20151005final_order_no_33391.pdf

Office of the Secretary
Service Date
October 5,2015
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER )
COMPANY’S APPLICATION FOR APPROVAL )CASE NO.IPC-E-15-17
OF LONG-TERM MAINTENANCE PROGRAM )
CONTRACT WITH SIEMENS ENERGY,SALE )
OF SPARE PARTS INVENTORY TO SIEMENS )ORDER NO.33391
ENERGY,AND DEFERRAL OF ASSOCIATED )
COSTS )
On June 5,2015,Idaho Power Company (the “Company”)applied to the Commission
for an Order approving the Company’s:(1)long-term program contract (the “Contract”)with
Siemens Energy under which Siemens agrees to maintain the Company’s three gas plants;(2)
sale and transfer to Siemens of $21.9 million in spare parts;and (3)proposed accounting
treatment for the transaction.The Company does not seek to change customer rates at this time.
On June 21,2015,the Commission issued a Notice of Application and a Notice of
Modified Procedure.The Commission invited interested persons to file written comments by
August 27,2015,and the Company to file a reply by September 3,2015.The Commission also
scheduled a September 9,2015 public hearing in accordance with Idaho Code §61-328
(governing the sale of utility property).See Order No.33340.
The Industrial Customers of Idaho Power (“ICIP”)intervened as a party.ICIP and
Commission Staff filed the only comments and supported the Company’s Application except for
the proposed accounting treatment.The Company then filed reply comments.The public
hearing was held,with the Company’s witnesses testifying in support of the Application.
Based on our review of the record,including the Application,the comments,and
testimony,we issue this Order granting the Company’s Application for approval of the proposed
Contract and sale of parts to Siemens Energy.We also approve a deferred accounting treatment
for the transaction as described in Section C,below.
APPLICATION
In its Application,the Company explains that it owns and operates three natural gas
plants in Idaho:the Danskin and Bennett Mountain single-cycle combustion turbine (SSCT)
plants near Mountain Home,and the Langley Gulch combined-cycle combustion turbine (CCCT)
plant near New Plymouth.The Company presently maintains these plants by contracting with
the plants’manufacturer,Siemens Energy,to service them on a case-by-case,as-needed basis.
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Under this approach,the Company buys parts from Siemens before a scheduled maintenance
outage,capitalizes the parts,and then uses them to replace old parts during the outage.The
Company then retires the old parts and sends them to Siemens to be inspected and repaired.
Once the old parts are repaired,Siemens returns them to the Company,and they are capitalized
as an “initial spare parts”inventory and kept ready for future use.The Company states that this
approach was the most cost-effective way to maintain its gas fleet until it added the Langley
Gulch CCCT plant.
With this Application,the Company proposes to address its new maintenance needs
by entering a long-term maintenance Contract with Siemens and selling its initial spare parts
inventory to Siemens.The Company also proposes an accounting treatment for the transaction.
The Company’s three proposals are summarized below.
A.Proposed Contract
With the addition of Langley Gulch,the Company believes its employees now lack
the skill to maintain the three gas plants at the same level of quality as could be provided by
Siemens.The Company thus proposes to replace the current,case-by-case maintenance
approach with a Contract in which Siemens agrees to provide scheduled maintenance on the
three gas plants,including parts and repairs,shipping,service,labor,engineering services,and
program management,for 20 years (20 years is the average length of the Contract;the actual
LTP length will differ for each plant based on its remaining life).The Company believes the
proposed Contract will lower overall costs to the Company and its customers by leveraging
Siemens’pool of inventory,outage resources,and technical expertise,and will save costs over
the life of the agreement when compared to the Company continuing to contract with Siemens
under the current case-by-case maintenance approach.
B.Proposed Sate of Spare Parts
The Company also proposes to sell and transfer $21.9 million of its “initial spare
parts”inventory to Siemens.The Company notes that the Contract price has been reduced to
reflect the net book value of the transferred parts inventory,and that Siemens would remove the
inventory once the Contract is approved.
Idaho Code §6 1-328 governs the Company’s proposal to sell and transfer its “initial
spare parts”inventory to Siemens.The statute provides,in summary,that an electric utility may
not dispose of its property unless authorized to do so by the Commission after a hearing in which
ORDER NO.33391
the Company establishes:(1)that the transaction is consistent with the public interest;(2)the
cost of and rates for supplying service will not be increased by reason of such transaction;and
(3)the purchaser has the bona fide intent and financial ability to operate and maintain said
property in the public service.The Company explains that its proposed spare parts transfer
meets these requirements by enabling the Company to return $21.9 million in parts to Siemens
that would otherwise have a limited market,and lowering overall costs for the Company and its
customers.further,the Company states that Siemens has a bona fide intent and financial ability
to operate and maintain the parts in the public interest.
C.Proposed Accounting Treatment
Lastly,the Company proposes an accounting treatment for the transaction.Under the
Company’s proposal,the Company would create a regulatory asset consisting of the:(a)deferred
initiation fees representing the Company’s prepayment for Siemens’services;and (b)transferred
parts’$21.9 million net book value (subject to true-up at closing)and associated tax expense
(about $1.8 million).The Company would amortize this regulatory asset on a straight-line basis
over the 20-year average length of the Contract.The Company also would earn a carrying
charge,at the Company’s last authorized rate of return,on the part of the regulatory asset balance
consisting of:(a)the initiation fee;and (b)$2.9 million of initial spare parts that are not yet
included in the Company’s authorized rate base and on which the Company is not yet earning a
return.
COMMENTS AND TESTIMONY
Commission Staff and ICIP filed the only comments in the case.The Company filed
a reply,and also expressed its position through testimony at the public hearing conducted
pursuant to Idaho Code §61-328.In summary,all parties concur that the Commission should
approve the Company’s proposed Contract and sale of spare parts to Siemens.But the parties
disagree on how the Company should account for the transaction.The parties’positions are
summarized by issue below.
A.Contract
Staff and ICIP agree with the Company that the Commission should approve the
Company’s Contract with Siemens.They note,in summary,that Langley Gulch is the
Company’s only CCCI,and with the addition of Langley the Company’s employees cannot
maintain the three gas plants as well as Siemens.Further,the Company reasonably analyzed
ORDER NO.33391 3
multiple maintenance proposals from other contractors,and fairly and accurately compared the
cost of self-maintaining the plants to the cost of contracting with Siemens to maintain them over
the long-term,before deciding to enter the Contract with Siemens.The parties concur that the
Company’s Contract will lower costs for the Company and its customers over the Contract’s life,
when compared to the Company’s current,self-maintenance approach.
Commission findings:Based upon our review of the record,we find that there is
no dispute on this issue,and that all parties recommend that the Contract be approved.We find
that the Contract will lower costs for the Company and its customers,and that the Contract is
fair,just,and reasonable and should be approved in the public interest.
B.Spare Parts Sate
Staff and ICIP agree with the Company that the Company’s proposal to sell and
transfer $21.9 million in “initial spare parts”to Siemens satisfies the three-part test in Idaho
Code §6 1-328.first,they note that the proposed transfer is in the public interest because it will
result in an overall cost savings and operational benefit to ratepayers.Second,because of the
expected cost savings,the transaction will not raise customer rates.Third,the parties believe
that Siemens,which is the original equipment manufacturer for the three plants and a leading
manufacturer in the industry,has the bona fide intent and financial ability to operate and
maintain the parts for use in the public interest.
Commission findings:Based on our review of the record,including the testimony
received at our public hearing,we approve the Company’s sale and transfer of $21.9 million in
spare parts to Siemens.We note that all parties concur on this issue,and find that this
transaction meets all of the requirements of Idaho Code §61-328.The sale of parts to Siemens
is in the public interest;it will not increase rates,and will enable Siemens to refurbish the parts
and better maintain the Company’s gas plants so the Company can provide safe and reliable
service to its customers.
C.Accounting Treatment
Commission Staff and ICIP dispute the Company’s proposed accounting treatment.
In summary,the Company proposes to defer to a regulatory asset account:(1)all of its initiation
fees under the Contract;and (2)the net book value and associated tax expense of the initial spare
parts being transferred to Siemens.The deferral would coincide with the Contract’s effective
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date,and would be amortized for recovery over the next 20 years.The Company proposes that
the regulatory asset earn a carrying charge at the Company’s existing rate of return.
With respect to this proposed accounting treatment,Staff and ICIP agree that the
Company should be allowed to create a regulatory asset.But Staff and/or ICIP disagree about
the:(1)extent to which the Company should defer its initiation fees into the regulatory asset;(2)
amortization period;and (3)carrying charge proposed for the regulatory asset.These three
issues are discussed below.
1.Deferral of Initiation fees.Staff disagrees with the Company’s proposal to defer
all of the initiation fees into a regulatory asset.Staff notes that the Company has historically
booked gas plant maintenance by capitalizing about 89%and expensing about 11%as O&M
expense.Staff believes that because the initiation fees essentially are prepayments towards
Siemens’future maintenance services,the Company should continue to account for gas plant
maintenance by capitalizing 89%of the initiation fees and deferring only that 89%into the
regulatory asset account.
In its reply,the Company explains that it must pay the initiation fees upfront.If
implemented,Staff’s proposal that the Company expense 11%of the initiation fees would
require shareholders to pay now for work that Siemens will perform in the future,and for cost
savings benefits that customers will receive in the future.The Company argues that this creates
a mismatch of costs and benefits and precludes it from earning a return on the expensed portion
of its investment.The Company thus urges the Commission to limit financial harm,and better
align expenses with work performed,by authorizing the Company to capitalize and defer all of
the initiation fees to a regulatory asset,not just 89%as recommended by Staff.
Commission Findings:The issue is whether we should allow the Company to defer
all or just 89%of its contractual initiation fees to a regulatory asset.We find merit to both the
Company’s and Staff’s arguments.The parties agree the initiation fees are prepayments towards
future maintenance services and repairs.As such,the initiation fees act as an insurance policy
that ultimately benefits the Company and customers.In this instance,we find it reasonable to
authorize the Company to defer 100%of the initiation fees in the regulatory asset.Our findings
on this issue,along with our findings on the amortization period and carrying charges issues
discussed below,form the overall accounting and regulatory treatment that we find to be
reasonable and authorize in this Order.
ORDER NO.33391 5
2.Amortization Period.Staff also disagrees with the Company’s proposal to
amortize the regulatory asset over the average,20-year life of the Contract.With respect to the
initiation fees,Staff recommended the Company defer and amortize the regulatory asset over the
remaining life of each gas plant,because the Contract expires at different times for each plant
based on each plant’s remaining life (18-22 years,as estimated by the Company).With respect
to the net book value of the “initial spare parts,”and the associated tax expense,Staff
recommended the Company defer and amortize the regulatory asset for the same period over
which the Company currently depreciates the associated plant.Although the parts are “shorter-
lived assets,”Staff believes maintaining the current recovery period will minimize any shift in
cost or faster recovery.
In its reply,the Company states that it believes its 20-year amortization proposal is
appropriate,but that it nevertheless can accept Staff’s proposal to match the amortization period
to the remaining life of the associated plant.
Commission findings:We find that amortization over the remaining life of each
asset aligns with the recovery that would have occurred absent the Siemens contract.Therefore,
we find it fair,just,and reasonable to authorize the Company to amortize the regulatory asset
over the remaining life of each asset.The Contract should not result in an amortization period
that differs from the depreciation rate for the associated gas plants currently included in rates.
3.Carrying Charge.The Company requests a carrying charge on the regulatory asset
balance consisting of the initiation fees and $2.9 million of the initial spare parts plus the
associated net tax expenses that are not currently included in the Company’s authorized rate base
and not earning a return.ICW and Staff disagree with the Company that it should earn a return
or carrying charge on the regulatory asset.
ICIP supports putting the value of the spare parts into a regulatory asset.But ICIP
argues it is inappropriate for the Company to earn a return of and on an expense that is
essentially the Company’s maintenance expense.ICIP maintains that the Company should only
receive relief for the regulatory asset when the Company files its next rate case.
Staff similarly argues that the Company should not earn a return on the parts until the
Company places them in service,transfers them out of the regulatory asset,and applies to
include them in rate base in the next general rate case.In particular,Staff notes that the
Company will no longer possess the initial spare parts once the Company transfers them to
ORDER NO.33391 6
Siemens,and that the $2.9 million not included in rate base will not be “used and useful.”Staff
thus asserts that the Company should accrue no more benefit from the initial spare parts than
amortization without a carrying charge and future rate recovery.
While ICIP and Staff believe the Company should not accrue a carrying charge on the
regulatory asset,they offer alternatives in case the Commission believes some return should
accrue.ICW,for instance,suggests that the Commission might allow a carrying charge that is
less than a full rate of return.ICIP notes the Contract reduces the Company’s risk in maintaining
the gas plants over the next 20 years;Siemens provides warranties and guaranties and the
Company will no longer carry spare parts that may lose value or become obsolete.ICW thus
suggests a carrying charge at the Company’s cost of debt,about 5.2%,to enable ratepayers to
share in the savings along with the Company.
Staff notes,on the other hand,that even if the Commission were to allow a carrying
charge on the regulatory asset,Staff’s view (as described above)is that 89%of the initiation fees
would be the most that should be capitalized on the effective date of the Contract,and the
remaining 11%should be expensed.Staff thus suggests that,if a carrying charge is allowed,it
should not take effect until 2016 when the first scheduled maintenance outage for the plants
occurs and the initiation fees are used toward milestone payments (i.e.,toward large payments
due at or near actual outage events)and other maintenance that contributes to the delivery of
services to customers.
In reply to ICW’s and Staff’s arguments against a carrying charge,the Company
reiterates that it should have an opportunity to earn a return on its entire regulatory asset,and that
any other treatment of the initial spare parts’net book value contradicts how they are treated
today.The Company stresses that the initial spare parts are already in service and “used and
useful.”And,consistent with other spare parts inventory,the initial spare parts receive rate base
treatment while in inventory as spare parts,and not just when they are installed in generating
units.The Company notes that when it transfers the initial spare parts to Siemens under the
Contract,Siemens will ensure those parts are available and stand ready for the Company when
the need arises.Accordingly,the initial spare parts should continue to receive the same
regulatory treatment when they are transferred to Siemens.The Company predicts that a
contrary decision by the Commission will create a financial disincentive for the Company to look
for opportunities to manage its costs over the long-term.
ORDER NO.33391 7
The Company also disagrees with Staff’s alternate proposal that the Commission not
allow a carrying charge until 2016,when the first scheduled maintenance outage occurs and the
Company’s initiation fees apply to milestone payments and maintenance that help the Company
serve its customers.The Company notes that Siemens also will perform unscheduled
maintenance that does not depend on payments made by the Company.Accordingly,these
maintenance activities should not be tied to the initial spare parts’current rate base treatment.
Lastly,the Company requests that,if the Commission decides against a carrying
charge on the regulatory asset,the Commission should assess the prudence of these investments
now,and find that,in the next general rate case,the Company will be allowed to include the
entire regulatory asset in rate base and earn a return on that asset’s unamortized balance.
Commission findings:We find merit to various positions presented by each of the
parties associated with the carrying charge issue.We typically do not authorize a return on
regulatory assets.But currently,the spare parts inventory included in the last general rate case
earns a return.These are two opposing viewpoints.The initiation fee is not the Company’s only
payment to Siemens under Contract Article 3.We expect the Company will appropriately
record,and capitalize or expense,the payments for maintenance and repairs not covered by the
initiation fees.The potential timing of payments reinforces Staff’s position that a return not be
effective before 2016 when the first scheduled maintenance outage occurs.ICIP,too,correctly
observes that the Contract reduces the Company’s risk in maintaining the gas plants over the
next 20 years;Siemens provides warranties and guarantees and the Company will no longer
carry spare parts that may lose value or become obsolete.
We desire a fairly straightforward method that balances and recognizes the situation
as described above.We thus find it fair,just and reasonable to direct the Company to establish at
least two regulatory assets:(1)one to initially cover the initial spare parts currently in rate base
with a subaccount with “Rate Based”in the title;and (2)the other to include the initiation fees,
and the $2.9 million in initial spare parts that currently are not in the Company’s authorized rate
base and do not earn a return and the associated net tax expense.Both regulatory assets will be
amortized over the life of the plant as discussed above.The first regulatory asset will continue to
be in rate base and earn a return like the current treatment.This treatment will be consistent with
current recovery,and will not shift costs to customers prematurely.The second regulatory asset
will not earn a return.Instead,the Company will move the unamortized amount to the first
ORDER NO.33391 8
regulatory asset in equal installments over ten years,with the first transfer made at the end of
2016.Once transferred to the first regulatory asset,the unamortized portion will be included in
rate base in the next general rate case.
DISCUSSION AND ULTIMATE FINDINGS
The Company is an electrical corporation and a public utility,and the Commission
has jurisdiction over it and the issues in this case under Title 61 of the Idaho Code and the
Commission’s Rules of Procedure,IDAPA 3 1.01.01.000,et seq.Based on our review of the
Application,the comments and reply,and the testimony received at the public hearing,we find it
fair,just,and reasonable to approve the Company’s proposed Contract,and sale and transfer to
Siemens of $21.9 million in spare parts.We find that this transaction meets all of the
requirements of Idaho Code §6 1-328.We also find it fair,just,and reasonable to approve the
accounting treatment for the transaction as more particularly described in our findings from
Section C,above.
ORDER
IT IS HEREBY ORDERED that the Company’s Contract with Siemens is approved.
IT IS FURTHER ORDERED that the Company’s sale and transfer to Siemens of
$21.9 million in spare parts,as described in the Application,is approved.
IT IS FURTHER ORDERED that the Company shall employ deferred accounting for
the transaction,in separate regulatory asset subaccounts,on the conditions described in our
findings as expressed in Section C,above.
THIS IS A FINAL ORDER.Any person interested in this Order (or in issues finally
decided by this Order)or in interlocutory Orders previously issued in this case 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.Within
seven (7)days after any person has petitioned for reconsideration,any other person may cross
petition for reconsideration.See Idaho Code §6 1-626.
ORDERNO.33391 9
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of October 2015.
PAUL KJELLANDER,PRESIDENT
1(a%%d&tJ
MARSHA H.SMITH,COMMISSIONER
KR TINE RAPER,CMMISSIONER
ATTEST:
Jn D.Jewell
Cx5mmission Secretary
O:IPC-E-15-1 7_kk2
ORDER NO.33391 10