(Nov. 28, 2014) As anyone who’s seen “Superman III” can attest, a fraction of a cent can have a big impact.
Although it will only make a tenth-of-a-cent’s difference for the time being, the settlement of the state’s case with Sandpiper Energy this week could have a big impact on the utility’s future rates, as the company continues to convert northern Worcester from propane to natural gas.
Last week, Sandpiper filed an amendment to its System Improvement Rate (SIR) for gas service, as part of the settlement of its case with the Maryland Public Service Commission regarding the depreciation rate of recently-acquired assets.
“Essentially, it was an issue with regards to the deprecation assessment for the assets that we bought from Eastern Shore Gas,” said Jim Moore, vice president of Chesapeake Utilities.
Two years ago, Chesapeake announced that it would be buying out ESG, the area’s previous gas utility provider, to form a new service called Sandpiper Energy.
Since ESG only distributed energy bought from other providers, and did not produce any on its own, it was not subject to oversight by the MPSC. Sandpiper, however, must submit its service rates for public scrutiny.
An important part of determining what a justifiable rate would be, in the MPSC’s regulatory system, is how quickly the infrastructure of the utility itself wears out – known as the depreciation rate.
“One of the conditions of approval [by the MPSC] for the merger was that we file a depreciation study with regard to ESG’s assets, because ESG had not been regulated in that way for a long time,” said Bill O’Brien, Chesapeake’s director of Pricing and Regulatory Affairs.
However, the Office of the People’s Counsel, which represents the public interest in any case before the MPSC, did not see eye-to-eye with the company’s methodology.
Simply put, the rate of depreciation controls how quickly the investor – meaning the shareholders of Chesapeake utilities – is compensated for the infrastructure investment of the ESG buyout. Theoretically, by the time all the existing infrastructure has worn out, Chesapeake should have accumulated the entire value of the investment as a depreciation reserve.
Making the rate match reality, however, is easier said than done. The OPC found that the company’s rate was too high, and would allow the company to “double-recover the depreciation expense from customers.”
As a compromise, the settlement agreement with the PSC allowed half of Sandpiper’s proposed depreciation cost increase to be added into customers’ base service cost, which will go into effect during the next full base rate case.
Additionally, the new depreciation rates were also implemented for the SIR scheduled to take effect next week. The SIR for natural gas will go from $0.117 per cubic foot of natural gas to $0.116 and from $0.295 to $0.291 for propane.
“The rate went down ever so slightly, meaning the depreciation rates themselves went down a bit, meaning the service lives of the infrastructure are slightly longer than what we had on the books prior,” O’Brien said.
But the change in depreciation could have a bigger impact once the next full base rate case comes up.
“Sandpiper is currently under the initial order when the acquisition [of ESG] was first approved,” O’Brien said. “Under that order, we have to present a full rate case by Dec. 1, 2015.”
That case will look at all of Sandpiper’s costs, not just those associated with the SIR. That line item, O’Brien noted, includes only three elements of service related to infrastructure improvement: the “bare steel” cost of line-laying, the cost of converting the distribution system from propane to natural gas, and the cost of converting internal equipment to natural gas.
The SIR does not include the basic distribution rate, which compensates Sandpiper for ongoing operating costs.
“The SIR only captures those three components,” O’Brien said. “The base rate covers everything in our entire system. It may have a bigger impact when we file the base rate case.”