VII. Prior Period Transactions
Both ORA and PG&E agree that the proper accounting periods for this application, pursuant to § 368(e), are calendar years 1997 and 1998. ORA points out, and PG&E concedes, that PG&E recorded some transactions that occurred prior to January 1, 1997 as 1997 expenses, and some transactions that occurred prior to January 1, 1998 as 1998 expenses. ORA states that PG&E should have recorded transactions based on accrual accounting methods, and not the cash accounting method it applied, to match the transactions with the relevant accounting period.
ORA offered Exhibit 21 into evidence, which are excerpts from an accounting textbook. There, accrual accounting is defined as "relating the financial effects of transactions, events and circumstances having cash consequences to the period in which they occur rather than when the cash receipt or payment occurs." (Ex. 21, p. 34.) Recording the "financial effects" when the cash is received or payment is made is cash-based accounting. The authors state that "[b]ecause cash basis accounting does not attempt to match expenses against revenues, it is not in conformity with generally accepted accounting principles." (See Ex. 21, p. 35.)
PG&E states "accruals sometimes are not recorded for certain routine maintenance and operation expenses since they have little or no effect on the accuracy of the financial statements." (See Ex. 3, p. 2-2.) PG&E states routine tree-trimming and other miscellaneous distribution expenses typically involve thousands of invoices from numerous vendors, and a consistent level of expenditures between years. It argues that use of cash-based accounting for expenditures with these characteristics saves in processing time and produces annual expense levels that are approximately the same as annual expense levels produced under the accrual method. PG&E claims that it has never used the accrual method for recording tree-trimming expenses, and that the Commission's adopted expenses for 1996 tree trimming were developed using costs recorded on a cash basis. It also argues that neither § 368(e) nor the related implementing decisions require accrual accounting of incremental distribution expenditures.
ORA states that throughout the audit report preparation and distribution, and the discovery process, PG&E maintained that it used the accrual method of accounting for recording expenses like tree-trimming expenses. It was not until PG&E served its rebuttal testimony, about seven months into the proceeding, that ORA was informed that cash-basis accounting was used for tree-trimming and other miscellaneous distribution expenses. ORA argues that $21.6 million in "1997 expenses" actually pertain to expenses incurred in 1996 for consulting or contract services like tree trimming. It further argues that $5.4 million in "1998 expenses" were for tree trimming work completed prior to 1998. ORA recommends that these prior period transactions be excluded from § 368(e) recovery. It states that § 368(e) provides for annual base revenue increases for 1997 and 1998, and expenditures should be recorded for the appropriate accounting period. It argues that the Federal Energy Regulatory Commission (FERC) and generally accepted accounting principles require accrual-based accounting, and not cash-based accounting.
ORA also argues that PG&E's tree-trimming expenditures do not have the characteristics that PG&E describes as the types of expenditures that lend themselves to cash-basis accounting. Specifically, ORA argues that the level of tree-trimming expenditures is not consistent between years. Rather, ORA argues, the level of tree trimming expenditures almost tripled over the five-year period, 1994-1998.
PG&E counters this argument by stating that the relevant years for this proceeding are 1996 through 1998. In those years, PG&E contends that tree trimming expenditures were steadily increasing.
PG&E also argues that ORA's recommendation is inflated and unreasonable because it is based on a flawed approach. Most important among the flaws from PG&E's perspective is that ORA ignores transactions that would have been recorded in 1997 and 1998 under the accrual method but were not since the transaction was recorded on a cash basis after the relevant accounting period. From its historic experience, PG&E asserts to include these transactions, and thereby make adjustments in both directions, would likely result in the adjustments that cancel each other out.
This is not the proceeding to litigate the appropriate method of accounting for tree-trimming expenditures to arrive at the appropriate revenue requirement. The GRC is the traditional venue for that litigation. Upon review of the 1996 GRC decision, it is apparent that the accounting basis for the adopted revenues was not addressed. However, the Commission did adopt the estimated expenditures for tree-trimming recommended by PG&E. (63 CPUC2d 570, 604.)
Generally, we believe that ORA has demonstrated that accrual accounting is the generally accepted accounting method for large companies to record expenses, and that it is the method required by FERC. PG&E has failed to demonstrate that applying the cash method of accounting to tree-trimming expenses is appropriate. It has failed to demonstrate that the Commission has explicitly endorsed such an exception to generally accepted accounting principles. We are concerned that allowing recovery of these prior period transactions would reward PG&E for accounting practices that deviate, without our consent, from our accounting policy. However, PG&E testified that it has used cash accounting throughout the 1990's, and it is apparent the 1996 GRC-adopted revenues for tree-trimming used PG&E's estimate. It appears, therefore, that the 1996 GRC adopted revenues for tree trimming were based on cash accounting. The revenues available for recovery here must be, among other things, incremental to the levels adopted in the 1996 GRC. In this limited situation, it is appropriate to calculate the increment using spending figures that are accounted for using the same accounting method. As so limited, we will allow PG&E to recover these expenditures, as recorded on a cash basis, even though they include prior period transactions.
