Paradox of Thrift
In his article “Paradox of Thrift,” (July 2009), author James M. Seibert looks to be calculating his average service lives as the reciprocal of depreciation rates, whereas utility depreciation rates reflect both life and net salvage. For electric utilities, the cost of removal for most types of transmission and distribution property exceeds the salvage, resulting in the net salvage component having the effect of increasing the rate. Therefore, the reciprocal of an electric transmission or distribution depreciation rate is likely to indicate a life less than the inherent average service life. How much less will be influenced by the extent to which regulatory bodies allow net salvage to be reflected in depreciation rates, and there is considerable variation in this from state to state.