On December 6, the Illinois Commerce Commission issued an Order initiating Docket 17-0855, a rulemaking to clarify the regulatory accounting treatment of utility cloud-based computing systems. Cloud-based computing systems are arrangements in which a pool of computing resources, such as servers, storage, applications, and services, can be rapidly deployed in response to demand.[1] Cloud computing offers utilities the promise of expanding their capacity and sophistication with respect to meter data management, emergency notification, advanced meter data analytics, and predictive maintenance, among several other functions.

The Commission’s rulemaking is supported by a Staff Report issued in April 2017: “Notice of Inquiry Regarding the Regulatory Treatment of Cloud-Based Solutions”, which summarized the comments the Commission received in response to a February 2016 Notice of Inquiry. The Report found that under current accounting principles, utility investment in on-premise computing systems is treated as a capital expense and included in the utility’s rate base on which it is allowed a return; whereas utility investment in cloud-based solutions is treated as an operating expense – typically as a service contract – which does not earn a rate of return. This inequality in regulatory treatment tends to disincentivize utility investment in cloud computing. As a result, the utility industry has consistently lagged behind its corporate peers in adopting cloud-based computing solutions.

Commenters responding to the Commission’s NOI suggested several alternatives to the status quo. Many electric and gas utilities and software providers agreed that most or all of the costs of cloud-based software could be included under FERC Account 303, “Miscellaneous Intangible Plant.” Water and sewer utilities similarly suggested the recognition of cloud-based software as intangible assets in NARUC Account 339.1. While the categorization of cloud computing systems in a FERC or NARUC account offers perhaps the most straightforward “fix”, other alternatives proposed include treating cloud-based systems as a capital lease, creating a new rider, or creating a regulatory asset accounting for the unamortized balance of cloud computing system costs. The Commission may evaluate several of these alternatives in the course of its rulemaking. While the Commission may consider the material differences in the manner in which utilities incur on-premise and cloud computing costs, the Report acknowledges a need to move towards a technology-agnostic, level playing field that allows utilities to make decisions regarding investment in computing solutions with an emphasis on ratepayer interests over ratemaking treatment.

The Commission’s first Notice Order in Docket 17-0855 is expected by June 4, 2018. That Order, and the publication of the proposed rule in the Illinois Register, initiates a 45-day “first notice” period under the Illinois Administrative Procedure Act, during which time the Commission accepts public comment on the proposed rule. The first notice period is followed by a 45-day second notice period, during which time the rule is submitted to the Joint Committee on Administrative Rules. A final rule clarifying the regulatory accounting treatment of cloud computing systems would therefore be expected no earlier than September 2018. Any accounting changes resulting from this rulemaking would affect applicable rate case (or other recovery mechanism) filings.

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[1] Notice of Inquiry Regarding the Regulatory Treatment of Cloud-Based Solutions. Report to the Illinois Commerce Commission. April 7, 2017.