ITEM NO. CA18. PUBLIC UTILITY COMMISSION OF OREGON STAFF REPORT PUBLIC MEETING DATE: December 19, 2013

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1 PUBLIC UTILITY COMMISSION OF OREGON STAFF REPORT PUBLIC MEETING DATE: December 19, 2013 REGULAR CONSENT X EFFECTIVE DATE N/A DATE: ITEM NO. CA18 TO: FROM: Public Utility Commission Brian Bahr THROUGH: Jason Eisdorfer, Maury Galbraith, and Marc Hellman SUBJECT: PACIFICORP: (Docket No. UI 342) Requests Approval of Affiliated Interest Agreement with International Business Machines Corporation. STAFF RECOMMENDATION: The Public Utility Commission of Oregon (Commission) should approve PacifiCorp s (PacifiCorp or Company) application for approval of an Affiliated Interest Agreement with International Business Machines Corporation (IBM), an affiliated interest, subject to the following conditions: 1. PacifiCorp shall notify the Commission of any substantive changes to the Agreement, including any material changes in price or other parameters specified in the Agreement. Any such changes shall be submitted in an application for a supplemental order (or other appropriate format) in this docket. 2. PacifiCorp shall report to the Commission, as part of its annual affiliated interest report, all transactions entered into under the Agreement with IBM. DISCUSSION: PacifiCorp filed this application with the Commission on October 8, 2013, pursuant to ORS (1) and OAR PacifiCorp is an indirect, wholly-owned subsidiary of MidAmerican Energy Holdings Company (MEHC). MEHC is a subsidiary of Berkshire Hathaway, Inc. (Berkshire). Berkshire (and its various affiliates and subsidiaries) holds over 5 percent interest in IBM common stock. 1 1 Staff accessed the Yahoo finance website on October 15, 2013 at < This resource reports that Berkshire owns over 68 million shares, or 6.22% of the outstanding common stock of IBM.

2 Page 2 "Affiliated interest," as defined in ORS (3), includes every corporation five percent or more of whose voting securities are owned by any corporation or person owning five percent of the voting securities of a public utility or in any successive chain of ownership of a public utility. Berkshire's ownership interest in PacifiCorp and IBM qualifies as an affiliated interest. In Order No , Docket No. UI 330, the Commission approved a previous affiliated interest contract between PacifiCorp and IBM for telecommunications expense management services. That application was precipitated by the acquisition by IBM of a company with which PacifiCorp had a preexisting contract for telecommunications expense management services. The telecommunications expense management services are used by the Company for activities such as invoice management, inventory management, and integrated accounts payable functions. The pre-existing contract expired in March MEHC and IBM have negotiated a new contract that allows the services previously provided to PacifiCorp to be provided to all of MEHC s subsidiaries (including PacifiCorp). The contract includes a Master Transaction Document and Scope of Work as well as an Affiliate Addendum (collectively, Agreement). The Affiliate Addendum allows the Company to participate in the Agreement under the terms negotiated by MEHC. With this application, PacifiCorp requests approval of its participation in the Agreement between IBM and MEHC. Staff s review of this application included examination of the Company s current application and Commission Orders from recent affiliated interest application dockets involving PacifiCorp and IBM. Staff also reviewed the Agreement and the Company s responses to four data requests. Issues Staff investigated the following issues: 1. Terms and Conditions of the Agreement; 2. Transfer Pricing; 3. Public Interest Compliance; and 4. Records Availability, Audit Provisions, and Reporting Requirements. Terms and Conditions of the Agreement The Agreement is between MEHC and IBM and allows IBM to provide MEHC subsidiaries with telecommunications expense management services. PacifiCorp participates in the Agreement through an Affiliate Addendum. Staff reviewed the Agreement, which is confidential, and did not find any unexpected or unusual terms or conditions.

3 Page 3 Transfer Pricing Under the renewed Agreement, the Company s anticipated expense is less than under its previous contract with IBM for telecommunications expense management services. The Company expects to pay a three-year subscription fee of $229,036 (or $76,345 annually the annual expense under the previous contract was approximately $103,000) in addition to any applicable fees or taxes. 2 Under the contract, PacifiCorp may be charged additional fees if new telecom services or functionalities are made available by IBM; however, the Company anticipates the level of fees will not increase over the period of the Agreement. 3 According to OAR , the Commission may, for good cause, waive the affiliated interest transaction requirements of OAR The rule provides: Upon petition by a utility and approval by the Commission for good cause, the requirements of OARs and may be waived for individual transactions or classes of transactions. As a general guideline, in the absence of showing that the transaction is fair and reasonable and not contrary to the public interest, transactions exceeding 0.1 percent of the previous calendar year s Oregon utility operating revenues will not qualify for waiver. As part of MEHC s acquisition of PacifiCorp, however, the Company agreed to file affiliated interest applications for all transactions between MEHC affiliates, regardless of the monetary amount involved. The expected annual expense of $76,345 to IBM under this contract would normally qualify for a waiver of OAR as the expense is less than 0.1 percent of PacifiCorp s annual Oregon operating revenue in 2012 of approximately $1.3 billion. However, the aggregate of transaction amounts of PacifiCorp s contracts with IBM is greater than the $1.3 million threshold. 4 IBM will directly bill PacifiCorp on a monthly basis for the services provided, as specified in the Agreement. Oregon s share of these costs is allocated on a system overhead allocation factor. 5 Staff agrees with PacifiCorp s proposed allocation methodology, finds the pricing to be fair and reasonable, and recommends that the rate charged to PacifiCorp by IBM for 2 See Company s response to Staff Data Requests No. 1 and No See Company s response to Staff Data Request No See Orders No , No , and No for approvals of other affiliated interest contracts between PacifiCorp and IBM. 5 See Company s response to Staff Data Request No. 2.

4 Page 4 telecommunications expense management services as part of the Agreement be approved. Public Interest PacifiCorp uses the telecommunications expense management services to manage its telecommunications network and reduce telecommunications expenses. PacifiCorp s participation in the renewed Agreement allows the Company to continue using the telecommunications expense management services already approved by the Commission. 6 Staff finds the Agreement to be in the public interest (customarily a no harm standard applied by the Commission) as the transactions under the Agreement will not harm customers. Records Availability, Audit Provisions, and Reporting Requirements Staff notes that in a previous affiliated interest application filing, Docket No. UI 327, the Commission approved PacifiCorp s request for approval of certain master agreements with IBM, which consolidated various prior agreements, and under which PacifiCorp purchases renewal of IBM software and support services. However, the Agreement with IBM for purchase of the telecommunications expense management services is between IBM and MEHC, with PacifiCorp participating through the Affiliate Addendum, and does not fall under the umbrella of software and services already addressed in Docket No. UI 327. Dockets No. UI 321 and UI 322 also addressed applications for approval of transactions between the Company and IBM. Condition 3 in each of the orders in these dockets, Orders No and No , requires: PacifiCorp shall notify the Commission in advance of any substantive changes to this agreement, or any other Company contract with IBM, that would result in an aggregate annual billing to the Company by IBM, across all contracts between IBM and PacifiCorp, of an amount greater than 0.1 percent of PacifiCorp's Oregon annual revenues. As noted in the Transfer Pricing section of this memo, 0.1 percent of the Company s 2012 Oregon operating revenue is approximately $1.3 million. The Company has estimated that it annually purchases from IBM approximately $2.5 to $3 million in software and support services. 7 Through October 31, 2013, the Company has paid 6 See Order No in Docket No. UI See pg. 6 of Appendix A of Order No

5 Page 5 $2,695,470 in total to IBM for products and services. 8 This amount is greater than 0.1 percent of PacifiCorp s 2012 Oregon revenue of $1.3 billion; therefore, this application is consistent with prior Commission orders. Staff notes that the Commission retains the ability to review all affiliated transactions of the Company through both its annual affiliated interest report and in general rate case filings. Staff s recommended Conditions provide for all necessary Commission examination of PacifiCorp s records concerning the Agreement with IBM. PacifiCorp has reviewed this memo and has not communicated any objections or concerns. Based on the review of this application, Staff concludes: 1. The application regards an affiliated interest agreement that is fair and reasonable and not contrary to the public interest with inclusion of the proposed ordering conditions; and 2. Necessary records are available. PROPOSED COMMISSION MOTION: PacifiCorp s application for approval of the Agreement with IBM, an affiliated interest, be approved subject to Staff s recommended conditions. 8 See Company s response to Staff Data Request No. 10.