20200521Comments.pdf

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DAYN HARDIE
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BARNO.9917
Street Address for Express Mail:
1I33I W CHINDEN BLVD, BLDG 8, SUITE 2OI-A
BOISE, D 83714
Attorney for the Commission Staff
BEF'ORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR AI\
ACCOUNTING ORDER FOR COSTS
ASSOCIATED WITH CLOUD COMPUTING
ARRANGEMENTS
CASE NO. IPC.E.2O.11
COMMENTS OF TIIE
COMI\ISSION STAFF
STAFF OF the Idaho Public Utilities Commission, by and through its Attorney of
record, Dayn Hardie, Deputy Attorney General, submits the following comments.
BACKGROT'ND
On March 9,2020,Idaho Power Company ("Company") applied to the Commission
seeking an order (l) approving the defenal of costs associated with future cloud computing
arrangements to a regulatory asset, and (2) acknowledging that the unamortized regulatory asset
amounts are eligible for rate base teatrnent and the associated annual amortization expense is
eligible for potential recovery in a future rate proceeding.
The Company's information technology ("IT") system includes both on-premise
solutions and cloud computing. The Company proposes to capitalize all costs associated with
cost-effective cloud computing because the cloud computing investments are "equivalent to that
of a traditional on-premise [IT] solution."
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ISTAFF COMMENTS MAY 2L,2O2O
STAFF ANALYSIS
Commission Staffhas reviewed Company's Application and accompanying testimony of
Matt Larkin, along with the resolution adopted by the National Association of Regulatory
Commissioners ('NARUC") encouraging State utility commissions to consider improving the
regulatory treatment of cloud computing arrangements. Based on its review, Staffrecommends
that the Commission issue an order authorizing the deferral of reasonable and prudent costs
associated with future cloud computing arrangements to a regulatory asset to be eligible for rate
base treatment. Additionally, Staffrecommends that the Commission also authorize the
associated annual amortization expense be eligible for potential recovery in a future rate
proceeding. However, to be consistent with the accounting treatment for capital expenditures
included in Plant-in-Service, Staffrecommends the Company begin amortizing the cloud
computing arrangements when placed in service and it becomes used and useful. Staffdiscusses
its recommendation in greater detail below.
Cloud Computing
Cloud computing is the delivery of computing services that include software, seryers,
storage, databases, networking, and other forms of IT over the internet, or "cloud". Cloud
computing arrangements differ from traditional, on-premise IT solutions.l The basic notion
behind cloud computing is that the location of the hardware or operating system on which a
product is running is irrelevant to a user, allowing products to be updated easily and often with
minimal business disruptions. Due to changes in technology over the last several decades, cloud
computing solutions have evolved leading to the current environment that sometimes favors
cloud-based solutions over on-premise solutions. The most common cloud computing services
include storage, networking, processing power, and standard office software applications.
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 increased the functionality of [T, offering faster and more flexible
resources in a secure manner. The Company has entered into several arrangements for cloud
I On-premise IT solutions are onsite products or applications for which the Company must buy a license or copy of
the software and are stored or maintained on-site.
2STAFF COMMENTS MAY 2T,2O2O
computing services covering a broad array of applications necessary to provide essential services
to customers because on-premise solutions had either become obsolete or were cost prohibitive.
An advantage of cloud computing is the ability to allow current IT staffto focus on other
issues within the Company. The Company could potentially save additional resources,
including: time, hiring new Staff, and replacement of outdated IT infrastructure. The Company
did not provide the potential cost savings it expects from using cloud computing. Staffexpects
the Company to provide the benefits and cost savings in a future rate case proceeding.
Accounting Treatment
Current Accountine Treatrnent
Fee strucfures for cloud computing arangements can vary but generally reflect a
monthly, quarterly, or annual payment schedule. For a traditional on-premise IT solution, an
upfront payment can be made in return for a reduced monthly feo<r no ongoing fee at all-
over the course of the contract period. The costs of cloud computing arrangements however are
not accounted for the same way as costs associated with the purchase of traditional on-premise
IT solutions. Based on current accounting guidelines, the Company currently classifies
investments in traditional on-premise IT solutions, including the integration costs, as a capital
expenditure. Cloud-based products and services are generally accounted for as operating
expenditures, except for the implementation and integration costs-which can be capitalized.
Traditional on-premise IT solutions are capitalized with the book value, net of
accumulated depreciated, included in rate base. The Company begins depreciating the on-
premise IT assets when it is placed in service and becomes used and useful. ln a rate proceeding,
the Company can recover the annual depreciation expense and earn a return on the undepreciated
book value remaining.
In April20l5, Financial Accounting Standards Board ("FASB"), issued Accounting
Standards Update No. 2015-05 to Accounting Standards Codification ("ASC") 350-40:
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which
provides further direction and treatment for cloud computing. The update provided additional
guidance of how to treat software license fees, and under certain conditions in which fees can be
considered intangible assets and therefore be capitalized. The Company states that no cloud
computing arrangements to date have been capitalized. [n Accounting Standards Update
STAFF COMMENTS MAY 21,20203
("ASU") No. 2018-15, FASB again provided additional clarification and provided users an
oppornrnity to capitalize and amortizethe costs over the term of the cloud computing
arrangernent.
On December20,2019, the Federal Energy Regulatory Commission ("FERC") issued
Docket No. AI20-l-000, that provided additional guidance to utilities regarding cloud computing
arrangements involving a service contract. "ASU No. 2018-15 clarifies that an entity obtaining a
service contract in a cloud computing arrangement should follow the existing guidance [ASC]
350-40 to determine which implementation costs can be capitalized...shall be amortized over the
term of the associated anangement." ASC 350-40-35-13 states, "a Service Contract ... shall be
amortized over the term of the associated hosting arrangement, on a straight-line basis." ASC
350-40-35-17 provides additional guidance which states, "each module or component of a
hosting arrangement, an entity shall begin amortizing the capitalized implementations costs
related to the hosting arrangement that is a service contract when the module or component ... is
ready for its intended use." Staff has reviewed the different orders and guidance cited by the
Company and believes that if all costs associated with a cloud computing arrangements are
deferred, then the Company should begin to amortize said costs when its placed into service and
ready for its intended use.
Proposed Accountine Treatment
The Company proposes to capitalize all costs associated with cost-effective cloud
computing arrangements because the services provide the Company with an investment
equivalent to that of a taditional on-premise IT solution. A deferral mechanism would remove a
financial disincentive for the Company to pursue cost effective, cloud-based IT solutions that
exist today.
The Company's proposed accounting treatment would book all cloud computing
transactions, including implementation costs, integration costs, and licensing fees to a regulatory
asset. The Company proposes that the regulatory asset would be eligible for rate base treatrnent,
and the associated amortization expense be eligible for recovery in the Company's next general
rate case. Matt Larkin states the Company prefers similar ffeatment to traditional on-premise [T
solution, which, if applied, would provide the Company the most value without forcing the
Company to base its IT decisions on regulatory accounting incentives. Larkin, DI page 15-16.
4STAFF COMMENTS MAY 2t,2020
Staffdoes not disagree with this statement but is concerned that the Company is only making
economic cloud computing arrangements if there are incentives to the Company.
To be consistent with the recovery of on-premise IT solutions, Staff recommends that the
Company begin amortizing deferred costs of the cloud computing arrangement when it is ready
for its intended use. The amortization period for each arrangement should be the lengXh of the
specific contract for that arrangement. If no contract period exists, Staffrecommends an
amortization period of 5-years, which is consistent with the depreciation life of FERC Account
303, Miscellaneous Intangible Plant. This recommendation removes the disincentive for the
Company to invest in cloud-based IT solutions. Staffrecommends using the FERC accounts
proposed in the Company's Application, as they would be used for on-premise IT investments.
STAFF RECOMMENDATION
Staffrecommends the Commission approve the deferral of costs associated with future
cloud computing arrangements to a regulatory asset account, with amortization of the
arrangements to begin when they are placed in service and become used and useful. Stafffurther
recommends that the Commission establish the amortization period of the cloud computing
arrangement to match the length of the service contract, or if the conffact length is indeterminant,
the amortization period should default to 5 years. The book value of any prudent cloud
computing arrangements, net of accumulated amortization, will be eligible for rate base
treatment in the Company's next general rate case, and any remaining amortization expense for
prudently incurred cloud computing expenditures will be eligible for recovery.
Respectfully submitted tlis 27st day of May 2020.
Dayn Hardie
Deputy Attorney General
Technical Staff: Travis Culbertson
Rachelle Farnsworth
i:umisc/commentVipce20. I I dhtncrf comments
5STAFF COMMENTS MAY 21,2020
CERTIF'ICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 21't DAY OF MAY 2020,
SERVED THE FOREGOTNG COMMENTS OF THE COMMTSSTON STAFF, IN
CASE NO. IPC.E-}0-II, BY E.MAILING A COPY THEREOF, TO THE
FOLLOWING:
LISA D NORDSTROM
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: [e-mail]
dockets@ idahopower. com
MATT LARKIN
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: [e-mail]
SECRETARY
CERTIFICATE OF SERVICE