also submitted the following information to reflect its financial data from the year 2019:

• a. the annual depreciation and rates of the BLPC's depreciable electric property as of December 31, 2019 (the “2019 Update”); and

• b. a scenario of capital recovery of all fossil-fueled generation by 2030 (2030 Scenario) (the “2030 Scenario”). 4

13 Subsequent to the delivery of the Application, the BLPC also submitted the Addendum which reflected the GoB's policy position in connection with renewable energy in Barbados, and more specifically, retirement strategies for generation plants owned by the Applicant. This new policy position required the Applicant to make adjustments to its generation plant. In light of this, the Addendum provided updated depreciation rates for the generation plant which had expected useful lives that exceeded the retirement strategy.

14 As it relates to specific retirement strategies, the Applicant noted that, based on its discussions with the Ministry of Energy, Small Business and Entrepreneurship (MESBE) during its license negotiations, it was confirmed that all existing fossil fuel generation facilities would be retired by December 31, 2030, with the exception of LSD-B 5 which would have a retirement date of 2032 6. Based on the BLPC's calculation, this retirement of the LSD-B station in 2032 will result in an additional impact on revenue requirements of approximately BDS$2.1 million annually.

15 The Applicant, however, did not update the 2017 Depreciation Study nor the Application to reflect the aforementioned 2030 and 2032 retirement dates. Accordingly, the Commission ruled on the Application based on evidence on the record supporting the retirement dates determined in the 2017 Depreciation Study and in the 2019 Update. ⁷

16 At the time of the submission of the Application, the BLPC's depreciation rates were those resulting from a Depreciation Hearing held by the Commission in 2009 8, and thereafter approved in an Order issued by the Commission, namely, documents No. 1 of 2009, dated February 25, 2009 (the “2009 Order” and the “2009 Decision”). Subsequent to the 2009 Order, the Commission approved an Application submitted by the BLPC for a Review of its Electricity Rates in a 2009/2010 Rate Review Hearing, namely, document No. 002/09, dated January 25, 2010, incorporating the depreciation rates outlined in the 2009 Order (the “2010 Decision and Order”). In the 2009 Decision, the Commission stated that:

“the remaining life techniques yields depreciation rates 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…provided depreciation rates that will lead to the Applicant's timely recovery of capital cost of investment in assets over their useful life”. 9

17 In the Decision dated May 12, 1983, the Public Utilities Board (PUB) in Schedule 3 set out the original rates used and the computation of the depreciation expense for regulatory purposes in respect of the property, plant and equipment of this Applicant.

18 In both proceedings, the method employed by the Applicant was the straight-line method for calculating annual depreciation, as applied to the historical cost of the assets, and the average service life technique was used. It was determined at those proceedings that this method provided results which achieved the objectives of the depreciation study.

19 Having reviewed and analysed the Application, the evidence submitted by the Applicant, the positions put forward by the Intervenors and the applicable methodologies related to depreciation, the Commission maintains that

depreciation should recover the capital cost of investment in assets over their useful life

20 The Commission is of the view that the financial information submitted by the Applicant to substantiate the Application and which was relied upon to prepare the 2017 Depreciation Study is...