5. Memorandum Account
5.1. Summary
This decision allows Bear Valley to establish a non-interest bearing memorandum account to track the unrealized gains and losses otherwise imputed to the Shell agreement as a consequence of complying with the Financial Account Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." The sole intention in granting this request is to preclude the unnecessary recognition in Bear Valley's financial statements of any unrealized gains or losses which may occur as a result of valuing the outstanding balance of the Shell agreement at market prices compared to the actual prices contained in the contracts. Bear Valley can only recover the actual and reasonable costs in rates as it acquires energy from Shell under the terms of the agreement and directly resells that energy to its customers. Bear Valley asks for a blanket memorandum account which would include all future power purchase contracts. We will only allow Bear Valley to include any existing contracts preapproved by the Commission and this contract with Shell. If Bear Valley enters into subsequent contracts it must file for authority to include them in the memorandum account. It may do so either as a part of an application for preapproval prior to contract execution or anytime after execution of a contract not subject to preapproval.
5.2. Accounting Issue
Bear Valley states that it believes for accounting purposes long-term power contracts, including its Shell agreement, qualify as derivative instruments under SFAS No. 133, which in turn requires Bear Valley to record derivatives on its balance sheet as assets and liabilities, and to measure those instruments at the fair value. Bear Valley asserts the Shell agreement would be classified as a derivative pursuant to SFAS No. 133. Applying SFAS No. 133 to the Shell agreement would mean recognizing unrealized gains and unrealized losses on an outstanding purchased power contract which would affect reported earnings, even though when the power contract is finally settled any unrealized gains or losses recognized under SFAS No. 133 are reversed. (Amended Application, p. 5.) For example, if the contract price is $10 per unit and the market value is $12 per unit, Bear Valley would have an imputed, but unrealized, gain of $2 per unit. Conversely, a market value of $9 would result in an unrealized loss of $1 per unit.
5.3. Discussion
There would be no public benefit if Bear Valley had to recognize unrealized gains or losses on its balance sheet during the life of the agreement related to the cost of energy which will be delivered to retail customers in the remaining years of the agreement. Bear Valley did not seek and therefore does not have advance authority from the Commission to hedge or trade the commodity underlying the Shell agreement and Bear Valley, therefore, cannot record for rate recovery any realized gains or losses for any trades or sales of energy acquired under the Shell agreement. Thus, there would be no impact on rates beyond the recovery of the actual costs of the Shell agreement for energy delivered to retail customers by adopting a memorandum account.
A memorandum account would allow Bear Valley to track, solely for financial reporting purposes during the life of the agreement, any unrealized gains or losses on the outstanding balance of the contract and record either an offsetting "refund" to ratepayers of an imputed market gain or an under collection of an imputed market loss. During contract performance,8 Bear Valley will record and recover only its actual costs under the terms of the contract for energy delivered to retail customers. The memorandum account will be reversed and no additional costs will be recovered from (or refunded to) ratepayers.
Bear Valley asserts that the Commission has previously granted similar authority to Sierra Pacific Power Company in D.02-10-054. In that decision, we found:
When the contract is actually settled, the expense is recognized as the actual contract price, the net gains or losses previously recognized would be reversed, and the net offsetting regulatory assets or liabilities would be reversed resulting in no net gain or loss. (Finding of Fact 7.)
We find Bear Valley's request is reasonable and grant Bear Valley's request for a memorandum account. Bear Valley must file a Tier 3 advice letter proposing the specific language for the memorandum account with the Commission's Energy Division and will become effective upon approval as appropriate at the time.9 We find no reason to make the memorandum account a blanket authority: Bear Valley must file for authority before we allow subsequent energy contracts to be included in the balancing account.
5.4. Conclusion
We find it is reasonable to allow Bear Valley to use a non-interest bearing memorandum account to offset the unrealized gains or losses attributable to the application of SFAS 133 to the Shell agreement. We grant this on the understanding that no actual additional cost will be recovered or refunded that is not directly incurred as a part of the good faith contract performance.
8 Performance is the fulfillment or accomplishment of a promise, contract, or other obligation according to its terms. Black's Law Dictionary, Fifth Edition.
9 GO 96 B § 5.3: An advice letter submitted under (8) of this Industry Rule may be designated by the Utility as effective pending disposition; all other matters appropriate to Tier 3 may become effective only after Commission approval. Matters appropriate to Tier 3 are: ... (2) A tariff change in compliance with a statute or Commission order where the wording of the change does not follow directly from the statute or Commission order. ...
