20040415Volume X Part I.pdf

ORIGINAL
BEFORE THE IDAHO' PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
IDAHO POWER COMPANY FOR AUTHORITY
TO INCREASE ITS INTERIM AND BASE
RATES AND CHARGES FOR ELECTRIC
SERVICE.
) CASE NO.IPC-E-O3-13
Idaho Public Utilities Commission
Office of the Secretary '
, .
RECEIVED -
APR 1 52004
Boise, Idaho
BEFORE
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COMMISSIONER MARSHA SMITH (Presiding)
COMMISSIONER PAUL KJELLANDER
COMMISSIONER DENNIS HANSEN
PLACE:Commission Hearing Room
472 West Washington
Boise, Idaho
DATE:March 31 2004
, VOLUME X - Pages 1396 - 1722
CSB: REpORTING
Constance S.Bucy, CSR No. 187
17688 Allenda1e Road * Wilder, I~aho 83676
[phone] * [phone]
Email csb~spro.net
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For the Staf f :Lisa Nordstrom, Esq.
and Weldon Stutzman, Esq.
Deputy Attorney Generals
472 West Washington
Boise, Idaho 83720-0074
Barton L. Kline, Esq.
and Monica B. Moen, Esq.
Idaho Power Company
Post Office Box 70
Bo i s e , Idaho 83 7 0 7 - 0 070
RICHARDSON & 0' LEARY
by Peter J. Richardson, Esq.
Post Office Box 1849
Eagle , Idaho 83616
RACINE , OLSEN , NYE , BUDGE
& BAILEY
by Randall C. Budge, Esq.
Post Office Box 1391
Pocatello, Idaho 83204-1391
Lawrence A. Gollomp, Esq.
Assistant General Counsel
U. S. Department of Energy
1000 Independence Ave., SWWashington, DC 20585
McDEVITT & MILLER
by Dean J. Miller, Esq.
Post Office Box 2564Boise, Idaho 83701
William M. Eddie
Advocates for the West
Post Office Box 1612Boise, Idaho 83701
G IVENS PURSLEY LLP
by Conley E. Ward, Esq.
Post Office Box 2720
Boise, Idaho 83701-2720
For Idaho Power
Company:
APPEARANCES
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For Industrial Customers
of Idaho Power:
For Idaho Irrigation
Pumpers Association:
For The United States
Department of Energy:
For United Water Idaho
Inc:
For NW Energy Coalition:
For Micron Technology,
Inc. :
CSB REPORTING
Wilder , Idaho 83676
....,.,.............----- .
A P P A RA N C E S (Continued)
For Community Action
Partnership Association
of Idaho and AARP:
For Kroger Company:
(Of Record)
Brad M. Purdy, Esq.
Attorney at Law
2019 North 17th Street
Boise , Idaho 83702
BOEHM , KURSZ & LOWRY
by Kurt J. Boehm, Esq.
36 E. Seventh Street
Suite 2110Cincinnati , Ohio 45202
CSB REPORTING
Wilder , Idaho 83676 APPEARANCES
WITNESS EXAMINATION BY PAGE
Alden Holm Ms.Nordstrom (Direct)1397(Staff)Prefiled Direct Testimony 1399
Ms.Nordstrom (Direct -Cont 'd)1448
Prefiled Supp.Direct 1451
Mr.Miller (Cross)1458
Mr.Kl i ne (Cross)1461
Commissloner Hansen 1478
Ms.Nordstrom (Redirect)1482
Donn Eng 1 i sh Ms.Nordstrom (Direct)1488(Staff)Prefiled Direct Testimony 1491
Mr.Kline (Cross)1526
Ms.Nordstrom (Redirect)1533
Joe Leckie Ms.Nordstrom (Direct)1537(Staff)Prefiled Direct Testimony 1540
Mr.Kl ine (Cross)1579
Ms.Nordstrom (Redirect)1598
Keith Hessing Mr.Stutzman (Direct)1603(Staff)Prefiled Direct Testimony 1606
Mr.Eddie (Cross)1631
Mr.Purdy (Cross)1633
Mr.Ward (Cross)1633
Mr.Budge (Cross)1636
Rick Sterl ing Mr.Stutzman (Direct)1638(Staff)Prefiled Direct Testimony 1640
Mr.Richardson (Cross)1664
David Schunke Mr.Stutzman (Direct)1667(Staff)Prefiled Direct Testimony 1670
Mr.Eddie (Cross)1717
CSB REPORTING
Wilder , Idaho
INDEX
83676
PAGE
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premar ked
Premarked
Premar ked
Premarked
NUMBER DESCRIPTION
FOR THE STAFF:
101. Commission Staff Proposed
Calculation of Revenue
Requirement, etc.
102. Idaho Power Proposed Adjustments
That Should Be Changed for IPC
103. IPC Proposed Adjustments That
Should Be Denied for IPC
104. Salary Comparison Information
for IPC
105. Audit Request #41, IPC Salary
Structure Adjustments
106. Commission Staff Proposed Income
Tax Calculations for IPC
107. Commission Staff Proposed
Amortization of Unusual Case
Expenses for IPC
108. Idaho Power Pension Costs 1994 -2 003
109. Average Annual Rates of Return
for Maj or Market Indices vs. Idaho
Power Pension Plan
110. IPC Adjustments to Operating
& Maintenance Expenses, etc.
111. IPC Adjustments to Management
Expenses
112. American Falls Actual Interest
Rate with Forecasted Interest Rate
for 2003 per IPC
113. Calculation of Adjustment to Rate
Base for Major Plant Additions
Known to Occur in 2004
CSB REPORTING
Wilder, Idaho 83676
EXHIBITS
(Continued)
NUMBER DESCRIPTION PAGE
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premar ked
Premar ked
Premarked
Premarked
FOR THE STAFF:Continued)
114. Calculation of Adjustment to Rate
Base for Maj or Plant Additions
Known to Occur in 2004
115. Application for Amendment of
License before the FERC
116. Idaho Power I s Response to Staff I s
Audit Request #30
117. Idaho Power I s Response to Staff I s
Audi t Request #183
118. Comparison of Jurisdictional
Allocators
119. Jurisdictional Separation Study
Revenue Requirement
120. Results of Weighted 12CP Cost of
Service Study
121. Results of 4 Month Weighted 12CP
Cost of Service Study
122. Results of 12CP Cost of Service
Study
123. Attachment to Response to Request
No. 30
124. Idaho Power PCA Total Deferrals
1999-2003
125. Summary of Idaho Power Short-Term
Programs & Contracts
126. Danskin Net Generation History
2001-2003
127. Summary of Revenue Impact
CSB REPORTING
Wilder , Idaho 83676
EXHIBITS
(Continued)
NUMBER DESCRIPTION PAGE
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Premarked
Identified 1473
FOR THE STAFF:(Continued)
128. Summary of Revenue Impact, Proposed
Base Rates, Residential Service
129. IPC Residential Average Use
130. Idaho Power Residential Bill
Comparison
131. IPC Bill Frequency Residential
Annual Total
132. Summary of Revenue Impact, SmallGeneral Service
133. IPC Schedule 7 Average Use
134. Summary of Revenue Impact, Proposed
Base Rates, Large General Service
135. Summary of Revenue Impact, Proposed
Base Rates, Large Power Service
136. Summary of Revenue Impact, Proposed
Base Rates , Agricultural IrrigationService
137. Rate Comparison 100 HP Out of
Season
138. Summary of Revenue Impact,
Proposed Base Rates, TOU
Agricul tural Irrigation Service
FOR IDAHO POWER COMPANY:
81. Report to the Governor , State
Employee Compensation
CSB REPORTING
Wilder , Idaho 83676 EXHIBITS
BOISE, IDAHO , WEDNESDAY, MARCH 31, 2004 , 9:00 A.
COMMISSIONER SMITH:Good morning, ladies
and gentlemen.It was ourWe I 11 go back on the record.
intention last night as we discussed witnesses to start
wi th Staff, but I believe Mr. Miller has said that
Mr. Healy is present and if there I s no obj ection , we
will - - oh, I think I see an obj ection.
MR. KLINE:I apologize.I thought
Mr. Healy was going to be tomorrow
COMMISSIONER SMITH:Okay.
MR. KLINE:- - and I didn I t bring the
materials.m sorry.
COMMISSIONER SMITH:Mr. Miller.
MR. MILLER:We can certainly have Mr.
Healy back tomorrow if it I S inconvenient for today.
MR. KLINE:I appreciate that, Joe.It is
rebuttal testimony and I just didn I t bring it along.
MR. MILLER:Initially, there was a
request that Mr. Healy be available for today with the
expectation that the out-of-town intervenors would be
tomorrow and the next day and some of the in-town
intervenors would be today, but we can certainly readj ust
and be back tomorrow.
CSB REPORTING
Wilder , Idaho
1396 COLLOQUY
83676
Mr. Miller.
MR. KLINE:Thank you.
COMMISSIONER SMITH:Okay.Thank you,
Then we will go with Staff.
MS. NORDSTROM:Thank you.As its first
witness, Staff will call Alden Holm.
CSB REPORTING
Wilder, Idaho
ALDEN HOLM
produced as a witness at the instance of the Staff,
having been first duly sworn , was examined and testified
DIRECT EXAMINATION
Good morning.
He 11 0 .
Please state your name and spell your last
name for the record.
Alden Holm, H-l-m.
By whom are you employed and in what
as follows:
BY MS. NORDSTROM:
I am a senior audi tor with the Idaho
Commission Staff.
Are you the same Alden Holm that filed
direct testimony on February 20th, 2004, and prepared
capacity?
1397 HOLM (Di)Staff83676
Exhibit Nos. 101 through 107?
Yes.
Do you have any corrections or changes to
your testimony or exhibits?
No.
If I were to ask you the questions set out
in your prefiled testimony today, would your answers be
the same?
Yes.
MS. NORDSTROM:I would move that the
prefiled testimony of Alden Holm be spread upon the
record as if read and that Exhibits 101 through 107 be
marked for identification.
COMMISSIONER SMITH:If there is no
objection , it is so ordered.
(The following prefiled direct testimony
of Mr. Alden Holm is spread upon the record.
CSB REPORTING
Wilder, Idaho
1398 HOLM (Di)Staff83676
Please state your name and business address for
the record.
My name is Alden Holm.My business address is
472 West Washington Street, Boise , Idaho.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission (Commission) as a senior auditor in the
accounting section.
What is your educational and professional
background?
I graduated from Boise State University in 1994
with a B.A. degree in Accounting.In 1998, I completed
a Masters Degree in Public Administration from Boise
State Uni versi ty.Prior to joining the Commission Staff
in 2000 , I worked for two years as an accountant at the
Boise Metro Chamber of Commerce and two years as an
accountant at Rocky Mountain Audio Visual , Inc.I have
attended the annual regulatory studies program sponsored
by the National Association of Regulatory Utilities
Commissioners (NARUC) at Michigan State Uni versi ty.I am
also a member of the Finance and Accounting Subcommittee
of NARUC.I am a Certified Public Accountant licensed in
the state of Idaho.
What is the purpose of your testimony in this
proceeding?
CASE NO. IPC-E- 03 -
02/20/04 (Di) Staff1399HOLM, A.
I am responsible for overseeing the Commission
Staff I s (Staff) audit of Idaho Power Company (Idaho
Power) and the 2003 test year.I will present many of
Staff I S revenue requirement adjustments and I have
prepared Staff I s summary revenue requirement exhibits.
am Staff I s main revenue requirement witness so I will
address any revenue requirement issues not addressed
elsewhere.
My testimony outlines Staff's proposed
adj ustments to Idaho Power's revenue requirement as filed
in this case.The adjustments can be broken into four
main categories - a review of Idaho Power I s proposed test
year and additions to that test year , salaries and
incentive pay, income taxes, and other adj ustments.
will discuss each of these items individually.
What exhibits are you sponsoring?
I am sponsoring Staff Exhibit Nos. 101 through
These exhibits outline Staff I s proposed revenue107.
requirement and adjustments to Idaho Power's proposed
test year.
Will you please review Staff Exhibit No. 101?
Certainly.This exhibit highlights Staff I s
revenue requirement calculations.The first page is the
Table of Contents for Staff Exhibit No. 101 , identifying
each schedule in the exhibit.Schedule 1 shows the
CASE NO. IPC-E- 03 -
02/20/04
HOLM, A.(Di) Staff1400
overall revenue requirement for Idaho.Staff witness
Keith Hessing will address the jurisdictional separation
study.
The total Idaho revenue requirement
proposed by Staff is $498,758,249.This requires an
overall base rate increase of $14 796,880 or 3.06%.Due
to the timing of this case, some of the adj ustments were
finalized after the cost of service, allocation to
classes and rate design studies were essentially
complete.Therefore, a revenue requirement of
$499,161,903 resulting in a revenue increase of
$15,200,534 and a 3.14% average increase in rates was
utilized for these studies.The differences do not
change the policy positions taken by Staff witnesses
Hessing and Schunke.Staff recommends these changes be
incorporated, if accepted, by the Commission in its final
order in this case.
Did you prepare an exhibit that shows how your
calculation of the revenue requirement was made?
Staff Exhibit No. 101 shows how theYes.
system revenue requirement was calculated.Schedule 1 of
the exhibit shows the calculation of the overall system
and Idaho revenue requirements using Idaho Power I
proposed test year, Staff adjustments, Staff's proposed
rate of return, and Staff I s recommended distribution of
CASE NO. IPC-03-
02/20/04
(Di) Staff1401HOLM, A.
costs and revenues between Idaho and the other
jurisdictions.The rest of the schedules in Staff
Exhibit No. 101 provide the
CASE NO. IPC-03 -
02/20/04 1402 HOLM , A. (Di) 3aStaff
details supporting Schedule Those schedules show the
total amount per Idaho Power I s books using the actual and
forecasted test year as filed in Column A , any Idaho
Power normalizing adjustments in Column B, Idaho Power
annualizing adjustments in Column C , Idaho Power I s known
and measurable adjustments in Column D , other adjustments
in Columns E , and Staff I s proposed adjustments in Column
The totals in Column G transfer over to the
appropriate place in Schedule
PROPOSED TEST YEAR AND IDAHO POWER ADDITIONS TO THE TEST
YEAR
Please explain how Idaho Power presented its
2003 test year.
Idaho Power has proposed a test year based on
six months of actual expenses and revenues (January 2003
through June 2003) and six months of forecasted or
budgeted revenues and expenses (July 2003 through
December 2003) .Idaho Power states that this test year
is appropriate because it provides the most current
information and allows Idaho Power time to better split
out transactions between companies affiliated with
( IDACORP) .IDACORP , Inc.However , the 2003 test year
chosen by Idaho Power limits customer sharing of a
substantial benefit Idaho Power received during 2002 due
to a significant income tax adjustment (discussed in
CASE NO. IPC-03-
02/20/04 HOLM , A.(Di) Staff
1403
LaMont Keen's direct testimony, page 26, lines 1-5).Use
of the 2003 forecast months also limits the ability of
Staff and the other parties to review actual amounts
during the fourth quarter , specifically December and
year-end adjustments , before filing testimony in this
case.
Did the parties to this case discuss the test
year and its complications?
Yes.At the prehearing conference, Idaho Power
represented that it would allow the Commission Staff to
review the actual data and present updated information on
a supplemental basis if necessary before the Commission
made its final decision.Staff will continue to review
data and recommend changes as necessary.
Please explain Staff's changes to Idaho Power I
proposed test year.
As part of our proposed revenue requirement
Staff has adj usted Idaho Power's test year to reflect
actual non-operating revenues, expenses and rate base
amounts through November 2003 with a forecast for
December 2003.This change represents a benefit to
customers of about $6.5 million because even though the
rate base accounts increased slightly, the actual
expenses were significantly less than the forecasted
amounts and the other revenues were significantly higher.
CASE NO. IPC-E- 03 -02/20/04 1404 HOLM, A.(Di) Staff
Staff did not receive actual account totals for
December 2003 in time to fully audit and incorporate the
actual figures in our testimony and exhibits.Because
Idaho Power's forecast through November 2003 was
overstated by about $1.3 million per month , Staff has
adjusted the December 2003 revenue and expense forecast
by the average amount each account was over- or
understated in previous monthly forecasts.This forecast
adjustment results in a revenue requirement decrease of
an additional $1.3 million.Staff will review the impact
of the December actual financial amounts as this case
continues.
IDAHO POWER I S PROPOSED TEST YEAR ADJUSTMENTS
Based on your review of Idaho Power I s proposed
test year adj ustments , what does Staff recommend
regarding each proposed adj ustment?
The Commission Staff has placed Idaho Power I
proposed adj ustments into three categories.First, there
are some adj ustments Staff accepts as reasonable.
Second , there are adjustments proposed by Idaho Power
that have merit, but for a variety of reasons require a
modification.Finally, there are proposed adj ustments
that Staff does not accept.I will discuss each
adjustment category and each adjustment individually.
Idaho Power-Proposed Adjustments That Should Be Adopted
CASE NO. IPC-03-02/20/04 HOLM, A.(Di) Staff
1405
Which Idaho Power adjustments does Staff
recommend the Commission adopt?
CASE NO. IPC-E- 03 -
02/20/04 1406 HOLM, A. (Di) Staff
Staff recommends the Commission adopt the
following six Idaho Power adjustments:
The first Company adjustment relates to
general advertising expense in Account 930.This
account contains expenses relating to advertising and
image enhancement including, the advertisements promoting
Idaho Power I s need for a rate increase that aired last
Idaho Power has removed all the 930.1 expensesyear.
from the rate case so that customers will pay for none of
these items.Staff supports this reduction of $452,109
as reasonable and necessary.
Idaho Power makes an adjustment for a 2002
prescription drug expense that was booked during 2003.
This amount was appropriately removed after Idaho Power
was billed late and posted the amount during 2003.Staff
accepts the adjustment of $280,107 to reduce 2003 test
year expenses.
Idaho Power makes an adjustment of $728,766
to Account 182 for the incremental security costs that
deferred as a result of Order No. 28975, Case No.
IPC-01-41.Staff witness Leckie testifies to these
costs in greater detail.
There are items relating to the prairie
Power Acquisition Adjustment that continue to be
amort i zed.Idaho Power proposes to reduce rate base by
CASE NO. IPC-03-
02/20/04
1407 HOLM, A.(Di) Staff
$422,264 for this adjustment.Staff witness Leckie will
further discuss this issue in his testimony.
Staff accepts the adjustment relating to
the additional Cable One revenue of $346,171.Idaho
Power has added the amount to the test year to replace a
billing that was missed during the year 2003.
Staff witness Leckie will discuss the Asset
Retirement Obligation adjustment proposed by Idaho Power.
This adjustment requires $106 million be added to
accumulated depreciation and $1.58 million be removed
from rate base to reverse the effects of Idaho Power
implementation of Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations.Idaho Power is required to implement SFAS
143 in order to comply with Generally Accepted Accounting
Principles but not for ratemaking purposes.Therefore,
this adj ustment appropriately reverses the effect of the
SFAS 143 implementation as discussed by Mr. Leckie.
Idaho Power Proposed Adjustments That Should Be Changed
Which Idaho Power adjustments have merit but
should be attributed a different dollar amount than that
proposed by Idaho Power?
The following seven Company adjustments need to
be revised.These adjustments are summarized on Staff
Exhibit No. 102, Schedule
CASE NO. IPC-03-
02/20/04
HOLM , A.(Di) Staff1408
The first adjustment relates to an increase
in operating payroll for known and measurable changes.
Idaho Power proposes to increase the payroll expense
913,244 by using the projected December 2003 payroll
to forecast the salary expense through 2004.Staff
supports this adjustment if the actual December 2003
payroll amount is used instead of the proj ection.
using the actual December amount , Staff reduces the
adjustment to $860 590. This is discussed in greater
detail later in my testimony on page 24.See 1 ine 1 of
Staff Exhibit No. 102 , Schedule Schedule 2 of Staff
Exhibit No. 102 provides additional details.
Idaho Power also proposes to increase its
operating expense by $2,241 595 for forecasted general
salary increases during 2004.Once again, the original
adjustment was based on the forecasted payroll amount.
Staff would support this adjustment if it were based on
the actual December payroll instead of the forecasted
December payroll.Staff proposes to reduce the
adj ustment to $2 124,920.This is also discussed later
in my testimony under the Salaries and Incentive Pay
section on page 25.See Staff Exhibit No. 102 , Schedule
1, line 2 and Schedule 3 for calculation details.
During 2003, Idaho Power filed Case No.
IPC-03-7 to change its depreciation rates for its
CASE NO. IPC-E- 03 -
02/20/04
HOLM , A.(Di)
Staf f
1409
plant.Idaho Power filed this rate case based on the
depreciation rates that it requested in that case.Staff
and the other parties in the Case No. IPC-E- 03 - 7 have
subsequently reached a stipulation that was approved by
the Commission in Order No.2 9313.Staff recommends
accepting the depreciation expense change, but proposes
that the change be based on the stipulated rates approved
by the Commission.This change will result in a decrease
to accumulated depreciation of $2 205,647 and a decrease
to depreciation expense of $4 411,294 from Idaho Power'
original filing.See Staff Exhibit No. 102, Schedule
lines 3 -, and Schedule 4, for calculation details.
Idaho Power requests recovery of $4 953 for
intervenor funding payments made to the Land and Water
Fund of the Rockies related to Case No. IPC-01-13 on
Demand Side Management.In addition , Idaho Power
requests recovery of another $5,335 it paid to the Idaho
Irrigation Pumpers Association during 2003 in the Power
Cost Adjustment, Case No. IPC-03-It is not
reasonable for Idaho Power to be allowed recovery of
these entire amounts in the test year as if they occur
each and every year until the next rate case.Instead,
Staff proposes recovery of a yearly amortization of
017 over five years to avoid over-recovery.I will
discuss this adj ustment in greater detail later in my
CASE NO. IPC-03-
02/20/04 HOLM , A.(Di) Staff1410
testimony on pages 35 and 36.See Staff Exhibit No. 102
Schedule 1 , line
The next Idaho Power adjustment removes
some memberships and contributions Idaho Power has
determined to be unreasonable based on past Commission
decisions.These memberships include the Idaho Mining
Association , the Idaho Water Users Association and the
Wyoming Taxpayers Association.The contributions removed
were for Kenneth Berain and a company called Global
Insight in the amount of $28,384.Staff supports this
adjustment and recommends that additional contributions
in the amount of $322 177 also be removed.Staff witness
English will discuss the additional items Staff is
recommending for removal.See Staff Exhibit No. 102
Schedule 1 , line
Idaho Power I s American Falls bond interest
adjustment increases the variable interest rate amount to
be included in rates based its forecast of increased
interest rates.Given actual interest rate trends, Staff
recommends the amount be reduced by $29,419 instead of
increased by $297 436 as requested by Idaho Power.Staff
witness English discusses this adjustment in his
testimony.See line 7 of Staff Exhibit No. 102, Schedule
Staff witness Leckie will discuss Idaho
CASE NO. IPC-03-02/20/04 1411 HOLM, A.(Di) Staff
Power's proposed adj ustments that relate to the known and
measurable changes to physical plant of approximately
$18.4 million.Staff recommends a different methodology
to calculate the known and measurable plant adj ustment
that results in an addition to rate base of approximately
$1.4 million instead of the proposed $18.4 million.See
line 8 of Staff Exhibit No. 102, Schedule 1.
Idaho Power-Proposed Adjustments That Should Not Be
Approved
Finally, which Idaho Power adjustments does
Staff recommend the Commission deny outright?
Staff recommends the Commission deny the
following five proposed adjustments.These adj ustments
are shown on Staff Exhibit No. 103.
Idaho Power makes an adj ustment for
property and liability insurance as a known and
measurable change during the year 2004.Staff does not
support this adj ustment because the amount of the
increase is not known and measurable; it is simply an
estimate of the new policy costs that may go into effect
sometime during 2004.In addition to a price change,
Idaho Power states that the coverage amounts may also
change - some coverage amounts may increase while others
may decrease.The costs of the policies are not known at
this time; they are simply estimated.Therefore, ,Staff
CASE NO. IPC-E- 03 -
02/20/04 1412 HOLM, A.(Di) Staff
removes the $364 014 of increased insurance costs from
Idaho Power I s requested
CASE NO. IPC-E- 03 -
02/20/04 1413 HOLM, A.(Di) 12aStaff
revenue requirement.See line 1 of Staff Exhibit No.
103.
The next adjustment is based on the same
projected 2004 increases in liability and property
insurance ment ioned above.Because the policies will
expire during 2004 and may be renewed at a higher rate
Idaho Power suggests that the estimated amount should be
annualized and included in the test year expenses.Staff
does not support this adj ustment because the amount of
the increase is not known and measurable and is simply an
estimate of the new policies that will go into effect
sometime during 2004.Therefore, these forecasted
increased costs should be excluded.See Staff Exhibit
No. 103, line
The next adj ustment proposed by Idaho Power
increases the amount of incentive pay from zero to
$5,114,821.After December 2003, Idaho Power updated its
proposed incentive payment amount to $4 837 358 based on
the actual year-end payroll amount instead of the
forecasted amount.Staff does not support this
adjustment because it is inappropriate to establish and
charge customers for incentive pay based primarily on the
returns earned by shareholders.This incentive pay
format can be used to increase shareholder returns at the
possible expense of ratepayers.Staff also believes
CASE NO. IPC-03-
02/20/04 HOLM , A.(Di) Staff
1414
Idaho Power employees are compensated adequately with the
base salary
CASE NO. IPC-03-
02/20/04 1415 HOLM, A.(Di) 13aStaff
and benefits.I will discuss the salary and incentive
pay in detail below.See line 3 of Staff Exhibit No.
103.
Idaho Power proposes an operating pension
expense increase of $2,170,163 to the test year.Staff
does not support this adj ustment because we do not
believe Idaho Power should collect funds from customers
when it does not make contributions to the pension fund.
Staff witness English will discuss this adjustment.See
line 4 of Staff Exhibit No. 103.
Staff witness English will also address the
proposed prepaid pension adjustment of $17,800,477 Idaho
Power requests to rate base.Staff does not believe
Idaho Power should receive a return on this amount when
customers and market conditions provided the prepaid
expense.See line 5 of Staff Exhibit No. 103.
Finally, Staff witness Leckie will discuss
Idaho Power s annualizing adjustment.This adjustment
increases rate base by $19,779,389 and expenses by
$873,129.Staff believes it is not reasonable to collect
this from ratepayers because the adj ustment is not
consistent with the thirteen-month average rate base
methodology.See line 6 of Staff Exhibit No. 103.
SALARIES AND INCENTIVE PAY
Q. Did you prepare an exhibit containing
information regarding Idaho Power I s salary and benefits
CASE NO. IPC-03-
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1416
package?
Yes.Staff Exhibit No. 104 contains
information relating to the salaries of Idaho Power
employees.The first chartPage 1 has three charts.
shows the average Idaho Power salary since 1996 and the
yearly change.The second chart compares the Idaho Power
average salary with the average salaries of classified
employees of the State of Idaho for two years.Finally,
there is a chart that compares the average employee
turnover for Idaho Power versus classified state
employees.
The next three pages of the exhibit are salary
surveys Staff has obtained to use as a comparison for
Idaho Power salaries.The first survey shows the average
salary in Boise Idaho to be $46,386.The second survey
shows the average salary in Boise to be 85.6% of the
national average.Finally, the Department of Labor shows
the average cash compensation to employees to be $17.
per hour or $36,442 per year.While these surveys may
not directly tie to Idaho Power I s employees' salaries,
Staff believes they provide at least some basis for
comparison.
Please describe Idaho Power's salary and
benefits package for its employees.
Idaho Power has a generous salary and benefit
CASE NO. IPC-E- 03 -
02/20/04 HOLM , A.(Di) Staff
1417
package compared to the average Boise salary.According
to Idaho Power, the purpose of the higher salary and
CASE NO. IPC-03-02/20/04 HOLM , A.(Di) 15aStaff
1418
1419
benefits is to attract and retain highly qualified
employees.Idaho Power has been very successful at
employee retention.For example, employee turnover was a
mere 2.3% during 2003.By comparison , the State of
Idaho, traditionally known as a stable employer with
excellent benefits , has had turnover rates in the range
of 12% to 18% over the last few years.
Idaho Power sets base salaries on the 50th
percentile of various salary surveys.The maj ori ty of
the surveys are national.That means that the salaries
are mostly based on a national level even though Idaho
has traditionally been a lower-income state.In addition
to an excellent salary, Idaho Power pays most of the
health insurance benefits for employees.Idaho Power
provides typical paid time off for vacations, sickness
and hol idays .It also offers service awards, education
and training benefits, life and disability insurance
programs , an employee assistance plan and a pension plan
fully funded by Idaho Power without any contribution from
employees.Idaho Power also offers an additional 401 (k)
retirement plan that matches up to 4% of a participating
employee's salary.Staff witness English will describe
these two retirement plans in more detail.
During 2003, the average base salary of Idaho
Power I S employees was $59,173.That compares well to the
CASE NO. IPC-03-02/20/04 HOLM, A.(Di) Staff
1419
average salary of $46,386 for a full-time worker in Boise
(http: / /www.payscale. com/ salary-survey/aid-42652/fid-79/
fid-6886/RANAME-SALARY , Real-time salary survey for
Boise, ID. January 28, 2004 shown as Staff Exhibit No.
104, page 2 of 4) and the average salary of $33,891 for a
classified state of Idaho employee.Change in Employment
Compensation Supplement, Idaho Division of Human
Resources, October 1 , 2003, page The Idaho Power base
salary does not include any additional amounts paid as
incentive pay to employees.Staff has reviewed
addi tional salary surveys showing that the average salary
for all workers in the United States is $36,442 (Staff
Exhibit No. 104 , page 4 of 4) and that the average salary
in Boise , Idaho is 85.6% of the national average (Staff
Exhibit No. 104 , page 3 of 4) .
Did you review salaries and benefits for Idaho
Power's executives?
Idaho Power uses a consultant to prepareYes.
a survey of the cash and benefits that similarly sized
regulated and non-regulated utility companies paid to
their executives.Idaho Power Company pays its
executives a base salary comparable to a 5 Oth percentile
of the comparable companies.Staff believes it is
reasonable to pay executives on a national scale because
they are often recruited nationally, even though Idaho
CASE NO. IPC-E- 03 -
02/20/04
(Di) Staff1420HOLM, A
Power has promoted most executives internally.
addition, executives that work for other IDACORP entities
have at least a portion of their salary and benefit costs
allocated to the appropriate IDACORP entity.This shifts
some of the costs away from ratepayers.
Some executives also have additional
compensation benefits that relate to IDACORP performance
goals.Other than the incentive plan discussed below,
these additional benefits are appropriately paid by
IDACORP or from shareholder funds, not by ratepayers.
Staff believes that IDACORP shareholders should pay for
all incentives that are based on IDACORP goals.
Is Staff proposing any adjustments to these
salary or benefit items that Idaho Power pays its
employees or executives?
No.While the base salary and benefits are
very generous, they should not be adj usted unless the
Commission decides to allow the incentive payments as a
ratepayer expense.If Idaho Power customers pay for the
incentive payments , the total cash compensation to be
included in rates should be reduced to the 50th percentile
instead of the 60th percentile (essentially reducing base
pay instead of eliminating the incentive pay) .A fair
overall compensation package does not require both 50th
percentile salary and a seven percent incentive payment
CASE NO. IPC-E- 03 -
02/20/04 HOLM , A.(Di) Staff
1421
to be paid for by ratepayers, especially when the 50th
percentile is based mostly on national salary levels.
Idaho Power's Incentive Payments Plan
Please describe the exhibit you prepared
regarding Idaho Power's Incentive Plan (the Plan)
Certainly.Staff Exhibit No. 105 contains
information regarding the Plan.Page 1 shows the Salary
Structure Adjustments all employees have received since
1995 and the average amounts paid out each year as
incentive paYffients.Page 2 is a memorandum responding to
an audit request and is quoted later in my testimony.
Pages 3 - 5 contain a letter that went out to all employees
explaining the new incentive plan and the amount of the
Salary Structure adjustment for 1995.Finally, pages
6 -17 are taken directly from Idaho Power's Employee
Handbook and explain in greater detail how the Plan works
and how employees will be rewarded under the Plan.
Please describe Idaho Power I S 2003 Employee
Incentive Plan and its requested recovery amounts.
The Plan was designed to incentivize employees
to think like IDACORP owners and to provide additional
compensation when IDACORP earnings goals are exceeded.
All designated employees of IDACORP, Inc. and its
subsidiaries , except IDACORP Energy, are eligible to
participate in the Plan.The Plan is designed to reward
CASE NO. IPC-03-02/20/04 1422 HOLM , A.(Di)
Staff
Idaho Power employees with additional compensation when
IDACORP I S earnings per share reach a desired amount.
accomplish the Plan I s goals, the Plan pays employees an
additional percentage of their base salary when IDACORP I s
earnings per share reach certain levels.In other words
as IDACORP I S earnings per share increases, the incentive
pay for employees increases.Most employees are eligible
to earn incentive pay from 0% to 15% of their base pay
depending on the earnings per share.The percentage
range is significantly higher for managers and for
executives.
In Idaho Power's Employee Handbook, employees
are encouraged to think like shareholders and make
decisions that are in the best interest of shareholders.
In the section that explains how employees can increase
their incentive pay, the Handbook states,"Earnings
common stock focuses attention on thinking like
The Incentive Compensation section of the Idahoowner.
Power Company Employee Handbook,(emphasis in original)
is also included as Staff Exhibit No. 105, pages 6-17.
Can you describe how the incentive pay system
was set up and implemented?
Certainly.According to the information Staff
recei ved from Idaho Power, the incentive payment program
was implemented in 1995.To initiate the program, Idaho
CASE NO. IPC-E- 03 -
02/20/04 HOLM, A.(Di) Staff1423
Power decided to move from paying employees base salaries
at the 60th percentile to the 50th percentile and use the
difference as incentive pay.In his direct testimony,
Mr. Ric Gale states,"After the incentive was added to
the compensation package, the benchmark for the base pay
was reduced to the 50th percentile"Ric Gale Direct
Testimony, page 7 , lines 17-19.That implies that
employees had their base salaries reduced so they would
receive the same amount of money when the incentive
payments kicked in.However , when asked for a list of
employees that had their base pay reduced when the Plan
began , Idaho Power replied that there were none.
Moreover,
There was never intent to implement an
immediate shift from the 60th to the 50th
percentile; as such no employee I s pay
was reduced. Rather, employees in
classifications that were significantly
over market had their pay "frozen " (i.e.,
no pay increases of any type) until the
market caught up with actual pay.
IPC response to Staff Audit Request #42, Meredith
Obenchain , November 17 , 2003.See Staff Exhibit No. 105,
page for the entire response.
In other words,when Idaho Power states that
pay was placed risk,they imply that salaries were
reduced.Ric Gale Direct Testimony, page 7, line
real i ty , there were no reduct ions to any employee I s
CASE NO. IPC-03-
02/20/04 HOLM , A.(Di)
Staf f
1424
salary.Instead, Idaho Power states that some employees
simply did not get the annual raises they were used to
CASE NO. IPC-03-
02/20/04
HOLM, A. (Di) 21a
Staff
1425
receiving.However, during 1995 , the first year of the
incentive payments, all employees were given a 2.
General Wage Adjustment to maintain the competitiveness
of Idaho Power I s salaries compared to the national salary
survey Idaho Power was using at the time.See Staff
Exhibit No. 105, page 1.It seems that the majority of
employees simply received the incentive pay as additional
compensation and lost nothing from the switch to the
incentive plan.
The amount of incentive pay has varied from
year to year as earnings per share have varied.The
level of payment also varies by the employees I level of
management responsibility.Regular employees have
received between 2.6% and 15% of their base salary as
incentive payments.Managers have received between 5.66%
and 20%, and officers have received between 0% and 80% of
their base salaries as incentive payments.The CEO has
received between 0% and 100% of his base salary as
incentive payments.
In its Application , Idaho Power asks to recover
approximately $5.1 million for employee incentive pay.
Idaho Power subsequently updated its forecast of
incentive payments to $4 837 358 instead of the original
$5,114 821. This amount represents the middle level or
the expected target of the possible award and would be
CASE NO. IPC-E- 03 -
02/20/04 HOLM , A.(Di) Staff
1426
approximately 7% of base pay for most employees.
Please explain Staff I s recommendation on Idaho
Power I S incentive payments adj ustment .
As I mentioned above, Staff does not support
the incentive payments adjustment for two reasons.
First, Idaho Power compensates its employees adequately
without the incentive pay.The base salary and benefits
are already generous when compared to local salaries and
wages.Second, the group that receives the direct
benefits resulting from the incentive payments to
employees - the shareholders of IDACORP - should pay for
the incentive compensation.Some of Idaho Power I
executives receive additional compensation from IDACORP
that is not passed on to ratepayers.These incentive
payments should be treated like those additional
executi ve incentive plans and paid for by IDACORP
shareholders.Ratepayers do not directly benefit when
IDACORP I S earning goal s are achieved or exceeded and thus
should not fund this program.
A portion of all incentive payments is
capitalized.In order to remove all the effects of the
incentive pay, an adjustment of $7 741 747 to the rate
base as well as an adjustment of $230,594 to annual
depreciation expense are required to completely remove
the costs associated with the capitalized incentive
CASE NO. IPC-E- 03 -02/20/04 1427 HOLM , A.(Di) Staff
payments. In addition to the removal of the capitalized
amounts and
CASE NO. IPC-03-02/20/04 1428 HOLM, A. (Di) 23aStaff
the associated depreciation expense, the underlying
$5,114 821 expense Idaho Power requests for recovery in
the 2003 test year should be removed.
You mentioned earlier that Staff had some other
adjustments to salary expense.Can you describe those
adjustments now?
Certainly.As I mentioned above , Idaho Power
has proposed to increase its salary expense based on the
proj ected December 2003 amounts.This adj ustment takes
into consideration all the salary increases employees
have received during the year 2003 and annualizes the
salary expense to the 2003 year-end level.Idaho Power
proposed to increase the amount by $2,913,244.Staff has
reviewed the actual December 2003 payroll amount and it
is significantly lower than the proj ected amount.
believe it is reasonable to increase the base salary
expense using the actual amount instead of the proj ected
amount.By using the actual payroll expense , the correct
increase is calculated to be $860,590 instead of the
913,244 originally proposed by Idaho Power.
Therefore, Idaho Power I s base salary adj ustment should be
reduced by $2,052 654.See Staff Exhibit No. 102,
Schedule 1, line 1 , and page 2 , for calculation details.
What is the final adjustment to salaries you
would like to propose?
CASE NO. IPC-03-02/20/04 HOLM, A.(Di) Staff
1429
As I mentioned above, the general salary
structure adj ustment should be corrected.This
adjustment is based on the annual raise all employees
recei ve at the end of the year.The amount has
traditionally been about three percent (3%).Once again
the original adjustment was based on a forecasted payroll
amount increased by the three percent (3 %) .This
adjustment would be justified if it were based on the
actual December payroll instead of the forecasted
December payroll.However , because the actual payroll
amount of $2,124 920 is less than the proj ected amount of
241 595, the payroll expense increase must be less
than originally requested.Therefore , Idaho Power I s test
year expense should be reduced by $116,675.See Staff
Exhibit No. 102, Schedule 1, line 2, and page 3, for
calculation details.
INCOME TAXES
Did Staff prepare an exhibit relating to income
taxes?
Yes.Staff Exhibit No. 106 shows Staff'
calculations relating to income taxes.Schedule 1 shows
the effective tax rate calculation and the gross-
calculations as proposed by Idaho Power and Staff.
Schedule 2, pages 1-2 show the deferred taxes
calculations proposed by Idaho Power and Staff.Finally,
CASE NO. IPC-E- 03 -
02/20/04 HOLM , A.(Di) Staff
1430
Schedule 3 shows Staff I s calculation of the average
additional tax
CASE NO. IPC-03-
02/20/04 HOLM , A.(Di) 25aStaff
1431
assessments.
Please provide an overview of Idaho Power I
income tax philosophies.
Idaho Power employs a group of tax
professionals who are charged with reducing current
income tax amounts. The federal tax regulations are
complex and allow a wide variety of deductions that
permit companies to push tax expense from current periods
into future periods.The acceptable methodologies used
to calculate the deductions are not always clear right
after the tax laws have been passed.Therefore,
companies exercise some discretion to interpret the laws
and maximize deductions in the current period.Idaho
Power appropriately maximizes these deductions and seeks
to utilize all available methods to push income tax
expense into the future knowing that the Internal Revenue
Service (IRS) will ultimately determine the appropriate
deduction calculation methodologies and audit Idaho
Power's filings.These audits are conducted regularly
and often result in additional tax payments.
In its present Application , Idaho Power
requests to recover income taxes at statutory rates
adj usted for various items.These items include
differences between tax and book amounts, permanent
differences and regulatory items.Some of these items
CASE NO. IPC-E- 03 -
02/20/04 HOLM, A.(Di) Staff
1432
are fairly stable, while others can change dramatically
between years.The result
CASE NO. IPC-03-02/20/04 1433 HOLM , A. (Di) 26aStaff
lS an effective tax rate that can vary from year to year.
Staff supports Idaho Power I s efforts to reduce
its current income tax expense.However, for rate
setting purposes, Idaho Power has the opportunity to
benefit from significant swings in income tax expense
while withholding these benefits from customers when
choosing its test year. For example, during 2002, Idaho
Power received a tax benefit of more than $31 million
dollars and booked a sizeable reserve that could
materially benefit Idaho Power and its shareholders later
when the 2002 IRS audit is final.See LaMont Keen'
Direct Testimony, page 26 , lines 1-Staff believes
rates should be set to better reflect the benefits and
risks of income tax expense fluctuations.
Please describe the tax benefit referred to in
Mr. Keen I s testimony.
Certainly.After the terrorist attacks in
September 2001 and the subsequent economic impacts, the
u. S. Congress and the President passed legislation that
allowed certain businesses additional tax benefits.One
of these benefits allowed Idaho Power to allocate
indirect overhead costs to inventory and expense them in
the current period.Idaho Power refiled several returns
from prior years using the new methodology.This allowed
Idaho Power to collect a refund on taxes paid in prior
CASE NO. IPC-E- 03 -02/20/04 1434 HOLM, A.(Di) Staff
years and push income tax expense to future dates.As a
resul t of
CASE NO. IPC-E- 03 -
02/20/04 1435 HOLM, A. (Di) 27aStaff
the refiled tax returns , Idaho Power received
approximately $41 million cash during 2002 as a tax
refund.Of that amount, Idaho Power flowed to earnings
about $31 million and created a reserve of $10 million to
keep in case of an assessment by the IRS at a later date.
If the IRS approves of the manner Idaho Power calculated
the revised income taxes, it will not assess additional
tax and the $10 million reserve will also be flowed to
earnings.Any additional assessment will reduce the
reserve.
Idaho Power continues to calculate its income
tax expense using the same overhead cost methodology
during 2003.This tax benefit of approximately $5
million provides a benefit to customers during 2003 and
is included in the test year.The amount will continue
to decrease each year, and eventually the income tax that
was avoided or refunded will have to be paid back at a
later date.Staff is concerned that Idaho Power has
taken the large benefit for shareholders and used 2003 as
a test year so that it could keep the tax refund for
itself while customers pay the higher taxes now and in
the future when timing differences reverse.
Please describe Idaho Power I s calculation for
income tax.
In its test year , Idaho Power uses statutory
CASE NO. IPC-03-
02/20/04 1436 HOLM , A.(Di) Staff
rates to calculate income tax.It then uses the
estimated deductions and additions (including the $5
million for overhead costs I mentioned above) for 2003 to
reduce or add to income tax expense.
How does Staff propose to calculate the income
tax expense?
Staff proposes to smooth out the significant
swings in income tax expense by using the average
effective rate over the last five years including 2003.
This allows Idaho Power and its customers to take
advantage of the aggressive tax strategies Idaho Power
It also reduces Idaho Power s ability to game theuses.
test year process to its advantage by keeping the
unprecedented 2002 flow-through tax benefits for its
shareholders and passing through to customers IRS tax
audit payments made in 2003.
If the average effective rate is used, how does
it compare to the rate proposed by Idaho Power?
Over the last five years, the average effective
rate for Idaho Power I s above the line income tax expense
has varied dramatically.The federal rate has been as
high as 37.97% in 2001 and as low as negative 4.16% in
2002, the year of the large tax benefit.Other than
2001 , it has been below the statutory rate of 35% that
Idaho Power is requesting in this case.Staff proposes
CASE NO. IPC-03-
02/20/04
1437 HOLM, A.(Di) Staff
using an average rate of 25.24%.This rate smoothes out
the significant tax swings in the last five years and
provides a more realistic basis for tax expense over time
to use in the test year for ratemaking.A three-year
average would produce an effective federal tax rate of
22.14% .Although Idaho Power is on a three-year IRS
audit cycle , these tax changes and tax rate are not tied
to the audit cycle.Staff believes a three-year average
weights the lower rate in 2002 too heavily when the tax
benefit results from changes in refiling multiple tax
years.The different time frames and dollar impact
supports using an average over the five-year period
rather than the three-year audit period to be more
representative over time.See Staff Exhibit No. 106,
Schedule 1 , for calculation details.
Did you adjust the state income tax rate as
well?
Yes.The state rate has been as high as 10.29%
in 2001 and as low as .23% in 2002.Staff proposes to
use the average rate over a five-year period including
2003 of 5.62% as opposed to the 5.9% proposed by Idaho
Power.See Staff Exhibit No. 106, Schedule 1, for
calculation details.
Does the rate change require a change to
deferred taxes as well?A. Yes. I adj usted the test year I s deferred tax
CASE NO. IPC-E- 03 -02/20/04 1438 HOLM, A.(Di) Staff
changes using the lower averaged rate.This lower rate
reduced deferred taxes by $352 405.See Staff Exhibit
No. 106 , Schedule 2 , pages 1-, for calculation details.
If Staff was so concerned about the large
benefit received during 2002, why doesn't Staff propose
to amortize it instead of averaging the tax rates?
Staff considered an amortization of the tax
benefit , but chose the alternative because amortization
might have required Idaho Power to restate its financial
statements for 2002 and 2003.By us ing the average
effective tax rate , we are looking forward instead of
backwards.This allows customers to benefit from the
lower effective rate now since they will pay more later
as timing differences reverse.Idaho Power should not
have to restate any financial statements by using Staff I s
proposed methodology.
Does changing the income tax rates used in the
test year require a change to the gross-up factor as
we 11 ?
Yes.Staff proposes to use the same rate for
the gross-up factor as that used to calculate the
effective tax rate for the test year tax expenses.
Unless there are extenuating circumstances, it is
generally appropriate to use the same rate for the test
year tax expense and for the gross-up factor because that
CASE NO. IPC-E- 03 -
02/20/04 1439 HOLM , A.(Di) Staff
is the best representation of tax expense.The gross -
factor is therefore reduced from 1.642 to 1.446.See
Staff Exhibit No. 106 , Schedule 1, for calculation
details.
Do you have any other adj ustments relating to
income taxes?
Yes.Another area that concerns Staff relates
to the IRS audits I mentioned above.These tax audits
can often result in additional tax payments made by Idaho
Power.By its choice of test year , Idaho Power can
propose to pass the costs associated with additional tax
assessments to customers while enj oying the benefits of
the lower taxes in other periods.In this rate case,
Idaho Power is proposing to include in the revenue
requirement $2.9 million dollars of additional tax
payments relating to tax years 1998-2000.These tax
payments associated with audited tax years need to better
match the tax time frames for the audited years when the
cost is included in rates.Customers should not be
required to pay the additional tax payments when they did
not enjoy the tax benefit in rates.Idaho Power knows
when it will be audited and evaluates the total revenue
requirement shortfall including the additional tax
payments in its choice of the test year.
To more fairly match tax benefits and
CASE NO. IPC-03-02/20/04 1440 HOLM , A.(Di) Staff
post -audi t paYments, Staff proposes to average the
additional assessments in a manner similar to that used
for the
CASE NO. IPC-E- 03 -
02/20/04 HOLM, A.(Di) 32aStaff
1441
effective tax rates.This will continue to encourage
Idaho Power to pursue aggressive tax positions and allow
customers and Idaho Power alike to benefit.Because the
IRS audits Idaho Power tax years every third year, with
any large assessments appearing every three years, Staff
proposes to average the assessments over three years.
This will smooth out the additional payments for both the
customers and Idaho Power.Staff also proposes to
average the additional state income tax payments over
three years.By averaging out the additional payments,
Idaho Power will not lose its incentive to file its
income taxes aggressively but will share benefits - not
just additional payments - with ratepayers.In order to
effect this adj ustment, $1 960,529 should be removed from
federal income tax test year expenses and $55,846 should
be added to the state income tax amount Idaho Power
requests to recover for the additional tax assessments.
See Staff Exhibit No. 106 , Schedule 3, for additional
calculation details.
OTHER ITEMS
Do you have any other adj ustments to Idaho
Power's test year?
Yes.During the year 2003, Idaho Power had
three unusual cases before the Commission that were
infrequent in nature and not likely to reoccur in the
CASE NO. IPC-03-
02/20/04 HOLM, A.(Di) Staff1442
near future.In addition to utilizing internal Idaho
Power employees, each of these cases required the use of
outside consultants.
The first case I would like to address is the
depreciation expense case (IPC-03-7).This was the
first depreciation review since Idaho Power's last rate
case approximately ten years ago.In this case , Idaho
Power hired a depreciation expert at a cost of $21,772
(Staff Exhibit No. 107, line 1).In Case No. IPC-E- 03 - 7
Staff recommended and the parties accepted by stipulation
that Idaho Power file another depreciation study in five
years to review those rates again.
The second case relates to Staff'
investigation of the IDACORP Energy- Idaho Power
relationship (IPC-01-16).This case has been
complicated and lengthy but the issues involved are
expected to be decided soon.On February 17 , 2004, a
Joint Motion and Stipulation were filed with the
Commission to bring this case to an end.For this case,
Idaho Power hired a consultant resulting in a cost of
$53,228 during 2003 (Staff Exhibit No. 107 , line 2).
Finally, Idaho Power has incurred expenses
relating to the current rate case (IPC-03-13).During
2003, Idaho Power paid its expert witness, Dr. Avera,
$24,720 for his work (Staff Exhibit No. 107 , line 3).
CASE NO. IPC-03-
02/20/04
HOLM , A.(Di) Staff1443
All three of these cases are unusual in that
they are infrequent and will not occur during a typical
year.However , Idaho Power has included these additional
costs in its pro forma expenses for the 2003 test year.
It is not reasonable to assume that these cases will be
repeated next year or each year in the near future.
Therefore, the costs should not be reflected in a single
year in their entirety as an annual cost.Staff proposes
to amortize the expenses associated with these cases over
five years instead of expensing them all at once.This
will allow Idaho Power to recover the expenditures and
customers to pay these costs only once instead of the
total amount year after year until the next rate case.
Staff proposes removing four-fifths of the outside
consultants expense associated with each case to reflect
this amortization.That results in a reduction of
$79 776 to test year expenses.See Staff Exhibit No. 107
for calculation details.
Did you review the adj ustment for recovery of
intervenor funding?
Yes.Idaho Power has requested recovery of
956 for intervenor funding paid during 2003 to the
Land and Water Fund for the demand side management review
case (IPC-01-16).Idaho Power's proposed recovery
methodology would occur during 2004 and Idaho Power would
CASE NO. IPC-E- 03 -02/20/04 1444 HOLM , A.(Di)
Staff
continue to recover that amount every year after that
until the next rate case.Staff proposes that the
Commission allow Idaho Power to recover these costs over
fi ve years.This amortization allows Idaho Power to
recover one-fifth ($991) of the expense in the test year.
Idaho Power was also ordered to pay intervenor
funding to the Idaho Irrigation Pumpers Association, Inc.
in the amount of $5 335 for its involvement in the 2003
PCA case (IPC-03-5).This case ended after Idaho Power
had finalized its rate case filing and was not included
in the test year.Staff proposes that the Commission
allow Idaho Power to recover one-fifth of the amount
($1,067) in the test year.This adj ustment will allow
Idaho Power to recover its expense once rather than year
after year until the next rate case.The net effect of
these two adjustments is to reduce the revenue
requirement by $8,067.
In the al ternati ve, if the Commission wishes to
grant a faster recovery of these two amounts, the 2004
Purchased Cost Adjustment (PCA) surcharge could be used
as the method to recover these intervenor costs.This
would allow Idaho Power to quickly recover these costs
and only recover them once.
Is there any other item you would like to
discuss?
CASE NO. IPC-E- 03 -
02/20/04 1445 HOLM , A.(Di) Staff
Yes.I have received many questions from
customers and others regarding the relationship between
Idaho Power and IDACORP.In every audit, Staff spends a
great deal of time tracing transactions between the
utility and its affiliates.In general , we were pleased
that Idaho Power has implemented a system of tracking the
flow of goods and services between IDACORP and its
affiliates.The accounting system set in place seems to
allocate costs and benefits between companies in a
reasonable and effective manner.The executives appear
to make an honest effort to appropriately assign their
time to the different companies.For example during
2003 , CEO Jan Packwood billed almost 86% of his time to
enti ties outside of Idaho Power.That means Idaho Power
customers will currently pay about 14% of his salary.
Other employees use time reporting to allocate time , and
therefore salaries and overhead expenses, between
affiliates.Idaho Power conducts a study each year to
determine if all costs are being allocated appropriately
to its affiliated companies.These costs include
insurance expense, special proj ects, and purchases from
affiliates.Staff will continue to review the Idaho
Power Company - IDACORP relationship and all affiliate
transactions in every audit and rate case.
Does this conclude your direct testimony in
CASE NO. IPC-E- 03 -
02/20/04 1446 HOLM , A.(Di)
Staff
this proceeding?
Yes , it does.
CASE NO. IPC-03-02/20/04 1447 HOLM , A. (Di) Staff
open hearing.
(The following proceedings were had in
DIRECT EXAMINATION
BY MS. NORDSTROM:(Continued)
CSB REPORTING
Wilder , Idaho
Are you the same Alden Holm that filed
supplemental testimony on March 24th , 2004, with seven
revised exhibits?
Yes.
Which exhibits were those?
101 , 102 , 103, 110, 111, 113 and 114.
Do you have any corrections or changes to
your supplemental testimony or exhibits?
Yes , I do.
MS. NORDSTROM:Madam Chair , if I may
approach?
COMMISSIONER SMITH:Certainly.
(Ms. Nordstrom distributing documents.
MS. NORDSTROM:Let the record reflect
that I I ve just handed the Commissioners a correct copy of
Mr. Holm I s testimony, supplemental testimony, and that
Staff is distributing a copy of page 1 of Exhibit 101
where there are multiple corrections.
BY MS. NORDSTROM:Mr. Holm, could you
1448 HOLM (Di)Staff83676
please explain the changes to your supplemental testimony
and exhibits?
Yes.Let's begin with the supplemental
testimony.On page 2 , line 11 , the updated revenue
requirement should be $498 183 182.Line the overall
increase is 2.94 percent instead of 3.08.Line 15 should
state $893,933 or 0.18 percent, and on page 3, line 13,
the benefit to Idaho Power of about million instead
of 1.
Were there any changes to your
supplemental revised exhibits?
Yes.The exhibit that we handed out, 101,
provides the updated revenue requirement.
Why did these changes take place?
As I stated in my testimony, Staff has
continued to update the year-end numbers for Idaho Power
and I now believe that they are all updated.
If I were to ask you the questions set out
in your prefiled supplemental testimony, would your
answers be the same today?
With these changes, yes.
MS. NORDSTROM:I would move that the
prefiled supplemental direct testimony of Alden Holm be
spread upon the record as if read and that the corrected
exhibits be marked for identification.
CSB REPORTING
Wilder , Idaho
1449 HOLM (Di)Staff83676
COMMISSIONER SMITH:I s there any
obj ection?Seeing none, it is so ordered.
(The following prefiled supplemental
direct testimony of Mr. Alden Holm is spread upon the
record.
CSB REPORTING
Wilder, Idaho
1450 HOLM (Di)Staff83676
Please state your name and business address for
the record.
My name is Alden Holm.My business address is
472 West Washington Street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission (Commission) as a senior auditor in the
accounting section.
Are you the same Alden Holm that submitted
direct testimony in this case on February 20, 2004?
Yes , I am.
What is the purpose of your supplemental
testimony?
I am updating the Commission Staff's revenue
requirement recommendations based on actual information
received for activities booked or identified during or
after December 2003.I will explain two additional
adj ustments based on the actual information for the year
ending December 2003.
Why did the Staff I s revenue requirement
recommendations change?
As I stated in my original testimony, Staff has
continued to audit updated information after its original
testimony was filed on February 20 , 2004 in this case.
This additional information reflects actual booked items
CASE NO. IPC-03-
03/24/04 1451 HOLM , A.(Supp)
Staff
that had been estimated for December 2003.Staff
proposes to incorporate into the original recommendations
this actual test year information through this
supplemental filing as agreed to by the parties at the
prehearing conference on November 13, 2003.Tr. at 38.
What additional information will you provide in
your supplemental testimony?
My supplemental testimony contains an updated
revenue requirement based on Staff's ongoing audit of
Idaho Power I s actual December 2003 account balances.
Staff I s updated Idaho revenue requirement is $498,183,182
or a 2.94% increase over current levels.I have also
updated Staff Exhibit Nos. 101 , 102 , 103, 110, 111, 113
and 114.These changes reduce Staff I s original
recommendation by $893 933 or 0.18%.
Staff recommends updating the forecasted
numbers it originally used to the actual year-end
amounts.In addition , due to the discovery of additional
information , Staff no longer recommends the Commission
adopt Idaho Power I s known and measurable Salary Structure
Adjustment (SSA).I will describe both new
recommendations below.
UPDATE OF ACTUAL YEAR-END ACCOUNT BALANCES
Please describe Staff's original
recommendations relating to the year-end account
CASE NO. IPC-E- 03 -
03/24/04 1452 HOLM, A.(Supp)
Staff
balances.
Staff originally proposed two adj ustments to
CASE NO. IPC-E- 03 03/24/04 1453 HOLM A. (Supp) 2aStaff
Idaho Power 1 s forecasted test year in its previously
filed direct testimony.First , Staff recommended that
the actual account balances be brought to the actual
balances through November 2003 and used Idaho Power I
forecasted December numbers because the actual December
amounts were not known.The second adj ustment used a
Staff forecast to update Idaho Power I S proj ected December
amount.
How do you propose to treat the actual year-end
account balances based on the Company I s year-end numbers?
I propose that the two Staff adjustments
mentioned above be removed and the actual accounts be
updated to December 2003 balances.This results in a
benefit to Idaho Power of about $1.2 million from Staff I s
original adj ustments to more accurately reflect test year
costs.
IDAHO POWER I S KNOWN AND MEASURABLE ADJUSTMENTS RELATING
TO THE SSA AND INCENTIVE PAY
Please describe Staff I s original recommendation
relating to Idaho Power 1 s Salary Structure Adj ustment
(SSA) and Incentive Pay.
Certainly.In its previously filed direct
testimony, Staff originally accepted an Idaho Power SSA
wi th adj ustment to true up to actual year-end amounts
because Staff believed the S SA woul d be paid starting in
CASE NO.IPC-E- 03 -1454 HOLM,(Supp)03/24/04 Staff
2004.Staff opposed and continues to oppose the
Incenti ve
CASE NO. IPC-03-
03/24/04 1455 HOLM , A.(Supp) 3a
Staff
Pay adj ustment requested by Idaho Power.
Has Staff received updated information
regarding these two adjustments?
Yes.As I stated earlier , Staff has received
new information that changes our prior recommendations.
Idaho Power originally called these two adjustments known
and measurable adjustments because they would be paid at
the end of the year when the exact dollar amounts could
be calculated.However , Idaho Power will pay neither the
SSA nor incentive pay amounts for the year 2003.
response to Audit Request No. 236 , Idaho Power provided a
copy of a Company newsletter to employees that stated
that neither the SSA nor the incentive pay would be paid
for the year 2003 because of poor financial conditions
and other reasons.Accordingly, these adj ustments are
nei ther known nor measurable.The earliest they would be
paid is in 2005, if at all.
In a response to Staff Audit Request No. 229
received March 11 , 2004 , Idaho Power states:
Also please note that the SSA and Incentive
adjustments included in the known and
measurable adjustments will not actually be
paid but IPC feels these adjustments normalize
the impact of payroll levels for the future and
should be included in the test year.
The SSA amount has been between 0% and 3.1% of
year-end payroll during the last nine years.Due to the
CASE NO. IPC-03-
03/24/04 1456 HOLM , A.(Supp) 4Staff
, 22
open hearing.
(The following proceedings were had in
MS. NORDSTROM:With that , I'll tender
this witness for cross-examination.
COMMISSIONER SMITH:Mr. Budge , do you
have questions for this witness?
CSB REPORTING
Wilder, Idaho
MR. BUDGE:No quest ions.
couple.
COMMISSIONER SMITH:Mr. Eddi e .
BY MR. MILLER:
MR. EDDIE:No questions.Thank you.
COMMISSIONER SMITH:Mr. Purdy.
MR. PURDY:I have no questions.
COMMISSIONER SMITH:Mr. Gollomp.
MR . GOLLOMP:No questions.
COMMISSIONER SMITH:Mr. Ward.
MR. WARD:No.
COMMISSIONER SMITH:Mr. Miller.
MR. MILLER:Actually, I do have a
CROSS-EXAMINATION
Mr. Holm , my questions are in the area of
Staff I S proposal with respect to income taxes, which I
believe are discussed generally at page 25 through 29 of
1458 HOLM (X)Staff83676
your direct testimony is that correct?
Yes.
And you also have Exhibit 106, schedule 1
which I believe summarizes the Company and the Staff'
different proposals for calculation of what is known as
the gross-up factor?
That I S correct.
Do I understand correctly that the Company
proposed using the federal tax rate of 35 percent?
Actually, Mr. Miller , if you look at that
Exhibit 106, line 16 - - no , I'm sorry, 17 , you I 11 see
that Idaho Power has proposed using approximately a 32.
percent --
Tha ti right.
- -
opposed to the 35.
And in contrast what does the Staff
propose?
Staff is recommending a 25.24 percent.
And in arriving at that 25 percent , do I
understand correctly that the Staff uses a five-year
average of the effective tax rate actually paid by the
Company?
That I S correct.
Is it fair to say that the method proposed
by the Company is the method that's traditionally been
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Wilder, Idaho
1459 HOLM (X)Staff83676
followed in calculation of the gross-up factor?
Yes , I believe if you work through the
math that the calculation is actually very similar.
you put the 32.8 percent into Staff I s calculation , the
rates will be almost identical , but you I re correct in
that the calculation of the effective tax rate is
different.
Why did the Staff propose in this case
using a five-year average as opposed to the actual
rate?
As I explained in my testimony, I believe
there are some unique facts and circumstances in this
case that would allow or require us to use a different
rate than what has normally been used in the past.
So the Staff's proposal in this case does
not reflect a change in the Staff I s philosophy with
respect to income tax policy?
I believe that I s correct, Mr. Miller.
think we look at it on a case-by-case basis.
So if the Commission were to accept the
Staff recommendation in this case, would the Staff have
any objection if the Commission made it clear in its
Order that the acceptance of your proposal is based on
the facts of this case and is not necessarily
precedential with respect to other utilities?
CSB REPORTING
Wilder , Idaho
1460 HOLM (X)Staff83676
MR.MILLER:Thank you Mr.Holm.Thank
you Madam Chairman.
COMMI S S IONER SMITH:Thank you,
Mr. Miller.
I think that could be appropriate , yes.
Mr. Richardson.
MR. RI CHARD SON :No quest ions
Madam Chairman.
COMMISSIONER SMITH:Did I ask you,
Mr. Budge?
Mr. Kline.
MR. KLINE:Thank you , Madam Chairman.
BY MR. KLINE:
CROSS -EXAMINATION
Mr. Holm , good morning by the way.
going to ask you just a few preliminary questions.First
of all , how long have you been with the Commission?
I started in May of 2000.
And is this the first utility general rate
case that you've participated in?
CSB REPORTING
Wilder, Idaho
No.
Which other case did you participate in?
I also was the lead auditor in two rate
1461 HOLM (X)Staff83676
cases for Falls Water.
And in preparing your recommendations and
testimony in this case, I'm assuming that there was some
kind of ongoing review process among members of the Staff
and the supervisory folks of the Staff?
That's correct.
And who would have participated in
reviewing the work that you were doing as you were
preparing it?
Ms. Carlock and Mr. Lobb.
All right , and then once your
recommendations and testimony kind of reached the final
stage, did the Staff meet as a group and review all of
the Staff's revenue requirement adjustments and their
recommendations in their totality?
Yes.
And that would have included Mr. English
and Mr. Leckie and Ms. Carlock and Mr. Lobb?
That's correct.
Now , I'd like to ask you just a few
questions about your experience with respect to income
tax , regulatory corporate income tax.Prior to joining
the Commission , could you please describe your experience
in regulatory corporate income tax matters?
I have none, other than accounting
CSB REPORTING
Wilder , Idaho
1462 HOLM (X)Staff83676
classes.
And since joining the Commission , have
you - - could you please describe the extent of your
experience in determining regulatory corporate income
taxes?
I have performed several audits of
regulated utilities in which income tax calculations were
performed.I have attended basic trainings from NARUC
where income taxes were discussed and reviewed.I have
worked on , well , very few cases specifically oriented to
income taxes.
In your time with the Commission here,
have you ever recommended that the Commission use an
income tax rate other than the statutory rates to
determine a public utility's revenue requirement?
No.
In developing your recommendations on
corporate income tax rate for Idaho Power in this case
did you consult with or obtain recommendations or
opinions from any individuals or entities as to the
appropriateness of the income tax recommendation you'
making in this case?
Yes, Mr. Kline, I did.
And who were those persons?
As you've pointed out, I don't have a lot
CSB REPORTING
Wilder, Idaho
1463 HOLM (X)Staff83676
of experience in this and in reviewing Idaho Power I s
responses to my audit request , I understand that the tax
law in this area is very complex and detailed, so
obviously, I didn't have enough time to get all the way
up to speed on this.As a result , I consulted a great
deal not only with Idaho Power I s tax people , but also
with Avista and PacifiCorp' s as well as the other
Commission Staff members.
Mr. Holm, Idaho Power did ask a production
request of you in this case, did they not?
Yes.
And in that production request, we asked
basically the same question, with whom did you consult
and at that time you indicated that you discussed it
internally among the Commission Staff.
I believe the question was more precisely
who did we discuss our recommendations with.We did not
discuss our recommendations outside of Staff , but I did
consul t to get appropriate tax information from other
parties.
Well , the question was , did Mr. Holm
I I m referring to production request No.6 propounded to
you and the question was, "Did Mr. Holm obtain any
recommendations or opinions from any individuals or
entities as to the appropriateness of his income tax
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Wilder, Idaho
1464 HOLM (X)
Staff83676
proposals? "And your response was, "Mr. Holm's income
tax recommendations were discussed internally among
CSB REPORTING
Wilder , Idaho
Commission Staff.
That I S correct.Our recommendations were
discussed internally, but I did get a lot of outside
information from those other two companies and from Idaho
Power.
Did any of those parties recommend the use
of the income tax recommendation that you made in this
case?
, but they both indicated that they
thought Idaho Power did not do it in the most appropriate
manner.
When you say "both," who is both?
PacifiCorp and Avista.
And who did you speak to at PacifiCorp?
At Pac i f i Corp, I spoke wi th Mr. Larry
Martin , director of the tax department, and Harold
Elliott , regulatory and compliance tax director.
And at Avista?
Mr. Bob Hansen.His title was tax
manager, something similar to Mr. Marcharo.
Are you aware of any state in which an
average effective income tax rate is used to set rates
for an electric utility?
1465 HOLM (X)Staff83676
No, I'm not.We did attempt to do a
survey of states and specifically on the treatment of
this tax item that Idaho Power had and when we did that
survey, we found that either the states had not dealt
with this yet or that all of their utilities had
normalized the effect as opposed to flow-through.
I guess you would agree with me that
regulatory corporate income tax accounting is extremely
complex?
Yes, I would have to agree with that.
In making your recommendation to use an
average effective income tax rate as opposed to the
statutory income tax rates , did you consider the
normalization requirements of the Internal Revenue
Code?
Like I said , Il m not an expert in this as
much as I I d ike to be.m assuming and I 1 m conf ident
that Idaho Power properly filed it for the IRS income tax
purposes.What I'm proposing is that we set a different
rate for regulatory income tax expense, which I believe
the Commission does have the authority to do without
violating IRS rules.
So it is your opinion that what you have
proposed if adopted by the Commission would not violate
any IRS normalization requirements?
CSB REPORTING
Wilder , Idaho
1466 HOLM (X)Staff83676
For purposes of regulatory income tax
expense, yes.
And could you describe how your method
meets those consistency requirements?
There are two different things.
MS. NORDSTROM:I obj ect at this point.
Mr. Holm has stated that he is not a tax expert and to go
into the details of the tax code at this point isn I
really appropriate for this proceeding or for this
witness.
COMMISSIONER SMITH:Mr. Kline.
MR. KLINE:Madam Chairman, Mr. Holm on
behalf of the Staff has made a recommendation for the
Commission to adopt an extremely - - a tax requirement
that is substantially different than what this Commission
has previously accepted and I think it's proper
cross-examination for us to try and understand , first of
all , whether he did understand what he was doing, and
secondly, what the effects, if he understands the effects
of what he's doing.
COMMISSIONER SMITH:Ms. Nordstrom.
MS. NORDSTROM:Mr. Holm has made the
distinction between regulatory tax treatment and IRS tax
treatment.He's acknowledged that Idaho Power has people
on staff that he expects properly filed and have met the
CSB REPORTING
Wilder , Idaho
1467 HOLM (X)Staff83676
regulatory or the IRS federal requirements for filing
income taxes and that I s not what he I s disputing.He is
making his recommendations solely for regulatory
treatment and not based on the IRS requirements for IRS
filings.
COMMISSIONER SMITH:I guess I'm going to
allow the inquiry and with the understanding that we'
talking about the regulatory treatment of the taxes
here.
MR. KLINE:I understand.One question.
BY MR. KLINE:Isn I t it true that
regulatory treatment of tax normalization is directly
linked to how the IRS treats Idaho Power I s income taxes
with normalization?
With normalization?Yes.
Normalization versus flow-through?
That's correct.
And they are 1 inked?
Once again, I'm not an expert in that
area.
Would you at least agree that if the
Commission adopts one set of income tax normalization for
regulatory purposes, that can affect how the IRS taxes
Idaho Power?
It possibly could.I would recommend that
CSB REPORTING
Wilder, Idaho
1468 HOLM (X)Staff83676
you ask Ms. Carlock additional questions in that area if
that is your concern.
Mr. Holm, you are - - you have recommended
amortizing Idaho Power s test year IRS deficiency payment
over three years.Now - - strike that.You I ve
recommended amortizing Idaho Power I s test year IRS
deficiency payment over three years; is that correct?
What I actually did is I added up the
total payments for the total of the three years and then
amortized the total three-year payments.
We I re talking about the tax deficiency
payment here; correct?
Yes.
And if you're amortizing that over three
years and you re doing that because it is - - and this is
paid in the test year; correct?
Yes.
Now , how would you treat a tax deficiency
payment that occurred outside of the test year?
The same way I treated it in this test
year.I did go back two years and bring in additional
tax assessments from two years that were not in the test
year and have amortized those as well.
Would you recommend that the Company be
given a reserve for income tax contingencies?
CSB REPORTING
Wilder, Idaho
1469 HOLM (X)Staff83676
No.
m sorry?
No.
So let me understand , your position is
that for tax deficiencies that occur outside the tax
year , you would not permit a reserve to be established
but for tax deficiencies that occur in the test year , you
would require that those be amortized; correct?
My adjustment is simply an attempt to
avoid over-collection of a tax paYment.If we allow this
tax paYment as Idaho Power has proposed, they will
continue to collect that $3 million every year until the
next rate case.This is not an expense Idaho Power will
have in 2004.My adj ustment , I believe, is a good
compromise between the fact that Idaho Power will not
have to pay this for another couple of years and
recognizing the fact that there was some amounts paid in
2003.
In response to a question from Mr. Miller
you indicated that you have adopted the recommendation
you I re making for income taxes in this case for Idaho
Power is because of a unique situation with Idaho Power;
is that basically what your answer was?
Yes.
Unique fact situation?
CSB REPORTING
Wilder, Idaho
1470 HOLM (X)Staff83676
Yes.
Is the unique fact situation you
talking about the 2002 income tax effect of the method
change that Idaho Power had on its 2001 income tax
return?
It is , Mr. Kline , but I feel like I need
to explain that a little bit more.
Please do.
I find it very interesting in both its
direct testimony and its rebuttal testimony of the four
or more witnesses that discussed this income tax
adjustment that none of them mentioned that this income
tax benefit , the one-time benefit, as you referred to it,
that occurred in 2002 will indeed have to be paid back
during future years.In fact, as I understand it, there
are some effects from that already being flowed through
the current year I s income taxes.
Staff I S adjustment attempts to provide
customers a benefit for those future tax payments that
they will have to make because of the Company I s taking of
that windfall in 2002 so yes, I believe that it is a
unique set of circumstances.
Just to make sure I understand , your
premise is that because sometime in the future customers
will be paying income taxes , you I re making that
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1471 HOLM (X)Staff83676
adjustment today in this test year?
Those income taxes are already being
affected right now and yes, I'm making an adj ustment
right now to provide customers a benefit for the income
taxes that they will have to repay in the future.
Mr. Holm , I I d like to shift gears a little
bit and talk about the portion of your testimony that has
to do with compensation.In your testimony, you
characterize Idaho Power Company's compensation as
generous, do you not?
Yes.
And on page 17 of your testimony - - and
doing so, you make a number of comparisons between Idaho
Power Company s compensation and other indices of
compensation; isn't that correct?
Yes, that's correct.
I direct your attention to page 17 of your
testimony and there you cite some information regarding
payment to classified state employees , State of Idaho
employees.
That's correct.
All right, and you also at that point
reference a document entitled Change in Employment
Compensation Supplement , Idaho Division of Human
Resources , October 1st, 2003; is that correct?
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1472 HOLM (X)Staff83676
That's correct.
MR. KLINE:Madam Chair, I I d like to
approach the witness with a document.
COMMISSIONER SMITH:Yes, Mr. Kl i ne .
(Mr. Kline approached the witness.
MR. KLINE:And the document I have given
to Mr. Holm
- -
I think Monica took my last copy of it,
thank you - - I think the next exhibit
- -
this is actually
the first three pages of the document referenced in Mr.
Holm's testimony, would you agree with that Mr. Holm?
THE WITNESS:Yes.
MR. KLINE:And if anybody wants the full
copy of the report, I certainly have some additional
copies of it, but for purposes of cross, I thought
perhaps just the first three pages would be acceptable.
COMMISSIONER SMITH:Is this 81?
MR. KLINE:Yes, Exhibit 81.
(Idaho Power Company Exhibit No. 81 was
marked for identification.
BY MR. KLINE:If you could turn to what'
identified as page 2 of 3 of what I s been identified as
Exhibit 81 , Mr. Holm?
Yes.
On the right-hand side, I've underlined
the first sentence in the fourth paragraph there, do you
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1473 HOLM (X)Staff83676
see that?
Yes.
Could you read that, please?
m happy to read that."The study found
that Idaho State employee wages currently lag labor
market average rates by approximately 14.6 percent.
Mr. Holm , don't you think it's a little
misleading to characterize Idaho Power's compensation as
generous by comparing it to compensation that even the
State of Idaho acknowledges is below market?
As I stated in my testimony, I believe
that these indices that I've included, these other
references, do provide at least a limited basis , but
obviously, they are not direct comparisons.I did
appreciate, though , that you underlined the finance and
accounting section down there.
Engineering is way behind as well?
COMMISSIONER SMITH:Where are the
Commissioners?
BY MR. KLINE:Mr. Holm , have you read
Mr. Minor I s rebuttal testimony in this proceeding?
Yes, I have.
Okay, could you turn to page 3 of 3 of
Exhibi t 81?
That's the one you handed me right?
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1474 HOLM (X)
Staff83676
That's correct.
Okay.
And I've also underlined some language
there, could you read that, please, in the Summary
section?
"The concept of market - average pay
expectations , as designed by the legislature in 1994 , and
advancement through pay for performance only, is sound
compensation philosophy on its face.
In reading Mr. Minor's testimony, would
you agree with me that the philosophy of compensation
that Idaho Power Company utilizes to compensate its
employees is not materially different than what
apparently the State of Idaho believes is the correct way
to set compensation?
I believe the philosophy is the same,
yes.
I I d like to spend just a second with your
supplemental direct testimony, Mr. Holm, and we have
had -- I'll wait until you get there.
Go ahead.
We have had quite a bit of discussion in
the Hearing Room so far about the merits of using actual
data as compared to the Company I s test year which
consisted of six months of actual and six months of
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1475 HOLM (X)Staff83676
forecast data isn I t that correct?
Yes.
You've been in the Hearing Room when we'
had those discussions?
Yes.
I obviously have not had an opportunity to
look at your revised exhibit and at some point in time we
may want to either respond to it in rebuttal testimony or
perhaps even some additional cross if the Chair would
allow , but what I I m trying to understand is , is it
Staff I s position that all of the Company's rate base and
expense items should be set at 2003 year-end actuals?
That's the adjustment I attempted to make,
yes.
So you're not just selecting some portions
of the Company's expense items and rate base items and
adjusting those and leaving the others as the Company
filed them?
No, I attempted to adjust all accounts,
both ways.
And isn t it also true that the Staff has
rej ected all of the Company's proposed known and
measurable changes and annualizing adjustments?
No, I know that we haven't rej ected all
them.I I d be happy to go through them one at a time.
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1476 HOLM (X)Staff83676
Would you agree with me that they'
rej ected the material ones?
Many of them , yes.
And have they also rej ected the ones that
would have increased Idaho Power Company I s revenue
requirement in this case?
I know at least the end-of -the-year salary
adjustment we modified slightly but accepted and that was
a fairly material adjustment.
Okay.
And I agree with that concept of the known
and measurable as they relate to these expense items.
Agree with?
The concept of the known and measurable
You agree that they should have been
rej ected or I I m sorry?
CSB REPORTING
Wilder , Idaho
I agree that a known and measurable
expense item that truly is known and measurable could be
added to the test year expenses.
MR. KLINE:That's all the questions
adj ustments.
COMMISSIONER SMITH:Do we have redirect
MS. NORDSTROM:Yes.
have.
Ms. Nordstrom?
1477 HOLM (X)Staff83676
COMMISSIONER SMITH:Oh, Il m sorry,
forgot the Commissioners.Commissioner Hansen.
COMMISSIONER HANSEN:I I ve got a couple
questions.
EXAMINATION
BY COMMISSIONER HANSEN:
Mr. Holm, were you in the room yesterday
and the day before when I asked some questions and was
discussing the bonuses with Mr. Keen and Mr. Gale?
Yes, I was.
In the Staff I s case , you made adjustments
to salaries and incentive pay, did you not?
Yes , I did.
And during the audit were you able to
determine how much was booked and paid for by Idaho Power
Company?
Yes.I audited Idaho Power in both the
year 2001 and for the test year 2003.I have a variety
of schedules that show the amounts that were booked as an
Idaho Power expenditure for officers and senior employees
for several years.For instance , during the years 2001
and 2002 , Idaho Power paid approximately 650 000 in
salary and 340,000 in incentive pay for Mr. LaMont Keen.
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This was precisely during the time when he was describing
the severe financial difficulties of Idaho Power.
What were the totals, though , for each
year?You said 2001 and 2002, do you have the totals for
those years?
I calculated those, Commissioner Hansen
but apparently, I left them in my office, but they were
as I recall , the largest year was over 2 million in 2002
and over a million in 2001 for the 36 to 40 or so
officers.
Could you submit those for the record?
That information I have is based off notes
I took from confidential audit responses from Idaho
Power, but I'm certain that they could provide you that
information.
COMMISSIONER HANSEN:Let me just a
moment , Mr. Kline , if this information , I guess , isn'
available now, would you be willing to, would the Company
be willing to, submit it under confidential
information?
MR. KLINE:We need to know very
specifically what information is being requested , perhaps
a written request specifying what you're requesting, we
can certainly do that.
COMMISSIONER HANSEN:Mr. Holm?
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1479 HOLM (Com)Staff83676
THE WITNESS:I think , Commissioner , that
if the Company could provide its audit response to Staff
audit request No. 20, it has the information that you
looking for.
MR. KLINE:Okay, and subj ect to an
appropriate confidentiality agreement, we can do that.
COMMISSIONER SMITH:I f needed.
MR. KLINE:I f needed.
BY COMMISSIONER HANSEN:A couple other
questions and I can probably bring this to a head, what
impact did these expenditures have on the financial
statement of Idaho Power Company in these two years?
These expenditures were booked by Idaho
Power as expenses or they were capitalized; therefore,
they are reflected in net income for those years.
incenti ve pay had not been paid or booked as an Idaho
Power expenditure like it was , the net income earnings
per share would have been higher for Idaho Power.
So is this correct to say, then , the
incentive, if the incentive pay had not been paid and
booked as Idaho Power1 s expenditures , like you say it
was , then the net income and the earnings per share for
the utility would have been higher?
Yes , definitely.
So it would have had an impact?
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Uh-huh.
You I re probably not the person to ask
this , but maybe through your auditing and if you don't
want to respond, don't , but do you have any idea why
these officers and senior employees received these
bonuses when Idaho Power Company I s financial performance
was so poor and the customers were being charged a
surcharge for extra high rates?
I think as I pointed out in my testimony,
one of the problems with Idaho Power's incentive pay, as
I see it, is that it's based entirely on IDACORP I
earnings; therefore, during those years when IDACORP is
doing very well , it doesn I t matter if Idaho Power is
doing well or not.It still pays out those bonuses out
of Idaho Power's earnings because it's based on IDACORP' s
earnings per share and IDACORP did very well during some
of those years.
Right, but didn I t you say in the two years
that you mentioned , 2001 and 2002 , over a million dollars
was paid out of Idaho Power Company I s earnings?
Yes.
COMMISSIONER HANSEN:Tha ti s all I have.
COMMISSIONER SMITH:Now , redirect.
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1481 HOLM ( Com)Staff83676
REDIRECT EXAMINATION
BY MS. NORDSTROM:
Mr. Holm , there were some questions by
Idaho Power Company regarding your experience.Did you
come up with these recommendations in a vacuum?
No, of course not.
And are there individuals on Staff who
have considerable tax experience?
Yes, there are and we did work together as
a team to come up with these recommendations.
You mentioned that you had spoken with
Avista and PacifiCorp and that in their opinion, Idaho
Power did not handle this tax methodology change in the
most appropriate fashion.What were you referring to?
When I spoke with the tax people at Avista
and at PacifiCorp, especially the gentleman from Avista
he told me that they have applied for the same benefit
and received approximately the same amount based on this
tax change.They did not flow it through to earnings
like Idaho Power did, they normalized it, and PacifiCorp
indicated that they would normalize it as well.The
gentleman from Avista also said that he was not aware of
any other company that flowed it through like Idaho Power
did.
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1482 HOLM (Di)Staff83676
Has Staff checked around to see if they
could locate any other utilities that have elected to
flow it through like Idaho Power has done?
Yes.Ms. Carlock was recently at an
accounting and finance subcommittee meeting for NARUC,
which was, of course, attended by accounting and finance
regulators from across the country and she found that, as
I mentioned earlier , that either the states hadn t dealt
with this or that all of their utilities had indeed
normalized the effects of the tax change.
You mentioned that ratepayers will have to
pay higher taxes in the future as a result of this tax
methodology change.In your opinion, how will ratepayers
be harmed in the future as a result of this change?How
will this harm manifest itself?
What essentially happened is that Idaho
Power went back and collected income taxes that it and
the customers had already paid.Now , as I understand
this tax change philosophy, what they did is they reduced
the capitalized overhead substantially and claimed those
as expenses and were able to take that one-time benefit,
but what they don I t mention is that when the overheads
are not capitalized that there is no associated
depreciation expense for later years to offset income tax
expense and when that depreciation expense is removed
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1483 HOLM (Di)Staff83676
there will be higher income taxes.
And is that what you I re saying the
customers are going to have to pay increased taxes for in
the future?
Yes.That I s why we do not believe that
this is a retroactive adj ustment .Our adj ustment
strictly forward looking for increased income tax expense
in the future.
If there are large plant additions in the
future, will this tax methodology change have an effect
on Danskin or Bennett Mountain or other large plant
additions coming on line in the future?
The tax change does change the way those
items are calculated for income tax expense.The exact
calculations, however, are fairly complex and I I m not
prepared to get into those.I think we can ask Mr.
MacMahon those questions as well.
We also discussed normalization and if
there is a normalization error in calculating deferred
tax , would you be willing to make that correction if
Idaho Power provides detail of that error?
Yes.I I d be willing to review it.
You accepted that known and measurable
adjustments would be reasonable.Please explain , what
would be reasonable?Must all revenues, expense benefits
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1484 HOLM (Di)Staff83676
or other benefits be included with expense increases?
It would seem to me that it would be
appropriate to include all the benefits and the expenses
of known and measurable items.That would be
appropriate , yes.
There was also discussion regarding the
Company I S salaries paid to its employees.I n your
opinion , why are these salaries generous?
I did make a variety of other comparisons
besides the ones in my testimony.I looked at -- let I s
see , I compared the salaries to both Avista I s and
PacifiCorp I S average salaries and Idaho Power I s were
between those two companies.I compared the salaries to
the average salaries of Intermountain Gas and United
Water Idaho and found that Idaho Power s salaries are
substantially higher than those two companies , even
though Intermountain Gas is
- -
has a union work force.
We also
- -
I also relied on Mr. English I
experience as a pension administrator of over 500
companies where he was not familiar with very many
companies that had both fully paid pension plans as well
as matching contributions to 401 (k) plans.
So does that mean that you were looking at
the total compensation package for Idaho Power I
employees when making your recommendation?
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Yes.
There was also discussions regarding
Staff I S true-up of the Company I s forecasted numbers to
actual numbers.When you compare the Company I s forecast
and the actual numbers at the end of the 2003 year , is
that a small difference between those two sets of
numbers?
In my opinion , it I S a very large
difference.We calculated the revenue impact to be over
$6 million a year and in my mind, that I s a fairly
substantial amount.
Did all actual numbers decrease the
Company I S forecasted amounts?
No.When you adj ust account by account,
of course, every account is going to be off from the
forecast.Some of those were higher and some were lower
but in the aggregate, it I s quite substantially in the
customer I S favor.
Did the Staff go through and cherry-pick
which accounts should be put in the year-end actuals and
which ones shouldn I
No.It was my intention to include all
accounts.
I have one last question regarding the
one-time tax benefit.If Idaho Power had normalized this
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benefit like Avista has done and PacifiCorp says it will
do, would your concerns and recommendations have been the
same?
I think any time there 1 s a maj or change in
tax policy, it I S a concern that we would have.We would
want to review that to make sure that it was appropriate.
I believe it does concern me that Idaho Power appears to
have done something different than all these other
utilities have and especially when they did it outside of
a test year and I think that yes, that was a maj
concern that we had.
By doing it outside of the test year , what
impact did that have on ratepayers?
The impact that had on ratepayers is
fairly substantial.As I stated before, Idaho Power
collected a great deal of prior income taxes that had
already been paid by the customers in the Company that
will have to be paid in the future and based on the
Company I S proposal to flow that through , the customers
will be the ones paying for that one-time benefit that
Idaho Power received.
MS. NORDSTROM:Thank you.I have no
further questions for this witness.
COMMISSIONER SMITH:Thank you, Ms.
Nordstrom and thank you, Mr. Holm.
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1487 HOLM (Di)
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(The witness left the stand.
MS. NORDSTROM:As its second witness,
Staff will call Donn English.
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DONN J. ENGLISH
produced as a witness at the instance of the Staff,
having been first duly sworn, was examined and testified
DIRECT EXAMINATION
BY MS. NORDSTROM:
Good morning.
as follows:
Good morning.
Please state your name and spell your last
name for the record.
My name is Donn J. English , E-
capaci ty?
By whom are you employed and in what
m employed by the Idaho Public Utilities
Commission Staff as a Staff auditor.
Are you the same Donn English that filed
direct testimony on February 20th , 2004 , and prepared
Exhibit Nos. 108 through 112?
I am.
1488 ENGLISH (Di)Staff83676
Do you have any corrections or changes to
your testimony or exhibits?
I do.
Please elaborate.
Just one second, please.On page 7, 1 ine
, actually starting with the last word on 20 , it says
page lines through and because of that
pagination error that we have had that now page 12,
1 i ne s through and again on the same page,line
where it says pages 9 and 10, that becomes pages 8 and
Did you have any other corrections or
changes to your testimony?
I do.On page 11 , line 16 before the
words actuarial assumptions, we want to insert the words
rate of return.On page 23, line 23, due to the Staff I s
continuing audit of the Company, the number 322,177 now
becomes 326,014.Again , for the same reasons, on page
26, line 4 , the dollar value of $717 becomes $817 and
again , for the reasons I mentioned , on page 28 , line 14
the dollar value of 36,066 becomes 39,803, and I believe
that is all my changes.
When you referred to the continuing audit,
are you talking about the updates to actual numbers?
Well, that is correct, but also, after we
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1489 ENGLISH (Di)Staff83676
filed our testimony, we received more information for the
fourth quarter of 2003 which we were not able to audit
during the course of our audi t , so some of those numbers
had been updated as well.
If I were to ask you the questions set out
in your prefiled testimony, would your answers be the
same today?
Wi th those changes, yes.
MS. NORDSTROM:I would move that the
prefiled direct testimony of Donn English be spread upon
the record as if read.
COMMISSIONER SMITH:If there is no
objection , it is so ordered.
MS. NORDSTROM:And that the exhibits be
marked for identification.
COMMISSIONER SMITH:That is ordered,
also.
(The following prefiled direct testimony
of Mr. Donn English is spread upon the record.
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Please state your name and business address for
the record.
My name is Donn English.My business address
is 472 W. Washington, Boise , Idaho 83702.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission (Commission) as an auditor in the accounting
section.
What is your educational and experience
background?
I graduated from Boise State University in 1998
wi th a BBA degree in Accounting.Following my graduation
I accepted a position as a Trust Accountant with a
pension administration , actuarial and consulting firm in
Boise.As a Trust Accountant, my primary duties were to
audit the day-to-day financial transactions of numerous
qualified retirement plans.In 1999 I was promoted to
Pension Administrator.As a Pension Administrator, my
responsibilities included calculating pension and profit
sharing contributions, performing required
non-discrimination testing and filing the annual returns
(Form 5500 and attachments) .In May of 2001 , I became a
designated member of the American Society of Pension
Actuaries (ASPA).I was the first person in
CASE NO. IPC-O3-
02/24/04 1491 ENGLISH , D.(Di)
STAFF
Idaho to receive the Qualified 401 (k) Administrator
certification and I am one of only nine people in Idaho
with the Qualified Pension Administrator certification.
In 2001 I was promoted to a Pension Consultant, a
position I held until 2003 when I joined the Commission
Staff.
wi th the American Society of Pension Actuaries,
served on the Education and Examination Committee for two
years.On this committee I was responsible for writing
and reviewing exam questions and study materials for the
PA-1 and PA-2 exams (Introduction to Pension
Administration Courses), DC-I, DC-2 and DC-3 exams
(Administrative Issues of Defined Contribution Plans
Basic Concepts, Compliance Concepts and Advanced
Concepts) and the DB exam (Administrative Issues of
Defined Benefit Plans) .I have also regularly attended
conferences and training seminars throughout the country
on numerous pension issues.
What is the purpose of your testimony in this
proceeding?
The purpose of my testimony is to present
Staff's position regarding the pension adjustments found
in Idaho Power's filing.These three adjustments will
reduce the pension expense to $0.00 to correspond with
the actual contributions funded by Idaho Power.I will
CASE NO. IPC-O3 -02/24/04 1492 ENGLISH , D.(Di)
STAFF
also present Staff I s adjustment to specific miscellaneous
expenses that Staff believes should not be recovered from
ratepayers.Such expenses include various membership and
association dues, political party donations and assorted
expenses discovered after a careful review of management
expense report s I will also discuss Staff's adjustments
regarding legal fees paid for advice and representation
pertaining to alleged trading improprieties.Finally, I
will present Staff I s adjustments to variable interest
rates that reduce the revenue requirement and the cost of
capi tal.
Why are there three adj ustments to pension
expense?
While Staff believes Idaho Power should not
recover anything for pension expense, we also disagreed
wi th some of their methodologies when calculating pension
expense.I will present each of these adjustments
separately, but ultimately, the pension expense for rate
purposes should be $0.00.
Are you sponsoring any Exhibits?
Yes , I will be sponsoring Exhibit Nos. 108-
112.
Will you please describe Exhibit No. 108?
Exhibit No. 108 consists of 5 pages and
displays the historical trends of the Retirement Plan of
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STAFF
Idaho Power Company (pension plan) .I will describe this
Exhibit in more detail when presenting Staff I s
adjustments.
OVERVIEW OF COMPANY I S RETIREMENT PLANS
Will you please describe the pension plan?
Idaho Power Company sponsors a traditional
defined benefit pension plan.Participants will receive
a monthly income upon retirement that is based on their
years of service and their final average earnings.This
plan is fully funded by Idaho Power Company.Assets in
the plan are secured in a trust and guaranteed by the
Pension Benefit Guaranty Corporation.
Is this the only retirement plan sponsored by
Idaho Power Company?
No, Idaho Power also sponsors a 401 (k) plan
called the Idaho Power Company Employee Savings Plan (ESP
plan) .
Please describe the ESP plan.
The ESP plan is a defined contribution plan
that allows Idaho Power employees to contribute to a
401 (k) plan on either a pre-tax or post-tax basis to
supplement their retirement.The assets are invested in
funds chosen by the employee and the employee bears all
of the investment risk.
Idaho Power Company provides matching
CASE NO. IPC-O3-02/24/04 1494 ENGLISH , D.(Di)
STAFF
contributions to this plan equal to 100% of the first 2%
of pay contributed, and 50% of the next 4% of pay
contributed.So if an employee contributes 6% if their
pay into the plan , they will receive a matching
contribution of 4 percent.
Does Idaho Power offer any other retirement
plans to employees?
Yes , for certain individuals.Idaho Powe
sponsors the Security Plan for Senior Management
Employees , the Executive Deferred Compensation Plan , the
Long-Term Incentive and Compensation Plan for Officers
and Senior Managers, and the Executive Incentive Plan.
With the exception of the Executive Incentive Plan , Idaho
Power appropriately charges contributions to these plans
below the line and the costs are not recovered from
ratepayers.
Does Staff believe that ratepayers should pay
the expenses and contributions for the Executive
Incentive Plan?
No.Idaho Power is requesting recovery of
the normalized level of costs of the Executive Incentive
Plan in the amount of $5 114 821 from ratepayers , as
displayed in Company witness Smith's Exhibit No. 19, page
2 of 6, 1 ine Because the compensation packages
received by Idaho Power I s employees and management is
CASE NO. IPC-O3 -1302/24/04 1495 ENGLISH, D.(Di)
STAFF
already very generous , Staff believes any additional
benefit to executives should also be booked below the
line.The pension plan and the ESP plan provide a more
than ample opportunity for Idaho Power executives to have
a secure retirement.The incentive payments will be
discussed in more detail in Staff witness Holm I
testimony.
ADJUSTMENTS TO PENSION EXPENSE
Please describe the Company's treatment of
pension expense in its current rate filing.
Idaho Power's pension expense included in its
rate filing is $7,018,000.However, Idaho Power proposed
an adjustment of $2 170,160 increasing the pension
expense from Net Periodic Pension Cost (Net Cost or FAS
87 Cost) to the Service Cost, less the amount capitalized
as shown in Company witness Smith's Exhibit No. 19, page
4 of 6 , line
Does Staff agree with this adjustment?
No.Idaho Power accrued the Net Periodic
Pension Expense on its books as required by Statement of
Financial Accounting Standards No. 87 (FAS 87) entitled
"Employers I Accounting for Pensions.The Accounting
Standards Board (Board) issued FAS 87 in an attempt to
alleviate long-standing controversy regarding how to
report for pension liability.As stated in FAS 87 , page
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STAFF
, the Board's objectives were as follows:
1. To provide a measure of net periodic pension
cost that is more representationally
faithful than those used in past practice
because it reflects the terms of the
underlying plan and because it better
approximates the recognition of the cost of
an employee I s pension over that employee I s
service period.
2. To provide a measure of net periodic pension
cost that is more understandable and
comparable and is, therefore, more useful
than those used in the past.
3. To provide disclosures that will allow users
to understand better the extent and effect
of an employer s undertaking to provide
employee pensions and related financial
arrangements.
4. To Improve reporting of financial position.
Please explain the Service Cost.
The Service Cost is a calculation of the
incremental increase in future benefit obligations due to
an added year of service for each participant.It is
only a calculation and not a cost to Idaho Power.
What is Idaho Power I s rationale for using
Service Cost rather than Net Periodic Pension Cost?
The Company believes that Service Cost is more
indicative future pension costs going forward as
stated Company witness Smith I direct testimony,page
ines 15-17.Company witness Gale I direct
testimony,page s and further states that using the
Service Cost removes market volatility and the interest
rate
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STAFF
volatility, while quantifying the cost of an additional
year of benefits to employees.Q. Do you agree with their assertion?
I strongly disagree with the assumption that
the Service Cost calculation is more representative of
future costs going forward.Exhibit No. 108, page 1 of 5
is a simple line graph that illustrates the 10-year
history of Service Cost, Net Periodic Cost and actual
cash contributions funded to the pension plan.As you
can see, the Net Pension Costs were actually closer to
the amounts funded by Idaho Power over the past 10 years.
What about Mr. Gale I s statement that Service
Cost removes the market volatility?
It is true that the Service Cost calculation is
exclusive of any market volatility and interest rate
volatili ty.However , I disagree that Service Cost should
be used for ratemaking purposes.As stated in FAS 87
the net cost feature implies that the recognized
consequences of events and transactions affecting a
pension plan are reported as a single net amount in the
employer I s financial statements.This net cost approach
aggregates at least three items that might be reported
separately for any other part of an employer'
operations:the compensation cost of benefits promised,
the interest cost resulting from deferred payment of
those benefits, and the results of investing.
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The Accounting Standards Board recognized
the importance of considering interest rates and
investment returns when they mandated the use of Net
Periodic Pension Cost for financial reporting purposes.
The maj or component of retirement planning is investment
ret urn.Simply setting aside money that does not earn an
investment return would defeat the purpose of investing,
and would make pension plans prohibi ti vely costly.
Because the entire investment community expects that the
market will produce positive rates of return in the long
run, it would be inappropriate to exclude this major
component of retirement when considering rates, as
Service Cost does.Idaho Power I s choice to use Service
Cost for its filing produces a greater revenue
requirement than Net Periodic Pension Cost.Idaho
Power's methodology of using the Service Cost calculation
would increase the revenue requirement without a
legitimate offsetting increase in actual cost, resulting
in a greater revenue requirement than necessary.
Therefore Staff takes exception to the Idaho Power I
adjustment to increase pension expense by $2 170 160 and
recommends an equivalent adj ustment to reduce the
expense.
Is the revenue requirement using the Service
Cost always greater than the revenue requirement using
CASE NO. IPC-O3 -02/24/04 1499 ENGLISH, D.(Di)
STAFF
the Net Periodic Pension Cost?
Not always , but in the case of Idaho Power
Company, it will be for quite some time.It would
require several years of negative returns for the revenue
requirement associated with the Net Periodic Pension Cost
increase the 1 eve 1 revenue requirement
associated with the Service Cost.Even after the poor
market performance of 2000 , 2001 and 2002 , the Net
Periodic Pension Cost was still over $3 million less than
the Service Cost.Considering the stellar market
performance of 2003, the revenue requirement gap between
Service Cost and Net Cost will be even greater going
forward.By using the Net Cost methodology, Idaho Power
would still be able to meet its pension obligations, but
at a significantly reduced cost than it is requesting.
Please describe Staff I s next adjustment to
pension expense.
Staff also recommends an adjustment that
reduces test year pension expense by an additional
379,148.
What is the basis for this additional
adjustment?
During a review of the pension plan, it was
determined that some of the actuarial assumptions for
calculating the pension cost for the 2003 test year were
CASE NO. IPC-O3 -02/24/04 1500 ENGLISH , D.(Di)
STAFF
changed from prior years.The discount rate was reduced
from 7.00% to 6.75% and the future expected return on
plan assets was reduced from 9.00% to 8.50%.Both of
these changes generated an increase in Idaho Power'
pension expense for 2003.Page 2 of Exhibit No. 108
which I will explain in detail later, will help
illustrate Staff's argument.
Is changing actuarial assumptions common?
Changes are not uncommon.However , the
important requirement in determining actuarial
assumptions is that they must be reasonable.When Idaho
Power files the annual return (Form 5500 and attachments)
for the pension plan with the Department of Labor , an
actuary will sign the Schedule B verifying the
calculations are reasonable.Though Idaho Power'
changes in assumptions are reasonable, it has been my
experience that rate of return actuarial assumptions will
rarely change barring some maj or event.
If the Company's actuarial assumptions are
reasonable , then why is Staff concerned with these
changes?
There are three reasons Staff is concerned with
the changes in actuarial assumptions.First, as
mentioned earlier , the fact that these changes served to
increase pension expense during the test year seemed a
CASE NO. IPC-O3-02/24/04 1501 ENGLISH, D.(Di)
STAFF
little suspect.Second , Staff reviewed the investment
policy for the pension plan and there were no changes to
that policy.If the reduction in expected return on
assets was due to a change in investment strategies, the
policy would have been updated to reflect that.In this
case, there have been no recent changes to the investment
policy.Lastly, when reviewing the workpapers of the
Company I S external audi tors, Deloi t te & Touche, LLP
Staff reviewed a letter from the Company I s Technical
Research Coordinator , Mark Annis, to the Company I
actuaries , Milliman USA.This letter instructed the
actuaries to use specific actuarial assumptions when
preparing the pension plan computations.
Is it unusual for Companies to choose their own
actuarial assumptions?
It is uncommon , but it happens occasionally.
Some actuarial firms have their clients agree to the
actuarial assumptions as a method to reduce possible
liabilities if those assumptions do not hold true.Staff
believes that in determining their own actuarial
assumptions , Idaho Power has the ability to game test
year expenses to their advantage by increasing revenue
requirement.Had it been Idaho Power's actuaries at
Milliman USA who determined it necessary to change the
actuarial assumptions based on extraordinary
CASE NO. IPC-E-O3 -02/24/04 1502 ENGLISH, D.(Di)
STAFF
circumstances, Staff believes the changes may have been
justified.Staff does not believe there have been any
events to warrant these changes.
Is it possible that economic factors , such as a
bear market , would cause Idaho Power to reduce their
expected rate of return on plan assets?
Current market performance should play only a
minor role , if at all, in determining expected rates of
future returns.To change the rate solely because of a
few bad years would have been a premature, knee-jerk
reaction.Retirement investing, by def ini tion , is a
long-term endeavor that requires consideration of
long-term averages when comparing expected rates of
return on investments.Historically, the market has
always returned to averages.The recession in the early
nineties was followed by unusually high returns in the
mid to late nineties.While the market declined during
2000-2002, it reversed itself in 2003 and experienced
huge gains.It is a yo-yo effect , but the stock market
has always returned to its averages.
Would you please describe Exhibit No. 108,
page 2?
Exhibit No. 108, page 2 is a line graph that
illustrates the historical rates of return of the Idaho
Power Company Retirement Plan over the last 15 years.
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STAFF
This confirms that the investments in the pension plan
conform to historical market tendencies.The straight
line through the middle of the graph is the average
annual return for the same 15-year period (12.97%).The
2003 returns are calculated through November 30 and for
simplicity, all contributions and distributions are
weighted at 50% as if they occurred on June 30 rather
than sporadically throughout the year.Thi s chart
supports Staff I s assertion that markets trend to their
averages, supporting Staff's recommendation to reduce
pension expense by $1 379,149 to offset the increase due
to Idaho Power's changes in the proj ected long-term rate
of return on assets.
How was this amount derived?
This amount was calculated using the Company'
expected rate of return on assets of 9.0% that the
Company used for several years prior to 2003, and keeping
all other actuarial assumptions unchanged.See Exhibi t
No. 108, page 3 for the calculation.
Please explain Staff I s third adjustment to
pension expense.
Staff also recommends reducing pension expense
by an additional $5 638 851.This adjustment would
reduce the pension expense to $0.00.
What is the basis for this adj ustment?
CASE NO. IPC-O3 -
02/24/04 1504 ENGLISH, D.(Di)
STAFF
This adjustment is a reconciliation between
cash and accrual accounting.As required by FAS 87
Idaho Power has accrued a pension contribution on its
books for financial reporting purposes, but Idaho Power
did not contribute to the plan for 2003 and therefore did
not incur any actual costs.When dealing with pension
plans , the FAS 87 accrued contribution amount and the
amount that is actually contributed to the plan are
completely unrelated.To determine the amount that Idaho
Power is required to actually contribute to the pension
plan , a different calculation is used entirely.
Referring back to Exhibit No. 108, page 1 , one can again
see the significant difference between Net Cost per FAS
87 Cost and the amounts Idaho Power has contributed to
the pension plan since the last rate case (Case
No. IPC-94-5).Idaho Power does not actually
contribute the amount identified for reporting purposes.
Please describe how the actual cash
contribution is calculated.
Under normal circumstances , companies have some
discretion as to how much they contribute to a pension
plan for a given year.There is a cost range and
companies can contribute any amount between the Required
Minimum Contribution and the Maximum Deductible
Contribution.Section 412 of the Internal Revenue Code
CASE NO. IPC-O3 -02/24/04 1505 ENGLISH , D.(Di)
STAFF
mandates the minimum funding, while section 404 mandates
the maximum funding.
Could you briefly explain how that cost range
is determined?
The first calculation determines the Normal
Cost for the year.The Normal Cost is the annual cost of
the pension plan using the plan. s actuarial cost method,
as established in the plan document.The Normal Cost is
a calculation that takes into consideration the present
value of future benefits , the actuarial value of the
plan. s assets , any unfunded liabilities and the present
value of the Company. s future payroll.With that
information, one can then calculate an accrual rate that
when multiplied by the Company. s current covered payroll
will produce the Normal Cost.After the Normal Cost is
calculated , any charges or credits are added or
subtracted to get the Annual Cost.The Minimum Required
Contribution is the lesser of the Annual Cost or the
difference between the Full Funding Limitation and any
credi t balance.The Minimum Required Contribution is the
amount that a company must fund in order to avoid a
funding deficiency in the Funding Standards Account.
You mentioned the term Full Funding
Limitation. Could you please describe this limitation?
The Full Funding Limitation is a calculation
CASE NO. IPC-O3 -02/24/04 1506 ENGLISH, D.(Di)
STAFF
that compares the Actuarial Accrued Liability as
calculated under the Employee Retirement Income Security
Act (ERISA) of 1974 , the Current Liability under the
Omnibus Budget Reconciliation Act (OBRA) of 1987 , and the
Current Liability under the Retirement Protection Act
(RPA) of 1994.
Now that the minimum point in the cost range is
established , how is the maximum point determined?
The Maximum Deductible Contribution is an IRS
calculation that determines deductibility under Section
404 (a) (1) (A) of the Internal Revenue Code.This
calculation is based on a comparison of any unfunded
liabilities and the Full Funding Limitation.A company
may choose to contribute to a pension plan any amount
that is greater than the Minimum Required Contribution
but less than the Maximum Deductible Contribution.
Based on these principles, what was the cost
range for Idaho Power for 2003?
There was no range for Idaho Power for 2003.
The Minimum Required Contribution was $0.00 and the
Maximum Deductible Contribution was also $0.00.
Does that mean Idaho Power did not contribute
to the plan for 2003?
They did not.In fact , even if they wanted
to, they could not have legally contributed to the
CASE NO. IPC-O3-02/24/04 1507 ENGLISH , D.(Di) 1 7
STAFF
pension plan without incurring penalties.They have not
been able to contribute to the pension plan since 1995.
Meanwhile, they continued to recover in rates more than
$3 million per year from ratepayers for pension expense.
Exhibit No. 108 , page 4 illustrates the historical
contributions since the last rate case versus the amounts
that Idaho Power has recovered through rates for pension
expense since the IPC-94-5 rate case.In aggregate,
Idaho Power has recovered nearly $19 million more than
they actually contributed to the pension plan since 1993.
How can a company go for so long without making
a single contribution to the plan?
A company can generate a prepaid pension
expense for a variety of reasons.The most obvious
reason is that companies use actuarial assumptions that
are inaccurate.For example, prior to 2003 Idaho Power
had assumed a future rate of return on assets of 9
percent.However , the average rate of return on pension
plan assets for the past 15 years was 12.97 percent.
When the pension plan I s investment performance over time
is that much greater than the proj ected rate of return
it creates a prepaid pension expense.It also discredits
a change to reduce the expected future rate of return for
funding calculations.Exhibit No. 108 , page 5
illustrates the increase in prepaid pension expense since
CASE NO. IPC-O3 -02/24/04 1508 ENGLISH , D.(Di)
STAFF
1994.At the end of 2002 , the Plan had a prepaid pension
expense of nearly $28 million.Compounded wi th the
stellar market performance for 2003, Idaho Power is not
expected to have to contribute to the pension plan for
several years.The Commission Staff believes it is
highly inappropriate for Idaho Power to seek recovery of
nearly $10,000 000 per year for pension expense when they
have not had to contribute a single dollar to the pension
plan for eight years and is unlikely to contribute to the
plan for several more years to come.
ADJUSTMENTS TO PREPAID PENSION EXPENSE IN RATE BASE
What is Idaho Power's treatment of prepaid
pension expense in this current rate case?
Idaho Power proposes to include prepaid
pension expense in rate base.The Company claims that
because prepaid pension expense is reported as an asset
on the Company's balance sheet, they should include it in
rate base to earn a return on that investment.
explained in Audit Response No. 113, Idaho Power also
argues:
Including a prepaid pension amount in the rate
base recognizes the investment and carrying
costs the Company has incurred over the years,
both in cash contributions and the value added
through proper oversight , portfolio management
techniques and asset allocation policies.
Does the Commission Staff agree with Idaho
CASE NO. IPC-O3 -02/24/04 1509 ENGLISH , D.(Di)
STAFF
Power's arguments?
, the Staff disagrees with both arguments.
Statement of Financial Accounting Standards No. 87
requires Idaho Power to report a prepaid pension expense
as an asset for financial reporting purposes.However
prepaid pension expense is not an asset of the Company,
but rather an asset of the trust that maintains the
assets of the pension plan.Assets of a qualified
retirement plan are required to be maintained in a trust.
This trust acts as its own entity, separate from Idaho
Power , and is assigned its own employer identification
number by the IRS for financial reporting of the trust
and withholding income taxes on plan distributions.Once
money is deposited into the trust , there are a very
limited number of circumstances in which the Company is
allowed to use those assets for its own corporate use.
Beyond those rare instances, a reversion of plan assets
from the trust back to the Company is a violation of the
Exclusive Benefit Rule and the Anti-Assignment and
Alienation Rule of Employee Retirement Income Securities
Act (ERISA).Even if the pension plan were to terminate
the amount of assets greater than the amount of
liabilities cannot revert back to the Company without
maj or penal ties.In short, the asset that appears on the
books is a result of payroll benefits.It is not an
CASE NO. IPC-O3 -02/24/04 1510 ENGLISH , D.(Di)
STAFF
asset that provides electric service on which
shareholders are entitled to earn a return.
What are ERISA's Exclusive Benefit Rule and the
Anti-Assignment and Alienation Rule?
The Exclusive Benefit Rule is one of the main
premises that all qualified retirement plans are based
on.It basically states that the assets of a qualified
retirement plan must be for the exclusive benefit of its
participants and beneficiaries.
The Anti-Assignment and Alienation Rule
essentially states that a person's benefit in a qualified
plan cannot be assigned to anyone else, except under a
qualified domestic relations order in which the benefits
are transferred to a former spouse.Benefits cannot be
used as collateral for credit, nor can they be
surrendered due to bankruptcy.A violation of either of
these rules is serious enough to disqualify the Plan.
These rules prevent Idaho Power from having a
reversionary interest in the pension plan's assets.
Al though the prepaid asset appears on a balance sheet, it
should not be considered an asset included in rate base
to earn a return for ratemaking purposes.It is clearly
not an asset that should earn a return if Idaho Power has
no ownership of the funds , no discretion on how those
funds can be used, and those funds cannot be returned to
CASE NO. IPC-O3 -02/24/04 1511 ENGLISH , D.(Di)
STAFF
them.
What is Staff's position on Idaho Power'
other argument that the inclusion of prepaid pension
expense in rate base recognizes the carrying costs the
Company has incurred over the years , both in cash
contributions and the value added through proper
oversight portfolio management techniques and asset
allocation principles?
Staff also disagrees wi th thi s argument.Idaho
Power has not made any cash contributions to the pension
plan since 1995 , and any contributions prior to that were
funded by customers.Also, any expenses generated by the
pension plan have been paid from the Plan's assets.
Since Idaho Power has not made any contributions to the
pension plan and Idaho Power does not incur costs to
maintain the plan , Staff disagrees that Idaho Power has
incurred any II carrying costs II .
Staff also takes exception to the argument that
Idaho Power should be recognized for its proper
oversight, portfolio management techniques and asset
allocation policies.Those actions are fiduciary
responsibilities required by ERISA , and Staff believes
that Idaho Power should not be rewarded for performing
actions that are required by law.Staff also believes
that the performance of Idaho Power's retirement plan
CASE NO. IPC-O3 -02/24/04 1512 ENGLISH , D.(Di)
STAFF
faired no better than the overall performance of the
market in general.Exhibit No. 109 illustrates the
comparison of the 15-year average annual rates of return
of Idaho Power's pension plan versus the average annual
rates of return for the Dow Jones Industrial Average
(DJIA) , the S&P 500 Composite Stock Index and the NASDAQ
Composite Index over the same time period.The DJIA, S
500 and the NASDAQ averaged annual rates of return of
13.89%, 15.02% and 21.6% respectively since 1989.The
fact that Idaho Power's pension plan averaged an annual
rate of return of only 12.97% during the same period does
not particularly support Idaho Power's argument that they
should be rewarded for value added and proper management
of the account. Therefore , Staff has removed the
$17 800 477 in Prepaid Pension from rate base.
Does that conclude Staff's pension-related
adj ustment s?
Yes , that concludes Staff's pension-related
adjustments.
ADJUSTMENTS TO OPERATING AND MAINTENANCE EXPENSES
Would you please describe Exhibit No. 110?
Exhibit No. 110 is a list of Staff'
adjustments to Operating and Maintenance (O&M) Expenses
totaling $326 014.Staff believes it is inappropriate to
pass on membership and association dues to customers if
CASE NO. IPC-O3 -02/24/04 1513 ENGLISH, D.(Di)
STAFF
those associations do not provide products or services
that, either directly or indirectly, allow Idaho Power to
provide electricity to its customers.These expenditures
may benefit other IDACORP affiliates , enhance the Idaho
Power and IDACORP image, or provide a social presence for
Idaho Power , IDACORP and its individually participating
employees.Al though this may be important for
non-regulated operations, customers should not be forced
to support an organization whose ideology they may not
agree with by including these expenditures in customers'
electric rates.Furthermore, in Case No. WWP-98-11 and
subsequent Commission Order No. 28097 , Staff argued and
the Commission agreed that a percentage of Account 930 be
removed from test year expenses because it included
below-the-line expenses such as lobbying, enhancing the
image of the Company in the community and efforts to
maximize shareholder value.
Please explain Exhibit No. 110 , line
Exhibit No. 110 , line 1 is an adjustment that
eliminates $246,048 from the test year for a portion of
the dues paid to the Edison Electric Institute (EEI) by
Idaho Power.Edison Electric Institute is an
organization whose primary efforts are directed toward
legislative lobbying and regulatory advocacy for
shareholder-owned electrical utili ties.According to The
CASE NO. IPC-O3-02/24/04 1514 ENGLISH , D.(Di)
STAFF
Center for Responsive Politics , a non-partisan , non-
profit research group that tracks money in politics and
its effect on elections and public policy, EEI spent more
on lobbying than any other organization in the Electric
Utilities category.In fact, EEI spent as much on
lobbying as the next four largest utility lobbying
organizations combined.The lobbying expenditures of EEI
were large enough to rank sixth overall amongst all
industries nationwide.Idaho Power has an internal
posi tion , Vice President of Public Affairs, whose sole
responsibility is representing the Company on major
political issues.The efforts of EEI and this position
essentially overlap and are duplicative.
Staff has consistently viewed EEI as an
organization whose activities are primarily for the
benefit of shareholders.EEI 's research information is
disseminated through other sources available to Idaho
Power and its receipt is not dependent upon membership.
EEI activities also benefit IDACORP and its affiliates.
Though Staff believes all dues paid to EEI should be
removed from the test year , we have only removed 75% of
the dues to remain consistent with precedent set in
Commission Order No. 25880, Case No. IPC-94-05.
Please continue with your explanation of
Exhibit No. 110.
CASE NO. IPC-O3 -02/24/04 1515 ENGLISH, D.(Di)
STAFF
Exhibit No. 110, line 2 removes $3,967 from
the test year membership dues and contributions paid to
various Rotary Clubs.Line 3 removes $1 689 from the
test year various contributions made to local Kiwanis
Clubs.Line 4 removes $817 from the test year in
contributions made to various Lion I s Clubs.These
organizations are social or spiritual organizations that
provide no benefit related to the provision of
electrici ty for Idaho Power customers.Though Staff
commends Idaho Power contributing to these fine
organizations, it is inappropriate to charge those
expenses to ratepayers.Any customer desiring to belong
to or contribute to these or other organizations may
voluntarily do so on their own.Customers should not be
required to pay for these costs in electricity rates.
Would you please explain line 5 on Exhibit No.
110?
Line the adj ustment that removes $24 490
from test year expenses that Idaho Power paid to the
Chambers Commerce of several Idaho cities.Chambers
of Commerce are advocates for businesses on issues that
impact the ability of regional businesses to be
successful in a competitive marketplace.Because Idaho
Power is a monopolistic utility, the Chambers I actions do
not have an impact on Idaho Power's ability to be
CASE NO. IPC-O3 -02/24/04 1516 ENGLISH , D.(Di)
STAFF
successful.Staff has removed these expenses, similar
to dues and contributions , because they benefit IDACORP
affiliates, non-regulated operations and shareholders,
but not ratepayers.
Would you please describe line 6 of Exhibit No.
110?
Line 6 is the adj ustment to remove $2,000 from
test year expenses that Idaho Power contributed to the
Democratic National Party and the Republican National
Party.It is not appropriate to use money received from
customers to support political organizations that the
customers may have serious disagreements with.
Therefore , Staff has adjusted the O&M Expenses to exclude
these contributions.
Would you please explain line 7 of Exhibit
No. 110?
Line 7 is Staff's adj ustment to remove from
test year expenses $7 200 for memberships to the
exclusive Arid Club for the following Idaho Power
officers: President and Chief Executive Officer, Jan
Packwood; President and Chief Operating Officer , Lamont
Keen; Vice President, Chief Financial Officer and
Treasurer , Darrell Anderson; and Senior Vice President of
Delivery, James Miller.Staff believes there may be
other officers and employees whose membership dues are
CASE NO. IPC-O3 -02/24/04 1517 ENGLISH, D.(Di)
STAFF
paid for by Idaho Power , but we were unable to identify
them specifically.Staff opines that customers receive
no benefits from these exclusive memberships and these
expenses should not be charged to customers.
Would you please explain line 8 of Exhibit
No. 110?
Line 8 is the aggregate sum of all items listed
on page 2 of Exhibit No 110.These are items that are
too small and numerous to discuss individually at length
but include contributions to the American Lung
Association , Historic Downtown Association, educational
entities and others.Staff sees no benefits provided to
customers from these expenses and believes these expenses
should not be charged to ratepayers.The total of all
these expenses is $39,803 as shown in line
ADJUSTMENT TO MANAGEMENT EXPENSES
Please explain Exhibit No. 111 entitled
"Adj ustment s to Management Expenses"?
During Staff I s audit of Idaho Power , we
requested to review the expense reports of all management
personnel.Due to time constraints, we chose six
managers and fully scrutinized their expenses.We then
perused the remaining reports to identify any obvious
expenses to which Staff might disagree.
The review consisted of two steps: First , we
CASE NO. IPC-O3 -02/24/04 1518 ENGLISH , D.(Di)
STAFF
determined if any of the expenses were not reasonable and
should therefore be removed from the test year.Second
Staff presumed much of these expenses were associated
with non-regulated operations or affiliate operations and
that a portion of these expenses should be allocated to
IDACORP or below the line.In order to determine the
proper allocation , we extrapolated the allocations from
these managers I salaries that were paid by IDACORP , its
other affiliates or below the line.Exhibit No. 110
1 '0 summarizes the scrutinized expenses of the six managers.
We totaled all of the expenses for each manager
subtracted the expenses we believe to be inappropriately
charged to customers , and then multiplied the remaining
expenses by the allocation factor determined from the
payroll allocation.
The maj ori ty of the expenses removed were for travel
and expenses for EEI conferences.Using the rationale
explained earlier , we have removed 75% of these expenses.
Other expenses Staff removed were meetings with Oregon
poli ticians and lobbyists , Washington D. C. lobbying
expenses and excessive meal expenses.We also removed
expenses for green fees at golf courses , liquor store
purchases, wine purchases and other entertainment
purchases.These expenses are not an ordinary or
necessary cost of doing business, are excessive and are
CASE NO. IPC-O3-1302/24/04 1519 ENGLISH , D.(Di)
STAFF
unreasonable to charge to customers.
ADJUSTMENTS TO LEGAL EXPENSES
Would you please explain the adj ustment to
legal expenses that you mentioned earlier in your
testimony?
This adj ustment relates to expenses paid for
outside legal advice for Idaho Power I s and IDACORP
Energy'(IE) defense in the California Refund Case and
the Pacific Northwest Refund Case.In June 2001 the
Federal Energy Regulatory Commission (FERC) established
price mitigation for sales in the wholesale electricity
market.Several wholesale purchasers alleged that energy
traders participated in price manipulation of spot market
prices.If the FERC or an appeals court determines that
those prices were unj ust and unreasonable, the trading
entities may be ordered to refund a portion of their spot
market sales prices.
These alleged improprieties were performed by
IE and not Idaho Power.Idaho Power was named as a
defendant in the cases because IE utilized Idaho Power'
trading license until IE obtained a separate license for
itself.Staff believes that IE or IDACORP should be held
fully responsible for the costs associated with these
cases.Customers should not bear the burden of IE'
defense because IE's trading acti vi ties were
CASE NO. IPC-O3 -1302/24/04 1520 ENGLISH , D.(Di)
STAFF
non-operating, and customers did not benefit from IE'
transactions.
One reason IDACORP was established was to
shield Idaho Power from liability for non-operating and
non-regulated affiliate activities.Idaho Power argued
in Case No. IPC-97-11 and the Commission agreed in
Order No. 27348 that transferring Idaho Power I
non-utility subsidiaries and operations to a holding
company would reduce the risk for the utility I
operations.Thus, the purpose of creating a holding
company was to allow subsidiaries to engage in
speculative ventures without creating risks for Idaho
Power and ratepayers.To later have Idaho Power
financially responsible for legal expenses resulting from
IE I S actions entirely defeats the purpose of creating the
holding company.Therefore, we have removed $352 544
from the test year for legal expenses that should not be
paid by customers. These expenses should be allocated
directly to IE or IDACORP.
INTEREST ADJUSTMENTS
Did you review Idaho Power I s known and
measurable adjustment to American Falls interest?
Yes.Idaho Power proposed a known and
measurable adj ustment to increase interest expense for
2004 for the interest on American Falls Bonds.At the
CASE NO. IPC-O3 -02/24/04 1521 ENGLISH, D.(Di)
STAFF
time Idaho Power filed their case, only the interest
amounts for the first six months of 2003 were known.
Idaho Power forecasted the interest rate on the American
Falls Bonds through the end of 2003 and all of 2004.
For 2003 , Idaho Power calculated interest rates
from July 22 , 2003 through December 31, 2003 using a
trend line developed by a regression equation using
actual data from January 1 2003 through July 22,2003.
This trend line is shown in a line graph prepared by
Idaho Power that is included as Staff Exhibit No. 112
page Staff reviewed the analysis and determined the
2003 forecast to be reasonable.Any differences between
actual amounts and budgeted amounts are captured in the
budget-to-actual adjustments presented by Staff witness
Holm.
For 2004 , Idaho Power used a completely
different methodology to calculate the interest on these
bonds.Exhibit No. 112, page 2 illustrates Idaho Power'
forecasts for the interest rates through the end of 2003
and all of 2004.Page 2 of this Exhibit is similar to
page 1 except that it includes Idaho Power's 2004
interest rate forecast on the same graph.Idaho Power
forecasted an interest rate of 2.3% on December 31 2003
and 4.2% on January 1 , 2004.Using Idaho Power'
methodology, an increase in interest rates of nearly 2
CASE NO. IPC-O3 -02/24/04 1522 ENGLISH, D.(Di)
STAFF
occurs overnight.This large differential is not
reasonable given that interest rates deviated
approximately 0.5% over the past year.
How does Staff propose to treat the interest
for these bonds?
The Company's adj ustment was based on the
premise that the increase in interest was known and
measurable.Staff believes that the increase is neither
known nor measurable.Staff believes the methodology
used by Idaho Power grossly overstates the forecasted
interest rate.Therefore Staff cannot accept Idaho
Power I S adjustment and proposes an adjustment of $297 436
to the Company I s filing to remove the additional interest
expense included in operating costs for falling water
payments.
If the Commission were to allow an
adj ustment , Staff recommends using the most recent
interest rate available , 2.35% as of January 20, 2004.
All things remaining constant, the best indicator of a
future interest rate is the current rate.Using this
current rate , Staff would propose an additional
adjustment of $29,418.50, thus decreasing the test year
interest expense to an amount more likely to be expensed
for 2004.
Is this Staff I s only adj ustment to interest
CASE NO. IPC-O3-
02/24/04 1523 ENGLISH , D.(Di)
STAFF
rates?
No.Staff also reviewed the interest rates of
the four variable interest Pollution Control Revenue
Bonds.For these bonds, Idaho Power used an estimated
interest rate based on the 10-year average of the Bond
Market Association (BMA) Index , plus the average spread
over the BMA Index on the life of the bond.Staff
disagrees with this methodology. Exhibit No. 112 , page 3
is a table comparing Idaho Power I s forecasted interest
rates on these Pollution Control Revenue Bonds to the
actual interest rates as of December 31 , 2003.Also, as
shown in Exhibit No. 112 , page 1 , interest rates have
been trending downward and remain at all-time lows.
would be inappropriate to use a methodology that unfairly
skews the interest rates higher and inflates the
effective embedded cost of long-term debt.Customer
electricity rates should reflect debt capital costs that
most accurately reflect the actual cost of the debt.For
fixed rate debt , this rate is the embedded effective cost
rate.For variable debt, this rate is the current rate
or a known and measurable proj ected rate.Staff cannot
support the jump from 2003 actual variable debt rates to
the forecasted variable rate.The 10-year average is not
reflective of the current rate or the rates for the last
several years.Therefore Staff does not accept the
CASE NO. IPC-E-O3-02/24/04 1524 ENGLISH , D.(Di)
STAFF
10-year average methodology as the best indicator of the
variable debt rate.
Company witness Gribble testified that
Idaho Power I s capital structure in its filing is based on
estimated year-end 2003 financial results.Furthermore,
Mr. Gribble testified that the Commission could update
the capital structure in this proceeding to incorporate
actual year-end 2003 financial results.Staff witness
Carlock uses the updated capital structure in support of
her testimony.If the capital structure is updated, it
would be appropriate to also update the interest rates on
capital debt to actual levels.Therefore , Staff
recommends using the current interest rate as of December
, 2003 to determine the actual 2003 year-end cost of
debt.This adjustment reduces the long-term interest
expense by $3,083 000.Staff witness Carlock will
discuss these adjustments in more detail.
Does this conclude your direct testimony in
this proceeding?
Yes, it does.
CASE NO. IPC-O3 -02/24/04 1525 ENGLISH , D.(Di)
STAFF
open hearing.
(The following proceedings were had in
MS. NORDSTROM:With that, I tender this
witness for cross-examination.
COMMISSIONER SMITH:Mr. Budge, do you
have questions for Mr. English?
CSB REPORTING
Wilder, Idaho
MR. BUDGE:No questions.
Madam Chairman.
COMMISSIONER SMITH:Mr. Eddi e .
BY MR. KLINE:
MR . EDD IE:No questions, thanks.
COMMISSIONER SMITH:Mr. Purdy.
MR. PURDY:I have no questions.
MR. WARD:No questions.
MR . RI CHARDSON :No questions.
COMMISSIONER SMITH:Mr. Kline.
MR. KLINE:I do have a few questions,
CROSS-EXAMINATION
Mr. English , I would direct your attention
to the bottom of page 1 of your testimony.Are you
there , Mr. English?
Yes, I am.
On line 23, there I s a sentence beginning
1526 ENGLISH (X)Staff83676
on line 23 that says, "In May of 2001 , I became a
designated member of the American Society of Pension
Actuaries (ASPA)," do you see that?
Yes , I do.
Okay.Now, are you an actuary?
, I'm not.
So what kind of actuarial functions, I
guess, do you perform as a member of the Society of
Pension Actuaries?
Well , ASPA is the American Society of
Pension Actuaries and it's a pension administration,
actuarial and consulting organization and they have
several different designations that they issue.I have
passed the exams and received the designations of
qualified 401 (k) administrator and qualified pension
administrator.
So that's primarily dealing with making
sure that you can comply with the federal requirements
for keeping plan records and eligibility and benefit
determination , those kind of things?
As well as plan calculations, yes.
But you aren't qualified to sign
statements of actuarial opinion regarding the funding of
pension plans or for the purposes of reporting the net
periodic pension cost of a pension plan correct?
CSB REPORTING
Wilder, Idaho
1527 ENGLISH (X)Staff83676
Because I am not an actuary, that is
correct.
And because you're not an actuary, you
not qualified to select actuarial assumptions or methods
under FAS 87 or under ERI SA?
That would be correct.
In this case, Staff is recommending
removal of prepaid pension cost from Idaho Power 1 s rate
base; is that correct?
That is correct.
And isn't it true that the Commission
included prepaid pension expense in rate base in Idaho
Power's last general rate case?
That is true.
So Staff is essentially recommending a 180
degree reversal from the current Order is that
correct?
Well , that would be a complete
mischaracterization of my testimony.I believe that
simply because an amount is included in the Company'
application and was accepted does not mean that that
amount had been given fair scrutiny.It simply means
that Staff at that time with their time constraints did
not have the time available to audit all information in
the application.Similarly, the amount included in the
CSB REPORTING
Wilder , Idaho
1528 ENGLISH (X)
Staff83676
94-5 rate case was under $3 million and may have been
considered at that time to be immaterial to the case.
But nevertheless, Idaho Power currently
has prepaid pension expense in its rate base, does it
not?
It proposes to include prepaid pension
expenses.
It has some in now and it I S proposing to
include more; is that correct?
I believe they. re proposing to include all
of it in this rate case.
Okay.I need to understand Staff I s
position on this prepaid pension expense.Could you turn
to 22 of your testimony?
Certainly.
And the answer beginning on line 8, let me
read it to you.
Okay.
"Staff also disagrees with this argument.
Idaho Power has not made any cash contributions to the
pension plan since 1995, and any contributions prior to
that were funded by customers.Is it Staff I s position
that because Idaho Power records its cost of pension
contributions from customers - - recovers its cost of
pension contributions from customers that customers have
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actually made the contribution?
Well , that would not be the case.The
Company has been receiving approximately $3 million per
year from customers and yet , they have not made any
contributions.
m focusing on the statement that you
made that contributions prior to that were funded by
customers.Now , are you using the term contributions
synonymous with what I would say like a contribution in
aid of construction , is that how you re using it?
Probably not and when we get into the
pension industry, there's several different types of
contributions.On this particular one , I believe, and
let me just get myself back into the context of the
question we're ultimately referring to, but prior to the
94-5 rate case, there would have been an amount that
customers would have been contributing or paying approved
by this Commission towards pension expense and those
amounts that could have been beyond what the Commission
approved which could have created that $2.7 million
prepaid pension amount in the 94 - 5 case would have been
paid by customers.Basically, what I'm saying is
customers have been paying more to Idaho Power than Idaho
Power has been paying to the plan.
But the customers haven't been making a
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contribution to that fund?
No.
Okay.On page 23 of your testimony,
Mr. English, you talk about and frankly, you I re critical
, the Company's investment performance and in looking
at your testimony on page 23 in order to support that
criticism, you're indicating that Idaho Power Company'
pension fund hasn I t done as well as the Dow Jones
Industrial Average , the S&P 500 Composite Stock Index and
the NASDAQ Composite Index over the same time period.
you see that in your testimony?
Yes , I do.
Of course , all of those indices are 100
percent stock indices , are they not?
Yes, they are.Those indices were
selected to use as a comparison because they were common
indices that the Commissioners and other parties of this
case would be aware of.They I re not necessarily
identical indices as a pension plan; however, it does
kind of provide some insight and maybe some remembrance
as to how the market was performing in the mid to late
90s where it doesn't take a genius to make a lot of
money during that time period.
But the Company I s portfolio isn I t - - I
mean, it has got bonds and
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Oh, certainly.
Yeah , and so comparing essentially what
you 'd call a balanced fund against a stock fund isn'
really a very fair comparison , is it?
It's apples to oranges.It's just like I
said , those indexes were there to give the Commissioners
and other parties to this case some idea and maybe to
recall what the market had been doing in the mid to late
I 90s.
It might have given them the wrong
impression, mightn't it?
Well , I wouldn't say the Commissioners are
that ignorant.
MR. KLINE:That I S all the questions
have.
COMMISSIONER SMITH:Do we have questions
from the Commission?
COMMISSIONER KJELLANDER:I I 11 pass.
COMMISSIONER SMITH:Wanting to maintain
our status as not ignorant, we have no questions.
Do you have redirect?
MS. NORDSTROM:I do, Madam Chair.
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1532 ENGLISH (X)Staff83676
REDIRECT EXAMINATION
BY MS. NORDSTROM:
Just to clarify your position , Mr.
English , are you recommending that the Commission adopt
the cash contribution methodology for the pension plan?
, no , ma I am, I I m not.I am simply
recommending that when we're dealing with actuarial
calculations, we're dealing with a bunch of inaccurate
subj ecti ve inputs through a precise methodology to come
up with a liability which has no real accurate picture to
the real world value.Basically, a pension contribution
is a subjective , artificial number that I s created with
assumptions and because of that, the Commissioners
shouldn I t mandate or lock themselves into accepting a
specific methodology, but rather to just look at all the
facts and circumstances surrounding each individual case.
In this specific case, Idaho Power has not
been contributing to the pension plant since the ' 95 plan
year.They had this huge pre-funded amount, so they'
not expected to be funding the pension plan for several
more years to come and therefore, they shouldn I t
recovering any pension expense.It I s just a matter of
equality and fairness.
Would you go so far as to deviate from the
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requirements of FAS 87?
, certainly, I wouldn I The Company is
required to report pension expense based on FAS 87.
would just draw the fine line between financial reporting
and regulatory collection.
There's been some discussion regarding the
funding of contributions to the pension plan and earlier
in this proceeding, Ms. Smith testified that the Company
has been funding contributions to the plan or has funded
contributions since 1995 , but your testimony states that
they haven I t funded any contributions since 1995.Can
you explain how you came to your conclusion?
Well , based on our audit given information
provided to us by the Company which were the actuarial
reports for the retirement plan and the Form 5500 I s which
is a annual report that the Company must file with the
Department of Labor every year, similar to a tax return
that reconciles the contributions , distributions , plan
assets , et cetera , et cetera , what we did is we looked at
the contributions reported to the Department of Labor on
the Form 5500 , reconciled it to the actuarial reports and
we noticed that the last contribution the Company made
was in 1996 , but it was applicable to the 1995 plan
year.
Did you compare the pension plans of other
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utilities when coming to your recommendations in this
case?
We certainly looked at pension plans of
other utilities.Avista has filed a rate case before
this Commission , but we have not had the time to go
through and scrutinize their specific pension plan , but
it will become an issue in their case as well , I
imagine.
Is there any information on a national
scale that indicates how Idaho Power I s pensions and
benefits compare to other utilities?
Certainly.According to the Department of
Bureau of Labor Statistics, the average benefits from
utility companies based on a percentage of pay is 4.
percent.Idaho Power employees can obtain 4 percent
contribution through the matching to the 401 (k) alone.
Its difficult to calculate how much the pension
contribution is going to be as a percentage of current
pay because we I re looking at future benefits , but I would
certainly say that the retirement benefits of Idaho Power
are well among, above the 4.5 percent national average
for utility companies.
There was some discussion regarding who
owns and who contributes to prepaid pension expenses and
assets, what is a prepaid asset and who owns it and who
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creates it?
Well , the correct definition would be that
the prepaid asset is the Company contributing more than
they re expending; however, when you look at this
particular case , the technical definition is not
necessarily the practical definition.When the Company
is contributing zero and expensing a negative amount,
then , at the same time , it's creating this prepaid asset,
so the Company hasn't really contributed money to the
plan; yet , because of the performance of the market,
their net periodic pension cost as required by FASB 87
was a negative number; therefore, that gap in between
zero and the negative number has created a cumulative
effect of a prepaid asset.I think it's important to
point out that the Company didn I t actually contribute
cash.It's just their cash contribution was zero and the
expense was a negative amount.Again , that I s for
financial reporting purposes only.
MS. NORDSTROM:Thank you.I have no
further questions.
COMMISSIONER SMITH:Thank you, and thank
you for your testimony, Mr. English.
(The witness left the stand.
COMMISSIONER SMITH:We I re going to take a
15-minute break right now.
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record.We're ready for your next Staff witness.
(Recess. )
COMMISSIONER SMITH:We'll go back on the
MS. NORDSTROM:
the state will call Joe Leckie to the stand.
Thank you.At this time
COMMISSIONER SMITH:Staff.
MS. NORDSTROM:Sorry.
COMMISSIONER SMITH:A flashback to the
prosecuting days.
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JOE LECKIE,
produced as a witness at the instance of the Staff
having been first duly sworn , was examined and testified
DIRECT EXAMINATION
BY MS. NORDSTROM:
Good morning.
as follows:
Good morning.
Please state your name and spell your last
name for the record.
My name is Joe Leckie, L-e-
capaci ty?
By whom are you employed and in what
1537 LECKIE (Di)
Staff83676
m employed by the Idaho Public Utilities
Commission and I'm an auditor.
Are you the same Joe Leckie that filed
direct testimony on February 20th , 2004 , and prepared
Exhibit Nos. 113 through 117?
Yes.
Do you have any corrections or changes to
your testimony or exhibits?
Yes, I do.On page 15, line 4, the fifth
word overage should be average.The " 0" should be an
a. "Then in three different places I stated a number
which should be a different number.The first place is
on page 18 , line The number 146,617 should be
144 485.That same mistake occurs on page 20, line
That same number 146,617 should be 144,485, and again on
page 21 , line 20 , the number 146,617 should be 144 485,
and then finally, in my originally- filed testimony,
Exhibit No. 113 was a duplicate of Exhibit No. 114 and we
subsequently refiled the correct Exhibit 113.
MS. NORDSTROM:We will get you a copy of
that corrected exhibit.
BY MS. NORDSTROM:I f I were to ask you
the questions set out in your prefiled testimony, would
your answers be the same today with those corrections?
Yes.
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1538 LECKIE (Di)Staff83676
MS. NORDSTROM:I move that the prefiled
direct testimony of Joe Leckie be spread upon the record
as if read and Exhibits 113 through 117 be marked for
identification.
COMMISSIONER SMITH:If there is no
objection, it is so ordered.
(The following prefiled direct testimony
of Mr. Joe Leckie is spread upon the record.
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