20190405Comments.pdf

EDWARD JEWELL
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 10446
IN THE MATTER OF THE APPLICATION OF )
AVISTA CORPORATTON FOR AN )
ACCOUNTING ORDER AUTHORIZING )
ACCOUNITNG TREATMENT OF COSTS )
RELATED TO ALLOWANCE FOR FUNDS )
USED DURING CONSTRUCTION. )
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Street Address for Express Mail:
472W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. AVU-E.I9.O2I
AVU-G-19-01
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission comments as follows on Avista
Corporation' s Application.
BACKGROUND
On February 1,2019, Avista Corporation ("Avista" or "Company") filed an Application
seeking authorization of accounting and ratemaking treatment related to its Allowance for Funds
Used During Construction ("AFUDC").
Avista is a utility that provides service to approximately 387,000 electric customers in
eastern Washington and northern Idaho and 354,000 natural gas customers in Oregon,
Washington, and Idaho.
In December2017,The Federal Energy Regulatory Commission ("FERC") notified
Avista that they would be auditing the Company's compliance with Form I and 3-Q, and
accounting requirements of the Uniform System of Accounts under CFR part 101. During the
ISTAFF COMMENTS APRIL 5,2019
course of the audit, 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. Application at 2.
In Compliance with FERC staff recommendations, the Company requests authorization
to defer the AFUDC difference calculated between using the State AFUDC rate and the Federal
Energy Regulatory Commission's AFUDC rate, beginning January 1,2018, as a regulatory asset
and amortize this regulatory asset over the composite remaining life of the plant-in-service.
The Company also requests authorization for deferred accounting treatment related to the
decrease in deferred federal income taxes that will result from the accounting change for the
equity portion of the AFUDC.
STAFF REVIEW
Staff reviewed Avista's Application requesting Commission approval of the AFUDC
treatment. The two requests are consistent with FERC staff recommendations given during the
on-going FERC audit. Neither of the recommended changes will result in changes to Avista's
overall rate base and will have no impact on ratepayers.
AFUDC
AFUDC represents the cost of both the debt and equity funds used to finance utility plant
additions during the construction period. AFUDC is capitalized as part of the cost of the utility
plant, and is included in rate base. The Company recovers the investment in utility plant, along
with the capitalized AFUDC, through depreciation expense over the expected life of the plant.
During the FERC audit, FERC staff recommended that the Company use the authorized
FERC rate (currently 6.12%) to calculate AFUDC on transmission projects under FERC's
jurisdiction. The FERC rate is calculated based on guidance in the Uniform System of Accounts
under CFR part 101. Avista has been calculating AFUDC based on the most recent Weighted
Average Cost of Capital ("WACC") approved by the Washington Utilities and Transportation
Commission ("WUTC"), currently 7.5Yot. FERC staff has indicated that if the FERC rate is
different than the state approved rate, the capitalized AFUDC should be split between utility
' The WACC approved by the WUTC in the most recent general rate case (Docket Nos. UE-170485 and UG-
170486)was7.SYo. In OrderNo.33953, the Idaho Public Utilities Commission approved a settlement stipulation
authorizing a WACC of 7 .610/o. For consistency among jurisdictions, the Company uses the Washington approved
WACC as the AFUDC rate for both Idaho and Washington.
STAFF COMMENTS 2 APRIL 5,2019
plant and a regulatory asset. The amount included in the regulatory asset would be the difference
between the AFUDC calculated using the rate approved by the WUTC (75%) and the AFUDC
calculated using the FERC rate (6.l2Yo). The regulatory asset would be amortized over the
composite remaining life of the assets. This approach insures that customer rates will not
increase and there would be no change in rate base due to the different AFUDC rates.
Tax Treatment of AFUDC
With the recommended changes to AFUDC, the Company also has to make adjustments
to the tax treatment of AFUDC. The Internal Revenue Service guidance and Statement of
Financial Accounting Standards No. 109 do not allow equity interest to be capitalized for tax
purposes. Equity AFUDC increases the book basis of assets. It originates as book income and
reverses as an expense through book depreciation. It has no impact on taxable income because
the income created by equity AFUDC is not taxable and the book depreciation attributable to
equity AFUDC is not deductible for income tax purposes. Equity AFUDC is a temporary book-
tax difference because it has no impact on either book income or taxable income. For income tax
purposes, the temporary book-tax difference for equity AFUDC generates a deferred income tax
liability upon origination, with a corresponding debit to a regulatory asset. As the temporary
book-tax difference reverses over the book life of the asset, the income tax accounting entry
debits the deferred income tax liability and credits the regulatory asset until the deferred income
tax liability is brought down to zero.
Deferred income taxes are included in revenue requirement under income tax
normalization. Under flow-through accounting, the deferred income taxes generated by equity
AFUDC never impact revenue requirement because there is no corresponding tax payable or
receivable. The Company's current rates include recovery of the deferred income tax expense
computed using normalization, which is approximately $1.34 million in 2018. The Company
proposes to record the deferred income tax expense associated with the equity AFUDC in 2018,
and each year thereafter, as a regulatory liability until such time that the flow-through method is
embedded in base rates. Staff will work with the Company to determine when and how the
deferral will be retumed to customers.
JSTAFF COMMENTS APRIL 5,2019
STAFF RECOMMENDATION
Staff recommends that the Commission:
(l) Approve the Application and allow the Company to make entries and adjustments to
defer the difference between AFUDC calculated using the FERC rate and AFUDC
calculated using the WACC approved by the WUTC as a regulatory asset, effective
January 1,2018, for transmission assets under FERC jurisdiction as recommended in
the FERC audit.
(2) Approve the deferral accounting treatment establishing a regulatory liability related to
switching from the normalization method to the flow-through method for equity
AFUDC, effective January 1,2018, with the balance being returned to customers at a
later date.
Respectfully submitted this
rtlv2 day of April2019.
Edward
Deputy General
Technical Staff: Travis Culbertson
Donn English
i :umisc:comments/avue I 9.2_avugl 9. I ejtnckkde comments
4STAFF COMMENTS APRIL 5,2019
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 5.h DAY OF APRIL 2019, SERVED
THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NOS. AVU-E-19-02/AVU-G.19.01, BY MAILING A COPY THEREOF, POSTAGE
PREPAID, TO THE FOLLOWING:
PATRICK EHRBAR
DIR OF REGULATORY AFFAIRS
AVISTA CORPORATION
PO BOX3727
SPoKANE WA99220-3727
E-mail : [e-mail]
avi stadockets@ avistacorp.com
DAVID J MEYER
VP & CHIEF COLTNSEL
AVISTA CORPORATION
PO BOX3727
SPOKANE WA99220-3727
E-mail: [e-mail]
SECRETARY
CERTIFICATE OF SERVICE