avue996.kls.doc

Q. Please state your name and business address?
A. My name is Kathleen L. Stockton. My business address is 472 West Washington Street, Boise, Idaho.
Q. By whom are you employed and in what capacity?
A. I am employed as an Auditor by the Idaho Public Utilities Commission.
Q. Please describe your educational background and professional experience.
A. I received my B.B.A. degree majoring in Accounting from Boise State University in December 1992. Following graduation I was employed by the Idaho State Tax Commission as a Tax Enforcement Technician. In my capacity as a Tax Enforcement Technician, I performed desk audits on individual state income tax returns. I was promoted to Tax Auditor, and after meeting the underfill requirements, was promoted to Senior Tax Auditor. In my capacity as an auditor, I performed audits on Special Fuel and Motor Fuel Tax returns, International Fuels Tax Agreement Returns and Special Fuel User tax returns. I accepted employment with the Idaho Public Utilities Commission (IPUC; Staff) in July of 1995. I attended the National Association of Regulated Utilities Commissioners Annual Regulatory Studies program at Michigan State University in the summer of 1996.
Q. What is the purpose of your testimony?
A. My testimony addresses the calculation of the gain associated with the sale of the Centralia Power Plant and Staff's recommendations for the proposed ratemaking treatment of the gain on the sale.
Q. What are the accounting rules and regulations for the treatment of the gain on the sale of a utility asset?
A. The Federal Energy Regulatory Commission (FERC) Uniform Systems of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act defines "Property retired," as property which has been removed, sold, abandoned, destroyed, or which for any cause has been withdrawn from service.
Section B of Account 108 - Accumulated
provision for depreciation of electric utility plant (Major only) states:
At the time of retirement of
depreciable electric utility plant,
this account shall be charged with
the book cost of the property retired
and the cost of removal and shall be
credited with the salvage value and
any other amounts recovered, such as
insurance. When retirement, costs of
removal and salvage are entered origin-
ally in retirement work orders, the
net total of such work orders may be

included in a separate subaccount here-
under. Upon completion of the work order,
the proper distribution to subdivisions
of this account shall be made. . .

Item 5, letter F from the Electric Plant Instructions from the Uniform System of Accounts, states:
F. When electric plant constituting
an operating unit or system is sold,
conveyed, or transferred to another
by sale, merger, consolidation, or
credited to the appropriate utility
plant accounts, including amounts
carried in account 1114, Electric
Plant Acquisition Adjustments. The
amounts (estimated if not known)
carried with respect thereto in the
accounts for accumulated provision
for depreciation and amortization and
in account 252, Customer Advances for
Construction, shall be charged to such
accounts and contra entries made to
account 102, Electric Plant Purchased
or Sold. Unless otherwise ordered by
the Commission, the difference, if any,
between (1) the net amount of debits
and credits and (2) the consideration
received for the property (less
commissions and other expenses of making
the sale) shall be included in account
421.1, Gain on Disposition of Property,
or account 421.2, Loss on Disposition of
Property. (See account 102, Electric
Plant Purchased or Sold.)

The accounting entry for the sale of depreciable property in textbook terms would be to debit the Cash account for the purchase or sale price of the property; credit the Property Asset account for the original cost of the asset; debit the Accumulated Depreciation account for the amount of accumulated depreciation associated with the property; and credit Gain on Disposal of the property. If the sale resulted in a loss, Loss on Disposition of property would be debited. The appropriate regulatory commission would determine the ratemaking treatment of any gain or loss.
Q. What are some of the prior Commission-Ordered Treatments of the Gain/Loss on a Sale of Utility Assets?
A. This Commission has utilized various treatments for the gain on the sale of Utility assets: charge to accumulated depreciation, offset expenses, return to ratepayers through a final bill credit, return a portion of the gain to the purchaser for plant investment plus a special contribution to the IUSF, and amortize over a period of years.
In Case No. U-1025-43, In the matter of the
Application of Boise Water Corporation to revise and increase rates charged for water service, the treatment of the gain from the sale of the Company's old downtown headquarters was decided. Order No. 16557 states:
The Staff proposed that the complete
after-tax gain from the sale of property
be recaptured for the benefit of the
ratepayers. The Company, on the other
hand, contended that that portion of
the gain attributable to non-depreciable
property (the land) should inure to the
benefit of the Company's shareholders
and that portion of the gain attributable
to depreciable property should inure to
the benefit of the ratepayers. We agree
with the Company…
The next issue presented is how should
the gain be apportioned between depreciable
and non-depreciable property. The Staff
contended that the gain should be in
proportion to the book value of depreciable
and non-depreciable property at the time
of the sale while the Company contended
that the gain should be apportioned
according to its appraiser's assessment
of the relative values. We agree with
the Staff. We find that book values are
the appropriate basis for allocating the
gain between depreciable and non-depreciable
asset. Instead, we find it fair and
reasonable to use book values, which are
used for determination of rate of return
and depreciation expense, to allocate gain
for the sale of property….
The Company proposed to amortize the
ratepayers' share of the gain over a five-
year period by reducing the revenue
requirement by 1/5th of the gain
attributable to the ratepayers over five
years. The Staff proposed to recapture
the gain which the ratepayers are entitled
by reducing the Company's rate base
attributable to the new headquarter by
the amount of the gain. We agree with the
Staff's approach. …We find that rate base
adjustment of the gain rather than
relatively quick amortization of the gain
over a five-year period is the proper way
to treat this item.

2. In Case No. IPC-E-93-24, Idaho Power Company
requested authority to offset the net gain from the sale of a gas turbine against the recent increase in its income tax rates. The recent increase in taxes was a result of the passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) by the United States Congress. The Staff recommended,
that Idaho Power be allowed to offset
its normalized incremental tax expense
associated with OBRA 93 on a prospective
basis from the date of the Commission's
final Order entered in this case with the
gain from the sale of the Hailey Turbine.
Using this method and the calculations
provided by Idaho Power in its filing,
Staff would anticipate that if the
Company's general rate case is filed when
expected, with new rates in effect by year
end 1994, approximately $1,200,000 of the
Hailey Turbine gain will remain for
disposition in the general rate case."

The Commission, in Order No. 25339 ordered, "that Idaho Power may offset OBRA 93 related tax increases against the gain from the sale of the Hailey Turbine for the entire year of 1993. The decision as to an offset for the 1994 increased tax expense will be made in the future, if presented to the Commission."
In Order No 25753, Case Nos. PPL-E-94-1 and
WWP-E-94-1 (the transfer to Water Power of Pacific Power's Bonner County, Idaho service territory and electrical distribution facilities) the Commission stated:
We find that the customers are entitled
to share in any gain attributable to the
sale of depreciable property. The
customers have paid rates based on a
revenue requirement that included the
assets to be transferred and therefore
have an equitable interest. …We find
it reasonable to distribute this amount
to Sandpoint District customers as a
final bill credit. The amount is to be
allocated among customer classes on the
basis of the most recent 12 months annual
kilowatt hour usage by class and is to be
shared equally by current customers within
each class.

In the Sale of the Exchanges from U S West
to the seven purchasers (Albion Telephone Company, Cambridge Telephone Company Inc., Midvale Telephone Exchange, Inc., Fremont Telcom Company, Silver Star Telephone Company, Rockland Telephone Company, Inc., and Project Mutual Telephone Cooperative Association, Inc.), the treatment of the gain was reached through a settlement stipulation and negotiation between the Commission Staff, U S West, and the purchasing companies. Order No. 26280 states:
Prior to the consolidated technical hearing
on the sales cases, the Commission Staff and
U S WEST entered into a settlement
stipulation “to compromise and resolve the
issue of the treatment of U S West's gain
on the sales transaction.” Staff Exhibit
No. 119. The Stipulation required U S WEST
to make a "special contribution" of
approximately $4.35 million to the Idaho
Universal Service Fund (USF). At the
hearing, Project Mutual and the other
purchasers suggested a different use for
the $4.35 million. Instead of depositing
this amount as a special contribution to the
Idaho USF, the purchasers suggested that
this amount be used to fund the replacement
of central office switches in the sales
exchanges including the existing remote
switch in Oakley.
In its Order approving the Oakley
exchange sale, the Commission adopted the
purchasers' alternative proposal for the
special contribution. The Commission found
that approval of this sale, [should be
conditioned upon the payment of $140,000
by U S WEST to Project Mutual to
replace the switch for the Oakley
exchange. This amount will be paid at
the time of closing. Because Project
Mutual will not have to pay income tax on
this contribution, the full amount may be
applied to the switch cost. This affords
ratepayers in the Oakley exchange a portion
of the gain through the contribution toward
the switch replacement cost. We believe
this is a fair, just, and reasonable
apportionment of the gain in the Oakley
exchange sale. Order No. 26198 at 11.]

In Order No. 26353, approving the sale of the exchanges to all parties except Project Mutual, which had already been approved in Order No. 26198, the Commission stated:
As we did in Order No. 26198, we find
it is fair and reasonable to adopt the
Purchasers' proposal, as amended for use
of a special contribution by U S WEST.
This resolution affords ratepayers in the
purchased exchanges a portion of the
purchase premium through the contribution
toward switch replacement costs. It is
also fair and reasonable to return funds
to the Revenue Sharing Plan for Tech II
improvements, and for U S WEST to make a
contribution to the Idaho Universal Service
Fund. This disposition of the contribution
by U S WEST spreads a benefit from the
sales to a significant number of ratepayers
in U S WEST's southern Idaho exchanges,
and materially improves the financial
aspects of the sales for the Purchasers.

A portion of the gain from the sale of the exchanges was used to update the switches in the exchanges that had been sold, and thus returned to the ratepayers. Some was also returned to the revenue sharing funds, and thus returned to the ratepayers, and some was put into the Idaho Universal Service Fund, thus benefiting ratepayers.
In Case No. IPC-E-93-20, Idaho Power Company
filed an Application for authority to sell electric distribution facilities located on Bald Mountain to Sinclair Oil Corporation, d.b.a. Sun Valley Company. This sale resulted in an accounting loss of $124,058. Idaho Power requested that the loss be absorbed in the accumulated reserve for depreciation account. This would be the conventional treatment of a gain or loss. Under this treatment, the reserve balance would be depleted and this in turn would cause an increase in the Company's rate base. The effect of the treatment would be to pass the loss onto the ratepayers. In the future, depreciation rates would also increase due to the loss. The Commission Staff recommended that the loss from the sale be placed "into a regulatory asset account to be amortized over a period of ten years. The unamortized balance of the loss would be excluded from rate base. The annual amortization expense would be included in revenue requirement." The Commission stated:
In Order No. 24676, Case No. IPC-E-92-9,
Idaho Power agreed to pass the gain from
the sale of its Hailey Turbine to its
ratepayers. It would be inconsistent
for us to now refuse to allocate the
loss from the sale of the Sun Valley
facilities to ratepayers.
We share Staff's concern, however, that
ratepayers should not be required to
continue to provide a return on assets no
longer owned by the Company. Staff's
proposal to place the loss from the sale
into a regulatory asset account to be
amortized over a period of ten years is a
reasonable one. Furthermore, Staff's
proposal to exclude the unamortized loss
from rate base and to include the
amortization expense in revenue
requirement would accomplish the
objectives of allowing the Company to
recover the loss from ratepayers but
not requiring ratepayers to continue
providing a return on assets that have
been sold. It is therefore ordered
that the net book loss from the sale
of the electrical distribution facilities
of $124,058, adjusted for income taxes,
will be placed in a regulatory asset
account to be amortized over ten years.
Amortization will commence January 1, 1994.
The annual amortization expense will be
included in the Company's revenue
requirement determinations.

Q. Have you examined the Company's calculation of the regulatory gain on the sale of the Centralia facility?
A. Yes. The Company has provided Staff with the workpapers and assumptions used in the calculation of the regulatory Gain for the Centralia facility. Staff has reviewed the supplied documents and agrees with the Company's calculation of the gain at this time. Because the sale has not been completed, the numbers are subject to change. At the time of the sale, Staff will audit and review the final sale numbers. The customer portion of the regulatory gain for Idaho, pending final sale, and as calculated by the Company and verified by Staff is $6,811,625.
Q. What method does the Company use to determine the customer portion of the gain?
A. The Company uses the depreciation approach to determine the customer portion of the gain. This approach uses the ratio of depreciated plant to total plant to determine the customer portion of the gain. The ratio of depreciated plant to total plant is applied to the total gain to determine the customer share of the gain.
Q. Mr. Dukich, in his testimony (page 3, line 10) states, "the Company believes there is still a rational and reasonable basis that would support a shareholder retention level above the depreciation based approach proposed by PacifiCorp." Why is the depreciation approach the proper approach for determining the customer portion of the gain on the sale of the Centralia facility?
A. The depreciation approach is the proper approach according to the Supreme Court of Idaho. The Supreme court of Idaho, in Boise Water Corporation v. Idaho Public Utilities Commission, 99 Idaho 158, 578 P.2d 1089 (1978), found that the ratepayers' payment of depreciation expense (on property other than real property) established a right to the gain on the sale of an asset. Not only was depreciation expense built into rates, but also maintenance expense; therefore the customers have borne the burden of the depreciation and maintenance expenses. Certainly there are risks associated with building a generation facility and initially shareholders bore those risks. However, those risks were lower for the Company and the shareholders, once the depreciation, operation and maintenance expenses were included in the Company's rates. The customers paid for and thus purchased a portion of the plant. Also, the Company was compensated for risk through the rate of return component included in rates.
Q. Has the Company proposed ratemaking treatment for the customer portion of the regulatory gain?
A. The Company is proposing that all the gain be assigned to shareholders. However, should the Commission allocate a portion of the gain to customers, then the Company proposes that the gain be used to:
offset costs related to storm damage
repair costs in Idaho resulting from the Ice Storm
in 1996;
offset the Idaho electric portion of the
remaining transition obligation for post- retirement health care and life insurance benefits;
offset the costs associated with the buy-
out of a PURPA contract; and
4. offset a portion of the cost of the initial payment to settle the Nez Perce lawsuit.
Q. Does Staff find the Company's proposal for the treatment of the Idaho jurisdictional regulatory customer portion of the gain on the sale of the Centralia facility acceptable?
A. No.
Q. Is it appropriate to use the gain on the sale of the Centralia facility to offset the unrecovered costs of the Ice Storm of 1996?
A. No. In the Company’s last general rate case, Avista was denied the opportunity to recover retroactively through rates, the Ice Storm costs. In Order No. 28097, the Commission stated, "When it became aware that the uninsured ice storm costs would be substantial, the Company had the opportunity to request rate relief or deferral of these costs for future recovery. It did neither." It is clear that since the Company, at the time of the Ice Storm, did not request rate relief or deferral of the Ice Storm costs for future recovery, it is not allowed to request recovery of those costs now, as the opportunity for requesting relief is past. It is clear that the Commission did not allow recovery of the Ice Storm costs through present rates, and did not intend for the Company to request relief at an even later time. If it was too late to request recovery at the time of the last general rate case, it is certainly too late now.
Q. What about the comparison the Company makes between the Ice Storm and the sale of the Centralia facility as both being unusual?
A. While it is true these events don't happen every day for Avista, it is not an unusual occurrence for electric companies to sell generating facilities. It may be prudent for a company to sell a generating facility and it is not unusual for utility companies to spin off their generating assets through a sale, and make a gain on that sale. Avista has control over what and when it will sell in regards to its generating facilities. Selling, building, or buying a generating facility is in the normal course of business for an electric utility, and therefore a usual event. An ice storm of the magnitude that happens only once every 115 years is an unusual event. The sale of Centralia is simply not an extraordinary and non-recurring type of event.
Q. Is it appropriate to offset the Idaho electric portion of the remaining transition obligation for post-retirement health care and life insurance benefits?
A. No, the proper time for that was established in Order No. 24673, Case Numbers WWP-E-92-5 and
WWP-G-92-2. In fact, the customers through current rates are already paying the remaining transition obligation for post-retirement health care and life insurance benefits. The transition amount is being amortized over a 20 year period, and the yearly amortization is already accounted for in current rates, so to offset these costs with the gain from the sale would mean that the customers would then be paying, through rates, what has already been recovered. The customers would, in effect, be paying for the transition obligation for post-retirement health care and life insurance benefits twice.
Is it appropriate to offset the gain with a
PURPA contract or the Nez Perce lawsuit?
No. These costs also are being amortized
over a period of years, and that amortization is already accounted for in current rates. Therefore, it makes no sense to offset these expenses against the gain from the sale. The customers are already paying these expenses, as the yearly amortization is already built into current rates. Approving an offset for these costs from the gain would allow over-recovery.
Q. Does Staff have a proposal for the treatment of the Idaho jurisdictional regulatory customer portion of the gain on the sale of the Centralia facility?
A. Yes. Staff proposes that the Idaho jurisdictional regulatory customer portion of the gain be credited to Accumulated Depreciation, thereby reducing rate base by the $6,811,625 gain amount. Staff also proposes that current rates be reduced to reflect the revenue requirement reduction associated with the lower rate base from the gain.
Q. Why should the gain be used to reduce rate base?
A. The gain should be used to reduce rate base because Centralia is rate based. Reducing rate base gives customers the full and immediate benefit of the gain in a simple and efficient manner.
Q. Please explain the benefits customers will receive from the gain?
A. Customers benefit from the reduced rate base and the associated revenue requirement reduction. Staff proposes that the reduced revenue requirement be immediately reflected in current rates. Therefore, customers will see benefits immediately.
Q. Have you calculated the reduction to Avista's revenue requirement as a result of reducing the rate base by the amount of the customer portion of the Idaho jurisdictional gain?
A. Yes. My calculations are shown in Exhibit 104. The existing revenue requirement, as well as the overall rate of return, the weighted return on equity, debt and preferred securities, are from Avista's last rate case, Case No. WWP-E-98-11.
Q. What is the total revenue requirement reduction associated with the rate base reduction from the gain on the sale?
A. The Total Revenue Requirement reduction, as shown on Line 16, Exhibit No. 104, is $1,031,784.
Q. How was this amount derived?
A. This amount is a composite of four pieces as shown on Exhibit No. 104. First, the net operating income requirement associated with the return on common equity (lines 4-5) and second, the net operating income requirement associated with the preferred securities (lines 6-7). Both equity components are grossed up for income taxes (lines 9-10). The third piece is the net operating income requirement associated with debt
(lines 11-12). The fourth piece is the depreciation expense associated with the rate base reduction from the gain on the sale (lines 14-15). The total revenue requirement reduction is $1,031,784 as shown on line 16. Staff witness Lobb discusses the rate design for the 0.551% decrease in revenue requirement as shown on line 18 of Exhibit No. 104.
Q. Does this conclude your testimony?
A. Yes, it does.

AVU-E-99-6 STOCKTON (Di) 1
12/02/99 STAFF

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25