[Federal Register: November 19, 2004 (Volume 69, Number 223)]
[Notices]
[Page 67727-67729]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19no04-49]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. AI05-1-000]
Accounting for Pipeline Assessment Costs; Notice of Proposed
Accounting Release
November 5, 2004.
Take notice that the Chief Accountant of the Federal Energy
Regulatory Commission proposes to issue an Accounting Release
(attached) to provide guidance on accounting for pipeline assessment
activities. The proposed Accounting Release would require an entity to
recognize costs incurred in performing pipeline assessments that are a
part of a pipeline integrity management program as maintenance expense
and would apply to all Commission jurisdictional entities.
The Commission has reviewed the proposed Accounting Release. At the
conclusion of the comment period specified at the end of this notice,
the Chief Accountant will consider the comments received, make any
necessary changes and circulate the proposed final Accounting Release
to the Commission for review. Upon the Commission's approval, a final
Accounting Release will be issued by the Chief Accountant.
All interested parties are invited to send electronic or written
comments on all matters in this proposed Accounting Release to the
Commission. Comments are requested from those who agree with the
provisions of the proposed Accounting Release as well as from those who
do not. Comments are most helpful if they identify the issues or
specific paragraph or group of paragraphs to which they relate and
clearly explain the problem or question. Those who disagree with
provisions of this proposed Accounting Release are asked to describe
their suggested alternatives, supported by specific reasoning.
Specifically, responses to the following questions are requested:
1. The Proposed Accounting Release concludes that pipeline
assessment activities performed as part of a pipeline integrity
management program should be accounted for as maintenance expense. Do
you agree or disagree with the conclusion? If you disagree, please
provide your alternative view and basis for it.
2. Are there instances, other than in connection with a major
pipeline rehabilitation project, where pipeline assessment costs should
be capitalized? If so, please provide particulars of the circumstances
under which the costs would qualify for capitalization, the applicable
Uniform System of Accounts Instruction and/or other authoritative
literature that supports such a determination.
3. This proposed Accounting Release contemplates an effective date
of January 1, 2005. Should this Accounting Release instead be applied
retroactively for all periods? If so, provide a basis for your
conclusion.
The Commission encourages electronic submission of comments in lieu
of paper using the ``eFiling'' link at http://www.ferc.gov. Persons
unable to file electronically should submit an original and 14 copies
of their comments to the Federal Energy
[[Page 67728]]
Regulatory Commission, 888 First Street, NE., Washington, DC 20426.
In addition to publishing the full text of this document in the
Federal Register, the filing is accessible online at http://www.ferc.gov
, using the ``eLibrary'' link and is available for review
in the Commission's Public Reference Room in Washington, DC. There is
an ``eSubscription'' link on the Web site that enables subscribers to
receive e-mail notification when a document is added to a subscribed
docket(s). For assistance with any FERC Online service, please e-mail
FERCOnlineSupport@ferc.gov, or call (866) 208-3676 (toll free). For
TTY, call (202) 502-8659.
Comment Date: December 20, 2004.
Magalie R. Salas,
Secretary.
Attachment--Federal Energy Regulatory Commission Proposed Accounting
Release No. 18 Accounting for Pipeline Assessment Costs
Summary
1. This Accounting Release clarifies that the pipeline
assessment costs of a pipeline integrity management program are
properly accounted for as maintenance and charged to expense in the
period incurred. These costs generally include hydrostatic testing,
smart pigging, and direct pipeline assessment techniques.
Reasons for Issuing Accounting Release
2. The Commission has become aware of diverse practices in
accounting for pipeline assessment activities. For example, some
entities view pipeline assessments as activities performed
specifically for the purpose of testing and reporting on the
condition and integrity of the existing pipeline to prevent failure
and recognize these costs as maintenance expense. While other
entities capitalize some or all pipeline assessment costs where the
assessment leads to any property changes that qualify as a capital
addition or replacement. These diverse accounting practices reduce
the comparability of financial statements among jurisdictional
entities and make reviews of existing rates more difficult. This
Accounting Release would clarify the proper accounting for pipeline
assessment costs, promote comparability of financial information,
and reduce uncertainty.
Basis for Conclusion
3. Under the requirements of the Commission's Uniform System of
Accounts, costs incurred to inspect, test, and report on the
condition of existing plant to determine the need for repairs or
replacements and testing the adequacy of repairs made are recognized
as maintenance expense.\1\ Additionally, costs incurred for work
performed specifically for the purpose of preventing failure or
maintaining the life of plant are recognized as maintenance
expense.\2\
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\1\ See Operating Expense Instruction No. 2, Maintenance, Item
No. 2 of 18 CFR parts 101 and 201 (2004).
\2\ See Operating Expense Instruction No. 2, Maintenance, Item
No. 3 of 18 CFR parts 101 and 201 (2004).
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4. The Commission, however, has permitted the capitalization of
pipeline testing costs related to existing plant in certain
instances. In response to pipeline safety legislation in 1968, the
Chief Accountant issued Accounting Release No. 8 (AR-8). In AR-8,
costs incurred under a planned maintenance program to meet the
requirements of the legislation were to be treated as maintenance
expense. However, entities were allowed to capitalize retest costs
in those instances where initial tests of a constructed pipeline did
not meet the requirements of the new legislation, making it
necessary to retest so that the full capacities of the pipeline
could be utilized. When such costs are capitalized all prior testing
costs related to the specific property were to be retired in
accordance with Gas Plant Instruction No. 10.
5. The Chief Accountant has also permitted entities to
capitalize hydrostatic testing costs when the work was done in
connection with major pipeline rehabilitation projects involving
significant replacements and modifications of facilities.\3\ These
rehabilitation projects extended the overall pipeline system's
useful life and serviceability. Capitalization of pipeline
assessment costs in these instances was permitted on the conceptual
basis that future accounting periods would be benefited.\4\ The
pipeline assessment activities in these instances were not, however,
associated with any on-going maintenance programs.
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\3\ In Docket No. AC94-149-000, Northwest Pipeline Corporation
(NPC) was permitted to capitalize the costs of pipeline coating and
hydrostatic testing costs incurred to rehabilitate its pipeline
system. NPC was also permitted to establish retirement units for
pipeline costing and hydrostatic testing. When coating costs and
hydrostatic testing costs were capitalized as part of a
rehabilitation project, NPC was required to retire all prior coating
and testing costs in accordance with Gas Plant Instruction No. 10.
Capitalization of pipeline assessment activities in this case was
permitted as they were considered part of a one-time rehabilitation
project which significantly enhanced and increased the life of NPC's
pipeline system as a whole, although the work was spread out over a
number of years.
\4\ See Statement of Financial Accounting Concepts No. 6,
paragraph 25.
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6. Natural gas and oil pipelines must now comply with new
Federal regulations regarding pipeline integrity management programs
issued by the Office of Pipeline Safety (OPS) of the U.S. Department
of Transportation.\5\ Under these regulations, natural gas pipeline
and hazardous liquid pipeline operators are required to develop,
implement, and follow an integrity management program for segments
of pipeline in high consequence areas. The pipeline integrity
management programs require pipeline companies to (a) identify and
characterize applicable threats to pipeline segments that could
impact a high consequence area; (b) conduct a baseline assessment
and periodic re-assessments of these pipeline segments; (c) mitigate
significant defects discovered from the assessment; and (d)
continually monitor the effectiveness of its integrity program and
modify the program as needed to improve its effectiveness. To make
initial and subsequent assessments, pipeline companies will use
hydrostatic tests, smart pigs, or direct assessment activities.
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\5\ 49 CFR part 192, Pipeline Safety: Pipeline Integrity
Management in High Consequence Areas (Gas Pipelines); Final Rule
effective January 14, 2004 and 49 CFR part 195, Pipeline Safety:
Pipeline Integrity management in High Consequence Areas (Hazardous
Liquid Operators with 500 or more miles of Pipeline); Final Rule
effective February 15, 2002.
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7. Under OPS's regulations for pipeline integrity management
programs, the pipeline assessment activities that pipelines must
undertake are to determine the condition of the pipe. If any
anomalies are detected, repairs or replacements are then made to
maintain and improve pipeline integrity and reliability. The
assessment activities required under a pipeline integrity management
program constitute steps performed as part of an on-going inspection
and testing program.
8. The Commission's accounting rules, as described above,
provide that costs incurred to inspect, test and report on the
condition of plant to determine the need for repairs or replacements
are to be charged to maintenance expense in the period the costs are
incurred. We view the various testing techniques that will take
place because of the new safety regulations to constitute a work
activity falling within our rules for maintenance expense. Further,
expenditures for pipeline assessment activities under a pipeline
integrity program do not meet the capitalization criteria
established by the Commission, as discussed above, as the costs are
not incurred as part of a one-time rehabilitation project to extend
the useful life of the pipeline system, rather the expenditures are
made as part of an on-going inspection and testing or maintenance
program.
9. Accordingly, pipeline assessment costs of a pipeline
integrity management program are properly accounted for as
maintenance and charged to expense in the period incurred. Appendix
A includes three examples that illustrate the provisions of this
Accounting Release.
10. This Accounting Release shall be effective January 1, 2005.
Appendix A--Illustrative Examples of the Application of the Accounting
Release
Example 1
A pipeline company owns and operates a large pipeline system.
The company has established 100 foot lengths of pipe as a retirement
unit for purposes of determining when the costs of property changes
are to be charged to expense or capitalized as a component of
pipeline property. During the year, the Company assesses 100 miles
using hydrostatic testing and direct assessment of pipe at a cost of
$1.5 million. As a result of the assessment, the company replaces a
continuous 2 mile segment of the pipe at a cost of $750,000 and
replaces or sleeves 3
[[Page 67729]]
other separate sections of the pipeline each being less than 100
feet in length at a total cost of $175,000. At the conclusion of all
work, the company hydrostatically tests the affected segments of
pipe to appropriate operating pressure at a cost of $150,000.
The assessment activity, regardless of whether hydrostatic
testing, direct assessment, or other techniques are utilized
constitutes work undertaken specifically for the purpose of
determining the condition of existing pipeline facilities. Although
the assessment did result in identifying a need to replace a segment
of line in excess of the designated property unit of 100 feet, only
the direct construction costs of $750,000 and a related portion of
the hydrostatic testing costs incurred following completion of the
construction work should be capitalized. All of the costs incurred
to assess the condition of the existing pipeline should be charged
to maintenance expense in the period they are incurred. Also, all of
the costs of replacing or sleeving the 3 pipe sections that are each
less than a retirement unit, including a portion of the related
hydrostatic testing costs incurred after completion of the work
should be charged to expense in the period incurred.
Example 2
A pipeline company owns and operates a large pipeline system.
Its pipeline system is comprised of segments with different size
pipe and different maximum allowable operating pressures (MAOP). The
company is experiencing capacity constraints on certain pipeline
segments because of increased demand for gas in markets it serves.
The company hydrostatically tests a 5 mile segment of its system
to assess its compliance with pipeline safety regulations at a cost
of $1,000,000. In conjunction with facility additions of $200,000,
the company uses the opportunity provided by the hydrostatic testing
to certify an increase in the MAOP of the 5 mile pipeline segment
from 750 pounds per square inch gauge (PSIG) to 1000 PSIG. The
increased MAOP of the 5 mile segment now equals the MAOP at the
upstream and downstream ends of the pipeline segments of which it is
interconnected and the company is able to alleviate an operational
constraint and increase the available capacity of its pipeline
system.
The costs of the hydrostatic test of $1,000,000 should be
charged to maintenance expense since they were incurred for the
purpose of determining the condition of existing pipeline
facilities, a maintenance activity. While a benefit of the
assessment activity was an increase in the capacity of the pipeline
segment, the company would have had to incur the costs to
hydrostatic test the pipeline segment to comply with pipeline safety
requirements regardless whether an increase in MAOP resulted. Thus,
the company cannot capitalize any of the hydrostatic test costs in
this instance. The company would, however, be allowed to capitalize
the $200,000 of facility additions.
Example 3
A pipeline company previously received approval from the Chief
Accountant to capitalize hydrostatic test and smart pigging costs
when the work was done in connection with a major pipeline
rehabilitation project involving significant replacements and
modifications of facilities. The rehabilitation project
significantly extended the overall pipeline system's useful life.
During 20X1, the Company assesses 50 miles of the eastern leg of
its system using hydrostatic testing and smart pigging at a cost of
$1.0 million. The assessment was done as part of the pipeline's
integrity management program to comply with DOT regulations. As a
result of the assessment, the company replaces a continuous 5 mile
segment of pipe at a cost of $1.5 million. In addition, the company
undertakes a major rehabilitation of the western leg of its system.
As a part of the $20 million rehabilitation project, the company
incurs $500,000 of hydrostatic test costs to determine the exact
nature of replacements to be made, along with incurring $250,000 of
hydrostatic test costs to determine that the replacements were
adequately made.
The costs of the hydrostatic and smart pigging assessment
activities performed on the eastern leg of the system of $1.0
million would be expensed as maintenance, since it was performed as
a part of the company's integrity management program. The company
would be allowed, however, to capitalize the $1.5 million of direct
construction costs it incurred, since they replaced a segment of
line in excess of the designated property unit of 100 feet.
In regards to the major rehabilitation project on the western
leg of the company's system, the company would be allowed to
capitalize assessment related costs, if it has in place appropriate
internal controls for distinguishing between costs incurred related
to ongoing assessment activities under its pipeline integrity
program and those assessment costs that are a part of a
rehabilitation project. As a minimum, in order to qualify for
capitalization, the company must have controls in place that clearly
define the scope of the rehabilitation project, separately budget
for the project as a capital item, provides for a projected
completion date for the project and adequately sets forth how costs
are assigned to construction projects.
If the above capitalization criteria are met, the company would
be allowed to capitalize the $500,000 of hydrostatic test costs it
incurred to determine the scope of the replacements needed related
to the major rehabilitation of the western leg of its system. The
company would also be allowed to capitalize the $250,000 of
hydrostatic test costs it incurred to determine that the
replacements were adequately made. Capitalization of hydrostatic
test costs in this instance is appropriate since the rehabilitation
project significantly extends the useful life of the western leg of
the company's system. Previous testing costs related to the
rehabilitated segments would of course be retired in accordance with
Gas Plant Instruction No. 10.
[FR Doc. E4-3224 Filed 11-18-04; 8:45 am]
BILLING CODE 6717-01-P