Capital Recovery

Depreciation, or capital recovery, is an area of vital importance as companies position themselves to face new service demands, and a competitive environment. Present switch platforms may need upgrades to meet new service demands, and current transmission equipment facilities may be obsolete or inadequate to provide the flexible, increased volumes expected in the future. Similarly, metallic cable is subject to increased obsolescence from both fiber and potential wireless competitors.

The need to review present service capabilities, and determine market requirements is part of the challenge facing those companies expecting to remain in the forefront of communications service provision. Associated with this is the need to plan for facility upgrades, including potential wireless services, and to time capital recovery of present facilities to be consistent with those plans.

Service lives continue to decline, and need to be reflected in the depreciation rates used to recover the cost of those facilities. Capital costs not provided for by past rates often result in significant reserve deficiencies. These deficiencies can be recovered over the expected remaining lives of these assets, or by means of a separate special amortization. The approach used depends on the level of the deficit, the individual company's ability and willingness to incur the associated increases in expense, and the fact that FCC approval is needed to include amortization in an interstate cost study. Also playing a role is the extent to which regulators are willing to recognize the decline in service life expectations.

The window during which reserve deficiencies can be recovered from present subscribers may well close in a competitive environment. New entrants will not be burdened by unrecovered capital costs of older technologies, and could well offer similar services at lower costs. For this reason, it is imperative that depreciation reserve levels remain consistent with plans. When lives are too long, capital costs are not distributed fairly to the service user. Similarly, if the lives underlying the depreciation rates are too short, the increased costs could price services beyond that of the competition.

We encourage companies to approach their regulators and/or legislators, and have frank discussions with regard to the need to speed and simplify the process of recognizing shorter service lives, where there is not now in place, a procedure for doing so. Where there is a simplified procedure in place companies need to remain vigilant that the depreciation rates they use match their plans.

If you are concerned about the adequacy of your company's depreciation reserves, JSI can review and discuss your capital recovery needs with you.