BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION

WASHINGTON UTILITIES AND   )
TRANSPORTATION COMMISSION, )
      ) DOCKET UE-010453 
IN THE MATTER OF THE PETITION )
OF PACIFICORP                     ) ORDER GRANTING 
For an Accounting Order Authorizing the ) ACCOUNTING PETITION
Establishment of a Regulatory Asset or   )
Liability to Account for the Effects of   )
Certain Derivative and Hedging Financial )
Accounting Rules    )
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . )

BACKGROUND

1 On April 4, 2001, PacifiCorp, (or the “Company”) filed a petition with this 
Commission pursuant to  Chapter 80.04 RCW and WAC 480-09-420(7) seeking an 
order authorizing the establishment of a  regulatory asset or regulatory 
liability associated with the implementation of Statements of Financial  
Accounting Standards 133 and 138 (FAS 133/138), Accounting for Derivative 
Instruments and  Hedging Activities. 

2 The Company proposes the following accounting treatment: 
 · To record the fair value of various resource acquisition contracts according 
to FAS 133/138,   as assets, in FERC Account 186, Miscellaneous Deferred 
Debits, or as liabilities, in FERC   Account 253, Other Deferred Credits. 
 · Simultaneously record offsetting regulatory assets and/or liabilities to the 
FAS 133/138 assets   and/liabilities, using the FERC  accounts, 182.3 for 
Regulatory Assets and FERC, account   254 for Regulatory Liabilities. 
 
 There would be no effect shown in the Company’s income statement.  The balance 
sheet would  reflect both the fair value adjustment and the offsetting 
regulatory asset or liability in the separate  accounts stated above.  Under 
the proposed accounting, when the obligations under an affected  contract are 
fulfilled, any gain or loss recognized under the standard would be reversed, 
and the  offsetting regulatory asset or liability would be reversed, resulting 
in no net gain or loss upon settlement  of the contract.
 
3 FAS 133 was issued by the Financial Accounting Standards Board (FASB) in June 
1998.  The  FASB amended it with FAS 138 in June 2000.  PacifiCorp requests 
that the accounting treatment  become effective for financial accounting 
entries beginning with the Company’s adoption of FAS  133/138 on April 1, 
2001.  

4 PacifiCorp, in the provision of service to its retail and wholesale 
customers, enters into contracts such  as power purchase and sale contracts.  
Further, the company may enter contracts to hedge the price  related to 
purchases and sales of energy.  Many of the contracts such as certain power 
purchase and  sale contracts, generation capacity, transmission capacity, and 
physical daily power purchase options,  meet the definition of a derivative as 
defined in FAS 133/138.  As a result, PacifiCorp will be required  to book 
assets or liabilities, created by the difference in each contract’s stated 
price and the current  market price, in financial statements issued between the 
time of the original contract and the final  settlement of the contract terms.  
In offsetting bookkeeping entries, PacifiCorp will have to record  gains and 
losses in their income statements.  For contracts that are ultimately fulfilled 
by the delivery of  the energy, the interim gains and losses related to the 
valuing of the contracts at fair value will offset,  resulting in no net gain 
or loss upon settlement of contract other than the actual expense or revenue  
generated by the contract.  Further, these accounting entries will have no 
direct effect on the   company’s cash flows.  

5 Assessment of PacifiCorp’s contracts required to be reported at fair value 
under FAS 133/138   indicates that the non-cash earnings adjustment  to 
implement the standards, as of March 23, 2001, is  estimated to range from a 
gain of $269 million to a loss of $1,049 million.  This illustrates the 
extreme  volatility the standards will introduce to the Company’s earnings.  
The Company claims that small  changes in market prices will result in 
significant volatility.  According to PacifiCorp, recording gains or  losses of 
the stated magnitude would cause significant volatility to the Company’s 
retained earnings  and thereby significantly impact (increasing or decreasing) 
the Company’s ability to pay dividends,  without a corresponding change in cash 
flow from operating results.  Financing arrangements of the  Company could also 
be impacted. 

DISCUSSION:

6 Normally, the Commission establishes rates by determining a company’s rate of 
return for a historical  period pro-formed for all known and measurable 
changes.  In these analyses, purchase and sales  contracts for energy are 
generally pro-formed to the actual known and measurable prices contained in  
the contracts for the rate period.  Market prices have not been considered 
relevant to the pricing of  contracts which have stated prices.  The adoption 
of FAS 133/138 by PacifiCorp will result in the  Company’s financial statements 
being inconsistent with the normal practice used by this Commission in  setting 
rates.  The use of fluctuating market pricing rather than embedded contract 
pricing is not   appropriate for setting rates, particularly when the 
fluctuating market prices have no long term impact  on the company’s earnings 
or cash flow.

7 Therefore, the Commission accepts the proposed accounting for derivatives and 
hedging activities as  contained in PacifiCorp’s petition.  Acceptance of the 
accounting treatment of these activities in no  way makes determination on the 
prudence of any energy contract or derivative for rate making   purposes. The 
future non-cash impacts of the accounting convention imposed by FAS 133/138 
will  be excluded from the Commission’s determination of cost of service with 
respect to the contracts.

8 This matter was brought before the Commission at its regularly scheduled open 
meeting on April 25,  2001.  The Commissioners, having been fully advised in 
the matter, and having determined the   following order to be consistent with 
the public interest, directed the Secretary to enter the following  order and 
related provisions.

FINDINGS

THE COMMISSION FINDS:

9 (1)  PacifiCorp is an electrical company and a public service company as 
defined by RCW    80.04.010 and, as such, is subject to the Commission’s 
jurisdiction. PacifiCorp also provides   retail electric service as a public 
utility in the states of California, Idaho, Oregon, Utah, and   Wyoming.

10 (2) On April 4, 2001,  PacifiCorp filed with the Commission a Petition for 
an Accounting Order   Authorizing the Establishment of a Regulatory Asset or 
Liability to Account for the Effects of   Certain Derivative and Hedging 
Financial Accounting Rules.

11 (3) The accounting treatment proposed by PacifiCorp is reasonable and should 
be approved.

ORDER

12 THE COMMISSION ORDERS That:

13 It has jurisdiction over the subject matter and the parties to these 
proceedings;

14 PacifiCorp’s  petition is granted, the Company is authorized to record 
regulatory assets and liabilities  in account 182.3, Other Regulatory Assets 
and account 254  Other Regulatory Liabilities, to offset the  assets and 
liabilities required by FAS 133/138 related to certain derivatives and hedging 
activities  described in the Company’s petition.  These entries are to be made 
simultaneously with the entries  required by FAS 133/138. 

15 Nothing herein shall be construed to waive or otherwise impair the 
jurisdiction of the Commission over  rates, services, accounts, and practices 
of Applicant, PacifiCorp.

16 THE COMMISSION ORDERS FURTHER That it retains jurisdiction over the subject 
matter and  the Parties to effectuate the provisions of this Order.

DATED at Olympia, Washington, and effective this 25th day of April, 2001.

WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION
 


CAROLE J. WASHBURN
     Secretary