20201207Comments.pdf

DAYN HARDIE
DEPUTY ATTORNEY GENERAL ,au e-L,
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE,IDAHO 83720-0074
[phone]
IDAHO BAR NO.9917
Street Address for Express Mail:
11331 W CHINDEN BLVD,BLDG 8,SUITE 201-A
BOISE,ID 83714
Attorneyfor the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF AVISTA )CORPORATION'S APPLICATION FOR AN )CASE NO.AVU-E-20-09
ACCOUNTING ORDER FOR APPROVAL OF )AVU-G-20-06
DEPRECIATION AND AMORTIZATION )RATES FOR INVESTMENTS IN SOFTWARE )COMMENTS OF THE
)COMMISSION STAFF
STAFF OF the Idaho Public Utilities Commission ("Staff'),by and through its Attorney
of record,Dayn Hardie,Deputy AttorneyGeneral,submits the followingcomments.
BACKGROUND
On October 9,2020,Avista Corporation dba Avista Utilities ("Company")applied to the
Commission seeking an accounting order authorizing it to use an amortization period for its
capitalized software license costs and capitalized software implementation costs that aligns with
the life of the underlyingcontract for Information Technology ("IT")services.
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.Intangible assets,including
software,are amortized and tangible assets like plant,property,or equipment,are depreciated.
Id.at 2.The Company's depreciation rates were updated in 2019 (see Order No.34276)but that
case did not address the amortization period for capitalized software costs.
STAFF COMMENTS 1 DECEMBER 7,2020
If cloud computing arrangements include a license for internal-use software,then the
software license is capitalized over a five-year period under authorized accounting practices.
The Company requests approval to use an amortization period for the license of internal-use
software and implementation costs of cloud computing arrangements that reflect the actual useful
life of the software arrangement.
The Company anticipates this would cause the lives of its various software and other
cloud computing arrangements and extensions to be amortized over periods from two to ten
years.
The Company is not requesting a change to customers'rates at this time and will only
begin to utilize the new amortization period for projects that become used and useful after
obtaining Commission approval.The impact on amortization expense would be included in a
future general rate case.
STAFF ANALYSIS
Staff recommends the Commission approve the Company's Application allowingthe
Company to use an amortization period for its software licenses and its capitalized software
integration costs that aligns with the life of the underlyingcontract plus expected extensions.
Matching the amortization period for IT software solutions with contract lengths provides the
proper matching of revenues with the benefits received from the services and will not require the
Company to maintain separate books for Generally Accepted Accounting Principles reporting
and regulatory reporting.The Comments below discuss the appropriate accounting treatment for
the amortization of IT software solutions.
IT Soliware Solutions
Historically,the Company has either purchased off-the-shelf software or self-developed
its software and the costs were capitalized and amortized over a five-year life.'Technological
changes over the last several decades have led the Company to begin leasing IT solutions,
includinghardware and software.There are several methods of leasing IT solutions,including
acquiring the applications to run on Company-owned equipment with a term license,or by
i For larger IT projects like the Company's Customer InformationSystem and the Meter Data Management System,
the Company requested and received approval for longer amortization periods.
STAFF COMMENTS 2 DECEMBER 7,2020
acquiring the applications to run on a hosted service or the "cloud."When leasing IT solutions,
license terms and contract lengths do not always align with the Commission approved five-year
amortization or depreciable life of IT solutions.
Accounting Treatment
Fee structures for cloud computing and licensing arrangements can vary but generally
reflect a monthly,quarterly,or annual payment schedule.For a traditional on-premise IT
solution,an upfrontpayment can be made in return for a reduced monthly feear no ongoing
fee at all-over the course of the contract period.Cloud computing arrangements are not
accounted for the same way as the purchase of traditional on-premise IT solutions.Current
accounting guidelines allow the Company to classify investments in traditional on-premise IT
solutions-includingthe integration costs-as a capital expenditure.Cloud-based products and
services are generally accounted for as operating expenditures.
In April 2015,Financial Accounting Standards Board ("FASB"),issued Accounting
Standards UpdateNo.2015-05 to Accounting Standards Codification ("ASC")350-40:
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,which
provides further direction and treatment for cloud computing.The update provided additional
guidance of how to treat software license fees,and under certain conditions in which fees can be
considered intangible assets and therefore be capitalized.In Accounting Standards Update
("ASU")No.2018-15,FASB provided additional clarification and provided users an opportunity
to capitalize and amortize the costs over the term of the cloud computing arrangement.
On December 20,2019,the Federal Energy Regulatory Commission ("FERC")issued
Docket No.AI20-1-000,that provided additional guidance to utilities regarding cloud computing
arrangements involvinga service contract."ASU No.2018-15 clarifies that an entity obtaining a
service contract in a cloud computing arrangement should follow the existing guidance [ASC]
350-40 to determine which implementation costs can be capitalized...shallbe amortized over the
term of the associated arrangement."ASC 350-40-35-13 states,"a Service Contract ...shall be
amortized over the term of the associated hosting arrangement,on a straight-line basis."
The Company proposes to amortize the associated costs of cloud computing and leasing
arrangements over the terms of their useful lives.The Company anticipates using lives between
two and ten years that will align with the terms of the various arrangements and expected
extensions to contracts.
STAFF COMMENTS 3 DECEMBER 7,2020
To be consistent with the recovery of on-premise IT solutions,Staff recommends that the
amortization period for each arrangement should be the length of the specific contract for that
arrangement or its useful life.If no contract period exists,Staff recommends that the Company
continue to use the amortization life of five-years.
STAFF RECOMMENDATION
Staff recommends the Commission approve the Company's Application allowing the
Company to use amortization periods for its software licenses and its capitalized software
integration costs that align with the length of the underlyinglicense or contract.If the contract
length is indeterminant,the amortization period should default to five-years.
Respectfully submitted this day of December 2020.
Dayn Ha e
Deputy AttorneyGeneral
Technical Staff:Travis Culbertson
i:umisc/comments/avue20.9_avug20.6dhtnc comments
STAFF COMMENTS 4 DECEMBER 7,2020
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 77"DAY OF DECEMBER 2020,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF,IN
CASE NOS.AVU-E-20-09/AVU-G-20-06,BY E-MAILING A COPY THEREOF,TO
THE FOLLOWING:
PATRICK EHRBAR DAVID J MEYER
DIR OF REGULATORY AFFAIRS VP &CHIEF COUNSEL
AVISTA CORPORATION AVISTA CORPORATION
PO BOX 3727 PO BOX 3727
SPOKANE WA 99220-3727 SPOKANE WA 99220-3727
E-mail:[e-mail] E-mail:[e-mail]
[e-mail]
SECRETARY
CERTIFICATE OF SERVICE