20201231Comments.pdf

JOHN R. HAMMOND, JR.
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-007 4
[phone]
IDAHO BAR NO. 5470
AVISTACORPORATION'SAPPLICATION )
FOR AN ACCOUNTING ORDER FOR )
APPROVAL TO CHANGE ITS )
ACCOUNTING FOR FEDERAL INCOME )
TAX EXPENSE FOR CERTAIN PLANT )
BASIS ADJUSTMENTS AND DEFERRAL OF )
ASSOCIATED CHANGE IN TAX EXPENSE )
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Street Address for Express Mail:
TI33I W CHINDEN BLVD, BLDG 8, SUITE 201-A
BOISE, D 83714
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. AVU.E.2O-IZI
AVU-G-20-07
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission ("Staff') submits the following
comments regarding the above referenced case.
BACKGROUND
On October 30,2020, Avista Coqporation ("Company") applied to: (1) change its
accounting for federal income tax expense from a normalization method to a flow-through
method for certain plant basis adjustments, and (2) defer associated change in tax expense.
Application at l.
The Company uses the normalization method to calculate federal income taxes for most
plant-related temporary book-to-tax differences. Id. The Company now requests authorization to
use the flow-through method to calculate certain plant basis adjustments, which it represents will
immediately benefit customers. Id. The Company proposes to defer those benefits and to start
providing them to customers in its next general rate case. Id.
ISTAFF COMMENTS DECEMBER 31,2020
STAFF ANALYSIS
Staff recommends that the Commission approve the Company's Application authorizing
the Company to change its accounting method for federal income tax expense from a
normalization method to a flow-through method for certain plant basis adjustments, including
Industry Director Directive No. 5 ("IDD#S") and meters. For tax pu{poses, the changes in the
accounting treatment will reclassify certain previous capital expenditures as expenses and will fall
under the Internal Revenue Code ("IRC") 481(a) adjustmentsl. In Private Letter Ruling ("PLR")
202010002, the Internal Revenue Service provided guidance that Accumulated Deferred Federal
Income Tax ("ADFIT") resulting from repair-related IRC $ a8l(a) adjustments is not subject to
the normalization method of accounting. Furthermore, the utilization of the flow-through method
on certain plant basis adjustments will provide immediate benefits to customers.
The tax normalization accounting method is used by regulated public utilities to reconcile
the tax treatment of accelerated depreciation of assets with their regulatory treatment. The
different treatment between tax accounting and regulatory accounting creates deferred income
taxes. Under normalization, a utility receives the tax benefit of accelerated depreciation in the
early years of an asset's regulatory useful life, and then passes that benefit through to ratepayers
ratably over the regulatory useful life of the asset by using the associated ADFIT to offset rate
base, thereby lowering customer rates.
The Flow-through tax accounting method treats the actual current federal income tax
liability of the regulated utility as the utility's tax expense in the determination of the utility's
rates. The accelerated depreciation is considered immediately deductible and reduces the utility's
rates through the reduction of the utility's current income tax expense. Consequently, the
accumulated deferred tax reserves that are flowed through are not included in the rate base
calculation because the tax benefit was already provided to customers.
The IDD#5 projects and meters have been capitaLized and under IRC $263(a) are
considered protected assets and subject to the requirements of tax normalization accounting.
These requirements typically do not allow the direct or indirect flow-through of accelerated
depreciation tax benefits to ratepayers. However, under Treasury Regulation $ 1.263A-1(f)(4), a
utility is permitted to use any reasonable method to properly allocate direct and indirect costs
I When a taxpayer changes its accounting method, IRC $ 481(a) adjustments are required to be made to prevent items
from being duplicated or omitted.
2STAFF COMMENTS DECEMBER 31, 2O2O
among units of property produced or property acquired for resale during the taxable year. On this
basis, the IRS allows the flow-through accounting method, which the Company proposes to use
for IDD#5 mixed service costs and meters.
IDD No. 5
In 2009 and2014, the IRS division of Large Business and International Division
("LB&I") issued an lndustry Director Directive regarding the method of allocating mixed service
costs of self-constructed assets under RC $ 263(a). The IDD provided guidance in determining
whether a taxpayer's method for allocating mixed service costs of certain self-constructed assets,
such as tangible personal property, is appropriate. Self-constructed assets are assets produced by
the taxpayer for use by the taxpayer in its trade or business. IDD#5 relates to mixed services
costs that are part of the capitalized book costs of utility property but can instead be capitalized to
inventory and deducted immediately for federal income tax purposes.
Under the Treasury Regulation $ 1.263A-1(eXaXii)(C), mixed service costs are service
costs that are partially allocable to production or resale activities (capitalizable) and partially
allocable to nonproduction or non-resale activities (deductible). As an example, a factory
worker's recruitment costs incurred by the personnel department are costs which are allocable to
production activities and therefore capitalized while the costs incurred by the personnel
department for the development of wage, salary, and benefit policies are allocable to
nonproduction or non-resale activities and would be deductible.
Meters
The Company currently capitalizes and depreciates meters over 5 to 20 years for tax
purposes and over 15 to 20 years for regulatory book purposes depending on the meter type. IRC
$ 162 allows a deduction for all ordinary and necessary expense paid or incurred during the
taxable year in carrying on any trade or business. Under Treasury Regulation $ 1.162-3(c),
materials and supplies are defined as property that has an acquisition cost of $200 or less that is
consumed in the taxpayer's operation and is not considered inventory. The Company proposes to
deduct meter costs instead of capitalizing them if the per unit cost is less than $200.
STAFF COMMENTS DECEMBER3I,2O2O3
Benefits to Ratepayers
Each of the accounting method changes described above were evaluated under the IRC
g aSl(a) which allows Avista to take deductions for prior periods (catch-up deductions). The
excess deferred income tax ("EDIT") amounts associated with this tax depreciation is also
reclassified to the basis adjustment moving it from protected to non-protected. The amount of
ADFIT related to IDD#5 and meters that are available for flow-through to customers, as of
December 31,2019, is estimated to be approximately $134 million (system), or $38.4 million
(Idaho), that can be recorded as a regulatory liability and returned to customers in future rate
cases.
The changes in accounting methods were included in the Company's 2OI9 federal income
tax return that was filed in October 2020but will be reviewed by the IRS during a future audit of
the Company's tax return. The Company will record the 2Ol9 tax return adjustments and all
future monthly tax accruals using the normalization method, until the Company receives approval
to change to the flow-through method in all three of its jurisdictions. This will allow the
Company to continue to record deferred taxes and will increase the ADFIT balance. When
approval is received from all three states for the Company to switch to the flow-through method
for meters and IDD#5 mixed services costs, the Company will record the amounts that have
accumulated at that point to FERC Account No. 254.3 - Regulatory Liability. The Company will
then be able to amortize the accumulated tax credits recorded in the regulatory liability account in
a manner approved by the Commission.
CUSTOMER COMMENTS
The Commission set a comment deadline of December 31, 2020. As of December 30,
2020, no customer comments had been filed.
STAFF RECOMMENDATION
Staff recommends the Commission approve the Company's Application allowing the
Company to change its tax accounting method for federal income tax expense from a
normalization method to a flow-through method for certain plant basis adjustments, including
IDD#5 mixed services costs and meters and to defer the benefits associated with the changes for
future return to customers.
4STAFF COMMENTS DECEMBER 3I, 2O2O
Respectfully submitted this vt 5'l-
day of December 2O2O.
John Jr.
General
Technical Staff: Johan Kalala-Kasanda
Donn English
i:umisc:comments/av w2A,l2 _av t920.7jff k comrnents
5STAFF COMMENTS DECEMBER 31,2020
CERTIFICATE OF SERVICE
I TMREBY CERTIFY THAT I HAVE THIS 31't DAY OF DECEMBER 2020,
SERVED THE FOREGOING COMMENTS OF THE COMIVtrSSION STAFF, IN
CASE NOS. AVU-E-20-12/AVU-G.20-07, BY E-MAILING A COPY THEREOF, TO
THE FOLLOWING:
PATRICK EHRBAR
DIR OF REGULATORY AFFAIRS
AVISTA CORPORATION
POBOX3727
SPOKANE WA99220-3727
E-mail: patrick.ehrbar@ avistacorp.com
avistadockets @ avistacorp.com
DAVID J MEYER
VP & CHIEF COUNSEL
AVISTA CORPORATION
POBO)(3727
SPoKANE WA99220-3727
E-mail: david.meyer@ avistacorp.com
SECRET
CERTIFICATE OF SERVICE