March 3, 2022
New FERC order allows capitalization of components of a corrosion control program that extends asset life
On February 22, 2022, the Federal Energy Regulatory Commission (FERC) issued an order granting a Pacific Gas and Electric (PG&E) request to treat their tower coating program as a "substantial addition" and therefore be able to capitalize the work.
FERC's decision is based on precedent as well as technical information provided by PG&E to demonstrate asset life extension as a result of implementing a tower coating program. Similarly, a Southern California Edison (SCE) request to capitalize remediation activities for tower corrosion in the 2021 SCE General Rate Case was unopposed by the California Public Utility Commission (CPUC). SCE states "[b]ecause remediation activities for tower corrosion can lead to an immediate life extension for up to 25 years for a failing asset, assessment and remediation costs are treated as capital."
What are the implications of this order? Components of a corrosion control program that will extend the useful life of assets can be capitalized.
Technical justification is necessary to demonstrate that the work being performed goes beyond expense maintenance work.
A robust corrosion control and asset strategy program that leverages applicable standards and procedures can help to justify the ability of the program to extend the life of assets and differentiate this work from expense work. In addition, implementing appropriate coating systems will improve system safety and mitigate the need for premature asset replacement.
An excerpt from the February 22, 2022, order is provided:
"The Commission has previously allowed utilities to treat the addition of minor items of property that previously did not exist as substantial additions and to capitalize the associated costs, when the costs extend the useful lives, operating capacity, or efficiency of the associated retirement units. Based on PG&E's representations that these first-time activities will extend the lives of the assets beyond their original estimated useful lives, as supported by PG&E's provision of extensive technical data, and its commitment to perform depreciation studies to incorporate the new service lives of the plant assets, we find that PG&E satisfies the requirements of EPI 10(C)(1) and may capitalize the Tower Coating Program costs as substantial additions."
How Exponent Can Help
With significant experience in corrosion and integrity management for utilities, as well as regulatory application support at the state and federal level, Exponent is well positioned to help operators develop the technical justification for life extension of assets. Exponent can also develop and improve methodologies and procedures that prioritize structures that would benefit from a dedicated corrosion control program and help operators understand whether other potential applications for this decision may exist beyond corrosion control.