PUBLIC MEETING DATE: February 16, 1999

DATE: September 15, 1999

TO: Bill Warren through Lee Sparling and Ed Busch

FROM: Judy Johnson

SUBJECT: Docket No. UM 881

NW Natural’s Deferred Accounting Application for Incremental Year 2000 Compliance Costs

 

SUMMARY RECOMMENDATION:

I recommend the Commission approve NW Natural’s (company) application for reauthorization of deferred accounting treatment for its incremental Year 2000 (Y2K) compliance costs for a 12-month period beginning December 18, 1998. I further recommend the Commission approve staff’s recommendations that no carrying charges be allowed on these deferred accounts and that NW Natural be required to file semiannual reports showing incremental Y2K expenditures, as outlined below, with the first report due on July 1, 1999.

DISCUSSION:

NW Natural filed its original application on December 18, 1997, requesting deferred accounting treatment for incremental Year 2000 compliance costs. The Commission approved the company’s deferred accounting request at the December 30, 1997, public meeting. NW Natural has filed an application requesting reauthorization to defer Y2K costs.

The account is subject to ORS 757.259 and OAR 860-27-0300, and the Commission may authorize deferred accounts for periods of 12 months or less. As a result, the deferrals will cease on December 17, 1998, unless the Commission reauthorizes the process. Staff recommends the Commission allow NW Natural to continue the deferred accounting previously authorized for a 12-month period beginning December 18, 1998. The company maintains that this filing is consistent with the Stipulation and Agreement approved December 30, 1997, in Order No. 98-019.

Staff interprets the Stipulation and Agreement as supporting this filing. However, as discussed below, staff will not recommend a further extension of deferred accounting treatment for Y2K compliance costs that are incurred after January 1, 2000.

On January 25, 1999, Lee Sparling, Administrator of the Electric and Natural Gas Division of the Oregon Public Utility Commission, sent a letter to all Oregon regulated utilities outlining accounting treatment for Y2K expenditures. In the letter he indicated the willingness of the OPUC staff to support deferred accounting for these costs under the following conditions:

1. Staff will support deferrals for incremental costs of Year 2000 compliance. As defined by PGE, " . . .all incremental expenses associated with the research, testing, analysis and repair costs required due to the ‘Year 2000’ issues. Incremental costs are external costs (such as material and external labor) and PGE labor costs associated only with new employees hired specifically for the ‘Year 2000’ work."
2. Staff will support deferrals from the date the application is received through December 31, 1999. Approval to defer the incremental costs of Year 2000 compliance activities through 1999 provides the utility with a reasonable incentive to take all necessary actions to ensure its systems are Y2K compliant. Staff believes additional costs after 1/1/2000 should not be significant unless the utility has not prudently conducted its Y2K remediation activities—or unless adversely affected by outside system issues. In the event of the latter, staff believes the company should pursue remedies from the outside entities responsible. Accordingly, if a utility requests deferrals past December 31, 1999, it will bear the burden of demonstrating that the costs are material and cannot otherwise be offset.
3. Staff will recommend amortization over 5 years for accounting purposes beginning on January 1, 2000, to properly match recognition of the costs with the period over which benefits will be received. (NW Natural is amortizing the costs over 5 years beginning January 1998.)
4. In its next general rate proceeding, the utility may request recognition of the annual amortization expense and rate base treatment for the unamortized balance. An earnings review will be conducted at the time the utility proposes to include the annual amortization expense in rates. For this type of deferral, carrying charges would not be accrued on the deferred account.
5. Following completion of Y2K compliance activities, staff will recommend the amount of costs appropriately deferred and subject to amortization. Our recommendation will be based on a review to ensure that the costs deferred are incremental and prudently incurred. If the utility’s Y2K remediation activities are not conducted smoothly or effectively, staff reserves the right to propose adjustments to deferral balances in a subsequent rate proceeding.
6. From the date deferrals begin until amortization is completed, the utility should file semiannual reports showing, on a monthly basis, incremental Y2K expenditures to date, amounts deferred (including Commission-determined adjustments), amortization expense, and unamortized balance.

Staff recommends that NW Natural be required to file its first report on July 1, 1999.

Description

NW Natural has software -- including its customer service, operations, and financial systems -- which was written using two digits to define the year, rather than four. Any of the company’s software that is time-sensitive may recognize a date using "00" as the year 1900 rather than 2000. This could result in the computer shutting down or performing incorrect calculations.

The company states it will defer its costs of Year 2000 compliance to the extent these costs are incremental to its costs of developing the new CIS, or of operating and maintaining its other systems but for the Year 2000 problem. These costs include costs of Year 2000 assessment, planning, and remediation, but do not include capital costs incurred for the purchase of new systems where the company chooses to replace an old system rather that to fix it.

Reason for Deferral

Adoption of this deferred account is authorized by ORS 757.259 in order to minimize the frequency of rate changes and to better match the costs borne and benefits received by the ratepayer. The company’s costs of Year 2000 compliance are concentrated within a short time period, but the benefits will be realized over a longer period.

Proposed Accounting

The proposed continued deferrals would be recorded in a subaccount of Account 186, "Miscellaneous Deferred Debit."

Estimated New Deferrals in Next Authorization Period

The estimated amount to be recorded in the 186 subaccount over the 12-month period subsequent to this application is $3.5 million.

STAFF RECOMMENDATION:

I recommend the Commission:

1. Approve NW Natural’s application for reauthorization of deferred accounting treatment for its incremental expenses associated with the research, testing, analysis and repair costs required for Year 2000 compliance costs for a 12-month period beginning December 18, 1998. Incremental costs are external costs (such as material and external labor) and utility labor costs associated only with new employees hired specifically for the Year 2000 work.
2. Approve staff’s recommendation that, for this type of deferral, carrying charges would not be accrued on the deferred account.
3. Approve staff’s recommendation that NW Natural should file semiannual reports showing, on a monthly basis, incremental Y2K expenditures to date, amounts deferred (including Commission-determined adjustments), amortization expense, and unamortized balance. The first report is to be filed July 1, 1999.