ITEM NO. CA17
PUBLIC UTILITY COMMISSION OF OREGON
STAFF REPORT
PUBLIC MEETING DATE: December 19, 2013
REGULAR
CONSENT
X
EFFECTIVE DATE
DATE:
December 2, 2013
TO:
Public Utility Commission
FROM:
Brian Bahr
N/A
THROUGH: Jason Eisdorfer, Maury Galbraith, and Marc Hellman
SUBJECT:
PACIFICORP: (Docket No. UI 341) 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 September 26, 2013, pursuant
to ORS 757.495(1) and OAR 860-027-0040. 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 3, 2013 at
<http://finance.yahoo.com/q/mh?s=IBM+Major+Holders>. This resource reports that Berkshire owns over
68 million shares, or 6.22% of the outstanding common stock of IBM.
Docket No. UI 341
December 2, 2013
Page 2
"Affiliated interest," as defined in ORS 757.015(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.
As described more fully in Commission orders approving various affiliated interest
agreements between IBM and PacifiCorp, the Company uses IBM technologies to
support many of its key business functions.2 Specific examples of services PacifiCorp
procures from IBM are support for customer service and billing, support for reporting,
support for document storage, archiving, and retrieval, and support for optimization of
energy trading activities. The software IBM provides is proprietary and not available
from other software providers.
PacifiCorp seeks with this application approval of the Enterprise Software and Services
Option (ESSO Agreement) with IBM. This agreement essentially allows PacifiCorp to
“bundle” the software services it is already purchasing from IBM in order to receive a
lower collective price. Note that no new services not already purchased by PacifiCorp
are included in the ESSO Agreement.
Staff’s review of this application included examination of the Company’s current
application and other recent affiliated interest application dockets involving PacifiCorp
and IBM, including the related Commission Orders approving the agreements. Staff
also reviewed the ESSO Agreement and the Company’s responses to nine data
requests.
Issues
Staff investigated the following issues:
1.
2.
3.
4.
Terms and Conditions of the Agreement;
Transfer Pricing;
Public Interest Compliance; and
Records Availability, Audit Provisions, and Reporting Requirements.
Terms and Conditions of the Agreement
Staff reviewed the confidential ESSO Agreement and did not find any terms or
conditions that would be unexpected or unusual. The ESSO Agreement includes only
2
See Order No. 12-227, Order No. 12-228, and Order No. 12-385 for examples of various recent affiliated
interest agreements between PacifiCorp and IBM that have been approved by the Commission.
Docket No. UI 341
December 2, 2013
Page 3
products and services provided by IBM to the Company that have been approved by the
Commission in prior affiliated interest dockets.3
Some terms and conditions are included in the ESSO Agreement that were not
contained in prior contracts with IBM that were approved by the Commission, such as,
“a mutual agreement to waive any trial by jury in respect to litigation arising out of the
agreement…”4 However, these additional terms and conditions are not unusual or
unexpected.
Transfer Pricing
The ESSO Agreement was procured when the Company requested IBM provide a
reduction in price for the software and services currently purchased by the Company.5
Through the Agreement, PacifiCorp will pay a lower price than it currently pays for
services and products from IBM that have been previously approved by the
Commission. Savings of approximately $347,000 are expected by the Company
annually on a total company basis through 2016, at which time the contract ends. The
Company anticipates a new agreement will be negotiated prior to the termination of the
present ESSO Agreement.6
Staff finds the pricing to be fair and reasonable.
Public Interest
The ESSO Agreement allows PacifiCorp to save money on its software and service
expenses purchased from IBM. These cost reductions will be passed on to ratepayers
in future general rate cases.
Staff finds the ESSO Agreement to be in the public interest (customarily a no harm
standard applied by the Commission) as the transactions will not harm customers.
Records Availability, Audit Provisions, and Reporting Requirements
Condition No. 3 of Order No. 12-227 and of Order No. 12-228, which approved prior
affiliated interest contracts between PacifiCorp and IBM, requires that the Company file
affiliated interest applications for transactions with IBM only if the cumulative annual
expense to the Company is greater than 0.1 percent of PacifiCorp’s annual Oregon
revenue. Through October 31, 2013, the Company has paid $2,695,470 in total to IBM
for products and services.7 This amount is greater than 0.1 percent of PacifiCorp’s
3
See Company’s response to Staff Data Request No. 2.
See Company’s response to Staff Data Request No. 6.
5
See Company’s response to Staff Data Request No. 5.
6
See Company’s response to Staff Data Request No. 8.
7
See Company’s response to Staff Data Request No. 10.
4
Docket No. UI 341
December 2, 2013
Page 4
2012 Oregon revenue of $1.3 billion; therefore, this application is consistent with prior
Commission orders.
Staff’s recommended Conditions provide for all necessary Commission examination of
PacifiCorp’s records concerning the ESSO 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 ESSO Agreement with IBM, an affiliated
interest, be approved subject to Staff’s recommended conditions.