Progress Energy 2008 Annual Report Download - page 66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Pursuant to their rate-setting authority, the NCUC, SCPSC
and FPSC can also grant approval to accelerate or reduce
depreciation and amortization rates of utility assets (See
Note 7).
Amortization of nuclear fuel costs is computed primarily
on the units-of-production method. In the Utilities’ retail
jurisdictions, provisions for nuclear decommissioning
costs are approved by the NCUC, the SCPSC and the FPSC
and are based on site-specific estimates that include the
costs for removal of all radioactive and other structures
at the site. In the wholesale jurisdictions, the provisions
for nuclear decommissioning costs are approved by
the FERC.
The North Carolina Clean Smokestacks Act (Clean
Smokestacks Act) was enacted in 2002 and froze North
Carolina electric utility base rates for a five-year period,
which ended in December 2007. Subsequent to 2007,
PEC’s current North Carolina base rates are continuing
subject to traditional cost-based rate regulation. During
the rate freeze period, the legislation provided for the
amortization and recovery of 70 percent of the original
estimated compliance costs for the Clean Smokestacks
Act while providing significant flexibility in the amount of
annual amortization recorded from none up to $174 million
per year. In September 2008, the NCUC approved PEC’s
request to terminate any further accelerated amortization
of its Clean Smokestacks compliance costs (See Note 7B).
ASSET RETIREMENT OBLIGATIONS
We account for AROs, which represent legal obligations
associated with the retirement of certain tangible
long-lived assets, in accordance with SFAS No. 143.
The present values of retirement costs for which we
have a legal obligation are recorded as liabilities with
an equivalent amount added to the asset cost and
depreciated over the useful life of the associated asset.
The liability is then accreted over time by applying an
interest method of allocation to the liability. Accretion
expense is included in depreciation, amortization and
accretion in the Consolidated Statements of Income. The
adoption of SFAS No. 143 and FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations
– an Interpretation of FASB Statement No. 143” (FIN 47)
had no impact on the income of the Utilities as the effects
were offset by the establishment of regulatory assets and
regulatory liabilities pursuant to SFAS No. 71 (See Note
7A) and in accordance with orders issued by the NCUC,
the SCPSC and the FPSC.
CASH AND CASH EQUIVALENTS
We consider cash and cash equivalents to include
unrestricted cash on hand, cash in banks and temporary
investments purchased with an original maturity of three
months or less.
INVENTORY
We account for inventory, including emission allowances,
using the average cost method. We value inventory of
the Utilities at historical cost consistent with ratemaking
treatment. Materials and supplies are charged to inventory
when purchased and then expensed or capitalized to
plant, as appropriate, when installed. Materials reserves
are established for excess and obsolete inventory.
REGULATORY ASSETS AND LIABILITIES
The Utilities’ operations are subject to SFAS No. 71, which
allows a regulated company to record costs that have
been or are expected to be allowed in the ratemaking
process in a period different from the period in which the
costs would be charged to expense by a nonregulated
enterprise. Accordingly, the Utilities record assets and
liabilities that result from the regulated ratemaking process
that would not be recorded under GAAP for nonregulated
entities. These regulatory assets and liabilities represent
expenses deferred for future recovery from customers
or obligations to be refunded to customers and are
primarily classified in the Consolidated Balance Sheets
as regulatory assets and regulatory liabilities (See Note
7A). The regulatory assets and liabilities are amortized
consistent with the treatment of the related cost in the
ratemaking process.
NUCLEAR COST DEFERRALS
PEF accounts for costs incurred in connection with the
proposed nuclear expansion in Florida in accordance
with FPSC regulations, which establish an alternative
cost-recovery mechanism. PEF is allowed to accelerate
the recovery of prudently incurred siting, preconstruction
costs, AFUDC and incremental operation and maintenance
expenses resulting from the siting, licensing, design and
construction of a nuclear plant through PEF’s capacity
cost-recovery clause, which is similar to, and works in
conjunction with, energy payments recovered through
PEF’s fuel cost-recovery clause. Unrecovered nuclear
costs eligible for accelerated recovery are deferred
and recorded as regulatory assets in the Consolidated
Balance Sheets and are amortized in the period the costs
are collected from customers.