20190201Application.pdf

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Avista Corp.
141 I East Mission P.O.Box 3727
Spokane. Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
January 31,2019
Diane Hanian, Commission Secretary
Idaho Public Utilities Commission
P O Box 83720
Boise, lD 83720-0074
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RE: Application of Avista Corporation for an Accounting Order Authorizing Accounting
Treatment of Costs Related to AFUDC (Allowance for Funds Used During Construction).
Dear Ms. Hanian:
Enclosed is an original and seven (7) copies of Avista's Application for an Accounting Order
Authorizing Accounting Treatment of Costs Related to AFUDC (Allowance for Funds Used During
Construction).
Please direct any questions on this matter to Elizabeth Andrews at [phone] or myself at
(s09) 49s-8620.
Ehrbar
Director of Regulatory Affairs
Avista Utilities
pat.ehrbar@avistacorp. com
s09-495-8620
Enclosures
AFursrA AY
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY AND GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220 -37 27
TELEPHONE: [phone]
david.meyer@ avi stacorp. com
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
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CASE NO. AVU-E-I9- o;u
CASE NO. AVU-G-I9- c' I
APPLICATION OF AVISTA CORPORATION
IN THE MATTER OF THE APPLICATION OF
AVISTA CORPORATION, D IBI A AVISTA
UTILITIES FOR AN ACCOUNTING ORDER
AUTHORIZING ACCOUNTING AND
RATEMAKING TREATMENT OF AFUDC
(ALLOWANCE FOR FI-iNDS USED DURING
coNSTRUCTTON)
I I. INTRODUCTION
Avista Corporation, doing business as Avista Utilities (hereinafter "Avista" or
"Company"), at l4l1 East Mission Avenue, Spokane, Washington, pursuant to Section 6l-
524 ldaho Code and Rule 52 of the Idaho Public Utilities Commission ("Commission Rules
of Procedure"), hereby applies to the Commission for an order authorizing the accounting and
ratemaking treatment detailed in this Application related to a portion of its calculated
Allowance for Funds Used During Construction ("AFUDC") and for a portion of associated
federal income taxes.
Avista is a utility that provides service to approximately 387,000 electric customers
and 251,000 natural gas customers in a26,000 square-mile area in eastern Washington and
northern Idaho. Avista Utilities also serves approximately 103,000 natural gas customers in
Oregon. The largest community served by Avista is Spokane, Washington, which is the
location of its main office.
Pursuant to Commission Rule of Procedure 201, the Company requests that this
filing be processed under the Commission's rules for Modified Procedure.
Communications in reference to this Application should be addressed to:
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David J. Meyer, Esq.
Vice President and Chief Counsel for
Regulatory & Govemmental Affairs
P. O.Box3727
l41l E. Mission Avenue, MSC 13
Spokane, Washington 99220-37 27
Telephone: [phone]
Facsimile: [phone]
E-mail: [e-mail]
Patrick Ehrbar
Director of Regulatory Affairs
Avista Corporation
P. O.Box3727
1411 E. Mission Avenue, MSC 27
Spokane, Washingto n 99220 -37 27
Telephone: [phone]
Facsimile: [phone]
E-mail : patrick. ehrbar@avistacom. com
Application of Avista Corporation
Case No. AVU-E-I9- &, AVU-G-l9-
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II. SUMMARY OF APPLICATION
Avista requests Commission approval to defer a portion of the costs related to
AFUDC, as follows:
l. Authorize the Company to defer the AFUDC difference calculated between using the
State AFUDC rate and the FERC AFUDC rate as a regulatory asset (i.e. FERC
Account No. 182.3), which would be included in rate base, and amortize this
regulatory asset over the composite remaining life of the plant-in-service, as
described in this Application. This proposed treatment would result in no impact to
overall rate base.
2. Authorize the deferred accounting treatment detailed in this Application related to the
decrease in DFIT expense that will result from the change in accounting for the equity
portion of AFUDC. Avista will address the return of these deferred costs to
customers (approximately $1.7 million on a system basis) in its next general rate case
filing or other future proceeding, as appropriate.
III. BACKGROUND
The Federal Energy Regulatory Commission (FERC) notified Avista in December
2017 that they would be auditing the Company's compliance with Form 1 and 3-Q, and
accounting requirements of the Uniform System of Accounts under CFR part 101.
During the course of the audit (which is ongoing), FERC staff made
recommendations regarding the recording of AFUDC and the tax treatment of the equity
component of AFUDC. Neither of the recommended changes will result in changes to
Avista's overall rate base. Once the new method of recording income taxes is built into
Application of Avista Corporation
Case No. AVU-E-I9- & AVU-G-lg-
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rates, deferred federal income taxes ("DFIT") will decline, which will reduce customers'
rates. This decrease is only a timing difference as customer's rates will be higher in future
years. Avista deferred this tax benefit at the end of December 2018 and will continue to
defer the tax collected until such time that the new method of calculating DFIT on equity
AFUDC is built into rates.r
IV EXPLANATION OF DEFERRAL AND PROPOSED ACCOUNTING
TREATMENT
The following discusses the current accounting and proposed revised accounting
related to (AFUDC) and (2) Tax Treatment of AFUDC.
I. AFUDC
AFUDC represents the cost of both the debt and equity funds used to finance utility
plant additions during the construction period. As prescribed by regulatory authorities,
AFUDC is capitalized, during construction, as part of the cost of utility plant. The
offsetting entries are recorded in the income statement as follows: a) the debt component
of AFUDC is credited to FERC Account No. 432 - Allowance for Borrowed Funds Used
During Construction and b) the equity component of AFUDC is credited to FERC Account
No. 419.1 - Allowance for Other Funds Used During Construction. The Company is
permitted, under established regulatory practices, to recover the capitalized AFUDC
through its inclusion in rate base and the provision for depreciation after the related utility
plant is placed in service. Avista capitalizes AFUDC in Washington, Idaho and Oregon on
1 As Avista is still under audit by FERC, no adjustments have been agreed upon or made for years prior to
2018 for either item noted above. Upon the audit's conclusion, if deemed necessary, Avista will make adjusting
entries.
Application of Avista Corporation
Case No. AVU-E-19- & AVU-G-I9-
Page 3
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1 a monthly basis using the Washington Utilities and Transportation Commission (WUTC)
approved Rate of Return (ROR) from the most recent general rate case.2 The most recent
approved ROR (7.500%) was from the 2017 general rate case (Docket Nos. UE-l70485 and
UG-I70486) effective May 1,2018.
The following represents how Avista currently accounts for AFUDC. These
amounts are based on actual results for 2018 ($ in millions). All of the amounts in this
memo are on a system basis. Idaho's electric share would be approximately 22Yo of the
system amounts and Idaho's natural gas share would be approximately 6%o of the system
amounts.
On the other hand, the AFUDC FERC rate (6)2%o for 2018) is calculated based on
guidance in the Uniform System of Accounts under CFR part 101. FERC has indicated
that if the FERC AFUDC rate is different than the state approved rate, the AFUDC
capitalized should be split between utility plant and regulatory asset. The amount
capitalized in utility plant would be based on the FERC AFUDC rate. The amount
included in the regulatory asset would be the difference between the State AFUDC rate
(currently 7.50%) and the FERC AFUDC rate (6.120/o for 2018). The entries below
represents Avista's proposed accounting entries for the difference between the state and
FERC AFUDC rates. The amount is based on actual system results for 2018 ($ in
millions).
2 The use of Avista's ROR authorized by the Washington Commission, its major jurisdiction, as the AFUDC
rate has been consistently used in Idaho since the 1980's.
Application of Avista Corporation
Case No. AVU-E-I9- & AVU-G-I9-
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FERC FERC Description Debit Credit Activity
107 /101.
432000
419100
cwrP/uPrs
AFUDC - DEBT
AFUDC - EQUITY
$r0.2
$3.9
$6
Record AFUDC using state approved rate - 7.29o/o Jan.
- Apr and 7.5%oMay -Dec.
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FERC FERC Description Debit Credit Activity
LOTlt}t
432000
419100
CWIP/UPIS
AFUDC. DEBT
AFUDC _ EQUITY
$8.3
$4
$4
.0
.3
Record AFUDC using FERC rate.
182311
407373
4074r2
REG ASSET (AFUDC)
REG DEBIT (AFUDC DEBT)
REG CREDIT (AFUDC EQUITY)
$1.9
$0.2
s2. r
Record difference between state and FERC AFUDC
rate as a regulatory asset.
4073LL
182318
REG DEBIT (AFUDC AMORT)
REG ASSET (AFUDC ACCUM
AMORT)
$0. I
$0. r
Amortize the regulatory asset using a composite
amortization rate.
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Using the proposed accounting described above, the Company's level of rate base
and depreciation/amortization expense does not change. The Company will include $10.2
million in rate base, including $8.3 million in FERC Account No. l0l - Plant in Service
and $1.9 million in FERC Account No. 182.3 - Regulatory Asset (AFUDC).
Avista has proposed to make changes, on a prospective basis, starting January l,
2018 related to the difference between the AFUDC rates. The following adjusting entry
was recorded with the year-end close, resulting in a regulatory asset of approximately $1.9
million that will be amortized over a calculated composite amortization rate of
approximately 30 years ($ in millions).
Application of Avista Corporation
Case No. AVU-E-I9- & AVU-G-I9-
FERC FERC Description Debit Credit Activity
101
432000
419100
108000
404000
UPIS
AFUDC _ DEBT
AFUDC _ EQUITY
ACCUMULATED DEPRECIATION
DEPRECIATION EXPENSE
st.9
$0.2
$2
$0
$0. l
Reverse AFUDC recorded in UPIS and
AFUDC accounts (and associated depreciation
expense) for the incremental difference
between state and FERC rates.
L823Lt
4073L3
4074L2
REG ASSET (AFUDC)
REG DEBIT (AFUDC DEBT)
REG CREDIT (AFUDC EQUITY)
$ 1.9
$0.2
s2. l
Record regulatory asset for the incremental
difference between state and FERC AFUDC
rates.
4073LL
182318
REG DEBIT (AFUDC AMORT)
REG ASSET (AFUDC ACCUM
AMORT)
$0. I
$0. I
Amortize the regulatory asset using a
composite amortization rate.
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II. Tax Treatment of AFUDC
For income tax purposes, the IRS provides guidance with respect to the
capitalization of interest. Using this guidance, Avista's calculated capitalized debt interest
(i.e., AFUDC) for tax purposes varies from the amount capitalized for book purposes. In
addition, the IRS does not allow any equity interest to be capitalized for tax purposes. The
table below summarizes the estimated amount of AFUDC allowed for book purposes and
tax purposes for 2018 and the associated federal income tax impact on those differences. ($
in millions)
Avista has recorded the tax impact of this book-tax difference for both the debt
AFUDC and equity AFUDC on a nonnalized basis. The following represents the
accounting that Avista has used to record the impact of the book-tax difference related to
AFUDC for the 2018 activity ($ in millions).
FERC has indicated that Avista should be using the flow-through method for equity
AFUDC rather than the normalized method.
Equity AFUDC increases the book basis of assets. It originates as book income and
reverses as an expense through book depreciation. Over the book life of the related asset,
Application of Avista Corporation
Case No. AVU-E-I9- & AVU-G-l9-
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Debt Equity Total
AFUDC Capitalized for Book $3.9 $6.3 $10.2
AFUDC Capitalized for Tax 9.4 0.0 9.4
Book-Tax Difference ${5s)$63 $_oa
Tax Impact of Book-Tax Difference at
21,o/o
$n5 $iL331 $I0-LBI
FERC FERC Description Debit Credit Activity
410100
282900
DFIT EXPENSE
ADFIT
$t.15
$l.rs
Record deferred tax expense on debt
AFUDC.
410100
282900
$r.33
$r.33
Record deferred tax expense on equity
AFUDC
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DFIT EXPENSE
ADFIT
1 equity AFUDC has no net impact on book income. Equity AFUDC also has no impact on
taxable income because the income created by equity AFUDC is never taxable and the
book depreciation attributable to equity AFUDC is never deductible for income tax
purposes. Accounting guidance indicates that equity AFUDC be tracked as a temporary
book-tax difference for income tax accounting purposes. Equity AFUDC is a temporary
book-tax difference in the sense that it ultimately has the same impact on book income and
taxable income - zero. For income tax accounting purposes, the temporary book-tax
difference for equity AFUDC generates a deferred income tax liability upon origination,
with a corresponding debit to regulatory asset. As the temporary book-tax difference
reverses over the book life of the related asset, the income tax accounting entry is to debit
the deferred income tax liability and credit the regulatory asset until the deferred income
tax liability is brought down to zero.
Deferred income taxes are included in the revenue requirement under a policy of
income tax normalization. Under flow-through accounting, the deferred income taxes
generated by equity AFUDC never impact revenue requirement, which is appropriate since
there is no corresponding income tax payable or receivable between the Company and the
IRS.
The Company will use flow-through accounting for the deferred income taxes
generated by equity AFUDC in all of its regulatory jurisdictions on a prospective basis,
beginning January l, 201 8.
The table below shows the AFUDC income tax accounting entries that were
recorded beginning in December 2018 based on the tax calculations above ($ in millions).
Application of Avista Corporation
Case No. AVU-E-l9- & AVU-G-I9-
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FERC FERC Description Debit Credit Activity
4101_00
282900
DFIT EXPENSE
ADFIT
$l.l s
$1.15
Record deferred tax expense for AIUDC Debt and Tax
Capitalized Interest.(Normalization)
182319
2829L9
REG ASSET AFUDC EQUITY
ADFIT-PLANT AFUDC EQ
$1.33
$r.33
Record AFUDC Equity. (Flow-through)
182319
283319
REG ASSET AFUDC EQUITY
AFUDC EQUITY GROSS UP
$0.40
$0.40
Record regulatory asset gross-up.
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The entry above also records a gross-up amount on the regulatory asset since the
future recovery in rates will increase tax expense, therefore increasing the amount Avista
will need to collect from customers.
Because Avista's customers rates currently being collected include recovery of the
deferred income tax expense computed using the normalized method (which is estimated to
be $1.73 million in 2018, including the gross-up) the Company will defer this amount when
it changes to the flow-through method, until such time that the flow-through method is built
into base rates. Avista will work with Commission staff in each state to determine when
this deferral will be returned to customers. The table below shows the entry, using actual
2018 data as an example, that will be recorded to defer the collection of these taxes on an
annual basis ($ in millions).
The amounts included above represents the actual deferrals for 2018. Avista
estimates that the amounts defened in 2019 will be consistent with these amounts estimated
for 2018. Interest will not accrue on the above deferral.
Application of Avista Corporation
Case No. AVU-E-I9- & AVU-G-l9-
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FERC FERC Description Debit Credit Activity
407319 AFUDC EQUITY TAX
DEFERRAL
REG LIABILITY AFUDC EQUITY
TAX DEFERRAL
$ 1.73
$r.73
Defer DFIT expense included in customers'
rates for equity AFUDC change in tax
method.
410100
DFIT AFUDC EQUITY TAX
DEFERRAL
DFIT EXPENSE
$0.36
$0.36
Deferred taxes on AFUDC equity deferral
FERC Account 407319
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V. OTHER CONSIDERATIONS
Avista has made similar filings with the Washington Utilities and Transportation
Commission and the Public Utilities Commission of Oregon concurrently with this filing. It
is critical that the Company maintain uniform utility accounts and AFUDC methodology for
common plant that are consistent among the Company's regulatory jurisdictions. In the
event different AFUDC rates or methods were to be ordered for common plant, it would
result in multiple sets of depreciation accounts and records that would need to be adjusted
annually for changes in allocation factors, which would impose a costly administrative
burden on the Company and unnecessary expense for the Company's ratepayers.
VI. REQUEST FOR RELIEF
WHEREFORE, Avista respectfully requests that the Commission issue an Order
approving the requested deferred accounting and ratemaking treatment, as follows:
l. Authorize the Company to defer the AFUDC difference calculated between using the
state AFUDC rate and the FERC AFUDC rate as a regulatory asset (i.e. FERC
Account No. 182.3), which would be included in rate base, and amortize this
regulatory asset over the composite remaining life of the plant-in-service, as
described in this Application.
2. Authorize the deferred accounting treatment detailed in this Application related to the
decrease in DFIT expense that will result from the change in accounting for the equity
portion of AFUDC. Avista will address the return of these deferred costs in its next
general rate case filing or other future proceeding, as appropriate.
Application of Avista Corporation
Case No. AVU-E-I9- &. AVU-G-I9-
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The Company requests that the matter be processed under the Commission's
Modified Procedure rules through the use of written comments.
DATED at Spokane, Washington, this 31st day of January 2019
AVISTA CORPORATION
By
Patrick Ehrbar
Director of Regulatory Affairs
Avista Corp
Application of Avista Corporation
Case No. AVU-E-l9- & AVU-G-l9-
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VERIFICATION
STATE OF WASHINGTON )
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County ofSpokane )
Patrick Ehrbar, being duly swom, on oath deposes and says:
That he is the Director of Regulatory Affairs of Avista Corporation;
That he has read the foregoing Application, knows the contents thereof, and
believes the same to be true.
Patrick Ehrbar
Subscribed and sworn to before me this 3 I tt day of Janu ary,2079.
\I
0,n
Notary Public in and for the State
Washington, residing in Spokane
It
Application of Avista Corporation
Case No. AVU-E-I9- & AVU-G-I9-
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