2000225_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
MYRNA WALTERS
RON LAW
TONYA CLARK
DON HOWELL
STEPHANIE MILLER
DAVE SCHUNKE
SYD LANSING
WORKING FILE

FROM:

DATE: February 25, 2000

RE: CASE NO. INT-G-99-2 (Intermountain Gas)
COMPOSITE DEPRECIATION RATE—TRI-ANNUAL REVIEW

Intermountain Gas Company (IGC; Company) filed an Application with the Idaho Public Utilities Commission (Commission) on December 23, 1999, requesting authority to increase its composite depreciation rate from 3.98% to 4.18%. The Company also proposes to convert the recovery of a number of its general plant accounts to amortization as opposed to the current depreciation rate procedures utilizing a service life and net salvage factor.
The Company’s presently authorized composite depreciation rate of 3.98% was approved by the Commission in Case No. INT-G-96-7, Order No. 26813 dated February 24, 1997. In its Order the Commission stated:
As before, our level of comfort with the reasonableness of such depreciation rates is enhanced by periodic review, which the Company previously stated is required for its depreciation study methodology. Therefore, we find it reasonable that the Company continue to examine its depreciation rates and practices on three year intervals.…We also find it important to monitor and revisit this matter in three years.

Based on an updated depreciation study by AUS Consultants, the Company concludes that the current rate is under-depreciating its assets. The effect of the requested higher rate would be to increase IGC’s depreciation accrual and decrease IGC’s rate base by $334,522 annually. As proposed, the total annual depreciation accrual would increase to $10,286,070. Although the Company’s depreciation expense would increase under its proposal, the present Application does not request a related increase in rates. The Company has requested that the increase to the annual composite depreciation rate be made effective at the beginning of its fiscal year, October 1, 1999.
A four page summary of the depreciation study was included with the Company’s Application. The complete depreciation study with workpapers, which the Company states are voluminous, are available for inspection at IGC’s general business office, which is located at 555 South Cole Road, Boise, Idaho (208-377-6097).
With this depreciation study, Intermountain Gas is proposing to convert the recovery of a number of its general plant accounts to amortization as opposed to the current depreciation rate procedures utilizing a service life and net salvage factor. In 1997 the Company states the Commission approved Idaho Power Company’s request for such an amortization in Order No. 26937 in Case No. IPC-E-97-4. In this case, the Company proposes to establish similar amortization for the following six Intermountain Gas accounts:
Account Numbers Account Name 391
393
394
395
397
398 Furniture and office equipment
Stores equipment
Tool, shop, and garage equipment
Laboratory equipment
Communications equipment
Miscellaneous equipment
These six accounts, the Company states, consist of numerous assets of relative low dollar value which are time consuming to track. Many of these assets are used throughout Intermountain Gas’s operation making the record keeping even more difficult. The Company contends that amortization of these assets will reduce the accounting and record keeping burden for the Company.
Commission Notices of Application and Modified Procedure in Case No. INTG992 issued on January 12, 2000. A February 15 deadline was established for filing written comments. The Commission Staff (Staff) was the only party to file comments (attached). A letter reply to Staff comments was filed by the Company on February 23rd (attached).
Staff proposes two adjustments to the changes in depreciation rates requested by the Company reducing the total requested increase in depreciation expense from $335,000 to $249,000.
1. Amortization—Six Accounts
The Company in this case proposes to change the depreciation methodology for six identified accounts from a depreciation method to an amortization method. In so doing, the Company requests two changes:
1. Change the life of the assets with each account being assigned its own amortization life—reduces the amount of expense by approximately $70,000, and
2. Amortize a calculated Theoretical Reserve over a six-year period—increases the amount of expense by approximately $148,000.
Staff agrees with the Company’s proposal to change the life of the assets and to change from a depreciation methodology to an amortization methodology.
Staff disagrees with the Company’s proposal to amortize the “Theoretical Reserve” over a shorter time period than the asset will be amortized. Staff recommends amortization of the Theoretical Reserve at the same rate as the asset, creating an expense of approximately $108,000 instead of the $148,000 requested by the Company—an expense reduction of $40,000.
2. LNG Plant
The Company LNG plant near Nampa, Idaho is approximately 24 years old. The Company has been depreciating the plant on a 30-year life. The concept that the plant must be removed when it is no longer used and useful, Staff contends, creates an additional requirement for capital recovery in excess of the original cost. The AUS Consultants recommend that 15% of the original cost be collected to recover removal costs. As of September 30, 1998, the Company had recovered almost 105% of the original costs. Therefore, there is an additional 10% of the original cost including estimated removal costs ($700,000) still to be recovered in the next six years.
Theoretically, Staff contends that based on estimated depreciable life and the accumulated depreciation balance, the plant should be removed from service in about seven years. However, Staff notes that the Company has no plans to remove the LNG plant from service at that time. Staff contends that now is the time to make adjustments to the depreciation rate reflecting the previously unexpected prolonged life of the LNG plant. Staff contends that this kind of knowledge and related planning is the reason for periodic depreciation studies as ordered by the Commission. Staff recommends a 12-year life for the remaining unrecovered costs. Therefore, depreciation expense, Staff calculates, should be about $58,000 per year instead of the $104,000 requested by Intermountain Gas, a $46,000 decrease. The rate of depreciation recommended by Staff would calculate to be 0.8% instead of 1.45% requested by the Company.

Company—letter reply
The Company disagrees with Staff’s proposed adjustments. Speaking of Staff’s first adjustment the Company contends that although technically the reserve imbalance in these accounts should be written off immediately, the proposed six (6) year period was chosen to smooth out the impact of such a large write off and additionally the proposed six (6) year period represented the weighted average life of the assets in question. The Company, however, states that it recognizes some merit in Staff’s adjusted amortization period but does not fully agree with the length of those periods. Intermountain Gas respectfully suggests that the Commission approve a mid point amortization period between the Company’s proposed six year period and Staff’s proposed periods as outlined in Staff Comments Attachment A. ($20,000 diff)
The Company also takes exception to Staff’s recommendation to apply a 12-year life to the remaining unrecovered cost of the Company’s LNG plant near Nampa, Idaho. The Company recognizes the merit in Staff’s suggestion but does not fully concur with the assumption that the plant will not be removed in seven years. Therefore, the Company respectfully suggests that the Commission approve a mid point between the Company’s proposed life of seven years and the Staff’s proposed life of twelve years, or a ten year depreciable life for the Company’s LNG facility. ($18,000 diff)

Commission Decision
The Company has requested an increase in its composite depreciation rate from 3.98% to 4.18%. The effect of the higher rate would be to increase the Company’s depreciation accrual and decrease its rate base by $334,522 annually. As proposed, the total annual depreciation accrual would increase to $10,286,070. Although the Company’s depreciation expense would increase under its proposal, the present application does not request a related increase in rates.
The Commission Staff proposes two adjustments to the Company’s proposal, reducing the proposed increase from $335,000 to $249,000. The Company proposes a compromise.
Should the Company’s Application be approved? With or without adjustment?

vld/M:INT-G-99-2_sw2

DECISION MEMORANDUM 5