OG&E questions depreciation from recent rate case

Letter voices concerns to utility regulators

The chief accounting officer for Oklahoma Gas and Electric Co. has written a letter to the three-member Corporation Commission, explaining the utility’s problems with part of a recently concluded rate case.

The commission voted last month to grant an $8.8 million increase for OG&E in a longrunning rate case that was filed in December 2015. The utility originally asked for an increase of $92.5 million and put in interim rates of $69.5 million last summer.

Because the final amount is less than what OG&E put in for interim rates, customers are due refunds on their monthly bills. The utility and the commission’s public utility division are still working on the details of the refunds.

In the April 20 letter, OG&E’s chief accounting officer, Scott Forbes, said the commission may not have realized the effects of the depreciation rates in its final order. Allocating depreciation is a major part of rate cases because it affects the amount of the total rate base on which rates are calculated.

Forbes said depreciation rates on several transmission and distribution items, such as substations, poles and transformers, were unreasonably long and out of step with depreciation rates in other states.

“Not only do these longer lives increase costs to customers in the long run, but they also slow OG&E’s cost recovery for company investments,” Forbes said in the letter. “This decrease in the company’s cash flow makes it more difficult for the company to fund future investments.

“Also, longer depreciation lives increases the risks of assets failing (or becoming functionally obsolete) prior to being recovered, thus creating potential stranded costs with which both the company and the commission will have to

grapple down the road.”

In one example, Forbes said the commission’s adoption of a depreciation schedule for distribution line transformers meant OG&E will recover $2.6 million less each year out of total depreciation expenses of $314.6 million from the test year used in the case.

No appeal filed

Like all parties involved in utility cases, OG&E had an opportunity to file a formal appeal within 10 days of the commission’s final order in the case. The utility chose not to, opting instead to send the accounting letter a month later.

“The rate case process includes the opportunity to file a motion to reconsider after a final order is issued and present evidence as to why modifications should be made to the order,” said commission spokesman Matt Skinner. “The company apparently decided not to do that.”

In its March 20 final order, the commission said OG&E’s rationale for higher depreciation expenses lacked detail. It found depreciation rates proposed by witnesses for the public utility division, Oklahoma Industrial Energy Consumers and Oklahoma Energy Results more reasonable.

Brandy Wreath, director of the commission’s public utility division, said depreciation experts calculated rates for the major portions of OG&E’s assets and assigned average useful lives based on their ages and salvage values. The testimony didn’t focus on the useful lives of all pieces of equipment.

“Our experts have it (the letter) on hand and will work with the company on these issues in the next rate case,” Wreath said.

Letter reaction

OG&E spokesman Brian Alford said the utility had several requests from interested parties for an explanation of the final order’s depreciation rates.

“Given the length of time to resolve this case and the repeated attempts to explain this issue in our previous testimony and pleadings, we felt it best to informally provide the information through correspondence instead of continuing to persuade the commission in a motion of appeal,” Alford said.

Tom Schroedter, an attorney for the Oklahoma Industrial Energy Consumers, said his client was puzzled why the letter was sent to the commission after the conclusion of the rate case. He said four witnesses from various intervening parties testified that OG&E’s depreciation rates weren’t reasonable and should be rejected.

“Moreover, the Oklahoma Corporation Commission staff and the OIEC conducted extensive and thorough actuarial analyses and curve-fitting techniques, supplemented by nonstatistical information provided by OG&E, to determine reasonable depreciation rates, which were authorized after being thoroughly evaluated by the commissioners,” Schroedter said in a statement.

AARP Oklahoma said OG&E proposed “very aggressive modifications to their depreciation schedules that would have resulted in an inflated rate request.”

“This is another funding scheme they try to use to justify large rate hike requests and charge customers more,” Sean Voskuhl, AARP Oklahoma state director, said in an email. “OG&E is using scare tactics by not using apples-to-apples comparisons in an attempt to intimidate the OCC (Oklahoma Corporation Commission) in future cases.”

The accounting letter comes as OG&E plans to file another rate case by the end of the year to recover costs from modernization of its Mustang natural gas plant in western Oklahoma City. The utility also is expected to file another rate case by the end of 2018 to recover environmental expenditures, including coal scrubbers at its Sooner plant near Red Rock.