20030204Order No 29187.pdf

Office of the Secretary
Service Date
February 4, 2003
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
INTERMOUNTAIN GAS COMPANY TO
INCREASE ITS COMPOSITE DEPRECIATIONRATE. CASE NO. INT -O2-
ORDER NO. 29187
Intermountain Gas Company (Intermountain; Company) filed an Application on
October 18, 2002 requesting authority to increase its composite depreciation rate from 3.71 %
(3.93% when weighted by 9/30/01 assets) to 4.08%. The Company stated that this 0.15%
increase was necessary in order to accrue the proper dollars over the remaining service life of the
Company s property. Application at 6. If approved, the higher rate would increase
Intermountain s annual depreciation accrual and decrease Intermountain s rate base by $428 482
annually. Id. at 4. The Commission issued Notices of Application and Modified Procedure in
this case on November 15 2002. Order No. 29153. The Commission Staff was the only party to
timely file comments, to which the Company replied on January 15 , 2003. In this Order, the
Commission authorizes Intermountain to use an overall depreciation rate of 3.93% and increase
its annual depreciation expense by $3 784 effective October 1 2002.
THE APPLICATION
Based on an updated depreciation study by ADS Consultants, the Company
Application concluded that the current rate is under-depreciating its assets, the original cost of
which increased from $234 093 752 to $280 990 082 during the three-year period. Application
at 6. Likewise, the accumulated reserve increased from $116,479 251 to $143 992 182. Id. The
current study advocated an annual depreciation and amortization expense accrual of $11 462 932
for the remaining life of the Company s property. Id. The study cited by the Application also
discussed Intermountain s planned deployment of electronic meter reading equipment and the
recovery of the associated investment, as well as the service life and estimated removal cost of
the Company s LNG facilities. Although the Company s depreciation expense would increase
under its proposal, the present Application did not request a related increase in customer rates.
The Company also requested that the increase to the annual composite depreciation rate and
ORDER NO. 29187
amortizations be made effective at the beginning of the Company s fiscal year, October 1 , 2002.
Id.
STAFF COMMENTS
According to Staff, the majority of Intermountain s requested depreciation rate
increase consisted of three items: an extended service life for the Liquefied Natural Gas (LNG)
plant in Nampa, an increase in the negative salvage cost accumulated to retire transmission and
distribution mains, and implementation of an electronic meter reading system (ER T) requiring
new accounts and depreciation rates. These items are discussed in greater detail below.
During its review of the depreciation study and workpapers, Staff encountered a
problem with the Company s accounting data used to substantiate the study. Staffs comments
were prefaced with the caveat that the misallocated dollars associated with problematic
accounting data were significant and would have made a major impact on the results of the
study. Staff Comments at
Account No. 363 - The LNG Plant
The Company proposed extending the service life of the LNG plant by five years to
approximately 35 years, making the remaining life of the plant approximately 10 years. The
Company based its support for a 35-year useful life on information obtained from a study
conducted by the American Gas Association (AGA study), 1 not by any defect or limitation
within the facility itself.
By contrast, Staff recommended a remaining life of 15 years instead of only 10
because the Company had already or plans to overhaul major plant components and has no plans
to replace the facility. !d. at 3. Staff also argued that the AGA study contained facilities with 40
and 50-year lives. Staff believed that a 40-year life was reasonable in this case, especially since
the Company will perform another depreciation study in 3 years. For these reasons, Staff
recommended that the Company depreciate the LNG plant over another 15 years for an
approximate average service life of 37 years. This would require an annual depreciation rate of
A Survey of Depreciation Statistics AGA Accounting Services Committee, EEl Property Accounting & Valuation
Committee, 1998-1999.
ORDER NO. 29187
1.29% instead of the Company-proposed rate of 1.69%, and would reduce the Company
proposed annual depreciation expense by $30 658.Id.
Account No. 367 - Transmission Mains
Depreciation on the Company s transmission mains, which are used to transport the
gas between the Company s distribution system and the Northwest Pipeline interstate system, is
currently calculated based on a 44-year life and a 32% negative salvage cost. The Company
sought to change the life of one particular transmission main running through the Fort Hall
Indian Reservation from 44 years to 20 years. Although this main has an estimated useful life of
44 years, the easement across the reservation is limited to 20 years and ends approximately in
2015. Id. at 4. By that time, the Company will need to renegotiate the easement and may not be
able to secure future use of the transmission line.
Staff found it reasonable to depreciate this main faster than the rest of the account and
monitor the situation carefully over the 12 years remaining on the easement. By reducing the life
of the main that runs through the reservation to a point mid-way between the expected life of 44
years and the easement's life of 20 years , Staff believed that additional depreciation can be taken
until the uncertainty surrounding the life of the easement can more fully be determined. Staff
recommended that a life of 32 years be used on the line through the reservation such that the
weighted average life of the total account is approximately 40 years. Id.
Staff indicated that transmission mains have experienced an overall net negative
salvage value of only 6.9%. Id. However, during the last few years retirement costs have been
higher, resulting in greater negative net salvage. Although the account has experienced negative
salvage costs of 185% or more since 1992, Staff indicated that only 0.000% to 0.056% of the
account has been retired annually because only a few projects were undertaken in each of the last
5 years. Id. Staff believes it is not reasonable to extrapolate a significant increase in negative
salvage costs based on such a small number of retirements, some of which were atypical. Thus
Staff recommended that the salvage costs remain at negative 32% until the Company improves
its accounting controls to correctly track retirement costs and shows that an increase is necessary.
Id. at 5.
2 The rate currently authorized for the LNG facility is 1.10%. Staffs proposal would allow the Company to accrue
an additional $14 563 each year.
ORDER NO. 29187
By making these two changes, Staff recommended an annual rate of 2.96% instead of
the Company s proposed 4.26%, thus reducing Company s proposed depreciation expense in this
account by $394 040.Id.
Account No. 376 - Distribution Mains
The Company recommended increasing the service life of its distribution mains
slightly from 42 years to 44. Staff supported extending the service life because 44 years seems
to better reflect the 40 to 65 year lives listed in the AGA study. Id.
Staff also recommended that the Commission adopt the Company s request to
change the depreciation rate from 3.60% to 4.02%. Id. at 6. While overall net salvage values
from 1975 through 2001 have been at negative 41 %, negative salvage value from 1992 through
2001 was 56% and increased to 71 % in the last 5 years. Id. at 5. Currently the Company uses a
negative salvage value of ~O% and recommends a change to 60%. Staff supported this change
because: 1) the Company consistently had a significant number of retirements in this account that
evened out the wide ranges of amounts seen in the transmission mains account, 2) this current
depreciation study substantiated findings in the last study that the negative salvage cost for this
account was increasing, and 3) AGA study data suggested that a 60% negative salvage cost was
in line with other utilities. Id.
Account No. 381.2 - Electronic Meter Readin2 Equipment and
Account No. 382.2 - Electronic Meter Readin2 Equipment Installation Labor
Intermountain Gas is currently implementing an automated/remote system that uses
electronic devices to record and transmit the customer s usage to a radio-receiving device. The
ERT device consists of a circuit board with a semiconductor chip radio transmitter and a lithium
battery. Staff stated that this device has a battery life of approximately 15-19 years and has little
or no value once the battery has been depleted. Id. at 6.Since the life of the device is
approximately 15 years, both Staff and the Company recommended that the life of the equipment
be rated at 15 years and depreciated at a rate of6.63%. Id.
3 The rate presently authorized for the transmission mains account is 3.57%. Staffs proposal would reduce the
amount the Company accrues by $184 896 each year.
ORDER NO. 29187
COMPANY REPLY COMMENTS
Filed on January 15 2003, Intermountain Gas Company s reply comments explained
that the purpose of the Company s Application was to update the depreciation parameters and
rates established in Case No. INT-99-2. Reply Comments at 1. Intermountain maintained that
the depreciation rates proposed in the Application were appropriate to recover its investment in
plant in service, adjusted for net salvage, over its' useful life. Id.
While the Company believes that its proposed depreciation parameters were
supported by the depreciation study, the Company also acknowledged the concerns raised by the
Staff in their comments. Intermountain stated that the next study filed in three years will "shore
up many of the parameters filed with this Case" and provide Staff with an added measure of
confidence in the Company s recommendations. !d. Therefore, Intermountain suggested that the
Commission adopt the changes as proposed by the Staff. Id.
COMMISSION FINDINGS
The Commission has reviewed and considered the filings of record in Case
No. INT -02-, including the comments of Commission Staff and the reply comments of
Intermountain Gas.
We continue to find it reasonable in this case to process the Company s Application
pursuant to Modified Procedure, i., by written submission rather than by hearing. Commission
Rules of Procedure, IDAPA 31.01.01.201-204.
Staff proposed three adjustments to the Company s filing. As described in greater
detail abdve, Staff first proposed that the LNG plant be given a remaining life of 15 years instead
of 10 in light of completed or planned plant upgrades. Citing the uncertainty surrounding
renewal of the transmission line lease on the Fort Hall Reservation, Staff advocated reducing the
44-year asset life of that particular transmission line to a midpoint of 32 years rather than the 20-
year easement term. Instead of adopting the 50% negative salvage rate proposed by the
Company, Staff recommended that Account 367's negative salvage remain unchanged until the
Company better tracks asset retirement costs and demonstrates that an increase is necessary. The
Company appears to agree with Staff s recommendations and suggested in its reply comments
that we adopt them. Reply Comments at 1. Because we find Staff s rationale for these three
changes to be persuasive and reasonable, we approve the Company s Application subject to
them.
ORDER NO. 29187
With these changes, we find it reasonable to reduce the Company s requested
increase in depreciation expense from $428,482 to $3 784 per year. This shall result in an
overall depreciation rate of 3.93% and a total annual depreciation expense of $11 038 234. The
new depreciation rates shall be effective at the beginning of Intermountain s fiscal year, October
2002.
As the Commission has stated in past depreciation cases, we recognize that there is an
element of judgment and discretion in choosing an asset life or salvage rate for regulatory
accounting purposes. Our depreciation review process is the appropriate time to consider and
make adjustments to reflect changed service lives or salvage rates of depreciation assets. Order
No. 28311 at 5. As we have done in past years, we intend to review the Company s depreciation
rates and practices again in three years to ensure that Intermountain s depreciation rates, salvage
rates and service lives remain accurate in the long term. This periodic review increases our level
of comfort with the reasonableness of the depreciation rates recommended by the Company and
Staff, and is required for the Company s depreciation study methodology. Order No. 26813.
therefore direct the Company to remedy its accounting problems and update its depreciation
study for submission to the Commission in three years.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over this matter and
Intermountain Gas Company, a gas utility, pursuant to the authority and power granted under
Title 61 of the Idaho Code and the Commission s Rules of Procedure, IDAP A 31.01.01.000
seq.
ORDER
IT IS HEREBY ORDERED and Intermountain Gas Company is authorized to
increase its depreciation expense by $3 784 per year. This shall result in an overall depreciation
rate of3.93% and a total annual depreciation expense of$11 038 234.
IT IS FURTHER ORDERED that the asset remaining life for the LNG Plant
(Account 363) be increased to approximately 15 years and the rate of depreciation be changed to
a weighted average of 1.29% to conform with the increased asset life.
IT IS FURTHER ORDERED that the negative salvage rate of 32% for Account 367
remain unchanged.
ORDER NO. 29187
IT IS FURTHER ORDERED that the life of the transmission line through the Fort
Hall Indian Reservation (Account 367) be reduced to 32 years for a weighted average rate of
96% to conform with the decreased service life.
Because we have required some changes in asset lives, IT IS FURTHER ORDERED
the Company shall calculate and submit a new Summary of Depreciation Accrual Parameters
and Expenses in accordance with this Order. These rates are for account balances effective the
beginning ofthe Company s current fiscal year, October 1 2002.
IT IS FVRTHER ORDERED that the Company submit an updated depreciation study
for Commission review in three years.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7)
days after any person has petitioned for reco~sideration, any other person may cross-petition for
reconsideration. See Idaho Code ~ 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this rd'
day of January 2003.
~" d&J
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Commission Secretary
0:INTGO204 Jn2
ORDER NO. 29187