20180814Comments.pdf

SEAN COSTELLO
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 8743
RTCEIVED
:l;ff flUG I b PH tr: l+6
UIHQC
Street Address for Express Mail:
472W, WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR AN ORDER
APPROVING THE TRANSFER AND SALE OF
CERTAIN ASSETS TO JAYCO,INC.
CASE NO. IPC.E.18-10
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
attorney of record, Sean Costello, Deputy Attorney General, and in response to the Notice of
Application and Notice of Modified Procedure issued in Order No. 34113 on J:uJy 26,2018, in
Case No. IPC-E-18-10, submits the following comments.
BACKGROUND
On June 6,2018, Idaho Power Company ("Idaho Power; Company") filed an Application
requesting authority to sell and transfer certain assets to Jayco, Inc. ("Jayco") under its Asset
Purchase and Transfer of Title Agreement,Idaho Code $$ 6l-328 and524, and Rule of
Procedure 52. Application at l. Pursuant to ldaho Code $ 6l-328,ldaho Power requested that
the Commission approve the sale and transfer of property and to process the Application by
Modified Procedure. Id. at 4.
Idaho Power's Application states that it provides electric service at Jayco's
manufacturing facility in Idaho Power's service territory. Idaho Power states that it owns and
)
)
)
)
)
)
)
1STAFF COMMENTS AUGUST 14,2018
operates transformers and other facilities beyond the point of delivery ("POD") for the sole
purpose of meeting Jayco's specific service requirements. Jayco pays Idaho Power a monthly
facilities charge to provide this optional service. Id. at2.
Jayco has requested to purchase the Assets described in Exhibit A to the Application
from Idaho Power under the Asset Purchase and Transfer of Title Agreement, through Idaho
Power's Rule M. Id. at2; and Attachment L Upon approval of the transfer and the closing of
the sale, Jayco would own all facilities installed beyond Idaho Power's current POD. Id. at2.
The Company's Application uses a sales price and accounting treatment that is consistent
with the methodology prescribed by Rule M. Under this methodology, the total purchase price
of the assets is $44,582. Id. at 5-11; and Exhibit B. The Company "provided the methodology
and resulting sales price to Jayco, and answered Jayco's inquiries prior to execution of the
Agreement." Application at 5. The methodology has five components: (1) net book value of
assets to be sold ($17 ,57 4); (2) true-up of past levelized rate of return ($7 ,252); (3) near{erm rate
of return impact resulting from the sale ($3,758); (a) near-term operational impact resulting from
the sale of assets ($4,903 ); and (5) net tax gross-up ($5,09 I ). Id. at 6-8 . In addition, Idaho
Power would collect $426 in estimated work order closing costs and $5,578 "for costs associated
with a pole and three switches used to house and operate the primary metering package located at
the facility" that were installed for the sole benefit of Jayco which Idaho Power would continue
to own. Id. at8.
STAFF REVIEW
Commission Staff reviewed the Application, and believes it meets the Rule M's
requirements and that the methodology for calculating the sales price, and pole and switches
compensation are appropriate and protect other customers of the Company under ldaho Code $
6l-328. Staff acknowledges that the Company and Jayco have signed the Agreement, agreeing
to the sales price and other terms. 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 Jayco's service requirements. Rule M allows Jayco to purchase
these facilities if the transaction satisfies the following provisions:
2STAFF COMMENTS AUGUST 14,2018
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 and not the Company will 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 because of this transaction.
Idaho Power and Jayco agreed that Jayco would purchase the assets and assume ownership,
operation, maintenance, and all associated liabilities. Therefore, Staff agrees with Idaho Power
that this transaction satisfies the requirements of Rule M. Under Rule M, the factors tn ldaho
Code $ 6l-328(3) will guide the sale of Company-owned facilities installed beyond the POD to
thecustomerservedbythosefacilities. SeeOrderNo.33514at8-9;andCaseNo. IPC-E-15-26.
The statutory factors relevant to this case include: (a) that 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 . See ldaho Code $ 6l -328(3)(a) and (b). Based upon the following analysis,
Staff believes the transaction between Idaho Power and Jayco meets these requirements.
Analysis of Sales Price Methodology
The Company states that its sales price methodology ensures that the transaction will not
negatively affect the Company or its other customers. See Application at 5. The Company
applied the methodology from Case Nos. IPC-E-15-26,IPC-E-16-31, and IPC-E-17-17 to
calculate the sale price for Jayco. 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:
JSTAFF COMMENTS AUGUST I4,2OI8
Purchase Price Component Amount
Net book value
True-up of past levelized rate of return
Near-term rate of return impact resulting from the sale
Near-term operational impact resulting from the sale of assets
Net tax gross-up
Subtotal
Work order closing costs
Total Purchase Price
$17,574
$7,252
$3,758
$4,903
$5,091
$38,578
$426
$39,004
The Company's treatment of each component relies on an approach used to compute the
Rule M monthly Facilities Charge rate that 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 return, 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 1.4 percent of
the original cost of installed Company-owned equipment. The approach establishes a fixed,
31-year depreciation life for all assets subject to the monthly Facilities Charge. After 31 years,
the monthly Facilities Charge rate decreases to 0.59 percent because the Company is not
authorized to recover either depreciation or a rate ofreturn on fully depreciated capital assets.
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 an annually
decreasing Facilities Charge, the 1.4 percent Rule M flat rate charge is computed to include a
"levelized," time-value equivalent for these revenue requirement components. This allows a
single, uniform Facilities Charge over the depreciable life of the equipment. Under the resulting
levelized payment schedule, Facilities Charge customers effectively underpay the Company for
STAFF COMMENTS 4 AUGUST 14,2018
Net Book Value
The assets in this transaction were installed in 2007. The Company has determined the
net book value for each asset as original investment cost less accumulated depreciation using
straight-line depreciation over 31 years. Staff agrees with the Company's method for computing
net book value and believes its inclusion in the sales price to be appropriate.
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. As a result, 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 Company foregoes the return it would have earned 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. See Application at 6-7.
Staff agrees that the asset sale could cause lost return until an alternate investment is made and
recognized in a future general rate case. Staffbelieves it is reasonable to include a revenue loss
component in the asset sales price.
Near-Term Operational Impact Resultinq from Sale of Assets
Part of the monthly Facilities Charge 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 sold. The Company explains that
during a general rate case, the revenue requirement for the Schedule 9 customer class includes a
revenue credit, or reduction, equal to the Facilities Charge revenue to be collected from Schedule
9 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
5STAFF COMMENTS AUGUST I4,2OI8
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 unrelated Schedule 9 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 Jayco 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, Staff believes the transaction is reasonable.
Net Tax Gross-Up
The timing differences between the straight-line depreciation methodology used to
determine book value and the accelerated depreciation methods used for assessing income taxes
generally results in some, or all, of the assets 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.
Analysis of Pole and Switches Compensation
The agreement provides that Jayco must compensate the Company for certain costs
associated with a pole and three switches that house and operate the facility's POD. These assets
are part of the transaction, but Jayco will not own them. Instead, the Company will continue to
own, operate, and maintain them as the POD to Jayco. Before the sale, and under Rule M, the
pole and switches were originally installed solely to benefit Jayco, with Jayco paying a monthly
Facilities Charge based on a percentage of the Company's initial investment. Because Jayco 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 return. This approach ensures customers
are not harmed by the transaction. If this compensation was not part of this transaction, the
Company's unrelated customers would pay for O&M and A&G expenses on these assets
installed solely for Jayco's beneht. Because the Company will continue to own, operate, and
maintain the pole and switches after the sale, the amounts related to them are separately
presented from the assets to be sold to Jayco.
6STAFF COMMENTS AUGUST I4,2OI8
Pole and switches valuation component Amounts
Book value
True-up of past levelized rate of return
Net tax gross-up
$3,707
$1,385
$486
Total $5,578
Staff agrees that the Company's treatment of the pole and switches book value, true up of
the levelized rate ofreturn, and net tax gross-up (based on an adjusted sales price) are
appropriate and protect customers.
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.
On August Z,the Company notified Commission Staff that its accounting treatment for
the pole and switches payment would differ from the treatment included in the Application as
Journal Entry d. See Application at 10. On August 10,2018, the Company provided a letter
detailing errors it has made in its original Application related to its requested accounting
treatment for a portion of the transaction. See Idaho Power Company Final Journal Entries. In
the Final Journal Entries, the Company showed that the debit to cash and credit to miscellaneous
non-operating income would not change, but instead of crediting $5,091 to FERC Account 108
for accumulated depreciation, $1,385 would be credited to FERC Account 108 and $3,707 would
be credited to FERC Account 101 for Plant in Service as a Contribution in Aid of Construction.
The $1,385 represents the true-up of past levelized rate of return and the $3,707 represents the
net book value of the pole and switches. There would be an additional journal entry debiting
FERC Account 108 for $1,790 and crediting $1,790 to FERC Account 101 as a Contribution in
Aid of Construction. The $1,790 represents the total accumulated depreciation on the pole and
switches since installation. The Company said it is using the Contribution in Aid of Construction
journal entries because it better reflects how the Company would have originally recorded the
assets if a facilities charge was not established. The CIAC journal entries also accurately reflect
that the assets were added for the sole benefit of Jayco. Id. at 9.
7STAFF COMMENTS AUGUST 14,2OI8
Staff has reviewed the proposed accounting treatment, including the modified treatment of the
pole and switches, and believes it is reasonable.
STAFF RECOMMENDATIONS
Staff recommends that the Commission approve Idaho Power Company's Application to
sell assets to Jayco as proposed. Staff believes that the proposed sale meets the requirements of
Idaho Power's Rule M, Idaho Code $ 61-328 and 524, and Rule of Procedure 52. Staff also
recommends the amended accounting treatment be approved.
2
Respectfully submitted this itl day of August 20 1 8.
tor Attorney
Technical Staff: Mike Morrison
Bentley Erdwurm
Brad Iverson-Long
i :umisc/comments/ipce I 8. I 0scmmbebl comments
8STAFF COMMENTS AUGUST I4,2OI8
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS l4th DAY OF AUGUST2O18,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-E-I8-IO, BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
LISA D NORDSTROM
SHELLI D STEWART
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-mail : lnordstrom@,idahopower. com
s stewart@ idahopower. com
ELECTRONIC ONLY
doc\e t sOidabqpq\^/e r.Sem
ZACH HARRIS
IDAHO POWER COMPANY
PO BOX 70
BOrSE rD 83707-0070
E-mail : zharri s@,idahopower. com
MATT THOMPSON COO
JAYCO
903 S MAIN STREET
PO BOX 460
MIDDLEBURY ID 46540
CERTIFICATE OF SERVICE