Agenda Date: October 13, 1999 Item Number: 2E Docket: UE-991328 Company Name: Puget Sound Energy Staff: Thomas Schooley, Policy Research Specialist Roland Martin, Regulatory Consultant Graciela Etchart, Utility Rate Research Specialist Recommendation: Direct PSE to capitalize CableCureTM expenditures to account 367, Underground Conductors. Discussion: On August 24, 1999, Puget Sound Energy (PSE) filed a petition for an accounting order authorizing deferral of certain costs associated with a silicone injection program. The petition requests that in recognition of the long-term benefits of this program, the costs be deferred and amortized over ten years. I. The physical problem. High molecular weight polyethylene (HMW) underground residential distribution system cable installed prior to 1979 is deteriorating faster than expected; sometimes within ten to twelve years instead of an expected 35 years. This problem is industry wide. The HMW polyethylene is the insulation around the electrical wire. Since the wires are strands wound around each other there is room for water to get inside and it does. The HMW polyethylene is breaking down in the presence of the water and an electrical current. "Water trees" form in the insulation and eventually the electricity finds a path of least resistance into the ground. This blows a big hole in the cable, causing an outage until the hole is found and repaired. PSE installed about 4,800 miles of HMW conductor during the 1960s and 1970s. Beginning in 1980, PSE specified use of improved cables. Today PSE suffers about 1,500 underground conductor related outages per year with 90% due to cable failures. Other parts of the underground system also fail, such as cable elbows or splices. The prevalent means to fix the failing cables is to dig them up and replace them. This method costs between $32,000 and $264,000 per mile depending on the terrain, averaging about $85,000 per mile of cable replacement. II. A physical solution In the early 1990s, PSE began experimenting with a silicone dielectric enhancement fluid which can be injected into stranded cables. "Stranded" in this use means underground conductor made of strands of wire, like a rope. The fluid is Docket UE-991328 injected in one end of the cable and flows around and between the strands until it comes out the other end. This silicone fluid permeates the HMW polyethylene insulation, fills in the "water trees", reacts with the water to fill the gaps, and prevents further deterioration. Cables injected with this substance are expected to last as long as newly installed cable. The manufacturer of CableCureTM guarantees its product for 10 years and laboratory testing by accelerated aging shows a life of 20 years or more can be expected. The silicone fluid is marketed as CableCureTM by the Utilix Corporation of Kent, WA. Silicone injection costs about nine dollars per foot, or $48,000 per mile. (As compared to $85,000 per mile for replacement on average.) Only about one-half of the HMW conductor is eligible for the CableCureTM solution. Reasons for not treating the cable include: -too many splices from prior repairs preventing the flow of the silicone, -corroded exterior neutral wire, or -the potential to redesign the distribution system for other reasons. CableCureTM is a one time application which needs no further maintenance. III. The accounting problem PSE tailors its remediation efforts to maintain underground outages at below 1,500 per year. To accomplish this goal, PSE is replacing from 120 to 180 miles of underground cable per year. PSE targets 150 miles per year for cable remediation with a budget of $10 million to $11 million. Under normal accounting procedures the cost of replacing cable is capitalized in Account 367, Underground Conductors. This activity is considered an investment by the company and is depreciated over 30 plus years. The CableCureTM treatment preserves the installed conductor and extends the conductor's life beyond the original estimate. Generally accepted accounting principles consider capital improvements as additions to assets which must be depreciated over the remaining life of the asset. The theory being that certain expenditures are incurred to obtain greater future benefits, rather than to maintain a given quantity of current services. Since these expenditures affect only future periods, they should be capitalized and allocated to future periods. This then accomplishes a matching of costs and benefits. However in 1992, the Federal Energy Regulatory Commission (FERC) ruled that the CableCureTM product is a maintenance item which must be expensed in the year incurred. The FERC also said if a utility receives permission to capitalize and amortize the CableCureTM costs from the utility's state commission, that is acceptable to the FERC. PSE now requests that permission. IV. An Accounting solution PSE requests permission to accumulate CableCureTM expenditures as a regulatory asset and to amortize this over ten years. PSE does not need the Commission's permission to use CableCureTM in PSE's operations. In Staff's opinion the use of CableCureTM to remediate the problem of conductor failure makes sense based on the economics of injection versus replacement, and for qualitative considerations such as minimizing ground disturbances. We conclude this is not a maintenance activity but an addition to the capital assets of PSE. We believe the proper accounting is for PSE to capitalize the expenditures in plant accounts, which would be then depreciated the same as cable replacements. A well reasoned accounting discussion from Price Waterhouse supports this conclusion. PSE accepts this revision of the request. Summary Underground residential conductors installed in the 1960s and 1970s are failing due to the infiltration of water into the plastic insulation causing water trees which eventually create an electrical path to the ground causing a power outage. CableCureTM is a liquid silicone which fills the voids and permanently solves the early failure problem. The FERC ruled that CableCureTM is a maintenance activity which must be expensed in the year incurred, but allows state commissions to reach different conclusions. Staff views the application of CableCureTM as a capital expense since it extends the life of the treated cable. The proper accounting for this conclusion is to capitalize the cost into plant account 367, Underground Conductors, and to depreciate it in a normal manner. Recommendation: Direct PSE to capitalize CableCureTM expenditures to account 367, Underground Conductors.