20070112Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:CECELIA GASSNER
DATE:JANUARY 12 2007
SUBJECT:ROCKY MOUNTAIN POWER'S APPLICATION FOR A DEFERRED
ACCOUNTING ORDER TO DEFER THE COSTS RELATED TO THE
MIDAMERICAN ENERGY HOLDINGS COMP ANY TRANSITION,
CASE NO. PAC-06-
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 MidAmerican Energy Holdings Company transition (the "MEHC
Transition ). The Commission has jurisdiction over the Company s request pursuant to Idaho
Code 9 61-524.
On November 9, 2006, the Commission issued a Notice of Application and Modified
Procedure and solicited comments from interested parties.
comments received were filed by Staff.
Order No. 30176.The only
THE APPLICATION
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.
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 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
DECISION MEMORANDUM
Account 930.2 Miscellaneous General Expenses.It proposes to include the unamortized
amounts in its rate base where they 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
operations and maintenance accounts. The Company does not request a determination of
ratemaking treatment of the MEHC Transition costs in this Application; rather, it proposes to
address the recovery of these costs in its next rate case.
ST AFF COMMENTS
Staff reviewed the Application and Company proposals, and separated the
Company s request for deferral for the employee severance from the request for deferral of the
conversion of 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. Staff believes that the accounts should not be
included in rate base, accrue any interest or reflect any carrying charge. Further, the Staff stated
that the Company should not be entitled to any return, accrued interest of carrying charges to the
deferred amounts.
Staff believes that 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.
Staff noted the potential conflict between potential recovery of these costs and the
commitments made by the Company as part of the MEHC acquisition case. One of those
commitments specific to Idaho was to reduce total Company Administrative and General (A&G)
expenses by $6 million annually. See Commitment I 31 in Order No. 29998, Case No. P AC-
05-8. Staff believes that 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.
Staff further noted that the Company also previously committed that its acquisition
would not result in ratepayers being charged increased rates. Thus, Staff has concerns related to
the evidence the Commission may receive from the Company in the rate case as justification for
cost recovery.
According to the Application, the deferral of the costs for severance payments to
involuntarily terminated employees as a result of the MEHC Transition is estimated to cost in
DECISION MEMORANDUM
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. Staff
commented that the termination of these employees, however, will result in lower salary and
benefit expenses that should offset the increase in the revenue requirement.
Staff asserted that 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. Staff commented that it will review in the next rate case any costlbenefit
studies showing that the savings from the Company s employee severance program exceed the
costs incurred to generate those savings.
Staff believes that 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. Staff noted that the Company will have the burden
of providing all costlbenefit analyses to justify the inclusion of this cost in the next rate case.
Lastly, Staff commented that 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 Recommendation
The Staff recommended:
1. 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;
2. That the Company be allowed to justify recovery of these costs in its next
general rate case;
3. That the deferred account balances will not be included in rate base
accrue interest or incur any carrying charges;
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4. That the Company be directed to file all costlbenefit studies along with all
study supporting materials with regards to the severance costs and
software change costs in its next general rate case;
5. 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
6. 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.
COMMISSION DECISION
Does the Commission desire to approve the Application and allow the Company to
defer certain costs related to the MEHC Transition? Does the Commission desire to adopt and
approve any of the Staff recommendations?
Cecelia Gassner
M:PAC-O6-cg2
DECISION MEMORANDUM