XVI. Capitalization Policy
A basic accounting tenet is that longer-lived and higher value equipment is accounted for by "capitalizing" the cost as a long-term asset and then recovering its cost over multiple years through "depreciation," spreading the cost 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 cost. Many hand tools last for years but no one would reasonably 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 tools that will not be used up immediately.
Parties spent 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. TURN 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.96 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 $5,000.97 They complained that SoCalGas and SDG&E witnesses would not or could not quantify administrative savings. But accruing a return on capitalized costs is inherently more expensive than expensing minor costs in a single year. ORA and UCAN did not brief this issue.
After a few years the effect of changing the capitalization threshold is neutralized because there would no longer be the cost of prior years' capitalized items included in current year expenses. 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. While reducing rates now may lead to immediate rate reductions, the public interest is served by taking a longer term view. Capitalizing more current costs in the test year adds to rate base for future recovery and is more costly. We will adopt the accounting change as proposed.
96 Ex. 501, pp. 9-10.
97 TURN SoCalGas opening brief, pp. 143-145.
