20201030Application.pdf

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Avista Corp.
1411 East Mission P.O.Box3727
Spokane, Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
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VIA OVERNIGHT MAIL
State of Idaho
Idaho Public Utilities Commission
11331W. ChindenBlvd
Bldg 8 Suite 201-A
Boise,ID 83714
Attention: Ms. Jan Noriyuki, Secretary
RE: Case Nos. AW-E-}0-J_L& AVtr-G-20-_0f_
In the Matter of the Application of Avista Utilities, for an Accounting Order for Approval to
change its accounting for Federal Income Tax expense for certain plant basis adjustments and
deferral ofassociated change in tax expense.
Dear Ms. Noriyuki
In accordance with Case No. GNR-U-20-01, Order No.34602, which suspends the requirement to
file physical copies, the Company has attached for elecfronic frling with the Commission an
Application for anAccounting Orderto change its accounting forFederal Income Tax expense for
certain plant basis adjustments and defenal of associated change in tax expense.
Please direct any questions regarding this filing to Elizabeth Andrews at [phone] or
\iz. [e-mail].
Sincerely,
/s/ Paul Kimball
Paul Kimball
Manager of Compliance & Discovery
Enclosures
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY AND GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O.BO)(3727
I4I1 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220 -37 27
TELEPHONE: (s09) 49s -4316
david.meyer@ avistacorp.com
BEFORE THE IDAHO PUBLIC UTILITIES COMNISSION
IN THE MATTER OF THE APPLICATION OF
AVISTA CORPORATION, D IBI A AVISTA
UTILITIES, FOR AN ACCOI.JNTING ORDER
FOR APPROVAL TO CHANGE ITS
ACCOUNTING FOR FEDERAL INCOME TAX
EXPENSE FOR CERTAIN PLANT BASIS
ADruSTMENTS AND DEFERRAL OF
ASSOCIATED CHAI{GE IN TAX EXPENSE
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CASE NO. AW-E-20-12-
CASE NO. AVU-G-20-OA
APPLICATION OF AVISTA CORPORATION
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L INTRODUCTION
Avista Corporation, doing business as Avista Utilities (hereinafter "Avista" or
"Company"), at l4l1 East Mission Avenue, Spokane, Washington, pursuant to Section 6l-524
Idaho Code and Rule 52 of the Idaho Public Utilities Commission ("Commission Rules of
Procedure"), hereby applies to the Commission authorizing Avista to change its accounting for
federal income tax expense from a normalization method to a flow-through method for certain
plant basis adjustments, including Industry Director Directive No. 5 (IDD #5) and meters. As
described more fully below, Avista is currently calculating federal income taxes utilizing the
normalization method for the majority of plant-related temporary book-to-tax differences.
This proposal would allow Avista to utilize the flow-through method on certain plant basis
adjustments, which will provide immediate benefits to customers. With this application, the
Company is proposing to defer those benefits and to begin to provide those benefits to
customers in its next filed general rate case.
Avista is a utility that provides service to approximately 395,000 electric customers
and 259,000 natural gas customers in a 26,000 square-mile area in eastern Washington and
northern Idaho. Avista Utilities also serves approximately 105,000 natural gas customers in
Oregon. The largest community served by Avista is Spokane, Washington, which is the
location of its main offrce.
Communications in reference to this Application should be addressed to:
David J. Meyer, Esq.
Vice President and Chief Counsel for
Regulatory & Governmental Affairs
P.O.Box3727
1411 E. MissionAvenue, MSC 13
Spokane, Washington 99220 -37 27
Telephone: [phone]
E-mail: [e-mail]
Patrick Ehrbar
Director of Regulatory Affairs
Avista Corporation
P.O.Box3727
1411 E. Mission Avenue, MSC 27
Spokane, Washington 99220 -37 27
Telephone: [phone]
E-mail: [e-mail]
Application of Avista Corporation
CaseNo. AVU-E-20- & AVU-G-20-
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Avista Dockets (Electonic Only) - [e-mail]
II. BACKGROT]ND
During 2020, Avista worked with consultants (Deloitte and Ernst and Young) on a tax
review projectl. The outcome of this project was to expand on the tax deduction for repairs
expenses that the Company originally implementedlrr,2014 and to modiff its tax method for
accounting for certain costs relating to meters and mixed service costs (IDD #5). This change
allowed the Company to deduct costs for tax pu{poses that previously were capitalized,thereby
reducing current federal income taxes owed to the Internal Revenue Service (tRS). This
change was included with the 2019 federal tax return that was filed in October 2020. While
the Company expanded its deduction forrepairs expenses, the deferred taxes forthis deduction
will continue to be normalized and therefore, are not part of this tax method of accounting
change and deferral application. Since the meters and IDD #5 basis adjustments were new,
Avista determined that the flow-through method of tax accounting would be appropriate, as
described below, which allows the tax benefits to be given to customers over a shorter period
than if using the normalizationmethod.
Attachment A provides two forms that were provided by Deloitte that Avista included
in its 2019 Federal lncome Tax Returnthat was filed in October2020 (Form 3115, Application
for Change of Accounting Method). These forms describe the new basis adjustrnents (IDD #5
and meters) that were included with this deferral application.
I With the enactment of the Tax Cuts and Jobs Act (TCJA) passed in De cember 2017 ,the Company was no longer
able to utilize bonus depreciation under IRC Section 168(k). The Company entered into the 2019 tax review
project as a replacement for tax cash savings.
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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III. CALCT]LATION OF FEDERAL INCOME TAXES
Federal income taxes are computed by Avista in general rate cases as follows:
First, current federal income tax is calculated. The starting point is "income
before tax adjustrnents" (or pre-tax operating income). Deductible interest
expense computed using rate case concepts (interest synchfonization) is
subtracted from pre-tax operating income to arrive at "net operating income
before taxes". Federal income tax temporary and permanent adjustments,
known as "book-to-tax" or ilM-l'r adjustrnents, are added or subtracted from net
operating income before taxes to produce what is commonly known as the
federal tax base. The federal tax base is reduced by the current state income tax
deduction to arrive at federal taxable income. Federal taxable income is
multiplied by the statutory corporate federal tax rate of 2l% to arrive at the
current federal income tax liability.
Second, the provision for deferred income taxes is computed by multiplying the
normalized temporary book-to-tax differences from the current income tax
calculation by the applicable statutory income tax rate. The resulting deferred
income tax expense is also the net annual change to the accumulated deferred
federal income taxes (ADFIT) component of rate base.
Thfud, the amortization of the excess deferred federal income tax (EDIT) that
arose in the Tax Cuts and Jobs Act of 2017 is computed using the average rate
assumption method (ARAM) and is recorded as a reduction to federal income
tax expense.
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Normalization versus Flow-Through
There are two methods that regulated utilities may use to record the federal income
taxes related to book-to-tax differences, normalization and flow-through. Using a
normalization method to compute income tax expense simply means that all of the income tax
costs related to items in the crrrent period will be computed, whether paid in the current year
or paid later. This method creates deferred income tax and the associated accumulated
deferred income tax that is subtracted from rate base.2 Flowthrough accounting generally
2 Avista is required to treat certain plant-related items in a manner consistent with the Internal Revenue Code
normalization requirements and consistency rule in order to avoid a normalization violation. Specifically, the
plant related items should be passed through to customers no more quickly than over the remaining book life of
the underlying assets. Additionally, all of the following items must be treated consistently: depreciation expense,
tax expense (including deferred tax expense), accumulated deferred taxes on the balance sheet, and rate base.
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-2O-
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treats the actual current Federal income tax liability of the regulated utility as the utility's tax
expense in determining utility rates. Thus, under flow-through accounting, the tax benefits of
accelerated tax expense and other similar items are taken into account immediately in
determining utility rates (through their effect of reducing current income tax expense).
Accumulated deferred tax reserves related to tax items that have been flowed through are not
included in the rate base calculation as the tax benefit was provided to customers.
A normalized book-to-tax difference is a temporary difference that for accounting
purposes adjusts current income tax expense and has an equal offset in deferred income tax
expense, thus the net effect to total book income tax expense is zero. A flow-through book-
to-tax difference is also a temporary difference that adjusts current income tax expense, but
does not have an offsetting deferred income tax expense amount. This is illustrated in the
following example using depreciation expense as the timing difference in Tables I through 3.
Table 1: Example - Depreciation Book-to-Tax Difference
Asset Cost = 5400
BookLife=4years
TaxLife=2Years
Year L
Year 2
Year 3
Year 4
Total
Book
Depreciation
ExpenseS roo
100
100
100
Tax
Depreciation
ExpenseS zoo
200
Book-to-
Tax
DifferenceS roo
100
(1oo)
(1oo)S +ooS +oos
Application of Avista Corporation
Case No. AW-E-20- & AVU-G-2O-
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Table 1 above shows that for tax purposes, the Company will deduct $100 more for tax
purposes than for book in the first two years and then that will reverse over the next two years.
Therefore, at the end of the four yearc, the Company will have recorded a book and tax
deduction for the entire $400 investrnent. This provides a cash benefit to the Company from
the IRS.
Table 2: Example - Normalization Method
Year 1
Year 2
Year 3
Year 4
Total
Current Tax
Expense
(Benefit)s l42l
!0"
Deferred Tax
Expense
(Benefit)
s21
2t
(21)
(271
Total Tax
Expense
(Benefit)
s (21)
(27l.
l27l
(21)
S s s (84)
Using the normalization method of accounting for book-to-tax differences, the
Company would record a consistent $21 tax benefit in each of the four years. This is done by
recording deferred taxes on the book-to-tax differences. Customers do not realize the benefit
of the timing difference (lower tax expense) in the first two years using this method. (However,
customers do benefit from a lower rate base as ADFIT is an offset to rate base lowering net
plant.)
Application of Avista Corporation
Case No. AW-E-20- & AW-G-20-
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Table 3: Example - Flow-Through Method
Year 1
Year 2
Year 3
Year 4
Total
Current Tax Deferred Tax
Expense Expense
(Benefit) (Benefit)s (42) s
(421
Total Tax
Expense
(Benefit)
5 (421
l42l
s (84)s s (84)
Using the flow-through method of accounting for the book-to-tax differences, the
Company would record the tax benefit in the first two years. This is done by recording no
deferred taxes on the book-to-tax differences within the income statement. Using this method,
customers realize the tax expense benefit of the timing differences allowed by the IRS in the
first two years. However, customers do not benefit from a lower rate base as there is no ADFIT
to offset or lower net plant.
TV. PROTECTED VS NON.PROTECTED ASSETS
The IRS requires normalization on book-to-tax differences it considers orotected. The
capitalizrng of utility property under IRC$ 263(a) constitutes protected assets that are subject
to the normalization requirement under IR.C $ 168(D(9). The two primary areas that give rise
to protected differences are book-totax differences for depreciation method and depreciable
life of the asset (commonly referred to as "method/life differences"). The normalization
requirements of the Internal Revenue Code are designed to prohibit the direct or indirect flow-
through of accelerated depreciation tax benefits to utility customers. Other book-to-tax
Application of Avista Corporation
Case No. AW-E-20- & AVU-G-2O-
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differences not related to method/life differences are considered non-orotected, such as
expenditures capitalized for book purposes but allowed as a deduction for tax purposes. These
non-protected book-to-tax differences are not required to be normalized.
Avista records the accumulation of deferred taxes on plant book-to-tax differences in
FERC AccountNo.2829OO. As of December3I,20l9, FERC AccountNo.282900 contained
a balance of $819 million that has been normalized prior to adjustrnents related to the strategic
tax review. After adjustment for the stategic tax review, the estimated balance is $885 million.
Much of this balance is protected because it relates to accelerated depreciation including bonus
depreciation.3 However, included in FERC Account No. 282900 is non-protected basis
adjustments. Avista has historically normalized the entire FERC Account No. 282900 balance.
However, Avista is proposing a change to the flow-through method for certain non-protected
basis adjusfrnents discussed below.
Table 4 provides a breakdown of the protected and non-protected deferred tax balances,
after adjustment for the 201 9 tax review, as of Decemb er 3l , 2019 .
!g!19.4,: FERC Account No.282900 ADFIT Detail
FERC Account No. 282900 - ADFIT
Estimated Balance at December 3L,zOLg
Protected
Non-Protected - Proposed Flow-Through
Non-Protected - Other
s 599,773,098
to6,824,795
778,574,5O8
s 88s,t72,40L
3 Bonus depreciation is a ta,x incentive that allows a business to immediately deduct a large percentage of the
purchase price of eligible assets, such as machinery, rather than write them off over the "useful life" of that asset.
Application of Avista Corporation
Case No. AW-E-20- & AW-G-20-
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There is no restriction from the IRS on changing to flow-througlr for non-protected
assets. Per guidance in a Private Letter Rulinga, (PLR 202010002), which has been provided
as Attachment B, the Internal Revenue Service held that the ADFIT resulting from the repair
related RC $ a81(a) adjustment is not subject to the normalization method of accounting
within the meaning of the IRC $ 168(iX9). They also held that the ADFIT resulting from
expenditures (1) related to an item of property includible in rate base and recoverable as
regulatory depreciation expense in the determination of the revenue requirement and (2)
deducted as repairs under IRC $162 to public utility property within the meaning of IRC $
168(i)(10) pursuant to the tax method of accounting change for repairs, is not subject to the
normalization method of accounting.
In PLR 202033002, also provided in Attachment B, the IRS ruled that depreciation-
related ADFIT balances attributable to costs that were capitalizedinto depreciable tax basis of
public utility property prior to a change in tax method of accounting, reclassiffing such costs
as current deductions, do not remain subject to the Section 168(iX9) deferred tax normalization
rules, after the changes in tax method of accounting (and, thus, presumptively are not required
to be reversed using ARAM).
V. REASONFORPROPOSAL
By changing to the flow-through method of accounting for certain basis adjustments,
including IDD #5 and meters, Avista will have an estimated $106 million (system) of ADFIT
4 Private Letter rulings obtained by other companies are used as guidance in determining how the IRS may rule
when facts and circumstances are similar. Avista's facts and circumstances related to the non-protected basis
adjustments described in this application are similar to the facts and circumstances included in recent private letter
rulings attached as Attachment B, and therefore will not require one specific for Avista.
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-20-
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as of December 31, 2019, which represents approximately $134 million (system) that can be
recorded in a regulatory liability and used to offset customers' rates in future general rate cases.
A summary of the estimated ADFIT amount by jurisdiction is shown in Table 5 below.
Table 5: Tax Benefit by Jurisdiction at December 3lr2019
Tax lmpact of Basis Adjustments (lDD #5 and Meters)
December 3t,20Lg
WA Electric
lD Electric
WA Natural Gas
lD NaturalGas
OR Natural Gas
Grossed-up for
ADFIT FederalTaxes
s (40,748,313) s (s1i80,141)
(2L,94L,3991: 127,773,9231
(19,653,2921 (24,877,5851
(8,422,8391 (10,66!,822t,
(15,443,480) (19,548,709)
s (106,209,323) s (134,M2,1871
Avista would have an annual additional tax benefit each year. beginning n2020, which
would be available for immediate use to offset customers' rates estimated to be $16.4 million,
shown in Table 6 below.
: Tax Benefit by Jurisdiction for Calend* 2020
Estimated Tax lmpact of Basis Adjustments (lDD #5 and Meters)
Annual Additional Amounts
WA Electric
lD Electric
WA Natural Gas
lD Natural Gas
OR NaturalGas
Grossed-up for
ADFIT FederalTaxes
s (5,L79,775) s (6,556,678)
12,789,L101 (3,530,519)
(2,624,9931 (3,322,7761
1L,L24,9971 (7,424,0471
(L,24O,032l. (1,559,551)
s (12,958,907) s (16,403,679)
Application of Avista Corporation
Case No. AW-E-20- & AVU-G-2O-
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ADFIT is a reduction to rate base. If Avista was authorized to change to the flow-
through method of accounting for certain basis adjushnents, including IDD #5 and meters, and
the tax benefits were to be given to customers over a shorter period than if using the
normalization method, the ADFIT balance related to these basis adjustments would not be
included in the rate base calculation as the amount would have already been flowed through to
customers. Given this complexrty, it is through a general rate case that the proposed
modifications take place, with the benefit used to mitigate such rate frlings and appropriately
kack changes in rate base and other accounts.
Avista has filed an accounting application with each jurisdiction (Idaho, Washington
and Oregon) to change from the normalization method to the flow-through method of
accounting for the IDD #5 and meters. The Company has asked to defer the deferred tax
balance in a regulatory liability until the benefit can be passed back to customers in a general
rate case proceeding. In addition, the tax benefits that are earned beginning in 2020 would
also be deferred until that level of benefit is also built into customers' rates.
Because some costs that are included as IDD #5 and meters are common to all services
and jurisdictions and because of limitations in the Company's tax software system, the
Company must maintain uniform tax accounting across its three state service territories.
Therefore, all three states must approve the proposed change in accounting for the tax benefits
it realizes from these two tax methods. Avista anticipates receiving approval from all three
jurisdictions at this time, however, the benefits of the change cannot be used in any one state
until approval has been obtained in all three states.
Again, because Avista needs approval in all three states and because the change impacts
both tax credits and rate base, Avista plans to include this change in accounting for these tax
Application of Avista Corporation
Case No. AW-E-20- & AVU-G-2O-
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credits in each state's next filed general rate case. It is for this reason the Company is
requesting an order approving the Company's deferral application and change from the
normalization method to the flow{hrough method of accounting for the IDD #5 and meters
tax benefits from all three jurisdictions, on or before May 1,2021.
YI. DESCRIPTION OF BASIS ADJUSTMENTS INCLTJDED IN PROPOSAL
During 2020, Avista worked with consultants from the Deloitte accounting firm on a
tax review project. The outcome of this project was to modiff its tax method for accounting
for certain costs relating to meters and mixed service costs (IDD #5). This change allowed the
Company to deduct costs for tax purposes that previously were capitalized, thereby reducing
current federal income taxes owed to the IRS. This change was included with the 2019 tax
return that was frled in October 2020.
IDD #5 relates to mixed services costs that are part of the capitalized book costs of
utility property but can be capitalized to inventory. Mixed service costs are defined as service
costs that are partially allocable to production or resale activities (capitalizable) and partially
allocable to nonproduction or non-resale activities (deductible). Avista does not deviate from
its financial statement treaftnent of mixed service costs for federal income tax purposes. An
opportunity exists for Avista to change to an "other reasonable method" for allocating mixed
service costs. This results in less indirect costs being capitalized to self-constructed assets for
federal income tax purposes. The costs not capitalized to self-constructed assets are deducted
currently. Inventory allocation and engineering costs are the main drivers.
Avista currently capitalizes and depreciates meters over 5 to 20 years for tax purposes
and over 15 to 20 years for book purposes depending on the meter type. I.R.C. Section 162
Application of Avista Corporation
CaseNo. AVU-E-2O- & AVU-G-20-
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allows a deduction for all ordinary and necessary expense paid or incurred during the taxable
year in carrying on any trade or business. Treas. Reg Section L162-3(c) materials and supplies
means tangible property that is used or consumed in the taxpayer's operations that is not
inventory and that-
(iv) Is a unit of property as determined under Sectionl.263(a)-3(e) that has
an acquisition cost orproduction cost... of$200 or less.
The meter accounting method change allows Avista, for income tax purposes, to deduct
meter costs instead of capitalizing them if the per unit cost is less than $200.
Each of the accounting method changes described above were evaluated under RC $
a8l(a) which allowed Avista to take deductions for prior periods (catch-up deductions). The
excess deferred income tax (EDIT) amount associated with this tax depreciation is also
reclassified to the basis adjustment moving it from protected to non-protected. Attachment C
details the amounts related to IDD #5 and meters that are available for flow-through to
customers at December 31,2020.
The change in accounting methods discussed above were included in the Company's
2019 federal income tax return that was ftled in October 2020,btfiwi1l be reviewed by the IRS
during a future audit of the Company's tax returns. The Company does not expect the
calculations to materially change due to futrue review by the IRS, however, if any adjustments
are made by the IRS, those amounts would result in adjustments to the amounts available to be
flowed through to customers through the deferral.
YII. PROPOSEDACCOT'NTINGTREATMENT
The Company has provided the accounting entries that reflects the impact of changing
from using the normalization method for certain basis adjustments to the flow-through method
Application of Avista Corporation
Case No. AW-E-20- & AVU-G-2O-
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in Attachment D. A high-level summary of those accounting entries follows.
Avista will record the2019 tax retum adjustments and all future monthly tax accruals
using the normalization method, until the Company receives approval to change to the flow-
through method in all three states. This allows the Company to continue to record deferred
taxes and will increase the ADFIT balance recorded in FERC Account No. 282900.
After the Company receives approval from all three states to utilize the flow-through
method of accounting for the basis adjustments described above, the Company will record the
amounts that have accumulated at that point related to those basis adjustrnents to FERC
Account No .254.3 - Regulatory Liability at the erossed-up amount. Associated deferred taxes
will be recorded on this deferral in FERC Account No. 190 - ADFIT. The net of these two
accounts will equal the amount that had been recorded in FERC Account. No. 282900 and will
be included as an offset to rate base until flow-through begins. This will allow customers to
continue to receive the benefits of the basis adjustments, as a reduction to rate base, until such
time the flow-through benefits are included in rates.
As a part of the Company's next filed general rate case, the Company will propose the
return of the accumulated tax credits recorded in FERC Account No. 254.3 taking into
consideration the impact of any proposed change in base rates. Once those credits are being
returned to customers, the Company will arnrtize the accumulated tax credits recorded in the
regulatory liability account as approved by the Commission, until such time that the regulatory
liability has been zeroed-out.
The Company is also proposing to defer the future annual benefits of these two basis
adjustments to ensure the customer receives all the benefits from the flow-through.
Application of Avista Corporation
Case No. AW-E-20- & AW-G-20-
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YI[. MODIFIED PROCEDT]RE
Avista believes tlnt a hearing is not necessary to consider the issues presented herein,
and respectfully requests that this Application be processed under Modified Procedure; i.e., by
written submissions rather than by hearing. RP 201, et seq.
D( REOUEST FOR RELIEF
WHEREFORE, Avista respectfully requests that the Commission issue an Order
approving Avista to change in its accounting for federal income tax expense from a
normalization method to a flow-through method for certain plant basis adjustnents, including
Industry Director Directive No. 5 (IDD #5) and meters, and to defer the benefits associated
with these changes for future retum to customers. Once approved, the impact on federal
income tax expense and ADFIT, which is a component of rate base, would be included in a
futtre general rate case.
DATED at Spokane, Washin5on, this 30ft day of October2020.
AVISTA CORPORATION
Patrick Ehrbar
Director of Regulatory Affairs
Avista Corp
Application of Avista Corporation
Case No. AVU-E-20- & AVU-G-2O-
Page 14
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VERIFICATION
STATE OF WASHTNGTON )
)
County of Spokane )
Patick Ehrbar, being duly swom, on oath deposes and says:
That he is the Director of Regulatory Affairs of Avista Corporation;
That he has read the foregoing Application, knows the contents thereof, and
believes the same to be true.
Patrick Etrbar
Subscribed and sworn to before me this #*of October,2020.
tl l1L
Notary Public in and for the State
Washington, residing in Spokane
Application of Avista Corporation
Case Nos. AVU-E-20- & AVU-G-2O-
2 3
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