MISSOURI PUBLIC SERVICE COMMISSION ACCOUNTING AUTHORITY ORDER SURVEY RESULTS

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MISSOURI PUBLIC SERVICE COMMISSIONACCOUNTING
AUTHORITY ORDER SURVEY RESULTS

• Thomas J. Ferris
• NARUC Staff Subcommittee on
• Accounting and Finance
• Fall 2005 Meeting
• Salt Lake City, Utah
• September 21, 2005

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Survey

• Missouri Public Service Commission
• Requested information concerning the standards
  and criteria used by other states when
  determining whether to grant an Accounting
  Authority Order (AAO).
• AAO is a mechanism used to allow a rate-regulated
  utility to accrue expenses between rate cases to
  cover items that were not in effect at the time
  of the last rate case and were generally
  unforeseen.

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Sibley Test

• The Missouri Public Service Commission uses the
  Sibley test.
• Requires that the expenses to be deferred are
  "extraordinary, unusual and unique, and not
  recurring".
• First stated test in, In the Matter of Missouri
  Public Service, 1 PSC 3d 200 (1991), and has
  continued to use it in subsequent cases.

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Has your state promulgated a rule that
establishes the criteria for granting an AAO?

• No deferrals allowed in Illinois.
• No authority in Nebraska.
• Deferrals allowed on case-by-case basis-23 states
• Deferrals allowed under Commission guidelines-4
  states
• Rules promulgated-2 states

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SPECIFIC CRITERIA TO CONSIDER IN GRANTING AN
AAO-VERMONT

• The event or transaction that gave rise to the
  charge must be an extraordinary event. 
• (1) not currently provided for under existing
  rates,
• (2) unplanned,
• (3) not anticipated,
• (4) not reoccurring over the foreseeable future,
  and

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SPECIFIC CRITERIA TO CONSIDER IN GRANTING AN
AAO-VERMONT

• The event or transaction that gave rise to the
  charge must be an extraordinary event (contd.). 
  
• (5) dollar amount associated with the event or
  transaction is (a) specifically known and
  measurable,
• (b) of a limited and specific amount that has
  been or will be incurred over a specific period
  of time,  and
• (c) the amount, if recorded following GAAP would
  represent a material adverse impact on reported
  financial results for an annual reporting
  period.earnings test

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SPECIFIC CRITERIA TO CONSIDER IN GRANTING AN
AAO-VIRGINIA

• Utilities may informally ask for permission
  to establish an extraordinary cost as
  a regulatory asset rather than expense the cost
  currently.   
• However, the utility's earnings test for the test
  year (including the extraordinary cost) must
  be below the utility's authorized return on
  equity (bottom of the range)  in order to
  establish a regulatory asset for
  the extraordinary cost.   
• For utilities with regulatory assets, an earnings
  test is filed each year to determine if the
  utility had earnings sufficient to accelerate the
  recovery of the regulatory asset. 
• If earnings are below the authorized ROE, then no
  acceleration of the amortization of established
  regulatory assets is required.

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SPECIFIC CRITERIA TO CONSIDER IN GRANTING AN
AAO-WISCONSIN

• According to the USOA, those items related to the
  effects of events and transactions which have
  occurred during the current period and which are
  of unusual nature and infrequent occurrence shall
  be considered extraordinary items.
• Events and transactions of significant effect
  which are abnormal and significantly different
  from the ordinary and typical activities of the
  company and which would not be expected to recur
  in the foreseeable future.

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SPECIFIC CRITERIA TO CONSIDER IN GRANTING AN
AAO-WISCONSIN

• Criteria used (need not meet all criteria)
• 1.The amount is outside the control of the
  utility
• 2.The expenditure is unusual (e.g., nontypical,
  noncustomary) and infrequently recurring (e.g.,
  doesn't occur every 2 to 5 years)
• 3.The immediate recognition of the expenditure
  causes the utility serious financial harm or
  significantly distorts the current year's income
  or
• 4.The immediate recognition of the expenditure
  causes significant ratepayer impact.

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SPECIFIC CRITERIA TO CONSIDER IN GRANTING AN
AAO-OTHER

• Rate stability in terms of rate impact.
• Industry practice and application of SFAS 71.
• Appropriateness of the expenditures Used and
  useful, necessary, prudent, etc.
• A benefit corresponding with the cost associated
  with the proposed deferral to the ratepayer and
  the shareholder.
• Must demonstrate that it has attempted to
  mitigate the expense to the extent possible

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How often can companies apply for an AAO?

• No limitation

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Are there any exceptions to the normal criteria
for granting an AAO?

• Case-by-Case

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Is there a minimum amount or percentage of the
net income that must be met to apply for an AAO?

• New York - generally uses a standard of 3-5 of
  net income in determining materiality
• Vermont - generally considered to be in the range
  of 10 of net income.
• Pennsylvania-5 of income before extraordinary
  items
• Other states no minimum, but amount generally
  needs to be material

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Are carrying costs or returns on the regulatory
asset allowed?

• Of 17 states responding that allow deferrals
• 2 states normally do not allow carrying costs
• No authority in Nebraska
• 14 states normally allow some type of carrying
  costs, but looked at on a case-by-case basis

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What is the basis for any carrying costs rate
used?

• Overall cost of capital or weighted cost of
  capital or authorized rate of return
•  To promote public policy an incentive carrying
  charge rate may be used.  For example for those
  demand side program costs included in rate base,
  the rate of return applicable to this account is
  the authorized rate of return calculated with a
  3 equity adder to the authorized ROE

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What is the basis for any carrying costs rate
used?

• Other customer deposit rate
• Short-term interest rate
• 3 month T-bill rates 
• Authorized after tax rate of return or economic
  cost of capital
• AFUDC rate 
• FERC prescribed rate (one-year treasury)

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Questions

• Thomas J. Ferris
• Audit Manager-Gas Energy Division
• Public Service Commission of Wisconsin
• P.O. Box 7854
• Madison, WI 53707-7854
• [phone]
• Fax [phone]
• Thomas.Ferris_at_psc.state.wi.us