ORDER NO. 99-276

ENTERED APR 19 1999

This is an electronic copy. Appendices and footnotes may not appear.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UM 927

In the Matter of the Application of PacifiCorp dba Pacific Power & Light Company for Approval to Defer Incremental Year 2000 Costs. )

) ORDER

DISPOSITION: APPLICATION DENIED; CAPITALIZATION AND SUBSEQUENT AMORTIZATION APPROVED WITH CONDITIONS

On February 22, 1999, the Commission received an application from PacifiCorp dba Pacific Power & Light Company (Pacific or the Company), filed pursuant to ORS 757.259 and OAR 860-027-0300, requesting authority for deferred accounting treatment for all for its incremental Year 2000 costs.

Based on a review of the application and the Commission’s records, the Commission finds that the application is consistent with the treatment approved by the Commission in Order No. 98-019 for NW Natural. However, Staff’s counsel has advised that approval of deferred accounting is not required for the proposed treatment. The Commission may permit capitalization and amortization of Year 2000 costs under ORS 757.120 and 757.125, and Staff recommends that this treatment of the costs be approved for accounting purposes only and with conditions. At its Public Meeting on April 6, 1999, the Commission adopted Staff’s recommendation, attached as Appendix A to this order and incorporated by reference.

Jurisdiction

ORS 757.005 defines a "public utility" as anyone providing heat, light, water, or power service to the public in Oregon. The Company is a public utility subject to the Commission’s jurisdiction.

Applicable law

ORS 757.120 and 757.125 provide the authority for the Commission to direct the accounting of a public utility. The Commission may permit capitalization and amortization of Year 2000 costs under these statutes.

ORDER

IT IS ORDERED that:

PacifiCorp dba Pacific Power & Light Company’s request for deferred accounting treatment for incremental Year 2000 costs is denied.

Capitalization and amortization of the 1999 incremental Year 2000 costs is approved, for accounting purposes only, beginning February 1, 1999, with conditions as described in Appendix A.

Made, entered, and effective ________________________.

BY THE COMMISSION:

______________________________

Vikie Bailey-Goggins

Commission Secretary

 A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements of OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070. A party may appeal this order to a court pursuant to ORS 756.580.

APPENDIX A                                              ITEM NO.____________

PUBLIC UTILITY COMMISSION OF OREGON

STAFF REPORT

PUBLIC MEETING DATE: April 6, 1999

REGULAR AGENDA CONSENT AGENDA X EFFECTIVE DATE February 1, 1999

DATE: April 23, 1999

TO: Bill Warren through Lee Sparling and Ed Busch

FROM: Judy Johnson

SUBJECT: Docket No. UM 927

Pacific Power and Light Company’s Deferred Accounting Application for Incremental Year 2000 Compliance Costs

SUMMARY RECOMMENDATION:

I recommend the Commission approve capitalization and subsequent amortization of the 1999 costs for accounting purposes only, beginning February 1, 1999, with conditions.

DISCUSSION:

On February 19, 1999, Pacific Power and Light Company (Pacific or company) filed an application under ORS 757.259 and OAR 860-27-0300 asking for approval by the Public Utility Commission (Commission) to defer all incremental expenses associated with the Year 2000 (Y2K) issue. The Commission authorized deferred accounting treatment for NW Natural’s Y2K costs in late 1997 (Order No. 98-019). Portland General Electric requested the same accounting treatment effective January 1, 1999.

ORS 757.120 and ORS 757.125 provide the authority for the Commission to direct the accounting of a public utility. ORS 757.259 provides the authority for the Commission to allow a utility to defer revenues or costs for later ratemaking treatment.

Pacific’s application for deferral under ORS 757.259 is consistent with the treatment approved by the Commission for NW Natural. However, based on advice of counsel, Staff now believes approval of deferred accounting is not required for the proposed treatment. The Commission may permit capitalization and amortization of Y2K costs under ORS 757.120 and ORS 757.125. Therefore, Staff recommends that the Commission approve this treatment for accounting purposes only, in response to requests for deferral of Y2K costs. In addition, Staff supports this treatment and the following guidelines for all energy utilities if deferred accounting treatment or capitalization and amortization of the costs is requested.

Staff will support capitalization 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."

Staff will support capitalization from the date the application is received through December 31, 1999. Approval to capitalize 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 capitalizes costs past December 31, 1999, it will bear the burden of demonstrating that the costs are material and cannot otherwise be offset.

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.

In its next general rate proceeding, the utility may request recognition of the annual amortization expense and rate base treatment for the unamortized balance. For this type of capitalization, interest would not be accrued on the capital account.

If the utility seeks to include the capitalized costs in a general rate proceeding, Staff will review the costs to ensure that all capitalized costs 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 capitalized balances.

From the date capitalization begins until amortization is completed, the utility should file semiannual reports showing, on a monthly basis, incremental Y2K expenditures to date, amounts capitalized (including Commission-determined adjustments), amortization expense, and unamortized balance.

Description

The roll over to the Year 2000 presents a potential problem for date dependant processors. These processors may be computer programs or electronic circuits embedded in devices that perform various functions. The programmers of these programs or circuits may have made assumptions about the date processing which will cause the program or circuit to behave unpredictably when certain dates arise. Among these dates are April 9, 1999 (the 99th date of 1999), September 9, 1999 (9/9/99), January 1, 2000 and February 29, 2000. The unpredictable results may occur when the program or circuit interprets the 9s in the April 9th and September 9th dates as "end of data" indicators rather than dates. They might also occur if the program or circuit assumes "19" as the century and interprets 2000 as 1900. Finally, the year 2000 is a leap year (most century years are not).

Pacific has undertaken an extensive research, testing, analysis and repair project to ensure that the occurrence of these dates will have no adverse impact on the delivery of electricity or related services in its service territory in the years 1999, 2000 and beyond.

Reason for Capitalization

Capitalization of the above-described costs is requested in order 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.

Estimated New Capitalization

Pacific estimates its Y2K total costs, including amounts already spent and not eligible for capitalization under this application, will be $27 million. Total Oregon incremental costs to be recorded and subject to capitalization for the period February 1, 1999 through December 31, 1999, are budgeted to be $2.5 million.

Proposed Accounting

The company proposes to record the incremental costs in FERC Account 182.3, Regulatory Assets. Absent an accounting order authorizing capitalization under this application, these costs would be recorded primarily in various operating and maintenance accounts, such as, Administrative and General Salaries (FERC 920), Office Supplies and Expenses (FERC 921), and Outside Services (FERC 923).

STAFF RECOMMENDATION:

I recommend the Commission approve capitalization of Pacific Power & Light’s incremental Year 2000 compliance costs for the period February 1, 1999 through December 31, 1999, subject to the following conditions:

Incremental Y2K costs subject to capitalization 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, including research, testing, analysis and repair costs.

Pacific will begin amortizing its Y2K capitalized costs over a 5-year period, beginning January 1, 2000. The Commission may adjust the total amount capitalized and subject to amortization based on a review of the expenditures.

Interest will not be accrued on the capitalized account.

Beginning July 1, 1999 until amortization is completed, Pacific will file semiannual reports showing, on a monthly basis, incremental Y2K expenditures to date, amounts capitalized (including Commission-determined adjustments), amortization expense, and unamortized balances. The report should be due 45 days after the end of each period.

The application for deferred accounting under ORS 757.259 should be denied.

Approval will be for accounting purposes only and does not constitute approval for ratemaking purposes. The utility may request recognition of the annual amortization expense and rate base treatment for the unamortized balance in its next general rate proceeding.