XIV. Capitalization Policy
A basic accounting Tenet is that longer-lived and higher value equipment is accounted for by capitalizing the costs as a long-term asset and then recovering its cost over multiple years through depreciation, spreading the costs over time as an annual expense for the useful life of the equipment. A pipeline might have a 30-year life and clearly all ratepayers should pay for the construction of that asset over its long life. But many items that might provide service for several years are acquired at a low costs. Many hand tools last for years but no one would reasonable argue to allocate a $30 hammer over its 10 year, or longer, life. SoCalGas and SDG&E have an accounting policy that, at some threshold, it is simpler and easier to record as an expense in the year of acquisition the full cost of many minor times that will not be used up immediately.
Parties spend some time on this issue because SoCalGas and SDG&E propose a new policy: items over $5,000 each should be capitalized replacing the old thresholds of $500 for SoCalGas and $2,500 for SDG&E. The short-term effect is to increase expenses because a portion of Test Year 2004 costs would no longer be capitalized and deferred to subsequent years. TUEN objected to the proposed change in SoCalGas' capitalization threshold (from $500 to $5,000). TURN's prepared testimony described in general terms the adverse rate impacts that it believes would result were the utility's proposal to be adopted.70 TURN argued in its brief that SoCalGas and SDG&E, and the Sempra Corporate Center could use the lowest rate of $500 (at SoCalGas) and achieve consistency rather than raise all three units' level to $5,000.71 They complained that SoCalGas and SDG&E witnesses would not or could not quantify administrative savings. But accruing a return, capitalized costs can be inherently more expensive that expensing minor costs in a single year. ORA and UCAN did not brief this issue.
The parties opposed to the accounting change argue that SoCalGas and SDG&E did not show material savings in administrative costs and that the immediate revenue requirement impact would be adverse to current ratepayers. Before we can agree to treat as a current-year expense the cost of such items as personal computers, we must be persuaded not only that long-term savings will be significant, but that it is most appropriate to think of such purchase as stand-alone expenses, rather than thinking of them as part of a broader, more costly network. The current record does not satisfy these concerns, and we will not adopt the proposed change. Apparently, SoCalGas and SDG&E presumed that the commission would adopt its new capitalization proposal, and did not provide a clear record as to how to calculate revenues for capitalization under the existing method. We have been left with the need to use an inelegant proxy for these revenues, and expect constructive comments on ways to make these numbers more precise.
70 Ex. 501,pp. 9-10.
71 TURN SoCasGas opening brief, pp. 143-145
