20100610Comments.pdf

NEIL PRICE
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 6864
REei:"Lj
20m JUN ! 0 PH 3: f8
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 PACIFICORP DBA ROCKY MOUNTAIN)
POWER FOR APPROVAL OF AN )
ACCOUNTING ORDER RECORDING )
CERT AIN POST -RETIREMENT )
PRESCRIPTION DRUG COSTS AS A )REGULATORY ASSET. )
CASE NO. PAC-E-IO-4
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of
Record, Neil Price, Deputy Attorney General, in response to the Notice of Application and Notice
of Modified Procedure, issued on May 20, 2010, Order No. 31088, submits the following
comments.
BACKGROUND
On April 2, 2010, PacifiCorp dba Rocky Mountain Power ("Rocky Mountain" or
"Company") filed an Application with the Idaho Public Utilties Commission ("Commission"),
pursuant to Idaho Code §§ 61-301, 61-307, 61-622, and 61-623, for approval of an Accounting
Order authorizing the Company to record a regulatory asset associated with tax benefits
previously reflected in rates that wil no longer be realized for certain costs incured for post-
retirement prescription drug coverage as the.result of the Patient Protection and Affordable Care
Act ("PP ACA").
STAFF COMMENTS 1 JUNE 10,2010
Rocky Mountain's Application for an Accounting Order was spurred by the passage of the
PPACA on March 23,2010. Designed to encourage employers to continue providing high quality
prescription drug coverage, the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 ("MMA") contains provisions for a federal subsidy of 28 percent for employers
offering post-retirement prescription drug coverage to its retirees that is at least as valuable as the
Medicare Par D standard drug benefit. Prior to passage of the PP ACA, employers were
permitted to deduct for income tax puroses the entire cost of providing the coverage, even
though 28 percent of the benefit was offset by the subsidy. The PPACA eliminates the MMA rule
permitting deduction of the portion of the expense offset by the subsidy.
Rocky Mountain requests authorization to record a regulatory asset to FERC Account
182.3 (Other Regulatory Assets) and a credit to FERC Account 410.1 (Deferred Tax Expense) in
order to allow recovery of the Idaho portion of tax benefits previously reflected in rates that wil
no longer be realized as the result of the MMA.
Rocky Mountain proposes that the aforementioned regulatory asset should be amortized
over a period of four years beginning January 1,2011. Rocky Mountain also proposes to reflect
the amortization expense in the Company's next general rate case.
Rocky Mountain estimates $30 milion in system-wide OPEB (Other Post-Employment
Benefit) related costs associated with the change in law. Rocky Mountain attibutes
approximately $11.4 millon of that amount to the first quarer of the 2010 calendar year resulting,
when amortized and grossed-up for tax effects, in a revenue requirement impact of approximately
$18.5 milion on a total company basis with a proposed four-year amortization period. The
Company estimates that Idaho's share of the regulatory asset is approximately $1.0 milion.
Rocky Mountain does not request a final Commission decision regarding rate recovery in
this fiing.
STAFF ANALYSIS
In the Medicare Modernization Act ("MMA") of 2003, the federal governent provided a
28 percent subsidy to companies that provided a retiree drug discount. Subsequent to negotiations
related to the MMA, companies were allowed to deduct 100 percent of the cost of the drug benefit
provided to their retirees even though the companies were paying only 72 percent of the benefits.
However, due to provisions included in the PPACA, the portion of the expense offset by
the 28 percent subsidy is no longer deductible for tax puroses and companies may deduct only
STAFF COMMENTS 2 JUE 10, 2010
the net amount of the drug costs. Therefore, companies must reduce the post-retirement benefit
obligation on the balance sheet by the amount of the actuarially-determined subsidy to be
received. In addition, the related deferred tax asset was based on the gross benefit obligation
before the reduction for estimated future subsidies because the subsidy was tax deductable.
Under the PPACA the future subsidies receivable wil remain non-taxable, but the corresponding
amount of OPEB related costs wil become non-deductable for income tax puroses. As a result,
the related deferred tax assets wil now be based on the benefit obligation net of subsidy payments
expected after 2012.
Consistent with Financial Accounting Standards Board Statement No. 106 (F ASB 1 06)
(circa 1990), the future retiree health costs must be recorded as a liabilty. For most companies,
this wil result in a one-time accounting entr that wil be recorded in the first quarer of201 O.
The reduction in the deferred tax asset wil be recorded in earnings from continuing operations in
the period including the March 2010 enactment date.
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 effect of the PPACA on
deductibilty of retiree drug benefits. Staff also believes it is reasonable to amortize the expense
over a four-year period beginning Januar 1, 2011. Staff believes this provides a direct benefit to
customers by minimizing the rate impact related to the change in accounting procedures. Staff
recommends that the Company use separate sub-accounts specifically for these entries in order to
faciltate Staffs abilty to audit account activity as needed. Staff notes that the actual financial
data provided by the Company in its Application has not been audited and reviewed. Although
Staff believes that creation of a regulatory asset in this case is reasonable and beneficial, fuher
review wil be conducted by Staff during its financial audit related to General Rate Case No.
PAC-E-1O-7 fied May 28,2010. The specific bookkeeping entries and amounts booked will be
evaluated and verified for inclusion in rates when the Commission renders its decision in Case
No. PAC-E-1O-7.
The Company did not request a carring charge on the regulatory asset associated with the
accounting changes mandated by the PP ACA. 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 carying charge.
STAFF COMMENTS 3 JUE 10,2010
SUMMARY AND RECOMMENDATIONS
Upon review of the Company's Application and the related accounting standards, 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 and amortize the
expenses associated with the change in deductibilty of retiree drug benefits resulting from
passage of the PPACA. These deferred expenses should be amortized over a four-year period
beginning Januar 1,2011.
Staff also recommends that Rocky Mountain Power not be permitted to earn a retur on
the regulatory asset associated with the change in deductibilty of retiree drug benefits. The
Company has not requested a return at this time.
Finally, Staff recommends conditioning language in the Commission's final Order
reiterating that approval of the Company's Application for an Accounting Order allows creation
of a regulatory asset, amortization of costs and provides the opportunity for recovery of the
amortization. It does not determine the specific dollar amounts recorded in the regulatory assets
that may be included in the calculation of the Company's revenue requirement. The actual
amounts booked wil be verified with the amount to be recovered in rates determined during
proceedings associated with the General Rate Case (PAC-E-10-7) fied by the Company on May
28,2010.
Respectfully submitted this ¡:Q£day of June 2010.
tV;Q~
Neil Price
Deputy Attorney General
Technical Staff: Cecily Vaughn
Terri Carlock
i:umisc:commentspace i O.4npcvtc.doc
STAFF COMMENTS 4 JUE 10,2010
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 10TH DAY OF JUNE 2010,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. PAC-E-10-04, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
TED WESTON
ID REGULATORY AFFAIRS MANAGER
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-MAIL: ted.weston(qpacificorp.com
DANIEL E SOLANDER
SENIOR COUNSEL
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-MAIL: daniel.solander(qpacificorp.com
DATA REQUEST RESPONSE CENTER
PACIFICORP
825 NE MUL TNOMAH STE 2000
PORTLAND OR 97232
E-MAIL: dataequest(qpacificorp.com
CERTIFICATE OF SERVICE