Columbia Gas of Pa. Seeks to Change to WACOG Methodology for Storage Inventory

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November 17, 2010

Columbia Gas of Pennsylvania has sought approval from the Pennsylvania PUC to revise its accounting methodology for gas in storage inventory from an annual last-in/first out (LIFO) methodology to the weighted average cost of gas (WACOG) methodology, effective January 1, 2011 (P-2010-2209925).  

Columbia said that the change should reduce Purchased Gas Cost rate volatility for customers.

The current LIFO method requires Columbia to initially project the average cost of all gas purchases for the entire fiscal year to set an initial LIFO injection/withdrawal inventory rate.  The rate derived from the total annual estimated purchase cost becomes the estimated inventory rate and is then updated monthly as actual costs for purchased volumes and revised projected costs for remaining purchase volumes become available.

As the estimated annual inventory rate based on all purchases is adjusted, a corresponding year-to-date LIFO adjustment is also recorded to bring storage inventory pricing of experienced injections and withdrawals in line with the updated rate.  The LIFO adjustments are made monthly.

"The monthly pricing adjustments can have a measurable effect upon quarterly gas costs, as prior injections and withdrawals for the year are repriced to the updated LIFO price," Columbia said.

Columbia's Purchased Gas Cost application period is the 12 months beginning October 1, which means that the PGC application period overlaps two annual LIFO periods.  "As a result, the rate effects resulting from the final LIFO adjustment for a calendar year, and from the creation or elimination of LIFO layers, are not known and cannot be reflected until the subsequent April quarterly PGC filing, because the information is not known at the time of the January quarterly PGC filing," Columbia said.

Under the WACOG method, the actual cost and volume of the current month's injections are added to the inventory value calculated at the end of the previous month, and a new average cost per Mcf is calculated for the current month.  The WACOG method does not require repricing of prior months' injections or withdrawals.

As a result, use of the WACOG methodology will enhance Columbia's ability to forecast a substantial portion of its PGC costs, and reduce associated PGC over/undercollection volatility, Columbia said.  Columbia noted that due to LIFO adjustments, the e-Factor, or reconciliation, has been as high as 50% of the total resulting cost of gas paid by customers, leading to large swings in gas commodity rates.

   
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