20160126Comments.pdf

DAPHNE HUANG RECEIVED
DEPUTY ATTORNEY GENERAL
IDAHo puBLIC uTILITIES coMMISSIoN 2015 JAH 26 Pt{ h: 30
PO BOX 83720 h. rni ,A
BorsE, rDAHo s3720-0074 ,,,'t"?.f$'Ci',fihi8r'o*[phone]
IDAHO BAR NO. 8370
Street Address for Express Mail:
472 W . WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
rN THE MATTER OF rDAHO POWER )coMpANy,s APPLICATION TO APPROVE ) CASE NO. IPC-E-15-26
THE TRANSFER AND SALE OF CERTAIN )
ASSETS TO THE UNITED STATES ) COivtMENTS oF THE
DEPARTMENT OF JUSTICE, FEDERAL ) COTvTMISSION STAFF
BUREAU OF INVESTIGATION. )
The Staff of the Idaho Public Utilities Commission, by and through its attorney of record,
Daphne Huang, Deputy Attorney General, submits the following comments in this case.
BACKGROUND
Idaho Power ("Idaho Power" or "Company") provides electric service to a United States
Department of Justice Federal Bureau of Investigation (FBI) facility in the Company's service
territory pursuant to Idaho Power's Tariff Schedule l9 (Large Power Service). Idaho Power owns
and operates transformers and other facilities (hereafter, "Assets") on the FBI's side of the Point of
Delivery (POD), to meet the FBI's electric service requirement under Idaho Power's Rule M
addressing Facilities Charge Service. The FBI pays a monthly facilities charge to Idaho Power for
this service.
On November 25,20l5,Idaho Power filed an Application with the Commission for an
Order approving the transfer and sale of the Assets to the FBL AT the FBI's request, Idaho Power
STAFF COMMENTS JANUARY 26,2016
entered into an Asset Sale Agreement to transfer and convey the Assets to the FBI for a purchase
price of $79,3731. Under this Agreement, the FBI agrees to obtain title to the Assets, and assume
ownership, operation, maintenance, and all liabilities associated with them. The FBI will own all
facilities installed beyond the POD upon sale and transfer of the Assets. The Agreement is
contingent upon the Commission's approval.
STAFF ANALYSIS
The Commission has authority to approve or reject the proposed Agreement under ldaho
Code $ 61-328. Also, all sales of facilities must be approved by the Commission under Section 3
of Idaho Power's Rule M, the tariff that governs the sale of Company-owned facilities beyond the
POD. Section 3 of Idaho Power's Rule M requires:
l. Compliance with ldaho Code $ 6l-328;
2. No mixed ownership of facilities. A customer purchasing Company-owned facilities
installed beyond the POD must purchase all facilities listed on the Distribution
Facilities Investment Report for that location;
3. The customer must provide the operation and maintenance of all facilities installed
beyond the POD after the sale is complete; and
4. The customer must prepay engineering costs for sales determinations taking more than
16 estimated hours of preparation. Sales determinations equal to or less than 16
estimated hours of preparation will be billed to the customer as part of the sales
agreement, or after engineering work is completed in instances where the sale is not
finalized.
Under ldaho Code $ 6l-328, the sale of Assets must meet the following criteria:
l. The proposed transaction must be consistent with the public interest;
2. The cost and rates for supplying service must not be increased because of the
transaction; and
3. The FBI must have the bona fide intent and financial ability to operate and maintain the
Assets in the public service.
' ldaho Power claims portions of the Agreement are confidential and submitted a redacted copy of the Agreement as
an attachment to its Application. See Rule 67, IDAPA 31.01.01.067.
STAFF COMMENTS 2 JANUARY 26,2016
In examining Idaho Power's proposed transaction with the FBI, Staff notes that its
assessment here is specific to this case. Analyses of such transactions under Idaho Power's Rule
M and ldaho Code $ 6l-328 depend on their unique circumstances. Staffls comments are not
intended as a generic endorsement of Idaho Power's transfer and sale agreements or the
methodologies used therein.
As to Rule M, the Company maintains there will be no mixed ownership of facilities, that
the Agreement requires the FBI to provide operation and maintenance of all facilities beyond the
POD after the sale is complete, and that the FBI will prepay engineering costs as required in
accordance with Rule M. Staff accepts the Company's assurances.
The Company also asserts the transaction satisfies the requirements of ldaho Code $ 61-
328. Idaho Power states that, because the Assets only serve the FBI, the Asset sale will not affect
the deliverability and reliability of electric service to other customers and is thus consistent with
the public interest. Under the Agreement, the Company will install a system protection package
prior to the FBI's POD. The costs of this system protection package are not included in the Asset
purchase price of $79,373, but are separately billed to, and paid by, the FBI. See Agreement at 3.
According to the Company, the Assets are all located beyond the FBI's POD and their sole
purpose is meeting the FBI's service requirements. Staff agrees that the Asset sale will not affect
the delivery and reliability of electric service to other customers.
Also, the Company notes that the FBI has agreed it has the bona fide intent and financial
ability to operate and maintain the Assets backed by the United States government. Staff believes
that this acknowledgement satisfies the statutory requirement regarding the FBI's intent and
ability to operate and maintain the Assets. The remaining requirement under ldaho Code $ 6l-328
is that the transaction must not increase the cost and rates for supplying service.
Analysis of Sales Price Methodology
Idaho Power states that its sales price methodology in this case ensures that the transaction
will not negatively impact the Company or its other customers. In its Application, the Company
describes its five-component methodology for establishing the sale price for the Assets. These
components and the amounts associated with each are listed below:
STAFF COMMENTS JANUARY 26,2016
Net Book Value
True-up of Past Levelized Rate of Return
Near Term Rate of Return Impact Resulting from Sale of Assets
Near Term Operational Impact Resulting from Sales of Assets
Net Tax Gross-up
Subtotal
Work Order Closing Costs
Total
$20,681
$11,955
s7,428
$14,776
$24,053
$78,893
$480
$?e3?3
The Company's treatment of each of these components relies on an approach used to
compute the Rule M monthly Facilities Charge Rate, which was established as part of the
Company's last general rate case and approved in Commission Order Nos. 32426 and3248l. This
approach allows the Company to recover its authorizedrate of return, book depreciation, operation
and maintenance expenses, administrative and general expenses, income taxes, property taxes,
regulatory fees, working capital, and insurance by means of a flat monthly Facilities Charge equal
to 1 .4lYo of the original costs of Company-owned equipment installed. The approach established
a f,rxed, 31-year depreciation life for all Schedule l9 assets subject to the monthly Facilities
Charge. After 31 years, the monthly Facilities Charge rate decreases to 0.59% because the
Company is not authorized to recover either depreciation or a rate of return on fully depreciated
capital assets.
Net Book Value
The Assets include facilities installed between 1974 and2005. The Company has
determined the net book value for each of these assets as original investment cost less accumulated
3 1-year straight line depreciation. Staff agrees with the Company's method for computing net
book value, and believes its inclusion in the sales price to be appropriate.
True-up of Past Levelized Rate of Return
Depreciation causes the net book value of assets, the authorized return on those assets, and
associated income taxes to decrease continuously over 31 years. In order to avoid the need for
imposing an annually decreasing Facilities Charge, the l.4lYo Rule M flat rate charge is computed
to include a "levelized," time-value equivalent for these revenue requirement components. This
allows a single FBI facilities charge over the life of the equipment even though net book value
STAFF COMMENTS JANUARY 26,2016
decreases over time. Under the resulting levelized payment schedule, facilities charge customers
effectively underpay the Company for the first l0 years of an asset's life, but then overpay for the
remaining period, so the Company fully recovers its revenue requirement over the asset's
depreciable life. Thus, a customer who purchases a facility from the Company before it is fully
depreciated still owes the Company a "true-up" for the difference between the Company's
authorized rate of return and the levelized rate recovered in the monthly Facilities Charge. Staff
believes that the true-up and the Company's methodology for computing this component are
appropriate.
Near-term Rate of Return Impact Resultine from the Sale of Assets
Idaho Power states that when a customer buys an asset subject to the Facilities Charge, the
return that the Company would have earned through the Facilities Charge is foregone, that the
Company has limited opportunity to re-invest those funds in other assets, and that the Company
will not be able to eam its authorized rate of return until an alternate investment is recognized in a
future rate case. To offset this loss, the Company has included the present value of three years of
the levelized rate of return component of the Rule M Facilities Charge. The Company chose three
years based on its estimate of average intervals between general rate cases.
Staff agrees that the Asset sale could result in lost return until an alternate investment is
made and recognized in a future general rate case. Staff believes that this revenue loss could be a
disincentive for the Company to sell its facilities to the FBI and other similarly situated customers.
Consequently, Staff maintains that it is reasonable to include a revenue loss component in the
asset evaluation methodology. Staff believes that inclusion of the near-term rate of return impact
in the Asset sales price does not violate the requirements of ldaho Code $ 6l-328.
Near-term Operational Impact Resulting from Sale of Assets
A portion of the monthly Facilities Charge paid by the FBI is intended to recover costs
associated with Operations & Maintenance ("O&M") and Administrative & General ("A&G")
expenses. After the sale, the Company will no longer receive this revenue.
Idaho Power's pricing methodology includes three years of monthly Facilities Charge
components related to O&M and A&G in order to offset the foregone revenue associated with
costs related to regulatory fees, O&M, A&G, and working capital incurred on behalf of the
facilities being purchased by the FBI. The Company explains that during a general rate case, the
STAFF COMMENTS JANUARY 26,2016
revenue requirement for the Schedule l9 customer class includes a revenue credit, or reduction,
equal to the amount of facilities charge revenue to be collected from Schedule 19 customers.
Because the Company will not have an opportunity to recalculate the revenue requirement and
reset rates until the next general rate case, it believes there will be a near-term operational impact
resulting from the sale.
Staff believes that once the facilities are sold, Idaho Power will no longer be responsible
for any associated O&M or A&G expenses or working capital. Once the O&M and A&G
expenses go away after the sale, Idaho Power should, in turn, no longer need to receive a
component of Facilities Charge revenue to cover these expenses. Because the expenses and the
revenues are presumably equal amounts and both go away at the same time, other Schedule 19
customers should not be adversely impacted. Consequently, Staff would not include this cost
component in the sales price due to any near-term operational impact resulting from the sale.
Nonetheless, Staff recognizes that the FBI has agreed to the sale price and thus inclusion of the
component, and that its inclusion does not appear to otherwise violate the requirements of ldaho
Code $ 6l-328, Given the FBI's agreement upon its arms-length bargaining with Idaho Power,
and for purposes of this particular case, Staff finds that inclusion of this component does not
warrant disapproval of the transaction.
Net Tax Gross-up
There is a mismatch between the straight-line depreciation methodology used to determine
book value and the accelerated depreciation methods used for assessing income taxes. This
mismatch will generally result in some, or all, of the asset's book value being treated as a gain for
income tax purposes. Accordingly, it is necessary to "gross-up" this portion of the book value, as
well as any other gain resulting from the sale. Staff agrees that the Company's net tax gross-up
methodology is appropriate, but believes that the computation of the gross-up amount should be
based only on the components included in the Assets' sales price.
Summary
Staff agrees that the Company's treatment of net book value, true-up of the levelized rate of
return, loss ofnear-term return, and net tax gross-up (based on an adjusted sales price) are
appropriate and protect ratepayers as required by ldaho Code $ 6l-328. Staff disagrees with the
Company about inclusion of the near term operational impacts associated with O&M and A&G in
STAFF COMMENTS JANUARY 26,2016
the Assets' sales price. Nonetheless, Staff acknowledges that both Idaho Power and the FBI have
signed the Asset Sales Agreement, agreeing to the sales price of $79,373 among other terms and
conditions. Despite the fact that Stafls recommendation would result in a lower sales price for
the Assets, the sales price mutually agreed to by the parties will not harm other ratepayers or cause
rates to increase. Thus, Staff concludes the proposed transaction satisfies the requirements of
Idaho Code $ 6l-328 and is consistent with the requirements of Idaho Power's Rule M.
Accounting Treatment
The Company's Application outlines the accounting treatment it will apply to the
transaction if approved by the Commission. The Company's proposed accounting treatment will
remove the assets from the Company's books, record the gain on the sale of the assets, and record
the impact on the Company's income taxes. Staff has reviewed the proposed accounting treatment
and believes it is acceptable.
RECOMMENDATIONS
Upon review of the Company's Application and following the Stafls investigation, Staff
recommends that the Commission approve Idaho Power Company's Application to sell assets to
the FBI as proposed. Staff believes that the proposed sale meets all of the requirements of ldaho
Code $ 6L-328, as well as meeting the requirements of Idaho Power's Rule M.
Should the Commission decide to approve the Application, Staff further recoflrmends that
the Commission not endorse the Company's pricing methodology as precedent going forward.
Although the methodology may be appropriate for establishing asset sales prices in many
circumstances, Staff believes each proposed sale is unique. Different circumstances may warrant
different pricing methods or contract terms.
STAFF COMMENTS JANUARY 26,2016
Respectfully submitted this ZGh day of Janu ary 2016.
Fr.:Daphne Huang
Deputy Attorney General
Technical Staff: Mike Morrison
Rick Keller
Mark Rogers
Donn English
i :umisc:comments/ipce I 5.26djhmmrkmrde comments
STAFF COMMENTS JANUARY 26,2016
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 26d' DAY OF JANUARY 2016,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN
CASE NO. IPC-E.15.26, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
LISA D. NORDSTROM
SHELLI D. STEWART
IDAHO POWER COMPANY
PO BOX 70
BOrSE ID 83707-0070
E-mail : [e-mail]
sstewart@ idahopower. com
PETER J RICHARDSON
RICHARDSON ADAMS PLLC
PO BOX 7218
BOISE ID 83702
E-mail : [e-mail]
TAMI WHITE
REGULATORY DOCKETS
IDAHO POWER COMPANY
PO BOX 70
BOrSE rD 83707-0070
E-mail: [e-mail]
dockets @ idahopower. com
DR DON READING
6070 HILL ROAD
BOISE ID 83703
E-mail : [e-mail]
CERTIFICATE OF SERVICE