20041227Application.pdf

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Douglas Larson
Vice President, Regulation
PacifiCorp
201 South Main Street, Suite 2300
Salt Lake City, Utah 84140
Telephone: [phone]
Facsimile: [phone]
E-mail: doug.1arson~pacificorp.com
Representative for PacifiCorp
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Application of
F or an Accounting Order Regarding Treatment
Of Certain Interest Expenses Associated With
PacifiCorp s Hydro Re-licensing Obligations
APPLICATION OF PACIFICORP
Case No. P AC-04~ACIFICORP
Pursuant to the provisions of Idaho Code 9 61-524, and the Rules of Procedure of the
Idaho Public Utilities Commission, PacifiCorp ("PacifiCorp" or the "Company ) applies to the
Commission for an accounting order authorizing the Company to (1) defer general rate
consideration of the costs associated with the re-licensing of a number of its hydroelectric
projects at this time, (2) reclassify the interest expense, associated with the Company s various
hydro re-licensing obligations, as an operating expense in FERC account 539, Miscellaneous
Hydroelectric Power Generation Expense, and (3) to include in rate base certain intangible assets
and liabilities that are associated with its hydroelectric licensing obligations.
PacifiCorp proposes to defer consideration of the costs it has incurred as part of the re-
licensing of it hydroelectric projects to a future rate filing, but it believes that re-classification of
the interest expense and inclusion of certain assets and liabilities in rate base is necessary at this
time to track and ensure appropriate regulatory recovery of the interest component that is
associated with the cash expenditures PacifiCorp is obligated to make, pursuant to the re-
licensing orders issued by the Federal Energy Regulatory Commission (FERC).
In support of its Application, PacifiCorp states:
PacifiCorp is an electrical corporation and public utility in the state of Idaho and
is subject to the jurisdiction of the Commission with regard to its rates, services, and accounting
practices. PacifiCorp also provides retail electricity service in the states of California, Oregon
Utah, Washington, and Wyoming.
This Application is filed pursuant to LC. 9 61-501 (general powers of supervision
and regulation) and 9 61-524 (power to establish a Systems of Accounts), which authorize the
Commission to prescribe the accounting to be used by any public utility subject to its
jurisdiction.
Communication regarding this Application should be addressed to:
Doug Larson or
John Stewart
Pacifi Corp
201 South Main, Suite 2300
Salt Lake city, Utah 84140-0023Telephone: [phone]Fax: [phone]
Email: john.stewart~pacificorp.com
In addition, it is respectfully requested that all formal correspondence and Staff requests
regarding this matter be addressed to:
By E-mail (preferred):datareQuest~pacificorp. com
By facsimile:
By mail:
[phone]
Data Request Response Center
PacifiCorp
825 NE Multnomah, Suite 800
Portland, OR 97232
PacifiCorp is in the process of re-licensing a number of its hydroelectric projects
with the Federal Energy Regulatory Commission (FERC) as current licenses expire. FERC
issues the licenses, while various stakeholders in the project participate by providing their input
regarding the application to FERC. Stakeholders in the project include various federal, state, and
local government agencies along with land owners and others who are affected by the project.
As part of the re-licensing process, the Company negotiates with stakeholders to gain support of
the re-license application. These negotiations may result in settlement agreements which
obligate PacifiCorp to make future payments which are intended to enhance tributaries, mitigate
fish and wildlife concerns, and minimize the environmental impacts of the project. The total
dollar amount of these future payments can be in the tens of millions of dollars and may require
the Company to make paYments over the entire course of the license, which may be up to a
period of 50 years. When a settlement agreement is adopted with stakeholders, FERC
incorporates the conditions of the agreement in the terms of the hydroelectric license it issues.
Until recently, the Company did not incur obligations of this magnitude in order
to license its hydroelectric facilities with FERC. However, legislation such as the Endangered
Species Act, the Clean Water Act, and the Fish and Wildlife Coordination Act, among others
now mandate that FERC consider the environmental impacts of a proj ect when making a
licensing decision. To ensure that all environmental issues are considered during the licensing
process, FERC is required to take into account the input of the stakeholders in the proj ect. As a
result, in order to re-license its hydroelectric projects with FERC, PacifiCorp has had to commit
funds that are intended to minimize the environmental impacts of its hydroelectric projects.
the present time, the Company has FERC ordered obligations of this character for both the Bear
River and North Umpqua hydroelectric facilities.
The terms of the recently re-licensed Bear River hydroelectric project will serve
as the basis for explaining the accounting treatment the Company has applied to these future
payments, and that will be applied to subsequent re-licensing obligations of other hydroelectric
projects. The license granted by FERC on 12/23/2003 obligates PacifiCorp to make payments of
approximately $25.9 million over the 30 year life of the license, to minimize the environmental
impacts of the project. PacifiCorp was required by Generally Accepted Accounting Principles
(GAAP) to record these future payments as a liability on the balance sheet upon accepting the
license from FERC.
Recognition of the future payments as a liability on the balance sheet is governed
by Financial Accounting Standards Board (F ASB) Concept Statement 6, paragraph 35 which
states
, "
Liabilities are probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in the
future as a result of past transactions or events." From an accounting perspective, the future
payments to minimize the environmental impacts of the project are the probable future sacrifices
of economic benefit. The event that obligates the Company to make the future payments is the
acceptance of the hydroelectric license from FERC. The future payments mandated in the terms
of the Bear River hydroelectric license meet the conditions set forth by GAAP to be recorded as
a liability. Consequently, a liability was recorded in FERC account 228 to reflect the future
payments.
The offsetting entry for the recorded liability is an intangible asset that reflects the
future benefit the Company will receive from the Bear River hydroelectric license over its life, as
electricity is generated by the facility. This is supported by F ASB Concept Statement 6
paragraph 25 which states
, "
Assets are probable future economic benefits obtained or controlled
by a particular entity as a result of past transactions or events." The past transaction or event that
provided PacifiCorp with a future economic benefit was the acceptance of the hydroelectric
license from FERC. An intangible asset was recorded in FERC accounts 302 and 303 to reflect
the future economic benefit of the Bear River hydroelectric license.
The liability and asset for the Bear River hydroelectric license were recorded on
the balance sheet at $12 194 375. This amount is the present value of the future payments
required by the terms of the license. According to F ASB Concept Statement 7, paragraph 1
quoted market prices are the best evidence of fair value and should be used as the basis for
measurement when available. When no quoted market price exists to determine fair value
present value techniques are often used to establish the fair value. ASB Concept Statement 7
paragraph 78 states
, "
A present value technique is often the best available technique with which
to estimate the fair value of a liability." Since there is no quoted market price for the future
payments required by the terms of the license, the Company used present value techniques to
determine the amount at which the liability and asset would be recorded.
10.The asset value in accounts 302 and 303 will be reduced or amortized over the 30
year life of the license on a straight line basis. The amortization of the asset will be charged to
FERC account 404, Amortization Expense, on the income statement and credited to FERC
account 111 , Accumulated Amortization, on the balance sheet. Due to the application of present
value accounting, interest expense is charged, or accreted on the liability. Accretingl interest on
the liability is intended to report the fair value of the liability on the balance sheet throughout its
life. When interest is accreted, the liability is increased and interest expense is charged to FERC
account 431 , Other Interest Expense. As cash payments are made, in accordance with the terms
Periodically the value of the liability is updated to its fair value. This update or change in the value of the liability
is known as accretion. Accretion is recorded as interest expense. Accretion or interest expense does not reflect
usury payments to creditors. It is an accounting method intended to reflect changes in the fair value of liabilities.
of the license, the liability in FERC account 228 is reduced. Exhibit 1 presents the journal
entries made by the Company to set up the initial asset and liability on the balance sheet and the
annual entries that GAAP requires to record interest accretion, amortization expense, and the
cash payments.
11.The values of the asset and liability on the balance sheet are not expected to be
equal to each other, other than at the beginning and ending of the license term, as the
amortization of the asset and the changes in value of the liability will occur at different times
over the term of the license. The difference between the asset and liability, at any given time
will equal cumulative amortization plus cumulative interest expense less total cash payments
made. At any point in the term of the license, when cumulative booked expense is greater than
cash payments made, the liability will be greater than the asset, creating a net liability position.
Likewise, when booked expense is less than cash payments made, the liability will be less than
the asset and a net asset position will exist. At the end of the life of the license; the total booked
expense will equal the total of all cash payments made. The value of the asset and liability will
both be zero. See Exhibit 2 for a detailed analysis of the expected expenses, balance sheet
amounts, and cash payments, by year, for the Bear River hydroelectric project, as an example.
12.The accounting treatment for the future payments, as described above, is required
by GAAP. However, this accounting treatment does not allow for recovery of the costs incurred
by the Company, to obtain hydroelectric licenses, such as the Bear River license. In the revenue
requirement formula, interest expense is calculated as the weighted cost of debt multiplied by
rate base; this calculation is known as the interest sYnchronization calculation. Interest expense
actually paid by the company is reversed out, and the calculated amount is included in results.
Any interest costs not associated with or necessary to support rate base, is not recovered in rates.
In this application, the Company is seeking to include the license asset and liability in rate base
as will be explained in paragraph 14. Including the license liability in rate base will offset the
rate base addition caused by including the license asset in rate base. Due to the inclusion of both
the asset and liability, the net impact on rate base is expected to be relatively small. Because
the nominal impact on rate base caused by including the license asset and liability in rate base
interest expense associated with the license will not be recovered under the traditional interest
sYnchronization method. Therefore, applying the accounting required by GAAP, the interest
expense component of the future cash payments, recorded in FERC account 431 , will not be
recovered in rates, absent a commission order allowing the Company to change the accounting.
Over the term of the license, cumulative amortization and interest expense will equal the sum of
total cash payments made, as is demonstrated in Exhibit 2. Interest expense related to
hydroelectric projects, such as the Bear River project, should be allowed regulatory recovery
because it represents cash payments made, or to be made, in order to comply with the terms of
the hydroelectric license.
13.In order to allow for regulatory recovery of the interest expense portion of the
future payments relating to hydroelectric licenses, the Company requests commission approval to
record interest expense accreted on the liability to FERC account 539, Miscellaneous
Hydroelectric Power Generation Expense. Recording interest expense as it is accreted in FERC
account 539 will allow for regulatory recovery of these otherwise unrecoverable costs.
Amortization expense will be recovered by recording it in FERC account 404. See Exhibit 3 for
the proposedjoumal entry to record accreted interest expense in FERC account 539. The
application of this accounting treatment presents a timing difference between the recovery of
interest and amortization expense through rates and actual cash disbursements made by the
Company. The timing difference is a result of the cash payments being disbursed over the term
of the license at a different rate than the recording of interest and amortization expense.
14.To offset the effects of the timing difference, the Company proposes to include
both the asset and liability, related to the hydroelectric license, in rate base. As explained in
paragraph 11 , when cumulative interest and amortization expense related to the license exceed
the sum of cash payments made, the recorded liability will be greater than the asset, resulting in a
net liability position for the license and a reduction to rate base. Likewise, when cumulative
interest and amortization expense are less than the sum of cash payments made, the recorded
asset will be greater than the liability, and the license will have a net asset position resulting in an
increase to rate base. Including the license asset and liability in rate base ensures that at any
given time during the term of the license, the timing differences between expense recognition
and cash payments related to the license will be recognized.
15.The accounting treatment for hydroelectric licenses proposed in this application
allows for the regulatory recovery of the cash expenditures associated with obtaining the license.
Recording accreted interest expense on the liability in FERC account 539 will allow for the
recovery of these costs, which represent cash payments made, or to be made, to meet the terms of
the license. Including the license asset and liability in rate base will offset the effect of timing
differences between the recognition of amortization and interest expense and the disbursement of
the cash payments.
16.Nothing in this Application is intended to request any approval regarding future
ratemaking treatment. The Company notes, however, that consistent with past rate proceedings
the Company will seek to recover all prudently incurred costs associated with the re-licensing of
its hydroelectric proj ects in future rate case proceedings.
WHEREFORE, PacifiCorp respectfully requests an Order of the Commission
authorizing PacifiCorp to (1) defer general rate consideration of the costs associated with the re-
licensing of a number of its hydroelectric projects at this time, (2) record accretion expense on its
hydroelectric license liabilities in FERC account 539, Miscellaneous Hydroelectric Power
Generation Expense, and (3) include hydroelectric license assets and liabilities in rate base.
PacifiCorp requests permission to apply this accounting treatment on an ongoing basis to
obligations the Company has incurred, or may incur in order to obtain licensure from FERC to
operate its hydroelectric facilities.
DATED: December 23 , 2004
Respectfully submitted
!J~
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~;VJD. Douglas Larson
Vice-President, Regulation
IDAHO APPLICATION
EXHIBIT
BEAR RIVER HYDROELECTRIC
LICENSE CURRENT ACCOUNTING
Exhibit 1
Bear River Hydroelectric License Current Accounting
FERC Account
Initial Setup Entry
Bear River FERC Hydroelectric License
Bear River Hydroelectric Project Liability
302 303
228.4
194 375
194 375
To record the asset for the Bear River hydroelectric license
along with the offsetting liability. Amount recorded represents the
net present value of the payments to be made over the term of the license.
Recurring Entries
Amortization of Bear River Hydroelectric License
Accumulated Provision for Amortization
404
111
350
350
Monthly entry to record amortization on the FERC license asset.
Other Interest Expense
Bear River Hydroelectric Project Liability
431
228.4
45,540
540
Monthly entry to adjust the liability to fair value through
the accretion of interest on the liability.
Bear River Hydroelectric Project Liability
Cash
228.4
131
590,449
590,449
To record cash payment made to satisfy terms of the FERC license.
Note: The amounts in entries 2 - 4 are based on projected amounts to be booked in Fiscal Year 2006
IDAHO APPLICATION
EXHIBIT
BEAR RIVER HYDROELECTRIC
LICENSE
Exhibit 2
Bear River Hydroelectric License
194,375 12,194,375
FY2005 833,696 360,679 189,180 442,275 447,470 (355,484)
FY2006 11,421,492 412 204 12,145,214 546,483 590,449 (723,722)
FY2007 009,288 412,204 100,986 560,982 605 210 091 698)
FY2008 10,597 084 412 204 12,087 446 574 093 587 633 (1,490,362)
FY2009 10,184 879 412 204 967 318 582 770 702,898 782,439)
FY2010 772,675 412 204 846,838 588,535 709,016 074 162)
FY2011 360,471 412 204 712,186 592 090 726,741 351 715)
FY2012 948,267 412 204 604 117 594 722 702 791 655,851)
FY2013 536,062 412 204 11,479,631 595,874 720 360 943 568)
FY2014 123,858 412,204 11,336,480 595 219 738,369 (3,212 622)
FY2015 711 654 412,204 11,172,194 592,543 756,829 (3,460,540)
FY2016 299,450 412 204 984 611 588,166 775,749 685 161)
FY2017 887 246 412,204 10,771,498 582,030 795,143 (3,884 252)
FY2018 6,475,041 412 204 10,530,430 573,954 815,022 055 389)
FY2019 062 837 412,204 10,258,777 563,744 835,397 195,940)
FY2020 650,633 412,204 953,679 551,184 856,282 303,046)
FY2021 238,429 412,204 611 959 535,970 877,689 373 531)
FY2022 826 224 412 204 230,149 517 821 899,631 (4,403 925)
FY2023 4,414 020 412,204 804,473 496,445 922 122 390,453)
FY2024 001,816 412,204 330 821 471 524 945,175 329,005)
FY2025 589,612 412,204 804,725 442,708 968 805 215 113)
FY2026 177 407 412 204 222 286 410,585 993,025 044,878)
FY2027 765,203 412,204 579,555 375,119 017 850 (3,814 352)
FY2028 352,999 412,204 872,336 336,078 043,297 (3,519 337)
FY2029 940,795 412 204 096,171 293,214 069,379 (3,155,376)
FY2030 528,591 412 204 246,321 246,263 096,113 717,730)
FY2031 116,386 412,204 317,752 194,947 123,516 201 365)
FY2032 704 182 412,204 305,116 138,969 151,604 600 934)
FY2033 291 978 412,204 202,735 78,013 180,394 (910 757)
FY2034 (0)291 978 (0)745 214,480
Bear River Hydro License Balance Sheet Values
000,000
000 000
10,000,000
000,000
000 000
000 000
000,000
000,000)
(4,000,000)
(6,000,000)
-+-
License Asset Value
-It- License Liability Value
Net License Value
Fiaure Calculations:
Columns A, C, E, & F are static numbers in this exhibit
Columns B, D, & G are calculated. FY 2022 will be used as an example to demonstrate how the figures in these columns are calculated
Column B formula: FY2021 B - FY2022 C = FY2022 B
Column D formula: FY2021 D + FY2022 E - FY2022F = FY2022 D
Column G formula: FY2022 B - FY2022 D = FY 2022 G
IDAHO APPLICATION
EXHIBIT
BEAR RIVER HYDROELECTRIC
LICENSE PROPOSED ACCOUNTING
Exhibit 3
Bear River Hydroelectric License Proposed Accounting
FERC Account
Miscellaneous Hydraulic Power Generation Expense
Bear River Hydroelectric Project Liability
539
228.4
540
540
Monthly entry to adjust the liability to fair value through
the accretion of interest on the liability.
Note: The only accounts affected by the proposed accounting change are 431 and 539
The amounts in this entry are based on projected amounts to be booked in Fiscal Year 2006