20070521_1930.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
CO MMISSI 0 NER RED FO RD
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DON HOWELL
DATE:MA Y 17, 2007
SUBJECT:ROCKY MOUNTAIN POWER'APPLICATION FOR
ACCOUNTING ORDER RELATING TO THE POWERDALE HYDRO
FACILITY, CASE NO. PAC-07-
On March 22, 2007, Rocky Mountain Power (a division of PacifiCorp) filed an
Application seeking an accounting order related to the November 2006 flooding of the
Powerdale generating facility. Powerdale is located in central Oregon on the Hood River, south
of its confluence with the Columbia River. Rocky Mountain requests an accounting order that
authorizes the Company to: (1) transfer $8.9 million in undepreciated net investment from FERC
Account 101 (Electric Plant in Service) to FERC Account 182.2 (Unrecovered Plant and
Regulatory Study Costs); (2) record $6.3 million in decommissioning costs to FERC Account
182.2; and (3) establish amortization periods for these amounts.
The Company asserts that the $8.9 million in Powerdale costs are currently being
recovered in rates. The Company does not seek any particular rate treatment at this time and
states that any incremental rate adjustments caused by approval of this Application will be
addressed in the Company s next general rate case.
On April 10, 2007, the Commission issued a Notice of Modified Procedure
requesting interested persons to submit comments on the Company s request for an accounting
order no later than May 2, 2007. Commission Staff was the only party to comment.
BACKGROUND
Powerdale was constructed in 1922-1923 and includes a small diversion dam, and 3-
mile water conveyance system, and a single MW powerhouse.After initiating a FERC
relicensing process for Powerdale in 1995, the Company subsequently concluded that continued
DECISION MEMORANDUM
operation of the facility would not be economical. Consequently, the Company filed a
decommissioning plan with FERC in 2003. In November 2005, FERC adopted a settlement
agreement and issued a "Removal Order" for Powerdale. The Removal Order authorized Rocky
Mountain to continue operating Powerdale until April 1 , 2010 and provided for removal of the
facilities by February 29 , 2012.
In November 2006, the Powerdale generating facility was damaged by flooding and
debris flow. Application at 2. Exhibit 1 to the Company s Application contains photographs
showing the damage to various components of the facility. After conducting another economic
analysis, the Company concluded that it is now more cost effective to retire this facility than to
repair the flood damage. Id. at 3. On February 1 , 2007, Rocky Mountain requested
authorization from FERC to cease operations immediately and sought approval to initiate
decommissioning actions ahead of schedule.
Based upon the substantial damage to the Powerdale facility and the change in the
river channel, Rocky Mountain asserts that it is no longer economical to repair the Powerdale
facilities for the remaining three years of its operating license. After comparing the total cost to
repair and operate Powerdale versus the total cost to retire Powerdale, the Company has
concluded that retirement "is an overall lower cost-to-customers alternative than repair/operation
by approximately $1.611 million.Therefore, (Rocky Mountain) intends to retire the plant
assuming the Commission approves this Petition." Application at 5; Exh. Nos. 4-
THE ACCOUNTING REQUEST
As set out above, Rocky Mountain seeks an accounting order addressing two
categories of costs: (1) undepreciated investment in Powerdale plant; and (2) decommissioning
costs. If approved, the Company s decision to retire Powerdale will result in the potential
impairment of the physical and intangible assets in accordance with Financial Accounting
Standard (F AS) No. 90
, "
Regulated Enterprises-Accounting for Abandonments and
Disallowances of Plant Costs." The Company states that F AS 90 will require "PacifiCorp to
write-off its undepreciated plant investment in the absence of the requested accounting treatment
from its commissions.Id. at ~ 8. Rocky Mountain proposes to account for the costs by
recording the decommissioning costs and the undepreciated portion of the plant assets in FERC
Account 182.
DECISION MEMORANDUM
As of December 31 , 2006, Rocky Mountain states that the unallocated net book value
of the tangible and intangible plant assets equal approximately $8.9 million. The actual amount
transferred to FERC Account 182.2 "will be the remaining undepreciated net book value as of
the date of the transfer.Id. The Company indicates that it will amortize this balance at a rate
equal to the depreciation rate used for FERC Account 101 , or 4., which is currently included
in rates.The Company estimates that the total decommissioning cost will be approximately
$6.3 million subject to final reconciliation and true-up of actual expenditures. The Company
requests a three-year amortization period for the deferred decommissioning expenses upon
inclusion in rates in the next rate case. "Absent Commission authority, the Company would need
to recognize the decommissioning as a current period expense.Id. at 8.
Pursuant to Rocky Mountain s Revised Protocol 2 hydro-related costs are initially
allocated ratably to each of the six state jurisdictions served by PacifiCorp. Rocky Mountain
calculates that the Idaho-allocated share of the undepreciated investment in Powerdale
approximately $557 000, and the Idaho-allocated share of the decommissioning cost is
approximately $393 000. Id. at ~ 11.
ST AFF COMMENTS
After reviewing the Company s Application, the Staff states that the Company
decision to decommission Powerdale appears reasonable. Based upon the early
decommissioning date, the Staff also believes it is appropriate for accounting purposes to transfer
the undepreciated net book value from the FERC 101 account to a deferred account, and then
continue amortize the transferred balance at the same rate as the depreciation rate.
Comments at 4.
Staff
The Company is also requesting permission to include the unamortized balance as
part of its depreciation case to be filed in September 2007. Staff asserts that it is premature in
this case for the Commission to set the amortization period for the remaining balance in the
deferred account.Staff believes the Company is not harmed if the Commission delays its
I The Company anticipates a change in this 4.2% rate after it files a new depreciation study in September 2007. The
Company anticipates that the new depreciation rate will become effective as of January 1 , 2008. The Company
intends to file a three-year amortization period for the remaining balance of the unrecovered net plant balance in that
study. Application at ~ 10.
2 The "Revised Protocol" is Rocky Mountain s inter-jurisdictional cost allocation methodology utilized in its six
state service areas.
DECISION MEMORANDUM
determination of the appropriate amortization period to when it reVIews more current and
relevant information in the September depreciation case. Id.
1. Decommissioning . Staff next turned to the decommissioning costs. Staff agrees
that the $6.million decommissioning (or $393 000 for Idaho share) satisfies the
Commission s standards for deferral treatment. These costs are extraordinary and unusual in the
nature given the unexpected flooding of the facility and the change in the river channel. Id. at 5.
Staff believes that customers benefit from the early decommissioning rather than paying the cost
of repair.
The Company s Application indicates that there is a possibility of recovery from its
insurance company. There is no discussion in the Application of the accounting treatment in the
event that Rocky Mountain is able to offset its loss with insurance. The Company s Exhibit 4
does show that the Present Value Revenue Requirement is reduced by $745 000 for estimated
property insurance payments. Id. at 5; Application, Exh. 4. This accounting offset is consistent
with the Staff s position that any insurance recovery from this event would be an offset to the
deferred costs in the deferral account.
The Company requests that the Commission establish a three-year amortization
period for these deferred decommissioning costs. Under the circumstances of this case
, "
Staff
does not agree with the Company s position that it should be allowed to fully collect the
decommissioning funds in advance of the actual expenditures for decommissioning.Id. at 6.
Any amortization of the decommissioning costs presented in the next general rate case should
only be the costs for decommissioning work and expenses incurred to date. With FERC'
approval to proceed with early decommissioning, the Staff believes that three-year amortization
period is too short to amortize all the decommissioning costs. Staff believes an appropriate
amortization period to amortize these decommissioning costs is ten years. Additionally, the
amortization of these costs should begin in the first year following the actual incurrence of the
costs. Consequently, Staff recommends that the Company be allowed to account for the actual
costs of decommissioning in a deferral account and that the Company begin amortizing those
costs over a ten-year period in the first year after incurring the costs. Id.
2. Cost Allocation. The Idaho estimated portion of undepreciated investment in the
Powerdale generating plant is $557 000 and the estimated decommissioning cost to Idaho is
$393 000. Staff proposes that the power replacement cost details should be clearly identified and
DECISION MEMORANDUM
included in the embedded cost differential calculation. A decision on the final amount to be
allocated to Idaho is appropriately decided in the Company s next rate case after this issue has
been clarified with PacifiCorp and the MSP Standing Committee. Id. at 7.
Staff Recommendation
A. Undepreciated cost of plant for the Powerdale Power facility:
1. Staff recommends that the Company be allowed to
undepreciated net plant.
defer the
Staff recommends that the Company continue to amortize the
transferred balance at the same rate as the current depreciation rate
for the plant.
Staff recommends that the Commission delay any decision on the
length of amortization for the undepreciated balance until this balance
is considered in a depreciation case to be filed later this year.
B. Decommissioning costs:
Staff recommends that the Company be allowed to record the actual
decommissioning costs in a deferred account; and that any insurance
proceeds for the loss of Powerdale received by the Company also be
recorded in the deferral account as an offset to the actual
decommissioning costs. This recommendation is only for the
recording of the costs in a deferred account and not for the recovery
of any of the costs. The recovery issue should be determined at the
time the costs are included in a rate case filed by the Company.
Staff recommends that these costs be amortized over a ten-year term
and that the amortization of these costs begin in the first year
following the actual incurrence of the cost.
C. Allocation ofldaho s portion of costs:
1. Staff recommends that the decision on the final amount to be
allocated to Idaho is appropriately decided in a future rate case after
this issue has been clarified with PacifiCorp and the MSP Standing
Committee.
COMMISSION DECISION
1. Undepreciated costs: Does the Commission wish to issue an accounting order so
that Rocky Mountain Power can defer the undepreciated net plant investment in the Powerdale
DECISION MEMORANDUM
facility? Should amortization continue at the existing depreciation rate? Should the length of the
amortization be set in this case or in the pending depreciation case?
2. Decommissioning Costs:Should Insurance proceedings offset any
decommissioning costs? Should decommissioning costs be recorded in a deferral account?
What is the appropriate time period for the amortization of this decommissioning deferred
account and when should amortization begin?
3. Allocation: Does the Commission wish to defer the question of allocating Idaho
portions of the Powerdale costs to the Company s next general rate case after this issue has been
clarified with PacifiCorp and the MSP Standing Committee?
4. Anything else?
Don Howell
blslM:PAC-O7-04 dh4
DECISION MEMORANDUM