20060214final_order_no_29975.pdf

Office of the Secretary
Service Date
February 14 2006
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF INTERMOUNTAIN GAS COMPANY
FOR APPROVAL TO PLACE INTO EFFECT
A CHANGE IN ITS COMPOSITE
DEPRECIATION RATE ORDER NO. 29975
CASE NO. INT -O5-
On October 28, 2005, Intermountain Gas Company (Intermountain Gas, Company)
filed an Application to change its composite depreciation rate with the Commission. On
November 23, 2005, the Commission issued a Notice of Application and Notice of Modified
Procedure, setting a comment deadline of January 24 2006. Order No. 29917. The Commission
Staff was the only party to file comments. With this Order the Commission approves the
Company s Application with some adjustments as more fully set forth below.
THE APPLICATION
The Commission set Intermountain Gas Company s current composite depreciation
rate at 3.93% in Case No. INT-02-4. Order No. 29187. The Company was directed to submit
an updated depreciation study three years from entry ofthat Order. !d. The Company contracted
the services of ADS Consultants to perform an update to the 2002 depreciation study. According
to the Application, the results of this study indicate that the current composite rate is over
depreciating the Company s assets. Consequently, Intermountain Gas is requesting a decrease in
its composite depreciation rate from 3.93% to 3.37%. This would decrease Intermountain Gas
annual depreciation accrual by $1 998 923. The Company does not seek to change its rates as a
result of this Application.
The current study addresses, among other things, lengthening the depreciation lives
of the Company s mains and services and a corresponding adjustment to net salvage ofthat same
plant. The Application states that the continued use of plastic in the Company s mains and
services, coupled with the increasing evidence of the benefits of plastic s longer service life and
lower costs vs. steel, necessitates the proposed change for mains and services.
The study update was based upon the books and records of the Company as of
September 30 , 2004. The Company requests that the decrease in annual composite depreciation
ORDER NO. 29975
rate be made effective at the beginning of its fiscal year, October 1 , 2005. The Company
attached a summary of the study as Exhibit 1 to its Application.
STAFF COMMENTS
Staff reviewed the Company s Application, the updated study, and performed an
analysis on the requested decrease in depreciation rates. Staff recommended approving the
Company s Application with adjustments to three accounts that result in a relatively minor
overall change in the annual depreciation expense as requested.
The major changes in the depreciation expense are generally attributed to a
lengthening of the useful life of mains and services due to the use of plastic pipe as opposed to
steel, as well as adjustments to the net salvage value. Although several accounts changed in the
new depreciation study, 99.9% of the overall decrease in depreciation expense is attributable to
changes in three accounts: Account 376 - Mains; Account 380 - Services; and Account 392 -
Transportation Equipment.
Account 376 - Mains
This account represents the Company s investment in distribution maIllS. The
depreciation study recommended that according to a life analysis, the life of these investments
should be increased.The mains currently have a service life of 44 years, and the study
recommends a service life of 51.4 years. Because the service life of steel pipe is different than
that of plastic pipe, the service life is weighted. When the longer service life is applied to the
investments made in this account, the ultimate result is a reduction in the annual depreciation
expense of $966 990. Staff reviewed the increase in the service life of these investments and
agrees that this is a reasonable change.
Account 380 - Services
This account contains the Company s investment in the service lines that provide gas
to individual customers. The study recommends increasing the service life from 36 years to 45.
years. This account, like the distribution mains, is weighted to take into account both the steel
and plastic pipe. This adjustment results in a reduction in the annual depreciation expense of
149 559. Staff agrees that this adjustment is reasonable and recommended its approval.
Additionally, Staff found that an accounting entry in this account was posted
incorrectly. To correct the error, this account should have included an additional $5 261 089.
of investment. Account 381 - Meters, should be reduced by $5 370 634., and Account 378-
ORDER NO. 29975
Regulator Station Equipment should have been increased by $109 544.60. When these
correcting entries are made, the annual depreciation expense is reduced by $60 002. Instead of
the annual depreciation expense of$11 036 164 as requested by the Company, the correct annual
depreciation expense should be $10 976 162. Although this correction does not change the
Company s total investment balance, it causes the depreciation expense to change because of the
different service lives and salvage values in the affected accounts.
Account 392 - Transportation Equipment
This account contains the Company s investment in compressed natural gas (CNG)
equipment, automobiles, light trucks, vans, SDV s, heavy trucks, utility boxes, and trailers. The
study recommends continuing the current nine-year service life. However, it recommends that
the net salvage value be adjusted from 15% to 5%. This causes an annual depreciation expense
increase of $102 184. Staff agreed that this adjustment is reasonable and recommended that it be
accepted.
Other Issues
Staff revisited an accounting problem that was recognized by the Commission in the
Company s prior Application to establish depreciation rates. Case No. INT-02-, Order No.
29187. The Company has corrected this accounting problem, and now has accounting
procedures in place that will insure that when any asset is retired from use, the appropriate
original investment is removed from the appropriate account. Staff does not believe that the
previous accounting problem has an impact on the balances used in this depreciation study, and
that it is thus reasonable to utilize the results of the study.
Staff also reviewed the useful life of the liquefied natural gas (LNG) plant with the
Company. The Company stated that it intends to perform the necessary research and study in the
next 12 months to support a decision regarding whether or not to keep the LNG facility for a
longer period or replace it with additional peaking capacity from the Northwest pipeline. The
useful life of the LNG plant was previously set at 15 years. Staff supported this 15.year service
life at the time it was set, commenting that the LNG facility was more economical than acquiring
firm peaking capacity. Staff recommended that there is presently no reason to disturb this figure
as long as the Company makes a firm commitment to bring before the Commission a decision on
the prudence of the LNG plant. The Company s review should include more than a straight
economic analysis. Risk associated with supply should also be part of the review. Staff
ORDER NO. 29975
recommended that the issue of remaining life and salvage value should be addressed after the
Company evaluates its peaking capacity options and files its next depreciation case with the
Commission.
Staff recommended that the Company s Application be approved with the following
corrected account balances:
Account 378 Regulator Station Equipment Increased by $109 544.
Account 380 Services Increased by $5 261 089.
Account 381 House Meters Decreased by $5 370 634.10
These changes will decrease the proposed annual depreciation expense by an additional $60 002
for a total annual depreciation expense of$10 976 162 or an overall rate of 3.35%. Additionally,
Staff recommended that the Commission adopt the Company s recommendation to implement
the new depreciation rates effective at the beginning of the Company s fiscal year, October 1
2005.
DISCUSSION
The Commission has reviewed and considered the filings of record for this case
including the comments of Commission Staff. We continue to find it reasonable in this case to
process the Company s Application pursuant to Modified Procedure, i., written submission
rather than by hearing.Commission Rules of Procedure, IDAPA 31.01.01.201-204. The
Commission has jurisdiction over Intermountain Gas, a gas utility, and this Application pursuant
to the authority and power granted under Title 61 of the Idaho Code, specifically !daho Code
61-129, 61-117, 61-307 , and 61-501 , and the Commission s Rules of Procedure IDAPA
31.01.01.000 et seq.
Staff proposed three adjustments to the Company s filing. As described in greater
detail above, Staff recommended correcting adjustments to Accounts 378, 380, and 381 because
of the incorrect posting of an accounting entry. This correction, although not changing the
Company s total investment balance, causes the depreciation expense to change because of
different service lives and different salvage values in the affected accounts. However, because
the change resulting from these corrections is a very small percentage of the overall annual
ORDER NO. 29975
depreciation expense, (decrease in annual depreciation expense of $60 002) and because it
simply corrects an accounting entry, we find this correction to be reasonable.
With these changes, we find it reasonable to decrease the Company s requested
annual depreciation expense from $11 036 164 to $10 976 162 , or stated differently, by an
additional $60 002 over that requested by the Company. This results in a total annual
depreciation rate of 3.35%. The new depreciation rates shall be effective at the beginning of
Intermountain s fiscal year, October 1 2005.
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 an 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. 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. We therefore
direct the Company to update its depreciation study for submission to the Commission in three
years. The Company is also directed to specifically include an analysis, as discussed by Staff
regarding the prudence of its LNG plant, including remaining life, salvage value, and peaking
capacity options.
ORDER
IT IS HEREBY ORDERED that Intermountain Gas Company is authorized to
decrease its annual depreciation expense by $2 058 925. This results in a total annual
depreciation expense of $10 976 162, or an overall rate of 3.35%. The new depreciation rate
shall be effective at the beginning of the Company s fiscal year, October 1 2005.
IT IS FURTHER ORDERED that the Company shall update its depreciation study
and submit the same to the Commission for review no later than three years from the entry of this
Order. This update shall include an analysis, as discussed above, regarding the Company s LNG
plant.
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 with regard to any
ORDER NO. 29975
matter decided in this Order.Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 9 61-
626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this /3
p...
day of February 2006.
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Je D. Jewell
Commission Secretary
O:INT-05-dw2
ORDER NO. 29975