20201009Application.pdf

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Avista Corp.
141 1 East Mission P.O. Box 3727
Spokane, Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
VIA OVERNIGHT MAIL
State of Idaho
Idaho Public Utilities Commission
11331 W. ChindenBlvd
Bldg 8 Suite 201-A
Boise,ID 83714
Attention: Ms. Jan Noriyuki, Secretary
RE: CaseNos. AVU-E-}}- gL& AW-G-2}-_($_
In the Matter of the Application of Avista Utilities, for an Accounting Order for Approval of
Depreciation and Amortization Rates for Investnent in Software
Dear Ms. Noriyuki:
In accordance with Case No. GNR-U-20-01, Order No. 34602, which suspends the requirement to
file physical copies, the Company has attached for electronic filing with the Commission an
Application for an Accounting Order for Approval of Depreciation and Amortization Rates for
Investment in Software.
Please direct any questions regarding this filing toLizAndrews at [phone] or
liz. andrews@ avi stacorp. com.
Sincerely,
/s/ Paul Kimball
Paul Kimball
Manager of Compliance & Discovery
Enclosures
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY AND GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O.BOX3727
141I EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-37 27
TELEPHONE: [phone]
david.mever@ avi stacorp. com
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
AVISTA CORPORATION, D/B/A AVISTA
UTILITIES, FOR AN ACCOTINTING ORDER
FOR APPROVAL OF DEPRECIATION AND
AMORTIZATION RATES FOR INVESTMENT
IN SOFTWARE
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CASE NO. AVU-E-2}- 91
CASE NO. AVU.G.}O-OL
APPLICATION OF AVISTA CORPORATION
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I. INTRODUCTION
Avista Corporation, doing business as Avista Utilities (hereinafter "Avista" or
"Company"), at l4l I East Mission Avenue, Spokane, Washington, pursuant to Section 6l-524
Idaho Code and Rule 52 of the Idaho Public Utilities Commission ("Commission Rules of
Procedure"), hereby applies to the Commission authorizing Avista to use an amortization
period for its capitalized software license costs and its capitalized software implernentation
costs that aligns with the life of the underlying contract for Information Technology (IT)
services. As described more fully below, Avista is currently authorized to amortize software
over a five-year period. Accounting guidelines require Avista to amortize capitalized costs
over its useful period, which can be different than a standard five-year period. With this
application, the Company is not requesting to impact customers' rates, or a prudence review
of any related assets at this time.
Avista is a utility that provides service to approximately 395,000 electric customers
and 259,000 natural gas customers in a 26,000 square-mile area in eastem Washington and
northern Idaho. Avista Utilities also serves approximately 105,000 natural gas customers in
Oregon. The largest community served by Avista is Spokane, Washington, which is the
location of its main office.
Communications in reference to this Application should be addressed to:
David J. Meyer, Esq.
Vice President and Chief Counsel for
Regulatory & Governmental Affairs
P. O.Box3727
l4ll E. Mission Avenue, MSC 13
Spokane, Washingto n 99220 -37 2l
Telephone: [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]
E-mail: [e-mail]
Avista Dockets (Electronic Only) - [e-mail]
Application of Avista Corporation
Case No. AVU-E-2O- & AVU-G-20-
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[. BACKGROUND
The purpose of depreciation and amortization expense is to provide for recovery of the
original cost of plant (less estimated net salvage) over the used and useful life of the property
by means of an equitable plan of charges to operating expense. Tangible assets, usually
referred to as plant, property and equipment, are depreciated. Intangible assets, such as
software, land rights and rights-of-way, are amortized.
The Commission is empowered to ascertain and determine the proper and adequate
rates of depreciation of the Company's properly used in the rendering of retail electric and
natural gas service under the provisions of Idaho Code Section 6l-525. Each utility under the
Commission's jurisdiction is required to conform its depreciation accounts to the rates so
ascertained and determined by the Commission. The Commission may make changes in such
rates of depreciation from time to time as the Commission may find necessary.
Avista updated its depreciation rates in Idaho in Case Nos. AVU-E-18-03 and AVU-
G-18-02, with depreciation rates effective April l, 2019 (See Order No. 34276 issued March
19,2019). In that depreciation study, for capitalized software (recorded in FERC Account No.
303100 - Intangibles Software) Avista had not proposed to change the amortization period for
software, so the five-year life that Avista had been using remained in effect.
III. REASON FOR PROPOSAL
There are fourbasic methods of acquiring software applications, including: 1) buy and
use off-the-shelf software, 2) buy and customize software, 3) self-develop software, and 4)
lease software. Historically, Avista has primarily either bought the software or self-developed
the software. In both of these cases, the costs were capitalized and amortized over the useful
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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life of the property. Avista has been approved to amortize most software over a five-year life.
For large IT projects that the Company has recently installed, including our Customer
Information Systern (Oracle CC&B) in 2015 and the Meter Data Management System in20l7,
the Company has requested and received approval for longer amortization periods.
A summary of the software costs that Avista has in service at Decernber 31, 2019
follows:
Software at December 31, 2019
Tvpe
Software S
CC&B Software
MDM Software
Amount Life
1.50,158,184 5 years
100,831,203 15 years
30,329,509 12.5 years
s 291,318,896
Due to changes in technology over the last several decades, leasingl of IT solutions,
including hardware and software has gained prominence for businesses. The leasing of the
products can be done several ways, including acquiring the applications to nrn on Avista-
owned equipment with a term license, or by acquiring the applications to run on a hosted
service or the "cloud". Avista has acquired software applications using these methods and
because of the contract terms, an amortization life of other than five years is necessary in both
types of arrangements.
Cloud computing services can provide a utility with access to vendors who operate
specialized technology, while providing a way to address technological obsolescence as the
contracts with these companies allow for renewals that use the latest technologies.
I The term leasing is used to describe the right to use IT services which can be in the form of a service level
agreement, a subscription agreement, a user contract or agreement, etc.
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
Page 3
I Fee structures for cloud computing arrangements (hosting flrangements) can vary, but
2 generally reflect ongoing monthly, quarterly, or annual payments. In addition, similar to a
3 traditional Company-owned IT solution, an upfront payment may be made in return for a
4 reduced monthly fee, or no ongoing fee at all, over the course of the contract period. The
5 contract period can also vary. Based on current accounting guidelines2, if the cloud computing
6 arrangement includes a license to internal-use software, then the software license is capitalized.
7 In addition, ifthe arrangement does not include a software license, the Company is allowed to
8 capitalize the integration costs of these arangements as software while recording the ongoing
9 service portion ofthe contract as an operating expense. Because these contract periods can
10 vary, the useful life of the capitalized license and integration costs will vary. Therefore, the
1l Company is requesting that the amortization period for the capitalized, license and the
12 capitalized integration costs be set to reflect the useful life or term of the arrangernent.
13 The term of the hosting arangement includes the noncancelable period of the
14 arangement plus periods covered bv (l) an option to extend the arrangement if the customer
15 is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the
16 customer is reasonably certain not to exercise the termination option, and (3) an option to
17 extend (or not to terminate) the alrangement in which exercise of the option is in control of the
18 vendor.
2 In August 2018, the FASB issued ASU 2018-15, "Intangibles---Goodwill and Other-Internal-Use Software(Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud ComputingArrangement That Is a Service Contract". These amendments align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitaliztng implementation costs incurred to develop or obtain internal-use software (and hosting arrangements
that include an intemal-use software license). The accounting for the service element of a hosting arrangement
that is a service contact is not affected by these amendments.
Application of Avista Corporation
Case No. AVU-E-20- & AW-G-20-
Page 4
I Avista is not requesting to impact customers' rates at this time. Avista will begin
utilizing the new amortization period on projects that become used and useful after obtaining
commission approval in this proceeding when the project becomes used and useful. Once
approved, the impact on amortization expense would be included in a future general rate case.
IV. DESCRIPTION OF PROJECTS
Leasing Arrangement Using Avista Owned Equipment
Avista has recently implemented leasing IT solutions that are term licensing
arrangements. For products acquired that are licensed with a perpetual license, a five-year life
is appropriate. If the term of the license is other than five years, a term other than five-years
is necessary. An example of this type of project and the reason for use of an amortization
period other than five years is as follows.
AppDynamics Pro is an application performance monitoring (APM) and IT operations
analytics (ITOA) solution that monitors application and infrastructure performance. Avista
purchased a three-year term license for on-premises deployment of the AppDynamics platform
in January 2O2O (lllll2}2} - lll}l2123) for $733,000. AppDynamics is used by operations
teams to reduce downtime, identiff potential performance issues, and speed time to resolution
among Avista's business critical infrastructure and applications. This tool quickly pinpoints
issues when they arise to assist in the quick identification of the root cause in application or
systern performance degradation. Based on the complexity and number of disparate systems
our business and customer transactions traverse, it would not be feasible to maintain industry
standard service levels by continuing to rely on a manual approach to system support without
incurring significant cost increases.
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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1 In accordance with GAAP, the portion of the cost attributable to the licenses for
AppDynamics Pro was fully capitalized,, which was approximately $590,000. The remaining
cost of $143,000 has been recorded as a prepaid IT contract (FERC Account No. 165150) and
is being amortized over the life of the contract, three years.
Because Avista has only been authorized by the Commission to amortize software costs
over 5 years, this asset is currently being amortized over a longer period than its useful life.
At the end of the three-year term, the renewal cost will create a situation where costs are
fluctuating annually, as depicted below:
As shown above, the actual annual cost, if the original cost was amortized over three
years would be a consistent $196,667 per year. By amortizing over five years, the annual
expense fluctuates between $118,000 and $236,000. This highlights the need for Avista to be
able to amortize software over its useful life (i.e. term), as opposed to a set five-year life, that
is currently authorized. AppDynamics Pro is one example of software that is leased by Avista
with a term license.
Application of Avista Corporation
Case No. AVU-E-2O- & AVU-G-2O-
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s-Year Amortizataon Period
Original License
First Renewal License
Second Renewal License
Annual Total
3-Year Amortization Period
Original License
First Renewal License
Second Renewal License
Annual Total
Cost
s590,000
ssgo,ooo
s590,000
2020
s118,000
202L
s118,000
2022
s118,000
2023
S118,ooo
s118,000
2024 2025
s118,OOO
s118,000 s118,000 s118,000 s118,000
s118.000 s118,000
s118,000 s118,000 sl18,000 S235.OOO s236,000 s11S,000 szge,ooo s236,ooo
Cost 2O2O 2O2l 2022
S59O,OOO s1g6,667 s196,667 s196,667
ss90,000
s590,000
2023 2024 2025
s 196,667 51s6,667 5Ls6,667
2026 2027
s196,667 s196,657
s 195.557 s L96,567 s196,667 S 195,667 S 195.667 S 196.667 sL96,667 5196,667
1 ttCloud" or Hostinq Arrangement
2 Avista plans on implementing IT solutions that are hosting arrangements. An example
3 of this type of project that was recently implemented in July 2020 and the reason for an
4 amortization life other than a five-year period follows.
5 Avista is building a Customer Experience Platform (CXP) and as abase to the software
6 suite, Salesforce software is being utilized. The initial implementations became operational in
7 J:uly 2020. The CXP tool will give customer service reps the ability to see the full scope of a
8 customer's services, billing information and interactions with customers in a single pane by
g integrating with foundational systerns, including customer information and information from
10 the billing system, work and asset management systern, etc. This tool will improve the
I I customer experience while improving the efficiency of the customer service reps.
72 The Salesforce platform was acquired in Febru ary 2019 for a 5-year term with an option
13 for an additional one-year extension, which ends in February 2025. During implementation,
14 costs have been capitalized. When the software became operational, the costs incurred
15 between February 2019 and J:u/ry 2020 (I8-month implernentation period) were recorded as
16 plant-in-service as software implementation costs. The remaining life will be approximately
17 54 months of the six-year term. The remaining contract costs will be recorded as a prepaid
18 expense when annual payments are made, and will be amortized over the remaining contract
19 life as operations and maintenance expense. The total costs of the 2020project is estimated to
20 be approximately $13.5 million. The capitalized portion will be approximately $10 million
2l and will be amortized over a five-year life as currently allowed. In addition, the Company
22 plans on investing in additional products to support the CXP beyond 2020. Those software
23 packages will have contracts that are planned to be co-termed, so the end of life will sync up
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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with the life of the Salesforce contract. Therefore, depending on the date that these additional
products are purchased and placed in service, the life may be between one to four years.
Approval of this application would allow Avista to use the shorter life on the new software
packages.
Avista has only been authorized by the Commission to amortize software costs over
five years but the costs of this product should be amortized over a shorter life than what is
currently authorized. Salesforce is one example of software acquired using a hosting
arrangsment by Avista.
Y. PROPOSED ACCOUNTING TREATMENT
Under Section 6l-525Idaho Code, which authorizes the Commission to determine the
proper and adequate rates of depreciation of property used by a public service company, the
Commission may ascertain and by order fix the proper and adequate rates of depreciation of
utility property. Each utility must conform its depreciation accounts to the rates ordered by
the Commission. Currently, the Commission has approved a depreciable life of five years for
software, with a depreciation rate of 20.0 percent.
The Company is requesting the Commission approve a depreciable life for the license
to internal-use software and implernentation costs of hosting arrangements to reflect its useful
life. Avista anticipates using additional lives between 2-10 years at this time that will coincide
with the terms of the various arrangements, and expected extensions to contracts. If the
Commissions were to not approve the use of lives other than 5 years for software, Avista would
be required to maintain two separate sets of books, with different depreciable lives for GAAP
reporting and for regulatory reporting. Two sets of books would be an administrative burden
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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and cost to the utility and its customers. Parties in general rate cases will have the opportunity
to review all of the software projects and the lives that have been assigned.
For administrative and economic efficiencies, the Company prefers to maintain
uniform utility accounts, including depreciation rates, across its three state service territories,
including Idaho, Washington and Oregon. To maintain consistent depreciation rates across all
states, the Company has also requested to use a life that reflects the useful life of the software
in its Washington and Oregon jurisdictions. Avista anticipates receiving approval for using a
rate that aglees with ttre useful life from these states for term license products and software
integration costs that are capitalized. Maintaining consistent depreciation rates across all states
is critical to avoid multiple sets ofdepreciation accounts and records that would impose a costly
administrative burden on the Company and unnecessary expense for the Company's
VI. MODIFIED PROCEDURE
Avista believes that a hearing is not necessary to consider the issues presented herein,
and respectfully requests that this Application be processed under Modified Procedure; i.e., by
written submissions rather than by hearing. RP 201, et seq.
VII. REOUEST FOR RELIEF
WHEREFORE, Avista respectfully requests that the Commission issue an Order
approving Avista to use an arrortization period for its software licenses and its capitalized
software integration costs that aligns with the life of the underlying contract and expected
extensions for Information Technology services. Avista is not requesting to impact customers'
Application of Avista Corporation
Case No. AW-E-20- & AVU-G-20-
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rat$ at tltis timc. Avisa will hgin utilizing the new amottization penod whsn the projec
bccomes used and useful. Once approved, the impact on amortization expensc would be
included in a future general rate case.
DATED at Spokane, Washington, Oris CAay of October, 2020.
TION
By
t0
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l2
Patrick Ehrbar
Dirocor of Regulatory Affairs
Avista Corp
Application of Avista Corporation
CaseNo, AVU-E-2O- & AVU4-20-
Pagc l0
VERIFICATION
STATE OF WASHTNGTON )
)
Coung 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 thercof, and
believes the same to be true,
Patrick Ehrbar
Subscribed and swora to before me this L\-of October,2020.
L I
z
Notary Public in and for the State
Washington, residing in Spokane l1
Applicalion of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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