I don’t usually read reference books, or textbooks, all the way through
like I did with Public Utility
Depreciation Practices. Because of my new job as a “depreciation engineer,”
I undertook reading this guide from the National
Association of Regulatory Utility Commissioners (NARUC).
The title describes the content of the book. It includes some historical
and legal
background, but the bulk of the book is aimed at the practicalities of
determining depreciation expenses.
The main elements going into depreciation rate determination are
depreciation base, service life, net salvage, and depreciation computation
methods. Depreciation base is the starting point; it represents the initial
investment of capital that is to be recovered as a cost through depreciation.
Generally it is the book cost (original cost of the infrastructure including
materials, equipment, labor and related costs).
Most methods of computing depreciation are referred to as age-life
methods. These methods spread the cost of the expected life of a piece of
infrastructure. The preferred method is straight line depreciation. To apply
these methods, one will need to know or estimate the life of the infrastructure
under consideration and the net salvage value. The depreciation rate is the
difference between the base and the net salvage, divided by the life of the
infrastructure. With the exception of unique pieces, like types of
infrastructure are lumped together because they are expected to have a similar
life (wooden poles, steel poles, copper wire, conduit, etc.).
Life expectancy can be estimated by several methods. Survivor curves
are developed from statistical studies of the life of particular types of
infrastructure, though other methods may be used depending on the type and
quality of data available.
Net salvage is estimated based on experience. The gross salvage is the
price received for the equipment or materials retired. The cost of removal is
subtracted from this to calculate the net salvage. Sometimes it can cost more
to remove infrastructure than the value of the retired equipment and materials,
so net salvage can be negative.
Calculating depreciation is more art than science. Projections of
future values are inherently tricky. Growth can cause infrastructure to become
inadequate before it is expected, or slower than expected growth can extend the
life infrastructure. New regulations can make infrastructure obsolete in an
instant, as can new technologies. In addition, utilities are constantly adding
and retiring infrastructure. Amidst this uncertainty, regulators must balance
the level of service needed by utility customers with the returns needed by
utility investors in a complex environment.
Admittedly, a book from 1968 may seem dated. However, many of the
practices described are still in use. Government regulation of monopoly utility
rates in the United States has been occurring for more than a century, and the
practices to not change rapidly. Even so, some of the practices described were
considered obsolete, or near obsolescence, at the time of publication, and are
not likely to be encountered now unless you’re a financial historian combing
through moldy account books.
National Association of Regulatory Utility Commissioners. Public Utility Depreciation Practices. 1968. Washington,
DC: Author, 1974.
