Current through Register Vol. 35, No. 18, September 24, 2024
A. General:
(1) Utilities may use any reasonable
acceptable method for estimating service lives which includes the analysis of
plant mortality by group accounts. It is recognized that over the years many
such methods have been developed and used successfully. However, it is
suggested that utilities restrict themselves to the use of the recognized
methods outlined in the following section. The purpose of such voluntary
restriction is to minimize the number of methods to be reviewed and to promote
economy among the utilities and the regulatory agency in the review of
procedures.
(2) Determination of
average service lives involves the basic study of historical patterns by use of
actuarial and/or simulated plant record methods for group accounts together
with engineering estimates of the future effect of physical factors of wear and
tear, decay, depletion of supply, action of the elements, and functional
factors of inadequacy, obsolescence, and public requirement. In those cases
where factors such as anticipated changes to plant, additions of new or
improved kinds of plant, previously unanticipated requirements, specific
changes in plans of management, or other developments occur, they are to be
given consideration in adjusting the average future service life of utility
plant in service. The weight to be given past experience shall depend upon the
extent to which conditions affecting service life in the future are expected to
be similar to or different from those for the historical study
period.
B. Actuarial
Methods:
(1) Actuarial methods are generally
similar to those developed by life insurance companies for the study of human
mortality. The end result of the modification and application of these methods
to utility plant is to determine estimates of average service life based upon
the analysis of past plant retirements. These methods require that plant
records be kept in sufficient detail so that the age of plant installed in any
one year can be determined at all times.
(2) Utilities are urged to confine their use
of actuarial methods to those which are discussed favorably in Public Utility
Depreciation Practices, published December 1968 by the National Association of
Regulatory Utility Commissioners, and any subsequent revisions. These methods
include the "Gompertz-Makeham" as well as the survivor curves developed by the
Engineering Research Institute of Iowa State University. These curves are
frequently referred to as "Iowa Curves."
(3) Included in Appendix A to NMPSC Rule 340
[17.3.340 NMAC] is a chart entitled "Elements of a Survivor Curve," which
contains the various elements related to service life of utility plant in
service. The "Frequency Curve" at the bottom of the chart indicates the
frequency of retirements related to annual additions. It is the curve which is
used in the "Brennan Method" described in the text that follows.
(4) The second curve is the "Survivor Curve"
which indicates the percent of the original plant surviving at any age
throughout the life of the group account. It is usually smoothed and extended
by mathematical means from a stub-survivor curve developed from actual observed
experience.
(5) As early
retirements take place the overall service life of the survivors becomes longer
than the total of the group at the time of first installation. Therefore the
third curve illustrated on the chart is the "Probable Life Curve" which always
lies to the right of the "Survivor Curve."
(6) The "Average Service Life" is indicated
by the vertical line which starts at the top of the "Probable Life Curve"
intersecting the "Survivor Curve" at a point where the "age" of plant in
service equals the average service life of the plant.
C. Simulated Methods:
(1) Where utilities lack sufficient records
to develop actuarial data, the use of simulated methods such as those developed
by Mr. Alex E. Bauhan or by Mr. Joseph F. Brennan are recommended.
(2) The Simulated Plant-Record Method
developed by Mr. Bauhan analyzes an account to determine average service life
and dispersion by using annual gross additions and yearly plant balances.
Through a process of iteration utilizing survivor tables, such as those
developed by the Engineering Research Institute of Iowa State University, an
attempt is made to duplicate the year-by-year plant balances in the account by
a series of simulated balances arrived at by the assumption that each year's
actual additions were subsequently retired in accordance with the pattern
demonstrated by a particular Iowa Curve being used in the analysis. The use of
electronic computing equipment expedites this procedure.
(3) The method developed by Mr. Joseph F.
Brennan which was initially described in February 1957 in an article entitled
"Plant Mortality" in Electrical Engineering avoids iterations and gives
satisfactory results. The calculations required are laborious if performed by
hand; however, the method lends itself to electronic computer operation. It
involves the parabolic relationships of retirements and relates them to annual
additions.
(4) For either of the
actuarial or simulated methods it is important that the plant balances, annual
additions, and recorded retirements accurately reflect the situation for the
year in which the accounting data was prepared. Consequently any accounting
adjustments or erroneous entries should all be corrected in the appropriate
year before the methods are employed.
D. Life Span Method: In classes of property
consisting of large units which are expected to be retired at one time as a
single unit, a method employing direct estimates adjusted for interim
retirements of portions of the large units is useful. This method is referred
to herein as the "Life Span Method". A form entitled "Life Span Calculation" is
attached as Appendix D. The method assumes that interim retirements will take
place at a relatively constant rate throughout the life of the major unit. The
tendency of these interim retirements of small subunits of the major unit is to
produce a shortening of the overall life of the major unit for depreciation
purposes.
E. Salvage Estimate: A
form has been included in Appendix G to aid in the preparation of estimated net
salvage. This form takes advantage of historical experience and provides for
the analysis by account of the dollars of plant retired in a series of years,
the amount of gross salvage received, the cost of removal of the plant, and the
resulting net salvage. Because salvage is a condition to be realized in the
future, the bottom of the form provides for preparing estimates of future net
salvage. It initially uses historical data together with an estimate of gross
salvage or scrap value of the surviving plant. By use of these data together
with consideration of cost of removal an estimate of future net salvage is
determined. With the ever increasing cost of labor and subsequent increase in
cost of removal it is recognized that negative salvage may be a factor to
consider in estimating the net salvage of any account.
F. Alternative Methods: In each instance
where a method other than that covered by the foregoing discussion is to be
advanced by a utility, the utility shall first present its proposal together
with a justification for its use to the Commission for review. In submitting
its request for authorization to use alternative methods the utility shall
include specific reasons why it is unable to employ any of the methods
previously discussed in NMPSC Rule 340 [17.3.340 NMAC] and the reason why the
utility believes the proposed alternative method is superior for the specific
application.
