Regulatory Matters

12 Months Ended

Sep. 30, 2020

Regulated Operations [Abstract]

Regulatory Matters

REGULATORY MATTERS

The SCC exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions and rates to be charged to customers for natural gas service, safety standards, service extension, and depreciation.

On October 10, 2018, Roanoke Gas filed a general rate case application requesting an increase in annual customer non-gas base rates. This application incorporated into the non-gas rate the impact of tax reform, non-SAVE utility plant investment, increased operating costs, recovery of regulatory assets associated with eligible safety activity costs and SAVE Plan investments and related costs previously recovered through the SAVE Rider. The new non-gas rates were placed in effect on an interim basis for service rendered on or after January 1, 2019, subject to refund pending audit and final order by the SCC.

On January 24, 2020, the SCC issued its final order on the general rate application. Under the provisions of this order, Roanoke Gas was granted an annualized non-gas rate increase of $7.25 million and provided for a 9.44% return on equity. In addition, the final order directed the Company to write-down a portion of the ESAC assets deemed not eligible for recovery. As a result, ESAC regulatory assets were written down approximately $317,000 in the first

quarter of fiscal 2020. In March 2020, the Company completed the refund of $3.8 million for revenues collected from the interim rates in excess of the final approved rates, including interest.

The final order did not provide for a return on Roanoke Gas infrastructure investments associated with two gate stations that will interconnect with the MVP; however, the order did provide for the ability to defer financing costs related to these investments for consideration of future recovery. The Company is deferring these costs through the application of AFUDC, which capitalizes both the equity and debt financing costs during the construction phases. Roanoke Gas applied AFUDC treatment retroactively to January 1, 2019, the date new non-gas rates became effective. The January 1, 2019 date was affirmed by the Commission in its October 1, 2020 order in the Company’s 2019 annual informational filing docket. Amounts capitalized are disclosed in the Utility Plant and Depreciation section of Note 1.

In 2020, Roanoke Gas accelerated amortization of the $525,000 remaining balance of its ESAC assets. This acceleration was the result of the Company's earnings test for fiscal 2020. The SCC requires regulated utilities with certain regulatory assets to perform and submit an annual earnings test. The Company's earnings test is required for its fiscal year ended September 30, 2020 and must be filed with the SCC in January 2021. Specific to ESAC assets, if the results indicate that earnings exceed the mid-point of its authorized return on equity range, the Company must write-down certain regulatory assets to the point where the actual return for the period falls to the mid-point. As Roanoke Gas' fiscal 2020 unadjusted earnings exceeded the mid-point, the Company accelerated amortization of the related ESAC assets.

On March 16, 2020, in response to the COVID-19 pandemic, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service for non-payment by any customer until May 15, 2020, which was subsequently extended to October 5, 2020. These moratorium orders prohibited utilities from disconnecting any customer for non-payment of natural gas service and also prohibited utilities from assessing late payment fees. As a result, the amount of current receivables and future billings that may ultimately become uncollectible will likely increase. In October 2020, during the special session of the Virginia General Assembly, HB5005 was enacted and extended the moratorium until the Governor determines that the economic and public health conditions have improved such that the prohibition does not need to be in place, or until at least 60 days after such declared state of emergency ends, whichever is sooner. Therefore, the Company has increased its provision for uncollectible accounts, based on information currently available and the expected continued aging of its accounts receivable at September 30, 2020. These estimates are subject to revision as the financial impact of COVID-19 continues to ripple through the economy.

As referenced in Note 8, the TCJA reduced the federal corporate tax rate to 21%. The Company revalued its deferred tax assets and liabilities to reflect the new federal tax rate. Under the provisions of ASC 740, the corresponding adjustment to deferred income taxes generally flows directly to income tax expense. For rate regulated entities such as Roanoke Gas, these excess deferred taxes were originally recovered from its customers based on billing rates derived using a federal income tax rate of 34%. Therefore, the adjustment to the net deferred tax liabilities of Roanoke Gas, to the extent such net deferred tax liabilities are attributable to rate base or cost of service, are refundable to customers. Roanoke Gas began accounting for the refund of these excess deferred taxes in fiscal 2018 along with reflecting a corresponding reduction in income tax expense. As of September 30, 2020, Roanoke Gas had approximately $11,000,000 remaining in the net regulatory liability related to these excess deferred income taxes, the majority of which will be refunded over a 28 year period per IRS normalization requirements.

The Company transitioned to a corporate federal income tax rate of 21% and a combined 25.74% state and federal tax rate in fiscal 2019. In January 2018, the SCC issued a directive requiring the accrual of a regulatory liability for excess revenues collected from customers attributable to the higher federal income tax rate, included as a component of customer billing rates, until such time as the SCC approved revised billing rates incorporating the lower tax rate. The Company refunded the excess revenues associated with the change in the tax rate over a 12-month period ended December 2019.

In June 2019, the Company submitted its updated depreciation study with the SCC staff. The depreciation study, which is based on average remaining service life, resulted in an overall composite weighted-average depreciation rate of 3.31% for fiscal 2019. In September 2019, the SCC staff approved the depreciation study filing and instructed the Company to implement the new rates retroactive to October 1, 2018. As a result, the Company recorded a $32,570 reduction in annual depreciation expense for the fiscal year ended September 30, 2019. See Note 1 for more information.

In May 2020, the Company filed with the SCC its most recent SAVE Plan and Rider update. The SAVE Plan provides a mechanism for the Company to recover the related depreciation and expenses and return on rate base of its infrastructure replacement program. In addition to the continued renewal of first generation plastic mains and related services, coated steel tubing services and specifically identified gate stations, the application proposes that the SAVE Plan be amended to include the renewal or removal of certain regulator stations and the renewal of pre-1971 coated steel mains and coated steel services. In September 2020, the SCC issued a final order on the SAVE Plan authorizing a SAVE Rider that provides up to $2.3 million in revenue in fiscal 2021 for SAVE Plan investment since January 1, 2019 and proposed fiscal 2021 SAVE investment. The SCC also approved the true-up factor to provide for the refund of approximately $73,000 in over-collected balance from the 2019 SAVE Plan.