20200528Reply Comments.pdf

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Lisa D. Nordstrom
An DTCOPP Company
LISA D. NORDSTROM
Lead Gounsel
[e-mail]
May 28,2020
ELECTRONIC FILING
Diane Hanian, Secretary
ldaho Public Utilities Commission
11331 W. Chinden Boulevard
Building 8, Suite 201-A
Boise, ldaho 83714
Re Case No. !PC-E-20-11
Accounting Order for Costs Associated with Cloud Computing Anangements
ldaho Power Company's Reply Comments
Attached for electronic filing in the above matter is ldaho Power Company's
Reply comments.
lf you have any questions about the enclosed documents, please do not hesitate
to contact me.
Very truly yours,
x;!.(""ut -*,
LDN:sdh
Enclosures
LISA D. NORDSTROM (lSB No. 5733)
ldaho Power Company
1221West ldaho Street (83702)
P.O. Box 70
Boise, ldaho 83707
Telephone: [phone]
Facsimile: [phone]
I n ord stro m @ ida hopower. com
Aftorney for ldaho Power Company
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER FOR COSTS
ASSOCIATED WITH CLOUD COMPUTING
ARRANGEMENTS.
CASE NO. !PC-E-20-11
IDAHO POWER COMPANY'S
REPLY COMMENTS
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ldaho Power Company ("ldaho Powe/'or "Company") respectfully submits these
Reply Comments in response to the Comments filed by the ldaho Public Utilities
Commission ("Commission") Staff ("Staff') on May 21,2020. ldaho Power appreciates
Staffs support of the Company's request for authorization to defer reasonable and
prudent costs associated with future cloud computing arrangements to a regulatory asset
to be eligible for rate base treatment and that the associated annual amortization expense
is eligible for potential recovery in a future rate proceeding. ln these Reply Comments,
the Company clarifies its request and addresses certain concerns expressed by Staff.
IDAHO POWER COMPANY'S REPLY COMMENTS - 1
I. BACKGROUND
For purposes of lnformation Technology ('lT"), on-premise solutions are those lT
products or applications that are kept within ldaho Powe/s own premises and require the
Company to purchase a license or copy of the software to use it. Cloud computing, on
the other hand, is the delivery of lT products, including servers, storage, databases,
networking, and software, over the internet or "cloud." Cloud computing solutions have
evolved over the last several decades leading to an environment that primarily favors
cloud-based solutions over previous on-premise solutions. Cloud computing services can
provide a utility with access to vendors who operate specialized technology, while
providing a way to address technological obsolescence as the contracts with these
companies allow for renewals that use the latest technologies. These cloud computing
services have gained prominence, offering faster and more flexible resources in a secure
manner, adding to the umbrella of lT solutions available.
The costs of cloud computing arangements however are not accounted for the
same way as costs associated with the purchase of traditional on-premise lT solutions.
Based on cunent accounting guidelinesl, the Company currently classifies investments
in traditional on-premise lT solutions, including certain integration costs, as a capital
expenditure, while cloud-based products and services are classified as an operating
expenditure, with the exception of certain integration costs which are capitalized. Under
the cunent regulatory accounting treatment there is an inherent financial disincentive for
ldaho Power to pursue certain cloud computing arrangements that would otherwise be
beneficial to customers over time. ln this filing, ldaho Power is proposing to capitalize all
1 Accounting Standards Codification ('ASC') 350-40: Accounting for the Costs of Computer Software
Developed or Obtained for lnternalUse, FinancialAccounting Standards Board ("FASB") Accounting
Standards Update No.2015-05, and FASB Accounting Standards Update No. 2018-15.
IDAHO POWER COMPANY'S REPLY COMMENTS - 2
costs associated with cost-effective cloud computing arangements because the services
provide the Company with an investment equivalent to that of a traditional on-premise lT
solution, thereby removing a financial disincentive to pursuing cost-effective lT solutions
that exist today.
II. IDAHO POWER'S REPLY
ln its Reply Comments, ldaho Power will respond to Staffs (1) identification of
cloud computing costs the Company is requesting be deferred to a regulatory asset, (2)
recommendation for the length of the amortization period of the deferred cloud computing
costs, and (3) @ncerns that the Company may only purchase lT solutions that provide
financial incentives to ldaho Power.
A. ldaho Power's Proposal is to Record to a Requlatorv Asset those Costs
Associated with CIoud Computino Arranqements that are not Currentlv
Capitalized U nder Current Accountinq Guidelines.
Current accounting guidelines require the Company to classify investments in
traditional on-premise solutions, including certain integration costs, as capital
expenditures while cloud-based products and services, with the exception of certain
integration costs which are capitalized, are classified as operating expenditures2. Further,
on December 20, 2019, the Federal Energy Regulatory Commission ("FERC") issued
clarification that ldaho Power may now capitalize implementation costs associated with
cloud computing arrangementss. With accounting guidance on the capitalization of
integration and implementation costs, the remaining ongoing costs, primarily the licensing
fees, must still be expensed.
2 Direct Testimony of Matthew T. Larkin, p. 10,11.7-12.3 Docket No. Al20-1400.
IDAHO POWER COMPANY'S REPLY COMMENTS - 3
ldaho Power wishes to clariff the Company's proposal in this case is for
authorization to defer to a regulatory asset onlv those cloud computing costs cunently
required to be recorded as an expense under current accounting guidelines. While Staff
characterizes the Company's proposed accounting treatment to record all cloud
computing costs to a regulatory assetr, the Company would like to clarify that its proposal
is to continue to capitalize certain integration and implementation costs pursuant to the
existing Accounting Standards Updates and FERC guidances. Similar to on-premise
solutions, the defenal to a regulatory asset of the remaining ongoing costs would allow
for those cloud computing costs to be capitalized.
B. The Companv Prefers the Amortization Period for CIoud Computinq
Arranqements Be Consistent with the Amortization Period for On-Premise lT
Solutions.
On page 5 of their Comments, Stiaff recommends ldaho Power begin amortization
of deferred costs associated with cloud computing arrangements "when they are placed
in service and become used and useful." Although not specified in the request, ldaho
Power supports Staffs recommendation that the amortization period that begins once the
services for the cloud computing anangements @mmence as this treatment is
commensurate with that of on-premise solutions that begin amortization when placed in-
service. Staff further proposes the amortization period for each arrangement should be
the length of the specific contract for the arangement or, if a contract period is
indeterminate, an amortization period of S-years, "which is consistent with the
depreciation life of FERC Account 303, Miscellaneous !ntangible Plant."
a Staffs Comments p. 4.5 ASC 350-40, FASB Accounting Standards Update Nos. 2015-05 and 2018-15, and FERC Docket No
At20-1-000.
IDAHO POWER COMPANY'S REPLY COMMENTS - 4
1. ldaho Powels Amoftization Peiod of Plant Account 303 - Miscellaneous
lntanoible Plant ('Account 303"1 is Sixtv-Two Months.
While Staff identified the amortization period of Account 303 as five years, the
current amortization period approved in Case No. !PC-E-16-23 with Order No. 33770, the
Company's most recent depreciation study, is slightly longer at sixty-two months. ldaho
Power wishes to clarify the amortization period of Account 303 is sixty-two months rather
than five years as discussed by Staff.
2. The Companv Prefers that the Amortization Period of a Cloud Computinq
Arranoement Correspond to that of an On-Premise Solution.
As explained in the direct testimony of Matthew T. Larkin, the services provided
under a cloud computing arrangement are equivalent to that of traditional on-premise IT
solutionso. The primary differences are the method of delivery (on-premise or via the
cloud) and ownership (product purchased or service delivered). CIoud computing
services have gained prominence because they offer faster and more flexible resources
adding to the umbrella of lT solutions available. As such, the Company prefers that the
amortization period of an lT solution is indifferent to how the product is delivered or its
ownership. This approach, which mirrors that of ldaho Power's other asset categories in
which like assets are grouped and an amortization or depreciation rate is uniformly
applied to each depreciable group, will maintain consistency among two similarly situated
assets.
Similar to Staffs recommendation that, to maintain consistency between lT
solutions, the amortization period of a cloud computing arrangement should begin when
it is placed in serviceT, ldaho Power believes the length of the amortization of all lT
6 Direct Testimony of Mafthew T. Larkin, p. 15,ll. 17-227 Staffs Comments, p.2.
IDAHO POWER COMPANY'S REPLY COMMENTS - 5
solutions should coincide. However, if the Commission believes Staffs proposal is more
appropriate and that the amortization period for each arrangement should be the length
of the specific contract for the arrangement or, if a contract period does not exist, the
amortization period should be equivalent to Account 303, the Company can implement
Staffs alternative amortization period.
C. ldaho Power's ProposalAliqns Customer and Shareowner lnterests.
Current accounting guidelines and FERC guidance require the Company to
classify investments in traditiona! on-premise solutions as a capital expenditure while
cloud-based products and services, with the exception of certain integration and
implementation costs, are classified as operating expenditurese. Absent the ability to
capitalize costs associated with cloud computing arangements, ldaho Power cannot eam
a return on a cost that would otherwise be authorized for inclusion in rate base if
purchased through a non-cloud-based software solution, displacing an eamings
opportunity. As pointed out in the Resolution adopted by the Nationa! Association of
Regulatory Commissioners included as Exhibit No. 1 to the testimony of Mr. Larkin, "the
disparity in accounting treatments . . . creates unintended financial hurdles that hinder
utilities from realizing the benefits that so many other industries are experiencing with
cloud-based software."
The Company, however, wishes to alleviate the @ncerns expressed by Staff on
page 5 of their Comments that ldaho Power "is only making economic cloud computing
arrangements if there are incentives to the Company." Although the financialdisincentive
exists, ldaho Power evaluates the purchase of all lT infrastructure on a case-by-case
8 ASC 350-40, FASB Accounting Standards Update Nos. 2015-05 and 2018-15, and FERC Docket No
Al20-1-000.
IDAHO POWER COMPANY'S REPLY COMMENTS - 6
basis and only pursues cost-effective on-premise solutions for which the Company may
capitalize expenditures. ldaho Power's request in this case simply equalizes the
treatment of future expenditures associated with on-premise solutions and cloud
computing arrangements, aligning the interest of both customers and the Company's
shareowners. The proposal does not alter the Commission's ability to determine prudence
of these costs in the Company's next genera! rate proceeding.
ilt. coNcLUSroN
ldaho Power reiterates its appreciation of Staffs support of the Company's request
in this case. To remove disincentives for cost-effective cloud-based investments, ldaho
Power respectfully requests that the Commission issue an order (1) approving the defenal
to a regulatory asset of costs associated with cloud computing arangements that the
Company must expense, and (2) acknowledging that the unamortized regulatory asset
amounts are eligible for rate base treatment and the associated annual amortization
expense is eligible for potential recovery in a future rate proceeding.
DATED at Boise, ldaho, this 28th day of May 2020.
&L !.fr^"t-+r.-*,
LISA D. NORDSTROM
Attorney for ldaho Power Company
IDAHO POWER COMPANY'S REPLY COMMENTS - 7
CERTIFICATE OF SERVICE
! HEREBY CERTIFY that on the 28h day of May 20201 served a true and correct
copy of IDAHO POWER COMPANY'S REPLY COMMENTS upon the following named
parties by the method indicated below, and addressed to the following:
Gommission Staff
Dayn Hardie
Deputy Attomey General
ldaho Public Utilities Commission
11331 W Chinden Blvd,
Bldg 8, Suite 201-A(83714)
P.O. Box 83720
Boise, ldaho 83720-007 4
_ Hand Delivered
_U.S. Mail
Overnight Mail
_FAXX Email [e-mail]
J**)^z/44_
Sandra Holmes, Legal Assistant
IDAHO POWER COMPANY'S REPLY COMMENTS - 8