20180125Comments.pdf

KARL KLEIN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5156
IN THE MATTER OF THE APPLICATION OF
IDAHO POWER COMPANY FOR AN ORDER
APPROVING THE TRANSFER AND SALE OF
CERTAIN ASSETS TO THE CITY OF
MERIDIAN,IDAHO
RTC E IVED
iClS "!f,i{ 25 Pl,l 2:07
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Street Address for Express Mail:
472W, WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
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CASE NO. IPC.E,-I7-I7
COMMENTS OF THE
COMMISSION STAFF
The Idaho Public Utilities Commission's Staff comments as follows on Idaho Power
Company's Application for approval of an asset sale to the City of Meridian, Idaho.
BACKGROUND
On December 6, 2017,Idaho Power Company applied to the Commission for an order
approving transfer of certain assets to the City of Meridian (City) under Idaho Power's Rule M,l
and ldaho Code $$ 6l-328 and6l-524. Rule M govems 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 l.
I Idaho Power's Rule M Facilities Charge Service is on the Commission's website at:
http://www.puc.idaho.gov/fileroom/tariff/electric/ldaho%20Power%20Company.pdf.
ISTAFF COMMENTS JANUARY 25,2018
The assets serve the City's wastewater treatment facility. Application at 2. Idaho Power
and the City agree the City will buy the assets and "obtain title to and assume ownership,
operation, maintenance, and all liabilities associated with" them. Id.
Idaho Power initially said the sale price of the assets is $761,693. But the Company later
revised the price down to $668,805. The Company reached these sales prices as follows.
In the Application, the Company stated the total sale price of the assets is $761,693.
Exhibit B at 16, to Application. The Company explained that it "provided the methodology and
resulting sale price to the City and answered the City's inquiries prior to execution of the
Agreement." Application at 6. The methodology has five components: (1) net book value
($353,091); (2) true-up of past levelized rate of return ($81,280); (3) near-term rate of return
impact resulting from the sale ($63,903); (a) near-term operational impact resulting from the sale
of assets ($83,783); and (5) net tax gross-up ($l6l ,432). Id. at6-8. In addition,Idaho Power
would collect "$480 in estimated work order closing costs [and] . . . $17,724 for costs associated
with a sectionalizer" that Idaho Power'owill reprogram to become the wastewater facility's
POD." Id. at8.
On January 19,2018, after the Company had filed the Application and initial sales price,
the Company made a supplemental filing to provide the Commission with an updated price,
found in Section 3 of the Asset Purchase and Transfer of Title Agreement. As described in
paragraph 9 of the Company's Application, the price is subject to change depending on the actual
closing date of the sale. The Company explained the total transaction amount of $761,693
presented in the Company's Application was based on the sale closing in2017. Because the sale
is now expected to close in2018, Idaho Power updated various elements of the purchase price
calculation including those elements impacted by federal corporate income tax rate changes
effective January l, 2018. The updated price is $668,805, as shown in the following table. The
updated price results primarily from the change in tax rates, but also reflects an additional year of
depreciation in the net book value of the assets, an additional year of the true up of the past
levelized rate of retum, and other updates. The updated purchase is subject to change if Idaho
Power replaces any assets before the transaction closes.
The Company included a table summarizing the proposed updates, which are subject to
acceptance by the City of Meridian, as shown below:
2STAFF COMMENTS JANUARY 25,2018
Revised
Purchase price components
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 f rom sale of assets
Total Purchase Price - before tax
Net Gross-up for tax
Total Purchase Price -aftertax
Work order closing costs
Total Purchase Price
Sectionalizer ents
Sectionalizer book value
Sectionalizer True up of past levelized rate of return
Total Price - before tax
Net gross up for tax
Sectionalizer Total
Total Amount Due
Amount
Original
Amount
353,091 s
81,280
63,903
83,783
338,287 s
90,486
63,319
83,016
(14,804)
9,206
(s84)
(767l.
6s2,374
480
9,321
4,909
14,229
1,722
582,057
161,432
743,489
480
743,969
9,882
4,776
14,658
3,066
(s61)
732
57 108
77
(91,115)
t
l42e)
(7,344)
15,951 17,724 773
s 668,805 s 761,693 l_______19?,8!g)
STAFF ANALYSIS
Commission Staff reviewed the Application, and believes it meets the Rule M's
requirements. Staff thus recommends the Commission approve the sale.
Rule M
Idaho Power owns and operates certain transformers and other facilities beyond the POD
for the sole purpose of meeting the City's service requirements. Rule M allows the City 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
JSTAFF COMMENTS JANUARY 25,2018
Description
s
652,854
(6,949)
agreement, or after the engineering is completed in instances where the sale is not
frnalized.
Staff believes that no mixed ownership of facilities will occur because of this transaction.
Idaho Power and the City agreed that the City would purchase the assets and assume ownership,
operation, maintenance, and all liabilities associated therewith. Therefore, Staff agrees with
Idaho Power that this transaction satisfies the requirements of Rule M.
Under Rule M, the factors rn ldaho Code $ 61-328(3) will guide the sale of Company-
owned facilities installed beyond the POD to the customer served by those facilities. See Order
No. 335 14 at 8-9, Case No. IPC-E-l 5-26.2 The statutory factors 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 the City meets these two
requirements specified in ldaho Code $ 6l-328(3).
Analysis of Sales Price Methodology
Idaho Power states that its sales price methodology ensures that the transaction will not
negatively affect the Company or its other customers. The Company applied the methodology
from Case Nos. IPC-E-15-26 and IPC-E-16-31 to calculate the sale price for the City. In its
Application, the Company describes its five-component methodology for establishing the assets'
price. These components, and the updated amounts associated with each component, are listed
below:
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
$338,287
$90,486
$63,319
$83,016
$77,266
Subtotal
Work Order Closing Costs
9652,374
$480
Total $652,854
2 In its Order on Reconsideration, the Commission found that $$ 6l-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 $ 6l-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
4STAFF COMMENTS JANUARY 25,2018
The Company's treatment of each component relies on an approach used to compute the
Rule M monthly Facilities Charge rate, which was established in the Company's last general rate
case and approved in Commission Order Nos. 32426 and3248l. This approach allows the
Company to recover its authorized rate of retum, book depreciation, operation and maintenance
expenses, administrative and general expenses, income taxes, property taxes, regulatory fees,
working capital, and insurance through a flat monthly Facilities Charge equal to l.4loh 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 3l years, the monthly Facilities Charge rate decreases to 0.59% because the Company is
not authorizedto recover either depreciation or a rate of return on fully depreciated capital assets.
Net Book Value
The assets include facilities installed between 1979 and2017. The Company has
determined the net book value for each asset as original investment cost less accumulated
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. To avoid the need for
imposing an annually decreasing Facilities Charge, the I.4loh 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, Facilities
Charge customers effectively underpay the Company for the first ten 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.
5STAFF COMMENTS JANUARY 25,2018
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 Company foregoes the return it would have eamed through the Facilities Charge. The
Company has limited opportunity to re-invest those funds in other assets, and cannot 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. Consistent with prior cases, three years was
used as an estimate of the average interval between general rate cases.
Staff agrees that the asset sale could cause lost return until an alternate investment is
made and recognized in a future general rate case. Staff continues to believe this revenue loss
could discourage the Company from selling its facilities. Staff thus maintains it is reasonable to
include a revenue loss component in the asset evaluation methodology. Staff believes that
including the near-term rate of return impact in the asset sales price is consistent with ldaho
Code $ 6l-328.
Near-term Operational Impact Resultine from Sale of Assets
Part of the monthly Facilities Charge paid by the City 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 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 City. 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 Facilities Charge revenue to be collected from Schedule l9 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 no longer need to receive a
component of Facilities Charge revenue to cover these expenses. Because Schedule 19
6STAFF COMMENTS JANUARY 25,2018
customers should not be hurt, Staff might not have included this cost component in the sales
price due to any near-term operational impact resulting from the sale. But Staff recognizes that
the City has agreed to the sale price, and Staff believes the agreement does not violate ldaho
Code $ 6l-328. Given the agreement is based upon its arms-length bargaining with Idaho
Power, and for this 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, and 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 in the assets' sales price.
Sectionalizer Compensation
The agreement provides the City must compensate the Company for certain costs
associated with a sectionalizer at the wastewater treatment facility. The Company plans to
reprogram the sectionalizer to allow it to become the wastewater facility's new POD. Although
part of the transaction, the sectionalizer is not being sold to the City. Instead, the Company will
continue to own, operate, and maintain the sectionalizer as the POD. Costs related to
reprogramming the sectionalizer will not be part of the agreement.
Before the sale, and under Rule M, the sectionalizer was originally installed solely to
benefit the City, with the City paying a monthly Facilities Charge based on a percentage of the
Company's initial investment. Because the City will no longer pay a monthly Facilities Charge
on this investment, the Company plans to recover its book value and the true up for the past
levelized rate of retum. This approach ensures customers are not harmed by the transaction.
Because Idaho Power will continue to own, operate, and maintain the sectionalizer after the sale,
the amounts related to the sectionalizer are separately presented from the assets to be sold to the
City.
7STAFF COMMENTS JANUARY 25,2018
Updated Sectionalizer Book Value
Updated Sectionalizer True-up of Past Levelized Rate of Return
Net Tax Gross-up
$9,321
$4,908
$1,722
Total $15,951
Staff agrees that the Company's treatment of the Sectionalizer book value, true up of the
levelized rate of retum, and net tax gross-up (based on an adjusted sales price) are appropriate
and protects customers.
Summary
Staff agrees that the Company's treatment of net book value, true-up of the levelized rate
ofreturn, loss ofnear-term return, and net tax gross-up (based on an adjusted sales price) are
appropriate and protect customers as required by ldoho Code $ 6l-328. Staff acknowledges that
both Idaho Power and the City have signed the Agreement, agreeing to the updated sales price of
$652,854 and other terms. The parties' mutually agreed upon sales price will not harm other
customers or cause rates to increase. Staff thus concludes the proposed transaction satisfies
Idaho Code $ 6l-328 and 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.
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 City of Meridian as proposed. Staff believes that the proposed sale meets the requirements of
Idaho Power's Rule M. Should the Commission approve the Application, Staff further
recommends that the Commission not endorse the Company's pricing methodology as precedent
8STAFF COMMENTS JANUARY 25,2018
going forward. Although the methodology often may be appropriate for establishing asset sales
prices, Staff believes each proposed sale is unique, and that different circumstances may warrant
different pricing methods or contract terms.
Respectfully submitted this Lrf^ day of January 2018.
Karl Klein
Deputy Attorney General
Technical Staff: Kathy Stockton
Bentley Erdwurm
Richard Keller
i:umisc/comments/ipcel7. I Tdjhklsberk comments
9STAFF COMMENTS JANUARY 25,2018
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 25TH DAY OF JANUARY 2017,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-E-77-17, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
LISA D NORDSTROM
SHELLI D STEWART
REGULATORY DOCKETS
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-mail : lnordstrom(@idahopower.com
s stewart(l i d aho po rver. con-r
do ckets (gl.i dahop ower. co rn
MARK ANNIS
IDAHO POWER COMPANY
PO BOX 70
BOrSE rD 83707-0070
E-mail : [e-mail]
CERTIFICATE OF SERVICE
'.L ,4dr'-,
SECRETAY-