20020730Decision Memo.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
BILL EASTLAKE
LOU ANN WESTERFIELD
RANDY LOBB
DON HOWELL
ALDEN HOLM
TERRI CARLOCK
TONYA CLARK
BEV BARKER
GENE FADNESS
WORKING FILE

FROM: LISA NORDSTROM

DATE: JULY 30, 2002

RE: 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.

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 authorized this filing to be processed under 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.
Since the Commission determined that the facilities charge should be treated for revenue requirement purposes in a manner similar to that afforded capital investments, Idaho Power requests that the facilities charge expenditures be treated in the same manner as other expenditures which have been deferred by the Commission until the Company’s next revenue requirement case. Application at 2.
Idaho Power proposes accounting and ratemaking treatment for annual billings of facility charges associated with the Company’s Danskin generation facility. Specifically, the Company would 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, focused on two issues: 1) the findings of the Commission when it set forth the issues associated with the facility charge and 2) the proper accounting treatment of that charge.
Commission Findings
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). The Company requests that the $419,054 not allowed in the PCA case be captured as a regulatory asset and any unamortized amount recovered in the next rate case. However, Staff noted that 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. Accordingly, 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.
Proper Accounting Treatment of the Facility Charge
Staff believes 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. Because the gas plant has a projected life of 30 years, 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 qualify 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.
The facility charge includes the amount to be amortized and an interest/expense component that should be expensed like all other expenses. Staff argued that if the capital lease asset is allowed in ratebase as proposed by the Company, Idaho Power will 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.
As an alternative to the preferred FASB guidelines cited above, Staff state it would accept another accounting treatment. The Company could continue to expense 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 and that the balance sheet would not show an asset (owned by Williams but reflected as a capital lease for Idaho Power) offset with a corresponding liability. Id.
In short, Staff believes the Company’s proposal is simply an attempt to recover additional expenses that were not allowed as a PCA expense. Id.at 4. Until the next rate case, Staff insists that these facility charges should be properly recorded as a capital lease or an operating expense not included in rates. Id.
Staff Recommendations
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 that it requested 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 the 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 charges 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 disagreed with “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” and stated that it is “not valid or reasonable.” Id. at 3. Idaho Power noted 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. The Company further stated that it is undisputed that the cost of fuel and its transportation includes the facilities charge Idaho Power is paying on the metering facilities and pipeline tap that is required in order for gas to be transported and delivered to the Mountain Home facility. Although the Commission in its judgment disallowed those costs for inclusion in the PCA, Idaho Power argued “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 charge 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 DECISION
Does the Commission wish to approve Idaho Power’s request for a deferred accounting order?

Lisa D. Nordstrom

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DECISION MEMORANDUM 1