20030922Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
HECEIVEO m
ILED
ZDfi3 SEP 22 PM it: 01
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UTILITIES COrH'HSSION
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, ID 83702-5983
Attorney for the Commission Staff
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.COMMENTS OF THE
COMMISSION STAFF
CASE NO. PAC-O3-
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Weldon B. Stutzman, Deputy Attorney General, in response to the Notice of
Application and Notice of Modified Procedure in Case No. PAC-03-8 issued on August 22
2003, submits the following comments.
BACKGROUND
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 asks for an accounting order authorizing the
Company to (1) record, as a regulatory asset or a regulatory liability, the cumulative financial
statement impact resulting from the Company s implementation of SF AS 143 , and (2) record on
an ongoing basis, as a regulatory asset or a regulatory liability, an amount equal to the difference
between the annual SF AS 143 depreciation and accretion expenses and the annual depreciation
expenses based on Commission approved depreciation rates and coal mine reclamation accruals.
STAFF COMMENTS SEPTEMBER 22, 2003
PacifiCorp also requests 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 July 9 2003, PacifiCorp provided Staff with additional
information about its Application. Attachment A to these comments is PacifiCorp s "Reasons
Why FAS 143 is not Appropriate for Ratemaking.
DISCUSSION OF SFAS 143 AND PACIFICORP'S APPLICATION
In June 2001 , the Financial Accounting Standards Board (FASB) issued SF AS 143
Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15
2002. PacifiCorp will be implementing SF AS 143 in its 2004 fiscal year (April 1 , 2003 through
March 31 , 2004).
The F ASB issued SF AS 143 to address the inconsistencies in accounting practices for
asset retirement obligations. F ASB noted that obligations that meet the definition of a liability
were not being recognized when incurred or the recognized liability was not consistently
measured or presented. PacifiCorp is required to implement SF AS 143 in order to comply with
Generally Accepted Accounting Principles.
Historically, under the accounting method currently used by PacifiCorp, 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. Because the cost of removal
is included in depreciation expense, it is included in the Company s revenue requirement. In its
Application, PacifiCorp is not requesting 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.
SFAS 143 Asset Retirement Obli2:ations (AROs)
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
STAFF COMMENTS SEPTEMBER 22 , 2003
asset retirement obligation (ARO) as defined by SF AS 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. This recognizes the entire cost of removal up-front while in ratemaking the cost of
removal is included in depreciation expense over the life of the asset. The liability must be
recorded at fair market value in the period in which the liability is incurred. SF AS 143 also
provides that if market prices are not available, estimates of fair value can be calculated by
discounting (using a credit-adjusted, risk-free interest rate) the estimated cash flows associated
with the ARO to their present value at the date the liability is recorded. PacifiCorp will use the
expected present value method to determine its ARO Liabilities and corresponding ARO Assets
(see next section re: ARO Assets). If a company has chosen to remove assets for reasons other
than legal obligations, then the future costs of removing those assets do not have to be
recognized under SF AS 143.
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. However, the timing of those obligations is indeterminate and the liability
cannot be measured and recorded at this time according to PacifiCorp s Application. PacifiCorp
states that there are no material AROs related to general plant assets.
SFAS 143 ARO Assets. Depreciation and Accretion Expenses
Under SFAS 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.
I According to SF AS 143
, "
it applies to legal obligations associated with the retirement ofa 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."
STAFF COMMENTS SEPTEMBER 22, 2003
Cumulative Effect at Implementation Date
Upon initial implementation of SF AS 143 , entities must establish in their financial
statements all of the amounts that would have been recorded had the new requirements always
been in place. PacifiCorp records this cumulative impact as transition entries. As part ofthese
transition entries, PacifiCorp will reverse the costs already contained in its financial statements
for legally obligated removals. This is done so that the Company will not have two different
removal costs (costs required by SF AS 143 and costs required for ratemaking) included in its
financial statements.
The initial implementation of SF AS 143 for PacifiCorp will create a regulatory asset for
those tangible assets with a positive cumulative effect adjustment and a regulatory liability for
those tangible assets with a negative cumulative effect adjustment. If the Commission authorizes
the accounting order, the total net cumulative adjustment at this time will be a regulatory
liability.
Rate-Re2:ulated Entities. Re2:ulatorv Assets and Re2:ulatorv Liabilities
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. SFAS 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 as opposed
to a charge or credit to net income if the requirements of SF AS 71 are met. PacifiCorp is
requesting such treatment. The regulatory asset or regulatory liability will be removed at the
time the related tangible long-lived asset is removed.
SUMMARY
SF AS 143 requires entities to separately account and report the liability for asset
retirement obligations, capitalize the asset retirement costs, charge earnings for the depreciation
ofthe asset and the accretion of the liability. Under 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 rather than recording such differences as a charge or
credit to net income.
The Company 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
ST AFF COMMENTS SEPTEMBER 22, 2003
there should be no rate change, now or in the future, associated with the application of the
requested accounting treatment. Neither the SF AS 143 transition entries nor the annual
accounting entries will change the level of costs included in rates.
STAFF RECOMMENDATIONS
Staff recommends approval for PacifiCorp to record, as a regulatory asset or liability, the
cumulative financial statement impact resulting from the implementation of SF AS 143 , and to
record the ongoing annual differences between the SF AS 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.
Staff also recommends that the Commission require in its accounting order that
PacifiCorp file annually and as part of its rate case filings, all journal entries made under the
requirements of SF AS 143, including documents supporting the determination of regulatory
assets and liabilities and related dollar amounts.
Staff acknowledges that PacifiCorp has a reasonable opportunity to recover prudently
incurred removal costs. Staff recommends that the reasonableness of differences between actual
and estimated costs should be addressed when those events occur. Staff recommends that no
further confirmation be included in the Commission s accounting order.
Because these new accounting entries will not change the level of the costs included in
rates, Staff is making no recommendation regarding the treatment of SF AS 143 Regulatory
Assets and Regulatory Liabilities in future rate cases. If the assets and liabilities have an
unanticipated affect on rates, then the ratemaking treatment should be determined at the time of
the next rate case.
DATED at Boise, Idaho, this 22nd day of September 2003.
2---=-,
Weldon B. Stutzman
Deputy Attorney General
Technical Staff: Patricia Harms
Michael Fuss
i:u misc/commen ts/paceO3 .8wsphmfusstc
ST AFF COMMENTS SEPTEMBER 22, 2003
REASONS WHY FAS 143 IS NOT APPROPRIATE FOR RATEMAKING
PacifiCorp believes that it is not appropriate to apply the requirements ofF AS 143 in
determining asset retirement obligations (AROs) for ratemaking purposes. Rather, the
Company believes that AROs (i., removal costs) should continue to be established
through traditional depreciation studies and recovered through the application of
Commission-approved depreciation rates. F AS 143 should not be used for ratemaking
for the following reasons:
1. The primary focus of F AS 143 is on financial statement presentation rather than cost
recovery.
The FASB provided the following two reasons for issuingFAS 143: (1) Users of
financial statements indicated that the diverse accounting practices that have
developed for obligations associated with the retirement of tangible long-lived
assets make it difficult to compare the financial position and results of operations
of companies that have similar obligations but account for them differently; and
(2) Obligations that meet the definition of a liability were not being recognized
when those liabilities were incurred or the recognized liability was not
consistently measured or presented.
The provisions ofFAS 143 are primarily focused on determining the appropriate
amount of the ARO liability to be reflected in the financial statements.
For ratemaking purposes the issue with asset removal cost is not nalance sheet
presentation. The ratemaking issue is how to properly estimate removal costs and
how to recover them in a fair and equitable manner from the utility customers
being served by the assets. This process of estimation and recovery is best
accomplished through traditional utility depreciation procedures that are subject
to regulatory review and oversight.
2. Adoption of F AS 143 for ratemaking effectively transfers the determination of the
appropriate amount of asset removal cost from regulators to the F ASB.
When removal costs are determined through a depreciation study, if a regulatory
Commission disagrees with the Company s estimates, the estimates are simply
changed and the depreciation rates adjusted accordingly.
If the F AS 143 estimates of removal cost are to be used for ratemaking, then the
Commission must accept whatever amount is calculated by the Company and
determined by its external auditors to be in compliance with F AS 143.
3. Under the provisions ofFAS 143 , the recognition of removal cost in period expense
over the life of the asset is "back-end loaded"
As a result of the application of present value techniques, F AS 143 results in
removal expense that is lower in the early years of asset life and greater in the
final years.
Attachment A
Case No. PAC-E-03-
Staff Comments
Information provided byPacifiCorp/7/9/039/22/03 Paqe 1 of 2
In contrast, for ratemaking purposes the goal of a depreciation study is to recover
the cost of an asset, including removal cost, on a straight-line basis over the
productive life of the asset.
4. The methods for determining the amount of removal cost required by FAS 143 are
different than those traditionally used in utility depreciation analysis and adopted for
ratemaking purposes , leading to potentially higher cost estimates.
F AS 143 requires that the value of the removal liability be determined based on
fair value , which would ideally be based on a market price. In other words F
143 assumes that asset removal would be accomplished by a third party engaged
by the utility. Use of a third party involves recognizing a profit margin in the
removal cost estimate.
As a practical matter, utilities would normally use their own workforces to the
extent possible to remove and dispose of utility assets. Thus the requirement by
F AS 143 to include a third-party profit margin could lead to higher removal cost
estimates than would be included in a traditional depreciation study.
5. Use ofF AS 143 for ratemaking would create additional regulatory oversight issues.
Under current procedures, all changes in asset lives as well as changes in asset
salvage and removal costs are contained in a single comprehensive depreciation
study that is prepared and submitted for regulatory review and approval at
periodic intervals (normally five years).
IfFAS 143 were adopted for ratemaking, it would still be necessary to prepare a
depreciation study and submit it for review and approval. In addition, for assets
than qualify for F AS 143 treatment, regulators would need to conduct a separate
review of ARO calculations, interest rate determinations, the calculation of annual
accretion and ARO asset amortization expense, etc.
When the recovery of asset removal costs is approved through a depreciation
study, it remains in effect until the next study is prepared, typically five years.
Potentially, under the provisions ofFAS 143 , new AROs could be added and the
amounts of existing AROs could updated each year; requiring virtually
continuous regulatory oversight.
Attachment A
Case No. PAC-E-03-
Staff Comments
Information provided byPacifiCorp/7/9/03
9/22/03 Paap ? of ?
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 22ND DAY OF SEPTEMBER 2003
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NO. PAC-03-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
DAN PETERSON
ACIFICORP
201 S MAIN ST. , SUITE 2300
SALT LAKE CITY, UT 84111
JOHN ERIKSSON
STOEL RIVES BOLEY ET AL
1 UTAH CENTER, SUITE 1100
201 S MAIN ST.
SALT LAKE CITY, UT 84111
CERTIFICATE OF SERVICE