Appendix A
C. H. GUERNSEY & COMPANY
Engineers  Architects  Consultants
July 31, 2017
Ms. Cynthia Green-Warren
Assistant People’s Counsel
Office of the People’s Counsel
State of Maryland
6 Saint Paul Street, Suite 2102
Baltimore, Maryland 21202
Dear Ms. Green-Warren,
Washington Gas Light (“WGL”) has requested the Maryland Public Service Commission to
expeditiously consider the Company’s request for favorable accounting treatment of the
encapsulation costs currently being incurred in Prince George’s County. The Company has
requested that an estimated $87 Million be treated for accounting purposes as Capital
improvements (See WGL letter dated April 28, 2005 to O. Ray Bourland, Executive Secretary,
Maryland Public Service Commission).
We see no compelling reason for the Commission to expeditiously grant the Company's
request for an accounting order. The Company's ongoing incurred costs related to the "leaking
couplings" have presumably been accounted for by either (1) accumulating them in an
appropriate "holding" account, or (2) including them in an expense account for maintenance of
lines. Without a full discourse about how the Federal Energy Regulatory Commission (“FERC”)
rules related to how the Uniform Standard of Accounts (“USOA”) should be applied, it would be
improper for the Commission to allow the Company to move these costs from either of these
accounts into a plant account and thus into its rate base where it would be earning a return for
shareholders.
At your request, our GUERNSEY Team of utility experts initiated a review of this request to
determine if the accounting treatment was logical and in accordance with FERC USOA; was
there any negligence on the part of the Company, Suppliers, or Contractors; or should any
insurance recoveries be reflected in the revenue requirements covered by ratepayers. We have
initiated these tasks by developing two (2) formal Data Requests for information from the
Company, one is of technical nature and the other is financial in nature. These two data requests
have only within the last week been formally delivered.
Our Team has identified four (4) areas of concerns:
 Failure Analysis is not complete,
 Request for Accounting Treatment is premature,
 Interpretation of FERC USOA is not consistent with prior accounting treatment,
 Financial impact of accounting treatment to ratepayers is not known
5555 North Grand Boulevard, Oklahoma City, OK 73112-5507
Phone: 405.416.8100
www.chguernsey.com
Fax: 405.416. 8111
Appendix A
The Company has elected to move forward with their request for favorable accounting
treatment without regard to the final outcome of the failure analysis currently underway (See
WGL Letter dated April 22, 2005, Appendix A). There are multiple failure options that could be
causing the leaks in the so-called 100-square mile area. At this point in time, we do not know if
the leaks are attributable to a single failure mechanism or multiple mechanisms. Nor do we know
if the failure mechanism is due to inferior rubber membranes, manufacturing error, installation
error, chemical decomposition, membranes reaching normal life expectancy, or just bad luck. It
is interesting that the “abnormal” numbers of leaks are occurring in a specified area indicative of
some physical influence that differentiates these couplings from those in the rest of the WGL
service territory. Implications of each of these failure mechanisms can define how the costs to
repair should be treated. For example, if it can be determined that the manufacturer used inferior
membrane material in the manufacture of the installed couplings, there should be some recourse
against the manufacturer. If the contractor used inappropriate installation techniques, then the
Company should investigate recovery of some or all of their costs for encapsulation from the
contractor. In each of these two examples, the ratepayers would be insulated from any rate
impacts. On the other hand, if the Company were to be found to have not provided adequate
maintenance, the costs should be borne by the Company and not on the backs of the ratepayer.
However, none of these decisions can be made until the failure analysis is completed and the
results confirmed.
At the Company’s request and apparently agreed upon by the Commission Staff (See Memo
dated May 17, 2005), the accounting treatment for the estimated $87 Million is to book these
costs to USOA Account No. 376, Mains. The Company’s justification is in their interpretation of
the word “substantial.” The Company has interpreted accounting guidance referenced in Gas
Plant Instructions of FERC, Additions and Retirements of Gas Plant, Section 10C(1), to mean
substantial addition in terms of total dollars. It appears that the PSC Staff is also interpreting
substantial additions to be in terms of total dollars expended. It is our experience and confirmed
with FERC that this is, in fact, not appropriate accounting treatment. Simply because there are
some 34,000 individual couplings in question does not, in and of itself, constitute “substantial
additions” to plant. It would be appropriate to examine each case, independently, and determine
the appropriate accounting treatment. The Company may be requesting this treatment in order to
solidify a position for use in a future rate case that these costs should be included in “rate base”
and that the Stockholders of WGL should be allowed to earn a return on this “investment.”
While the Commission would preserve their statutory position to approve these costs during a
rate case proceeding, the aforementioned position of the Staff (in Memo dated May 17, 2005)
would set a precedent that would be extremely difficult to retract at that point in time. Therefore,
to move forward with the accounting treatment determination at this point is without merit and
should be delayed until further discussions with FERC can occur and the determination of failure
mechanism can be defined.
WGL has, itself, recognized that encapsulations “are not substantial and thus, recorded as
maintenance expense (See WGL Letter dated April 28, 2005 to the Commission).” The FERC
is clear in its’ application of USOA when it comes to the consistent handling of costs. In this
case, an encapsulation is just that, an encapsulation. It does not matter if there are 5
encapsulations to be booked or 34,000. In terms of accounting treatment, consistency must be
maintained or what good is a set of books? The aggregated dollar value is not a controlling
criterion for determination of accounting treatment. An additional “test” of accounting treatment
5555 North Grand Boulevard, Oklahoma City, OK 73112-5507
Phone: 405.416.8100
www.chguernsey.com
Fax: 405.416. 8111
Appendix A
of costs is the question of “life extension.” Does the activity that has generated the cost add years
to the existing installation? If the addition adds years to the life of the existing service life then
the costs can, within reason, be treated as capital additions. However, absent the increase in
service life, the costs should be assumed to be maintenance and, therefore, booked to and O&M
account. In the instant case, the encapsulation itself does not extend the service life of the lines. It
merely assures the existing lines will last through their expected life when they were originally
installed. The installation of the “plastic sleeves” inside of the existing wrapped-steel lines does
provide life extension and should be capitalized. The difference in these two specific techniques
is obvious and the accounting treatment should be just as obvious. However, until WGL can
define the extent of encapsulations versus insertion of plastic sleeve, it is premature for the
Commission to issue a blanket order on accounting treatment.
Prudence, at this point in time, requires that, at a minimum, the overall impact of these costs
to the ratepayer and to the Company, regardless of the accounting treatment, be evaluated to
determine the overall impact. However, the Staff’s position and the continued pressing by WGL
for expedited treatment preclude any substantive analysis of impacts to either party.
Conclusions:
There are “Clearing Accounts” available within the USOA that act as temporary storage
locations for costs that do not meet formal definitions within the USOA. Once a formal
determination has occurred, the balances in these Clearing Accounts can be moved to
their proper location and, if capitalization is appropriate, returns can be applied
retroactively.
Any determination of accounting treatment premature to identification of cause of
failure will lessen the importance to the Company to actively pursue financial recourse
should it be available.
If the Commission prematurely orders the capital accounting treatment and the
Company does pursue recourse, what assurances are there that the ratepayer will see any
benefit. The Stockholders will see their rate of return on investment and the Company
will see a revenue stream from possible settlement. What will the ratepayer see?
With highest regards,
Mark W. Crisp, P.E.
Cc: Mr. Jerry Smith, P.E.
Ms. Audrey Osburn
Mr. Ken Senour
5555 North Grand Boulevard, Oklahoma City, OK 73112-5507
Phone: 405.416.8100
www.chguernsey.com
Fax: 405.416. 8111