ORDER NO. 99-277
ENTERED APR 19 1999
This is an electronic copy. Appendices and footnotes may not appear.
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM 919
| In the Matter of the Application of Portland General Electric Company for Approval to Defer Incremental Year 2000 Costs. | ) ) ORDER |
DISPOSITION: APPLICATION DENIED; CAPITALIZATION AND SUBSEQUENT AMORTIZATION APPROVED WITH CONDITIONS
On December 31, 1998, t
he Commission received an application from Portland General Electric Company (Company), filed pursuant to ORS 757.259 and OAR 860-027-0300, requesting authority for deferred accounting treatment for all of 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:
Portland General Electric 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 January 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_________
DATE: March 18, 1999
TO: Bill Warren through Lee Sparling and Ed Busch
FROM: Ed Krantz
SUBJECT: UM 919, Portland General Electric Company Application for Approval to Defer Incremental Year 2000 Costs
SUMMARY RECOMMENDATION:
Approve capitalization and subsequent amortization of the 1999 costs for accounting purposes only, beginning January 1, 1999, with conditions.
DISCUSSION:
On December 31, 1998, Portland General Electric Company (PGE 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 research, testing, analysis and repair costs required due to the "Year 2000"(Y2K) issue. The Commission authorized deferred accounting treatment for NW Natural’s Y2K costs in late 1997 (Order No. 98-019).
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.
PGE’s application for deferral under 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 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 to follow if deferred accounting treatment or capitalization and amortization of the costs is requested:
Capitalization of incremental costs incurred to address the Year 2000 issue. 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 the new employees hired specifically for the "Year 2000"work."
2. Capitalization of these costs for 1999 only. Approval to capitalize the incremental costs of Year 2000 compliance activities during 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. It may be that expenditures will be required to complete permanent remediations or to address remediation activities 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 costs incurred after December 31, 1999 are capitalized, the utility will bear the burden of demonstrating that the costs provide future benefit and cannot otherwise be offset.
3. Amortization of the capitalized account 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.
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. For this type of capitalization, interest would not be accrued on the capital account.
5. 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.
6. 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 Year 2000 problem results from the use in computer hardware and software of two digits rather than four digits to define the applicable year. The use of two digits was a common practice for decades when computer storage and processing was much more expensive than today. When computer systems must process dates both before and after January 1, 2000, two-digit year "fields" may create processing ambiguities that can cause errors and system failures. Computer programs that have date sensitive features may recognize a date represented by "00" as the year 1900, instead of 2000. These errors or failures may have limited effects, or the effects may be widespread, depending on the computer chip, system or software, and its location and function.
PGE began its Year 2000 process to identify, repair, and/or replace computer software and hardware that could be affected by the Year 2000 issues. PGE expects this work to continue into the year 2000, but most of the remaining costs are expected during calendar year 1999. PGE’s application covers the capitalization of those incremental costs previously described for the calendar year 1999.
Reason for Capitalization
Capitalization of the above-described costs is requested both to match appropriately the costs borne by and benefits received by customers.
Estimated New Capitalizations
PGE estimates its Year 2000 total costs, including amounts already spent and not eligible for capitalization under this application, will be approximately $25 to $30 million. Total incremental costs to be recorded and subject to capitalization for the 12-month period subsequent to January 1, 1999 are expected to exceed $13 million.
Proposed Accounting
PGE proposes to record the incremental costs in FERC Account 182.3, Other Regulatory Assets. Absent an accounting order authorizing capitalization under this application, these costs would be recorded primarily in the Operation Supervision and Engineering (FERC 580), Customer Records and Collection Expenses (FERC 903), and Office Supplies and Expenses (FERC 921) accounts.
STAFF RECOMMENDATION:
I recommend the Commission approve capitalization of Portland General Electric’s incremental Year 2000 compliance costs for a 12-month period beginning January 1, 1999, subject to the following conditions:
Incremental Y2K costs subject to capitalization 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, including research, testing, analysis and repair cost required due to the Year 2000 compliance.
B. PGE will begin amortizing its Y2K capitalized cost to FERC Account 407.3, Regulatory Debits, over a 5-year period on January 1, 2000, to properly match recognition of the costs with the period over which benefits will be received. The Commission may adjust the total amount capitalized and subject to amortization based on a review of the expenditures.
C. Interest will not be accrued on the capitalized account.
D. Beginning July 1, 1999 until amortization is completed, PGE 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.
E. 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.