20240830PAC to PIIC 19-3 Attachment.pdf

FEDERAL ENERGY REGULATORY COMMISSION
WASHINGTON, D.C. 20426 In Reply Refer To:
Office of Enforcement
Docket No. FA16-4-000
August 29, 2017 Sarah E. Edmonds
PacifiCorp
Vice President and General Counsel
825 NE Multnomah Street, Suite 1800
Portland, OR 97232 Dear Ms. Edmonds: 1. The Division of Audits and Accounting within the Office of Enforcement of the
Federal Energy Regulatory Commission (Commission) has completed an audit of
PacifiCorp (Company). The audit covered the period of January 1, 2013 to
December 31, 2015. 2. The audit evaluated PacifiCorp’s compliance with (1) approved terms, rates, and
conditions of its wholesale formula rate mechanism as outlined in PacifiCorp’s Open
Access Transmission Tariff (OATT), and other jurisdictional rates on file with the
Commission, (2) the accounting requirements of the Uniform System of Accounts
Prescribed for Public Utilities and Licensees under 18 C.F.R. Part 101, and (3) the
reporting requirements of the FERC Form No. 1, Annual Report, under
18 C.F.R. § 141.1. The enclosed audit report contains nine findings and
38 recommendations that require PacifiCorp to take corrective action. 3. On August 22, 2017, you notified DAA that PacifiCorp accepts the audit report.
A copy of your verbatim response is included as an appendix to this report. I hereby
approve the audit report. 4. PacifiCorp should submit its implementation plan to comply with the
recommendations within 30 days of this letter order. PacifiCorp should make quarterly
submissions to DAA describing the progress made to comply with the recommendations,
including the completion date for each corrective action. As directed by the audit report,
these submissions should be made no later than 30 days after the end of each calendar
quarter, beginning with the first quarter after this audit report is issued, and continuing
until all the corrective actions are completed.
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
5. The Commission delegated authority to act on this matter to the Director of OE
under 18 C.F.R. § 375.311 (2017). This letter order constitutes final agency action.
6. This letter order is without prejudice to the Commission's right to require hereafter
any adjustments it may consider proper from additional information that may come to its
attention. In addition, any instance of noncompliance not addressed herein or that may
occur in the future may also be subject to investigation and appropriate remedies.
7. I appreciate the courtesies extended to the auditors. If you have any questions,
please contact Mr. Bryan K. Craig, Director and Chief Accountant, Division of Audits
and Accounting at [phone].
Sincerely,
• PLL:
Lan . Parkinson
Director
Office of Enforcement
Enclosure
11
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
Federal Energy Regulatory Commission Office of Enforcement Division of Audits and Accounting AUDIT REPORT Audit of PacifiCorp ’s compliance
with its wholesale formula rate ;
the accounting requirements of
the Uniform System of Accounts
Prescribed for Public Utilities
and Licensees; and the reporting
requirements of the FERC Form
No. 1, Annual Report. Docket No. FA16-4-000 August 29 , 2017 Document Accession #: 20170829-3016 Filed Date: 08/29/2017
i TABLE OF CONTENTS I. Executive Summary ...................................................................................................... 1
A. Overview .................................................................................................................. 1
B. PacifiCorp ................................................................................................................. 1
C. Summary of Audit Findings ..................................................................................... 2
D. Summary of Recommendations ............................................................................... 4
E. Compliance and Implementation of Recommendations .......................................... 8
II. Background ................................................................................................................ 10
A. PacifiCorp’s Transmission System ......................................................................... 10
B. Wholesale Formula Rate ......................................................................................... 10
III. Introduction .............................................................................................................. 12
A. Objectives ............................................................................................................... 12
B. Scope and M ethodology ......................................................................................... 12
IV. Findings and Recommendations ............................................................................. 19
1. Storm Damage Accounting and Costs Recovery ................................................... 19
2. Mining Assets ........................................................................................................ 23
3. Amort ization of Regulatory Assets ........................................................................ 26
4. Injuries and Damages Accounting and Costs Recovery ........................................ 31 5. Allowance for Funds Used During Construction .................................................. 36 6. Asset Retirement Obligations ................................................................................ 41
7. Accounting for Coal Settlement Costs ................................................................... 44
8. Accounting for Liquidated Damages ..................................................................... 48
9. Accounting for Pensions, PBOP and Other Benefits ............................................... 51
Appendix: PacifiCorp’s Comments on Audit Report ................................................. 53 Document Accession #: 20170829-3016 Filed Date: 08/29/2017
1 I. Executive Summary A. Overview The Division of Audits and Accounting (DAA) in the Office of Enforcement of
the Federal Energy Regulatory Commission (Commission) has completed an audit of
PacifiCorp (Company). The audit evaluated PacifiCorp ’s compliance with requirements
of PacifiCorp ’s Open Access Transmission Tariff (OATT). Specifically, the audit
evaluated whether PacifiCorp complied with: (1) protocols and instructions for the
various accounts incorporated in its wholesale formula rate; (2) the accounting
requirements of the Uniform System of Accounts (USofA) Prescribed for Public Utilities
and Licensees under 18 C.F.R. Part 101; and (3) FERC Form No. 1 reporting
requirements for Major Electric Utilities under 18 C.F.R. § 141.1 . The audit covered the
period January 1, 2013 to December 31, 2015. B. PacifiCorp PacifiCorp was established in 1910 under the name Pacific Power & Light
Company. In 1984, Pacific Power & Light Company changed its name to PacifiCorp. In
1989, PacifiCorp formed the entity operating today by merging with Utah Power and
Light Company to form an Oregon corporation. PacifiCorp is a vertically integrated
electric utility company providing utility services to over 1.8 million customers in six
states: Utah, Wyoming, Idaho, Oregon, Washington, and California. PacifiCorp
provides electric service to customers in Utah, Wyoming and Idaho under the trade name
Rocky Mountain Power and to customers in Oregon, Washington, and California under
the trade name Pacific Power. PacifiCorp also operates a business unit called PacifiCorp
Transmission, which includes transmission operations, and related Energy Gateway
Expansion projects for the company. PacifiCorp is principally engaged in the business of
generating, transmitting, distributing, and buying and selling electricity on the wholesale
market with other utilities, energy marketing companies, financial institutions and other
market participants. PacifiCorp is a wholly owned subsidiary of Berkshire Hathaway Energy Company
(BHE), through an intermediate parent, PPW Holdings LLC. PacifiCorp owns, or has
interests in, 75 thermal, hydro-electric, wind-powered, coal, and geothermal generating
facilities, with a net owned capacity of 10,894 MW. The company has interests in four
coal mining operations to support power generation at its coal generating facilities.
PacifiCorp also owns, or has interests in, electric transmission and distribution assets and
transmits electricity through approx imately 16,500 miles of transmission and
64,000 miles of distribution lines. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
2 C. Summary of Audit Findings Audit staff’s compliance findings are summarized below. Details of these findings
are in Section IV of this report. Audit staff found nine areas of noncompliance.  Storm Damage Accounting and Costs Recovery - PacifiCorp’s accounting and
wholesale formula rate billings for storm damage costs during the period of 2012
through 2015 were deficient as follows: o PacifiCorp improperly overbilled storm damage costs to its merchant
function and third-party wholesale customers that procured transmission
services under PacifiCorp’s OATT. This occurred because PacifiCorp
improperly included actual plus estimated costs associated with the same
storms in billings to its merchant and third-party wholesale customers. As
a result, PacifiCorp overstated its wholesale transmission revenue
requirement by approximately $6.9 million, which led to overbillings to
third-party wholesale customers by approximately $1.1 million. o PacifiCorp did not make refunds to its wholesale customers for the
excessive storm damage revenues collected from its wholesale customers.  Mining Assets - PacifiCorp inappropriately recovered from its wholesale
customers the cost of production related mining assets through its wholesale
formula rates. As a result, PacifiCorp overstated its wholesale transmission
revenue requirement by approximately $3.7 million, which led to overbillings to
third-party wholesale customers by approximately $600,000.  Amortization of Regulatory Assets - PacifiCorp inappropriately included
amortization of regulatory assets in its wholesale formula rates. As a result,
PacifiCorp overstated its wholesale transmission revenue requirement by
approximately $800,000, wh ich led to overbillings to third-party wholesale
customers of approximately $100,000.  Injuries and Damages Accounting and Costs Recovery - PacifiCorp improperly
classified injuries and damages accruals and recovered those costs through its
wholesale form ula rates when it had insurance policies to cover the cost of those
damages. As a result, PacifiCorp overstated its wholesale transmission revenue
requirement by approximately $2.9 million, which led to overbillings to third-party wholesale customers by approximately $400,000. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
3  Allowance for Funds Used During Construction - PacifiCorp’s methods for
calculating Allowance for Funds Used During Construction (AFUDC) rate was
deficient as follows: o PacifiCorp inappropriately included letter of credit fees (up-front and
quarterly) as part of short term debt interest expense to compute AFUDC
rate. o PacifiCorp inappropriately included Unappropriated Undistributed
Subsidiary Earnings as part of the equity component for the purpose of
computing AFUDC rate. o PacifiCorp inappropriately included Accumulated Other Comprehensive
Income (AOCI) as part of the equity component for the purpose of
computing AFUDC rate in 2013. As a result, PacifiCorp over accrued Allowance for Funds Used During
Construction by approximately $6.8 million for 2013 through 2015. PacifiCorp
overbilled wholesale customers for the excessive AFUDC costs included in utility
plant that was included in wholesale formula rates determinations through rate
base and depreciation charges.  Asset Retirement Obligations - PacifiCorp’s accounting and rate treatment of
Asset Retirement Obligations (ARO) were deficient as follows: o PacifiCorp inappropriately excluded accumul ated depreciation amounts
removed from Account 108, Accumulated Provision for Depreciation of
Electric Utility Plant, to implement ARO accounting in the wholesale
formula rates determinations. As a result, PacifiCorp understated its
wholesale transmission revenue requirement which led to under-billings
to its wholesale customers through its wholesale formula rates. o PacifiCorp inappropriately included estimated future asset retirement
costs recorded in General Plant in its wholesale formula rate base. As a
result, PacifiCorp overstated its wholesale transmission revenue
requirement, which led to overbillings to its wholesale customers. As a result of the deficiencies, PacifiCorp under-billed its wholesale
customers through its wholesale formula rates.  Accounting for Coal Settlement Costs - PacifiCorp incorrectly accounted for
amortization of two coal settlement payments in Account 151, Fuel Stock, instead
of Account 501, Fuel. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
4  Accounting for Liquidated Damages - PacifiCorp incorrectly accounted for
amortization of production related regulatory assets associated with liquidated
damages as an administrative and general expense in Account 930.2,
Miscellaneous General Expense.  Accounting for Pensions, PBOP and Other Benefits - PacifiCorp recorded the cost
of pensions, post-retirement benefits other than pensions (PBOP) and other
employee benefits in various functional operating and maintenance expense
accounts, instead of in Account 926, Employee Pensions and Benefit s. D. Summary of Recommendations This section summarizes audit staff’s recommendations to remedy this report’s
findings. Audit staff’s 38 compliance recommendations are summarized below and detailed in S ection IV. To address the areas of noncompliance, audit staff recommends
that PacifiCorp: Storm Damage Accounting and Costs Recovery 1. Refrain from recovering actual and estimated storm damage costs from
wholesale customers associated with the same storm. Revise policies,
procedures and practices to ensure the proper accounting procedures are
employed to prevent the double collection of storm damage costs through the
wholesale formula rates. 2. Revise wholesale formula rates development procedures to strengthen
coordination between accounting and wholesale formula rates development
departments. 3. Provide training to staff on the revised storm damage accounting and rate
development methods. Also, develop a training program that supports the
provision of periodic training in this area, as needed. 4. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate storm damage recoveries
since 2012, plus interest; (2) determinative components of the refund;
(3) refund method; (4) customers to be refunded; and (5) period(s) refunds
will be made. Include the results of the analysis of transmission-related storm
damage expenses in the refund amount. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
5 5. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 6. Refund amounts disclosed in the refund report to wholesale customers, with
interest calculated in accordance with section 35.19a of Commission
regulations. Mining Assets 7. Revise procedures for computing the annual wholesale transmission revenue
requirement and billing to wholesale customers by ensuring that it excludes
cost of mining assets from the wholesale formula rates. 8. Submit a refund analysis, within 60 days of rece iving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate cost of mining asset
recoveries that resulted from the inclusion of mining assets in the wholesale
formula rates base since 2012, plus interest; (2) determinative components of
the refund; (3) refund method; (4) customers to be refunded and (5) period(s)
refunds will be made. 9. File a refund report with the Commission after receiving DAA’s assessment of the refund analysis. 10. Refund amounts disclosed in the refund report to wholesale customers, with
interest calculated in accordance with section 35.19a of Commission
regulations. Amortization of Regulatory Assets 11. Revise accounting procedures to record pensions, and postretirement
regulatory asset amortizations in Account 926. 12. Revise accounting procedures to exclude amortization of environmental
damages regulatory assets to Account 925, and record amortization of
amounts recovered in retail rates in appropriate functional operating and
maintenance accounts. 13. Provide training to staff on the revised regulatory assets accounting and rate
development methods. Also, develop a training program that supports the
provision of periodic training in this area, as needed. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
6 14. Record correcting entries to reclassify pensions, and postretirement regulatory
assets amortization from Account 920 to Account 926. 15. Record correcting entries to reclassify environmental damages amortization
from Account 925 and record the amounts recovered from retail rates in
appropriate functional operating and maintenance accounts. 16. Revise procedures for computing wholesale formula rates billings to
wholesale customers to exclude amortization of regulatory assets which were
not approved by the Commission. 17. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate regulatory asset
amortizations which were included in wholesale formula rates and the refunds
resulting from the inclusion of those regulatory asset amortizations in the
wholesale formula rates, plus interest; (2) determinative components of the
refund; (3) refund method; (4) customers to be refunded and (5) period(s)
refunds will be made. 18. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 19. Refund amounts disclosed in the refund report to wholesale customers, with
interest calculated in accordance with section 35.19a of Commission
regulations. Injuries and Damages Accounting and Costs Recovery 20. Revise policies, procedures and practices to book accruals for covered damage
amounts in Account 426.5 when management makes a decision not to se ek
insurance recoveries for damages covered by insurance. 21. Provide training to staff on the revised injuries and damages expenses covered
by insurance accounting and rate development methods. Also, develop a
training program that supports the provision of periodic training in this area,
as needed. 22. Submit a refund analysis within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate injuries and damages
recoveries that resulted from the inclusion of excessive estimated expenses in
the wholesale formula rates since 2012, plus interest; (2) determinative
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
7 components of the refund; (3) refund method; (4) customers to be refunded;
and (5) period(s) refunds will be made. 23. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 24. Refund amounts disclosed in the refund report to wholesale customers, with
interest calculated in accordance with section 35.19a of Commission
regulations. Allowance for Funds Used During Construction 25. Revise its procedures to ensure its AFUDC rate calculation is consistent with
Order No. 561 and other applicable Commission requirements. 26. Revise its procedures to ensure that Account 216.1 is excluded from equity
components used to derive AFUDC rate. 27. Revise its procedures to ensure that the amounts reported on the FERC
Form No. 1 are used to compute AFUDC rate. 28. Provide training to staff on the revised AFUDC accounting and rate
calculation method. Also, develop a training program that supports the
provision of periodic training in this area, as needed. 29. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds to wholesale customers base since 2012, plus interest; (2)
determinative components of the refund; (3) refund method; (4) customers to
be refunded and (5) period(s) refunds will be made. 30. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 31. Refund amounts disclosed in the refund report to wholesale customers, with
interest calculated in accordance with section 35.19a of Commission
regulations. Asset Retirement Obligations 32. Revise existing accounting and rate development procedures and practices to
ensure all ARO-related accounting effects and associated adjustments are
excluded from wholesale formula rates determinations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
8 Accounting for Coal Settlement Costs 33. Establish procedures to identify components of coal settlement cost between
past coal supply disputes and costs that provide future benefits. 34. Establish procedures to expense immediately prior disputed costs that is
related to coal already consumed in Account 501, unless rate recognition is
approved by a regulatory authority. 35. Revise accounting procedures to record amortization of deferred coal
settlement and renegotiation costs in Account 501. Accounting for Liquidated Damages 36. Revise accounting procedures to record regulatory asset amortization related
to production plant liquidated damages in the functional operating and
maintenance accounts when appropriate. 37. Record correcting entries to reclassify regulatory asset amortization related to
state created advance refund of liquidated damages from Account 930.2 to
Account 557, Other Expenses. Accounting for Pensions, PBOP and Other Benefits 38. Revise procedures to ensure it records pensions, PBOP, and other employee
benefits in Account 926, Employee Pensions and Benefits, as required by the
Commission accounting regulations. E. Compliance and Implementation of Recommendations Audit staff further recommends that PacifiCorp submit the following for audit
staff’s review:  A plan for implementing the audit recommendations within 30 days after
the final audit report is issued in this docket;  Quarterly reports describing progress in completing each corrective action
recommended in the final audit report. Quarterly, nonpublic submissions
should be made no later than 30 days after the end of each calendar quarter,
beginning with the first quarter after the final audit report is issued, and
continuing until all recommended corrective actions are completed; and Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 9  Copies of any written policies and procedures developed in response to
recommendations in the audit report. These documents should be
submitted in the first quarterly filing after PacifiCorp completes the
products. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 10 II. Background A. PacifiCorp’s Transmission System PacifiCorp used its electric transmission system, which was connect ed throughout
its six operating states, for transmission of electricity of others as well as to serve PacifiCorp ’s native load. PacifiCorp’s own use of the transmission system was to
provide transmission of electricity for sale by PacifiCorp for resale by other utilities and
public authorities, and to serve PacifiCorp’s customers under retail jurisdictions. PacifiCorp’s transmission customers executed service agreements stipulating the terms
and conditions, and applicable tariffs for PacifiCorp’s transmission service. The service
agreements were entered into between PacifiCorp Transmission and all transmission
customers, including PacifiCorp – Merchant Function which represented PacifiCorp’s
own use of the transmission system. PacifiCorp’s cost to operate the transmission system
was billed to wholesale customers through wholesale formula rates, described below, for
the transmission of electricity of others. PacifiCorp’s share of the cost of transmission
system for its own use was billed to its merchant function. In limited situations,
PacifiCorp’s wholesale customers were directly billed for transmission based on
wholesale formula rates. B. Wholesale Formula Rate PacifiCorp’s OATT includes a wholesale formula rate which is used to derive a
system-wide transmission service rate. PacifiCorp filed its transmission rate case with
the Commission in Docket No . ER11-3643-000 in 2011 . The revisions to PacifiCorp’s
OATT in the docket included an amendment of Attachment H (Annual Transmission
Revenue Requirement for Network Integration Transmission Service), and the addition of
Attachment H-1 (PacifiCorp’s Formula Rate) and Attachment H-2 (i.e., the Protocols) to
comprise PacifiCorp’s wholesale formula rate inputs. PacifiCorp’s charges for Point-to-Point Transmission Service (PTP Service) and Network Integration Transmission Service (NIT Service) under PacifiCorp’s OATT are calculated annually using the Annual Transmission Revenue Requirement (ATRR), which is derived from the formula defined
in the OATT. The ATRR determined for a rate year is billed to PacifiCorp’s own use of
the transmission system to serve PacifiCorp ’s distribution and wholesale customers, and
to provide transmission of electricity of others.1 1 PacifiCorp developed projected rates annually, effective from June 1 to May 31.
Actual rates we re developed on a calendar year basis. Long term firm point-to-point and
network integration transmission service customers who were billed projected rates we re
trued-up for the actual rates. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 11 The wholesale formula rate is the product of a settlement agreement negotiated by PacifiCorp with it transmission customers, and was approved by the Commissi on and
added to the OATT in 2013 , with a retroactive effective date of December 25, 2011 . Since its approval of the settlement agreement in 2013, the Commission has approved
various revisions and updates to Attachment H and other attachments to the formula to
incorporate additional settlements with transmission customers (e.g., updates to the depreciation rate2 and using actual post-retirement benefits other than pensions (PBOP) expense instead of fixed PBOP expense).3 2 See Docket Nos. ER13-1207, ER14-918, ER14-1601, ER14- 01635. 3 PacifiCorp , 149 FERC ¶ 61,267 (2014). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 12 III. Introduction A. Objectives The DAA conduct ed an audit of PacifiCorp, evaluating PacifiCorp ’s compliance
with: (1) approved terms , rates, and conditions of its wholesale formula rate mechanism
as outlined in the PacifiCorp’s OATT, and other jurisdictional rates on file with the
Commission, (2) the accounting requirements of the Uniform System of Accounts
Prescribed for Public Utilities and Licensees under 18 C.F.R. Part 101, and (3) the
reporting requirements of the FERC Form No. 1, Annual Report, under 18 C.F.R. § 141.1. The audit covered January 1, 2013 to December 31, 2015. Additional limited
audits, in light of certain audit findings, covered years prior to 2013 and the year 2016. B. Scope and Methodology To evaluate PacifiCorp ’s compliance with the terms and conditions of its OATT,
audit staff performed these procedures:  Review of Public Information – Before commencing the audit on March 7, 2016, reviewed publicly available materials to obtain a broad understanding of
PacifiCorp ’s corporate structure, regulatory actions and history, system
infrastructure and operations, tariff procedures and services, wholesale energy
transactions, wholesale formula rate protocols and calculation, and other pertinent
business and regulatory aspects. Also, reviewed information included
PacifiCorp ’s FERC Form Nos. 1 and FERC Form No. 3-Q, Annual and Quarterly
Reports, as well as PacifiCorp’s OATT, prior Commission audit reports, and other
relevant information in the Commission’s eLibrary records system and on public
web sites.  Regulatory Standards and Criteria - Identified regulatory requirements, filings and criteria to evaluate PacifiCorp’s compliance with each audit objective. These
requirements and filings included Attachment H to PacifiCorp’s OATT, and
related filings to understand PacifiCorp’s wholesale formula rate requirements the
Commission imposed in its approval of PacifiCorp’s wholesale formula rate.
Also, reviewed Commission financial accounting and reporting requirements and
other Commission orders relevant to the audit.  Data Collection and Data Requests - Issued several formal data requests,
supplemental site visit informational requests, and numerous emails with questions
and requests for clarification to obtain information to support compliance tests and
evaluation of compliance. This information pertained to PacifiCorp’s corporate
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 13 structure, policies and procedures, accounting systems and data, financial and
reporting activity, wholesale formula rate processes, procedures, and inputs, rate
schedules and tariffs, internal audit, Board of Directors and Audit Committee
meeting minutes, settlement agreements and contracts, FERC compliance
program, and other pertinent information not publicly available. Audit staff used
this information as the basis for compliance testing and evaluation.  Site Visits - Conducted four site visits to PacifiCorp for testing in audit scope
areas. The visits enabled audit staff to understand PacifiCorp ’s structure,
activities, functions, systems, and the processes used in its operations. While on
site, audit staff interviewed personnel with direct knowledge and involvement with
activities in the audit scope areas about processes, procedures, operations, and
preliminary observations, reviewed and discussed documented policies and
procedures and observed accounting system functionalities.  Interviews and Teleconferences - Held an opening conference with PacifiCorp to
discuss audit objectives, scope, and process. Audit staff also held a closing
conference about fieldwork completion and the extent of audit findings and
recommendations. Audit staff conducted regular phone interviews and
teleconferences with PacifiCorp employees to clarify and understand company
policies, practices, and procedures relevant to the audit.  External Auditor Working Papers – To substantiate audit staff’s testing, reviewed
PacifiCorp ’s external auditors , Deloitte & Touche LLP, working papers for
PacifiCorp ’s financial reporting in the FERC Form No. 1 and relevant accounting
to substantiate audit staff’s testing in these areas.  Interoffice Outreach - Conferred with Commission staff from other divisions
within the Office of Enforcement, and with technical and legal staff from other
Commission offices, including the Office of Energy Market Regulation (OEMR),
who have knowledge and expertise about PacifiCorp’s transmission system and
regulatory history. Also, discussed with the Commission staff about audit
development and potential compliance issues, to ensure audit report findings were
written consistent with Commission precedent and policy. Further, as detailed below, audit staff performed specific actions to facilitate the
testing and evaluation of compliance with Commission requirements relevant to audit
scope areas: Compliance with Wholesale Formula Rate Audit staff performed these actions to evaluate PacifiCorp ’s compliance with the
requirements of its wholesale formula rate: Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 14  Formula Rate Schedules - Reviewed Commission approved wholesale formula
rate schedules and tariffs in effect for PacifiCorp as reported on page 106 of
the PacifiCorp’s FERC Form No. 1.  Commission Orders - Reviewed initial and subsequent Commission orders
accepting PacifiCorp’s wholesale formula rate , including orders approving
related settlements and PacifiCorp’s OATT revision in Attachment H-1 for
depreciation rates. Reviewed Commission orders for background information
about specific cost treatments and unique inputs, and other matters disclosed as
part of approving the derivation of PacifiCorp’s wholesale formula rate.  Formula Rate Procedures - Evaluated PacifiCorp ’s processes, procedures, and
controls used for preparing and reviewing annual and true-up informational
filings and their supporting work papers. Reviewed wholesale formula rate mechanics, such as annual informational filings, true-up informational filings,
and summary report true-up informational filings associated with PacifiCorp ’s
wholesale formula rate . Reviewed PacifiCorp ’s tariff and its Attachment H to
determine the services rendered under the tariff.  Interviewed Employees Responsible - Interviewed PacifiCorp employees responsible for calculating the wholesale formula rate and for providing data
inputs into the rate. Assessed the level of oversight and controls to ensure
complete and accurate wholesale formula rate inputs.  Formula Rate Reconciliation - Reconciled the wholesale formula rate inputs to
figures reported in the FERC Form No. 1. Evaluated the adequacy of
disclosure for formula rate inputs not derived from the FERC Form No. 1.  Mathematical Accuracy - Evaluated PacifiCorp’s mathematical accuracy of
computations entered into the wholesale formula rate to ensure all information
was correctly entered. For example, audit staff reviewed supporting
documentation for post-retirement other than pensions to verify amounts were
correctly populated into the wholesale formula rate template.  Formula and Input Analysis - Reconciled the components of the approved rate
formula to the corresponding calculations in the annual rate filings. Analyzed
and assessed PacifiCorp’s compliance with U niform System of Accounts and
accounting treatment of se lect formula input. Reviewed the support behind
allocation factors used in the wholesale formula rate to ensure the correct
amounts were used in the calculations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 15  Formula Rate Billing Analysis - Reviewed the accuracy and timeliness of
wholesale formula rate customer billing, including refunds and surcharge
billings resulting from formula rate true-ups. Compliance with Commission Accounting Re gulations  Accounting Process and Procedures - Evaluated PacifiCorp ’s financial
accounting processes, procedures, and internal controls to comply with
Commission financia l accounting regulations under 18 C.F.R. Part 101. Audit
staff interviewed PacifiCorp employees about accounting practices, reviewed
system processes for account assignments, and observed controls for achieving
compliance with the Commission’s Accounting Regulations.  Accounting Applications and Classifications - Evaluated PacifiCorp ’s chart of
accounts used during the audit period to determine if it was consistent with the
Commission Ac counting Regulations. Reviewed descriptions of accounting
practices and tested examples for specific accounts in sample months to supporting material, and evaluated quality controls to ensure accounting
classifications complied with the Commission’s Accounting Regulations .  Accounting Systems - Reviewed PacifiCorp ’s financial accounting systems to
manage company financial records, such as systems for recording and tracking
PacifiCorp ’s costs, including the general ledger, work order, expense and
billing and accounts payable. Reviewed practices and procedures around the
accounting cycle for charges and the mapping of those charges to FERC
accounts.  Employee Time Tracking System - Evaluated PacifiCorp ’s employee time-tracking system and internal controls, such as management reviews and budget
variance procedures for employee time, and reviewed select time reports
illustrating time charges to business units and the classification of work.  Project Tracking System - Reviewed project tracking procedures for a project’s
life cycle, i.e., procurement, selection of cost allocators, tracking and billing of
costs to affiliated companies, and system work order removal procedures.  Significant Accounting Matters - Tested select accounts impacting the
wholesale formula rate to ensure the nature of costs recorded in those accounts
complied with the Commission’s Accounting Regulations. For example, audit
staff performed select testing of these accounting matters: Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 16 o Transmission vs. Distribution - Reviewed certain transmission operating
and maintenance accounts to ensure costs related to transmission and no
other functional expense accounts, such as distribution or production. o Administrative and General Expenses - Tested select 900 series accounts to
determine whether PacifiCorp recorded salaries, office supplies, outside
services (e.g. consultant fees), pensions and employee benefits, and other
administrative and general expenses consistent with account instructions. o Non-operating Expenses - Examined summaries for above-the-line
accounts to ensure PacifiCorp did not record non-operating expenses, such
as political and charitable contributions in these operating expenses
accounts. Exa mined the accounting for expenses for employment practices
that judicial or administrative decrees found to be discriminatory to verify
PacifiCorp recorded these activities to the proper non-operating expense
account consistent with Commissio n policy. o Cost Allocations - Examin ed support and tested the corporate and
associated company allocation methodologies for recording shared service
costs between affiliates, and billing and accounting of non-power goods
and services provided amongst assoc iated companies. For example, audit
staff reviewed cost centers’ shared-service allocation ratios and tested select
cost centers to ensure PacifiCorp allocated and accounted for shared
services correctly. Also reviewed affiliate billing procedures and select
invoices to verify PacifiCorp recorded the proper amounts in accordance
with those procedures. o Accumulated Deferred Income Taxes - Reviewed a monthly summary of
deferred taxes that flowed into the rate base component of the wholesale
formula rate. Analyzed supporting documentation to evaluate how
PacifiCorp calculated the deferred tax component and underlying
accounting entries made to FERC deferred tax accounts (i.e., Accounts 190,
282, and 283). Evaluated PacifiCorp ’s method for associating depreciation
on property and allocating percentages, its liberalized depreciation of
Accounts 282 and 283, and the accounting impact relating to depreciation
and recognition of income for select divested assets. o Income Taxes and Tax Allocation Agreements - Evaluated PacifiCorp ’s
consolidated income tax allocation share agreement and the tax payment
structure between PacifiCorp and BHE , including the methodology used to
allocate the tax benefits/burden. Reviewed supporting documentation to
validate the calculation of tax accruals and deferred income taxes.
Reviewed discrepancies found between deductions taken on PacifiCorp ’s
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 17 books and the Schedule M-1 of PacifiCorp ’s Federal income tax return (FF1120), which could affect the rate base adjustment worksheet of the
wholesale formula rate . o Hedging Activities and Unrealized Gains/Losses - Reviewed PacifiCorp ’s derivative instruments and hedging activities resulting in unrealized gains
and losses and how these amounts factored into its rate of return for
ratemaking and AFUDC purposes, and supporting journal entries to verify
amounts were recorded consistent with Commission regulations. o Depreciation - Evaluated PacifiCorp ’s monthly depreciation and
amortization expense and supporting calculations to verify it used the
proper accounts and recorded the correct amounts. Reviewed PacifiCorp ’s depreciation expense calculation to ensure it derived monthly depreciation
expenses using approved depreciation rates on file with the Commission. o Pensions - Reviewed descriptions of PacifiCorp ’s active pension plans,
policies, procedures, and guidelines. Examined journal entries for pension
expenses, funding, and liabilities to ensure it charge d the appropriate
accounts. Also evaluated PacifiCorp ’s rate-recovery mec hanism to
determine how PacifiCorp funded its pension plans, and the methodology
PacifiCorp used to recover pension costs through rates. o Asset Retirement Obligations (ARO) - Reviewed PacifiCorp ’s accounting
treatment for costs recorded in select 300 series or plant-in-service accounts
relating to AROs for compliance with Commission accounting regulations.
Evaluated PacifiCorp ’s valuation methodology to record each ARO to
ensure it recorded depreciation and accretion expense properly and did not
recover those amounts in wholesale rates. o Contingent Liabilities - Reviewed the Notes to Financial Statements in the
FERC Form No. 1s and identified information about accruals for potential
future obligations. Analyzed information on commitments and environmental and legal contingencies, and assessed whether these amounts
affected wholesale rates. o Sale or Retirement of Business Assets - Evaluated gains and losses result ing from the disposition of assets in Account 421.1, Gain on Disposition of
Property, and reconciled the book depreciation and retirement amounts
reported in the FERC Form No. 1 for assets in certain tax classes. o Subsidiary Accounting - Reviewed the FERC Form No. 1, materials
PacifiCorp provided, and publicly available information to determine
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 18 whether PacifiCorp controlled any wholly owned subsidiaries, and applied
the equity method or consolidated method of accounting for subsidiary
investments. o AFUDC - Reviewed the company’s AFUDC rate calculation for consistent
application with Electric Plant Instruction No. 3. Validated PacifiCorp ’s
methodology for determining the annual AFUDC rate to ensure it was
based upon its own debt and equity book balances and to ensure the short
term debt rate variance did not exceed 25 basis points. Reviewed work
orders to confirm the company ceased accruing AFUDC upon in-service
dates , periods of suspension, and abandonment. Examined the construction
base component of its AFUDC accrual c alculation to ensure it included
amounts relating to construction activities and properly allocated
overheads. Compliance with FERC Form No. 1 Reporting Requirements Audit staff performed the following actions to facilitate the testing and evaluation of compliance with Commission requirements relevant to the FERC Form No. 1:  Reporting Process and Procedures - Audit staff evaluated PacifiCorp ’s financial
reporting processes, procedures, and quality controls used to prepare FERC Form
No. 1 and comply with Commission regulations in Part 141.  Financial Reporting Instructions - Audit staff evaluated PacifiCorp ’s financial
reporting to determine whether it complied with the account and page instructions
of FERC Form No. 1.  Financial Statement Account Balances - Audit staff tied the account balances
reported in FERC Form No. 1 to PacifiCorp ’s books and records. To facilitate the
review, audit staff reviewed selected transactions to confirm the balances.  Account Variance Analysis - Audit staff performed variance analyses for accounts
reported in FERC Form No. 1 with large balances, unusual activity, and/or
significant fluctuations.  Notes to Financial Statements - Audit staff reviewed the Notes to Financial
Statements of FERC Form No. 1 for signif icant accounting matters, and followed
up on these matters to understand financial statement and wholesale formula rate
implications.
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 19 IV . Findings and Recommendations 1. Storm Damage Accounting and Costs Recovery PacifiCorp’s accounting and wholesale formula rate billings for storm damage
costs during the period of 2012 through 2015 were deficient as follows:  PacifiCorp improperly overbilled storm damage costs to its merchant function and
third-party wholesale customers that procured transmi ssion services under
PacifiCorp’s OATT. This occurred because PacifiCorp improperly included
actual plus estimated costs associated with the same storms in billings to its
merchant and third-party wholesale customers. As a result, PacifiCorp overstated
its wholesale transmission revenue requirement by approximately $6.9 million, which led to overbillings to third-party wholesale customers by approximately
$1.1 million.  PacifiCorp did not make refunds to its wholesale customers for the excessive
storm da mage revenues collected from its wholesale customers. Pertinent Guidance 18 C.F.R. 101, Account 924, Property Insurance, states in part: Recoveries from insurance companies or others for property damages shall
be credited to the account charged with the cost of the damage. If the
damaged property has been retired, the credit shall be to the appropriate
account for accumulated provision for depreciation. 18 C.F.R. 101, Account 571, Maintenance of Overhead Lines, states in part: This account shall include the cost of labor, materials used and expenses
incurred in maintenance of transmission plant, the book cost of which is
includible in accounts 354, Towers and Fixtures, 355, Poles and Fixtures,
356, Overhead Conductors and Devices, 359, Roads and Trails. Background PacifiCorp experienced a number of uninsured property damages due to wind,
rain, ice, and snow storms. The storms caused power outages in PacifiCorp’s generation,
transmission, and distribution systems. To evaluate storm damage cost incurred by
PacifiCorp and storm damage cost charged through wholesale formula rates, audit staff
examined PacifiCorp’s accounting policies, processes, and procedures, interviewed
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 20 employees responsible for implementing accounting practices, evaluated detailed
accounting records and supporting documentation and analyzed PacifiCorp’s
Commission-jurisdictional wholesale formula rate filings and associated orders. PacifiCorp’s wholesale customers that take service under its OATT have written contracts in place that governs the transmission services offered by PacifiCorp.
PacifiCorp ’s wholesale transmission customers include its merchant function as well as
other wholesale customers. Accounting for Storm Damages PacifiCorp accounted for tra nsmission-related storm damage costs using
Account 571, Maintenance of Overhead Lines, and Account 924, Property Insurance.
Actual storm damage costs were recorded in Account 571, while estimated costs for the
storms were recorded in Account 924. Both Accounts 571 and 924 were used in
PacifiCorp wholesale formula rates in determining billings to its merchant function and
other wholesale customers. When a storm occurs, PacifiCorp paid storm damage costs
and recovered such actual costs from wholesale customers through its wholesale formula
rate by charges to Account 571. Also, PacifiCorp recovered estimated storm damage
costs related to the same storm from its wholesale customers through charges to
Account 924. From 2012 through 2015, PacifiCorp recorded $1,634,718 in Account 571
and $6,861,201 in Account 924. Wholesale Formula Rates Recovery of Storm Damage Costs Since 2012, PacifiCorp’s wholesale formula rates have been determined pursuant
to the directives of the formula manual in its OATT.4 In accordance with the formula
manual, balances appropriately accounted for in specific accounts may be includible in
the derivation of wholesale formula rates charged. As mentioned above, PacifiCorp
accounted for actual and estimated storm damage costs in Accounts 571 and 924,
respectively. The amounts recorded in these accounts were included in the determination
of wholesale formula rates billed to the company’s merchant function and other
wholesale customers . The table below shows the total amount collected for storm
damage costs versus the actual storm damage costs incurred to repair and restore the
transmission system. 4 See PacifiCorp, Transmission OATT and Service Agreements, OATT Volume
No. 11, Attachment H-2, Formula Rate Implementation Protocols (1.0.0). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 21 Audit staff point out that, PacifiCorp billed its merchant function and third-party wholesale customers for actual storm damage costs while also collecting estimated storm
damage costs through its wholesale formula rates. Since PacifiCorp recovered from its
merchant function and other wholesale customers the actual storm damage costs, there
was no basis for PacifiCorp to also recover estimated storm damage costs from wholesale
customers . Thus, PacifiCorp should have excluded estimated amounts for storm damage
expenses in Account 924, subsequently allocated to the wholesale formula rates. Audit staff evaluated through interviews and document reviews the coordination
between departments within PacifiCorp. Audit staff is concerned that coordination
between departments within PacifiCorp was not strong enough to prevent PacifiCorp
from collecting both act ual and estimated (over collection) storm damage costs through
the wholesale formula rates. Strengthening the coordination between departments may have mitigated the over billing of storm damage costs. As a result of PacifiCorp’s accounting and wholesale transmission rate recovery practices, the company overstated
its wholesale transmission revenue requirement by approximately $6.9 million from 2012
to 2015. This led to PacifiCorp overbilling its merchant function through inter-departmental billings by $5.8 million and third-party wholesale customers by $1.1 million. Recommendations We recommend PacifiCorp: 1. Re frain from recovering actual and estimated storm damage costs from
wholesale customers associated with the same storm. Revise policies,
procedures and practices to ensure the proper accounting procedures are
employed to prevent the double collection of storm damage costs through the
wholesale formula rates. Storm Damage Operating and Maintenance Expense 2012 2013 2014 2015 TotalActual expenses incurred on transmission system615,586 162,714 292,450 563,968 1,634,718 Actual expenses collected through formula rate615,586 162,714 292,450 563,968 1,634,718 Estimated expenses collected through formula rate1,505,666 1,598,713 1,747,354 2,009,468 6,861,201 Total storm damages collected through formula rate2,121,252 1,761,427 2,039,804 2,573,436 8,495,919 Expenses over collected through formula rate1,505,666 1,598,713 1,747,354 2,009,468 6,861,201 Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 22 2. Revise wholesale formula rates development procedures to strengthen coordination between accounting and wholesale formula rates development
departments. 3. Provide training to staff on the revised storm damage accounting and rate
development methods. Also, develop a training program that supports the
provision of periodic training in this area, as needed. 4. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate storm damage recoveries
since 2012, plus interest; (2) determinative components of the refund;
(3) refund method; (4) customers to be refunded; and (5) period(s) refunds
will be made. Include the results of the analysis of transmission-related storm
damage expenses in th e refund amount. 5. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 6. Refund amounts disclosed in the refund report to wholesale customers , with
interest calculated in accordance with section 35.19a of Commission
regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 23 2. Mining Assets PacifiCorp inappropriately recovered from its wholesale customers the cost of
production related mining assets through its wholesale formula rates. As a result,
PacifiCorp overstated its wholesale transmission revenue requirement by approximately
$3.7 million, which led to overbillings to third-party wholesale customers by approximately $600,000. Pertinent Guidance In Ameren Corporation , the Commission states in part: [It] has repeatedly held that it may order refunds for past periods where a
utility has either misapplied a formula rate or otherwise charged rates
contrary to the filed rate. The Commission has explained that, “in approving
any formula rate, the Commission approves the formula itself, the algebraic
equation used to calculate the rates. It does not approve the inputs into the
formula or the charges r esulting from the application of the inputs to the
algebraic equation.” Moreover, “[t]he Commission’s long-standing
precedent is that, under formula rates, parties have the right to challenge the
inputs to or the implementation of the formula at whatever time they discover
errors in the inputs to or implementation of the formula.” The reason for
permitting such challenges and related refunds is because “customers may
not uncover errors in data or imprudent or otherwise inappropriate costs until
well after the challenge period.5 PacifiCorp’s OATT, Volume No. 11, Part IV. 36, Definitions, states in part: Tariff shall mean the Transmission Provider's Tariff through which open
access transmission service and Interconnection Service are offered, as filed
with F ERC, and as amended or supplemented from time to time, or any
successor tariff.6 Background Deer Creek Mine was an underground mine owned by PacifiCorp . In addition,
PacifiCorp owned a separate mineral lease license for lands adjacent to the Deer Creek
5 Ameren Corporation , 147 FERC ¶ 61225, at P 27 (2014). 6 PacifiCorp, Transmission OATT and Service Agreements, OATT Volume
No. 11, Part IV.36, Definitions (1.0.0). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 24 Mine, through its 100 percent owned subsidiary Fossil Rock Fuels, LLC. The mine was
operated by Energy West Mining Company, also a subsidiary of PacifiCorp.
PacifiCorp’s ownership interests in Fossil Rock Fuel and Energy West Mining Company
were recorded based on the equity method as required by the Commission’s accounting
regulations. PacifiCorp’s ownership of the tangible and intangible assets of the Deer Creek
Mine was recorded on the balance sheet of PacifiCorp in Account 399, Other Tangible
Property, and Account 303, Miscellaneous Intangible Plant, respectively. The
depreciation component of the mining assets were recorded in Account 151, Fuel Stock,
as part of coal inventory. In 2013, PacifiCorp’s wholesale formula rate was approved by the Commission
and was retroactive to the 2012 rate year. The settlement agreement added an
Attachment H to PacifiCorp’s OATT which included wholesale formula rates for
transmission services. The Attachment H included the protocols used by PacifiCorp to
compute its annual wholesale transmission revenue requirement. Per the wholesale
formula rates, General Plant in Service is included in transmission rate base and in
developing allocators based on gross plant and net plant. Audit staff reviewed
PacifiCorp’s wholesale formula rates for 2012 through 2015 and determined that
PacifiCorp inappropriately recovered the cost of mining assets recorded in Account 399
from wholesale customers. PacifiCorp’s wholesale formula rates tariff was developed to recover the cost for transmission service provided by PacifiCorp. Additionally, PacifiCorp’s wholesale
formula rate was not developed to permit the recovery of production assets exclusively
used to serve its production function . Audit staff determined that PacifiCorp’s mining
assets served only the production function and had no relevance to the transmission
service provided under PacifiCorp’s wholesale formula rates tariff; hence the cost related
to mining assets should not be recovered from wholesale customers. Audit staff analysis of PacifiCorp’s inclusion of mining assets in wholesale
transmission rate base and gross and net plant allocators determined that PacifiCorp
overstated its wholesale transmission revenue requirement by approximately
$3.7 million, which led to PacifiCorp overbilling its merchant function through inter-departmental billings by approximately $3.1 million and third-party wholesale customers by approximately $600,000. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 25 Recommendations We recommend Pa cifiCorp: 7. Revise procedures for computing the annual wholesale transmission revenue
requirement and billing to wholesale customers by ensuring that it excludes
cost of mining assets from the wholesale formula rates. 8. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate cost of mining asset
recoveries that resulted from the inclusion of mining assets in the wholesale
formula rates base since 2012, plus interest; (2) determinative components of
the refund; (3) refund method; (4) customers to be refunded; and (5) period(s)
refunds will be made. 9. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 10. Refund amounts disclosed in the refund report to wholesale customers , with
interest calculated in accordance with section 35.19a of Commission
regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 26 3. Amortization of Regulatory Assets PacifiCorp inappropriately included amortization of regulatory assets in its
wholesale formula rates. As a result, PacifiCorp overstated its wholesale transmission
revenue requirement by approximately $800,000, which led to overbillings to third-party wholesale customers of approximately $100,000. Pertinent Guidance PacifiCorp’s OATT states in part: All regulatory asset amortizations shall be excluded from the calculation of
the Annual Transmission Revenue Requirement (ATRR) and charges under
the Formula Rate, unless approved by the Commission.7 18 C.F.R. Part 101, Account 920, Administrative and General Salaries, states in
part: A. This account shall include the compensation (salaries, bonuses, and other
consideration for services, but not including directors' fees) of officers,
executives, and other employees of the utility properly chargeable to utility
operations and not chargeable directly to a particular operating function. 18 C.F.R. Part 101, Account 925, Injuries and Damages, states in part: A. This acco unt shall include the cost of insurance or reserve accruals to
protect the utility against injuries and damages claims of employees or
others, losses of such character not covered by insurance, and expenses
incurred in settlement of injuries and damages claims. For Major utilities, it
shall also include the cost of labor and related supplies and expenses incurred
in injuries and damages activities. 7 PacifiCorp, Explanatory Statement in Support of Settlement, Docket No. ER11-3643, Section 3.4.2.9 (filed on Feb. 22, 2013) (Approved by the Commission under
PacifiCorp , 143 FERC ¶ 61,162.) Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 27 18 C.F.R. Part 101, Account 926, Employee Pensions and Benefits, states in part: This account shall include pensions paid to or on behalf of retired employees,
or accruals to provide for pensions, or payments for the purchase of annuities
for this purpose, when the utility has definitely, by contract, committed itself
to a pension plan under which the pension funds are irrevocably devoted to
pension purposes, and payments for employee accident, sickness, hospital,
and death benefits, or insurance thereof. This also includes expenses
incurred in medical, educational, or recreational activities for the benefit of employees, and administrative expenses in connection with employee
pensions and benefits. Background PacifiCorp provided electric utility services to customers in six retail jurisdictions.
Due to ratemaking actions of these retail jurisdictions, PacifiCorp created regulatory
assets to recover the retail portion of certain expense items in retail rates. Audit staff
reviewe d items recorded in PacifiCorp’s Account 182.3, Other Regulatory Assets, to
determine if items recorded in the account were appropriately accounted for and
approved in accordance with Commission accounting regulations and tariff requirements.
In addition, audit staff reviewed regulatory assets to understand the effect of regulatory
assets on PacifiCorp wholesale transmission revenue requirement. Audit staff’s review of Account 182.3, found that PacifiCorp recorded several
regulatory assets based on ratemaking actions of state regulators. PacifiCorp did not seek
Commission approval for any of the regulatory assets included in Account 182.3. Audit
staff found that amortization of four regulatory assets impacted wholesale formula rates
development. Environ mental damages amortization PacifiCorp incurred environmental damage costs related to 33 properties it
owned or adjacent to properties it owned due to local, state and federal environmental
regulations. Some of the locations were previously owned by PacifiCorp and
subsequently sold prior to the audit period. PacifiCorp represented that much of the environmental damage were attributable to utility operations of several companies it
acquired, some legacy sites of which were subsequently sold by those com panies. The
properties owned by PacifiCorp were used in its production and distribution functions.
The environmental damage costs were approved by several state commissions for retail
rate recovery over ten years. PacifiCorp recorded the cost of environmental damages as
regulatory assets in Account 182.3 and amortized the regulatory asset to Account 925,
Injuries and Damages. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 28 Prepaid Pension, PBOP and Injuries and Damages amortization The regulatory assets recorded in Account 182.3 included regulatory assets
associated with prepaid pensions and prepaid postretirement benefits approved for
recovery by several of PacifiCorp’s retail regulators.8 PacifiCorp also recorded a
regulatory asset for injuries and damages claims in the state of Oregon based on an
Oregon Public Utility Commission order. PacifiCorp recorded amortization of the
regulatory assets for prepaid pensions and postretirement benefits in Account 920,
Administrative and General Salaries, and amortization of the regulatory asset for injuries
and damages in Account 925, based on recovery of the regulatory assets in retail rates. Accounting for amortization of regulatory assets Audit staff found that PacifiCorp’s accounting for amortization of environmental
damages regulatory asset in Account 925 was inconsistent with Commission accounting
regulations. Account 925 should include the cost of insurance or reserve accruals to
protect the utility against injuries and damages claims of employees or others, or losses of
such character not covered by insurance. Audit staff believes that PacifiCorp’s
environmental damages did not meet the character of losses included in Account 925.
PacifiCorp should have amortized the amounts of the environmental damages related
regulatory assets recovered in its retail rates to appropriate functional production or
distribution operating and maintenance expense accounts. Audit staff found that PacifiCorp’s accounting for amortization of prepaid pension
and postretirement benefit regulatory assets in Account 920 was inconsistent with
Commission accounting regulations. Pensions and postretirement benefits should be
recorded in Account 926 under the Commission accounting regulations. Also,
PacifiCorp should have recorded the amortization of pension and postretirement benefit
costs to Account 926, Employee Pensions and Benefits, not Account 920. Wholesale formula rates recovery of amortization of regulatory assets PacifiCorp’s settlement agreement and wholesale formula rates protocols
approved by the Commission in Docket No. ER11-3643 included allocable costs of items
recorded in Account 920 and Account 925, to deriv e the wholesale transmission revenue
8 See Application for an Accounting Order Regarding Pension Curtailment, Order
No. 08-598 (Oregon Public Utility Commission, Dec. 24, 2008); Accounting Order
Regarding Pension Curtailment and Pension Measurement Date Change, Docket No. 08-035-93 (Utah Public Service Commission, Feb. 4, 2009). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 29 requirement c alculation, by way of a wages and salary allocator.9 However, Section
3.4.2.9 of PacifiCorp’s settlement agreement stated that, in part, all regulatory asset
amortizations should be excluded from the calculation of the wholesale transmission
revenue requirement and charges under the wholesale formula rates, unless approved by
the Commission. Based on the fact that PacifiCorp’s regulatory assets for prepaid
pensions, prepaid postretirement benefits, environmental damages, and injuries and
damages were not approved by the Commission, these amounts should not have been
included in the wholesale transmission revenue requirement and billings to wholesale
customers. PacifiCorp’s inappropriate inclusion of the regulatory assets’ amortization into the
wholesale transmission expenses overstated the wholesale transmission revenue
requirement by approximately $800,000 from 2012 through 2015, which led to
PacifiCorp overbilling its merchant function through inter-departmental billings by approximately $700,000 and ot her third-party wholesale customers by approximately
$100,000. Recommendations We recommend PacifiCorp: 11. Revise accounting procedures to record pensions, and postretirement
regulatory asset amortizations in Account 926. 12. Revise accounting procedures to exclude amortization of environmental
damages regulatory assets to Account 925, and record amortization of
amounts recovered in retail rates in appropriate functional operating and
maintenance accounts. 13. Provide training to staff on the revised regulatory assets accounting and rate
development methods. Also, develop a training program that supports the
provision of periodic training in this area, as needed. 14. Record correcting entries to reclassify pensions, and postretirement regulatory
assets amortization from Account 920 to Account 926. 15. Record correcting entries to reclassify environmental damages amortization
from Account 925 and record the amounts recovered from retail rates in
appropriate functional operating and maintenance accounts. 9 PacifiCorp, Transmission OATT and Service Agreements, OATT Volume
No. 11, Attachment H-1 (8.1.0), Appendix A. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 30 16. Revise procedures for computing wholesale formula rates billings to
wholesale customers to exclude amortization of regulatory assets which were
not approved by the Commission. 17. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate regulatory asset
amortizations which were included in wholesale formula rates and the refunds
resulting from the inclusion of those regulatory asset amortizations in the
wholesale formula rates, plus interest; (2) determinative components of the
refund; (3) refund method; (4) customers to be refunded and (5) period(s)
refunds will be made. 18. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 19. Refund amounts disclosed in the refund report to wholesale customers , with
interest calculated in accordance with section 35.19a of Commission
regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 31 4. Injuries and Damages Accounting and Costs Recovery PacifiCorp improperly classified injuries and damages accruals and recovered
those costs through its wholesale formula rates when it had insurance policies to cover
the cost of those damages. As a result, PacifiCorp overstated its wholesale transmission
revenue requirement by approximately $2.9 million, which led to overbillings to third-party wholesale customers by approximately $400,000. Pertinent Guidance 18 C.F.R. 101, Account 925, Injuries and Damages, states in part: A. This account shall include the cost of insurance or reserve accruals to
protect the utility against injuries and damages claims of employees or
others, losses of such character not covered by insurance, and expenses
incurred in settlement of injuries and damages claims. For Major utilities, it
shall also include the cost of labor and related supplies and expenses incurred
in injuries and damages activities. Reimbursements from insurance companies or others for expenses charged
hereto on accou nt of injuries and damages and insurance dividends or refunds
shall be credited to this account. 18 C.F.R. Part 101, Account 426.5, Other Deductions, states in part: This account shall include other miscellaneous expenses which are non-operating in natur e, but which are properly deductible before determining
total income before interest charges. 18 C.F.R. Part 101, General Instruction No. 2, Records, states in part: A. Each utility shall keep its books of account, and all other books, records,
and memo randa which support the entries in such books of account so as to
be able to furnish readily full information as to any item included in any
account. Each entry shall be supported by such detailed information as will
permit ready identification, analysis, and verification of all facts relevant
thereto. B. The books and records referred to herein include not only accounting
records in a limited technical sense, but all other records, such as minute
books, stock books, reports, correspondence, memoranda, etc., which may
be useful in developing the history of or facts regarding any transaction. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 32 Background PacifiCorp operates in many western states where the frequency of wildfires has
been high. PacifiCorp has historically had a significant amount of insurance coverage,
provided by multiple insurers due to the potential for injuries and damages claims arising
from wildfire and other perils of operating its electric system. PacifiCorp’s insurance
was organized on an excess liability structure with multiple tiers. The cumulative excess
liability insurance provided by the insurers totaled $250 million in protection to
PacifiCorp, with a $3 million deductible, from August 28, 2011 to October 1, 2012. PacifiCorp’s liability insurance program was administered by its indirect parent
company, Berkshire Hathaway Energy Company (BHE). BHE, through a third-party
provider, assigned the relevant insurance premium costs to PacifiCorp and the other
affiliates. PacifiCorp paid approximately $2 million in insurance premiums for the
August 28, 2011 to October 1, 2012 insurance period, and allocated a portion of this
insurance premium to wholesale customers in developing wholesale formula rates. Wildfires PacifiCorp was exposed to two wildfire claims in 2012 during the policy period
from August 28, 2011 to October 1, 2012. A claim on PacifiCorp by an unrelated third-party for damages resulting from a 2009 fire, known as “Williams Creek fire” on
Umpqua National Forest land in Oregon, followed by another claim notice for the same
fire by the US Forest Service, United States Department of Agriculture. In addition,
several claims were made in 2012 against PacifiCorp for a second fire at Wood Hollow,
Sanpete County, Utah in June 2012. Audit staff determined that the damages from the
Wood Hollow wild fire would significantly exceed damages from the Williams Creek
fire. Investigations and claim negotiations related to both wildfires (Williams Creek and
Wood Hollow) have not been completed, as of the date of this audit report. Chevron Oil Pipeline Leak PacifiCorp was exposed to another damage claim in 2012, when the Pipeline and
Hazardous Materials Safety Administration concluded that an electrical arc from an
electrical transmission station owned by PacifiCorp created a hole in a pipeline in June
2010. The pipeline was owned by Chevron Pipe Line Company. The damage from the
electrical arc caused oil to leak into Red Butte Creek and migrated into the Liberty Park
pond in the foothills of Salt Lake City, Utah. Accounting for Injuries and Damages PacifiCorp’s legal team met quarterly, to evaluate pending liability claims against
the company. The legal team produced a report called the quarterly litigation report
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 33 (QLR). The QLR provided the legal team’s assessment of PacifiCorp’s exposure to
potential losses arising from each liability claim. PacifiCorp’s accounting staff made
appropriate accounting entries based on the QLR produced by the legal team. Based on the QLR for the Williams’s Creek and Wood Hollow fires and Chevron
Oil Pipeline leak, PacifiCorp recorded the following accruals in Account 925, Injuries
and Damages, with corresponding credits in Account 228.2, Accumulated Provision for
Injuries and Damages: Expenses recorded in Account 925 for wildfires and oil leak Expenses 2012 2013 2014 2015 Wildfires and Oil Leak
36,427,396
29,238,276
(33,495,311)
(5,118,064) PacifiCorp had insurance to cover the losses from the Wood Hollow fire and
Chevron Oil Pipeline leak. However, even though it had insurance policies in 2012 to
cover the losses less the deductible due to the fire and oil leak, PacifiCorp recorded an
accrual on its books for the full amount of the losses, which included the $3 million
deductible for each loss. During audit staff’s several interviews, PacifiCorp represented
that a management decision not to reduce the accrual for any insurance receivable was
made by PacifiCorp’s Executive Management in 2012 when they decided not to seek
insurance reimbursement for damages covered by the insurance policies. PacifiCorp
represented that, it did not retain any analyses, rationale or written directives to support
the accounting decision for not recording insurance receivables. Since PacifiCorp’s
executive management decided not to seek insurance reimbursement for damages
covered by existing insurance policies, it should have recorded the accrual for the
covered damage amounts in Account 426.5, Other Deductions, instead of Account 925. PacifiCorp began accruing for the Wood Hollow fire insurance recoveries from
insurance companies in 2014. In 2015, PacifiCorp received insurance reimbursement
from its policy holders for the Wood Hollow fire claims, directly settled and paid by
PacifiCorp to its claimants. In addition, PacifiCorp recorded additional offsets in 2014
for the excess Wood Hollow fire expenses recorded in Account 925 in 2012 and 2013.
However, PacifiCorp did not record any insurance reimbursement and reduced the
accrual related to the Chevron Oil Pipeline leak during this period. Wholesale Formula Rates Impact PacifiCorp had insurance to cover losses caused by the Wood Hollow fire and
Chevron Oil Pipeline leak. The insurance premiums for those insurance policies were
recorded in Account 925, and an allocated portion of the premiums was collected from
wholesale customers. During audit staff’s interviews, PacifiCorp could not provide audit
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 34 staff with any satisfactory evidence to support the collection of damages in excess of
coverage deductible in 2012 and 2013 was approved by the Commission. Hence,
PacifiCorp should not have collected the damages from the Wood Hollow fire and
Chevron Oil Pipeline leak in 2012 and 2013, except for the insurance deductible amounts
paid and stipulated in the insurance policies, from wholesale customers. Even though
PacifiCorp credited the excess amount related to the Wood Hollow fire that was
inappropriately collected in 2012 and 2013 to wholesale customers through its wholesale
formula rates in 2014, audit staff points out that loads and customer groups in 2012 and
2013 were different from 2014; hence, the wrong customer groups may have been
refunded the inappropriately collected funds. Audit staff is concerned that PacifiCorp recovered wildfire and oil leak damages
covered by in surance policies from the wholesale customers, who paid the insurance
premiums. Audit staff did not find sufficient evident that shows that, wholesale
customers under the Commission’s jurisdiction, and other wholesale formula rates
stakeholders were informed of PacifiCorp’s decision not to seek insurance recovery for
the wildfire and oil leak damages. Due to PacifiCorp’s accounting and wholesale formula rates practices, it
inappropriately collected approximately $2.9 million through its wholesale transmission
revenue requirement in 2012 and 2013, which led to PacifiCorp overbilling its merchant
function through inter-departmental billings by approximately $2.5 million and third-party wholesale customers by approximately $400,000. Recommendations We recommend PacifiCorp: 20. Revise policies, procedures and practices to book accruals for covered damage
amounts in Account 426.5 when management makes a decision not to seek
insurance recoveries for damages covered by insurance. 21. Provide training to staff on the revised injuries and damages expenses covered
by insurance accounting and rate development methods. Also, develop a
training program that supports the provision of periodic training in this area,
as needed. 22. Submit a refund analysis within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate injuries and damages
recoveries that resulted from the inclusion of excessive estimated expenses in
the wholesale formula rates since 2012, plus interest; (2) determinative
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 35 components of the refund; (3) refund method; (4) customers to be refunded;
and (5) period(s) refunds will be made. 23. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 24. Refund amounts disclosed in the refund report to wholesale customers, with
interest calculated in accordance with section 35.19a of Commission
regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 36 5. Allowance for Funds Used During Construction PacifiCorp’s methods for calculating Allowance for Funds Used During
Construction (AFUDC) rate was deficient as follows:  PacifiCorp inappropriately included letter of credit fees (up-front and
quarterly) as part of short term debt interest expense to compute AFUDC rate.  PacifiCorp inappropriately included Unappropriated Undistributed Subsidiary
Earnings as part of the equity component for the purpose of computing
AFUDC rate.  PacifiCorp inappropriately included Accumulated Other Comprehensive
Incom e (AOCI) as part of the equity component for the purpose of computing
AFUDC rate in 2013. As a result, PacifiCorp over accrued Allowance for Funds Used During
Construction by approximately $6.8 million for 2013 through 2015. PacifiCorp
overbilled wholesale customers for the excessive AFUDC costs included in utility plant
that was included in wholesale formula rates determinations through rate base and
depreciation charges. Pertinent Guidance Order No. 561, states in part: The balances of long-term debt, preferred stock, and common equity for use
in the formula for the current year will be the balances in such accounts at
the end of the prior year… We agree that in some instances, such items could properly be considered in
determining the effective cost rate for short-term debt for use in the formula.
However, primarily because of measurement problems, we do not believe
that specific recognition should be given in the general rule. Instead, where
an individual company has a written agreemen t and can support the fact that
compensating balances and commitment fees are necessary in order to obtain
favorable short-term financing and are not considered in its rate proceedings,
we will permit an adjustment to the nominal short-term interest rates to
reflect this additional cost.10 10 Amendments To Uniform System of Accounts for Public Utilities and Licensees
and for Natural Gas Companies (Classes A, B, C and D) to Provide for the
Determination of Rate for Computing the Allowance for Funds Used During
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 37 18 C.F.R. Part 101, Electric Plant Instructions 3(A)(17), Allowance for Funds
Used during Construction, states in part: Allowance for funds used during construction includes the net cost for the
period of construction of borrowed funds used for construction purposes and
a reasonable rate on other funds. The rates shall be determined annually. The balances for long-term debt,
preferred stock and common equity shall be the actual book balances as of
the end of the prior year. Order No. 469, states in part: It will continue to be the Commission's policy that the undistributed earnings
of subsidiaries are to be excluded from the common stockholder's equity in
determining rate of return.11 18 C.F.R. Part 101, General Instruction No. 23(C), Accounting for Other Comprehensive Income, states: When it is probable that an item of other comprehensive income will be
included in the development of cost-of-service rates in subsequent periods,
that amount of unrea lized losses or gains will be recorded in Accounts 182.3
or 254 as appropriate. Background Letter of Credit Facility PacifiCorp entered into two separate letter of credit agreements, in 2012 and 2013,
for $600 million each. The terms of each agreement required PacifiCorp to pay an up-front fee in addition to quarterly interest payments on the unused balance at the end of
Construction and Revision of Certain Schedule Pages of FPC Reports , Order No. 561, 57
FPC 608, at 610-611 (1977), order clarifying orders, Order No. 561-A, 2 FPC ¶ 1340
(1977). 11 Revisions in Uniform System of Accounts, and Annual Report Forms No. 1 and
No. 2 to Adopt the Equity Method of Accounting for Long-Term Investments in
Subsidiaries, Order No. 469, 49 FPC 326, at 327 (1973). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 38 each quarter. During 2012 and 2013, PacifiCorp paid approximately $3.6 million for
upfront fees and approximately $3.3 million for quarterly interest payments. When
PacifiCorp used the letter of credit, it was charged interest on the amount outstanding
each month until PacifiCorp paid off the outstanding balance. PacifiCorp accounted for the upfront fees and quarterly interest payments as well
as the monthly interest payments for the credit balances outstanding by debiting
Account 431, Other Interest Expense, and crediting Account 131, Cash. Audit staff reviewed the individual components and calculations of PacifiCorp’s
AFUDC rate to determine whether PacifiCorp was in compliance with Commission
accounting requirements. Audit staff determined that the components of short term
interest expense included up-front fees and quarterly interest payments for the two
$600 million letter of credit agreements obtained by PacifiCorp in 2012 and 2013. By
including up-front fees and quarterly interest payments on unused credit balances,
PacifiCorp’s short term interest component of AFUDC rate calculation was overstated
during the audit period. The table below shows appropriate short-term AFUDC rates
developed in compliance with the Commission regulations and the AFUDC rates used by
PacifiCorp: Short-term AFUDC capitalization rate overstatement Audit staff noted that, the Commission in Order No. 56112 and Order No. 561-A13 stated that, in order to include compensating balance and commitment fees in the
12 In Order No. 561, the Commission stated that, “we do not believe that specific
recognition should be given in the general rule. Instead, where an individual company has
a written agreement and can support the fact that compensating balances and commitment
fees are necessary in order to obtain favorable short-term financing and are not
considered in its rate proceedings, we will permit an adjustment to the nominal short-term
interest rates to reflect this additional cost.” 57 FPC 608 at 5. 13 Order No. 561-A, the commission stated that “Order No. 561 neither changes
the Commission's policy with respect to treatment of short-term debt in capitalization
used for rate of return purposes nor does it grant blanket approval for recognition of
compensating balances and commitment fees in costing sh ort-term debt. The burden of Year AppropriateRate Rate Used by PacifiCorp Rate Overstatement 2013 0.31%15.92%15.61%
2014 0.26%15.50%15.24%
2015 0.49%3.89%3.40%
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 39 short term debt interest component for AFUDC rate computation, an entity must obtain
Commission approval. PacifiCorp did not provide audit staff with any evidence it
obtained Commission approval to include these costs in its AFUDC rates calculation. Equity component of AFUDC rate
Audit staff’s examination of the equity component that was included in
PacifiCorp’s AFUDC rate calculation revealed that PacifiCorp incorrectly used balances
from Account 219, Accumulated Other Comprehensive Income , during 2013 , and
Account 216.1, Unappropriated Undistributed Subsidiary Earnings, in the equity
compone nt of the AFUDC rate calculation. Account 219’s balance represented an
unrealized loss attributable to a Senior Executive Retirement Plan. In addition,
PacifiCorp used a different amount from what was reported on it FERC Form No. 1 for
Account 201, Common Stock Issued, Account 211, Miscellaneous Paid-In Capital, and
Account 216, Unappropriated Retained Earnings, in its equity component for computing
the AFUDC ra te during the audit period, instead of using the amounts as reported on its
FERC Form No.1 . AFUDC includes the net cost of borrowed funds used for construction purposes
and an allowed rate on other funds. Since the gains and losses in Account 219 were unrealized, and amounts in Account 216.1 were undistributed by the subsidiaries and
therefore not available to finance construction, those amounts should not have been
considered as funds available for construction in deriving the rates used in AFUDC. In
Order No. 469 the Commission stated that undistributed earnings of subsidiaries are to be
excluded from the common stockholder's equity in determining rate of return. Additionally, the Commission’s accounting regulations require the use of actual book
balances as of the end of the previous year in the appropriate equity accounts when computing the AFUDC rate. Since PacifiCorp did not seek or obtain Commission approval to include
commitment fees in its AFUDC calculation or to deviate from the appropriate method for
computing the AFUDC rate, it was inappropriate for PacifiCorp to include these amounts
in its AFUDC rate calculation. Audit staff’s review of PacifiCorp’s projects under construction showed that
transmission projects represented approximately $106 million or 38 percent of the total
AFUDC accrued during 2013 through 2015. As a result of PacifiCorp’s deviation from
the appropriate method for computing AFUDC rate, PacifiCorp over-accrued AFUDC by
proof is upon the companies to justify such items before they will be permitted.” 2 FPC ¶
1340 at 1342. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 40 approximately $6.8 million for all projects, including transmission projects, which led to
overbilling its merchant function and third-party wholesale customers. Recommendations We r ecommend PacifiCorp: 25. Revise its procedures to ensure its AFUDC rate calculation is consistent with
Order No. 561 and other applicable Commission requirements. 26. Revise its procedures to ensure that Account 216.1 is excluded from equity
components used to derive AFUDC rate. 27. Revise its procedures to ensure that the amounts reported on the FERC
Form No. 1 are used to compute AFUDC rate. 28. Provide training to staff on the revised AFUDC accounting and rate
calculation method. Also, develop a training program that supports the
provision of periodic training in this area, as needed. 29. Submit a refund analysis, within 60 days of receiving the final audit report, to
DAA for review that explains and details the following: (1) calculation of
refunds to wholesale customers base since 2012, plus interest; (2)
determinative components of the refund; (3) refund method; (4) customers to
be refunded; and (5) period(s) refunds will be made. 30. File a refund report with the Commission after receiving DAA’s assessment
of the refund analysis. 31. Refund amounts disclosed in the refund report to wholesale customers , with
interest calculated in accordance with section 35.19a of Commission
regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 41 6. Asset Retirement Obligations PacifiCorp’s accounting and rate treatment of Asset Retirement Obligations
(ARO) were deficient as follows:  PacifiCorp inappropriately excluded accumulated depreciation amounts
removed from Account 108, Accumulated Provision for Depreciation of
Electric Utility Plant, to implement ARO accou nting in the wholesale formula
rates determinations. As a result, PacifiCorp understated its wholesale
transmission revenue requirement which led to under-billings to its wholesale
customers through its wholesale formula rates.  PacifiCorp inappropriately included estimated future asset retirement costs recorded in General Plant in its wholesale formula rate base. As a result,
PacifiCorp overstated its wholesale transmission revenue requirement, which
led to overbillings to its wholesale customers. As a result of the deficiencies, PacifiCorp under-billed its wholesale customers
through its wholesale formula rates. Pertinent Guidance 18 C.F.R. § 35.18, Asset Retirement Obligations, states in part: A. …all cost components related to asset retirement obligations that would
impact the calculation of rate base, such as electric plant and related
accumulated depreciation and accumulated deferred income taxes, may
not be reflected in rates and must be removed from the rate base
calculation through a single adjustment. B. A public utility that has recorded asset retirement obligations on its
books, but is not seeking recovery of the asset retirement costs in rates,
must remove all asset-retirement-obligation-related cost components
from the cost of service supporting its proposed rates. Order No. 631 states: After considering the comments, the Commission will grant jurisdictional
entities the authority to adjust accounts 108, 110 and 253 to properly
recognize and record the liabilities for legal retirement obligations for
existing assets, the asset retirement costs and related accumulated
depreciation on the capitalized costs when the amounts that would otherwise
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 42 be included in net income determinations meet the criteria for recognition as
regulatory asset or liability.14 Background
In Order No. 631, the Commission granted authority to utilities under its
jurisdiction to make transition entries to reclassify the excess or shortfall of depreciation
recorded in Account 108 from prior cost of removal accounting over the accumulated
depreciation that would have been recorded under SFAS No. 14315 to Account 254, Other
Regulatory Liabilities, or Account 182.3, Other Regulatory Assets, as appropriate. The
Commission’s rate regulations enacted by Order No. 63116 required jurisdictional utilities
to exclude the impact of all ARO-related accounting including cost components from rate
determinations unless they sought and received approval to include ARO in rates. Under
Order No. 631, PacifiCorp recorded certain accounting entries to transition from prior
cost of removal accounting to ARO accounting for assets with legal retirement
obligations. Account 108 Removals Based on Order No. 631, PacifiCorp made transition entries to debit approximately $11 million to Account 108 as excess depreciation and credited the same
amount to Account 254. Also, PacifiCorp debited an additional $11 million to
Account 108 and credited Account 254 following issuance of FASB Interpretation
No. 47, Accounting for Conditional Asset Retirement Obligations. PacifiCorp in total
removed approximately $22 million in transition entries from Account 108 pursuant to
Commission Order No. 631. Audit staff reviewed PacifiCorp’s wholesale formula rates inputs and supporting
worksheets and found that the accumulated depreciation amounts removed from
Account 108 to implement ARO accounting requirements were excluded from wholesale
formula rates determinations. PacifiCorp neither sought nor received approval from the
Commission to exclude the accumulated depreciation balances from rates. PacifiCorp
should have included the $22 million of accumulated depreciation in Account 108
14 Accounting, Financial Reporting, and Rate Filing Requirements for Asset
Retirement Obligations, Order No. 631, FERC Stats. & Regs. ¶ 31,142, at P 30, order on
reh’g, Order No. 631-A, 104 FERC ¶ 61,183 (2003). 15 Accounting for Asset Retirement Obligations , Statement of Financial
Accounting Standards No. 143 (Fin. Accounting Standards Bd. 2001); see also
Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB
Statement No. 143, FASB Interpretation No. 47 (Fin. Accounting Standards Bd. 2005). 16 18 C.F.R. § 35.18, Asset Retirement Obligations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 43 balances used in its wholesale formula rates to eliminate the impact of PacifiCorp’s ARO
accounting on rate determinations as required by the Commission’s rate regulations. General Plant AROs PacifiCorp recorded the asset retirement costs and liabilities as debits in
Account 101 and credits in Account 230, Asset Retirement Obligations. PacifiCorp
included in wholesale formula rate base the asset retirement costs recorded in
Account 101 for general plant in service, resulting in an increase in wholesale
transmission rate base. By including asset retirement costs in rate base, PacifiCorp
overstated its wholesale transmission revenue requirement, which led to overbillings to
its merchant function and other wholesale customers. In addition, PacifiCorp’s inappropriate exclusion of the accounting effect of Order
No. 631 from its wholesale formula rates impacted the derivation of the account balances
allocated to wholesale formula rates using net plant ratios. Also, inclusion of asset retirement costs in plant in service impacted the net plant and gross plant allocators.
Based on PacifiCorp’s inappropriate rate treatment, it under-billed it’s merchant function
and third-party wholesale customers since 2012. Recommendations We recommend PacifiCorp: 32. Revise existing accounting and rate development procedures and practices to
ensure all ARO-related accounting effects and associated adjustments are
excluded from wholesale formula rates determinations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 44 7. Accounting for Coal Settlement Costs PacifiCorp incorrectly accounted for amortization of two coal settlement payments
in Account 151, Fuel Stock, instead of Account 501, Fuel. Pertinent Guidance In Kentucky Utilities Company, the Commission notes: [T]hat the purpose of Account 151 is to accumulate the cost of fuel on hand,
whereas, buyout costs are for the purpose of terminating a contract to
purchase future coal. Buyout costs would therefore be includable in Account
151 only to the extent that we were to interpret our accounting regulations to
contemplate that costs of future fuel purchases should include some portion
of previously in curred buyout costs. We have not so interpreted our
accounting regulation in the past, nor do we believe that it would be wise to
do so here. We believe that buyout costs should be expended as incurred or,
in the event that rate recognition is given in an appropriate proceeding,
amortized to expense from a deferred charge account consistent with the rate
recognition.17 18 C.F.R. § 35.14(a)(6), provides that, The cost of fossil fuel shall include no items other than those in Account 151. 18 C.F.R. Part 101, Account 151, Fuel Stock (Major Only), states in part: This account shall include the following book cost of fuel on hand: Items 1. Invoice price of fuel less any cash or other discounts 2. Freight, switching, … 18 C.F.R. Part 101, Account 501, Fuel, states in part: A. This account shall include the cost of fuel used in the production of steam
for the generation of electricity, including expenses in unloading fuel from
the shipping media and handling thereof up to the point where the fuel enters
the first boiler plant bunker, hopper, bucket, tank or holder of the boiler- 17 Kentucky Utilities Company, 45 FERC ¶ 61,409, at P 4 n.16 (1988). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 45 house structure. Records shall be maintained to show the quantity, B.t.u.
content and cost of each type of fuel used. 18 C.F.R. Part 101, Account 186, Miscellaneous Deferred Debits, states: For Major utilities, this account shall include all debits not elsewhere
provided for, such as miscellaneous work in progress, and unusual or
extraordinary expenses, not included in other accounts, which are in process
of amortization and items the proper final disposition of which is uncertain. Background PacifiCorp entered into two separate coal supply contracts to provide coal to its
Wyodak and Naughton coal generation plants. Chevron Mining Inc. supplied coal to the
Naughton plant and Wyodak Res ources Development Corporation (Wyodak Resources)
supplied coal to PacifiCorp’s Wyodak generation plant. Due to pricing and contract
disputes, PacifiCorp renegotiated the coal supply contracts with Chevron Mining Inc.
(Naughton contract) and Wyodak Resources (Wyodak contract). Naughton Contract The Naughton contract between Chevron Mining Inc. and PacifiCorp was entered
into in 1992 and was scheduled to terminate on December 31, 2016. The Naughton
contract included market price reopeners. PacifiCorp renegotiated a new coal contract
with Chevron Mining, Inc. to eliminate the market price reopener provision in the
Naughton contract during 2010. As part of the settlement to renegotiate the original
Naughton contract, PacifiCorp made a one-time payment upon execution of the
settlement agreement. Per analysis performed by PacifiCorp, the renegotiated contract
provided millions of dollars in cost savings on a net present value basis to customers
through a lower cost of coal. The one-time payment mad e to Chevron Mining Inc. by PacifiCorp was recorded
by a debit to Account 186, Miscellaneous Deferred Debits with a credit to Account 131,
Cash. The consideration payment was amortized over the life of the new agreement to
Account 151, Fuel Stock. The amount amortized to Account 151 was ultimately charged
to Account 501, Fuel as coal was burned. The Commission held that buyout costs should be expended as incurred or, in the
event that rate recognition is given in an appropriate proceeding, amortized to expense
from a deferred charge account consistent with the rate recognition18. Audit staff believe
18 Id. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 46 that the deferral of the one-time payment in Account 186 was appropriate since
PacifiCorp was given rate recognition by the state commission. However the am ount
paid by PacifiCorp to renegotiate the contract does not meet the instruction for the items
allowed in Account 151. The Commission has stated that the purpose of Account 151 is
to accumulate the cost of fuel on hand , however, since the payment was for contract
renegotiation and not directly related to fuel on hand, PacifiCorp should have recorded
the amortization to Account 501, instead of Account 151. Wyodak Contract In May 1987, PacifiCorp and Wyodak Resources Development Corporation
entered into a contract under which Wyodak Resources supplied coal to PacifiCorp’s
coal-fired steam electric generation facility in Wyodak, Wyoming. In 1998, PacifiCorp
began to withhold a portion of the invoiced coal price from Wyodak Resources due to
contract price disputes. As of March 2001, PacifiCorp had withheld disputed invoice
payments for coal delivered by Wyodak Resources. In August 2000, Wyodak Resources
filed a lawsuit against PacifiCorp to collect the withheld amounts. PacifiCorp responded
with a counter-suit by claiming Wyodak Resources had improperly billed PacifiCorp. In
April 2001, Wyodak Resources and PacifiCorp agreed to settle the dispute and
renegotiate the Wyodak contract. As part of the settlement and renegotiation of the Wyodak contract, Wyodak
Resources reduced the future unit price of coal, the contract period was extended to
December 2022, and PacifiCorp made a one-time payment to Wyodak Resources to settle
all past claims (i.e., invoices) under the old coal contract and for the price reduction
PacifiCorp received under the terms of the new contract. PacifiCorp did not provide any
evidence showing how the settlement amount was determined nor support for the amount
actually included in the settlement to relieve past billing disputes. The one-time payment made to Wyodak Resources by PacifiCorp was recorded by
a debit to Account 186, Miscellaneous Deferred Debits, and a credit to Account 131,
Cash. The total amount recorded in Account 186, was amortized over the life of the new
agreemen t to Account 151, Fuel Stock. The amount amortized to Account 151 was
ultimately charged to Account 501, Fuel, as coal was burned. Audit staff believe that the one-time payment, excluding payment for the
settlement of billing disputes, should have been amortized to Account 501 since
PacifiCorp was given rate recognition by the state commission.19 The portion related to
the billing dispute should have been identified immediately expensed to Account 501
unless a regulatory asset had been approved by the sta te commission to recover the past
19 Id. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 47 disputes. PacifiCorp represented to the state commission that the settlement included
past disputes and the contract price renegotiation but it did not identify the components of
settlement. The Commission has stated that the purpose of Account 151 is to accumulate
the cost of fuel on hand. The amount paid by PacifiCorp to settle and renegotiate the
contract did not meet the instructions for and items allowed in Account 151. PacifiCorp
should have recorded the amortized costs to Account 501, instead of Account 151. The
amount paid by PacifiCorp did not represent costs incurred to acquire coal received and
in inventory, nor do such amounts represent payments for the invoiced price of fuel or
items of cost listed in Account 151. PacifiCorp incorrectly recorded coal settlement and renegotiation costs in
Account 151, contrary to Commission accounting regulations. PacifiCorp should have
recorded these amounts in Account 501. Audit staff verified that that PacifiCorp’s
inc orrect accounting did not impact wholesale formula rates during the audit period. Recommendations We recommend PacifiCorp: 33. Establish procedures to identify components of coal settlement cost between
past coal supply disputes and costs that provide future benefits. 34. Establish procedures to expense immediately prior disputed costs that is
related to coal already consumed in Account 501, unless rate recognition is
approved by a regulatory authority. 35. Revise accounting procedures to record amortization of deferred coal
settlement and renegotiation costs in Account 501. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 48 8. Accounting for Liquidated Damages PacifiCorp incorrectly accounted for amortization of production related regulatory
assets associated with liquidated damages as an administrative and general expense in Account 930.2, Miscellaneous General Expense. Pertinent Guidance 18 C.F.R. Part 101, Account 930.2, Miscellaneous General Expenses, states in
part: This account shall include the cost of labor and expenses incurred in
connection with the general management of the utility not provided for
elsewhere. Order No. 552, states in part: Account 182.3 would include costs incurred and charged to expense which
have been, or are soon expected to be authorized for recovery through rates
and which are not specifically provided for in other accounts. Regulatory
assets would be recorded by charges to Account 182.3 and credits to Account
407.4. Amounts in Account 182.3 would be amortized to Account 407.3
over the appropriate rate recognition period.20 18 C.F.R. Part 101, Account 557, Other Expenses, states in part: This account shall be charged with any production expenses including
expenses incurred directly in connection with the purchase of electricity,
which are not specifi cally provided for in other production expense accounts.
Charges to this account shall be supported so that a description of each type
of charge will be readily available. Background PacifiCorp subcontracted several production plant related construction projects.
Many of the construction projects included liquidated damages due to PacifiCorp because 20 Revision to Uniform Systems of Accounts to Account for Allowances under the
Clean Air Act Amendments of 1990 and Regulatory-Created Assets and Liabilities and to
Form Nos. 1, 1-F, 2 and 2-A, Order No. 552, 62 FERC ¶ 61,299 at 85-86 (1993). Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 49 the subcontractor missed performance milestones.21 PacifiCorp collected several
liquidated damages as construction invoice credits or direct payments from multiple
contractors22 due to contractual performance breaches on certain capital projects. Liquidated damages received and related accounting PacifiCorp received liquidated damages of approximately $3.35 million and
approximately $6.9 million, for construction delays of the Goodnoe Hills wind project
located in Goldendale, Washington, and the Lake Side 1 natural gas generation plant
located in Viney ard, Utah, respectively. PacifiCorp also received liquidated damages for
contractual breach at its Jim Bridger Unit 4, Naughton Unit 1, and Naughton Unit 2
plants in the amount of approximately $1.6 million. PacifiCorp accounted for the
liquidated damage s for each project as a credit to construction work-in progress with a corresponding debit to cash or accounts payable. By crediting construction work in
progress, PacifiCorp ultimately reduced the total cost of each project that was recorded in
the various plant in service accounts to reflect the original cost of the plants. The cost
containment benefit of the liquidated damage was passed on to customers in the form of
lower depreciation expense over the life of the plants. Revaluation of Regulatory Assets PacifiCorp filed rate cases23 in Wyoming and Utah for its Power Cost Adjustment
Mechanism and Energy Balancing Account Mechanism from 2008 through 2013.
PacifiCorp and its retail customers reached settlement agreements for all years with the
approva l of state commissions. As part of the settlement agreements, PacifiCorp was
required to revalue the existing regulatory assets for the Power Cost Adjustment
Mechanism and Energy Balancing Account Mechanism in Account 182.3, Other
21 These liquidated damages were financial compensations that were agreed upon
by the parties during the formation of a contract for PacifiCorp to collect as compensation
upon a specific breach of the contract by subcontractor, (e.g., late performance, delay in
delivery, etc.). 22 Those contractors are Northwest wind partners LLC and Lake Side Power, LLC 23 See Wyoming Public Service Commission Doc ket Nos. 20000-341-EP-09,
20000-315-EP-08, 20000-315-EP-13 for PacifiCorp tariff schedule 94, Power Cost Adjustment Mechanism for 2009, 2008 and 2013 (PCAM); Utah Public Service
Commission Docket Nos. 13-035-32, 13-035-T14 for PacifiCorp’s tariff Schedule 94,
Energy Balancing Account Mechanism. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 50 Regulatory Assets, by re vising the amortization period for the regulatory assets with the
life of the plants24 that were credited with the liquidated damages. Accounting for Regulatory Asset changes and amortizations Based on state rate case settlements, PacifiCorp reclassified regulatory assets
included in a sub-account of Account 182.3 to another sub-account of Account 182.3.
PacifiCorp amortized the revalued regulatory assets by debiting Account 930.2,
Miscellaneous General Expenses. PacifiCorp excluded the amortizations recorded in
Account 930.2 when developing the wholesale transmission revenue requirements. Audit staff point out that, Account 930.2 is used to record expenses incurred in
connection with the general management of the utility not provided for elsewhere in the
Commission accounting regulations. Since the amortized regulatory assets were
production related, PacifiCorp should have recorded the amortization of the regulatory
assets in the specific productions operating and maintenance account instead of in Ac count 930.2. Recommendations We recommend PacifiCorp: 36. Revise accounting procedures to record regulatory asset amortization related
to production plant liquidated damages in the functional operating and
maintenance accounts when appropriate. 37. Record correcting entries to reclassify regulatory asset amortization related to
state created advance refund of liquidated damages from Account 930.2 to
Account 557, Other Expenses. 24 Goodnoe Hill, Lake Side, Jim Bridger, and Naughton Unit 1 and 2 Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 51 9. Accounting for Pensions, PBOP and Other Benefits PacifiCorp recorded the cost of pensions, post-retirement benefits other than
pensions (PBOP) and other employee benefits in various functional operating and
maintenance expense accounts, instead of in Account 926, Employee Pensions and
Benefits. Pertinent Guidance 18 C.F.R. Part 101, Account 926, Employee Pensions and Benefits, states in part: A. This account shall include pensions paid to or on behalf of retired
employees, or accruals to provide for pensions, or payments for the purchase
of annuities for this purpose, when the utility has definitely, by contract,
committed itself to a pension plan under which the pension funds are
irrevocably devoted to pension purposes, and payments for employee
accident, sickness, hospital, and death benefits, or insurance thereof. This
also includes expenses incurred in medical, educational or recreational
activities for the benefit of employees, and administrative expenses in
connection with employee pensions and benefits. Background PacifiCorp recorded pension, PBOP and other benefits (e.g., medical, vision,
401K, etc.) to employees ’ primary functional account “i.e. production, transmission and
distribution etc.” The amounts recorded in employee functional accounts are
redistributed using a fully loaded labor rate,25 based on the activity performed by the
employee “i.e. capital projects, O&M, A&G etc.” PacifiCorp did not record pensions,
PBOP and other benefits expenses in Account 926, Employee Pensions and Benefits, as
required by the Commission accounting regulations. The Commission accounting
regulations require a company to record these costs in Account 926, except for amounts
property assignable to construction or non-utility operating accounts. Although
PacifiCorp functionalized pension, PBOP and other employee benefits in O&M accounts,
the total amounts that should have been recorded in Account 926 was noted on the FERC
Form No. 1. 25 PacifiCorp’s fully loaded labor rate included employee base pay, benefits and
taxes, direct supervision, overhead etc. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 52 In order to meet the uniformity of accounting transactions across utilities under the
Commission’s jurisdiction, audit staff believe PacifiCorp should have recorded pensions,
PBOP and other employee benefits in Account 926 or sought Commission approval
before it deviated from Commission accounting regulation. Recommendation We recommend PacifiCorp: 38. Revise procedures to ensure it records pensions, PBOP, and other employee
benefits in Account 926, Employee Pensions and Benefits, as required by the
Commission accounting regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
PacifiCorp Docket No. FA16-4-000 53 Appendix: PacifiCorp’s Comments on Audit Report Document Accession #: 20170829-3016 Filed Date: 08/29/2017
Via Electronic Delivery Followed by Overnight Courier August 22, 2017 Mr. Bryan K. Craig Director and Chief Accountant Division of Audits and Accounting Office of Enforcement Federal Energy Regulatory Commission 888 First street NE, Room 5K-13 Washington, DC 20426 RE: PacifiCorp Docket No. FA16-4-000 Response to August 15 , 2017 Draft Audit Report Dear Mr. Craig: In accordance with Part 41 of the regulations of the Federal Energy Regulatory Commission
(FERC or the Commission), please accept on behalf of PacifiCorp this response to your
August 15, 2017 letter transmitting the draft audit report in the above-captioned docket (Draft
Audit Report ). PacifiCorp accepts Division of Audit and Accounting’s (DAA) proposed findings and
recommendations in the Draft Audit Report and proposes the corrective actions below. I. Responses to DAA ’s Findings and Recommendations A. Storm Damage Accounting and Costs Recovery Summary of Proposed Finding & Recommendations Audit staff concludes PacifiCorp improperly overbilled storm damage costs to its merchant
function and third-party wholesale customers that procured transmission services under
PacifiCorp’s OATT and did not make refunds to its wholesale customers for the excessive
storm damage revenues collected fr om its wholesale customers. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
2 1. Ref rain from recover ing actual and estim ated storm damage costs from wholesale customers associated with the same storm . Revise pol icies, procedures and practic es
to ensure the pro per accounting procedur es are employ ed to pre vent the double
col lection of storm damage costs thro ugh the wholesale formula rate s. 2. Revise wholesale formula rates dev elopme nt procedures to streng the n coordination between accounting and who lesale form ula rat es developme nt departm ents. 3. Provide training to staff on the revised storm damage accounting and rate development
methods . Also, develop a training program that supports the provision of periodic
training in this area, as needed. 4. Submit a refund analysis, within 60 days of receiving the final audit report, to DAA for
review that explains and details the following: (1) calculation of refunds that include
the amount of inappropriate storm damage recoveries since 2012, plus interest; (2) determinative components of the refund; (3) refund method; (4) cus tomers to be
refunded; and (5) period(s) refunds will be made . Include the results of the analysis of
transmission-related storm damage expenses in the refund amount. 5. File a refund report with the Commission after receiving DAA’s assessment of the
refund analysis. 6. Refund amounts disclosed in the refund report to wholesale customers, with interest
calculated in accordance with section 35.19a of Commission regulations. PacifiCorp Response PacifiCorp accepts the finding and the recommendations. Pacifi Corp’s Corrective Action Plan 1. PacifiCorp will revise its policies, procedures and practices to ensure the proper
accounting procedures are used to prevent the double collection of storm damage costs
through the wholesale formula rates and has strengthen ed coordination between the
accounting department and the department responsible for developing wholesale formula
rates. PacifiCorp will further revise its policies, procedures and practices to include
training for staff on the revised accounting and rate-development methods. 2. PacifiCorp will submit a refund analysis, within 60 days of receiving the final audit
report, to DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate storm damage re coveries since 2012,
plus interest; (2) determinative components of the refund; (3) refund method;
(4) customers to be refunded; and (5) period(s) refunds will be made. PacifiCorp will include the results of the analysis of transmission-related storm damage expenses in the
refund amount. 3. PacifiCorp will file a refund report with the Commission after receiving DAA’s
assessment of the refund analysis and will refund amounts disclosed in the refund report
to wholesale customers, with interest. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
3 B. Mining Assets Summary of Proposed Finding and Recommendations Audit staff concludes PacifiCorp inappropriately recovered from its wholesale customers the
cost of production-related mining assets through its wholesale formula rates. Audit staff
claims this resulted in PacifiCorp overstat ing its wholesale transmission revenue requirement
by approximately $3.7 million, which led to overbilling third-party wholesale customers by approximately $600,000. 7. Revise procedures for computing the annual wholesale transmission revenue
requirement and billing to wholesale customers by ensuring that it excludes cost of
mining assets from the wholesale formula rates. 8. Submit a refund analysis, within 60 days of receiving the final audit report, to DAA for
review that explains and details the following: (1) calculation of refunds that include
the amount of inappropriate cost of mining asset recoveries that resulted from the
inclusion of mining assets in the wholesale formula rates base since 2012, plus
interest; (2) determinative compone nts of the refund; (3) refund method; (4) customers
to be refunded; and (5) period(s) refunds will be made. 9. File a refund report with the Commission after receiving DAA’s assessment of the
refund analysis. 10. Refund amounts disclosed in the refund report to wholesale customers, with interest
calculated in accordance with section 35.19a of Commission regulations. PacifiCorp Response PacifiCorp accepts this finding and the recommendations. PacifiCorp ’s Corrective Action Plan 4. PacifiCorp has divested from al l of its directly owned mining assets , except minor
amounts of land, as of year-end 2015 . PacifiCorp will revise procedures for computing
the annual wholesale transmission revenue requirement and billing to wholesale
customers by ensuring that it excludes any remaining cost of mining assets from the
wholesale formula rates. 5. PacifiCorp will submit a refund analysis, within 60 days of receiving the final audit
report, to DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate cost of mining asset recoveries that
resulted from the inclusion of mining assets in the wholesale formula rates base since
2012, plus interest; (2) determinative components of the refund; (3) refund method;
(4) custome rs to be refunded; and (5) period(s) refunds will be made. 6. PacifiCorp will file a refund report with the Commission after receiving DAA’s
assessment of the refund analysis and will refund amounts disclosed in the refund report
to wholesale customers, with interest. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
4 C. Amortization of Regulatory Assets Summary of Proposed Finding and Recommendations Audit staff concludes PacifiCorp inappropriately included amortization of regulatory assets
in its wholesale formula rates. Audit staff claims this resulted in PacifiCorp overstat ing its
wholesale transmission revenue requirement by approximately $800,000, which led to
overbilling third-party wholesale customers by approximately $100,000. 11. Revise accounting procedures to record pensions, and postretirement regulatory asset
amortizations in Account 926. 12. Revise accounting procedures to exclude amortization of environmental damages
regulatory assets to Account 925, and record amortization of amounts recovered in
retail rates in appropriate functional operating and maintenance accounts. 13. Provide training to staff on the revised regulatory assets accounting and rate
development methods . Also, develop a training program that supports the provision of
periodic training in this area, as needed. 14. Record correcting entries to reclassify pensions, and postretirement regulatory assets
amortization from Account 920 to Account 926. 15. Record correcting entries to reclassify environmental damages amortization from
Account 925 and record the amounts recovered from retail rates in appropriate
functional operating and maintenance accounts. 16. Revise procedures for computing wholesale formula rates billings to wholesale
customers to exclude amortization of regulatory assets which were not approved by the
Commission. 17. Submit a refund analysis, within 60 days of receiving the final audit report, to DAA for
review that explains and details the following: (1) calculation of refunds that include
the amount of inappropriate regulatory asset amortizations which were included in
wholesale formula rates and the refunds resulting from the inclusion of those
regulatory asset amortizations in the wholesale formula rates, plus interest; (2) determinative components of the refund; (3) refund method; (4) customers to be
refunded; and (5) period(s) refunds wi ll be made. 18. File a refund report with the Commission after receiving DAA’s assessment of the
refund analysis. 19. Refund amounts disclosed in the refund report to wholesale customers, with interest
calculated in accordance with section 35.19a of Commission regulations. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
5 PacifiCorp Response PacifiCorp accepts this finding and the recommendations. PacifiCorp ’s Corrective Action Plan 7. PacifiCorp will revise accounting procedures to: record pensions and post-retirement
regulatory asset amortizations in Account 926; exclude amortization of environmental
damages regulatory assets to Account 925; and record amortization of amounts recovered
in retail rates in appropriate functional operating and maintenance accounts. PacifiCorp’s
revised procedures will include provisions on training. 8. PacifiCorp will record correcting entries in 2017 to: reclassify pensions and post-retirement regulatory assets amortization from Account 920 to Account 926; and
reclassify environmental damages amortization amounts recovered in retai l rates from
Account 925 to the appropriate functional operating and maintenance accounts. 9. PacifiCorp will r evise procedures for computing wholesale formula rates billings to
wholesale customers to exclude amortization of regulatory assets that were not ap proved
by the Commission. 10. PacifiCorp will s ubmit a refund analysis, within 60 days of receiving the final audit
report, to DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate regulator y asset amortizations which
were included in wholesale formula rates and the refunds resulting from the inclusion of
those regulatory asset amortizations in the wholesale formula rates, plus interest;
(2) determinative components of the refund; (3) refund method; (4) customers to be
refunded; and (5) period(s) refunds will be made. 11. PacifiCorp will file a refund report with the Commission after receiving DAA’s
assessment of the refund analysis and will refund amounts disclosed in the refund report
to wholesale customers, with interest. D. Injuries and Damages Accounting and Costs Recovery Summary of Proposed Finding and Recommendations Audit staff concludes PacifiCorp inappropriately accounted for and recovered injuries and
damages through its wholesale formula rates when it had insurance policies to cover the cost
of those damages . Audit staff claims this resulted in PacifiCorp overstating wholesale
transmission revenue requirement by approximately $2.9 million, which led to overbilling
third-party wholesale customers by approximately $400,000. 20. Revise policies, procedures and practices to book accruals for covered damage
amounts in Account 426.5 when management makes a decision not to seek insurance
recoveries for damages covered by insurance. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
6 21. Provide training to staff on the revised injuries and damages expenses covered by
insurance accounting and rate development methods . Also, develop a training
program that supports the provision of periodic training in this area, as needed. 22. Submit a refund analysis within 60 days of receiving the final audit report, to DAA for
review that explains and details the following: (1) calculation of refunds that include
the amount of inappropriate injuries and damages recoveries that resulted from the
inclusion of excessive es timated expenses in the wholesale formula rates since 2012,
plus interest; (2) determinative components of the refund; (3) refund method; (4) customers to be refunded; and (5) period(s) refunds will be made. 23. File a refund report with the Commission after receiving DAA’s assessment of the
refund analysis. 24. Refund amounts disclosed in the refund report to wholesale customers, with interest
calculated in accordance with section 35.19a of Commission regulations. PacifiCorp Response PacifiCorp accepts this find ing and the recommendations. PacifiCorp ’s Corrective Action Plan 12. PacifiCorp will revise its policies, procedures and practices to book accruals for covered
damage amounts in Account 426.5 when the Company determines it will not seek
insurance recoveries for damages covered by insurance. The revised policies, procedures
and practices will include provisions for training. 13. PacifiCorp will submit a refund analysis within 60 days of receiving the final audit
report, to DAA for review that explains and details the following: (1) calculation of
refunds that include the amount of inappropriate injuries and damages recoveries that
resulted from the inclusion of excessive estimated expenses in the wholesale formula
rates since 2012, plus interest; (2) determinative components of the refund; (3) refund
method; (4) customers to be refunded; and (5) period(s) refunds will be made. 14. PacifiCorp will file a refund report with the Commission after receiving DAA’s
assessment of the refund analysis and will refund amounts dis closed in the refund report
to wholesale customers, with interest. E. Allowance for Funds Used During Construction Summary of Proposed Finding and Recommendation Audit staff concludes PacifiCorp’s methods for calculating the rate for Allowance for Funds
Us ed During Construction (AFUDC) was deficient because PacifiCorp inappropriately:
included letter-of-credit fees (up-front and quarterly) as part of short-term debt-interest
expense to compute the AFUDC rate; included Unappropriated Undistributed Subsidiary Earnings as part of the equity component for the purpose of computing the AFUDC rate; and
included Accumulated Other Comprehensive Income (AOCI) as part of the equity
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
7 component for the purpose of computing the AFUDC rate in 2013. Audit staff asserts that because of this, PacifiCorp over-accru ed Allowance for Funds Used During Construction by
approximately $6.8 million for 2013 through 2015 . Audit staff claimed that this resulted in PacifiCorp overbilling wholesale customers for AFUDC costs included in ut ility plant that
was included in wholesale formula rate determinations through rate base and depreciation
charges. 25. Revise its procedures to ensure its AFUDC rate calculation is consistent with Order
No. 561 and other applicable Commission requirements. 26. Revise its procedures to ensure that Account 216.1 is excluded from equity components
used to derive AFUDC rate. 27. Revise its procedures to ensure that the amounts reported on the FERC Form No. 1
are used to compute AFUDC rate. 28. Provide training to staff on the revised AFUDC accounting and rate calculation
method. Also, develop a training program that supports the provision of periodic
training in this area, as needed. 29. Submit a refund analysis, within 60 days of receiving the final audit report, to DAA for
rev iew that explains and details the following: (1) calculation of refunds to wholesale
customers base since 2012, plus interest; (2) determinative components of the refund;
(3) refund method; (4) customers to be refunded; and (5) period(s) refunds will be
ma de. 30. File a refund report with the Commission after receiving DAA’s assessment of the
refund analysis. 31. Refund amounts disclosed in the refund report to wholesale customers, with interest
calculated in accordance with section 35.19a of Commission regulations. PacifiCorp Response PacifiCorp accepts this finding and the recommendations. PacifiCorp ’s Corrective Action Plan 15. PacifiCorp revised its procedures to: ensure its AFUDC rate calculation is consistent with
Order No. 561 and other applicable Commission requirements; ensure that Account 216.1
is excluded from equity components used to derive the AFUDC rate; and ensure that the
amounts reported on the FERC Form No. 1 are used to compute the AFUDC rate.
PacifiCorp’s revised procedures will include provisions for training. PacifiCorp intends
to petition the Commission to obtain written authorization to include: (1) Commitment
fees in the short-term debt-rate component of the AFUDC rate calculation and (2)
Unappropriated Undistributed Subsidiary Earnings of wholly owned captive mining
companies (Account 216.1) in the common equity component of the AFUDC rate
calculation. 16. PacifiCorp will submit a refund analysis, within 60 days of receiving the final audit
report, to DAA for review that explains and details the following: (1) calculation of
Document Accession #: 20170829-3016 Filed Date: 08/29/2017
8 refunds to wholesale customers base since 2012, plus interest; (2) determinative
components of the refund; (3) refund method; (4) customers to be refunded; and
(5) period(s) refunds will be made. 17. PacifiCorp will file a refu nd report with the Commission after receiving DAA’s
assessment of the refund analysis and will refund amounts disclosed in the refund report
to wholesale customers, with interest. F. Asset Retirement Obligations Summary of Proposed Finding and Recommendation Audit staff concludes PacifiCorp’s accounting and rate treatment of Asset Retirement
Obligations (ARO) were deficient because PacifiCorp inappropriately: excluded accumulated
depreciation amounts removed from Account 108, Accumulated Provision for Depre ciation
of Electric Utility Plant, to implement ARO accounting in the wholesale formula rates
determinations, resulting in an understatement of its wholesale transmission revenue
requirement which led to under-billings to its wholesale customers through its wholesale
formula rates; and included estimated future asset retirement costs recorded in General Plant
in its wholesale formula rate base, resulting in an overstatement of its wholesale transmission
revenue requirement, which led to overbillings to its wholesale customers. Audit staff claims
that as a result of the deficiencies, PacifiCorp under-billed its wholesale customers through
its wholesale formula rates. 32. Revise existing accounting and rate development procedures and practices to ensure
all ARO-related accounting effects and associated adjustments are excluded from
wholesale formula rates determinations. PacifiCorp Response PacifiCorp accepts this finding and the recommendation. PacifiCorp’s Corrective Action Plan 18. PacifiCorp will revise existing accounting and rate development procedures and practices
to ensure all ARO-related accounting effects and associated adjustments are excluded
from wholesale formula rates determinations. G. Accounting for Coal Settlement Costs Summary of Proposed Findin g and Recommendations Audit staff concludes PacifiCorp incorrectly accounted for amortization of two coal
settlement payments in Account 151, Fuel Stock, instead of Account 501, Fuel. 33. Establish procedures to identify components of coal settlement cost between past coal
supply disputes and costs that provide future benefits. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
9 34. Establish procedures to expense immediately prior disputed costs that is related to
coal already consumed in Account 501, unless rate recognition is approved by a
regulatory authority . 35. Revise accounting procedures to record amortization of deferred coal settlement and
renegotiation costs in Account 501. PacifiCorp Response PacifiCorp accepts this finding and the recommendations. PacifiCorp’s Corrective Action Plan 19. PacifiCorp will establish procedures to identify components of coal settlement cost
between past coal supply disputes and costs that provide future benefits. 20. PacifiCorp will establish procedures to immediately expense prior-disputed costs that are related to coal already consumed in Account 501, unless rate recognition is approved by a
regulatory authority 21. PacifiCorp will revise accounting procedures to record amortization of deferred coal
settlement and renegotiation costs in Account 501. H. Accounting for Liquidated Damag es Summary of Proposed Finding and Recommendations Audit staff concludes PacifiCorp incorrectly accounted for amortization of production-related
regulatory assets associated with liquidated damages as an administrative and general
expense in Account 930.2, Miscellaneous General Expense. 36. Revise accounting procedures to record regulatory asset amortization related to
production plant liquidated damages in the functional operating and maintenance
accounts when appropriate. 37. Record correcting entries to recl assify regulatory asset amortization related to state
created advance refund of liquidated damages from Account 930.2 to Account 557,
Other Expenses. PacifiCorp Response PacifiCorp accepts this finding and the recommendations. PacifiCorp’s Corrective Action Plan 22. PacifiCorp will revise accounting procedures to record regulatory asset amortization
related to production-plant liquidated damages in the functional operating and
maintenance accounts when appropriate. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
10 23. PacifiCorp record ed correcting entries in 2017 to reclassify current regulatory asset
amortization related to production-plant liquidated damages from Account 930.2 to
Account 557. I. Accounting for Pensions, PBOP and Other Benefits Summary of Proposed Finding and Recommendations Audit staff conc ludes PacifiCorp recorded the cost of pensions, post-retirement benefits other
than pensions (PBOP) and other employee benefits in various functional operating and
maintenance expense accounts, instead of in Account 926, Employee Pensions and Benefits. 38. Re vise procedures to ensure it records pensions, PBOP, and other employee benefits in
Account 926, Employee Pensions and Benefits, as required by the Commission
accounting regulations. PacifiCorp Response PacifiCorp accepts this finding and the recommend ation, and proposes a corrective action
plan that avoids the need to substantially revise PacifiCorp’s accounting systems. PacifiCorp’s accounting for pensions, PBOP and other benefits was an issue in PacifiCorp’s
last audit.1 The Office of the Chief A ccountant, however, deferred the issue because it
planned “to study the issue of assignment of payroll taxes, pensions, and [PBOP] on an
industry-wide basis, and therefore did not make any recommendations on the subject pending
completion of the study and any resulting FERC action.”2 The Draft Audit Report provides
final clarification on this issue. PacifiCorp, however, built its accounting systems around its practice of functionalizing these
costs to accurately account for both costs that are situs-assi gned to one of PacifiCorp’s six
state jurisdictions and transmission-function costs. PacifiCorp anticipates that it could take
12-24 months to revise its accounting processes and software to incorporate manual
allocation processes. PacifiCorp believes it can address this concern by revising its
procedures to charge the full cost of pensions, PBOP and other benefits to Account 926 with
an offsetting credit to Account 929, Duplicate Charges – Credit, thereby maintaining the
benefits of functionalization, ensuring zero impact to the formula rate, and appropriately
populating Account 926 in the FERC Form No 1 with pension, PBOP and other benefit costs. PacifiCorp’s Corrective Action Plan 24. PacifiCorp revised its procedures effective with the second quar ter 2017 Form 3Q filed in
August 2017 to charge the full cost of pensions, PBOP and other benefits to Account 926,
and book an offsetting credit to Account 929 to ensure zero impact to the formula rate.
1 FERC Docket No. FA96-34-000 and FA94-34-001. 2 Draft Audit Report in FA94-34-000 and FA94-34-001 at p. 30-31. Document Accession #: 20170829-3016 Filed Date: 08/29/2017
11 This revised procedure will also appropriately po pulate Account 926 in PacifiCorp’s
2017 FERC Form No. 1 with pension, PBOP and other benefit costs. II. Conclusion PacifiCorp thanks the audit staff for their professionalism throughout the course of the audit.
The company appreciates the opportu nities provided by audit staff to discuss and seek
clarifications on the findings and recommendations . Audit staff ’s willingness to discuss its
findings and recommendations removed a number of PacifiCorp’s initial concerns. Please contact the undersigned with any questions. Respectfully submitted, /s/ Nikki Kobliha Nikki Kobliha Vice President, Chief Financial Officer & Treasurer PacifiCorp 825 N.E. Multnomah Street, Suite 2000 Portland, OR 97232 503-813-5645 [e-mail] /s/ Sarah E. Edmonds Sarah E. Edmonds Vice President, Transmission Regulation, Strategy & Compliance PacifiCorp 825 N.E. Multnomah Street, Suite 1800 Portland, OR 97232 503-813-6840 [e-mail] /s/ Matthew McVee Matthew McVee Chief Reg ulatory Counsel PacifiCorp 825 N.E. Multnomah Street, Suite 2000 Portland, OR 97232 503-813-5585 [e-mail] Document Accession #: 20170829-3016 Filed Date: 08/29/2017
Document Content(s)
FA16-4-000.PDF ............................................................1Document Accession #: 20170829-3016 Filed Date: 08/29/2017