FERC plans to issue an accounting release requiring regulated pipelines to treat as a maintenance expense those costs incurred while performing pipeline assessments that are mandated under a federal pipeline integrity program.

The pipeline assessment activities that generally would be treated as maintenance expense, and thus recoverable in a pipe’s rates, would include hydrostatic testing, smart pigging and direct pipeline assessment techniques, according to FERC’s proposed accounting release [AI05-1]. The costs would be accounted for as maintenance and charged to expense in the period incurred, it said.

The Commission said it was proposing the accounting release because of the “diverse practices” in the industry for accounting of pipeline assessment activities. While some companies “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,” other companies “capitalize some or all pipeline assessment costs where the assessment leads to any property changes that qualify as a capital addition or replacement.”

By capitalizing expenses, pipeline companies are able to take expenses that they incur today and deduct them over the long term without an immediate negative affect against revenues.

FERC’s proposed accounting release addresses the costs associated with carrying out the Office of Pipeline Safety regulations, which require pipeline operators to develop and implement integrity management programs for the segments of their lines that are located in the riskiest high-consequence areas (HCA). Under the integrity programs, pipes are required to identify potential threats to their lines in HCA areas, conduct baseline inspections and periodic re-inspections, mitigate significant defects and continually monitor their systems.

“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, [as well as] testing the adequacy of repairs made, are recognized as maintenance expense. Additionally, costs incurred for work performed specifically for the purpose of preventing failure or maintaining the life of plant are recognized as maintenance expense.”

The Commission’s chief accountant, however, has permitted pipelines to capitalize hydrostatic testing costs when the work was done in connection with major pipeline upgrade projects involving significant replacements and modifications of facilities, according to the proposed accounting release. “The pipeline assessment activities in these instances were not…associated with any on-going maintenance programs.”

In general, “expenditures for pipeline assessment activities under a pipeline integrity program do not meet the capitalization criteria established by the Commission, …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,” the proposed accounting release said.

In a notice of the accounting proposal issued on Friday, FERC asked pipelines to cite instances, other than those related to major pipeline upgrades, where pipeline assessment costs should be capitalized. It also requested that pipelines comment on the agency’s conclusion that pipe assessment activities that are performed as part of a pipeline integrity management program be treated as maintenance expense.

The chief accountant will weigh the comments and make possible changes before submitting a proposed final accounting release to the Commission for review. Upon FERC approval, the final accounting release will be issued by the agency’s chief accountant.

The accounting release is expected to take effect on Jan. 1, 2005.

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