20200309Larkin Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OE IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER FOR COSTS
ASSOC]ATED W]TH CLOUD COMPUTING
ARRANGEMENTS.
TDAHO POWER COMPANY
DIRECT TESTIMONY
OE
MATTHEW T. LARKIN
CASE NO. TPC-E-20-11
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o Pl-ease state your name, busj-ness address, and
Idaho Power Company ("Idaho Power" orpresent position with
"Company").
A. My name
address is 1221, West
am employed by Idaho
Senior Manager j-n the
is Matthew T
Idaho Street,
Power as the
Larkj-n. My business
Boise, Idaho 83702. I
Revenue Requj-rement
Department.
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Regulatory Affairs
O. Pl-ease describe your educational background.
A. I received a Bachelor of Business
Administration degree in Finance from the University of
Oregon in 2001. In 2008, I earned a Master of Business
Administration degree from the Universj-ty of Oregon. I
have also attended electric utility ratemaking courses,
including the Electric Rates Advanced Course, offered by
the Edison Electric Institute, and Estimation of
ETectricity Marginal- Costs and Application to Pricing,
presented by Natlonal Economlc Research Associates, Inc.
O. Pl-ease describe your work experience with
Idaho Power.
A. I began my employment with Idaho Power as a
Regulatory Analyst in January 2009. As a Regulatory
Analyst, I provided support for the Company's regulatory
activities, including compliance reporting, financial
analysis, and the development of revenue forecasts for
regulatory filings.
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LARKIN, DI
Idaho Power
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Company
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1 In January 2074, I was promoted to Senior Regulatory
2 Analyst where my responsibilities expanded to include the
3 development of complex cost-related studies and the
4 anal-ysis of strategic regulatory j-ssues.
5 Since becoming the Revenue Requirement Senior
6 Manager j-n March 2078, 7 have overseen the Company's
7 regulatory activities rel-ated to revenue requj-rement, such
8 as power supply expense modeling, jurisdictional separation
9 studies, and Idaho Power's Open Access Transmj-ssion Tariff
10 formula rate.
11 I. O\IERVIEIT
t2 o What is Idaho Power's request in this case?
13 A. Cloud computing servj-ces have gained
L4 they offer faster and more flexiblepopularity, as
resources in a secure15
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Information Technology
the current regulatory
arrangements to a regulatory
unamortized regulatory asset
manner, adding to the umbrella of
("fT") solutions available. Under
accounting treatment there is an
inherent financial dislncentive for Idaho Power to pursue
certain cloud computi-ng arrangements that would otherwise
be economically beneficial to customers over time.
Therefore, Idaho Power is requesting (1) approval of the
deferral of costs associated with c1oud computing
asset,
amounts
and (2) that the
are eligible for rate
amortization
LARKTN, DT
Idaho Power
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Company
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1 expense is eligible for potential recovery in a future rate
2 proceeding.
3 Q. How is your testlmony organized?
4 A. My testimony will (1) summarize cloud
5 computing and the evolution of on-premise IT solutions, (2)
6 explaj-n the current accountj-ng treatment of costs
7 associated with cl-oud computing arrangements, and (3)
8 summarize Idaho Power's proposed accounting treatment of
9 these costs.
10 O. Do you have any exhibits?
11 A. Yes. Exhibit No. 1 to my testimony is a copy
72 of the National- Association of Regulatory Commissioners
13 (*NARUC") ResoLution Encouraging State Utility Commissions
L4 to Consider Improving the Regulatory Treatment of CLoud
15 Computinq Arrangements ("Resolution").
1,6 II. CLOT'D COMPIITING
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O. For purposes of IT, what is meant by the term
"on-premise solution?"
A. On-premise solutions are those IT products or
applications that are kept within Idaho Power's own
premises and require the Company to purchase a l-icense or
copy of the sof tware to use it. An on-premj-se sol-ut j-on is
managed and maintained by the Company requirj-ng in-house
server hardware, software Iicenses, j-ntegration
LARKIN, DI
Idaho Power
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Company
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capabil-ities, and personnel on hand to support and manage
the application should issues arise.
O. What is c1oud computing?
A. Cloud computing is the delivery of IT
products, including servers, storage, databases,
networking, and software, over the internet or "cIoud. "
The basic notion behind cl-oud computing is that the
Iocation of the hardware or operating system on which a
irrelevant to a user,allowing
minimaleasily and often with
disruptions.
. How has cl-oud computing progressed over the
l-ast several decades?
A. Due to changes in technology over the last
several decades, cloud computing sol-utions have evolved
since their inception, leading to the current environment
that primarily favors cloud-based solutions over previous
on-premise sol-utions. On-premise solutions became
prominent with the arrival- of affordable personal
computers, when software and files were typically stored
Ioca1Iy, making these solutions the standard opti-on for
utilities. Through time, however, with the proliferation
of data collection and processing, companies began
requiring data centers to store large amounts of data,
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product
products
business
is running is
to be updated
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Idaho Power
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sol-idified by the development of the internet
advent of advanced fil-e sharing, which allows
resulting in cloud computing solutions emerging as an
important component of data management.
The modern prominence of cloud solutions was then
files to be uploaded to
from different l-ocations
the cloud for storage
and the
computer
and accessed
or uploaded to the cloud for
access by others. Now, many technology vendors only offer
services vi-a the internet or cloud rather than a standal-one
on-premise product.
Cl-oud computing services are generally categorized
as software-as-a-service or SaaS, Infrastructure-as-a-
Service or IaaS, and Pl-atform-as-a-Service or PaaS
(co1J-ectively, "cfoud computing services") and can be
standalone services or work in conjunction with each other.
Cl-oud computing servj-ces can provide a util-j-ty with access
to vendors who operate specialized technology, whil-e
providing a way to address technological obsolescence as
the contracts with these companies allow for renewafs that
use the l-atest technologies. These cl-oud computing services
have gained prominence for the reasons stated above,
offering faster and more flexible resources in a secure
manner, adding to the umbrella of IT sol-utions avaj,Iabl-e.
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Idaho Power
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Company
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1 Q. Does the Company anticipate cl-oud computing
2 arrangements will continue to advance and offer advantages
3 in the future?
4 A. Yes. Utilities now can access complex and
5 flexible IT infrastructure and software through a cloud
6 delivery model and reduce in-house technical- support
7 requirements and costly hardware system requirements. In
8 addition, cloud computing arrangements are a necessity 1n
9 today's web-enabl-ed world where a web presence is a
10 requirement and web applications del-iver customer services,
11 modernizing the customer experience. Fina11y, cloud
t2 computing services may offer more economical sol-utions to
13 data centers or warehouses for storage.
14 O. What are some currently available cl-oud
15 computing services?
16 A. Currently, the most common cloud computing
l7 services inc1ude storage, networki-ng, processing power, and
18 standard office software applications. In addition, more
L9 advanced business analytics features such as Machine
20 Learning and Artificial Intelligence are primarily
2L delivered via cloud computing models.
22 O. Aside from the delivery of the products
23 through the c1oud, how does cloud computing differ from
24 traditional on-premise IT solutions?
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LARKIN, D]
Idaho Power
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Company
1 A. The primary difference between traditional- on-
2 premise IT solutions and cl-oud computing services involves
3 ownership. With a cloud computi-ng arrangement, a company
4 purchases a service for the delivery of the IT products and
5 pays a fee for the delivery of the product. Alternati-ve1y,
6 with traditional IT on-premise solutions, a company
7 purchases and owns the software license and infrastructure
8 and is responsible for its maintenance and replacement.
9 Q. In what ways does cloud computing provide
10 benefits that the traditional deli-very of on-premise IT
11 solutions does not?
L2 A. Cloud computing services afford companies the
74 procurement process.
15 is owned and maintained by the cloud provider, a company
can avoid some of the upfront costs and the compJ-exity of
ownlng and maintaining the IT infrastructure. Many
technology vendors that offer both owned and leased usage
13 ability to test out
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include more
product concepts without
In addition, when the
a long
i-nf rastructure
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weII as options delivered via the
features in thei-r cloud version
c1oud,
than their on-
enhancements,2! premise version, including
22 and security updates that
23 Additionally, updates and
24 burden on in-house staff
patches, software
are automatically updated.
upgrades are typically a lower
and usually can
on-premise based
be delivered more
technology.
LARKIN, DI
Idaho Power
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Company
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Fina11y, a cloud computing
applications and services
arrangement may offer additional
that are not provided to on-
allowing a company to pay forwhilepremise deployments
only those resources they consume.
O. Does Idaho Power currently purchase any cloud
computing services?
A. Yes. The Company has entered into a number of
arrangements for cloud computing services covering a broad
array of applications necessary to provide essential-
10 services to customers because the on-premise sol-ution
11 either became obsolete or was cost prohlbitive. The most
L2 widely known is Microsoft Office 365, which provides on-
13 premise and cloud rlghts for Exchange, SharePoint, Word,
74 Office, Excel, Outlook, PowerPoint, PowerBI, Teams,
15 Planner, and OneNote, to name a few. Other cl-oud computing
76 arrangements include: (1) Workday, a financial- and human
77 capital management software, (2) the Learning Management
18 System that administers, documents, and tracks the delivery
19 of employee educational and/or training programs, and (3) a
20 Cl-oud Access Security Broker to protect Idaho Power's data
21, and ldentities for c]oud solutions.
22 O. What is the typical fee structure of a cloud
23 computing arrangement?
24 A. Fee structures for cloud computing
25 arrangements can vary but generally reflect ongoing
LARKIN, DI
Idaho Power
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Company
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2 traditional on-premise IT sol-ution, do upfront payment can
3 be made in return for a reduced monthly fee, or no ongoing
4 fee at all, over the course of the contract period.
5 Q. Does the Company believe traditional on
6 premj-se IT solutions will be completely replaced
7 with cloud computing services?
8 A. Not entireJ-y. Al-though technological
9 innovatlon has transformed IT solutions, Idaho Power does
10 not bel-ieve cloud computing arrangements wil-1 completely
11 replace traditional on-premise IT solutions at this time.
72 Cloud computing services may be cheaper than purchasing an
13 IT product but not always. For example, it may be
L4 difficul-t to migrate existing products to the c1oud, thus
15 adding to the cloud computing expense, making it less
16 economica.l- or an infeasibl-e alternatlve. While Idaho Power
L7 evaluates each individual purchase to determine the most
f8 cost-effective sol-utj-on, the Company envisions its IT
19 lnfrastructure needs will continue to be met through a
20 combination of traditional on-premise IT solutions and the
27 delivery of IT services via the cloud.
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Idaho Power
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III. CI'RRENT ACCOI'NTING TRE]AIIIENT OF COSTS ASSOCIATED WITB
CLOI'D COMPUTING ARRJA}IGEMENTS
O. Does Idaho Power account for costs of cloud
computing arrangements the same way as costs assoclated
with the purchase of traditj-onal on-premise IT solutions?
the Company
No. Based on current accounting
currentfy classifies investments in
on-premise IT solutions, including the integrati-on
as a capital expenditure. Cloud-based products and
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A guidelines,
traditional
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why the two
standpoint?
A.
the
Are
an operating expenditure, with the
integration costs which are capitalized.
there accounting rules that woul-d explain
74 are treated differently from an accounting
76 Yes. The first guidance to address accounting
71 for software did not come until- 1998 when Accounting
18 Standards Codification ("ASC") 350-40 z Accounting for the
L9 Costs of Computer Software DeveToped or Obtained for
20 InternaL Use was issued. Because cl-oud computing was in
2I its infancy at the time, ASC 350-40 did not address
22 accountlng for c1oud computing arrangements. Direction
23 specific to the accounting for cloud computj-ng came in
24 April 201,5, when the Financial Accounting Standards Board
25 (*FASB") issued Accounting Standards Update No. 2015-05.
26 The intent of the update was to help entitles eval-uate the
LARKIN, DI
Idaho Power
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Company
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accounting of fees paid for cloud computing services given
the significant evolution of IT products. The update
provides guidance for determining when an arrangement
incl-udes a software license and clarifies that under
certai-n conditi-ons the l-icense-related portion of the cloud
considered an intangible asset; thereforecomputing cost
those specific costs may be capitalized.
O. Does Idaho Power have any software l-lcenses
that have been recorded as an j-ntangible asset as a result
of a purchased cloud computing arrangement?
A. No. None of the cloud computing services the
Company has purchased to date have included software
l-i-censes that could be recorded as an intangible asset.
However, the Company has capitalized upfront implementation
and integration costs as all-owed by the accounting guidance
detailed in my testimony.
O. Has there been any additional guidance issued
since Update No. 2015-05?
A. Yes. In August 2078, FASB issued the
Accounting Standards Update No. 2018-15 with amendments to
ASC 350-40, providing users information about the type and
amount of implementation costs that may be capitalized to
an intangible asset, and further that the capitalized
implementation costs should be amortized over the term of
the cloud computing arrangement. At the request of
LARK]N, DI
Idaho Power
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1 industry partlcipants, oD December 20, 20L9, the Federal-
2 Energy Regulatory Commission ("FERC") issued clarification
3 on how to apply Accounting Standards Update No. 2018-15
4 within the framework and regulatory intent of their
5 existing accounting requirementsl, and provided detailed
6 accounting for the expensi-ng or capitalization and
7 resulting depreciation or amortization of the
8 lmplementation costs associated with a cloud computing
9 arrangement.
10 O. Did Accountj-ng Standards Update No. 2018-15 in
11 conjunctj-on with FERC' s guidance eliminate the disparate
72 accounting treatment between on-premise and cloud
13 investments?
14 A. No. Accounting Standards Update No. 2018-15 in
15 conjunction with FERC's gui-dance provided cl-arification on
!6 accounting for upfront implementation costs of cloud
l1 computing arrangements, but did not address the ongoing
18 expendj-tures of these arrangements.
79 0. How do the differences j-n the accounting
20 treatment impact Idaho Power?
2l A. Absent the ability to capi-talize cl-oud
22 computing arrangement costs, dD earnings opportunity is
23 displaced as the Company is not eligible to earn a return
24 on a cost that would otherwise be authorized for incl-usion
LARKIN, DI
Idaho Power
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Company
1 Docket No. AI20-1-000
1 in rate base if purchased through a non-cloud based
2 software sol-ution.
3 Q. Has any state regulatory accounting guidance
4 been given with respect to cloud computing costs?
5 A. Yes. Recognizing the disincentive that
6 exists, in November 20!6, NARUC adopted the Resolution
7 which is specific to the regulatory accounting of cloud
I computing expenditures. fn the Resolution, included as
9 Exhibit No. 1 to my testimony, NARUC encouraged state
10 utility commissions to consider improving the regulatory
11 treatment of cl-oud computing arrangements. The NARUC Board
1,2 of Directors resolved that utilities best serve customers
13 by making software procurement decisions regardless of the
t4 delivery method or payment model and encouraged state
15 regulators to consider whether cloud computing costs should
16 receive similar regulatory accounting treatment as
77 traditional- on-premise sol-utions.
18 O. Can the Company deviate from the Accounting
79 Standards Update Nos. 2015-5 or 2078-15?
20 A. Yes. Under the Statement of Financial
2l Accounting Standard ("SFAS") 7L, now codified as ASC 980,
22 whlch applies to the financial statements of regulated
23 utilities, the Commisslon can allow the deviation from
24 certain standards for ratemaking purposes, providing
25 utility regulators with some f1exibility in how they al-l-ow
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Idaho Power
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Company
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utilities
regulatory
accounting
2015-5 or
o.
to address
treatment
to account for costs. Deferral- of costs to a
asset is one of those approved regulatory
departures
2018-15.
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from Accounting Standards Update Nos.
Have any state commissions enacted solutions
the differences in the accounting and regulatory
of cl-oud computing arrangements when compared to
traditional on-premj-se IT solutions?
A. Yes. In 2016, the New York Publlc Servlce
Commission issued a declaratory statement that utilj-ties
could capital-ize the total cost of a SaaS contract when
paid up-front, indicating in their statement that they were
confj-rming an existing capability under current accounting
rules rather than providing a new capability. More
recently, in January 2019, the Illinois Commerce Commission
issued an order allowing utilities to pre-pay for a cloud
service, amortize those costs, and derive earnings from
18 them as they would a typicaf asset.
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IV. PROPOSED ACCOI'NTING TRE.ATI{ENT OF COSTS ASSOCIATED VTITH
CI,OT,D COMPUTING ARRANGEIT{ENTS
O What
23 treatment of costs
is fdaho Power's proposed accounting
associated with cl-oud computing
24 arrangements?
25 A Idaho Power requests (1) approval of the
cl-oud computing
LARKIN, DT
Idaho Power
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Company
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1 arrangements to a regulatory asset, and (2) that the
2 unamortj-zed regulatory asset amounts are eligible for rate
3 base treatment and the assoclated amortization expense is
4 eligible for recovery in the next general- rate proceeding.
5 Q. Does the Company's request in this case
6 pertain to costs associated with both existing and future
7 cloud computing arrangements?
I A. No. If approved, Idaho Power's accounting
9 treatment would appfy only to costs associated with future
10 cloud computing arrangements.
11 O. Why does the Company seek to defer costs
72 assocj-ated with cloud computing arrangements?
13 A. Under the current regulatory accounting
14 treatment there is an inherent financial disincentive for
15 Idaho Power to pursue certain cloud computing arrangements
16 that woul-d otherwise be benefici-al- to customers over time.
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Idaho Power is proposing
with cost-effective cloud
the services provi-de the
equivalent to that of a
to capitalize all costs associated
computing arrangements because
Company with an investment
on a case-by-
from the
Idaho Power
traditional on-premise IT solution,
27 thereby removing a financial- disincentive to pursuing cost-
22 effective IT solutj-ons that exist today. The Company
23 evaluates the purchase of IT infrastructure
24 case basis. In order to get the most value
25 service or investment, it is important that
LARKIN, D]
Idaho Power
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Company
t have no regulatory or accounting reason to favor one
2 solution when an alternative woul-d serve the Company and
3 its customers better. To do so, the Company is requesting
4 the Commission equalize the treatment of expenditures
5 associated with traditional on-premise IT solutions and
6 cloud computing arrangements.
7 Q. Does the recent NARUC resol-ution align with
8 the Company's request in this case?
9 A. Yes. As explained in the NARUC Resolution,
10 "the disparity in accounting treatments between these two
11 software approaches creates a regulatory j-ncentive for
12 utilities to invest in on-premise software solutions and
13 creates unintended financial hurdles that hinder utilities
74 from real-izing the benefits that so many other lndustries
15 are experiencing with cloud-based software." Therefore, it
16 is important that Idaho Power make IT investments based on
L7 which option best meets the needs of the Company and 1ts
18 customers rather than on the accounting treatment of those
19 costs.
20 O. If the Company's accounting request is
27 approved, how can the Commission ensure Idaho Power
22 continues to make investments in IT solutions that are in
23 the best interest of customers?
24 A. Idaho Power's request in this case is for an
25 accounting order associated with costs of future cost-
LARKIN, DI
Idaho Power
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Company
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effective cloud computing arrangements. If approved, the
proposal will not alter the Commi-ssion's ability to
determine the prudence of
computing arrangements in
proceeding.
O. What is the
the Company is requesting?
A. fdaho Power is
the costs associ-ated with cl-oud
the Company's next general rate
Iength of the amortization period
amortization
of
proposr-ng an
its software investments,
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period equivalent to that
recorded in plant Account 303 Miscellaneous Intangible
11 Pl-ant , or sixty-two months.
1,2 O. What j-s Idaho Power's proposed accounting for
13 the deferral and amortization of the cl-oud computing costs?
14 A. Idaho Power proposes to record the deferred
15 amounts to Federal- Energy Regulatory Commission (*FERC")
16 Account l-82.3, Other Regulatory Assets. The Company will
L7 record amortlzation of the deferred amounts to EERC Account
18 407.3, Regulatory Debits.
19 A. Is Idaho Power proposing to accrue a carrying
20 charge on the amounts incl-uded in the regulatory asset?
27 A. No, not at this time. However, the Company is
22 proposing the regulatory asset is eligible for rate base
23 treatment, simil-ar to the treatment of traditional- on-
24 premise IT solutions. Upon a prudence review in Idaho
25 Power's next general rate proceeding, both the unamortized
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Idaho Power
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Company
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regul-atory asset
expenses would be
O. If the Company's
does Idaho Power anticipate it
computj-ng costs over the next
A. Idaho
approxlmately $Z to
O. Will approval
case change customer rates
balance and associated annual amortization
eligible for inclusion in customer rates.
request is approved, how much
will defer in cloud
few years?
Power anticipates deferri-ng a total of
$3 million over the next three years.
of Idaho Power's request 1n this
at this time?
10 A. No, the Company is not requesting to change
11 customer rates at this time.
72 V. CONCLUSTON
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A.
popularity,
resources in
Please summarize your testimony.
Cloud computing services have gained
as they offer faster and more flexible
a secure manner, adding to the umbrella of IT
L1 soluti-ons availabl-e. Under
18 accounting treatment there
1-9 disincentive for Idaho
computing arrangements
to customers over time.
the current regulatory
is an inherent financial
Power to pursue certain cloud
that would otherwise be beneficial
Idaho Power is proposing to
cost-effecti-ve cloud
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22 capitalize all costs associated with
23 computing arrangements because the services provide the
24 Company with an investment equivalent to that of a
25 traditional on-premise IT solution thereby removing a
LARKIN, DT
Idaho Power
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Company
1 financial dj-sincentive to pursuing cost-effective IT
2 solutj-ons that exists today. Specifically, the Company is
3 requesting (1) approval of the deferral of costs associated
4 with cloud computing arrangements to a regulatory asset,
5 and (21 that the unamortized regulatory asset amounts are
6 eligible for rate base treatment and the associated
7 amortization expense is eligible for recovery in the next
8 general rate proceeding.
9 Q. Does this conclude your testi-mony?
10 A. Yes, it does.
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LARKTN, Dr 19
Idaho Power Company
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ATTESTATION OF TESIIMONY
STATE OF IDAHO
County of Ada
T, Matthew T. Larkin, having been duly sworn to
testify truthfully, and based upon my personal knowledge,
state the following:
I am employed by Idaho Power Company as the Revenue
Requirement Senior Manager in the Regulatory Affairs
Department and am competent to be a witness in this
proceeding.
I decl-are under penalty of perjury of the faws of
the state of Idaho that the foregoing pre-fil-ed testimony
and exhibits are true and correct to the best of my
information and bel-ief .
DATED this 9tn day of March 2020.
Matthew T. Larkin
SUBSCRIBED AND SWORN to before me this 9th day of
March 2020.
DA
P ic for o
Residing at: N ampa o
My commission expiresz 8/8/2020
OF
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LARKIN, Dr 20
Idaho Power Company
Comm.529?0
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BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
GASE NO. IPC-E-20-11
IDAHO POWER COMPANY
LARKIN, DI
TESTIMONY
EXHIBIT NO. 1
Resolution Encouraging State UtiW Commissions to Consider Improving the Regulatory
Treatment of Cloud Computing Aruangements
WHEREAS, The business of electric, gas, and water utilities is changing rapidly. Utilities are
now faced with how best to respond to modern customer expectations, technological innovation,
and new regulatory drivers; and
WHEREAS, To thrive in the future, utilities may need to modernize and transform their business
operations. A key element of this may be access to state-of-the-art commercial cloud computing
services, which is increasingly delivered via a "cloud-based" or "sofLware-as-a-service" model;
and
WHEREAS, The various functionalities provided by commercial cloud computing services may
help utilities fully realize the economic, social, and environmental value of the smart gas and
electric grid; and
WHEREAS, Other highly regulated industries tike financial services, healthcare,
telecommunications, and auto insurance use commercial cloud computing services and are
delivering a superior customer experience. These industries now outperform utilities in customer
satisfaction rankings, according to surveys from J.D. Power and Associates; and
WHEREAS, Federal government agencies, including the Departments of Treasury, State, and
Defense, are rapidly transitioning to commercial cloud computing services and cloud-based
solutions through a federal requirement to "evaluate safe, secure cloud computing options before
making any new IT investments"; and
WHEREAS, In addition to enhanced security, commercial cloud computing services can provide
increased reliability and flexibility. In contrast to on-premise solutions, cloud-based solutions can
be frequentty and easily updated with minimal business disruptions, allowing utilities to keep pace
with innovation and changing technology; and
WHEREAS, Commercial cloud computing services and traditional on-premise software have
different business models and payment streams. Purchasing cloud computing services typically
involves periodic payments for the services consumed, while purchasing on-premise softwarc
typically involves a large up-front payment and a regular maintenance fee; and
WHEREAS, Under current guidelines, a utility may classify investments in legacy hardware and
supporting on-premise software as a capital expense, on which it can receive a rate of return;
however, if a utility invests in cloud-based technologies, it typically treats the investment as an
operating expense, on which it does not receive a rate of retrtrn; and
WHEREAS, The disparity in accounting treatments between these two software approaches
creates a regulatory incentive for utilities to invest in on-premise software solutions and creates
unintended financial hurdles that hinder utilities from realizing the benefits that so many other
industries are experiencing with cloud-based software; and
Exhibit No. 1
Case No. IPC-E-20-11
M. Larkin, IPC
Page 1 of 2
WHEREAS, Utilities should be free to make software investments based on which option best
meets both the needs of the utility and its customers, rather than how the investment will be treated
for accounting purposes; and
WHEREAS, The existing regulatory accounting rules may be interpreted, if appropriate, to allow
for utilities to capitalize cloud-based software; and
WHEREAS, Regardless of how cloud computing is treated for regulatory accounting purposes,
regulators will still examine whether the investment is prudent; now, therefore be it
RESOLVED, That the Board of Directors of the National Association of Regulatory Utility
Commissioners (NARUC), convened at its 2016 Annual Meetings in La Quinta, California,
recognizes that utilities best serve customers, society, the environment, and the grid by making
software procurement decisions regardless of the delivery method or payment model; and be it
.further
RESOLVED, That NARUC encourages State regulators to consider whether cloud computing
and on-premise solutions should receive similar regulatory accounting treatment, in that both
would be eligible to earn a rate of return and would be paid for out of a utility's capital budget.
Sponsored by the Committees on Critical Infrastructure, Gas, and Ll/ater
Recommended by the NARUC Board of Directors on November I 5, 201 6
Adopted by the NARUC Committee of the l{rhole on November 16, 2016
Exhibit No. 1
Case No. IPC-E-20-11
M. Larkin, IPC
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