20031202Final Order No 29385.pdf

Office of the Secretary
Service Date
December 2 2003
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
ACIFICORP FOR AN ACCOUNTING ORDER
REGARDING TREATMENT OF CERTAIN ASSET
RETIREMENT OBLIGATIONS.ORDER NO. 29385
CASE NO. P AC-O3-
On May 27, 2003, PacifiCorp dba Utah Power & Light Company (PacifiCorp;
Company) filed an Application seeking an accounting Order authorizing the Company to record
regulatory assets or liabilities associated with implementation of Statement of Financial
Accounting Standards (SFAS) 143. PacifiCorp s Application asked for an Order authorizing the
Company to record, as a regulatory asset or a regulatory liability, (1) the cumulative financial
statement impact resulting from the Company s implementation of SFAS 143 , and (2) on an
ongoing basis, an amount equal to the difference between the annual SFAS 143 depreciation and
accretion expenses and the annual depreciation expenses based on Commission approved
depreciation rates and coal mine reclamation accruals. PacifiCorp also requested confirmation
by the Commission that (1) asset removal costs, in the form of negative net salvage, are currently
accrued through annual depreciation expense which is recoverable in rates; (2) these costs are
based on estimates of the final removal costs; and (3) such costs are trued-up for ratemaking
purposes at the time the related assets are retired and the actual removal costs are determined.
On August 22, 2003, the Commission issued a Notice of Application and Notice of Modified
Procedure to process PacifiCorp s Application. In response to the Commission s Notice, written
comments were filed only by the Commission Staff.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143
Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15
2002. PacifiCorp will be implementing SFAS 143 in its 2004 fiscal year (April 1 , 2003 through
March 31 , 2004). The FASB issued SFAS 143 to address inconsistencies in accounting practices
for asset retirement obligations. F ASB noted that obligations that meet the definition of
liability were not being recognized when incurred or the recognized liability was not consistently
measured or presented. PacifiCorp is required to implement SFAS 143 in order to comply with
Generally Accepted Accounting Principles.
ORDER NO. 29385
As noted in PacifiCorp s Application, SF AS 143 requires entities to recognize and
account for certain asset retirement obligations in a manner different from the way PacifiCorp
has traditionally recognized and accounted for such costs. Specifically, if a legally enforceable
asset retirement obligation (ARO) as defined by SFAS 143 1 is deemed to exist an entity must
measure and separately account and report the liability for the ARO (ARO Liability) on its
books. Under the accounting method currently used by PacifiCorp before SFAS 143, the
reasonable cost of removing a tangible long-lived asset at retirement is included in the
calculation of depreciation rates and is recovered over the useful life of the asset and, as a
depreciation expense, is included in the Company s revenue requirement. Thus, SF AS 143
recognizes the entire cost of removal up-front while in ratemaking the cost of removal is
included in depreciation expense over the life ofthe asset. In its Application, PacifiCorp did not
request any changes to its currently approved depreciation rates or any change in the level of
asset removal included in the Company s revenue requirement through depreciation expense.
Under SF AS 143 , at the same time the ARO Liability is recorded, a corresponding
and equivalent Asset is also recorded on the entity's books as part of the cost of the associated
tangible asset. The ARO Asset is then depreciated over the life of the associated tangible asset.
In addition, a period-to-period increase in the carrying amount of the liability (accretion expense)
is added to the ARO Liability annually to account for the time value of money, so that at the time
of retirement the recorded ARO Liability will be sufficient to meet the legal obligation. Any
gain or loss when the actual liability is paid in the future will be recognized in the Company
accounting records.
SF AS 143 applies to rate-regulated entities that meet the criteria for application of
F ASB Statement No. 71 , Accounting for the Effects of Certain Types of Regulation. SF AS 143
recognizes that differences may exist between its requirements and the treatment of AROs for
regulatory purposes. SF AS 143 provides that a regulated entity subject to SF AS 71 recognize
differences between the two approaches as a regulatory asset or a regulatory liability.
I According to SF AS 143
, "
it applies to legal obligations associated with the retirement of a tangible long-lived asset
that result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset
except. . . for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party
is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel."
ORDER NO. 29385
PacifiCorp has determined that it will need to record AROs under SFAS 143 for
certain generation and mining assets. The Company has also identified AROs for transmission
and distribution assets. The timing of those obligations is indeterminate, however, and the
liability cannot be measured and recorded at this time, according to PacifiCorp s Application.
PacifiCorp stated that there are no material AROs related to general plant assets.
SUMMARY
SFAS 143 requires entities to separately account and report the liability for asset
retirement obligations, capitalize the asset retirement costs, charge earnings for the depreciation
of the asset and the accretion of the liability. Pursuant to SF AS 71 , a public utility is permitted
to record a regulatory asset or regulatory liability for differences between SF AS 143 and
regulatory accounting for asset retirement obligations. PacifiCorp s proposed accounting
treatment will use SFAS 143 for reporting on its financial statements but retain its current
methodology for ratemaking purposes. As a result, there should be no rate change, now or in the
future, associated with the application of the requested accounting treatment.
The Commission approves PacifiCorp s Application to record, as a regulatory asset or
liability, the cumulative financial statement impact resulting from the implementation of SF
143, and the ongoing annual differences between the SFAS 143 depreciation and accretion
expenses and the annual depreciation and reclamation expenses that are currently authorized by
the Commission in depreciation rates and reclamation accruals. The Commission also requires
PacifiCorp to file annually and as part of any rate case filing all journal entries made under the
requirements of SFAS 143 , including documents supporting the determination of regulatory
assets and liabilities and related dollar amounts.
ORDER
IT IS HEREBY ORDERED that PacifiCorp s Application to record regulatory assets
or liabilities consistent with Statement of Financial Accounting Standards 143 is approved.
PacifiCorp is directed to file annually and as part of any rate case all journal entries made under
the requirements of SF AS 143 , including documents supporting the determination of regulatory
assets and liabilities and their amounts.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. PAC-03-
may petition for reconsideration within twenty-one (21) days of the service date of this Order
ORDER NO. 29385
with regard to any matter decided in this Order or in interlocutory Orders previously issued in
this Case No. P AC-03-Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 9 61-
626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this sf"
day of~~:tff2003.
PAUL
MARSHA H. SMITH, COMMISSIONER
ENNIS S. HANSEN, COMMISSIONER
ATTEST:
vld/O:P ACE0308 ws
ORDER NO. 29385