20060111Comments.pdf

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CECELIA A. GASSNER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 6977
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
VISTA CORPORATION FOR AN
ACCOUNTING ORDER REGARDING
TREATMENT OF CERTAIN ASSET
RETIREMENT OBLIGATIONS RESULTING
FROM IMPLEMENTATION OF SFAS 143
CASE NO. A VU-O5-
A VU-O5-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of record
Cecelia A. Gassner, Deputy Attorney General, in response to the Notice of Application and Notice of
Modified Procedure in Order No. 29937 issued on December 20, 2005 , submits the following
comments.
BACKGROUND
On November 30, 2005, Avista Corporation ("A vista" or "Company ) filed an Application
with the Idaho Public Utilities Commission ("Commission ) seeking an accounting order authorizing
the Company to treat certain asset retirement obligations ("AROs ) for the current and future fiscal
years in accordance with Statement of Financial Accounting Standards (SFAS) 143. Pursuant to Idaho
Code 9 61-524, the Commission is empowered to establish a system of accounts to be kept by public
utilities subject to its jurisdiction.
STAFF COMMENTS JANUARY 11 2006
A vista is required to implement SF AS 143 as clarified by Financial Accounting Standards
Board (FASB) Interpretation (FIN) 47 in order to comply with generally accepted accounting
principles. Specifically, if a legally enforceable asset retirement obligation is deemed to exist an entity
must measure and record the liability for the ARO on its books. The liability must be recorded at fair
market value in the period in which the liability is incurred. SFAS 143 also provides that if market
prices are not available, estimates of fair value can be calculated by discounting the estimated cash
flows associated with the ARO to their present value at the date the liability is recorded. Due to the
lack of an active market for settling AROs, A vista intends to use the expected present value method to
determine its ARO liabilities and offsetting assets.
Avista s Application asks for an accounting order authorizing the Company to (1) record, as a
regulatory asset or a regulatory liability, the cumulative financial statement impact resulting from the
Company s implementation of SF AS 143 , and (2) record on an ongoing basis, as a regulatory asset or a
regulatory liability, an amount equal to the difference between the annual SF AS 143 accretion and
depreciation expense and annual depreciation expense based on Commission-approved depreciation
rates. The Commission granted similar accounting treatment to Idaho Power Company in Case No.
IPC-03-, Order No. 29414, issued January 8 , 2004. Avista also requested the Commission Order
in this case include confirmation that asset removal costs, in the form of negative net salvage, are
currently accrued through annual depreciation expense, which is recoverable in rates; that these costs
are based on estimates of the final removal costs; and that such costs are trued-up for ratemaking
purposes at the time the related assets are retired and the actual removal costs are determined.
The accounting changes proposed by A vista are supported by a series of workpapers
identifying the proposed journal entries the Company believes are needed to comply with SFAS 143.
The Company states that nothing in its Application is intended to request any approval regarding future
ratemaking treatment. However, the Application states that consistent with past rate proceedings, the
Company will continue to seek recovery of prudently incurred removal costs not previously recovered
through depreciation expense in future rate case proceedings.
OVERVIEW
SF AS 143 as clarified by FIN 47 requires entities to separately account and report the liability
for asset retirement obligations, capitalize the asset retirement costs, charge earnings for the
depreciation of the asset and the accretion of the liability. Under SFAS 71 , a public utility is permitted
to record a regulatory asset or regulatory liability for differences between SF AS 143 and regulatory
STAFF COMMENTS JANUARY 11 2006
accounting for asset retirement obligations rather than recording such differences as a charge or credit
to net income. The Company s proposed accounting treatment will use SF AS 143 for reporting on its
financial statements but retain its current methodology for ratemaking purposes. Neither the SF
143 transition entries nor the annual accounting entries will change the level of costs included in rates.
DISCUSSION OF SFAS 143 AND AVISTA'S APPLICATION
The basis of Avista s Application is SFAS 143, as clarified by FIN 47, Accounting for
Conditional Asset Retirement Obligations. In June 2001 , FASB issued SFAS 143, Accounting for
Asset Retirement Obligations, effective for fiscal years beginning after June 15 , 2002. The clarifying
interpretation, FIN 47, is effective for fiscal years ending after December 15 , 2005 (December 31
2005 for calendar-year enterprises).
The F ASB issued SF AS 143 to address the inconsistencies in accounting practices for asset
retirement obligations. F ASB noted that obligations that meet the definition of a liability were not
being recognized when incurred or the recognized liability was not consistently measured or presented.
Avista is required to implement SFAS 143 as clarified by FIN 47 in order to comply with Generally
Accepted Accounting Principles.
Historically, under the accounting method currently used by Avista and other utilities, the
reasonable cost of removing a tangible long-lived asset at retirement is included in the calculation of
depreciation rates and is recovered over the useful life of the asset. Because the cost of removal is
included in depreciation expense, it is included in the Company s revenue requirement.In its
Application, A vista is not requesting any changes to its currently approved depreciation rates or any
change in the level of asset removal included in the Company s revenue requirement through
depreciation expense.
SFAS 143 Asset Retirement Obli2ations (AROs)
As noted in A vista s Application, SF AS 143 requires entities to recognize and account for
certain asset retirement obligations in a manner different from the way A vista has traditionally
recognized and accounted for such costs. Specifically, if a legally enforceable asset retirement
STAFF COMMENTS JANUARY 11 2006
obligation (ARO) as defined by SFAS 143 1 is deemed to exist an entity must measure and separately
account and report the liability for the ARO (ARO Liability) on its books. This recognizes the entire
cost of removal up-front while in ratemaking the cost of removal is included in depreciation expense
over the life of the asset. The liability must be recorded at fair market value in the period in which the
liability is incurred. SF AS 143 also provides that if market prices are not available, estimates of fair
value can be calculated by discounting (using a credit-adjusted, risk-free interest rate) the estimated
cash flows associated with the ARO to their present value at the date the liability is recorded. A vista
will use the expected present value method to determine its ARO Liabilities and corresponding ARO
Assets (see next section re: ARO Assets). If a company has chosen to remove assets for reasons other
than legal obligations, then the future costs of removing those assets do not have to be recognized
under SFAS 143.
Avista has determined that it will need to record AROs under SFAS 143 as clarified by FIN 47
for Coyotes Springs 2 , Colstrip, its office building and transformers. While A vista has included in its
workpapers three AROs associated with Colstrip, only one was considered material and included
within its proposed entries. A vista also inadvertently included two sets of workpapers for its office
building ARO with differing rates to discount and present value the ARO. The rates intended for use
with this Application is a credit adjusted risk free rate of 6.13% based upon a 20-year treasury rate
adjusted for A vista s credit rating because AROs are long-term.
SFAS 143 ARO Assets. Depreciation and Accretion Expenses
Under SF AS 143 , at the same time the ARO Liability is recorded, a corresponding and
equivalent Asset is also recorded on the entity's books as part of the cost of the associated tangible
asset. The ARO Asset is then depreciated over the life of the associated tangible asset. In addition, a
period-to-period increase in the carrying amount of the liability (accretion expense) is added to the
ARO Liability annually to account for the time value of money, so that at the time of retirement the
recorded ARO Liability will be sufficient to meet the legal obligation. Any gain or loss when the
actual liability is paid in the future should be recognized in the Company s accounting records. The
Federal Energy Regulatory Commission, in Order No. 631 dated April 9, 2003 from Docket No.
According to SF AS 143
, "
it applies to legal obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset, except...for
certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle
as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppeL"
STAFF COMMENTS JANUARY 11 2006
RM02- 7-000 specified that jurisdictional entities would
.. .
record the depreciation of the asset
retirement costs in account 403., Depreciation expense for asset retirement costs, and the accretion
of the liability for the asset retirement obligations in account 411., Accretion expense. A vista
workpapers underlying its Application does not reflect entries to these accounts. Instead, the Company
will use Account 182376 (a regulatory asset) to record the ARO accretion expense and the depreciation
expense for the asset retirement costs. For ease of review and to separate depreciation expense for
asset retirement costs from the accretion of the liability for the asset retirement obligations, Staff
believes the Company should record these items in separate sub-accounts even if they do not use the
accounts specified by FERc.
Cumulative Effect at Implementation Date
Upon initial implementation of SF AS 143 as clarified by FIN 47, entities must establish in their
financial statements all of the amounts that would have been recorded had the new requirements
always been in place. A vista records this cumulative impact as transition entries. The initial
implementation of SF AS 143 as clarified by FIN 47 proposed by A vista will create a regulatory asset
for the cumulative accretion of interest on the ARO liabilities and the cumulative depreciation of the
ARO assets. While Avista s Application (page 4, lines 3-4) states that a third entry will adjust the
accumulated removal costs included in accumulated depreciation to the current amount, no such entry
is included in A vista s workpapers. According to A vista personnel, this is because no removal costs
were included in its current depreciation rates for these obligations. Typically this type of adjustment
would be necessary to remove those costs already contained in its financial statements for legally
obligated removals. In 2003 the Company reclassified utility plant retirement costs previously
recorded in accumulated depreciation to regulatory liabilities to conform with SFAS 143. These costs
do not represent legal or contractual obligations.
Rate-Re2ulated Entities. Re2ulatorv Assets and Re2ulatorv Liabilities
SFAS 143 as clarified by FIN 47 applies to rate-regulated entities that meet the criteria for
Application of FASB Statement No. 71 , Accounting for the Effects of Certain Types of Regulation.
SF AS 143 recognizes that differences may exist between its requirements and the treatment of AROs
for regulatory purposes. SF AS 143 provides that a regulated entity subject to SF AS 71 recognize
differences between the two approaches as a regulatory asset or a regulatory liability as opposed to a
charge or credit to net income if the requirements of SF AS 71 are met. Avista is requesting such
STAFF COMMENTS JANUARY 11 2006
treatment. The regulatory asset or regulatory liability will be removed at the time the related tangible
long-lived asset is removed.
SUMMARY
SF AS 143 as clarified by FIN 47 requires entities to separately account and report the liability
for asset retirement obligations, capitalize the asset retirement costs, charge earnings for the
depreciation of the asset and the accretion of the liability. Under SF AS 71 , a public utility is permitted
to record a regulatory asset or regulatory liability for differences between SF AS 143 and regulatory
accounting for asset retirement obligations rather than recording such differences as a charge or credit
to net income.
The Company s proposed accounting treatment will use SFAS 143 as clarified by FIN 47 for
reporting on its financial statements but retain its current methodology for ratemaking purposes. As
result, there should be no rate change, now or in the future, associated with the application of the
requested accounting treatment. Neither the SF AS 143 transition entries nor the annual accounting
entries will change the level of costs included in rates.
STAFF RECOMMENDATIONS
While Staffs review has identified immaterial inconsistencies in Avista s Application (as noted
on page 4), Staff recommends approval for Avista to record, as a regulatory asset or regulatory
liability, the cumulative financial statement impact resulting from the implementation of SF AS 143
and to record the ongoing annual differences between the SFAS 143 depreciation and accretion
expenses and the annual depreciation expenses that are currently authorized by the Commission in
depreciation rates.
Staff recommends that the Company record in separate sub-accounts the depreciation expense
for asset retirement costs and the accretion of the liability for the asset retirement obligations. Staff
believes this will aid tracking these items in subsequent cases.
Staff also recommends that the Commission require in its accounting order that A vista file
annually and as part of its rate case filings, all journal entries made under the requirements of SF
143, including documents supporting the determination of regulatory assets and liabilities and related
dollar amounts. Due to the nature of these entries, Staff will be reviewing the underlying support for
them during analyses of assets and depreciation. As a result, Staff recommends that the Company
ST AFF COMMENTS JANUARY 11 2006
maintain financial records associated with these entries similar to the long-lived assets to which they
relate.
Staff acknowledges that Avista has a reasonable opportunity to recover prudently incurred
removal costs. Staff recommends that the reasonableness of differences between actual and estimated
costs should be addressed when those events occur. Staff recommends that no further confirmation be
included in the Commission s accounting order.
Because these new accounting entries will not change the level of the costs included in
rates, Staff is making no recommendation regarding the treatment of SF AS 143 Regulatory Assets and
Regulatory Liabilities in future rate cases. If the assets and liabilities have an affect on rates, then the
ratemaking treatment should be determined at the time of a rate case.
Respectfully submitted this 1/ day of January 2006.
Deputy Attorney General
Technical Staff: Patricia Harms
i:umisc:comments/avugO5.3 - avueO5,9cgph
STAFF COMMENTS JANUARY 11 2006
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 11TH DAY OF JANUARY 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. A VU-05-9/ A VU-05-, BY E-MAILING A COpy THEREOF AND BY
MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
KELLY NORWOOD
VICE PRESIDENT - STATE & FED. REG.
A VISTA UTILITIES
PO BOX 3727
SPOKANE W A 99220-3727
E-mail Kelly.norwood~avistacorp.com
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CERTIFICATE OF SERVICE