20110816PAC to IPUC 105 -1.pdf

1. PURPOSE

1.1. The purpose of the Capital Surcharge Policy is to establish guidelines for the
capitalization of administrative and general costs, which cannot be charged
directly to a capital project, in accordance with Federal Energy Regulatory
Commission (FERC) and U.S. Generally Accepted Accounting Principles
(GAAP). This policy will accomplish the following:

Provide accounting guidance for the proper identification of overheads which
can be appropriately capitalized as an overhead.

Reiterate guidance found in PacifiCorp’s capitalization policy to help users
utilize consistent application when determining capital vs. expense.

Augment PacifiCorp’s capitalization policy by helping to ensure costs of
capitalized overheads relate to assets, which provide future benefits to
ratepayers (“used and useful”) and, thereby, are allocated through depreciation
expense to the periods expected to benefit from the asset.

Establish accountability and consistency at the Business Unit level.

2. SCOPE

2.1. The following capital surcharge policy applies to the operations of PacifiCorp’s
regulated domestic electric utility.

3. CAPITAL OVERHEAD RECOGNITION CRITERIA

3.1. FERC’s definition of Overhead Construction Costs, Electric Plant Instruction
No. 4:

Overhead Construction Costs
A. All overhead construction costs, such as engineering, supervision, general
office salaries and expenses, construction engineering and supervision by
others than the accounting utility, law expenses, insurance, injuries and
damages, relief and pensions, taxes and interest, shall be charged to particular
jobs or units on the basis of the amounts of such overheads reasonably
applicable thereto, to the end that each job or unit shall bear its equitable
proportion of such costs and that the entire cost of the unit, both direct and
overhead, shall be deducted from the plant accounts at the time the property is
retired.
B. As far as practicable, the determination of payroll charges includible in
construction overheads shall be based on time card distribution thereof.
Where this procedure is impractical, special studies shall be made periodically
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of the time of supervisory employees devoted to construction activities to the
end that only such overhead costs as have a definite relation to construction
shall be capitalized. The addition to direct construction costs of arbitrary
percentages or amounts to cover assumed overhead costs is not permitted.
C. For Major utilities, the records supporting the entries for overhead
construction costs shall be so kept as to show the total amount of each
overhead for each year, the nature and amount of each overhead expenditure
charged to each construction work order and to each electric plant account,
and the bases of distribution of such costs.

3.2. Costs included in Capital Surcharge will include, but not be limited, to the
following:

Salaries and expenses of Corporate and Business Unit support staff when
they are performing construction related activities.

Engineering and supervision labor and expenses related to capital
expenditures.

Support activities such as computer support, safety, security, material
handling which can be directly determined to be construction related.

The Annual Incentive Plan (AIP) accruals as determined by the relationship
of labor capitalized to total labor.

3.3.Costs accounted for as expense and which should not be included in Capital
Surcharge are expenditures related to the following:

Preventing failure

Restoring serviceability

Maintaining the life of plant (Including hardware/software maintenance
contracts and accounts directly assigned to maintenance in FERC)

The net cost of installing, maintaining and removing temporary facilities to
prevent interruptions in service

Rearranging and changing the location of plant not retired

Inspecting, testing and reporting on the condition of plant to determine the
need for repairs and replacements

Repairing for reuse materials recovered from plant

Efficiency and other tests performed on equipment after the in-service date

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Training costs except when related to facilities which are not conventional in
nature or are new to company operations

Replacing minor items of plant that are not identified as a Property
Retirement Unit

Other normal departmental costs, which are not directly construction,
related (e.g. bank fees, interest expense, and depreciation)

3.4. All capital projects, with the exception of large capital projects, will be flagged
to receive capital surcharge through the system allocation methodology. Large
capital projects will also receive capital surcharge, however the amount will be
determined and booked as outlined in the Capital Surcharge Procedures
document.

4. CAPITAL SURCHARGE DETERMINATION

4.1. Each business unit is responsible for the creation and maintenance of records
supporting costs being allocated to the Capital Surcharge pools. Their
responsibilities include, but are not limited to, the following:

Determining which costs should be included in the pool as well as properly
instructing employees as to whether their costs should be direct charged (
preferred method) or allocated to the pool through the assessment process.

Determining an appropriate methodology to accurately capture capital related
costs, and calculating the assessment rate to be applied to each included cost
center (e.g. timesheet distribution, number of invoices, number and types of
jobs).

Determining the allocation of costs between the Business Unit Capital
Surcharge pools using appropriate methodology in order to accurately assign
costs to each Business Unit.

Determining the clearing percentage for their respective pool including
estimates of costs and related capital to which it is projected to be applied.
5. CAPITAL SURCHARGE POOLS MAINTENANCE AND CONTROLS

5.1. The following will help ensure proper financial reporting and internal controls:

Each Business Unit will continually monitor costs allocated to the
Capital Surcharge pools.

Each Business Unit Controller or their delegate will approve all changes to
Capital Surcharge components.
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Each Business Unit will identify and monitor large capital projects which will
be called out as an exception to the Capital Surcharge. These projects will be
of the magnitude which would distort the overall allocation of overheads to
normal capital projects (>$10 million).

Regulatory Accounting will control and maintain all tables related to Capital
Surcharge. This will include the capital surcharge cost element groupings
(O_SURASSMT & O_SURASSM3), cost centers and associated percentages
included in the assessment calculation, allocation factors, and capital
surcharge clearing rate.

Each Business Unit will prepare an Annual Capital Surcharge study in
accordance with the Capital Surcharge Procedures.

Regulatory Accounting will perform an Annual Capital Surcharge review.

For quarterly reporting, the Capital Surcharge pools will be cleared to
Account 148002 (Assets Under Construction Reserve) which is a contra
account to Assets Under Construction and will be reinstated back into the
pools at the beginning of the following quarter.

For auditing purposes, all records and studies supporting Capital Surcharge
amounts charged and or allocated shall be retained by each Business Unit for
no less than seven years.

The supporting documentation that Regulatory Accounting requires from the
Business Units shall also be retained for no less than seven years.
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