[Federal Register Volume 69, Number 223 (Friday, November 19, 2004)]
[Notices]
[Pages 67727-67729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3224]


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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 
[email protected], 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