20060206_1459.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:DONOV AN E. WALKER
DATE:FEBRUARY 3, 2006
SUBJECT:INTERMOUNT AIN GAS COMPANY'S APPLICATION TO CHANGE ITS
COMPOSITE DEPRECIATION RATE - CASE NO. INT -05-
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 Order No. 29917, Notice of Application and Notice
of Modified Procedure, setting a comment deadline of January 24, 2006. Commission Staff was
the only party to file comments, and recommended approval of the Company s Application with
minor adjustments.
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 of that Order. Id. The Company contracted
the services of AUS 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 prices 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
DECISION MEMORANDUM
services, coupled with the increasing evidence of the benefits of plastic s longer service life and
lower costs vs. steel, necessitates the proposed change in 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
rate be made effective 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 recommends approving the
Company s Application with adjustments to three accounts that results 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 mams. 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 is different for steel pipe and
for 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
DECISION MEMORANDUM
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 recommends 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 $5 370 634.10; and Account 378-
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, SUV s, heavy trucks, utility boxes, and trailers. The
study recommended continuing the current nine-year service life. However, it recommended that
the net salvage value be adjusted from 15% to 5%. This causes an annual depreciation expense
increase of $102 184. Staff agrees that this adjustment is reasonable and recommends 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 of 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
DECISION MEMORANDUM
life at the time it was set commenting that the LNG facility was more economical than acquiring
firm peaking capacity. Staff recommends 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
recommends 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.
ST AFF RECOMMENDATION
Staff recommends 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 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 of3.35%.
Additionally, Staff recommends that the Commission adopt the Company
recommendation to implement the new depreciation rates effective at the beginning of the
Company s fiscal year, October 1 2005.
COMMISSION DECISION
Does the Commission wish to grant or deny the Company s Application to change its
composite depreciation rate? Does the Commission wish to make the adjustments recommended
by Staff?
DONOV AN E. WALKER
M:INT-O5-03 dw2
DECISION MEMORANDUM