Oil and gas pipelines depreciation rate reduced to 3.17%

The rate of depreciation on oil and gas pipelines in the books of accounts has been changed to 3.17 per cent from 10.34.

Earlier, depreciation rate for calculating pipeline tariffs was 3.17 per cent. The new rate will be applicable on a retrospective basis from April 1, 2005.

This was done following a request from Gail, the biggest owner and operator of natural gas pipelines in the country. Gail had said there was a disparity in depreciation rates considered for tariff calculation purposes and for book accounting. This resulted in the books reflecting a lower asset value than the actual value.

According to senior Gail executives, the interim report of the Tariff Commission brought out the dichotomy in the technical useful life of the asset.

The commission, while reviewing tariff rates, considered the asset value based on books of accounts. The asset value worked out to be much lower as the depreciation rate was higher. The interim report, therefore, reflected a reduction in the tariffs.

"The interim report did not take into account the fact that the actual capital recovery was effected through the tariff over a longer time-span of 30 years, which was lower than what the books of accounts reflected. This led to under-recovery of the cost of the asset as calculated in the tariffs," said a Gail executive.

Gail contented that the true life of a pipeline asset was higher than that of normal plant and machinery and that the accounting depreciation rate for gas pipelines should be commensurate with the true life of the asset.

International practices in developed economies also consider the life of pipeline to be over 30 years. The company's views were endorsed by the Engineers India Ltd and the Institute of Chartered Accountants of India.

Gail also presented a new methodology to the Tariff Commission for the calculation. "The new cost-of-service method is not only cost-reflective and enables periodic review, but is also the method adopted in many advanced economies," said a Gail executive.

The company also said the new method would enable easy, structured and transparent calculation of an integrated tariff required for the inter-state gas grid.