6. Memorandum Account Request

6.1. Summary

This decision allows BVES to establish a non-interest bearing memorandum account to track the unrealized gains and losses otherwise imputed to the LACSD PPA 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 BVES' financial statements of any unrealized gains or losses which may occur as a result of valuing the outstanding balance of the LSCSD PPA at market prices compared to the actual prices contained in the contracts. BVES can only recover the actual and reasonable costs in rates as it acquires energy from LACSD under the terms of the PPA and directly resells that energy to its customers.

6.2. Accounting Issue

BVES states that it believes for accounting purposes, long-term power contracts, such as the LACSD project, qualify as derivative instruments under SFAS No. 133, which in turn requires BVES to record derivatives on its balance sheet as assets and liabilities, and to measure those instruments at the fair value. BVES asserts the LACSD PPA would be classified as a derivative pursuant to SFAS No. 133. Applying SFAS No. 133 to the PPA 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.³⁴ (Application at 5.)

6.3. Discussion

A memorandum account would allow BVES to track, solely for financial reporting purposes during the life of the PPA, 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, BVES will record and recover only its actual costs under the terms of the contract for energy delivered to retail customers.

BVES notes that the Commission previously granted similar authority to Sierra Pacific Power Company in D.02-10-054, and to BVES in D.09-05-025. In D.02-10-054, 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.)

Similarly, in D.09-05-025 the Commission granted BVES authority to establish a non-interest bearing memorandum account to record refunds or under collections to offset the unrealized gains or losses from agreements created by the financial reporting impacts of SFAS No.133.³⁵

Lastly, we note that there would be no public benefit if BVES had to recognize unrealized gains or losses on its balance sheet during the life of the PPA related to the cost of energy which will be delivered to retail customers in the remaining years of the PPA. BVES did not seek and therefore does not have advance authority from the Commission to hedge or trade the commodity underlying the LACSD PPA and BVES, therefore, cannot record for rate recovery any realized gains or losses for any trades or sales of energy acquired under the LACSD PPA. Thus, there would be no impact on rates beyond the recovery of the actual costs of the LACSD PPA for energy delivered to retail customers by adopting a memorandum account.

We therefore find BVES' request is reasonable and grant BVES' request for a memorandum account. BVES must file a Tier 2 advice letter proposing the specific language for the memorandum account with the Commission's Energy Division will become effective upon approval as appropriate at the time. We find no reason to make the memorandum account a blanket authority and so will direct BVES to file for authority before we allow subsequent energy contracts to be included in the balancing account.

6.4. Conclusion

We find it is reasonable to allow BVES to use a non-interest bearing memorandum account to offset the unrealized gains or losses attributable to the application of SFAS 133 to the LACSD PPA. 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.

³⁴ 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.

³⁵ D.09-05-025, Ordering Paragraph 3 at 16.