20061222Comments.pdf

CECELIA A. GASSNER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 6977
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2006 DEC 22 AN/a: 10
ID/UiC'i.::j;:;Lit"'UTILITIES coi\:~il (ISSIO;
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 PACIFICORP DBA
ROCKY MOUNTAIN POWER'S APPLICATION)
FOR A DEFERRED ACCOUNTING ORDER TO )
DEFER THE COSTS RELATED TO THE
MIDAMERICAN ENERGY HOLDINGS COMPANY TRANSITION
CASE NO. PAC-O6-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of
record, Cecelia A. Gassner, Deputy Attorney General, in response to the Notice of Application
and the Notice of Modified Procedure in Order No. 30176 issued on November 9, 2006, submits
the following comments.
BACKGROUND
On October 10, 2006, PacifiCorp dba Rocky Mountain Power filed an Application
seeking an order authorizing the Company to defer and amortize over a three-year period the
costs related to the transition following MidAmerican Energy Holdings Company s purchase of
PacifiCorp (the "MEHC Transition ). The Commission has jurisdiction over the Company
request pursuant to Idaho Code ~ 61-524.
According to the Application, the Company is incurring costs related to the MEHC
Transition for employee severance and conversion of software to an accounting calendar year.
STAFF COMMENTS DECEMBER 22, 2006
The Company seeks an order authorizing the capitalization of these costs through March 2007
and then amortization of the capitalized balance over a three-year period to begin at the
implementation of new rates from a general rate case filed after December 2006.
The Company wishes to capitalize the costs of the severance program in accordance with
paragraph 9 of SF AS No. 71. The cost of the MEHC Transition would then be amortized on a
straight-line basis over a three-year period. The Company states that this amortization is
appropriate because the MEHC Transition activities are concentrated in the first several months
while the benefits of the transition are realized over a longer timeframe. According to the
Company, charging the transition costs in the period they are incurred would be unfair to existing
customers for the benefit of future customers; thus, capitalizing the costs and amortizing them
supports the matching principle for costs and benefits.
The Company anticipates that its costs related to employee severance will exceed $25
million on a total Company basis. It also estimates that the cost of adapting the software will fall
between $500 000 and $1 000 000. The Company proposes that the MEHC Transition costs be
charged to Account 182.3 Other Regulatory Assets and that they be amortized to Account 930.
Miscellaneous General Expenses. It proposes to include the unamortized amounts in its rate base
where it would earn a return at the Company s authorized rate of return. If the Application is not
granted, these costs would be charged to the Company s operations and maintenance accounts.
The Company does not request a determination of ratemaking treatment ofthe MEHC Transition
costs in this Application; rather, it proposes to address the recovery of these costs in its next rate
case.
STAFF ANALYSIS
Staffhas reviewed the Application and proposed treatment for the deferral of the costs
relating to the employee severance program and conversion of computer software to an
accounting calendar year. Staff has separated its discussion of the deferral request for the
employee severance from the discussion of the deferral request for the conversion of the
computer software.
Initially, Staff agrees with the proposed accounting treatment for the deferrals, and agrees
that the costs should be segregated in separate deferral accounts until they can be considered in
the next general rate case. The accounts should not be included in rate base, accrue any interest
or reflect any carrying charge.
STAFF COMMENTS DECEMBER 22, 2006
The Company should not be entitled to any return, accrued interest or carrying charges on
the deferred amounts. The Company should be allowed to defer the amounts as Staff explains
below; however, two of the primary reasons for being allowed to defer these costs are: 1) to
match the actual customer benefits with the actual costs and 2) to allow recovery of prudently
incurred costs. Staff believes that by authorizing deferred accounting treatment for PacifiCorp,
the Commission is granting the Company a significant opportunity to recover these costs that
would not be recoverable otherwise on a retroactive basis, and therefore recovery of a return or
interest is not necessary.
A three-year amortization of the approved costs appears to be reasonable. This allows
the Company to match the costs with resulting associated benefits or reduced expenses.
Overriding considerations regarding potential recovery of these costs include the
Company s agreement, as part of the MEHC acquisition case, to several commitments. One of
those commitments specific to Idaho was to reduce total Company Administrative and General
(A&G) expenses by $6.0 million annually. See Commitment I 31 in Order No. 29998, Case No.
P AC-05-8. The committed reduction in total Company A&G should be realized by the
customers before any consideration is given to recovery of the amortization associated with these
deferred costs. Additional benefits or cost savings resulting from the reduction of employees
under the severance program or the streamlining of the financial reporting for regulatory
purposes created by the conversion of the computer software should be realized in order to allow
a ratemaking offset with the deferral amortization.
The Company also previously committed that its acquisition would not result in
ratepayers being charged increased rates. In addition, Staff has concerns related to the evidence
the Commission may receive from the Company in the rate case as justification for cost
recovery. The Company is required to carry the burden of proof that the Company did in fact
have a reduction of employees as part of the MEHC Transition, and that employee salaries and
benefits after the severance program is completed are less than the baseline.
The deferral of the costs for severance payments to involuntarily terminated employees as
a result of the MEHC Transition is estimated to cost in excess of $25 million on a total company
basis. Idaho s allocable share of these costs would increase the Company s revenue requirement
by approximately $1.5 to $2.0 million. The termination of these employees, however, will result
in lower salary and benefit expenses that should offset the increase in the revenue requirement.
STAFF COMMENTS DECEMBER 22, 2006
The matching principle of accounting requires that benefits and any costs associated with
that benefit be matched in the same reporting period. The cost savings by the Company in
employee expenses should be evident in the next rate case and therefore a benefit to customers.
If the savings in the reduced human resources expenditures is greater than the costs incurred and
amortized, the Company s customers will likely benefit from the reduction in revenue
requirement in future rate cases. Staff will review in the next rate case any cost/benefit studies
showing that the savings from the Company s employee severance program exceed the costs
incurred to generate those savings.
The Company states in its Application "(tJhe MEHC Transition also necessitates
changing computer software from a fiscal year ending March to a calendar year ending
December " as the Company believes this "will streamline financial reporting for regulatory
purposes." Application at 3. The cost of changing the Company s software to accommodate an
accounting year-end that matches MEHC's without some benefit to the ratepayers should not be
allowed in rates. In the next rate case, the Company will be required to show that the cost of
changing the software for a different year-end results in a benefit to the customers, and that the
benefit is greater than the cost of the change. The Company will have the burden of providing
all cost/benefit analyses to justify the inclusion of this cost in the next rate case. Only when the
Company can adequately show the benefits to customers of this change, would it be appropriate
to consider recovery and allow the Company to match the costs of the change with the resulting
benefits.
Lastly, deferral of the costs as requested in the Application should not limit the right of
Staff to audit, question and challenge the appropriateness, reasonableness and prudence of any of
the costs included in the deferred accounts or any of the benefits the Company may include in
the cost/benefit studies. This sort of review is critical to protect ratepayers.
STAFF COMMENTS DECEMBER 22, 2006
STAFF RECOMMENDATIONS
The Staff recommends:
That the Company be allowed to defer in separate subaccounts the costs of the
MEHC Transition related to the severance of certain employees and for changes
in computer software changing the fiscal year-end from March to December;
That the Company be allowed to justify recovery of these costs in its next general
rate case;
That the deferred account balances will not be included in rate base, accrue
interest or incur any carrying charges;
That the Company be directed to file all cost/benefit studies along with all study
supporting materials with regards to the severance costs and software change
costs in its next general rate case;
That the Commission direct that any deferral approval of the severance and
software costs not limit or modify the Staff s ability to audit, review or challenge
the deferred costs or any benefits claimed by the Company in its justification of
cost recovery; and
That any benefit or cost savings from the severance program or the software
change not be included in any evaluation or other determination as to whether the
Company has met its commitment to reduce Company total A&G by $6.0 million
annually.
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Respectfully submitted this oJ- '3 day of December 2006.
Cecelia A Gassner
Deputy Attorney General
Technical Staff: Joe Leckie
i:umisc:comments/paceO6.llcgjl
STAFF COMMENTS DECEMBER 22, 2006
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 22ND DAY OF DECEMBER 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. PAC-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID
TO THE FOLLOWING:
DEAN BROCKBANK ESQ
ACIFICORP
DBA ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2200
SALT LAKE CITY UT 84111
BRIAN DICKMAN
P ACIFICORP
DBA ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
DATA REQUEST RESPONSE CENTER
ACIFICORP
825 NE MULTNOMAH STE 2000
PORTLAND OR 97232
'K'ocL
SECRETARY
CERTIFICATE OF SERVICE