20010529Order No 28735.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF PACIFICORP FOR AN ACCOUNTING ORDER AUTHORIZING ESTABLISHMENT OF A REGULATORY ASSET OR LIABILITY FOR DEFERRAL OF THE EFFECTS OF CERTAIN DERIVATIVE AND HEDGING FINANCIAL ACCOUNTING RULES.
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CASE NO. PAC-E-01-5

ORDER NO. 28735
On March 30, 2001, PacifiCorp filed its Application for an accounting order authorizing the establishment of a regulatory asset and/or liability for deferral of the effects of certain derivative and hedging financial accounting rules. Notice of Application and Notice of Modified Procedure were issued on April 5, 2001. Order No. 28697. The original comment deadline was April 26, 2001. The Commission extended this deadline indefinitely until PacifiCorp responded to a Staff information request. After receiving this information Staff filed written comments on May 7, 2001. Staff was the only party to submit comments.
BACKGROUND
PacifiCorp requests that the Commission issue an order authorizing the establishment of a regulatory asset and/or regulatory liability associated with the implementation of Financial Accounting Standards 133 and 138 (FAS 133/138), Accounting for Certain Derivative Instruments and Certain Hedging Activities for its electric operations. The Financial Accounting Standards Board (FASB) issued FAS 133 in June 1998. FAS 138 later amended it in June 2000. PacifiCorp must adopt these rules no later than April 1, 2001. Companies with calendar year ends were required to adopt the standards by January 1, 2001.
This standard requires all derivatives and certain embedded derivatives to be reported on the balance sheet at fair value. Changes in the fair value of derivatives are to be recorded through earnings, i.e. mark-to-market. PacifiCorp contends that this standard will potentially expose its accounting earnings to significant volatility not experienced previously. PacifiCorp contends that this volatility is strictly related to timing differences between when a resource acquisition contract is entered and when it is settled. PacifiCorp states that accounting associated with FAS 133/138 therefore will not be part of its regulated pricing. It requests deferred accounting treatment be approved so that any entries it makes for balance sheet recognition can be offset by regulatory assets or liabilities and not recorded through the statement of income.
PacifiCorp conducted an analysis of all instruments and contracts to determine which ones would be viewed as a derivative requiring mark-to-market accounting under FAS 133/138 and which ones were exempt, i.e. scoped out. Staff has reviewed the criteria used by PacifiCorp in the analysis, the contract types and the contracts that would scope out versus the ones that would be marked to market. The net amount of fluctuation under FAS 133/138, to be reported quarterly, would have created liabilities on the balance sheet with a corresponding reduction to the 2000 earnings. PacifiCorp states the non-cash earnings adjustment is estimated to range from a gain of $269,000,000 to a loss of $1,049,000,000. These liabilities and earnings impacts would ultimately be reversed if the contracts were actually fulfilled and the power delivered or received, as is the case for normal utility operations.
The Derivatives Implementation Group (DIG) continues to further define and provide guidelines of its interpretation on specific types of instruments and contracts for FAS 133/138 implementation. The following issues continue to be discussed:
"Normal Purchases and Sales Exception in the Electric Industry for Capacity Contracts Including Contracts that May Have Some Characteristics of Purchases and Written Options" and
"Normal Purchases and Sales Exception for Electricity Contracts Subject to Bookouts".
The DIG decisions will impact the financial impact under FAS 133/138 due to normal purchases and sales to manage regulated customer loads and resources. The financial changes in reported income without a corresponding change in cash flow could potentially impact stock and bond ratings and ultimately the cost of capital.
STAFF RECOMMENDATIONS
Staff recommends that the Commission issue an accounting order authorizing PacifiCorp to establish regulatory assets and/or regulatory liabilities to defer the impact associated with the implementation of Financial Accounting Standards 133 & 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities for its electric operations. Staff believes deferral is reasonable and is more consistent with existing regulatory policies. Staff recommends that PacifiCorp record the fair value of the various contracts according to FAS 133/138, as assets in Account 186, Miscellaneous Deferred Debits, or as liabilities in Account 253, Other Deferred Credits. Regulatory assets using Account 182.3 and/or regulatory liabilities using Account 254 would offset the non-cash accounting entries. Staff recommends PacifiCorp use unique subaccounts to designate these entries from other deferrals.
COMMISSION FINDINGS
After review of the record, the Commission approves PacifiCorp’s Application for a Deferred Accounting Order that will allow the establishment of regulatory assets and regulatory liabilities associated with the implementation of Financial Accounting Standards 133 and 138 (FAS 133/138), Accounting for Certain Derivative Instruments and Certain Hedging Activities for its electric operations. Commission approval of this Application does not relieve PacifiCorp of its obligation to demonstrate the prudence of its resource acquisition decisions including review of all original contracts, Company actions (or lack of actions) with respect to any contract or settlement of any contract prior to completion. Any deferred balances that do not net out will be reviewed in a future proceeding to determine the appropriate ratemaking treatment. PacifiCorp shall record the fair value of the various contracts according to FAS 133/138, as assets in Account 186, Miscellaneous Deferred Debits, or as liabilities in Account 253, Other Deferred Credits. Regulatory assets using Account 182.3 and/or regulatory liabilities using Account 254 would offset the non-cash accounting entries. PacifiCorp shall use unique subaccounts to designate these entries from other deferrals.
O R D E R
IT IS HEREBY ORDERED that PacifiCorp’s Application for a Deferred Accounting Order in relation to the implementation of Financial Accounting Standards 133 and 138 is granted.
IT IS FURTHER ORDERED that PacifiCorp shall record the fair value of the various contracts according to FAS 133/138, as assets in Account 186, Miscellaneous Deferred Debits, or as liabilities in Account 253, Other Deferred Credits. Regulatory assets using Account 182.3 and/or regulatory liabilities using Account 254 would offset the non-cash accounting entries. PacifiCorp shall use unique subaccounts to designate these entries from other deferrals.
THIS IS A FINAL ORDER. Any person interested in this Order or in interlocutory Orders previously issued in this Case Nos. PAC-E-01-5 may petition for reconsideration within twenty-one (21) days of the service date of this Order with regard to any matter decided in this Order or in interlocutory Orders previously issued in this case. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of May 2001.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

O:PAC-E-01--05_jh2

ORDER NO. 28735 -1-

Office of the Secretary
Service Date
May 30, 2001