20010507Comments.doc

JOHN R. HAMMOND
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5470

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

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.
)
)
)
)
)
)
)
)
CASE NO. PAC-E-01-5

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission (“Commission”), by and through its attorney of record, John R. Hammond, Deputy Attorney General, and in response to the Notice of Application, Notice of Modified Procedure, Order No. 28697 issued on April 5, 2001 and Stipulation dated April 30, 2001 submits the following comments.
On March 30, 2001, PacifiCorp filed its Application for an accounting order authorizing the establishment of a regulatory asset or liability for deferral of the effects of certain derivative and hedging financial accounting rules. 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 & 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, i.e. mark-to-market. Changes in the fair value of derivatives are to be recorded through earnings. 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 is concerned that the quarterly financial income fluctuations from FAS 133/138 on PacifiCorp might create a situation where new accounting standards rather than prudent utility operations could drive management decisions. The mark-to-market change and therefore the earnings swing in one quarter for one contract alone would have been over $200,000,000. This volatility could impact decision-making practices. Staff believes utility decisions should be made with the goal to provide the utility service to customers at the lowest possible price. Staff also believes an accounting order allowing PacifiCorp to establish regulatory assets and liabilities to defer the impact of the accounting entries that will be required under FAS 133/138 will continue to allow this goal to be the focus of the decision-making process of utility management. The intent of the proposal is to continue the treatment of long-term sales and purchase contracts as they have been in the past with the expenses recognized at the embedded prices contained in the contract rather than restating the costs of these contracts on a quarterly basis at market prices. Staff believes this is consistent with the regulatory treatment currently authorized by this Commission.
Transactions where a contract is settled for cash at a gain or loss in advance of normal delivery of power would continue to be available for Commission review in the determination of rates. This proposal does not in any way relieve PacifiCorp of its obligation to demonstrate the prudence of its resource acquisition decisions including review of the original contract, Company actions, or lack of actions with respect to the contract or settlement of the contract prior to completion.
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. PacifiCorp will 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.

Respectively submitted this day of May 2001.

_____________________________________
John Hammond
Deputy Attorney General

Technical Staff: Terri Carlock

JH:TCarlock:gdk:i:umisc/comments/pace01.5jhtc

STAFF COMMENTS 4 MAY 7, 2001