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FERC Nixes NGPL Bid to Capitalize Bulk of Rehabilitation Project Costs

FERC last Monday rejected Natural Gas Pipeline Company of America's (NGPL) request to capitalize the bulk of the costs that it will incur in a pipeline rehabilitation project aimed at mitigating stress corrosion cracking (SCC) on its system.

In a December 2005 filing, NGPL said it planned to spend $140 million over a five-year period to remediate SCC through the combination of hydrostatic "spike" testing (spike pressurization), pipe replacement and coating on 1,300 miles of pipeline. Of the $140 million, it said $100 million would be spent on spike pressurization and $40 million on pipe replacement and coating. Natural proposed the repairs after the Department of Transportation (DOT) issued a corrective action against the pipeline following an incident on its system in May 2005.

To comply with the DOT directive, NGPL's parent, Kinder Morgan Inc. (KMI), developed and implemented a patented process to locate specific parts of its system that are susceptible to SCC and require remediation (KMI Process). Natural said it used the KMI process along with spike pressurization as the remediation tool to fix known problems.

Spike pressurization is a scientifically validated method of blunting SCC. It stops or significantly reduces the growth rate of cracks in the pipeline and extends the useful life of a pipe by up to 10 years, according to NGPL.

But the Federal Energy Regulatory Commission refused NGPL's request to capitalize the $100 million in spike pressurization costs, noting that the chief purpose of spike pressurization is to identify SCC rather than correct the problem. "Spike pressurization is primarily a type of hydrostatic test used to reveal critical cracks that threaten the pipeline's integrity, albeit with the added benefit of blunting minor cracks. Therefore, NGPL must expense rather than capitalize the cost of spike pressurization under the Commission's accounting requirements," the order said.

"Contrary to assertions by Natural, blunting cracks in a pipeline using spike pressurization does not meet the capitalization criteria set forth in" FERC regulations. "Natural may, however, capitalize the cost of pipe replacement and coating [$40 million] undertaken as a part of its remediation program," the order noted.

To capitalize project costs, they must meet two qualifications: 1) extend the life, increase the capacity or improve the safety or efficiency of property owned by a company; and 2) improve the condition of that property after the costs are incurred as compared with the condition of that property when originally constructed or acquired, FERC said.

"The Commission finds that the second criterion for capitalization...is not met because spike pressurization does not improve the condition of pipe to a state better than its original condition. By blunting the cracks in the pipe, the symptom (SCC) is temporarily mitigated; however, the cracks and the cause of the problem (soil ph, imperfections in the pipe and disbonded coating) remain present. This will cause the blunted SCC in the pipe to eventually grow again and new SCC to develop in other places," the order said.

Capitalizing the spike pressurization costs would have allowed Natural to delay the recognition of expenses by recording them as a long-term asset. The pipeline would have been permitted to take expenses that it incurs now and deduct them over the long term without an immediate negative affect against revenues.

FERC instead directed Natural to expense the spike pressurization costs, which will allow the pipeline to recover them in rates.

FERC Commissioner Nora Brownell dissented from the majority on the issue of Natural capitalizing its costs. "I believe that Natural has justified capital treatment for the costs of spike pressurization incurred in conjunction with its SCC remediation project." While spike pressurization can be used as an assessment tool, Brownell said "the method that Natural has employed this technique for its SCC problem is not."

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