Hi, "RolandPipe"!
I haven't used IGE/TD/12 for fatigue analysis purpose until now. However, your question made me curious and I've read both Caesar Documentation and Code specifications (1985 version, I don't own the ultimate edition) regarding the subject under discussion.
First of all, Caesar Technical Reference Manual - Code Compliance Considerations chapter (page 6-120 - 4.40 version), referring to IGE/TD/12 Code, stipulates clearly that "... Fatigue Analysis is done per 4.4.3 and 5.5.4" using the S_R "fatigue stress range", which is one of the two principal stress ranges calculated by your SECOND (correct, indeed) formula. I haven't found the wrong FIRST formula that you noted.
Reading IGE/TD/12 Code (1985 edition) specifications regarding the fatigue analysis/design (par. 4.4.3, page 14-17 and par. 5.3.5, page 25), we see that "... The principal stress range S_R at each significant point in the piping system should be evaluated using the method described in sub-section 5.4 (i.e. "Stresses" paragraph) for EACH COMBINED PRESSURE AND TEMPERATURE RANGE OF OPERATION...".
Further, par. 5.4 ("Stresses") stipulates that the two principal stresses (in any plane) are assessed using, again, your SECOND (correct) formula, and (as per par. 5.4.4), this formula "...should be used for establishing the range of stress, due regard being paid to the direction and sign. THE MAXIMUM RANGE should be THE DIFFERENCE in the direction being considered."
So, to conclude, you are absolutely right to consider the SECOND formula in order to evaluate the principal stresses and, further, the fatigue stress range. I didn't have time to make a test with Caesar, you have to do this, but I think that Caesar uses the formula under discussion correctly.
For me, this approach has been somehow surprising, because ASME Codes "classical" approach (which I used several times before), uses the Stress Intensity (i.e. Equivalent Stress established as per Tresca Yield Criterion) concept in order to assess the fatigue stress range.
All the best and good luck,
Dorin Popescu
Senior Pipe Stress Engineer,
Washington Group Romania - Ploiesti Office
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Dorin Daniel Popescu
Lead Piping Stress Engineer