20060124Comments.pdf

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DONOV AN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5921
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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
APPROVAL TO PLACE INTO EFFECT
CHANGE IN ITS COMPOSITE DEPRECIATION)RATE CASE NO. INT-O5-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through it Attorney of
Record, Donovan E. Walker, Deputy Attorney General, in response to the Notice of Application
Notice of Modified Procedure, and Notice of Comment/Protest Deadline issued on November
2005, Order No. 29917, submits the following comments.
BACKGROUND
Intermountain Gas Company (Intermountain; Company) filed an Application with the
Commission on October 28 , 2005 , requesting authority to place into effect a change in its
composite depreciation rate from 3.93% (3.98% when weighted by September 30, 2004 assets)
to 3.37%. The effect of the lower rate would be to decrease Intermountain s annual depreciation
accrual by $1 998 923 annually. Although the Company s depreciation expense would decrease
the Application did not seek a change in its current prices and rates resulting from this change.
STAFF COMMENTS JANUARY 24, 2006
STAFF ANALYSIS
Staff has reviewed the Company s application and performed an analysis on the
requested decrease in depreciation rates. The Commission previously reviewed the Company
depreciation expense in Case No. INT -02-, and approved an overall depreciation rate of
93% of the annual investment balance. See Order No. 29187. This rate is used to determine an
annual depreciation expense as of September 30, 2004, of$13 035 087.
In this case the Company depreciation study uses an investment balance of
$327 259,429 as of September 30, 2004; and shows an increase in investment since the
Company s prior case of $46 269 347. Attached as Attachment A is a schedule showing the
additional investment in each of the investment accounts, the reserve balance for each account
the remaining service life, and the annual accrual rate for each account. Although the amount of
investment balance has increased, the Company is requesting that the amount of annual
depreciation expense be reduced by $1 998 923. Several accounts are changed by the new
depreciation study, however, most of the changed accounts experienced minor changes. The
overall decrease in depreciation expense is attributable to changes in three accounts: Account
376 -- Mains, Account 380 - Services, and Account 392 -- Transportation Equipment. The
changes in these three accounts will be discussed below. The overall net change when these
three accounts are removed from the depreciation study was ($14 579) or approximately one-
tenth ofa percent (0.1 %) of the total depreciation expense.
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.
ACCOUNT 376.00 -- MAINS
This account represents the Company s investment in distribution mains. Both steel and
plastic pipe are used as these distribution mains. The Company had an investment balance of
$112,440 644 with $62 837 622 of reserved investment balance as of September 40, 2004. In the
current depreciation study, a life analysis indicates that the life of these investments should be
increased. As part of the previous study, the Company used a 44-year service life. The new
study recommends that this service life be increased to 51.4 years.
The service life is a weighted service life because the service life for steel pipe is
different from the service life for plastic pipe. When the longer service life is applied to the
STAFF COMMENTS JANUARY 24, 2006
investments in this account, the ultimate result is a reduction in the annual depreciation expense
of $966 990. Staff has reviewed the increase in the service life of these investments and agrees
with the Company that this is a reasonable change. Therefore Staff recommends this decrease in
the annual depreciation expense.
ACCOUNT 380.00 -- SERVICES
This account represents the investment of the Company in the service lines the Company
uses to provide gas to its individual customers. The Company had an investment balance of
$100 838 552 with $52 318 921 of reserved investment balance as of September 40 2004. In the
current depreciation study, the Company is recommending a longer service life for the assets in
this account. Currently, the Company is using a 36-year service life for this account. The study
recommends that the service life be lengthened to 45.year weighted service life. This also is a
weighted service life because the service life must account for the difference in service lives for
steel pipe and plastic pipe. When the longer service life is applied to the investments in this
account, the ultimate result is a reduction in the annual depreciation expense of $1 149 559.
Staff has reviewed the increase in the service life of these investments and agrees with the
Company that this is a reasonable change. Therefore this decrease in the annual depreciation
expense is recommended.
Staff has found that an accounting entry in this account was not posted correctly. During
2003, $5 261 089.50 of additional investment should have been included in this account.
Additionally, Account 381 -- Meters should have been reduced by $5 370 634.10 and Account
378 -- Regulator Station Equipment should have been increased by $109 544.60. When these
corrections are made the annual depreciation expense should be reduced by $60 002. Instead of
the annual depreciation expense of $11 036 164 as asked for in the application, the correct
annual depreciation expense should be $10 976 162. The incorrect accounting entry, 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.
ACCOUNT 392 -- TRANSPORTATION EQUIPMENT
This account represents the Company s investment in CNG equipment, automobiles, light
trucks , vans SUV s, heavy trucks, utility boxes, and trailers. The Company has a total
investment in this account of $5 378 092 with a reserve investment balance of $2 622 696. The
STAFF COMMENTS JANUARY 24, 2006
depreciation study indicates that a 9-year service life be continued. However, the depreciation
study also indicates that the salvage value of these assets at retirement is less that in previous
studies. The last study recognized a net salvage value of 15%; this study recommends that the
net salvage value be reduced to 5%. This reduction of net salvage value causes the annual
depreciation expense to increase from $489,406 to $591 590 or an increase of $102 184. Staff
believes this change is not unreasonable and recommends it be accepted.
PRIOR DEPRECIATION STUDY ACCOUNTING PROBLEMS
As Staff investigated the Company s prior Application to establish depreciation rates
(Case No. INT-02-4), it encountered an accounting problem regarding the manner in which
the Company recorded its retirements from the depreciable investment accounts.The
Commission s Order in that case (Order No. 29187) recognized the Staffs comments and noted
that "Staff s 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 . In this case, Staff revisited that accounting problem with the Company.
The Company appears to have corrected the 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 the previous
accounting problem has an impact on the balances used in this depreciation study and that going
forward it is reasonable to utilize the results of this study.
LNG PLANT
The Staff reviewed the useful life of the LNG plant with the Company. The Company
stated that it intends to perform the necessary research and study work in the next twelve (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. In comments
supporting the prior service life of 15 years, Staff took the position that maintaining the LNG
facility is more economical than acquiring firm peaking capacity. The Company s review of the
LNG plant should include more than straight economic analysis; risk associated with supply
should also be part of the review. With a firm commitment from the Company to bring before
the Commission a decision on the prudence of the LNG plant, there is no reason to disturb the
current service life as recommended in the current study. Instead, the issue of remaining life and
STAFF COMMENTS JANUARY 24, 2006
salvage value should be addressed after the Company evaluates its peaking capacity options and
files its next depreciation case with the Commission.
RECOMMENDATION
At this time Staff recommends that the Company s Application be approved with the one
correction reflecting the correct account balances for the following three accounts:
Account 378 Regulator Station Equipment
Account 380 Services
Increased by $109 544.
Increased by $5 261 089.
Decreased by $5 370 634.Account 381 House Meters
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 of3.35%. The
Company s Application requested a decrease in its annual depreciation expense of $1 998 923.
With the above adjustment, the Company s annual depreciation expense would be decreased by
058 925.
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 2005.
Respectfully submitted this a ~ day of January 2006.
onovan E. Walker
Deputy Attorney General
Technical Staff: Harry Hall
Joe Leckie
i :umisc:comments/intgOS.3dwhhjl
STAFF COMMENTS JANUARY 24, 2006
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Attachment A
Case No. INT-05-
Staff Comments
01/24/06
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 24TH DAY OF JANUARY 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. INT-05-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
PAUL R. POWELL
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
INTERMOUNTAIN GAS CO
PO BOX 7608
BOISE, ID 83707
MORGAN W. RICHARDS, JR.
ATTORNEY AT LAW
804 E PENNSYLVANIA LANE
BOISE, ID 83706
J-)
SECRETAR~
CERTIFICATE OF SERVICE