20100625Decision Memo.pdf

DECISION MEMORANDUM- 1
DECISION MEMORANDUM

TO: COMMISSIONER KEMPTON
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL

FROM: NEIL PRICE
DEPUTY ATTORNEY GENERAL

DATE: JUNE 24, 2010

SUBJECT: PACIFICORP’S APPLICATION FOR APPROVAL OF AN
ACCOUNTING ORDER RECORDING CERTAIN POST-RETIREMENT
PRESCRIPTION DRUG COSTS AS A REGULATORY ASSET, CASE
NO. PAC-E-10-04

On April 2, 2010, PacifiCorp dba Rocky Mountain Power (“Rocky Mountain” or
“Company”) filed an Application with the Idaho Public Utilities 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 will no longer be realized for certain costs incurred for post-
retirement prescription drug coverage as the result of the Patient Protection and Affordable Care
Act (“PPACA”). Application at 1.
THE APPLICATION
Rocky Mountain states that its Application was instigated by the passage of the
PPACA on March 23, 2010. Id. at 2. The PPACA “contains provisions for a federal subsidy for
employers offering post-retirement prescription drug coverage to its retirees. . . .” Id. at 3.
According to Rocky Mountain, “[t]he [PPACA] changes the deductibility of certain costs
incurred for post-retirement prescription drug coverage.” Id. at 2. Prior to the PPACA,
employers were allowed “to deduct the entire cost of providing the coverage, even though a
portion is offset by the subsidy.” Id. at 3. The PPACA eliminates the “current rule permitting
deduction of the portion of the expense that is offset by the subsidy.” Id.

DECISION MEMORANDUM- 2
As a result, Rocky Mountain requests authorization for the recording of a “regulatory
asset to FERC Account 182.3 (Other Regulatory Assets) and a credit to FERC Account 410.1
(Deferred Tax Expense) to recover the Idaho Portion of tax benefits previously reflected in rates
that will no longer be realized as the result of the [PPACA].” Id. at 4. If Commission approval
is granted, the aforementioned regulatory asset would be amortized “over a period of four years
beginning January 1, 2011, and reflect the amortization expense in the Company’s next general
rate case.” Id. at 2-3.
Rocky Mountain estimates a $30.0 million system-wide OPEB (Other Post-
Employment Benefit) related cost associated with the change in the law. Id. at 3-4. The
Company attributes approximately $11.4 million of that amount to the first quarter of the 2010
calendar year resulting, when amortized and grossed up for tax effects, in a revenue requirement
impact of approximately $18.5 million on a total company basis amortized over four years. Id. at
4. The Company claims that Idaho’s share of the regulatory asset would be approximately $1.0
million. Id. Rocky Mountain does not request a final Commission decision regarding rate
recovery. Id.
STAFF COMMENTS AND RECOMMENDATION
Staff explained that the Medicare Modernization Act (“MMA”) of 2003 “provided a
28 percent subsidy to companies that provided a retiree drug discount” because it allowed
companies “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.” Staff Comments at 2.
The PPACA’s elimination of that tax subsidy compels companies to “reduce the post-
retirement benefit obligation on the balance sheet by the amount of the actuarially-determined
subsidy to be received.” Id. at 3. “[T]he related deferred tax asset was based on the gross benefit
obligation before the reduction for estimated future subsidies because the subsidy was tax
deductable.” Id. “[F]uture subsidies receivable will remain non-taxable, but the corresponding
amount of OPEB related costs will become non-deductable for income tax purposes.” Id.
“[T]he related deferred tax assets will now be based on the benefit obligation net of subsidy
payments expected after 2012.” Id.
Pursuant to Financial Accounting Standards Board Statement No. 106 (FASB106)
(circa 1990), most companies will make a single accounting entry reflecting a liability for “future
retiree health costs” during the first quarter of 2010. Id. “The reduction in the deferred tax asset
DECISION MEMORANDUM- 3
will be recorded in earnings from continuing operations in the period including the March 2010
enactment date.” Id.
Staff supports the creation of a “regulatory asset in FERC Account 182.3 (Other
Regulatory Assets) to account for the effect of the PPACA” and the amortization of “the expense
over a four-year period beginning January 1, 2011.” Id. This sort of accounting treatment will
provide “a direct benefit to customers by minimizing the rate impact related to the change in
accounting procedures.” Id.
Staff recommends that the Company use separate sub-accounts specifically for these
entries in order to facilitate an audit of Rocky Mountain’s account activity. Id. Staff has not
audited or reviewed the financial data provided by the Company. Id. Staff intends to review the
financial data as part of its financial audit related to general rate Case No. PAC-E-10-07 filed
May 28, 2010. Id.
Rocky Mountain did not request a carrying charge on the regulatory asset emanating
from the revised accounting treatment mandated by the PPACA. Staff believes that it would be
inappropriate to include a carrying charge in rate base. Id. Finally, Staff recommends that an
Order include specific language noting that the Commission will defer any decision regarding
rate recovery for “specific dollar amounts recorded in the regulatory assets” to its deliberations
concerning the Company’s current general rate Case in PAC-E-10-07. Id.
COMMISSION DECISION
Does the Commission wish to approve Rocky Mountain’s Application for an
accounting order authorizing the Company to record a regulatory asset associated with tax
benefits previously reflected in rates that will no longer be realized for certain costs incurred for
post-retirement prescription drug coverage as the result of the Patient Protection and Affordable
Care Act and the amortization of the expense over a four-year period beginning January 1, 2011?

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