20161227Comments.pdf

DAPHNE HUANG
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 8370
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
IDAHO POWER COMPANY TO APPROVE ITS )
SALE OF ASSETS TO MCCAIN FOODS USA, )
INC. )
) ___________________ )
CASE NO. IPC-E-16-31
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Daphne Huang, Deputy Attorney General, and submits the following
comments.
BACKGROUND
On November 15, 2016, Idaho Power Company sent a letter to Commission Staff,
advising that it reached an agreement to sell certain Company-owned assets to its customer,
McCain Foods USA, Inc., pursuant to the Company's Rule M "Facilities Charge Service." Rule
M governs the sale of Company-owned assets or facilities that are -as here -beyond the "point
of delivery." The point of delivery (POD) is the point at which the customer's power-usage is
measured, and "beyond the POD" refers to the customer side, rather than the utility side, of the
POD. Order No. 33470 at 1.
STAFF COMMENTS 1 DECEMBER 27, 2016
The assets at issue are used to meet "McCain's service requirements" alone, and are "not
devoted to the public service." Application at 2. Idaho Power and McCain agreed that McCain
would purchase the assets "and thereby assume ownership, operation, maintenance, and all
liabilities associated therewith," in order to resolve "current mixed ownership issues." Id. at 1.
Idaho Power states the total sale price of the assets, which was "reached as the result of
an arm's length transaction," is $373,974. Id. at 3. "Idaho Power explained the sale price
methodology and resulting amounts" -described in its Application -"to McCain prior to
execution of the Agreement and McCain does not contest the same." Id. The Company's
accounting treatment is also set forth in the Application. Id. at 4.
STAFF ANALYSIS
RuleM
Currently, Idaho Power owns and operates certain transformers and other facilities
beyond the POD for the sole purpose of meeting McCain's service requirements. Rule Mallows
McCain to purchase these facilities if the transaction satisfies the following provisions:
a. No mixed ownership of facilities. A Customer purchasing the Company-owned
facilities installed beyond the POD must purchase all facilities listed on the
Distribution Facilities Investment Report for that location.
b. The Customer must provide the operation and maintenance of all facilities installed
beyond the POD after the sale is complete.
c. The Customer must prepay engineering costs for sales determinations taking greater
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 the engineering is completed in instances where the sale is not
finalized.
Staff believes that no mixed ownership of facilities will occur as a result of this
transaction. Idaho Power and McCain agreed that McCain would purchase the assets and
thereby assume ownership, operation, maintenance, and all liabilities associated therewith.
Therefore, Staff agrees with Idaho Power that this transaction satisfies the requirements of
Rule M .
STAFF COMMENTS 2 DECEMBER 27, 2016
Pursuant to Rule M, the factors set forth in Idaho Code§ 61-328 (3) will be considered as
a guide for the sale of Company-owned facilities installed beyond the POD to the customer
served by those facilities. See Order No. 33514 at 8-9.1 The factors in the statute that are most
relevant to this case include: ( a) the transaction is consistent with the public interest; and (b) the
cost of and rates for supplying service will not be increased by reason of such transaction. Based
upon the following analysis, Staff believes the transaction between Idaho Power and McCain
meets these two requirements specified in Idaho Code § 61-328 (3).
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. The Company
applied the same methodology used in Case No. IPC-E-15-26 to calculate the sale price for
McCain. 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:
Net Book Value $127,054
True-up of Past Levelized Rate of Return $54,865
Near Term Rate of Return Impact Resulting from Sale of Assets $32,251
Near Term Operational Impact Resulting from Sales of Assets $57,936
Net Tax Gross-up $101,388
Subtotal $373,494
Work Order Closing Costs $480
Total $373,974
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 and 32481 .
This approach allows the Company to recover its authorized rate of return, book depreciation,
operation and maintenance expenses, administrative and general expenses, income taxes,
1 In its Order on Reconsideration, the Commission found that§§ 61-327 and -328 do not strictly apply because the
property being transferred serves only a single customer and thus is not "devoted to public service." Order No.
33514 at 8-9. However, the Commission determined that the factors in§ 61-328 are "an effective means of
protecting the public interest and ensuring that ratepayers will not be harmed by such transactions," therefore they
would be used for guidance. Id.
STAFF COMMENTS 3 DECEMBER 27, 2016
property taxes, regulatory fees, working capital, and insurance by means of a flat monthly
Facilities Charge equal to 1.41 % of the original costs of Company-owned equipment installed.
The approach established a fixed, 31-year depreciation life for all Schedule 19 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 1955 and 2015. The Company has
determined the net book value for each of these assets as original investment cost less
accumulated depreciation. Depreciation is based on a 31-year straight-line depreciation rate.
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 1.41 % Rule M flat rate charge is
computed to include a "levelized," time-value equivalent for these revenue requirement
components. This allows a single facilities charge over the life of the equipment even though net
book value decreases over time. Under the resulting levelized payment schedule, facil ities
charge customers effectively underpay the Company for the first 10 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 Resulting 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
STAFF COMMENTS 4 DECEMBER 27, 2016
the Company has limited opportunity to re-invest those funds in other assets, and that the
Company will not be able to earn 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. 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 Idaho Code§ 61-328.
Near-term Operational Impact Resulting from Sale of Assets
A portion of the monthly Facilities Charge paid by McCain Foods 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 McCain Foods. The Company explains that during a general rate
case, the revenue requirement for the Schedule 19 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 O&M or A&G expenses or working capital associated with these facilities. Once the
O&M and A&G expenses go away after the sale, Idaho Power should, in tum, no longer need to
receive a component of Facilities Charge revenue to cover these expenses. Schedule 19
customers should not be adversely impacted. So, Staff might not include this cost component in
the sales price due to any near-term operational impact resulting from the sale. Nonetheless,
Staff recognizes that McCain Foods has agreed to the sale price and the agreement does not
STAFF COMMENTS 5 DECEMBER 27, 2016
appear to otherwise violate the requirements of Idaho Code§ 61-328. Given McCain Foods
agreement is based upon its arms-length bargaining with Idaho Power, and for purposes of this
particular case, Staff believes the transaction is reasonable.
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
ofretum, loss of near-term return, and net tax gross-up (based on an adjusted sales price) are
appropriate and protect ratepayers as required by Idaho Code § 61-328. Staff acknowledges that
both Idaho Power and McCain Foods have signed the Asset Sales Agreement, agreeing to the
sales price of $373,974 among other terms and conditions. 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§ 61-328 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 reasonable.
STAFF COMMENTS 6 DECEMBER 27, 2016
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RECOMMENDATIONS
Upon review of the Company's Application and following the Staffs investigation, Staff
recommends that the Commission approve Idaho Power Company's Application to sell assets to
McCain Foods as proposed. Staff believes that the proposed sale meets the requirements of
Idaho Power's Rule M. Should the Commission decide to approve the Application, Staff further
recommends 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.
Respectfully submitted this ') 11):' day of December 2016.
Technical Staff: Kathy Stockton
Yao Yin
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STAFF COMMENTS
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Deputy Attorney Genera;
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7 DECEMBER 27, 2016
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 27TH DAY OF DECEMBER 2016,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-E-16-31 , BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
LISA D NORDSTROM
REGULATORY DOCKETS
IDAHO POWER COMPANY
POBOX70
BOISE ID 83707-0070
E-MAIL: lnordstrom(cv,idahopower.com
dockets(a),idahopower.com
ZACH HARRIS
REGULATORY ANALYST
IDAHO POWER COMPANY
POBOX70
BOISE ID 83707-0070
E-MAIL: [e-mail]
SECRETARY
CERTIFICATE OF SERVICE