HomeMy WebLinkAbout29100.docBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AN ACCOUNTING ORDER AUTHORIZING DEFERRAL OF FACILITY CHARGES RELATING TO THE MOUNTAIN HOME NATURAL GAS FACILITY. )
)
)
)
)
)
CASE NO. IPC-E-02-7
ORDER NO. 29100
On June 3, 2002, Idaho Power Company applied for an accounting order authorizing Idaho Power to defer facility charges relating to the Mountain Home natural gas facility. On May 13, 2002, the Commission disallowed recovery of the Williams Facility Charge Adjustment as a Purchase Cost Adjustment (PCA) expense in Case Nos. IPC-E-02-2 and –3. Order No. 29026. On June 21, 2002, the Commission issued the Notice of Application and Notice of Modified Procedure and established a written comment deadline. Order No. 29060. Commission Staff was the only party to file comments, to which Idaho Power responded on July 22, 2002.
BACKGROUND
On May 13, 2002, the Commission disallowed recovery of the Williams Facility Charge Adjustment as a PCA expense in Case Nos. IPC-E-02-2 and –3. Order No. 29026. In relevant part, the Commission stated:
4. Williams Facility Charge Adjustment. Williams Gas Pipeline West (Williams) charged Idaho Power the first annual billing for payment of $419,054 to install a meter station, control equipment, and a 4,200 foot pipeline from the mainline to Idaho Power’s Mountain Home natural gas facility. A fluctuating annual facility charge will pay for these items over the next 30 years. Staff argued that this charge is more like a capital cost than an annual gas delivery expense. Thus, it would be more appropriate to seek recovery of this amount as a capital asset cost in ratebase than to be recovered through the PCA. Tr. at 427-28. The Company indicated that because it is booked to a PCA-appropriate account, is fuel-related, and varies year to year, the facilities charge is appropriate for inclusion in the PCA. Tr. at 561.
Commission Findings. The Commission finds that although the facilities charge is not a capital expense per se, it has many of the characteristics of a capital expense normally recovered as an asset in rate base. The charge pays for plant investment over time and includes expenses related to depreciation, interest, a return and maintenance on the plant investment. Although this charge enables Idaho Power to buy fuel from Williams, the repayment structure over 30 years is typical of a capital investment. Thus, the facilities charge should be considered for recovery in Idaho Power’s next rate case – not in this PCA case. The $419,054 shall not be recovered through the PCA.
Order No. 29026 at 12.
Idaho Power’s Application proposed accounting and ratemaking treatment for the annual billings of facility charges associated with the Company’s Danskin generation facility. Specifically, the Company wished to defer with interest the Williams facility charges incurred during the years 2001 and 2002 to install equipment and pipeline to the Mountain Home natural gas facility to Account 182.3 (Regulatory Assets). This amount would be amortized as a non-PCA related cost over a 10-year period commencing January 2003. The facility charges incurred by the Company for the year 2003 would be amortized over a 10-year period commencing January 2004. At the next general rate case, the Company’s facilities charge incurred in the future would be treated in the same manner as depreciation, i.e., the average annual amount of the facilities charge would be a non-PCA expense during the operating life the of the Danskin generation facility. Application at 3.
STAFF COMMENTS
Staff comments, filed on July 11, 2002, first pointed out that the Commission found “the facilities charge should be considered for recovery in Idaho Power’s next rate case – not in this PCA case. The $419,054 shall not be recovered through the PCA.” Order No. 29026 at 12 (emphasis added by Staff Comments). Staff thus argued the Commission did not find that the $419,054 expense incurred in 2001 should be recovered in the next rate case. Staff Comments at 2. Instead, Staff believes the Commission found only that the facility charge was the type of charge to be considered as a test-year expense in a rate case and should be reviewed at that time. Id.
Second, Staff maintained that the facility charge arrangement has many of the characteristics of a capital lease even though it is not specifically called a “capital lease.” Id. According to the Financial Accounting Standards Board (FASB) Statement No. 13, a payment arrangement must meet at least one of four requirements to be considered a capital lease. Staff asserted that the Idaho Power/Williams arrangement meets two. Id. at 3. First, facility payments will be paid over the life of the pipeline. The gas plant has a projected life of 30 years and the pipeline lease is for 30 years. Once the plant ceases functioning, the pipeline will be of no value. Second, the net present value of the payments is more than 90% of the value of the pipeline. Staff believes that either of those characteristics qualifies the pipeline payment arrangement to be treated as a capital lease. Id.
According to Staff, the accounting profession has a specific method to account for capital leases. FASB Statement No. 13 as Amended states that a capital lease should be accounted for in the following manner:
The Company records an asset equal to the lower of the fair market value of the leased property (approximately $1.9 million) or the sum of the present value of all the payments.
The Company establishes a liability equal to the asset.
The asset is amortized over the life of the lease down to the residual value as the portion of the annual payment that pays for the capital costs reduces the value of the asset and the liability.
The remaining portion of the payment should be expensed just as the depreciation, maintenance and other charges reimbursed to Williams through the facility charges would have been expensed if Idaho Power had built the pipeline.
Id. Staff further explained that the facility charge includes the amount to be amortized and an interest/expense component that should be expensed like all other expenses. If the capital lease asset is allowed in rate base as proposed by Staff, Idaho Power would earn a return on the unamortized portion of the pipeline asset while also recovering interest and amortization charges paid to Williams in rates (after the amount has been approved by the Commission in a general rate case.) Id.
Another accounting treatment acceptable to Staff would be for the Company to continue expensing the facility charge as it occurs and in the next rate case propose to recover the average annual amount of the charge as a non-PCA expense. Id. This expense would be included in base rates during the operating life of the Mountain Home generation facility and adjusted, as needed in future rate cases. Staff suggested that this alternative would impact the income statement only; the balance sheet would not show an asset offset with a corresponding liability. Id.
Accordingly, Staff recommended that the Commission not allow the Company to defer the facility charge as a regulatory asset because such a treatment “is not consistent with past Commission actions or proper regulatory accounting practices.” Id. Staff insisted that the facility charge is a normal operating expense or a capital lease that should be considered in the Company’s next rate case. However, if the Commission does allow Idaho Power to classify the facility charge as a regulatory asset, Staff recommended the Commission order the Company to begin amortization over the 10-year period beginning immediately after the expense occurs, not a year or more later. Id. If the deferral and amortization are approved, Staff stated that the Company would recover at least a portion of actual expenses that the Commission currently does not allow the Company to recover at all. Id. It is Staff’s belief that the recovery of these costs and the resulting associated earnings will sufficiently compensate the Company without authorizing interest as well. Therefore, any deferral allowed should not accrue interest charges. Id.
IDAHO POWER REPLY COMMENTS
In its reply comments filed on July 22, 2002, Idaho Power argued that it should be permitted to defer with interest the 2001 and 2002 facilities charge as a regulatory asset because the year 2001 had expired and by the time an order is issued in this proceeding, it would be the latter part of 2002. Reply Comments at 5. If the Company amortized the 2001-2002 expenses over a 10-year period commencing January 1, 2003 as a non-PCA related cost as proposed, the facilities charge expenditures incurred prior to the next revenue requirement case would be deferred with the amortization of the expenses commencing January 1 of the following year. Id. According to Idaho Power, this would have “the effect of levelizing the expenditures and allows the Company to recover the unamortized portion of the expenditures over a period of time.” Id.
Idaho Power found “Staff’s interpretation that the Commission’s Order denying recovery of the facilities charge as a PCA recovery was a determination that the Company should absorb the facilities charge as an expense until the next general requirement proceeding to be unreasonable.” Id. at 3. Idaho Power stated that the Order authorizing the Mountain Home Project issued in Case No. IPC-E-01-12 approved inclusion of the Mountain Home Station’s cost of fuel and fuel transport for recovery through the PCA mechanism. Id. Although the Commission in its judgment disallowed those costs for inclusion in the PCA, Idaho Power argued that “the Commission did not rule that those costs should be absorbed by Idaho Power and not recovered as a reasonable and legitimate cost.” Id. at 4 (emphasis in Reply Comments).
According to the Company, Staff’s proposal would force Idaho Power to absorb the facilities charge – a required expense to provide for the transportation/delivery of fuel - as an expense to the Mountain Home facility. Idaho Power finds this “tantamount to disallowing the facilities charge as a recoverable expense until the new revenue requirement case.” Id. Instead, the Company stated that deferring the recovery of this expense until the next revenue requirement case accomplishes the Commission’s desire without placing the cost burden solely on Idaho Power. Id.
Under its own interpretation of accounting principles, Idaho Power disagreed with Staff’s attempt to compare the facilities charge arrangement to a capital lease. The Company argued that the facilities charge is a charge by the pipeline company to Idaho Power, much like the facilities charges that Idaho Power imposes on its customers when special facilities are required. Id. The underlying agreement between the pipeline company and Idaho Power is for services and does not transfer the right to use the property, plant or equipment. In short, the special facilities charge is merely a charge imposed on a customer (Idaho Power) for services requested by the customer and provided by the utility (the pipeline company). Thus, Idaho Power argued that this arrangement is not a capital lease but a contract for services. Id. at 5.
In sum, Idaho Power believes Staff’s recommendation is unfair in that the Company would be forced to absorb the facilities charge as a fuel delivery/transportation expense without the recovery it believes was previously authorized in Order No. 29026. Id.
COMMISSION FINDINGS
Having reviewed the comments in this matter, we find it is reasonable to deny the Company’s request for the reasons set forth below.
While Order No. 28773 in Case No. IPC-E-01-12 approved inclusion of the Mountain Home plant’s cost of fuel, fuel storage and fuel transport in the PCA mechanism, it did not authorize the $419,054 annual facility charge for plant investment to be passed through the PCA as well. The variable cost of fuel transportation (i.e., the right to use the pipeline) is a charge separately recovered in the PCA based on a tariff rate set by the Federal Energy Regulatory Commission (FERC); it is not included in the $419,054 facility charge that reimburses Williams for installing the physical pipe and facilities.
The Company argues that the facility charge paid to Williams is merely a charge for a service presently provided to Idaho Power. However, this argument ignores the fact that the “service charge” actually pays for capital plant rather than the cost of transportation capacity to move the gas.
As we previously indicated in Order No. 29026, the facilities charge has many of the characteristics of a capital expense normally recovered as an asset in rate base. Capital expenditures and associated expenses that do not vary with plant output are properly recovered in base rates following a rate case. Had Idaho Power installed a meter station, control equipment and the 4,200 foot pipeline from the Williams mainline to the Danskin facility on its own rather than entering into this contract with Williams, the costs comprising the “facility charge” would have been captured as plant investment and related operating expenses. These costs would not be subject to recovery prior to rates becoming effective following a rate case. The PCA was intended to allow utilities to timely recover variable power supply costs, not immediately recover usage costs or rental of capital facilities in an effort to avoid building plant infrastructure that would otherwise be recovered in a rate case at a later date.
The Commission has no preference as to whether Idaho Power constructs prudent plant investment itself or contracts with a third party like Williams to install the necessary equipment. Therefore, the applicable accounting treatment should be indifferent as well. To avoid offering utilities an incentive to deviate from normal accounting and ratemaking procedures by deferring plant investment for recovery through the use of a third-party contractor, the Commission finds that past and future Williams facilities charges shall not be deferred for recovery.
O R D E R
IT IS HEREBY ORDERED that Idaho Power Company’s Application for an accounting order authorizing Idaho Power to defer facility charges relating to the Mountain Home natural gas facility is denied as set forth above.
THIS IS A FINAL ORDER. Any person interested in this Order or in interlocutory Orders previously issued in this Case No. IPC-E-02-7 may petition for reconsideration within twenty-one (21) days of the service date of this Order with regard to any matter decided in this Order or in interlocutory Orders previously issued in this Case No. IPC-E-02-7. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61 626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of September 2002.
PAUL KJELLANDER, PRESIDENT
MARSHA H. SMITH, COMMISSIONER
DENNIS S. HANSEN, COMMISSIONER
ATTEST:
Jean D. Jewell
Commission Secretary
O:IPCE0207_ln2
ORDER NO. 29100 1
Office of the Secretary
Service Date
September 10, 2002