20091201Comments.pdf

NEIL PRICE
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
POBOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 6864
R'. E. f" r._. \ \,1 F D" vl.~ c.""
2nn~ OEC -I M1 9~ 46
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
P ACIFICORP DBA ROCKY MOUNTAIN ) CASE NO. P AC-E-09-8
POWER FOR APPROVAL OF AN )
ACCOUNTING ORDER AUTHORIZING THE )
DEFERRL OF COSTS ASSOCIATED WITH ) COMMENTS OF THE
COAT MINE STRIPPING ACTIVITIES. ) COMMISSION STAFF
)
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Neil Price, Deputy Attorney General, and in response to the Notice of
Application and Notice of Modified Procedure in Order No. 30942 issued on November 10,2009,
submits the following comments.
BACKGROUND
On October 13,2009, PacifiCorp dba Rocky Mountain Power ("Rocky Mountain" or
"Company") fied an Application with the Idaho Public Utilties Commission ("Commission"),
pursuant to Idaho Code § 61-524 and Rule of Procedure 52, for approval of an Accounting Order
authorizing the Company to record a regulatory asset associated with the còsts of removal of
overburden and waste materials at its affliate coal mines.
STAFF COMMENTS 1 DECEMBER 1, 2009
Rocky Mountain is a Uta corporation providing retail electric service to customers in Utah,
Wyoming and Idaho with its principal place of business in Salt Lake City, Utah. Rocky Mountain,
as part of the PacifiCorp organization, operates numerous coal-fired power plants throughout the
western United States. The Company owns several coal mines, including the Bridger, Deer Creek
and Trapper Mines ("the Mines"), that supply the coal needed to operate the coal-fired plants. Coal
is extracted from the Mines using various underground and surface mining techniques. Surface
mining requires the removal of soil, rock or "overburden" on seams of coal which lie near the
surface.
Rocky Mountain seeks an Accounting Order from the Commission authorizing it to record
as a regulatory asset the costs associated with coal mine stripping activities. The Company believes
that the requested accounting treatment is necessary in order to more closely match the costs of coal
stripping with the actual extraction of the coaL. Recording the coal stripping costs as a regulatory
asset would eliminate the expensing of coal strpping costs when incured as required by Emerging
Issues Task Force stadard 04-6 ("EITF 04-6").
Rocky Mountain proposes that these costs be recorded in Account 182.3, Other Regulatory
Assets, and Account 501, Fuel Expense, based on extracted coal delivery. The Company believes
that customers wil benefit from the modification of the customar treatment of stripping expenses
under EITF 04-6 through increased intergenerational equity among customers.
STAFF REVIEW
In the mining industry, companies may be required to remove overburden and other mine
waste materials to access mineral deposits. The costs of removing overburden and waste materials
are referred to as "stripping costs." During the development of a mine before production begins, it
is generally accepted in practice that stripping costs are capitalized as part of the depreciable cost of
building, developing, and constructing the mine. Those capitalized costs are typically amortized
over the productive life of the mine using the units of production method. A mining company may
continue to remove overburden and waste materials, and therefore incur stripping costs, during the
production phase of the mine. EITF 04-6 addresses accounting for stripping costs incured durng
the production phase.
For puroses of this discussion, the definition of the production phase of a mine is as
follows:
STAFF COMMENTS 2 DECEMBER 1,2009
The production phase of a mine is deemed to have begun when saleable
minerals are extracted (produced) from an ore body, regardless of the
level of production. However, the production phase does not commence
with the removal of de mininis saleable mineral material that occurs in
conjunction with the removal of overburden or waste material for the
purose of obtaining access to an ore body.
EITF 04-6 states that stripping costs incured durng the production phase of a mine are
variable production costs that should be included in the costs of the inventory produced (that is,
extracted) during the period that the stripping costs are incured. This requirement is effective for
the first reporting period in fiscal years beginning after December 15,2005.
The Company states that they expect to incur significant stripping costs at its Bridger Coal
Mine (Bridger) in 2010 for the first time since the issuance ofEITF-04-6. This mine stripping
activity is expected to uncover coal that wil remain in the mine and be extracted in later years. If
EITF-04-6 dictates the accounting for mine stripping costs at Bridger, the cost of the coal extracted
in 2010 wil be higher because it will include all the stripping costs while coal costs in later years
wil be lower because no stripping costs are included.
Rocky Mountain Power in this Application requests an Accounting Order granting the
Company authority to record as a regulatory asset the production costs associated with removing
mine overburden at the Company's affiiate mines. An Accounting Order would create regulatory
accounts that essentially undo the impact ofEITF-04-6 in order to match to costs of coal stripping
with coal extraction. Staff believes approval of an Accounting Order would allow all mine
stripping costs for mines serving Rocky Mountain electric customers to be accounted for in the
same maner. This will correct the cost mismatch that exposes customers to the fuel cost volatilty
inherent in EITF-04-6 accounting treatment. It wil allow the Company to continue accounting for
coal stripping costs as they did prior to 2006.
Staff believes that expensing stripping costs as they are incured results in an inherent
mismatch of stripping costs with coal inventory balances. For example, activities in a given period
may result in the removal of overburden at a mine with only a minor amount of coal extracted
during the same period; during the next period the Company would actually extract the coal
uncovered in the prior period. This misalignment of stripping costs with coal extraction could cause
customers to pay for the costs of uncovering coal well before it is extracted from the mine for use in
power plants to generate electricity. This mismatch of stripping costs to coal uncovered and
extracted could significantly increase fuel cost variability for both the Company and its customers.
STAFF COMMENTS 3 DECEMBER 1, 2009
Staff believes it is reasonable to allow the Company to create a regulatory asset in FERC
Account 182. 3 (Other Regulatory Assets) to account for the cumulative effect of removing mine
overburden during the production phase at the affiliate mines. The stripping costs wil be expensed
through Account 501 (Fuel Expense) when the coal is actually extracted. Staff recommends that the
Company use separate sub-accounts specifically for these entries in order to facilitate Staff's abilty
to audit account activity as needed. It should also be noted that any bookkeeping entries approved
by the Commission in this case do not constitute concurence by Staff on the specific ratemaking
impact.
The Company did not request a carring charge on the regulatory asset associated with mine
stripping costs. Staff agrees with this position. Because this regulatory asset is created by a change
in accounting procedures, Staff believes it would be inappropriate for the asset to be included in rate
base or accrue a carring charge.
Staff believes that all transactions between affiliates should be subject to greater scrutiny
during audit prior to any inclusion of expenses in rates. Because of its affliated relationship to the
mines and the volume of the purchases, Staff believes the Company enjoys a position of dominance
in this relationship. This may make a comparison of prices of non-affiiated market transactions
inadequate as a measure of reasonableness of the Company's purchases from affiiates. As a result,
even when the affiliates' costs are lower than market, Staff believes that component costs, including
the deferred costs of stripping, should be examined for reasonableness for ratemaking puroses.
Actual coal fuel costs allowed to be recovered in rates should be addressed in the next general rate
case determining Power Supply Costs.
STAFF RECOMMENDATION
Upon review of the Company's Application and the related accounting standards issued by
the Emerging Issues Task Force in EITF-04-6, it is the recommendation of Staff that the
Commission approve Rocky Mountain Power's Application for an Accounting Order allowing the
Company to create a regulatory asset to defer costs associated with mine stripping during coal
production. These deferred costs would be amortized over the production life of the coal mine.
Staff also recommends that Rocky Mountain Power not be permitted to ear a return on the
regulatory asset created by the deferral of coal mine stripping costs. The Company has not
requested a retur at this time.
STAFF COMMENTS 4 DECEMBER 1,2009
Finally, Staff recommends conditioning language in the Commission's final Order
reiterating that approval of the Company's Application for an Accounting Order allows deferral of
costs and provides the opportity for recovery. It does not constitute automatic approval of the
specific dollar amounts recorded in the regulatory assets for inclusion in the calculation of the
Company's revenue requirement. The actual amount to be recovered in rates should be determined
in fuher proceedings addressing the actual costs.
Respectfully submitted this \ k. day of December 2009.~
¡;~Nefî
Deputy Attorney General
~-~
Technical Staff: Terri Carlock
Cecily Vaughn
i:/umisc/comments/pace09.8nptccv.doc
STAFF COMMENTS 5 DECEMBER 1,2009
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 1ST DAY OF DECEMBER 2009,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. PAC-E-09-08, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
DANIEL SOLANDER
SENIOR COUNSEL
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-MAIL: daniel.solandel(mpacificorp.com
TED WESTON
MGR, ID REGULATORY AFFAIRS
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-MAIL: ted.weston($pacificorp.com
DATA REQUEST RESPONSE CENTER
PACIFICORP
825 NE MUL TNOMAH STE 2000
PORTLAND OR 97232
E-MAIL: datareguest($pacificorp.com
CERTIFICATE OF SERVICE