20030113Comments.pdf

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LISA D. NORDSTROM
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5733
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2003 JAN 13 PM 3:
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
INTERMOUNTAIN GAS COMPANY FOR
AUTHORITY TO INCREASE ITS COMPOSITEDEPRECIATION RATE.
CASE NO. INT-O2-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Lisa D. Nordstrom, Deputy Attorney General, and in response to the Notice
of Application, Notice of Modified Procedure, and Notice of Comment /Protest Deadline issued
on November 15 , 2002, Order No. 29153, submits the following comments.
Intermountain Gas Company (Intermountain; Company) filed an Application with the
Commission on October 18 , 2002, requesting authority to increase its composite depreciation
rate fTom 3.71 % (3.93% when weighted by 9/30/01 assets) to 4.08%. The Company stated that
this 0.15% increase is necessary to accrue the proper dollars over the remaining service life of
the Company s property. Intermountain requests the rate become effective the beginning of its
fiscal year, October I , 2002. If approved, the higher rate would increase Intermountain s annual
depreciation accrual and decrease Intermountain s rate base by $428 482 annually. Although the
Company s depreciation expense would increase under its proposal, the present Application did
not request a related increase in customer rates.
STAFF COMMENTS JANUARY 13, 2003
STAFF ANALYSIS
Staff has reviewed the Company s Application and performed an analysis on the
requested increase in depreciation rates. The majority ofthe increase consists of three items.
First, the Company seeks to extend the service life of the Liquefied Natural Gas (LNG) plant in
Nampa. The Company recently updated some of the equipment and plans future updates as
needed. Second, the Company requested an increase in the negative salvage cost accumulated to
retire transmission and distribution mains due to increased costs at retirement. Finally, the
Company is implementing an electronic meter reading system (ERT) that will require new
accounts and new depreciation rates.
Staff conducted its review by analyzing the depreciation study and workpapers prepared
by AUS Consultants, the Company s depreciation consultant. The study is based on the
Company s accounting records and other external sources. During its review, Staff encountered
a problem with the accounting data used to substantiate the Company s study. The Company
upgraded its accounting software in 2000, which caused problems with the way some of the asset
retirements were recorded. Staff found instances where the Company recorded salvage costs for
assets that were either not removed ftom the books or were removed ftom the wrong accounts.
After further review with Staff, the Company also discovered an additional $105 000 that should
have been added to the total salvage costs but were not. These dollars are significant and would
have made a major impact on the results of the study. The Company has indicated that it is
working to improve the accounting system.
Staff also reviewed a study performed by the American Gas Association (AGA study)
that was used by AUS Consultants to help provide guidelines in setting the useful lives and
salvage values ofthe Company s assets. The AGA study provided some valuable insight into the
salvage costs and useful lives of gas distribution equipment.
Account No. 363 - The LNG Plant
The LNG plant has been in service since 1976. The Company proposed to extend the life
ofthe facility 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 life on information
obtained ftom the AGA study, not by any defect or limitation within the facility itself.
A Survey of Depreciation Statistics, AGA Accounting Services Committee, EEl Property Accounting & Valuation
Committee, 1998-1999.
STAFF COMMENTS JANUARY 13 , 2003
Staff believes it is reasonable to extend the life of the LNG plant an additional five years
beyond the ten years proposed by the Company. Thus, Staff recommends a remaining life of 15
years instead of only ten. This is appropriate for several reasons. First, the Company overhauled
the primary compressor associated with the liquefaction process in 2000. It also removed the gas
turbine prime mover for overhaul next year. Second, the Company stated that the LNG facility
controls, which are electrical and pneumatic, would be replaced with electronic and hydraulic
controls between 2004 and 2006. Third, the Company has no plans to replace the LNG facility
with any other type of equipment or contract. In a discussion with Company officials, Staff
learned that acquiring peaking services providing benefits similar to those derived ftom the LNG
facility would be significantly more expensive than maintaining the current unit. Furthermore
the Company s 2002 IRP did not indicate a replacement of the facility. The Company continues
to update the unit as needed, including making significant overhauls of its major parts. Finally,
while the AGA study lists equipment similar to the equipment recently replaced or proposed to
be updated (compressors, connections, gauges and instruments, etc.) with lives in the 25-30 year
range, it also contains facilities with 40 and 50-year lives. Staffbelieves that a 40-year life is
reasonable in this case, especially since the Company will perform another depreciation study in
three years.
Staff recommends that the Company depreciate the LNG plant over another fifteen years
for an approximate average service life of37 years. This requires an annual depreciation rate of
1.29% instead of the Company-proposed rate of 1.69% and would reduce the Company
proposed annual depreciation expense by $30 658.
Account No. 367 - Transmission Mains
Transmission mains are large steel pipes used to transport the gas between the
Company s distribution system and the Northwest Pipeline interstate system. These mains
generally have long lives and are simply capped instead of being removed at retirement.
Currently, depreciation on the Company s transmission mains is calculated based on a 44-year
life and a 32% negative salvage cost.
The Company proposed to change the life of one particular transmission main ftom 44
years to 20 years. The main in question runs through the Fort Hall Indian Reservation.
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.
STAFF COMMENTS JANUARY 13 2003
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. By that time, the Company will need to
renegotiate the easement and may not be able to secure future use of the transmission line. The
Company recommended that the useful life of the transmission main be reduced to only 20 years
instead of 44. Staff believes it is reasonable to base the life of an asset on its known useful life.
Although the Company currently believes there is a good chance it will not be able to renew its
easement, the Company has provided no evidence in support of that belief. The other party has
not indicated whether or not it will renew the easement. Since approximately 12 years remain on
the easement, the Commission has time to adjust the account if necessary as more information
becomes available. However, because there is some uncertainty, Staff believes it is reasonable to
depreciate this main faster than the rest of the account and monitor the situation carefully.
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 of20 years, Staff believes that additional
depreciation can be taken until the uncertainty surrounding the life of the easement can more
fully be determined. Staff recommends that a life of 32 years be used on the portion in question.
By using a 32-year life on the line through the reservation, the weighted average life of the total
account is approximately 40 years.
Overall, transmission mains have experienced a net negative salvage value of only 6.9%.
However, during the last few years retirement costs have been higher, resulting in greater
negative net salvage. Since 1992, the account has experienced negative salvage costs of 185%.
The last few years have been even higher.
While these numbers seem high, it is important to keep a few things in mind. First, very
little plant has been retired in this account. During the last five years, only 0.000% to 0.056% of
the account has been retired each year. Typically there were only a few projects undertaken each
year. Staff believes it is not reasonable to extrapolate a significant increase in negative salvage
costs based on such a small number of retirements. Second, some of the retirements were
expensive projects that were not typical. Third, the AGA study provided no information on
transmission mains. Therefore, Staff could not use the AGA study for support. Finally, the poor
accounting records cast a shadow over the integrity of the Company s study. The Company
needs to improve the accounting controls to make sure that retirements are performed correctly
STAFF COMMENTS JANUARY 13, 2003
and have additional transactions take place before Staff believes it is reasonable to change the
depreciation rates in this account.
Staff recommends that the Commission adopt the Company s proposal to leave the lives
of the transmission distribution account at 44 years except for the portion of the main that runs
through the reservation. This section should be depreciated based on a 32-year life until more
information can be gathered. Staff also recommends that the salvage costs remain at negative
32% until the Company can correctly track retirement costs and show that an increase is
necessary. By making these two changes, Staff recommends an annual rate of2.96% instead of
the Company s proposed 4.26%, thus reducing Company s proposed depreciation expense in this
account by $394 040.
Account No. 376 - Distribution Mains
Distribution mains are steel or plastic pipes used to take gas ftom transmission mains to
the distribution system that delivers gas to individual customers. These lines also have long lives
that allow them to be used for many years. Like transmission mains, the distribution mains will
either be removed or abandoned at retirement. The Company s study recommends that the
service life of the distribution mains be increased slightly to 44 years ftom 42. Staff supports the
extension of the service life because the 44 years seems to better reflect the 40 to 65 year lives
listed in the AGA study.
Overall, net salvage values ftom 1975 through 2001 have been a negative 41 %. From
1992 through 2001 , negative salvage value was 56% and increased to 71 % in the last five years.
Currently the Company uses a negative salvage value of 40% and recommends a change to 60%.
Staff supports this change for three reasons. First, there is more data to support this change than
exists in the transmission mains account. The Company consistently had a significant number of
retirements in this account that even out the wide ranges of amounts seen in the transmission
mains account. Second, data ftom the previous Company study showed evidence that the
negative salvage cost for this account was beginning to increase. This current depreciation study
substantiates the findings of the last study. Finally, the data in the AGA study suggests that a
60% negative salvage cost is in line with other utilities.
3 The rate presently authorized for the transmission mains account is 3.57%. Staffs proposal would reduce the
amount the Company accrues by $184 896 each year.
STAFF COMMENTS JANUARY 13 , 2003
Staff recommends that the Commission adopt the Company s request to change the
depreciation rate ftom 3.60% to 4.02%.
Account No. 381.2 - Electronic Meter Reading Equipment and
Account No. 382.2 - Electronic Meter Reading Equipment Installation Labor
Intermountain Gas is currently implementing an automated/remote system that uses
electronic devices to record and transmit the customer s usage to a radio-receiving device. The
ERT device consists of a circuit board with a semiconductor chip radio transmitter and a lithium
battery. The electronics and battery are housed in a sealed plastic enclosure that is mounted on
the meter. This device has a battery life of approximately 15-19 years and has little or no value
once the battery has been depleted. Since the life of the device is approximately 15 years, the
Company recommends that the life of the equipment be rated at 15 years. Staff believes it is
appropriate to set the depreciation rate based on the life of the equipment. Staff also
recommends that these new accounts be depreciated at a rate of 6.63% as requested by the
Company.
RECOMMENDATION
At this time, Staff recommends that the Company s Application be approved with the
following changes:
1. The LNG plant be given a remaining life of 15 years instead of 10.
2. The negative salvage rate of 32% for account 367 should remain unchanged instead
of increased to 50% as proposed by the Company.
3. The life of the transmission line through the reservation should be reduced to 32 years
instead of the 20 years proposed by the Company.
These changes will give an overall depreciation rate of3.93% and a total annual
depreciation expense of$II 038 234. This allows for an increase in depreciation expense of
784 per year instead of the $428,482 requested by the Company.
Staff recommends that the Commission adopt the Company s recommendation to
implement the new depreciation rates effective at the beginning of Intermountain s fiscal year
October 1 , 2002.
STAFF COMMENTS JANUARY 13 2003
Staff also recommends that Intermountain Gas file another depreciation study for
Commission and Staff review in another three years. Staff encourages the Company to work to
solve the identified accounting problems to provide good data for future studies.
Dated at Boise, Idaho, this 13 day of January 2003.
Lisa D. Nordstro
Deputy Attorney
Technical Staff: Alden Holm
Michael Fuss
LN:i :/umisc/comrnents/intgO24.1nahmfuss
STAFF COMMENTS JANUARY 13, 2003
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 13TH DAY OF JANUARY 2003
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. INT-02-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
MICHAEL E HUNTINGTON
VP GOVERNMENTAL AFFAIRS
INTERMOUNTAIN GAS COMPANY
PO BOX 7608
BOISE ID 83707
MAIL - mhunting~intgas.com
MORGAN W RICHARDS JR
MOFFATT THOMAS ET AL
PO BOX 829
BOISE ID 83701-0829
MAIL - mwr~moffatt.com
MIKE McGRATH
INTERMOUNT AIN GAS COMPANY
PO BOX 7608
BOISE ID 83707
MAIL - mmcgrath~intgas.com
~~~.
SECRETARY
CERTIFICATE OF SERVICE