Editorial Note on Part 1206
Editorial Note: Nomenclature changes to part 1206 (formerly part 206) appear at 67 FR 19111, Apr. 18, 2002.

§ 1206.161 How do I determine a processing allowance if I have a non-arm's-length processing contract? ( a ) This section applies if you or your affiliate do(es) not have an arm's-length processing contract, including situations where you or your affiliate provide your own processing services. You must calculate your processing allowance based on your or your affiliate's reasonable, actual costs for processing during the reporting period using the procedures prescribed in this section.
( b ) Your or your affiliate's actual costs may include: ( 1 ) Capital costs and operating and maintenance expenses under paragraphs (d), (e), and (f) of this section.
( 2 ) Overhead under paragraph (g) of this section.
( 3 ) Depreciation and a return on undepreciated capital investment in accordance with paragraph (h)(1) of this section, or you may elect to use a cost equal to the initial depreciable capital investment in the processing plant under paragraph (h)(2) of this section. After you have elected to use either method for a processing plant, you may not later elect to change to the other alternative without ONRR's approval. If ONRR accepts your request to change methods, you may use your changed method beginning with the production month following the month when ONRR received your change request.
( 4 ) A return on the reasonable salvage value under paragraph (h)(1)(iii) of this section, after you have depreciated the processing plant to its reasonable salvage value.
( c ) You may not use any cost as a deduction that duplicates all or part of any other cost that you use under this section.
( d ) Allowable capital investment costs are generally those for depreciable fixed assets (including costs of delivery and installation of capital equipment), which are an integral part of the processing plant.
( e ) Allowable operating expenses include the following: ( 1 ) Operations supervision and engineering
( 2 ) Operations labor
( 3 ) Fuel
( 4 ) Utilities
( 5 ) Materials
( 6 ) Ad valorem property taxes
( 7 ) Rent
( 8 ) Supplies
( 9 ) Any other directly allocable and attributable operating expense that you can document
( f ) Allowable maintenance expenses may include the following: ( 1 ) Maintenance of the processing plant
( 2 ) Maintenance of equipment
( 3 ) Maintenance labor
( 4 ) Other directly allocable and attributable maintenance expenses that you can document
( g ) Overhead, directly attributable and allocable to the operation and maintenance of the processing plant, is an allowable expense. State and Federal income taxes and severance taxes and other fees, including royalties, are not allowable expenses.
( h ) ( 1 ) To calculate depreciation and a return on undepreciated capital investment, you may elect to use either a straight-line depreciation method based on the life of equipment or on the life of the reserves that the processing plant services, or you may elect to use a unit-of-production method. After you make an election, you may not change methods without ONRR's approval. If ONRR accepts your request to change methods, you may use your changed method beginning with the production month following the month when ONRR received your change request. ( i ) A change in ownership of a processing plant will not alter the depreciation schedule that the original processor/lessee established for purposes of the allowance calculation.
( ii ) You may depreciate a processing plant only once with or without a change in ownership.
( iii ) ( A ) To calculate a return on undepreciated capital investment, you may use an amount equal to the undepreciated capital investment in the processing plant multiplied by the rate of return that you determine under paragraph (h)(3) of this section.
( B ) After you have depreciated a processing plant to its reasonable salvage value, you may continue to include in the allowance calculation a cost equal to the reasonable salvage value multiplied by a rate of return under paragraph (h)(3) of this section.
( 2 ) You may use as a cost an amount equal to the allowable initial capital investment in the processing plant multiplied by the rate of return determined under paragraph (h)(3) of this section. You may not include depreciation in your allowance.
( 3 ) The rate of return is the industrial rate associated with Standard & Poor's BBB rating. ( i ) You must use the monthly average BBB rate that Standard & Poor's publishes for the first month for which the allowance is applicable.
( ii ) You must re-determine the rate at the beginning of each subsequent calendar year.
( i ) ( 1 ) You must determine the processing allowance for each gas plant product based on your or your affiliate's reasonable and actual cost of processing the gas. You must base your allocation of costs to each gas plant product upon generally accepted accounting principles.
( 2 ) You may not take an allowance for processing lease production that is not royalty-bearing.
( j ) You may apply for an exception from the requirement to calculate actual costs under paragraphs (a) and (b) of this section. ( 1 ) ONRR will grant the exception if: ( i ) You have or your affiliate has arm's-length contracts for processing other gas production at the same processing plant; and
( ii ) At least 50 percent of the gas processed annually at the plant is processed under arm's-length processing contracts.
( 2 ) If ONRR grants the exception, you must use as your processing allowance the volume-weighted average prices charged to other persons under arm's-length contracts for processing at the same plant.