20230714IPC to Staff 1-2 - REDACTED.pdf

DONOVAN WALKER
Lead Counsel
[e-mail]

July 14, 2023

VIA ELECTRONIC FILING

Jan Noriyuki, Secretary
Idaho Public Utilities Commission
11331 W. Chinden Blvd., Bldg 8,
Suite 201-A (83714)
PO Box 83720
Boise, Idaho 83720-0074

Re: Case No. IPC-E-23-20
In the Matter of Idaho Power Company’s Application for a Certificate of Public
Convenience and Necessity to Acquire Resources to be Online in Both 2024
and 2025 and for Approval of an Energy Storage Agreement with Kuna Bess,
LLC

Dear Ms. Noriyuki:

Attached for electronic filing please find a redacted version of Idaho Power
Company’s Response to the First Production Request of the Commission Staff in the above
matter.

Idaho Power Company’s Response to the First Production Request of the
Commission Staff contains confidential information within the response. A confidential
version will be provided separately via an encrypted email to parties who sign the protective
agreement.

Please feel free to contact me directly with any questions you might have about this
filing.

Very truly yours,

Donovan E. Walker
DEW:cd
Enclosures
RECEIVED
2023 JULY 14, 2023 3:13PM
IDAHO PUBLIC
UTILITIES COMMISSION

IDAHO POWER COMPANY’S RESPONSE TO THE FIRST PRODUCTION REQUEST OF THE
COMMISSION STAFF - 1

DONOVAN E. WALKER (ISB No. 5921)
Idaho Power Company
1221 West Idaho Street (83702)
P.O. Box 70
Boise, Idaho 83707
Telephone: [phone]
Facsimile: [phone]
[e-mail]

Attorney for Idaho Power Company

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF IDAHO POWER
COMPANY’S APPLICATION FOR A
CERTIFICATE OF PUBLIC CONVENIENCE
AND NECESSITY TO ACQUIRE
RESOURCES TO BE ONLINE IN BOTH
2024 AND 2025 AND FOR APPROVAL OF
AN ENERGY STORAGE AGREEMENT
WITH KUNA BESS LLC.
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CASE NO. IPC-E-23-20

IDAHO POWER COMPANY’S
RESPONSE TO THE FIRST
PRODUCTION REQUEST OF
THE COMMISSION STAFF

COMES NOW, Idaho Power Company (“Idaho Power” or “Company”), and in
response to the First Production Request of the Commission Staff (“Commission” or
“Staff”) to Idaho Power Company dated June 23, 2023, herewith submits the following
information:

STAFF REQUEST FOR PRODUCTION NO. 1 Please outline any differences in
the future recovery process, if KUNA BESS is considered a capital lease as opposed to
an operating lease.
RESPONSE TO STAFF’S REQUEST FOR PRODUCTION NO. 1:
In 2019, Idaho Power adopted Accounting Standards Codification (“ASC”) 842,
which replaced the previous lease standard ASC 840 under the generally accepted
accounting principles in the United States of America (“GAAP”). Under ASC 842, leases
are classified as operating or finance leases, both of which are considered “capital leases”
recorded on the balance sheet with a lease liability and corresponding right-of-use asset.
In other words, the distinction is whether a lease is considered “operating” or “finance”
rather than “capital” or “operating” as indicated in Staff’s request. Under ASC 842, the
main difference in accounting between an operating lease and a finance lease lies in the
presentation of expenses on the income statement.
While both methods result in the same amount of expense over the contract term,
the timing of the recording of the expenses may be different as well as the timing of the
associated recovery. Idaho Power has prepared an illustrative example of the differences
between the recording of expenses under operating and finance leases as required under
ASC 842. Attachment 1 presents a hypothetical lease scenario and the associated timing
of the recording of expenses under both an operating lease and a finance lease. The
Company does not anticipate any difference in the future recovery process of the total
overall KUNA BESS costs regardless of whether the lease is considered an operating
lease or a finance lease. However, because the presentation of the expenses on the
income statement differ between the two methods the expense accounts for which Idaho

Power will seek cost recovery in a future filing may also be different.
The response to this Request is sponsored by Tim Tatum, Vice President of
Regulatory Affairs, Idaho Power Company.

STAFF REQUEST FOR PRODUCTION NO. 2: For a lease to be classified as a
capital lease under GAAP, it must meet at least one of the following five criteria:
a. Transfer of ownership to the lessee at the end of the lease.
b. A bargain purchase option, which allows purchase of the asset at a significantly lower
price than the fair market value of the asset, in which the lessee is reasonably certain
to exercise.
c. The term of the lease is equal to or greater than 75 percent of the asset's useful life.
d. The lease payments have a present value which equal to or greater than 90 percent
of the asset's fair market value.
e. The asset has a specialized use in which the lessor would have no alternate use after
the lease ends.
Please indicate for each of the criteria if the lease satisfies the requirement or not.
If one or more of the criteria is met by the lease, please explain why. Please provide all
assumptions and comparative calculations.
RESPONSE TO STAFF’S REQUEST FOR PRODUCTION NO. 2:
As noted in the Company’s Response to Staff’s Request for Production No. 1, in
2019, Idaho Power adopted ASC 842, which replaced the previous lease standard ASC
840 under GAAP. Under ASC 842, leases are classified as operating or finance leases,
both of which are considered “capital leases” and both of which are recorded on the
balance sheet with a lease liability and corresponding right-of-use asset. Under ASC 842,
the main difference in accounting between an operating lease and a finance lease lies in
the presentation of expenses on the income statement. For operating leases, right-of-use
amortization is recognized on a straight-line basis over the lease term, while for finance

leases, interest expense is recognized in addition to straight-line right-of-use amortization.
The criteria for a lease to be classified as a finance lease under ASC 842 is similar
to the criteria for capital lease classification under superseded ASC 840. Similar to the
capital lease criteria under ASC 840, in order to be a finance lease under ASC 842 the
lease must meet at least one of the relevant five criteria. As noted in the Direct Testimony
of Mr. Tatum, based on the Company’s preliminary accounting evaluation and
conclusions, Idaho Power expects the KUNA BESS lease would satisfy two of the criteria
to be classified as a finance lease under GAAP (ASC 842). Idaho Power’s consideration
of each of the criteria for finance lease classification under ASC 842 is documented below.
These preliminary conclusions may be subject to change as battery storage agreements
are relatively new in the industry and industry participants are still interpreting how the
GAAP lease accounting guidance applies to some of the more complex aspects of these
arrangements. The Company’s actual accounting evaluation related to the KUNA BESS
will be effective as of the lease commencement date, which is expected to be June 2025.
The following are the criteria for a lease to be classified as a finance lease under
ASC 842 and the Company’s analysis of the Kuna Bess as it relates to each criteria:
a. The lease transfers ownership of the underlying asset to the lessee by the end of the
lease term.

The KUNA BESS agreement, provided as Confidential Exhibit No. 6, does not transfer
ownership to Idaho Power at the end of the lease term.
b. The lease grants the lessee an option to purchase the underlying asset that the lessee
is reasonably certain to exercise.

Section 2.7 of the KUNA BESS agreement includes the option for Idaho Power to
purchase, at certain dates, the battery project at fair market value or higher. Because

the option is at fair market value or higher, Idaho Power is not reasonably certain to
exercise the option.
c. The lease term is for the major part of the remaining economic life of the underlying
asset. However, if the commencement date falls at or near the end of the economic
life of the underlying asset, this criterion shall not be used for purposes of classifying
the lease. ASC 842-10-55-2 states, “Seventy-five percent or more of the remaining
economic life of the underlying asset is a major part of the remaining economic life of
that underlying asset.”

The KUNA BESS lease term is 20 years. Determining the economic life of the
underlying battery storage asset requires some judgement, but Idaho Power currently
estimates the economic life of the underlying battery storage at lease commencement
date would align closely with the useful life of similar Idaho Power-owned battery
energy storage systems of 20 years approved with Order No. 35643 (page 12). Based
upon these factors, the lease term is 100 percent of the remaining economic life of the
underlying battery storage asset, which exceeds the 75 percent threshold for finance
lease classification in ASC 842.
d. The present value of the sum of the lease payments and any residual value
guaranteed by the lessee that is not already reflected in the lease payments in
accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the
fair value of the underlying asset. ASC 842-10-55-2 states, “Ninety percent or more of
the fair value of the underlying asset amounts to substantially all the fair value of the
underlying asset.”

The Company preliminarily estimates the present value of fixed lease payments at the
lease commencement date will be approximately $ . The fair value of the
project has not been explicitly or implicitly mentioned in the KUNA BESS agreement,
however, Idaho Power was offered the option to purchase the battery storage project
using a Build Transfer Agreement mechanism, which valued the project at $
at the commencement date. The Company believes this to be a reasonable

approximation of project fair value. Based on these estimates, Idaho Power calculates
that the present value of fixed lease payments is approximately 94 percent of the
estimated fair value of the project at the lease commencement date, which exceeds
the 90 percent threshold for finance lease classification in ASC 842.
e. The underlying asset is of such a specialized nature that it is expected to have no
alternative use to the lessor at the end of the lease term.

There are no contractual restrictions related to a lessor’s alternative use of the
underlying asset at the end of the lease term and there are also no significant practical
limitations aside from the location of the battery project on Idaho Power’s grid. The
Company believes that the lessor would be able to find alternative uses at the end of
the lease term.
The response to this Request is sponsored by Daren Wallace, Accounting and
Reporting Director, Idaho Power Company.

DATED at Boise, Idaho this 14th day of July 2023.

DONOVAN E. WALKER
Attorney for Idaho Power Company

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on the 14th day of July 2023, I served a true and correct
copy of Idaho Power Company’s Response to the First Production Request of the
Commission Staff upon the following named parties by the method indicated below, and
addressed to the following:

Commission Staff
Chris Burdin
Deputy Attorney General
Idaho Public Utilities Commission
11331 W. Chinden Blvd., Bldg No. 8
Suite 201-A (83714)
PO Box 83720
Boise, ID 83720-0074

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Christy Davenport
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