20040416Volume XV Part II.pdf

PHIL A. OBENCHAIN
produced as a rebuttal witness at the instance of the
Idaho Power Company, having been previously duly sworn,
resumed the stand and was further examined and testified
as follows:
DIRECT EXAMINATION
For the record, would you please state
Phil Obenchain.
And are you the same Phil Obenchain who
previously presented direct testimony in this proceeding
CSB REPORTING
Wilder , Idaho
before this Commission?
I am.
Mr. Obenchain, did you prefile 12 pages of
direct rebuttal testimony in this proceeding?
I did.
And you had no exhibits that accompanied
your rebut tal testimony; is that correct?
I did not.
Do you have any additions or corrections
that you need to make to your rebuttal testimony?
No.
BY MR. KLINE:
your name?
2781 OBENCHAIN (Di-Reb)
Idaho Power Company83676
So if I were to ask you the same questions
contained in your prefiled rebuttal testimony, would your
answers be the same today?
They would.
MR. KLINE:wi th that, Madam Chairman, I
would request that Mr. Obenchain I S prefiled rebuttal
testimony be spread on the record as if read.
COMMISSIONER SMITH:If there is no
obj ection , the testimony will be spread upon the record
as if read.
(The following prefiled rebuttal
testimony of Mr. Phil Obenchain is spread upon the
record.
CSB REPORTING
Wilder , Idaho
2782 OBENCHAIN (Di-Reb)
Idaho Power Company83676
Please state your name and business address.
My name is Phil A. Obenchain , and my business
address is 1221 West Idaho Street, Boise, Idaho.
Are you the same Phil A. Obenchain who
previously testified before this Commission in this
proceeding?
Yes , I am.
Do you have comments on certain adj ustments to
test year amounts proposed in the pre-filed direct
testimony of Staff and Micron Witness Dr. Peseau?
Yes.Recognizing the need to limit issues, I
will only address Staff I s and Micron's reductions to the
Company I S annual i zing adj ustments and known measurable
adjustments to the test year rate base.This does not
mean I accept any additional proposed adj ustments that
are not specifically addressed in my rebuttal testimony.
What is the purpose and intent of the test year
in setting rates for an electric utility?
Rates established during a general rate
proceeding are often in effect for many years; for Idaho
Power Company it has been ten years since the last
general revenue requirement proceeding.According to
NARUC's Cost Allocation Manual it is important that rates
established use the most current actual , or proj ected,
cost and sales information available "which are expected
2783 OBENCHAIN , Di -Reb
Idaho Power Company
to be representative of those that will be experienced
during the time the rates are likely to remain in
effect. (NARUC: Electric Utility Cost Allocation
Manual 1992 24)Typically this Commission and the
Company have utilized the most recent twelve months of
actual data , with adj ustments, as the representative test
period.Other state regulatory Commissions have adopted
ei ther proj ected test periods or a spl it between
historical and proj ected to better match rates to the
costs that will be incurred by the utility during the
period in which the rates will be in effect.
In short, the test period should reflect, to the
greatest extent possible, the levels of rate base,
expenses and revenues that the utility would reasonably
expect to experience during the time the rates being
requested are in effect.
What test period did the Company propose in
this case to best reflect the levels of rate base,
expenses and revenues that the Company will experience
once new rates become effective?
The Company filed its case based on six-months
of actual data and six-months of estimated 2003 test year
information adjusted for normalizing, annualizing, and
known and measurable adjustments.
Q. In his testimony on behalf of Staff Mr. Leckie
proposes the elimination of certain annualizing
2784 OBENCHAIN , D i - Reb
Idaho Power Company
adj ustments from the Company I s rate base.Would you
please discuss in more detail the purpose of "annualizing
adj ustments" for a test year?
Annualizing adjustments are adjustments
necessary to reflect changes that occur within the test
period and will continue on an ongoing basis. In this
case , the test period is the twelve months ending
December 31 , 2003 If the annualizing adjustment is for an
addi tion to electric plant in service , then it is
appropriate , in fact imperative, that the investment be
included for the full year.Once again we can look to
the NARUC Manual for guidance as to the appropriateness
of making this type of adjustment to actual historical
test year costs.
"In order to reflect the cost conditions that
may occur during the actual effectiveness of the
rates, most agencies permit adj ustments to the
actual data to reflect changed conditions, to
correct for unusual events during the recorded
period , or to include costs estimated for a time
period in the near future.The goal is to adjust
the actual costs to present normal operating
condi tions as accurately as possible so that rates
resul ting from proceeding are appropria te for
appl i ca ti
2785 OBENCHAIN , Di -Reb
Idaho Power Company
~n the immedia te future (emphasis added) . " (NARUC:
Electric Utility Cost Allocation Manual , 1992 , p. 24)
What are the plant investments the Company has
included in its annualized adjustment?
The plant investments the Company is requesting
be included for the entire twelve months of the test year
is for two large proj ects currently in rate base, that
are used and useful and will continue to serve customers
from this point forward.The first is the Bridger rewind
proj ect at a total investment of close to $8.7 million of
which $6.6 million was reflected in the test year as an
annualizing adjustment.The second is the 230kv
Brownlee-Oxbow transmission line at a total investment of
close to $14.5 million of which $13.2 million was
reflected in the test year as an annualizing adjustment.
The two large proj ects total $23.2 million of which $19.
million is for the annualizing adjustment necessary to
reflect the entire investment for twelve months.
Do you agree with Mr. Leckie that Idaho Power
deviated from accepted methodology in its annualizing
adjustments to the test year in this case?
No, I do not.Idaho Power used the same
annualizing methodology for these plant investments that
the Commission has approved for annualizing adjustments
in prior
2786 OBENCHAIN, D i - Reb
Idaho Power Company
rate cases.I am aware of several Commission orders in
prior cases which support the Company I s treatment of the
annualizing plant adjustments in this case.For example,
Uni t No.1 of the Company I S Valmy generating station was
included in rate base for the entire twelve months ending
December 31 , 1981 even though it did not come online
until December 11, 1981.(Orders No. 17499, Case No.
1006-185)In Case Nos. U-1006-185, U-1006-265, and
IPC-E- 94 - 5 payments for purchase power from CSPP proj ects
that came in at various times during the test year were
all included for the full year.
Did Mr. Leckie recommend the disallowance of
the annualizing adjustment because he did not believe the
particular plant item should be allowed in rate base?
No.Mr. Leckie does not seem to have an
obj ection to the investment being allowed in rate base
but just that it should not be reflected in rate base for
an entire year.
What is the basis for Mr. Leckie
recommenda t ion?
Mr. Leckie I s recommendation is based in a
belief there is a mismatch between costs and revenues.
Wi th regard to costs and revenues, Mr. Leckie
states that by putting the annualizing adjustments for
the Bridger rewind proj ect and Brownlee-Oxbow
2787 OBENCHAIN , Di-Reb
Idaho Power Company
transmission proj ect in for a full year the Company is
violating the matching principle that would allow an
annualizing adjustment.Do you agree with Mr. Leckie
that there must necessarily be a revenue match to warrant
inclusion of plant for a full year?
Absolutely not.These two proj ects are not
revenue producing proj ects.There is no revenue that the
Company is failing to include.Thus, there is no
mismatch of costs and revenues.The Bridger rewind
proj ect consisted of a generator rewind, control upgrade,
pI us, other plant related costs, none of which creates
additional revenue.Even though these Bridger
modifications did not add to the plant I s capacity, or
create any additional revenue , the investments were
necessary to ensure ongoing plant reliability.
Why should the new 230kv Brownlee-Oxbow
transmission line be included for a full year?
Like the Bridger rewind proj ect investment
discussed above , the Brownlee-Oxbow line represents a
sizeable investment by the Company.The benefits of the
new Brownlee-Oxbow line are twofold: first , it increases
the over-all reliability of the Company I s transmission
system and second , it increases simultaneous Brownlee
east and northwest import capability.This line is fully
operational and will benefit customers this year and for
2788 OBENCHAIN , Di - Reb
Idaho Power Company
years to come.It is an appropriate ratemaking
adjustment to reflect this investment for a full year.
Why is it appropriate to reflect these plant
additions in rate base for an entire year?
As stated previously, the purpose of a test
year is to reflect the costs and revenues that customers
will be facing during the period rates will be in effect.
It is appropriate that customers pay the full annualized
cost associated with these plant additions because
customers are receiving the benefits of these sizable
plant investments now and will be receiving the benefits
in all months once new rates are established.The
amounts and impact to the historical test year costs are
identifiable.As a result , it is not reasonable that the
Company and its investors should have to wait an
additional year before being able to earn a return on
these sizeable increases in plant.Mr. Leckie's proposed
treatment reflects only a partial year I s inclusion of
costs even though the plant will be there for customers
each and every month that new rates are in effect.
Dr. Peseau testifies that the annualizing
adj ustment the Company has proposed constitutes a move to
the establishment of a year-end rate base.Do you agree?
Dr. Peseau is mistaken as to the Company I
proposed annualizing adjustment.The Company did not
2789 OBENCHAIN , Di -Reb
Idaho Power Company
propose replacing the thirteen-month average balance with
a year - end
2790 OBENCHAIN , Di -Reb
Idaho Power Company
balance.As explained above , the proposed $19.8 million
annualizing adjustment is only for specific new large
plant investments and is treated in the same way that
that the Company treated new test year large plant
addi tions in past proceedings.
In his testimony on behalf of Staff , Mr. Leckie
proposes the elimination of certain known and measurable
adj ustments from the Company I s rate base. Would you
please discuss in more detail the purpose of "known and
measurable adj ustments" in a test year?
Known and measurable adj ustments are
adj ustments necessary to reflect changes that occur after
the test period, in this case December 31 2003, but that
are appropriately incorporated for a full year on an
ongoing basis.The goal is to adjust the actualAgain
costs to present normal operating condi tions
accurately as possible so that rates resul ting from
proceeding are appropriate for application in the
immediate future (emphasis added) " (NARUC: Electric
Utility Cost Allocation Manual , 1992 24)
What are the plant additions the Company has
included as known and measurable adjustments to test year
rate base in this case?
The plant investment the Company is requesting
to be reflected in rate base for the twelve months ending
December 31 , 2003 involves large transmission proj ects
2791 OBENCHAIN , Di - Reb
Idaho Power Company
that will be in plant-in-service and used and useful by
the time the rates determined by this proceeding go into
effect.These proj ects will continue to serve customers
from that point forward.The Company requested only
those transmission proj ects that were of a significant
size to be included for the full test year recognizing
that upon their completion they would be of immediate
benef i t to customers of Idaho Power.
Do you agree with Mr. Leckie that Idaho Power
deviated from accepted methodology in applying a known
and measurable adjustment for the full test year in this
case?
No, I do not.Idaho Power calculated the known
and measurable plant adjustment for this case in the same
way as it has done, and the Commission has approved, in
all past rate cases that I am aware of.There are many
Commission orders in prlor cases to support the Company'
treatment of certain known and measurable plant
adjustments in this case.In Case No IPC-265 the
Commission approved the inclusion of Valmy II in rate
base as a known and measurable adjustment. Valmy II came
online in May of 1985 and was a known and measurable
adjustment to the 1984 test year.More recently, the
Commission allowed the inclusion of the Swan Falls plant
addition in the Company s last general rate case, Case
2792 OBENCHAIN , Di-Reb
Idaho Power Company
No. IPC-E- 94 -5, as a known and measurable.The Swan
Falls plant addition came online in April of 1994
2793 OBENCHAIN, Di-Reb
Idaho Power Company
and was a known and measurable adjustment to the 1993
test year.In the 94 - 5 case the Company calculated the
known and measurable adjustment for Swan Falls in
precisely the same manner as proposed in this case.
addition to the known and measurable adjustment to plant
in service , the Company also made all of the new plant
related adj ustments in accordance with accepted
Commission practice.Specifically, the Company and the
Commission have always used a half-year convention in the
calculation of the first year's depreciation reserve
balance.
Did Mr. Leckie recommend the disallowance of
the transmission plant the Company proposed to include as
a known and measurable adjustment to the test year
because he didn I t believe the particular plant item
should be allowed in rate base?
No.Mr. Leckie does not seem to have an
objection to the item being rate based.In fact, Mr.
Leckie recommends that the Company make a known and
measurable adj ustment to the test year , but only for one
month.In over twenty years of regulatory experience
am not aware of a known and measurable adj ustment
include a plant item , that will be used and useful on an
ongoing basis , for only one month of the year.
Q. Why is it appropriate to include these known
and measurable plant additions in rate base for an entire
2794 OBENCHAIN , Di - Reb
Idaho Power Company
year?
As stated above, the use of a test year is
designed to reflect the costs and revenues that customers
will be facing during the period rates being requested
are in effect.It is appropriate that customers pay the
cost associated with the additional plant.Customers are
receiving the benefits of these sizable plant investments
now.The amounts and impact to the historical test year
costs are identifiable and it is not reasonable that the
Company and its investors should have to wait an
additional year or more before being able to include
these sizeable increases in plant.
Wi th regard to costs and revenues, Mr. Leckie
states that by putting the known and measurable
adjustments in for a full year the Company is violating
the matching principle that would allow such an
adj ustment .Do you agree with Mr. Leckie that there must
be full year of revenue match to include plant adjustment
for full a year?
No.The transmission proj ects at issue
involve investments, which will increase the transmission
system reliability.Even though these investments may
not produce revenues they do produce benefits for
customers.
Dr. Peseau testifies that the known and
2795 OBENCHAIN, Di -Reb
Idaho Power Company
measurable adjustments make a miss-match from the
year-end problem even worse.Do you agree?
2796 OBENCHAIN , Di-Reb 11a
Idaho Power Company
Again, Dr. Peseau, is mistaken in his
understanding of what the Company has proposed.As wi th
the Company s annualizing adjustment, the known and
measurable adj ustment was only for certain large
investments to be included in the test year not to bring
the entire test year balance to a June, 2004 level.
Does this conclude your direct rebuttal
testimony?
Yes, it does.
2797 OBENCHAIN, Di-Reb
Idaho Power Company
open hearing.
(The following proceedings were had in
MR. KLINE:Thank you, and with that,
Mr. Obenchain is available for cross-examination.
BY MR. BUDGE:
COMMISSIONER SMITH:Okay, thank you.
Mr. Budge , do you have questions?
MR. BUDGE:Just a couple , if I may.
CROSS - EXAMINATION
Mr. Obenchain, on page 3 of your direct
rebuttal testimony, you speak in greater detail regarding
the purpose of annualizing adj ustments for the test year.
Yes.
And you make a comment that annualizing
adjustments are adjustments necessary to reflect changes
CSB REPORTING
Wilder , Idaho
that occur within the test period and will continue on an
Do you recall that testimony?
I do.
And then you cite as support the NARUC
Manual which you quote from at some length and part of
the quote says that the goal is to adjust the actual
costs to present normal operating conditions as
accurately as possible so that rates resulting from a
ongoing basis.
2798 OBENCHAIN (X-Reb)
Idaho Power Company83676
proceeding are appropriate for application in the
immediate future, and that's part of the quote on the
bottom of page 3 and 4.
I just had a couple questions.Is it true
that you didn I t remove any abnormal expenses in the
adj ustments you made except for those that related to
fuel and purchased power?
What abnormal expenses are you referring
to?
You didn I t do any annualizing adjustments
other than those that related to fuel and purchased
power?
m trying to think , it seems like there
were some other annualizing adjustments that we also
made, but if you can point me to some, 11 m not sure what
you I re referring to.
Well , in Mr. Yankel's testimony, he had
reviewed accounts 500 through 905 and he had made a
number of adjustments that he felt were appropriate in
those accounts.Would it be accurate to say that you
didn I t make any normalization adjustments on those
expense accounts 500 through 905?
We didn I t make any of those adj ustments,
but I'm not sure those were abnormal.
And I note the Company didn I t seem to
CSB REPORTING
Wilder , Idaho
2799 OBENCHAIN (X-Reb)
Idaho Power Company83676
rebut any of those proposed adj ustments directly, at
least I didn't see it in your testimony, would that be
accurate?
No, we did not.
MR. BUDGE:I have no further questions.
COMMISSIONER SMITH:Thank you, Mr. Budge.
Madam Chairman.
Mr. Richardson.
MR. RI CHARDSON :No questions,
BY MR. WARD:
COMMISSIONER SMITH:Mr. Ward.
MR. WARD:I have a few.
CROSS -EXAMINATION
Mr. Obenchain, the primary adj ustments you
are talking about consist of, in terms of annualization
consist of , the Bridger rewind and what I'll call the
Brownlee-Oxbow transmission proj ect; is that correct?
That's correct.
And then you have as a separate item known
and measurable adjustments for additional transmission
CSB REPORTING
Wilder , Idaho
proj ects; is that correct?
That I S correct.
Now , wi th regard to the known and
2800 OBENCHAIN (X-Reb)
Idaho Power Company83676
measurable adj ustments, when you place them in rate base,
did you in effect annualize them as well?
That'yes?
yes.
We put them in for a full 12 months.
Okay; so effectively, they're annualized?
It I S a different set of terminology, but
I understand.Now , first of all , if you
turn to page 11 of your testimony, at lines 21 through
you say,"Even though these investments may not produce
revenues, they do produce benefits for customers.
you see that testimony?
Yes.
Now , I take it the implication there is
that transmission upgrades don I t produce - - they don I
CSB REPORTING
Wilder , Idaho
have any impact on revenues; is that really true?
These transmission investments did not
have any revenue impacts.
Well, let I s go to page 6 of your
At lines 23 through 24, you re discussing the
Brownlee-Oxbow line and you say,"i t increases
simul taneous Brownlee east and northwest import
Correct.
Doesn I t that have potential revenue
testimony.
capability.
2801 OBENCHAIN (X-Reb)
Idaho Power Company83676
implications?
Those revenue implications are picked up
in the net power supply expense model.Wha t I I m
referring on the other page is any impacts from
third-party wheeling.The Brownlee-Oxbow line does not
have any third-party wheeling impacts.The transmission
upgrades and the known and measurable adjustments have no
revenue impacts.They're merely for reliability and load
growth only, so these investments have no revenue
offsets.
Well, and let's take the latter , your last
statement, isn't it true that investments such as these
that the Company makes are designed to enable it to
provide service in the future and in fact in the present
to serve 2004 loads and beyond?
Part of the investments are to allow the
Company to have greater capacity for load growth in the
future.Part are strictly system reliability in the
present.
But would you at least agree with me that
at least in part , all of these proj ects are designed to
enable you to serve loads, growing loads , that will
produce revenues In excess of the test year 2003 base?
No, sir , I don't believe that's true.
You don I t believe you built these for
CSB REPORTING
Wilder , Idaho
2802 OBENCHAIN (X - Reb)
Idaho Power Company83676
future needs?
I believe we built them for future
needs --
And you don t believe
- - and for reliability.The experts that
I I ve talked to as to the need for this investment are all
for reliability and future capacity needs.We were to
the absolute capacity of our system and we had to do
something about it.We had to increase some station
investments and we had to build some lines and my
understanding, and I am not a transmission engineer , but
my understanding is that these investments had to be made
and yes , they will have future capacity benefits and they
will improve system reliability, but if you I re asking do
they increase revenues above what the test year revenues
are, then no, they do not.
Mr. Obenchain , I I m not disputing your
assertion that these investments are made in part to
increase system reliability, but isn I t it a fact that
they I re also made in part to serve growing loads?
I guess it I S your use of the word
growing" that bothers me.
You don I t believe your loads are
growing?
Of course, our loads are growing, but it I S
CSB REPORTING
Wilder, Idaho
2803 OBENCHAIN (X-Reb)
Idaho Power Company83676
the way you use the word growing.
It depends on what the meaning of growing
is?
Yes.
How about increasing?
Or increasing.As I I ve stated, these
investments are reliability and future capacity
investments.
Let me ask it another way, Mr. Obenchain:
Except for the annualizing, annualized investments that
came on at the end of the year , isn I t it true that you
served your 2003 loads without these investments?
Wi thout these investments, yes.
All right, doesn I t it follow , therefore,
that if the Company is doing a responsible job of
engineering its system , taking care of its loads and
resources that these investments were made in part to
serve load growth beyond the average of the 2003 test
year?
Well, Mr. Ward , I do think the Company was
doing a responsible job , but I also believe that the
Company has an obligation to make sure that we provide
reI iable service and I think the system was strained and
at capacity and I think in order to continue to do a
responsible job and to do a job, a good job, on behalf of
CSB REPORTING
Wilder, Idaho
2804 OBENCHAIN (X-Reb)
Idaho Power Company83676
its customers, it has to invest in these kinds of
facilities and it cannot just sit at the level that
was in the middle of 2003, so it has to make these
investments and I think all we I re asking for is that
these investments be included in rate base and we
allowed to earn a return.
But, Mr. Obenchain , the flip side of that
question , is it not, from the Commission I s point of view,
is not so much whether you earn a return , but whether
that return - - whether the return on rate base is
properly matched with the revenues you are going to in
fact receive?
There is a flip side being argued and
guess my argument is that it is properly matched because
there are no additional revenues from these investments
in the test year.
Let me try one more time.You ve been
here throughout the proceedings,have you not?
Yes,have.
Were you here when Mr.Keen testified that
Idaho Power s loads are continuing to grow at
approximately two-and-a-half to three percent a year?
Yes, I was.
All things being equal , will that sort of
growth in 2004 produce additional revenues over and above
CSB REPORTING
Wilder , Idaho
2805 OBENCHAIN (X-Reb)
Idaho Power Company83676
your 2003 normalized revenues?
Yes , it will.
That's all I have.MR. WARD:Thank
you.
COMMISSIONER SMITH:Thank you, Mr. Ward.
Mr. Cooke?
I have no questions.MR. COOKE:Thank
you.
COMMISSIONER SMITH:Mr. Purdy?
MR. PURDY:None, thank you.
COMMISSIONER SMITH:Mr. Eddie.
No questions.MR. EDDIE:Thank you.
COMMISSIONER SMITH:Ms. Nordstrom.
MS. NORDSTROM:Yes, thank you.
CROSS - EXAMINATION
BY MS. NORDSTROM:
Good morning.
Good morning.
On the bot tom of page 8 and the top of
page 9 , specifically line 25, you discussed the
transmission proj ects included in the known and
measurable adj ustment .Isn t it true that the Company
described transmission station adjustment is an
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Wilder , Idaho
2806 OBENCHAIN (X-Reb)
I daho Power Company83676
aggregation of four different proj ects, the Star Station
the Vallivue Station , the Midrose Station and the Goshen
Capaci tor Bank?
That I S correct.
Do you have your workpapers in front of
you, Mr. Obenchain?
I do.
MS. NORDSTROM: I d 1 ike to have marked as
Exhibi t 145 Mr. Obenchain's workpaper.
COMMISSIONER SMITH:All right , we 'll mark
that Exhibit 145.
(Staff Exhibit No. 145 was marked for
identification.
BY MS. NORDSTROM:Is this the same as
your copy?
Yes , it is.
I would note for the record that the
handwriting on the document came from or arrived to Staff
that way, we didn't write on it.That was the state in
which it was received.
Mr. Obenchain, could you describe the
round dollar amounts for each of these four proj ects?
Star Station, the total is 2.6 million;
Valli vue Station is 2.5 million; Midrose Station is 2.
and Goshen Series Capacitor Bank is 5.
CSB REPORTING
Wilder , Idaho
2807 OBENCHAIN (X-Reb)
Idaho Power Company83676
And then as to your annualizing adjustment
that you describe on page 4 of your rebuttal testimony,
the Bridger rewind proj ect, is this annualizing
adjustment an aggregation of four separate proj ects
completed during the same Bridger maintenance schedule
where a generator rewind was completed , unit No.
controls were replaced and work was done on spent liquor
ponds and the No.3 submerged dragline?
Tha t 's correct.
Do you have a copy of your workpaper No.
in front of you?
Yes , I do.
MS. NORDSTROM:I I d like to have that
marked as Exhibit No. 146.
COMMISSIONER SMITH:All right , we'll mark
this as Exhibit 146.
(Staff Exhibit No. 146 was marked for
identification.
(Mr. English distributing documents.
BY MS. NORDSTROM:Mr. Obenchain, could
you please describe the round dollar amounts for each of
these proj ects?
Yes.The Bridger generator rewind was --
the total amount was 2.3 million; generator unit controls
were 2., spent 1 iquor pond was 1.9; and the submerged
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Wilder , Idaho
2808 OBENCHAIN (X-Reb)
Idaho Power Company83676
dragline was 2 million.
What is a spent liquor pond?
I have a lot of jokes, but I have no idea.
It's -- I'm not , no.
CSB REPORTING
Wilder, Idaho
Okay, you don I t have a technical answer?
I do not.I was told it , but I won t --
MS. NORDSTROM:Thank you.Staff has no
further questions.
COMMISSIONER SMITH:Do we have any
questions from the Commissioners?
Any redirect?
MR. KLINE:One quick redirect question.
no.
REDIRECT EXAMINATION
Mr. Obenchain , Mr. Ward asked you a number
of questions about load growth and the relationship
between load growth and expense and revenues and at the
end he said well , he concluded that if you have more load
growth as described by Mr. Keen , won I t you have more
Do you remember that question?
Yes, I do.
BY MR. KLINE:
But if you have more load growth , you will
revenues.
2809 OBENCHAIN (Di-Reb)
Idaho Power Company83676
also have expenses associated with that load growth , will
you not?
Yes, you will.
A whole galaxy of additional expenses that
we haven t tried to address in this proceeding; isn I
that correct?
That's correct.In fact , if you had to
adjust for this new load growth , you would also have to
rerun the Company s net power supply expense model for
the new loads and that would totally increase your net
power supply expenses with that new load and you 'd be
just off to the races again.
MR. KLINE:That's all the questions
have.
COMMISSIONER SMITH:Thank you, Mr. Kline.
Thank you , Mr. Obenchain.
THE WITNESS:Thank you.
(The witness left the stand.
MR.KLINE:Madam Cha i rman the next
wi tness that have on the list Mr.Fowler.
Mr. Fowler is from Seattle.I don't see Mr. Fowler in
the Hearing Room, so it is possible that he has been
delayed.If it would be possible , I'd like to move on to
the Company s next witness.I don't think it will change
the flavor of the presentation.
CSB REPORTING
Wilder , Idaho
2810 OBENCHAIN (Di-Reb)
Idaho Power Company83676
Mr. Kline.
COMMISSIONER SMITH:It's your case,
MR. KLINE:Thank you, Madam Chairman.
Please call Dan Minor.
DANIEL B. MINOR,
produced as a rebuttal witness at the instance of the
Idaho Power Company, having been first duly sworn, was
examined and testified as follows:
BY MR. KLINE:
DIRECT EXAMINATION
Mr. Minor , would you please state your
name for the record, please?
CSB REPORTING
Wilder , Idaho
Daniel B. Minor.
What is your position with Idaho Power?
My position is vice president of
administrative services and human resources.
And , Mr. Minor , did you previously file
pages of rebuttal testimony in this case and Exhibit
Yes, I did.
And you didn I t have any direct testimony
in this case; isn I t that correct?
71 ?
2811 MINOR (Di-Reb)
Idaho Power Company83676
No, I did not.
All right, and do you have any additions
or corrections that need to be made to either your
rebuttal testimony or to your exhibit?
No, I do not.
I f I were to ask you the same questions
that are contained in your rebuttal testimony today,
would your answers be the same?
Yes , they would.
MR. KLINE:Madam Chairman , I would
request that Mr. Minor s rebuttal testimony be spread on
the record and that Mr. Minor 's Exhibit 71 be marked for
identification.
COMMISSIONER SMITH:Without objection , it
is so ordered.
(The following prefiled rebuttal
testimony of Mr. Daniel Minor is spread upon the record.
CSB REPORTING
Wilder, Idaho
2812 MINOR (Di-Reb)
Idaho Power Company83676
Please state your name and business address.
My name is Daniel B. Minor and my business
address is 1221 West Idaho Street, Boise, Idaho 83702.
What is your position at Idaho Power Company?
I am the Vice President of Administrative
Services and Human Resources.
What is your educational background?
I graduated from Idaho State University in
Pocatello , Idaho in 1981 receiving a Bachelor of Business
Administration in Accounting.In 1984 , I passed the
Certified Public Accounting exam and was licensed as a
CPA in the state of Idaho.In 1996 I attended the
University of Idaho Public Utility Executive I s Course.
Please outline your business experience.
I began my career as a staff accountant with
Alexander Grant & Company (later known as Grant Thornton
International) in August 1981. In April 1983 I began my
employment with Idaho Power Company in the property
accounting department.I advanced through several
accounting positions and in October 1990, I was promoted
to Manager of Employment & Compensation in the Human
Resources Department. In October 1995 I was appointed to
Senior Manager of Human Resources and served in that
capacity until September 1998 when I left the Company.
returned to the Company in July of 2001 as the Director
of Audit Services
2813 MINOR , Di-Reb
Idaho Power Company
and served in that capacity until May of 2003 when I was
appointed to Vice President of Corporate Services and in
November 2003 I was also given responsibility for the
Human Resources and Information Security departments as
the Vice President of Administrative Services and Human
Resources.
What are your duties as the Vice President of
Administrative Services and Human Resources?
I am responsible for general oversight of the
Human Resources, Corporate Services and Information
Securi ty Departments.
What is the purpose of your testimony?
As the Company I s Vice President responsible for
Human Resources , I am responding to the issues regarding
the Company's total cash compensation comprised of base
pay and annual pay-at-risk incentives raised by Staff
Witness Holm.
Please describe the Company s cash and benefit
compensation philosophy.
Idaho Power I s compensation philosophy is
generally based on achieving four goals:(1 )
facilitating the achievement of Idaho Power I s vision
mission and goals (2) attracting, retaining and
motivating employees with the skills and performance
level to achieve the goals of the Company,(3) providing
2814 MINOR , Di-Reb
Idaho Power Company
opportuni ties for employee development and advancement,
and (4) maintaining our non-
2815 MINOR, Di-Reb
Idaho Power Company
union status.Successful execution of that philosophy
requires that cash compensation and benefits be
competitive in the labor markets where the Company
competes for employees.
Has the Company I s compensation philosophy
evolved over time?
Yes.Prior to 1991, the Company I s compensation
goal was focused on providing a wage and benefit package
that was sufficiently competitive for the Company to
remain a non-union employer.To assure compliance with
that goal , the Company annually conducted a survey of
Pacific Northwest utilities focusing on the Lineman
position. Based on that survey, management would
recommend to the Board a Salary Structure Adj ustment
(" SSA") that would maintain the compensation for the
Company's Linemen and other skill/craft positions at a
level that was at or near the top of the market in the
northwest.
Were changes to the compensation program
implemented in 1991?
Yes.In 1991 , the Company adopted a number of
structural changes to its cash compensation program.
that time the compensation market was expanded beyond the
Pacific Northwest to encompass the intermountain west
utility industry and the competitive level for cash
2816 MINOR , Di-Reb
Idaho Power Company
compensation was set at the 60th percentile of that
market.
2817 MINOR, Di-Reb
Idaho Power Company
The Company also moved away from a single competitive
benchmark position (lineman) comparison in the market to
a salary benchmarking process that included approximately
seventy union , professional, supervisory and
administrative positions that were reviewed annually to
determine the amount of adj ustment necessary to maintain
the overall competitiveness of the compensation
structure.
How has the general compensation program
evolved Slnce 1991?
In 1995, the Company made several maj or changes
to its compensation program to meet new , more competitive
labor markets.The biggest change was the decision by
the Board to put a portion of employees I compensation at
risk based on pre-determined goals.This pay-at-risk
program is generally referred to as the annual incentive
At implementation , the control point for baseprogram.
pay was adjusted to the 50th percentile of the competitive
market with the target for total cash compensation (base
pay + at-risk pay) remaining at the 60th percentile.
Why do you refer to the annual incentive
program as pay at-risk?
Unlike base pay, which is guaranteed,
incenti ve pay may not be paid unless the Company '
performance meets or exceeds predetermined goals.For
2818 MINOR , Di-Reb
Idaho Power Company
example, in 2003 no incentive payout was made to Company
employees.
Staff Witness Holm has recommended that the
Commission remove all incentive pay expense from the
Company s 2003 test year.Do you believe the Commission
should accept Mr. Holm I s recommendation.
Mr. Holm's recommendation should beNo.
rej ected for several reasons.First, Mr. Holm
erroneously concludes that including the pay-at-risk
component of the Company s compensation package will
resul t in Idaho Power employees being overpaid.Second,
Mr. Holm does not understand the labor markets in which
the Company competes for skilled employees.Finally, Mr.
Holm erroneously concludes that the Company I S pay-at-risk
compensation structure does not benefit Idaho Power'
customers.
Staff Witness Holm is critical of the Company
use of national market data for setting employee
compensation.Why did the Company change its competitive
compensation market from intermountain west utilities to
a national utility market?
Utility associations such as National Electric
Power Association (NELPA) and Edison Electric Institute
(EEl), in conjunction with human resource consulting
firms such as Towers Perrin , have conducted compensation
surveys for their members for many years. With
2819 MINOR , Di-Reb
Idaho Power Company
the onset of deregulation, and the ensuing competition
for experienced professionals between companies,
utili ties became extremely protective of this data. With
fewer companies participating in the Northwest Utility
Salary Survey, the data became less reliable and was
increasingly vulnerable to high salary/high cost of
living areas such as Portland and Seattle. The national
utility market offered the Company a broader based, more
reliable data pool on which compensation decisions could
be made.Further , the Company felt the data was more
relevant to our market because it wasn I t as heavily
influenced by the high salary/high cost of living cities
as the Northwest Utility Salary Survey.Because many
Idaho Power Company jobs are only found in other electric
utilities, we must survey compensation levels outside the
state and local markets and, in our opinion, the national
market provides the most reliable and relevant database
available.
Why does the Company align its pay with the 60th
percentile of the relevant marketplace?
We believe compensation is an important
strategic tool and a key part of how a successful company
is run. We keep our fixed costs at a reasonable level by
paying salaries at the middle of the market (5 Oth
percentile), and reward superior performance results
2820 MINOR , Di-Reb
I daho Power Company
through variable cost incentive plans that only pay when
pre-defined results that
2821 MINOR , Di-Reb
Idaho Power Company
benefi t the Company I s customers and shareholders are
achieved. Compensation levels reach the 60th percentile
only when a target incentive is earned through
accomplishing performance goals.By structuring our
total cash compensation program this way, the Company is
able to vary pay based on actual Company performance
paying a 50th percentile salary (and less than 60th
percentile total cash compensation) when performance
goals are not achieved, and 60th percentile salary (50th
percentile salary plus pay at-risk) when goals are
achieved.The total cash compensation program is an
important strategic tool because: 1) it helps us manage
our costs by varying total cash compensation levels based
on Company performance; and 2) it specifically identifies
and focuses all of our employees on important goals for
each fiscal year.
Staff Witness Holm is critical of the Company
decision not to immediately cut wages when it implemented
the pay-at-risk plan.Please explain why the Company did
not cut wages when it implemented the pay at-risk plan.
The Company believed that precipitously cutting
compensation to implement an at-risk component of
compensation would have undermined the ultimate success
of the plan.Consistent with the approach used by many
companies , Idaho Power elected to transition to the 50th
2822 MINOR , Di-Reb
Idaho Power Company
percentile over a three year period by implementing a
less than competitive annual salary structure adjustment
each year.The Company continued to conduct annual
salary structure reviews and as the base salary structure
moved closer to the 50th percentile, the Company increased
the target incentive award opportunity at levels
necessary to maintain total cash compensation (base pay +
at-risk pay) at the 60th percentile.
Mr. Holm compares Idaho Power I s wages to the
wages of all employees in the state in general and
specifically to employees of the State of Idaho.Are
average pay levels within the state and for State of
Idaho employees relevant for assessing Idaho Power wages?
Mr. Holm I s comparisons overly simplify aNo.
complex business issue.First, an overall average is a
meaningless statistic unless you are comparing like-jobs
in both organizations.Since such comparisons are only
possible with a small number of jobs, an overall average
is not representative of the entire organization and
doesn I t demonstrate whether compensation is high , low or
in-between.Second , competitive markets for compensation
comparisons should be those job markets where the Company
recruits and where the Company loses employees.Given
the very specialized types of jobs needed to run a
successful electric utility, the national electric
2823 MINOR, Di-Reb
Idaho Power Company
utility employee market is far more important than the
general state employee market for compensation
comparisons. A more meaningful and appropriate comparison
would be the average Company wage of $59,173 as compared
to the average wage at the Bonneville Power
Administration of $73 380 or the average wage at Grant
County PUD in 2002 of $ 72 429 as reported in the February
23, 2004 issue of Clearing Up (Exhibit 71) .
In his testimony Mr. Holm compares employee
turnover rates between Idaho Power and the employees of
the state of Idaho.What conclusions can be drawn from
the comparison of employee turnover at Idaho Power to the
employee turnover experience by the State of Idaho?
There are many variables that impactNone.
turnover in both workforce populations including culture,
work environment, morale , satisfaction with pay and
benefits, promotional opportunities, personal choice,
travel , work shift, permanent vs. temporary or seasonal
labor. We believe there are many benefits to the customer
from having low turnover.Low turnover means higher
levels of institutional knowledge among our employees,
less investment in retraining and employee development,
improved safety records, lower worker compensation costs
and better customer service.Each not only benefits the
customer , but the Company and its shareholders as well.
2824 MINOR, Di-Reb
Idaho Power Company
How does using an IDACORP earnings goal in the
at-risk incentive plan benefit the customers of Idaho
Power?
In addition to being the variable component of
compensation , the real benefit of any at-risk pay plan is
the collective employee focus on key Company goals.
the first few years of the plan the Company established
goals based on controlling O&M costs, customer
satisfaction and safety. However , as the Company gained
experience with pay-at-risk the plan evolved to support
the strategic direction of the Company. Beginning in
1997 , the Company moved to focus employees on continuous
process improvement with the goal of each employee
contributing towards the "Operational Excellence " of each
area of the Company. As the Company considered how the
plan should evolve in support of this new direction , it
was decided that the original goals while extremely
important to all stakeholders , limited the power of the
pay-at-risk plan. Upon further review it became apparent
that the impact of achieving each of the original goals
as well as the results of continuous process improvement
could be best measured in the earnings of the Company.
Additionally, an earnings goal provided an objective,
auditable metric for performance under the plan. In 1997
the Company made the decision to change the plan to a
2825 MINOR , Di-Reb
I daho Power Company
single goal of earnings on common shares of Idaho Power
Company (Later IDACORP) with the performance level being
set
2826 MINOR , Di-Reb lOa
Idaho Power Company
independently by the Compensation Committee of the
Company I S Board of Directors.When discussing this goal
wi th employees , representatives of Human Resources as
well as management continue to focus utility employees
behavior on achieving operational excellence making a
difference where they can through excellence in customer
service, working efficiently, safely, and controlling
utility operations and maintenance expenses.wi th
ongoing focus on these areas by employees, both Idaho
Power and its utility customers will continue to benefit.
Are the capitalized incentive amounts the
Company included in its test year data appropriate?
Yes. The incentive payroll amounts capitalized
by the Company reflect the ratio of base salaries and
overtime charged to Capital and O&M proj ects in each
If the Company had not implemented an at-risk payyear.
incentive plan and had continued to maintain the salary
structure at the 60th percentile base pay level , base
compensation, including overtime would be $7-8 million
dollars higher per year.This additional cost would
place upward pressure on benefits tied to wages such as
the 401k, pension , vacation and sick leave. Additionally,
the Company and its customers would lose the benefit of
the at-risk incentive compensation program and its power
to focus employee behavior on the achievement of
2827 MINOR , Di-Reb
I daho Power Company
operational excellence, and aligning the interests of the
customer , shareholders and the Company.
Did the Company raise base pay wages for 2004?
The Company completed its annualNo.
competitive analysis for the salary structure in November
This competitive analysis indicated that the2003.
Company needed to implement a 3% salary structure
adjustment effective January 1 , 2004 to maintain the
competitiveness of the base pay structure at the 50th
percentile. In November, management and the Board elected
to not grant the increase until financial conditions of
the Company improve.In reaching its determination
management considered a number of factors including the
overall financial condition of the Company, failure to
receive interim rate relief , the reduction in the
dividend from $1.86 to $1.20 per share and the potential
for a fifth consecutive year of below normal water
condi tions .This effectively deferred any upward Salary
Structure Adj ustment until such time that the Company
financial situation improves.
How will the decision to not grant a Salary
Structure Adj ustment in 2004 affect the Company?
The salary structure will fall below
competitive pay levels in the relevant market and the
Company will face a greater threat of losing quality
2828 MINOR , Di-Reb
Idaho Power Company
employees and becoming a union shop.Since early
February 2004 , representatives of the International
Brotherhood of Electrical Workers Union have been
actively engaged in efforts to organize the Company'
Delivery Business Unit employees.The key organizing
issue raised by the union representative is the Company
failure to implement the January 2004 salary structure
adjustment and the lack of a 2003 incentive payment.
Unfortunately, it is true that without the salary
structure adjustment and with no incentive payment, the
compensation of many of our workers is currently below
the pay of their peers , particularly in the Pacific
Northwest. This situation cannot continue over the long
term or we will face ongoing organizing efforts and
perhaps even the unionization of our work force.
What action will the Company be required to
take if recovery of the at-risk pay expense is
disallowed?
As previously discussed, the Company believes
that in order to retain our skilled employees and
maintain our non-union status, total cash compensation
must be at the 60th percentile.I f the outcome of these
proceedings indicates that at-risk compensation expense
is not favored by the Commission, management will be
forced to consider termination of the current pay-at-risk
2829 MINOR , Di-Reb
Idaho Power Company
plan and restoration of base pay to the 60th percentile of
the competitive market.This will require a significant
one-time increase in base
2830 MINOR, Di-Reb 13a
Idaho Power Company
pay with a resulting
compensa t ion.
increase in our fixed total
Does this conclude your direct rebuttal
Yes.
testimony?
2831 MINOR , Di-Reb
Idaho Power Company
(The following proceedings were had in
open hearing.
MR. KLINE:with the Chair I s permission
Mr. Holm , Staff witness Holm, filed some supplemental
direct testimony and I would like an opportunity to ask
Mr. Minor just a couple of questions relating to that.
COMMISSIONER SMITH:Please proceed.
DIRECT EXAMINATION
Continued)BY MR. KLINE:
Mr. Minor , on page 4 of Mr. Holm'
supplemental testimony, he states, and I III just read it
to you, "The SSA amount has been between 0 percent and
1 percent of year-end payroll during the last nine
years. "Now , I have a couple of questions associated
with that.First, what is SSA?
The SSA refers to the salary structure
adjustment that is made annually by the Company in order
to bring the pay system competitive with our market.
And secondly, is the percentage amounts
quoted by Mr. Holm in his supplemental testimony, are
they correct?
I would say no, they re not.The zero
percent that he refers to in his testimony is actually a
CSB REPORTING
Wilder , Idaho
2832 MINOR (Di-Reb)
Idaho Power Company83676
three percent salary structure adjustment that was
prepared - - there was a study that was prepared by my
staff in November of 2003.That study recommended a
three percent salary structure adj ustment .I t was
presented to the board at the November compensation
committee meeting and the board and management
collectively agreed to defer that increase until such
time as the financial condition of the Company improves.
That increase will have to be made up.
You know, at the point in time we did that, we did not
change the competi ti ve point for pay, for base pay
total compensation , and that being the case, we will have
to make up that adj ustment sometime , hopefully as soon as
the financial condition of the Company improves.
Also on pages 4 and 5 of Mr. Holm
supplemental testimony, he stated, again, I III read the
the incentive pay has been between 0 percent andquote,
100 percent since 1995.Is that a correct statement?
Well , I would say it 1 S correct on the
surface.I think the testimony is misleading.The zero
percent that he refers to is actually the actual plan
experience that all participants saw in 2003 when the
Company failed to meet its performance goal and thus, no
payout was made.
The 100 percent he refers to is one single
CSB REPORTING
Wilder , Idaho
2833 MINOR (Di-Reb)
Idaho Power Company83676
individual's opportunity that was from , I think, the year
2001 when we had a maximum payout under the plan.This
particular individual charges less than 15 percent of
their payroll to Idaho Power Company, so it I S misleading
to use the whole 100 percent.
I believe a better measure to use would be
to take the total incentive payments paid by Idaho Power
Company and charged to Idaho Power Company against Idaho
Power payroll and that number has ran consistently
between zero and 15 percent with the average over the
period of time since its inception being in the
neighborhood of 6.8 percent.
Thank you.With that,MR. KLINE:
Madam Chairman, Mr. Minor would be available for
cross -examination.
Thank you very much.COMMISSIONER SMITH:
Do you have questions, Mr. Eddie?
No questions.Thank you.MR. EDD IE:
No questions.MR. PURDY:
MR. COOKE:No questions.
COMMISSIONER SMITH:Mr. Ward.
I do.MR. WARD:
CSB REPORTING
Wilder , Idaho
MINOR (Di-Reb)
Idaho Power Company
2834
83676
CROSS - EXAMINATION
BY MR. WARD:
Mr. Minor , my understanding is that, as
you say on page 4 , the bottom of page 4 your testimony,
"Unlike base pay, which is guaranteed, incentive pay may
or may not be paid.
Actually, the way "may " is used there, it
would actually be is not.I mean, it is not paid unless
performance goals are met , correct.
All right, and those performance goals
understand are based on the IDACORP earnings goal; is
that correct?
That is correct.
Now , would you explain for me how that
goal is set?Is it pegged to some sort of benchmark or
index or how is it done exactly?
Well, the goal, again , there is a study
that's done usually at the November compensation
committee meeting, there's one done for that, if not,
it I S done at the January meeting, and what happens is
that the finance department prepares a forecast of
earnings, presents that to management, management takes
that to the board.The board then takes and looks at
that goal and determines whether they believe there
CSB REPORTING
Wilder, Idaho
MINOR (X - Reb)
Idaho Power Company
2835
83676
significant stretch in that goal or not and they usually
will up the goal from there from.Whatever the Company
thinks it will do that year, they increase it
substantially so if that award is paid, there is
significant benefit to the Company that's been earned.
Okay; so if I understand you correctly,
what happens is early in the year , the board sets an
earnings goal and if that earnings goal is exceeded,
bonus pay may be appropriate?
Well , first of all , I wouldn I t refer to it
as a bonus.It is part of anIt is simply not a bonus.
overall compensation amount that has to be paid in order
to at tract and retain the talent necessary to run the
Company, but if that goal is earned, the incentive
payment would be made.
How is that split up between employees and
shareholders?Let's say your goal was a 10 percent
return on equity and you make 11 percent , how does that
get split?
I guess I don't know if I can answer that
question today or not.don't know m even
following your question.You'saying what part
allocates back the Company?
I mean , I assume you don t pay outYes.
100 percent of the amount by which the goal was exceeded;
CSB REPORTING
Wilder, Idaho
2836 MINOR (X-Reb)
Idaho Power Company83676
am I incorrect in that?
No, we wouldn'We wouldn 't pay out 100
percent of that amount.It is paid, I mean, there is a
threshold level at which the plan pays.There is a
target level of performance in which it pays and there
a maximum level and at the target level , and I think this
is what you re asking, at a target level, something
around the neighborhood of 30 percent of the increase is
paid out, and at maXlmum it would be, I don I t know , I
think the plan is actually capped at 10 percent for 2004
and I don I t know how that would impact earnings because
it would depend at a certain point, you I d pay out the 10
percent, the earnings may continue to grow well beyond
that goal and it becomes a smaller and smaller percentage
that's actually paid out.
Okay, would it be fair to say that if the
incentive pay is actually paid because you do not pay 100
percent of the excess over the goal , that it is
self-funding in the sense that the incentive awards are
generated by the very results we're talking about?
Well , I mean , obviously, it's funded by
earnings, so a growth in earnings would potentially fund
the payout under the plan.
Okay.Now , I want to take the fl ip side
of this.As you said, the incentive pay is not
CSB REPORTING
Wilder , Idaho
MINOR (X-Reb)
Idaho Power Company
2837
83676
guaranteed; correct?
Correct.
Let's assume that the Commission accepts
the Company s position and includes incentive pay in
CSB REPORTING
Wilder , Idaho
rates , would you hypothesize that for me?sure you
Okay.
Now , the incentives are not met in the
Would you make that assumption for me?
Okay.
Who pockets the money that the Commission
included in rates?
The money would be retained in the
Where is the justice in that?The
ratepayers have paid for an incentive not met and in
fact, it flows straight to the Company s bottom line?
Well, a well-designed incentive plan over
a five-year period of time will pay out at target three
years , will pay out at less than target one year and will
probably have no payout during that period of time.The
design is to build a plan that actually gets paid to
competitive in most years, so it's reasonable for the
Company or for the Commission to fund the plan at the
target level , because the expectation would be that the
probably can.
next year.
Company.
2838 MINOR (X-Reb)
Idaho Power Company83676
plan would pay out in most years at that level on an
average basis, and if you look at our plan over time, we
actually have done that.We have had years where we
maxxed it, years where we ve hit the threshold level and
years where we've had no payout like we had in 2003, but
overall, we paid out about a 7 percent level over the
period of time since the inception of the plan.
Thank you.Tha t 's all I have.MR. WARD:
COMMISSIONER SMITH:Mr. Ri chardson .
MR. RICHARDSON:No questions
Madam Chairman.
COMMISSIONER SMITH:Mr. Budge.
No questions.MR. BUDGE:
COMMISSIONER SMITH:Ms. Nordstrom.
Thank you.MS. NORDSTROM:
CROSS -EXAMINATION
BY MS. NORDSTROM:
Good morning.
Good morning.
I just wanted to clarify, is it true that
eligibility for pay at risk or this incentive pay is met
in one year and the employee I s pay is received in the
next year?
CSB REPORTING
Wilder , Idaho
MINOR (X-Reb)
Idaho Power Company
2839
83676
The goal is achieved in one year and the
eligibility, then , for the payout is achieved by being an
employee of the Company during that period of time and
the amounts are actually booked in that year of earnings
and then it is paid out the year following and that is
because we do it after the earnings are audited by the
Company.
Thank you.Referring to page 13,
beginning on line 20 , you discuss what happens if the
Commission does not favor this at risk compensation
You say that management will be forced toexpense.
consider terminating the current pay at risk plan and
restoring base pay to the 60th percentile of the
competitive market.If the Commission decides the
incentive pay should not be included in rates in this
case, are you implying that this Commission would be
required to accept the increased base pay to 60 percent
if the Company restored pay at the 60th percentile pay
level?
I am not implying that at all.What I am
saying is that the Company has set competi ti ve pay at the
60th percentile of the market.It's a fact that 1 s well
understood by our employees and if we do not have an
incentive opportunity in the Company, we will be forced
to put their base pay back to the 60th percentile because
CSB REPORTING
Wilder , Idaho
MINOR (X-Reb)
Idaho Power Company
2840
83676
we believe at the Company that there s a significant
value in keeping pay at that level in terms of us staying
non-union.
Thank you.No furtherMS. NORDSTROM:
questions.
Any questions?COMMISSIONER SMITH:
Commissioner Hansen.
EXAMINATION
BY COMMISSIONER HANSEN:
ve just got a couple of questions.
kind of discussed these bonuses a little bit earlier and
from what you ve just mentioned , I guess I'm kind of
curious of what kind of goals would be achieved in 2001
and 2002 to merit 60 and 80 percent bonuses that had an
effect on the net earnings of Idaho Power Company whose
earnings were down of over a million dollars in both
those years.Could you give me an idea of what kind of
goals were achieved that would merit that kind of a
reward?
Well, the goal in both those years was an
earnlngs on common goal , so that the goal was achieved in
both years.In 2001 , the regulated earnings of Idaho
Power were down, the unregulated earnings of Idaho Power
CSB REPORTING
Wilder , Idaho
MINOR (Com-Reb)
Idaho Power Company
2841
83676
were actually, I believe , around 50 million , so the
overall earnings of the Company were very good.I guess
I'd like to go on and say that the 60 to 80 percent that
you talk about, again, if we did not have an incentive
plan , if there were no incentive plans in the Company and
if our base pay had stayed the same as it was in the
early ' 90s where we were paying at the 60th percentile
above the 50th percentile, that if we only had that
system today, I would argue that up to the target level
of our incentive plans, there would be no difference in
our earnings, because theoretically, we would be paying a
base pay wage at the 60th percentile.The only impact on
earnings , truly, would be the impact in those years where
we had a difference between the target and the maximum.
Do you think it's a wise management
decision, then , when the rates are at an extreme high to
the customer , maybe the highest they ve ever been , the
economy is in a depressed state , people are trying to
survive and stay afloat and do you think it's better to
give out these types of bonuses rather than to adj ust
person s pay and I guess if you do, what perception do
you think that has in the customer's mind?
Well, I think it has a terrible perception
in the customer's mind, but I think, again , when you put
a plan out there and you put goals in front of your
CSB REPORTING
Wilder , Idaho
MINOR (Com-Reb)
Idaho Power Company
2842
83676
employees and your employees achieve those goals , you
faced with either breaking a contract with your employees
or maintaining that contract, and again , I don't think
our customers would feel any better in those years about
paying a base pay to , say, LaMont Keen that was in the
three-quarters of a million dollar range instead of a net
pay of 350,000 with a bonus or with an incentive.
You know , the reality is that the world
pays executives this way.They look at a total comp
number that it takes to attract and retain people and
they split it up in base pay, short-term incentives and
long-term incentives and we have chosen to go down that
road.We believe that it's a good business practice to
incent our executives to do and lead that Company in a
way that's good for the customer and good for the
shareholders of the Company.
But you do agree that it has a very
negative perception to the customers that you serve?
I think an incentive would and I think a
high base pay would, too.I don't know if it would be
any more negative than giving people a guaranteed pay.
That's all I have.COMMISSIONER HANSEN:
CSB REPORTING
Wilder , Idaho
MINOR (Com-Reb)
Idaho Power Company
2843
83676
EXAMINATION
BY COMMISSIONER SMITH:
Mr. Minor, I guess I was startled and
concerned by your testimony on page 13.It seems to be
CSB REPORTING
Wilder , Idaho
extremely anti -union.Is that not a yes?
No, that is not a yes.
, I I m sorry, what was that nod?
I was in agreement with you that the
testimony did refer to the union.
In a negative way?
We simply do not believe that the union
offers anything of value to our customers or to our
When you look at the union , and we've been
through two organizing campaigns recently, our experts
tell us that in the 196 campaign --
Who is "our
The Company'
Okay.
Idaho Power Company s experts --
All right.
- -
in the 1996 campaign, where there was
actually a petition for election filed by the IBEW , they
told us that we needed to take this issue very seriously,
because if we lost this election , we could expect a 10
employees.
2844 MINOR (Com-Reh)
Idaho Power Company83676
percent increase in our operating costs of the Company,
so at that time that would be between 10 and $15 million
annually tied to that and that is because of additional
staffing that's required, inefficiency that is brought on
by the union environment and potentially higher wages and
benefits.
Aren't the people who would get those
higher wages and benefits if the union came in the same
people who get the incentive bonuses?
Well , I mean , at the employee level , they
would , I mean, arguably the union would attempt to get
them higher wages and benefits.
That wasn't my question.The people who
now get your incentive pay
Which is everybody has an incentive pay
opportunity.
Everybody in the whole Company?
Everybody in the Company has an incentive
pay opportunity.
Do you expect the Commission to endorse
your anti-union agenda?
I guess I don't expect the Commission to
endorse it.I just want the Commission to understand
that the risk to our customers in terms of reliability
and in terms of cost is significant.
CSB REPORTING
Wilder , Idaho
2845 MINOR (Com-Reb)
Idaho Power Company83676
So if I understand your testimony
correctly, if we disallow the at risk compensation, it'
CSB REPORTING
Wilder , Idaho
your belief that the union has a better chance?
No, I wouldn I t agree with that.I think
if you disallow our at risk compensation, we will be
forced to make adjustments in our base pay to bring our
total class compensation back to the 60th percentile.
, I I m looking at your testimony there on
Which page?
Page 13 , that's where I've been the whole
Okay.
So --
That's what I'm saying there is that we
must maintain total cash at the 60th percentile.
And you weren't saying that either
starting at the bottom of page 12, continuing over to 13,
this greater threat of becoming a union shop would be a
direct resul t of the Commission disallowing the incentive
Well , yeah , what I'm talking about there
is if the Company didn I t grant the salary structure
adj ustment from 2004.
You mean the Commission?
line
time.
pay?
2846 MINOR (Com - Reb)
Idaho Power Company83676
Well , at this point I guess what I'
saying is if the Company didn't go forward and grant that
amount, at some point then we fall below competitive, so
I guess the bot tom of page 12 I'm talking about the
Company s action , that we must at some point again bring
the base pay system competitive.
, I thought your question referred to
the decision which I thought was the Commission.
No, I was talking about our decision as a
Company not to do it.m sorry.
COMMISSIONER SMITH:Thank you.
Mr. Kline, do you have redirect?
I do not.MR. KLINE:
(The witness left the stand.
Let I S take a break.COMMISSIONER SMITH:
How about a 13 -minute break.
(Recess. )
Okay, welcome back.COMMISSIONER SMITH:
Mr. Kline.
Yes, Idaho Power would callMR. KLINE:
Brad Fowler as its next witness.
CSB REPORTING
Wilder, Idaho
MINOR (Com-Reb)
Idaho Power Company
2847
83676
BRADLEY FOWLER
produced as a rebuttal witness at the instance of the
Idaho Power Company, having been first duly sworn , was
examined and testified as follows:
BY MR.KLINE:
please?
Fowler?
DIRECT EXAMINATION
Would you please state your name,
Bradley Fowler.
And by whom are you employed, Mr.
I I m employed by Milliman USA , a national
firm of consultants and actuaries.
CSB REPORTING
Wilder , Idaho
And you ve been retained in this case by
Idaho Power to provide expert consulting services; is
That's correct.
And Mr. Fowler , a few weeks back you
prefiled rebuttal testimony consisting of 17 pages and
one exhibit, Exhibit 70; is that correct?
Tha t 's correct.
And are there any additions or corrections
that you think need to be made to your prefiled rebuttal
that correct?
2848 FOWLER (Di-Reb)
Idaho Power Company83676
testimony or Exhibit 70?
No.
MR. KLINE:With that, Madam Chairman , I
would request that Mr. Fowler I S prefiled rebuttal
testimony be spread on the record and that Exhibit No. 70
be marked for identification.
is so ordered.
COMMISSIONER SMITH:Wi thout obj ection, it
(The following prefiled rebuttal testimony
of Mr. Bradley Fowler is spread upon the record.
CSB REPORTING
Wilder , Idaho
2849 FOWLER (Di -Reb)
Idaho Power Company83676
Would you please state your name, business
address , and present occupation?
My name is Bradley Fowler, and my business
address is Milliman USA , Suite 3800, 1301 5th Avenue,
Seattle Washington 98101.I am a Principal and
Consul ting Actuary specializing in pensions and employee
benefits.
What is your general educational background?
I graduated from the University of Washington
in Seattle in 1969 with honors, receiving a Bachelor of
Science degree in Mathematics.In 1971 , I received a
Master of Arts degree from Cornell University in
Mathematics.In 1979, I completed The Management Program
in the Business Department of the University of
Washington.
What is your professional educational
background?
The highest-level professional designation in
the actuarial profession is Fellowship in the Society of
Actuaries.This is obtained through a series of
examinations covering actuarial mathematics, principles
of insurance and employee benefits, investments,
economics, taxation , insurance and benefit law
accounting and financial reporting, model building,
underwriting, benefit plan design, and plan funding.
2850 FOWLER , Di-Reb
Idaho Power Company
During the period when I was pursuing the examinations,
there were nine examinations, requiring an average of 300
to 400 hours of study for
2851 FOWLER , Di-Reb
Idaho Power Company
successful completion of each exam.I completed my
Fellowship in 1976.wi th the passage of the Employee
Retirement Income Security Act (ERISA) of 1974 , actuaries
practicing in the area of pension plans were required to
become Enrolled Actuaries under ERISA to certify plan
funding to the IRS as required annually.I became an
Enrolled Actuary in 1980.My enrollment number is
02-3089.In order to maintain my status as an Enrolled
Actuary, I am required to complete a minimum of 30 hours
of continuing education in supervised settings during
each three year period.I have completed this continuing
education through seminar attendance, and presenting
seminars to others.I have also made presentations to
clients and other professionals on topics such as pension
funding, pension accounting, and proj ection of pension
funding and expense requirements into the future.I am
also a member of the American Academy of Actuaries since
This is the body that develops qualification1978.
standards for its members to sign statements of actuarial
opinion, such as those supporting the pension expense and
obligation measurements reported by companies like Idaho
Power in their annual reports to shareholders.
Would you outline your business experience?
Milliman USA is an international firm of
actuaries and consultants with 1800 employees.Milliman
2852 FOWLER , Di-Reb
Idaho Power Company
provides actuarial and administration services to many
pension plan sponsors, including Idaho Power Company.
began working for Milliman USA, then called Milliman and
Robertson , in Seattle as a summer student in 1966, and I
continued working part time until 1972 when I joined
Milliman full time.In 1974, I transferred to M&R
Services , the data processing company of Milliman
responsible for large scale actuarial system development,
and for operating the firm 1 s mainframe computer center.
In 1979 , I became the Chief Operating Officer of M&R
Services.In 1984, I returned to Milliman as an actuary
and consultant in the retirement practice.I was elected
a Shareholder of Milliman in 1985, and a Principal in
1987.I began working as the senior consultant and
actuary for Idaho Power Company in 1986 , and have had
responsibility for the actuarial valuation of the Idaho
Power Company Pension Plan since 1987.I am a senior
Principal in the Seat tIe Employee Benefits practice with
management responsibility for several maj or practice
areas in addition to my consulting role.My primary
consulting relationships are with corporate clients
similar to or larger than Idaho Power Company, and with
several large non-profit hospitals.
What services do you provide to Idaho Power and
its pension plan that are related to the Company
current revenue requirement filing?
2853 FOWLER , Di-Reb
Idaho Power Company
In my role as Idaho Power I s plan actuary, I
supervise the annual valuation of the pension plan
I iabil i ties.The valuation process measures the expected
payouts that will be due to participants from the plan,
using census data and assumptions regarding how long
participants are expected to work for Idaho Power , their
rates of salary growth, their expected lifetime following
retirement, and other contingencies affecting the amount
of benefits due.The valuation results are measured
under the FAS 87 required methods and assumptions for use
in financial reporting in Idaho Power's financial
statements , and separately under the IRS required methods
and assumptions for tax deductibility and minimum
contribution purposes.I sign the report that is used by
Idaho Power and relied upon by their auditors supporting
pension expense in the financial statements.I also sign
the annual actuarial report and filings made to the IRS
under ERISA , certifying that minimum contribution levels
have been met.I consult with Idaho Power regarding
forecasts of future pension expense and pension
contributions, and recommend changes to assumptions when
appropriate.
What is the purpose of your testimony in this
proceeding?
A. The purpose of my testimony is to offer
expert opinion on the pension cost items in Idaho Power
2854 FOWLER , Di-Reb
Idaho Power Company
filing and to respond to Staff witness Mr. Donn English I
recommendation that the Commission exclude all pension
expense from Idaho Power s revenue requirement.
Idaho Power used the Service Cost methodology
to compute its pension cost in this case.Wha t is your
opinion regarding the use of Service Cost as the basis
for pension cost recovery?
Service Cost computed on the basis of the
assumptions used for financial reporting represents a
fairly stable measure of the value of benefits being
earned each year.It is often used to convey the value
of the plan to participants, because it is independent of
experience gains and losses, and is relatively stable as
a percentage of covered payroll.However, for the
purpose of util i ty rate making, Service Cost does not
include several other important costs of providing the
pension benefits.These are the financing cost, which is
the net effect of interest cost on liabilities offset by
investment income on plan assets, and the cost of gains
or losses due to experience more or less favorable than
assumed.Gains and losses occur from assets earning more
or less than assumed, retirees living longer than
assumed, salaries growing more slowly or more rapidly
than assumed, etc.In my opinion , the financing cost,
and the cost of gain or loss experience are appropriately
shared by the Company and its customers. The
2855 FOWLER, Di-Reb
Idaho Power Company
impact of these elements may be either to lower total
cost below the Service Cost, or raise it above Service
Cost.
What is the most important characteristic to
consider in selecting a method for recognizing the cost
of pension benefits in utility rate making?
Consistency is the primary characteristic that
should be present in the treatment of pension cost for
rate making.By consistency, I mean consistency from one
rate filing to the next.This is also a primary
characteristic necessary for measurement of pension costs
for financial reporting purposes, and was one driver
behind the development of FAS 87 , the accounting standard
required for financial reporting purposes.
What basis for measuring the cost of pension
benefits do you believe is appropriate for utility rate
making purposes?
I support the use of FAS 87 Net Periodic
Pension Cost as the best measure of pension costs for
rate making purposes , because it is a publicly disclosed
and audited value, controlled by a well defined and
consistent accounting standard.This view is supported
by the direct testimony of Mr. English.FAS 87 was
specifically developed to create consistency of
measurement from period to period , and to facilitate
2856 FOWLER , Di-Reb
Idaho Power Company
comparison of pension costs on a consistent basis from
one company to another.Therefore, I
2857 FOWLER , Di-Reb
Idaho Power Company
support using the net periodic pension cost included in
the Company's rate filing of $7,018,000, the net periodic
pension cost is the value prior to application of the
service cost adj ustment proposed by the Company.
Removing the service cost adjustment results in a
reduction of $2 170,160 from the Company s proposed
pension expense amount.To that extent I agree that the
adj ustment proposed by Mr. Engl ish is appropriate.
Does consistency mean that the Net Periodic
Pension Cost is stable from period to period?
No.Changes in prevailing interest rates,
rates of inflation , rates of return on plan assets , and
other experience will impact the amount of the Net
Periodic Pension Cost.Large changes will impact the
pension cost significantly.The recent downward changes
in interest rates and large losses on pension assets have
had a maj or upward impact on pension expense for
virtually all plans.But the underlying methodology and
discipline for measurement, for selection of assumptions,
and for recognition of gains and losses is consistent.
The consistent use of Net periodic Pension Cost also
avoids significant discretionary adjustments because of
the public and audited nature of the values.
Mr. English proposes to adj ust Idaho Power
pension cost by an additional $1 379 148.What is your
2858 FOWLER , Di - Reb
Idaho Power Company
opinion regarding this additional Staff adjustment to
pension cost?
The rationale provided by Staff for this
additional adjustment is invalid, and represents a
misunderstanding of the requirements of FAS 87.
reported by Mr. English , the discount rate for 2003 was
reduced from 7.00% to 6.75% and the future expected
return on plan assets was reduced from 9.00% to 8.50%.
These changes resulted in an increase in pension expense
for Idaho Power.However , these changes in assumptions
were fully consistent with the requirements of FAS 87.
Milliman tabulated FAS 87 assumptions for 2003 for the
largest 100 companies in the US.The median discount
rate used by these companies for 2003 was 6.75%, down
from a median of 7.25% in 2002.The median assumed long
term rate of return on assets for these 100 companies
declined from 9.50% in 2002 to 9.00% in 2003.
Additionally, the 2004 Greenwich Associates report states
that the mean reduction in rate of return on plan assets
of 1 032 corporate pension plans between 2002 and 2003
was .40% from 8.9% to 8., as seen on Exhibit No. 70.
The size of Idaho Power s Plan is better represented in
the Greenwich Associates data which places Idaho Power at
their median.In general , smaller companies with smaller
plans tend to use slightly lower assumptions than the
2859 FOWLER, Di-Reb
Idaho Power Company
largest funds (Fortune 100 companies), in part because
they incur greater
2860 FOWLER , Di-Reb
Idaho Power Company
investment expenses as a percentage of assets.
Is changing actuarial assumptions common?
Under FAS 87 , it is not only common , but
required that the assumptions be re-examined annually.
The discount rate under FAS 87 is defined as the rate of
interest at which the obligations could be settled
prevailing on or close to the measurement date for
financial statements.This means that in an environment
of rapidly falling interest rates , such as occurred from
2002 to 2003 , it was required that companies change their
discount rate.98 of the 100 largest companies in our
study reduced their discount rate from 2002 to 2003.The
assumed long-term rate of return on assets assumption is
changed less often than annually by most companies.Due
to the fall in interest rates over several years , and the
fall in inflation , however , it became increasingly hard
for companies to support the long-term rate of return
assumptions used in 2001 and 2002 with the asset mix in
the plans.This is because yields on bonds , comprising
for most plans 35% to 40% of the portfolio, had dropped
into the 4% range.From 2002 to 2003 the great majority
of companies reduced their long-term rate of return
assumptions on pension plan assets.
Under the conditions described, would a change
in the investment policy of the pension plan be needed to
justify a reduction in the assumed return?
2861 FOWLER , Di-Reb
Idaho Power Company
No. The basis for the reduction rested on the
fall in interest rates and inflation, not on a change in
the asset mix.
Mr. Engl ish asserts that it is unusual or
irregular for the Company to document in a letter to the
Company's actuaries, Milliman USA , their choice of
financial assumptions for FAS 87 reporting purposes.
he correct?
No. It is in fact appropriate and routine.FAS
87 requires that the assumptions used for measuring
pension obligations and pension expense in the financial
statements of the Company represent management's best
estimate, subject to the requirements of FAS 87 for
selection of assumptions.This is consistent with the
general requirements of financial reporting, that the
annual statement is the report of management.The role
of the actuary is to advise the Company on their
selection of assumptions by providing advice on what we
believe is appropriate under the requirements of FAS
for the current year, the actions of other similarly
si tuated organizations , and data on external relevant
measures , such as bond yields and annuity rates.
UI timately, it is the Company's decision what assumptions
to use.The actuary is required in our report to state
that we believe the reported results based on these
2862 FOWLER , Di-Reb
Idaho Power Company
assumptions meet the requirements of FAS 87.I did that
on behalf of Milliman for Idaho Power Company for 2003.
2863 FOWLER , Di-Reb lOa
I daho Power Company
The assumptions the Company selected were entirely
consistent with our recommendations , and with our
recommendations to other clients we serve.Further, the
entire annual report was subj ect to review by the
Company s auditors.
Is the responsibility for selection of
assumptions different for reports to the IRS under ERISA?
Yes.Under ERISA , the Enrolled Actuary and not
the Company is responsible for the selection of actuarial
assumptions, and must certify that they represent the
actuary s best estimate.The definition of the
assumptions used under ERISA differs from the
requirements under FAS 87 , and the ERISA assumptions are
changed less frequently.
What is your opinion about the Staff's proposed
final reduction of $5 638,851 to pension expense?
I do not support the third adjustment.This
adjustment abandons FAS 87 Net periodic Pension Cost
entirely as the basis for rate making, and substitutes
the cash contribution methodology.The critical need for
using a consistent methodology from year to year is
disregarded when the pension cost allowed is switched
from a FAS 87 basis in one rate filing to a cash basis in
the next.
Q. Why is FAS 87 Net periodic Pension Cost for the
Idaho Power pension plan currently higher than the
2864 FOWLER , Di - Reb
Idaho Power Company
required cash contribution?
There are two primary reasons.
(1) The liabilities under FAS 87 are measured
using a 6.75% discount rate for 2003.For cash
contributions , liabilities are measured using an 8%
discount rate.The FAS 87 basis produces a higher value
for the liabilities in the current interest rate
environment.For many years after the initial adoption
of FAS 87, this relationship was reversed.The discount
rate for FAS 87 was higher than the rate used for cash
contributions.
(2 )Idaho Power uses market value of assets for
determining their Net Periodic Pension Cost , and a
smoothed value of assets for computing the cash
contribution.At the beginning of 2003, the market value
was $282 million, while the smoothed value was $339
million.The smoothed value recogni zes gains and losses
on plan investments over a period of five years, so much
of the very bad asset performance in 2000-2002 was not
yet reflected in the cash contribution calculation.
However, those losses are still to be phased into that
calculation.In that sense, the FAS 87 cost is more up
to date, because the effect of the losses is more
completely reflected.
will the FAS 87 Net Periodic Pension Cost
2865 FOWLER, Di-Reb
Idaho Power Company
always remain higher than the cash contribution amount?
No.Looking at the period from 1986 when FAS
2866 FOWLER, Di-Reb 12a
Idaho Power Company
87 was adopted through 2003, a period of 18 years, Idaho
Power s contribution exceeded the Net Periodic Pension
Cost (NPPC) in 12 years , and was less than NPPC in 6
years.The years where NPPC was higher have been
primarily times when the discount rate was low , and/or
asset performance was poor relative to assumptions.The
times when cash contributions have been higher have been
times when the discount rate was high and/or asset
returns were well above assumptions.
Is the cash contribution method recommended by
Mr. English less subj ect to discretion than the FAS
Net Periodic Pension Cost?
, there is a greater level of discretion in
the cash contribution.The IRS permits several different
funding methods.For a particular year, different
methods produce different levels of minimum
contributions.The IRS allows companies to change
methods every five years without approval , and in certain
cases more often with approval.The IRS allows companies
to use a smoothing method on plan assets or to use market
value.Companies may change asset methods without
approval every five years.
In many years, the calculation of the minimum and
maximum cash contributions produces a very large range.
The Company has the opportunity to select the amount of
2867 FOWLER , Di-Reb
Idaho Power Company
their contribution wi thin this range, and may vary their
contribution considerably from year to year.
2868 FOWLER , Di-Reb 13a
Idaho Power Company
All of these factors make the cash contribution
method recommended by Mr. English less stable and
consistent in methodology from year to year than the FAS
87 Net Periodic Pension Cost.
Why not simply allow the lesser of the cash
contribution and the Net Periodic Pension Cost?
This is the equivalent of saying to the
Company, heads I win , tails you lose. The size of the
cash contribution and the Net periodic Pension Cost will
vary differently from year to year, but over time, both
calculations reflect the size of the benefits actually
paid out to plan participants.Any over or under
estimate made along the way becomes an adjustment to
amounts needed in future periods.Taking the lower of
the two results is a method that will not ultimately pay
the cost of the benefits, because the cumulative amounts
considered will be less than the amounts calculated under
ei ther a cash method or a FAS 87 method.
What is prepaid pension expense?
Prepaid pension expense represents the
cumulati ve amount since the adoption of FAS 87 by which
cash contributions to the Idaho Power Pension Plan have
exceeded the recorded Net Periodic Pension Cost.So it
represents the excess of funding over what has been
expensed.Q. Is prepaid pension expense an asset of the
2869 FOWLER, Di-Reb
Idaho Power Company
Company?
Yes , under generally accepted accounting
principles, as defined by FAS 87.Under FAS 87 , the
amounts recognized as Net periodic Pension Cost are by
definition the proper allocation of pension cost to
current and past periods for accounting purposes.If the
Company has paid more cash into the plan than the amount
of NPPC recognized, they have prepaid pension benefit
cost , and there is an expectation that this will be
reversed' in some future period, with expense exceeding
the contribution.The asset is not a claim on
investments that are inside the pension trust.
described by Mr. English , plan assets may not easily be
removed by the Company due to ERISA law.The use of plan
assets is limited to providing benefits to plan
participants until all the promised benefits have been
delivered.The prepaid pension expense asset is a credit
for having given up cash in excess of the NPPC.That
cash did not get charged as an expense, so it represents
the exchange of one asset , cash , for another asset, the
prepaid pension expense.
Why should this asset be included in the rate
base?
This asset represents a use of cash.It is a
consequence of providing a pension plan for employees
following the required rules for funding the plan , and
2870 FOWLER, Di-Reb
Idaho Power Company
recording the expense of the plan on the Company s books.
The pension plan is an important benefit for attracting
and retaining the employees needed to provide reliable
electric service to the Company s customers.
addition , the prepaid pension expense was allowed as an
asset in the Company s last rate filing (Case No.
IPC-94-5) .
Mr. English calculates Idaho Power's 15 -year
average annual rate of return in its pension fund at
12.97% and states that his calculated return was below
the DJIA , S&P 500 and the NASDAQ with returns of 13.89%,
15.02% and 21., respectively.Mr. English opines that
the investment results of Idaho Power s pension fund are
no better than the performance of the general market.
you agree with that opinion?
I do not agree with that assessment.First of
all , Mr. English compares Idaho Power's pension fund
return against stock market index averages.This is not
an appropriate comparison , as a prudent pension fund
normally holds 35% to 40% in fixed income securities like
bonds and only 60% to 65% in stocks.Secondly, as a part
of creating our annual Actuary's Report Milliman USA
calculates a rate of return based on the change in fund
assets from period to period.Idaho Power's investment
performance has consistently been among the best of all
of the pension plans I review.
2871 FOWLER , Di-Reb
Idaho Power Company
Mr. Fowler , can you summarize your rebuttal
testimony?
Yes.Staff witness Mr. English advocates
making three downward adj ustments to the Company's test
year pension expense and removing the entire prepaid
asset from rate base.disagree with the reduction of
379 148 based recalculating the 2003 pension
expense higher rate return on plan assets 9%,
the removal of $5,638 851 of the remaining FAS 87 Net
Periodic Pension Cost to equate FAS 87 pension expense to
zero , and the removal of the prepaid pension asset of
$17,800 477 from rate base.I do agree wi th Mr.
English's reduction in pension expense in the amount of
170 160 which results from not applying the Company'
2003 Service Cost adjustment to the 2003 FAS 87 Net
Periodic Pension Cost of $7 018 000.
Does this conclude your rebuttal testimony in
this case?
Yes, it does.
2872 FOWLER , Di - Reb 1 7
Idaho Power Company
(The following proceedings were had in
open hearing.
MR. KLINE:Madam Chairman, I would also
request at this point that I be permitted to ask
Mr. Fowler just a few additional questions.
COMMISSIONER SMITH:Please proceed.
MR. KLINE:Thank you.
DIRECT EXAMINATION
BY MR. KLINE:Continued)
Mr. Fowler, were you present when Staff
Don English presented his direct testimony in this
case?
Yes, I was.
In response to a question from Staff
counsel , Mr. English stated that it is uncommon for
utilities and other companies of Idaho Power's size to
provide both a pension plan and a 401 (k) plan with a
matching contribution from the Company.Is Mr. English
correct in his understanding?
No, that is not correct.It is most
common for larger companies the size of Idaho Power to
provide both a pension plan and a 401 (k) plan with a
match.For smaller companies, they tend to provide less,
CSB REPORTING
Wilder , Idaho
2873 FOWLER (Di-Reb)
Idaho Power Company83676
wi th the very smallest companies providing the least.
For example, in the Greenwich Associates survey from
2002 , they reported that over 80 percent of companies
sponsoring a plan with plan assets in the range of up to
$500 million sponsored both a defined benefit plan and a
401 (k) plan.
Speaking specifically of utilities, what
is the prevalence of both defined benefit pension plans
and 401 (k) plans , again among utilities?
We looked at two data sources with respect
to this question.One was the 2003 A Benefits Report.
The A company is a company that specializes in
compensation and benefits, consulting and surveys and
they reported for the transportation and utilities group
that 80 percent of those companies sponsored a defined
benefit plan and 97 percent of the companies in that
group sponsored a 401 (k) plan with a match , so this fits
the profile of larger companies and particularly
utilities.
We also looked at a 2002 survey by the
Western Energy Institute which is a organization of
utilities in the western states and 12 of 15 of those
companies sponsored a defined benefit plan and again,
with all of them sponsoring in addition a defined
contribution plan.
CSB REPORTING
Wilder , Idaho
2874 FOWLER (D i - Reb )
Idaho Power Company83676
In response to another redirect question
from Staff counsel , Mr. English , I believe, was frankly
critical of the actuarial process of measuring and
recording pension liabilities and expense.Do you recall
that part of his testimony?
Yes, I do.
Do you believe Mr. English was correct in
his characterization?
No, I believe Mr. English said that the
actuarial numbers had no basis in reality and that is not
true.The actuarial numbers are prepared according to a
methodology and discipline that is well accepted by
regulatory authorities like the SEC and the IRS.We use
assumptions to forecast liabilities into the future and
these are recorded in both the tax returns and the
financial statements of companies of all size and used
for important reporting purposes.
In fact, the liabilities that are being
measured and the transactions that are being recorded
have to be recorded in the current period long before the
experience that will come through the plan is ultimately
all known and by the time a last recording could be made
of all those benefit payments, it will be far after the
point in time when rates have to be set, taxes paid and
financial statements prepared.
CSB REPORTING
Wilder , Idaho
2875 FOWLER (Di-Reb)
Idaho Power Company83676
Finally, again in response to a question
from Staff counsel , do you agree with Mr. English'
testimony that the current period that we're now in is an
exceptional period and it would be appropriate to ignore
the FAS 87 pension expense methodology as the basis for
determining Idaho Power's pension expense and instead use
zero dollars as he recommends?
I do not agree that this is an exceptional
period , that pension expense has been increasing rapidly,
kind of the mirror of the decline in pension expense
going back a few years.We forecast that pension expense
will remain fairly high for the next foreseeable future
and that cash contributions are also going to rebound and
reemerge.
MR. KLINE:That's all the additional
questions I have.With that, Madam Chairman , I would
make Mr. Fowler available for cross-examination.
COMMISSIONER SMITH:Thank you , Mr. KI ine .
Mr. Eddie.
MR. EDDIE:I have no questions.Thank
you.
COMMISSIONER SMITH:Mr. Purdy?
MR. PURDY:None.
MR. COOKE:I have no questions.
COMMISSIONER SMITH:Mr. Ward.
CSB REPORTING
Wilder , Idaho
2876 FOWLER (Di - Reb)
Idaho Power Company83676
BY MR. WARD:
MR. WARD:Yes, I have a few.
CROSS - EXAMINATION
Mr. Fowler , arguments about pension costs
are relatively rare in ratemaking proceedings , so bear
CSB REPORTING
Wilder , Idaho
with me if I mangle the proper terminology of the real
experts.I want to see if I understand this controversy
First of all , I understand that you agree
wi th one of the Staff's adj ustments in the amount of
$2 million , 2 million odd dollars?
That is correct.
And would it be correct that we then have
remaining in dispute two other adj ustments, one of which
has to do with the expense claimed for contributions to
the pension and the other has to do with a rate base
item; is that correct?
I believe so.
Now , with regard to the expense claimed,
respect to the defined benefit plan, I
Yes.
Okay, it doesn't have anything to do wi
the defined contribution plan?
correctly.
this with
assume?
2877 FOWLER (X-Reb)
Idaho Power Company83676
That's right.
My understanding is that - - well , do you
recall the amount Idaho Power is claiming for an annual
CSB REPORTING
Wilder , Idaho
I believe Idaho Power is claiming an
amount for annual expense, I can't remember the exact
amount, but in the neighborhood of $7 million.
Now , I believe Mr. English testified
earlier in this proceeding that Idaho Power has not in
fact actually made a cash contribution to this defined
benefit plan since 1995; is that correct?
That is correct.
And on page 12 of your testimony, you
discuss what I'll call the smoothing of contributions and
point out that the last few years don't necessarily
reflect the entirety of the 2000-2002 market performance;
Could you rephrase the question?
contribution?
Well , let me direct your attention to
lines 17 through 19 on page 12.
Yes.
And there you say, "so much of the very
bad asset performance in 2002-2002 was not yet reflected
in the cash contribution calculation.
That is correct.
is that correct?
2878 FOWLER (X - Reb )
Idaho Power Company83676
And I take it , would it also be true that
the very good , at least in the stock market , asset
performance of 2003 is not yet reflected?
The 2003 performance is only partially
reflected and will be smoothed into that calculation over
five years.
Is there anything in the facts in this
case that suggests that notwithstanding the fact that
Idaho Power hasn't actually made a contribution since
1995, we can expect them to be forced to do so in the
next year , in 2004 or 2005?
We are not anticipating a cash
contribution in 2004.
And you don't know or haven t forecast
2005 yet?
2005 we have not forecasted under all
possible investment scenarios.If the plan returns the
actuarial assumption , we expect cash contributions to
emerge in 2007.If the markets return less than the
actuarial assumption , we could see cash contributions
potentially returning earlier.
All right.Now that'the expense side
the dispute.want turn
- -
That the cash contribution.just
talked about the cash contribution.
CSB REPORTING
Wilder , Idaho
2879 FOWLER (X-Reb)
Idaho Power Company83676
Yes , I understand that.Let's turn to
what I'll characterize in our nomenclature as the rate
base issue and let's see if I understand this correctly.
In your nomenclature, it's the prepaid pension asset
that's in dispute; is that right?
Yes.
And as I recall, the rate base amount is
about $17 800 000; is that correct?
I believe that's correct , yes.
Now , again , I don't know the terminology
of your field , so bear with me, am I correct in assuming
that this $17 million figure represents the amount by
which the pension plan is ahead of the game , so to
speak?
That is correct.On a FAS 87 basis, it'
the amount by which cash paid into the pension plan is
ahead of the accumulated pension expense.
All right; so it's essentially excess cash
in terms of at least current pension expense; right?
Tha t 'correct.
Who owns that excess cash?
The cash that you'talking about
really a - - it's really the difference between cash
that's gone into the plan and the expense that's been
booked by the Company, so it's an expectation under FAS
CSB REPORTING
Wilder , Idaho
2880 FOWLER (X-Reb)
Idaho Power Company83676
87 that over time that relationship will be reversed and
that the Company will in effect pay in less cash and
record more expense in future periods.
I appreciate that, but my question is who
owns that asset?What corporate entity owns it?
The FAS 87 asset is an asset on the
Company s books.The cash itself has gone into a trust
and the trust is the entity that owns the cash.
Does Idaho Power have the ability to in
any way liquidate that asset and claim it as if it were
its own?
Not under any sort of normal ongoing
business type of conditions.It would require
termination of the plan.
And would it be fair to say that the
beneficial owners of that asset are in fact the employees
who either are or will be entitled to defined benefit
pensions?
Actually, I think you re confusing really
two assets.I mean , what the Company has done is they
have traded one asset, cash , for a second asset, a
prepaid pens ion expense that is recorded on their balance
sheet, so the asset that belongs to the Company is the
recorded prepaid pension expense.The asset that they
exchanged for that is the cash that they deposited into
CSB REPORTING
Wilder , Idaho
2881 FOWLER (X - Reb )
I daho Power Company83676
the trust , so to talk about the ownership of the cash is
to not talk about the asset that belongs to the
Company.
I see.Would it be fair to say that
well , let me see if I can understand your last answer.
earlier asked you if this amount is not due to the amount
by which the pension plan is ahead of the game and so we
can't really say, can we , that the amount by which it'
ahead of the game came from contributions from the
Company, it may have come from earnings that exceeded the
actuarial assumption?
It came from the cumulative experience of
the plan which included a lot of things, including
investment returns.
I'll accept that.Now , I've been
referring to this as a cash asset, but presumably, it'
not actually in cash , is it , it's invested in the plan?
That's correct.
And it's earning a rate of return,
hopefully an at tractive rate of return?
The assets in the plan are invested and,
as you say, are earning, hopefully, a good rate of
return.
Now , I recognize your distinction as to
the bookkeeping or the accounting of the matter, but
CSB REPORTING
Wilder, Idaho
2882 FOWLER (X-Reb)
Idaho Power Company83676
nevertheless, if that asset is earning a return and while
the Company nevertheless has a figure showing on its
books, we don't know that it actually represents any
contribution that they ve made.If the underlying asset
is already earning a return , why should it earn another
in the Company s rate base?
Again, I think you sort of are talking
about two separate assets.It's the cash in the trust
that's earning the return and the recorded asset on the
books of the Company is what they booked in exchange for
the cash.
But isn't it true that the recorded asset
on the books of the Company doesn I t necessarily represent
any investment or cash contribution that the Company
itself made, it's simply a figure driven by the extent to
which the pension plan is exceeding its actuarial
assumptions; isn t that correct?
That's correct.
MR. WARD:That's all I have.
COMMISSIONER SMITH:Mr. Richardson.
MR. RI CHARDSON :No questions,
Madam Chairman.
COMMISSIONER SMITH:Mr. Budge.
MR. BUDGE:No questions.
COMMISSIONER SMITH:Ms. Nordstrom.
CSB REPORTING
Wilder , Idaho
2883 FOWLER (X-Reb)
Idaho Power Company83676
CROSS - EXAMINATION
BY MS. NORDSTROM:
Good morning.
Good morning.
On page 6 , lines 12 and 13, you state that
FAS 87 is the accounting standard required for financial
reporting purposes.Does FAS 87 specifically dictate
regulatory recovery of the booked pension costs?
FAS 87 does not speak at all to regulatory
accounting.
Thank you.Prior to the change in 2003
for the interest rate and return assumptions used to
calculate the FAS 87 pension expense, when did Idaho
Power last change these specific assumptions?
They have changed the discount rate almost
annually for the last four or five years.There may have
been one - - I'm working from memory now , I don't have my
records, but there may have been one year in which it was
constant from year to year , but by and large , the
discount rate has changed almost annually.
What about the return assumption?
The rate of long-term return on assets has
not been changed nearly as frequently.
In fact , isn't it true that the Company
CSB REPORTING
Wilder, Idaho
2884 FOWLER (X - Reb )
Idaho Power Company83676
has had a 9 percent return assumption since prior to 1986
and before the passing of FAS 87?
It would not have been before the passage
of FAS 87 because the FAS assumption was introduced for
the first time in 1986 when the Company adopted FAS 87
but I believe it's true that the 9 percent has been in
effect Slnce the adoption of FAS 87.
So for almost 20 years the Company has
used a 9 percent assumption and is only changing its
assumption to 8.5 for this test year?
I would not characterize it as "for this
test year " and would also add that the pattern that
you re alluding to is similar to the pattern of virtually
all of the other larger corporate clients that we work
for.There is certainly a disincentive of corporate
clients to lower that rate because it raises their booked
pension expense which in effect has a downward impact on
corporate earnings and is not attractive to shareholders
so to the extent that it is supportable, there's an
incentive to try to maintain that rate and in fact, it
would be desirable to have it be higher rather than
lower; however , the economic circumstances over the last
several years, particularly the low interest rates and
low inflation as pointed out in my written testimony,
have forced virtually all large companies that are
CSB REPORTING
Wilder , Idaho
2885 FOWLER (X - Reb )
Idaho Power Company83676
subj ect to FAS 87 to lower this assumption , and in my
testimony, I provided some statistics about the
prevalence of lowering that assumption among large
companies in 2003.
So has this return assumption changed due
to events or changes that have occurred in the last few
years , is that the basis of the change?
The basis of the change , yes , is
responding to the decline in general interest rates and
the decline in inflation which has dramatically lowered
returns on the fixed income side of a pension portfolio
accompanied by three consecutive years of very, very poor
performance in the equity markets.
Isn t it true that the review must be
forward looking and not give undue weight to recent past
history?
That's correct , and certainly, that's one
reason why there's been some delay in bringing these
rates down , but interest rates have been low for some
time , inflation has been low for some time and the SEC
has actually been challenging excessively high rates of
long-term return for FAS reporting purposes so that the
higher level of rates are really becoming unsupportable
in the current environment.The SEC in fact has gone on
record as to say they will challenge the financial
CSB REPORTING
Wilder , Idaho
2886 FOWLER (X-Reb)
Idaho Power Company83676
statements of companies that are using rates in excess of
9 percent.
They've drawn kind of a 1 ine there and
said that they believe that it would be unreasonable
using a rate above that and Idaho Power has consistently
been far closer to median in their choice of assumptions
and the quality of their financial reporting as it
relates to pensions.They re not a company that chooses
the upper limit.
How does this compare to the expectation
of increased rates as discussed by witnesses Gribble and
Avera?
I was not present for the testimony of
ei ther of those witnesses.
What the average return this plan?
Over what kind period time?
Well any period time.
I believe in my written testimony on
page 16, line 8 that there was a number quoted by
Mr. English that was close to the number that was being
reported by the Company as well , that over a 15 -year
period , the plan has returned 12.97 percent, slightly
under 13 percent.
Thank you.On page 12 you state that the
adjustment of 5.69 million is inconsistent with the last
CSB REPORTING
Wilder, Idaho
FOWLER (X - Reb)
Idaho Power Company
2887
83676
rate case.Do you believe this Commission should be
blindly consistent to a 10-year old rate case when the
issue was not specifically addressed and circumstances
today are considerably different?
I don't have an opinion on that.
On page 14 , lines 20 through 24 , you
describe the prepaid pension expense and what it
represents.Do you have a copy of Staff witness
English's exhibits on the stand with you?
No.
MS. NORDSTROM:May I approach the
witness?
COMMISSIONER SMITH:Yes.
(Ms. Nordstrom approached the witness.
MS. NORDSTROM:m handing him a copy of
Staff Exhibit No. 108.
THE WITNESS:Thank you.
MS. NORDSTROM:I just handed him page
Who is that with , Lisa?MR. KLINE:
sorry.
MS. NORDSTROM:Donn English.
MR. KLINE:Okay.
BY MS. NORDSTROM:Looking at page 1 of
Exhibit No. 108 , would you agree that Idaho Power
prepaid pension expense from 1998 through 2002 resulted
CSB REPORTING
Wilder , Idaho
2888 FOWLER (X - Reb )
Idaho Power Company83676
from Idaho Power paying zero cash contributions while the
recorded pension expense was negative?
Yes, I would.
MS. NORDSTROM:Thank you.No further
questions.
COMMISSIONER SMITH:Are there questions
from the Commission?Nor I.
MacMahon.
Redirect, Mr. Kline?
MR. KLINE:No redirect.
COMMISSIONER SMITH:Thank you.
(The witness left the stand.
MR. KLINE:Idaho Power would call Bruce
BRUCE E. MacMAHON
produced as a rebuttal witness at the instance of the
Idaho Power Company, having been first duly sworn , was
examined and testified as follows:
BY MR. KLINE:
DIRECT EXAMINATION
Mr. MacMahon , are you ready?
I am.
Okay, would you please state your name for
CSB REPORTING
Wilder , Idaho
2889 MACMAHON (Di-Reb)
Idaho Power Company83676
the record?
Bruce MacMahon.
And by whom are you employed?
I am employed currently by IDACOMM and
formerly by Idaho Power Company.
CSB REPORTING
Wilder , Idaho
And at the time this rate case was being
prepared , you were the tax manager for Idaho Power; is
I was.
And you previously prefiled rebuttal
testimony consisting of 18 pages in this case , have you
I have.
And you didn't have any exhibits, as I
recall; is that correct?
No exhibits.
Do you have any additions or corrections
that you need to make to your prefiled rebuttal
No, I do not.
MR. KLINE:Madam Chairman, I would
request that Mr. MacMahon's rebuttal testimony, prefiled
rebuttal testimony, be spread on the record as if read in
COMMISSIONER SMITH:If there is no
that correct?
not?
testimony?
its entirety.
2890 MACMAHON (Di-Reb)
Idaho Power Company83676
objection , it is so ordered.
(The following prefiled rebuttal testimony
of Mr. Bruce MacMahon is spread upon the record.
CSB REPORTING
Wilder , Idaho
2891 MACMAHON (Di-Reb)
Idaho Power Company83676
Please state your name and business address.
My name is Bruce E. MacMahon and my business
address is 350 N. Mitchell Street, Boise, Idaho 83704.
What is your educational background?
I graduated from Saint Mary s College in
Moraga , California in 1983, receiving a Bachelor of
Business Administration Degree in Accounting.Since that
time , I have participated in nume~ous training courses
related to industry, taxation, management and leadership,
as well as developed course material and provided
instruction on technical business taxation topics.
became a licensed Certified Public Accountant in the
State of Idaho in 1987.I have been an active member of
the Tax Committee of the Edison Electric Institute , Tax
Executives Institute, and served as a board member of the
Idaho Society of CPA's Southern Idaho Chapter , and as a
board member of the Associated Taxpayers of Idaho.
Please outline your business experience.
I have worked in government and industry since
graduating from college in 1983.I initially worked at
the Federal Energy Regulatory Commission as a Financial
Audi tor , taking part in a number of audits of regulated
utility companies , including Idaho Power.In 1984 I
joined the Boise Cascade Corporation as a Tax Analyst and
Research Supervisor until 1996, at which time I joined
2892 MACMAHON , D i - Reb
Idaho Power Company
the Idaho Power Company as the Tax Research Coordinator.
In 1999, I became the Corporate Tax Director for Idaho
Power Company and remained so until November of 2003 when
I became Chief Financial Officer for IDACOMM , Inc.
In your position as Corporate Tax Director for
Idaho Power Company were you responsible for the filing
of the income tax returns for Idaho Power Company with
the Internal Revenue Service and the state tax agencies
for the tax years 2001 and 2002?
Yes.
Did you participate in and are you familiar
wi th the income tax calculations that are presented in
Idaho Power's direct case in this proceeding?
Yes.
Have you reviewed Mr. Holm 1 s testimony as it
relates to the adjustments proposed by Staff for income
taxes?
Yes.
Do you believe that Staff's income tax
proposals are reasonable and should be implemented by the
Idaho Public Utilities Commission for purposes of
determining Idaho Power's revenue requirement in this
proceeding?
No.Staff's approach ignores the computation
of the applicable tax base and instead applies a
2893 MACMAHON , D i - Reb
Idaho Power Company
five-year average ratio to the pre-tax rate case income.
This approach (1) ignores what is uniquely taxable or
deductible under current income tax law (2) it ignores
enacted income tax rates, and (3) it ignores the
distinction between normalized income tax adjustments and
flow- through income tax adj ustments, sweeping away years
of carefully maintained regulatory process, principles,
and orders.
Please explain how Idaho Power prepared the
income tax calculations that are presented in its direct
case.
First , current federal income tax is
calculated.The starting point is "income before tax
adj ustments"Deductible(or pre-tax operating income) .
interest expense computed using rate case concepts
(interest synchronization) is subtracted from pre-tax
1 7 operating income to arrive at "net operating income
before taxes"Federal income tax temporary and
permanent adjustments, known as "book-to-tax " or "M-
adj ustments, are added or subtracted from net operating
income before taxes to produce what is commonly known as
the federal tax base.The federal tax base is reduced by
the current state income tax deduction to arrive at
federal taxable income.Federal taxable income is
mul tiplied by the statutory corporate federal tax rate of
2894 MACMAHON , Di -Reb
Idaho Power Company
35% to arrive at the current federal income tax
liability.Added to the test year 1 s current federal
income tax were
2895 MACMAHON , Di-Reb 3a
Idaho Power Company
federal deficiencies paid in 2003 for Idaho Power
1998-2000 Internal Revenue Service examination.
Second , current Idaho, Oregon , and other state
income taxes are computed.The starting point for each
calculation is the federal tax base.From that point
various state tax adjustments are made to arrive at the
state tax base.For Idaho , the federal deduction for
bonus depreciation is added back.The result is the
Idaho state income tax base , which is multiplied by 5.9%.
The 5.9% rate is Idaho's statutory corporate tax rate of
6% multiplied by Idaho Power s state of Idaho
apportionment factor of 78%, which is consistent with the
methodology set forth in Commission Order 17499 (p. 13).
The resulting Idaho state tax is reduced by Idaho Power
current Idaho Investment Tax Credit to yield the current
Idaho state income tax liability.For Oregon , a
depreciation adj ustment is also added back.The result
is Oregon's tax base , which is multiplied by .3%.The
3% is Oregon s statutory corporate tax rate of 6.
multiplied by Idaho Power's state of Oregon apportionment
factor of 5%.The result is the current Oregon state
income tax liability.The other states calculation
starts with the same base as Idaho multiplied by a
blended rate of .1%.
Third , the provision for deferred income taxes is
2896 MACMAHON, Di -Reb
Idaho Power Company
computed by multiplying the normalized temporary
book-to-tax
2897 MACMAHON , D i - Reb 4 a
Idaho Power Company
differences from the current income tax calculation by
the applicable statutory income tax rate.The resulting
deferred income tax expense is also the net annual change
to the accumulated deferred income taxes component of
rate base.
Finally, the investment tax credit component of
income tax expense is computed by combining the current
year amortization of federal and Idaho deferred
investment tax credits with the current year deferral of
Idaho investment tax credit earned.
Are you familiar with the terms "normalization"
and " flow-through" as those terms are used to reflect
income tax adjustments in public utility revenue
requirement cases?
Yes.
Please provide to the Commission a definition
of normalization and flow-through as those practices
would be reflected in Idaho Power's revenue requirement.
These two terms refer to two distinct methods
of computing income tax expense in a regulatory
proceeding.Using a normalization method to compute
income tax expense simply means that all of the income
tax costs related to items in the current period will be
computed , whether paid in the current year or paid later.
This method creates deferred income tax expense and the
2898 MACMAHON , D i - Reb
Idaho Power Company
associated accumulated deferred income tax liability that
is subtracted from rate base.The flow-through method of
computing income tax expense will take into account only
those taxes that will be paid in the current year , and
does not create deferred income tax or add to accumulated
deferred income taxes on the balance sheet.
Unless a book-to-tax adjustment is permanent, it is
considered temporary, meaning that the item will reverse
in a future period.A normalized book-to-tax difference
a temporary difference that for accounting purposes
adjusts current income tax expense and has an equal
offset in deferred income tax expense, thus the net
effect to total book income tax expense is zero.
flow-through book-to-tax difference is also a temporary
difference that adjusts current income tax expense , but
does not have an offsetting deferred income tax expense
amount.
For example , if a flow-through adj ustment is a
deduction , current income tax is reduced and with no
deferred income tax offset, book income tax expense is
lower than if the adjustment were normalized.
Flow-through is a regulatory accounting concept only.
Generally Accepted Accounting Principles ("GAAP") , under
Financial Accounting Standard Board Statement No. 109
FASB 109"), require that deferred income taxes be
recognized for all temporary differences.
2899 MACMAHON, D i - Reb
Idaho Power Company
In its test year regulatory income tax expense
calculations, Idaho Power identified both its normalized
and flow-through book-to-tax adjustments.The total
system flow-through adjustments in the test year are a
net $21.2 million deduction.This net deduction reduces
current income tax expense by $8.3 million.
Is Idaho Power considered a flow-through
company for Idaho ratemaking purposes?
Yes , Idaho Power is a flow-through company for
ratemaking purposes.The only temporary book-to-tax
differences that receive normalized accounting treatment
are those provided by federal law.
Please describe the normalized treatment
specified by federal law.
Temporary differences created by federal
accelerated and bonus depreciation and
contributions-in-aid-of-construction (CIAC) are excluded
from flow- through treatment by federal law (Internal
Revenue Code ~168 (f) (2) and Notice 87-82 respectively).
A violation of the normalization requirements in the
federal tax law would trigger a repaYment obligation to
the federal government of previously accumulated deferred
income taxes and the forfeiture of accelerated tax
depreciation methods to Idaho Power in the future.
Accordingly, the Company has provided for deferred income
taxes on these items in its regulatory
2900 MACMAHON , D i - Reb
Idaho Power Company
income tax expense at the federal statutory income tax
rate.The Commission has not normalized these items for
state of Idaho income tax purposes, thus the state effect
of the adjustment is flowed through to current income tax
expense.
Please explain the event that Mr. Holm refers
to as being the cause of the 2002 tax benefit.
The tax benefit that Mr. Holm refers to was the
result of an accounting method change adopted in Idaho
Power s 2001 federal income tax return.
Please explain to the Commission why Idaho
Power made this accounting method change for tax
purposes.
In early 2002 , the IRS issued certain technical
changes in Revenue Procedures 2002-, 2002-19, and
2002-, and Announcement 2002-17 that made the method of
accounting change under Internal Revenue Code ~263A and
associated Treasury Regulations possible for Idaho
Power's 2001 tax return.
Idaho Power is required to capitalize certain
indirect costs under Internal Revenue Code ~263A.
Section 263A requires the capitalization of all direct
costs and those indirect costs, known as "mixed service
costs", that directly benefit or are incurred by reason
of the production of property.In its business, Idaho
2901 MACMAHON , D i - Reb
Idaho Power Company
Power produces self -constructed assets (plant), and
electrici ty (inventory) for sale to its customers.
2902 MACMAHON, D i - Reb 8 a
Idaho Power Company
The IRS ruled in Technical Advice Memoranda 9527003 that
electricity is inventory for tax purposes.Thi s rul ing ,
plus the changes to ~263A , allowed Idaho Power to
allocate some of its mixed service costs to inventory,
which then became immediately deductible, due to
electricity's unique nature of real-time production and
consumption. The Company applied with the Internal
Revenue Service to change its method of accounting for
capitalizing mixed service costs with its 2001 federal
income tax return , which it filed in September 2002.
Idaho Power followed the automatic accounting method
change procedures authorized in Revenue Procedure 2002-
to properly apply for the change in method.
Idaho Power changed its previously allowable method
of accounting to a new allowable method using the
simplified service cost method of ~1. 263A-1 (h) with the
production based allocation ratio in ~1. 263A-1 (h) (5)
determine its future capitalizable mixed service costs
for inventory and self -constructed assets.
How did this accounting method change cause
such a large benefit in 2002?
When a taxpayer changes its method of
accounting for an item , it must compute the effect the
change would have had on prior tax years had the method
been utilized.This is done pursuant to ~481 (a) of the
2903 MACMAHON , Di-Reb
Idaho Power Company
Internal Revenue Code.A "~481 (a) adj ustment" will
either result in
2904 MACMAHON , Di - Reb
Idaho Power Company
a decrease (negative) or an increase (positive) to the
taxpayer s taxable income.Idaho Power's adj ustment was
negative.The adjustment was computed by applying the
new method to the mixed service costs incurred by Idaho
Power during the years 1987-2000.Following Revenue
Procedure 2002-19, Idaho Power was allowed to recognize
its negative ~481 (a) adjustment in the tax year of
change , 2001, thus creating a one-time single-year tax
deduction, which was recorded on the Company s books in
2002.
As the individual responsible for the filing
Idaho Power's income tax returns in the year 2002 for the
tax year 2001 did Idaho Power amend any prior tax returns
when it filed its 2001 income tax returns in 2002?
, for income tax and accounting purposes the
one-time ~481 (a) adjustment created by the method change
is considered a 2001 adj ustment , therefore no prior year
returns were amended , nor would the tax authorities allow
them to be amended for this purpose.
Does the 2003 test year include any benefits
related to the method change?
Yes , the 2003 test year regulatory income tax
expense includes a total system $14.3 million
flow-through tax deduction.The deduction reduced
current income tax expense by $5.6 million.Had Idaho
2905 MACMAHON , D i - Reb
Idaho Power Company
Power not initiated the method change , customers would
not be realizing this benefit
2906 MACMAHON, Di-Reb lOa
Idaho Power Company
in the 2003 test year.
Could you please describe your understanding of
the proposals for income tax adjustments that the Staff
has made in this proceeding?
Certainly.Staff has proposed to compute Idaho
Power's income tax expense by using an average ratio of
Idaho Power's actual above-the-line income tax expense as
a percentage of actual pre-tax book income for each of
the past five years added together and then divided by
five.
Specifically, Staff has developed a hybrid income
tax rate concept by taking each of the last five years
including the test year and averaging the ratio of total
income tax expense (current tax , deferred tax, and ITC)
for each year over the total pre-tax book income for each
year.The resulting ratio for each year was added up and
divided by five to arrive at an average ratio that
applied to the previous five years.This average ratio
was applied to regulatory pre-tax income and labeled
current tax"
Staff's hybrid ratio was used to value the current
change in normalized temporary differences for deferred
income tax expense , without regard to the beginning
balance in accumulated deferred income taxes having been
previously established using enacted tax rates.
2907 MACMAHON , D i - Reb
Idaho Power Company
This hybrid ratio was used by Staff to compute the
net-to-gross tax multiplier to set new revenue
requirement
2908 MACMAHON , Di-Reb 11a
Idaho Power Company
to a pre-tax revenue value , without regard to the actual
income taxes the Company will pay on these new revenues.
Additionally, Staff has taken Idaho Power'
1998-2000 Internal Revenue Service examination deficiency
payment included in the test year income tax expense and
reduced it by two-thirds on the theory that the payment
is for a three-year settlement and should be amortized
accordingly.
Please explain your understanding of the
computations that Staff made utilizing their five-year
hybrid tax ratio.
As I previously discussed , Staff has averaged
Idaho Power s above-the-line effective income tax rate
for the previous five years rather than looking to the
statutory income tax rates that Idaho Power is subj ect
to.Staff then used their average rate to recompute
current and deferred income tax , and reset the
net -to-gross multiplier.
Staff has taken a very simplistic view of the income
tax calculations in the test year.It would appear that
their primary motivation for developing the five-year
average rate is to take advantage of Idaho Power
abnormally low effective income tax rate in 2002.The
cause of the low income tax rate was a non-reoccurring
deduction for an accounting method change adopted in the
2909 MACMAHON , D i - Reb
Idaho Power Company
2001 federal income tax return.When I removed the
benefit for the non-reoccurring deduction from the 2002
2910
effective income tax
MACMAHON , Di-Reb 12a
Idaho Power Company
rate and recomputed the five-year average ratio it came
out to 39.19%.This happens to be extremely close to
Idaho Power s federal and state combined statutory income
tax rate of 39.10%.
Mr. Holm stated in his testimony that by using
an average effective income tax rate Staff is "
...
looking
forward instead of backward.Do you agree?
No.By using this five-year hybrid ratio of
income tax expense to pre-tax book income , Staff is
looking backward to seize a portion of a non-reoccurring
flow-through deduction claimed in the 2001 income tax
return and then assumes that it could somehow be repeated
to set future rates.
Is Staff's proposed computation an appropriate
way to compute income tax expense for revenue requirement
purposes in this proceeding?
No.As a theoretical method of reimbursing
lncome tax expense, the Staff's computation bears no
direct relationship to the income taxes a company will
pay in the future , unless every single variable that
produced the ratio in the past five years could somehow
repeat itself in a single year , which is quite
impossible.Staff's approach confuses the basic formula
for computing income tax expense: the income tax base
times the currently enacted income tax rates. TheCommission's approved method has always been to
2911 MACMAHON , Di-Reb
Idaho Power Company
compute the applicable tax base (taxable income) and then
apply the currently enacted income tax rates to that
base.As I have previously stated, Staff's approach
ignores the computation of the applicable tax base and
instead applies a five-year average ratio to the pre-tax
rate case income.This approach (1) ignores what is
uniquely taxable or deductible under current income tax
law it ignores enacted income tax rates, and (3) it(2 )
ignores the distinction between normalized income tax
adjustments and flow-through income tax adjustments
sweeping away years of carefully maintained regulatory
process , principles , and orders.
An example is helpful to illustrate this point.
Assume Idaho Power earns $100 in Year 1 and claims a $5
repair allowance deduction on its income tax return
paying federal income tax of $33.($95 x 35%) The
effective tax ratio is 33.25%, while the statutory tax
rate remains at 35%.
Assume further that Idaho Power makes $150 in year
and claims another $5 repair deduction on its annual
income tax return , paying federal income tax of $50.
($145 x 35%) If the Commission were to use the prior
year s effective tax ratio to reimburse the Company for
its Year 2 income tax expense, the Company would receive
only $49.($150 x 33.25%).The Company would be left
2912 MACMAHON , D i - Reb
Idaho Power Company
short by $0.87 ($50.75 - $49.88).The overall effect of
Staff's approach
2913 MACMAHON , D i - Reb 14 a
Idaho Power Company
when applied within the context of the current rate
proceeding has an effective decrease to revenue
requirement in the millions of dollars.Clearly, this is
a significant issue to Staff's case.
Staff has suggested that blending the rates
between years "
...
provides a more realistic basis for tax
expense over time Do you agree?
As noted above, the effective tax ratio has
relevance only inside a single year , due to its
interdependence upon book income as its denominator.
Since it would be a mathematical impossibility to have a
test year mirror all the conditions that gave rise to the
previous year's tax ratio, let alone five previous years
ratios averaged together , there is no possibility of
accurate or even reasonable income tax recovery.
Mr. Holm also notes that the adjustments that
historically have gone into Idaho Power's calculation of
taxable income can be either stable or change
dramatically, year over year.Mr. Holm concludes that
because of this reality, the Company s effective income
tax rates vary from year to year.This is only half
true.The other half is that book income is also varying
widely from year to year , and as previously noted, has
been generally lower than the test year operating income
due to drought conditions. A low book income with largeflow-through deductions for the
2914 MACMAHON , D i - Reb
Idaho Power Company
method change and repair allowance in the tax calculation
has resulted in unprecedented low tax ratios.
Is Staff's amortization of the Internal Revenue
Service tax deficiency payment appropriate?
No.Staff's proposal is not consistent with
Commission Order 17499 (p. 24) where the Commission
ordered that income tax contingencies would not be
allowed in determining the test year regulatory income
tax expense but that any income tax deficiencies actually
paid in the test year should be included in regulatory
income tax expense.Idaho Power has settled and paid tax
deficiencies in its two previous audit cycles that were
not in test years (1993-, paid in 1998 and 1996-97 paid
in 2000) and has not included these deficiencies in the
2003 test year in accordance with the Commission
previous order.The test year tax expense includes only
the amounts paid in the current test year , at 100%, not
33% .
Would Staff I s hybrid income tax ratio proposal
violate the requirements of the Internal Revenue Code as
it relates to normalization vs. flow-through?
Yes, it would.By applying Staff's five-year
hybrid tax ratio to deferred income taxes , Mr. Holm has
caused the current year change for accelerated
depreciation to be valued at something other than the
2915 MACMAHON , D i - Reb
Idaho Power Company
statutory rate.This violates the normalization
requirement of Internal
2916 MACMAHON , Di-Reb 16a
Idaho Power Company
Revenue Code ~168 (f) (2) .
Please explain the effect of the use of Staff'
hybrid tax ratios on the Company s deferred income tax
balances.
Mr. Holm reduced deferred income tax expense by
using Staff's five-year hybrid tax ratio on the current
year change to temporary differences, while disregarding
the fact that the beginning balance in accumulated
deferred income taxes has been recorded using statutory
income tax rates.Setting aside the resul ting issue of
triggering a normalization violation , another deficiency
in the Staff's proposal is that the accumulated deferred
income taxes would need to be recomputed using the
five-year hybrid tax ratio.Following Staff's proposal
the recomputed reserve for deferred income taxes would
increase the Company's rate base by approximately $53
million as the net deferred tax liability balance would
drop due to the application of the lower rate.
Does Staff's use of a net-tb-gross tax
multiplier that is based upon their proposed five-year
hybrid tax ratio adequately reimburse Idaho Power for the
income taxes it will pay on the new revenue received from
customers?
No.By using the five-year hybrid tax ratio
Staff is assuming that the same ratio of average income
2917 MACMAHON , Di-Reb
Idaho Power Company
tax to average pre-tax book income will apply to the new
revenue deficiency dollars paid by customers.The
federal and state governments will not recognize this
ratio when Idaho Power's income tax returns are filed
that contain these new revenue dollars.Instead, the
governments will apply the statutory income tax rates to
these new revenue dollars.Staff's proposal leaves the
Company far short of the cash needed for its real income
tax liabilities.
Does this conclude your direct rebuttal
testimony in this case?
Yes , it does.
2918 MACMAHON , Di -Reb
Idaho Power Company
open hearing.
(The following proceedings were had in
MR. KLINE:And I do have a couple of
additional questions for Mr. MacMahon , if I could
Madam Chairman.
COMMISSIONER SMITH:Yes, you may.
BY MR. KLINE:
DIRECT EXAMINATION
(Continued)
Mr. MacMahon , were you in the room when
Mr. Holm presented his direct testimony in this case?
CSB REPORTING
Wilder , Idaho
Yes, I was.
This is Staff witness Holm.On redirect
Staff counsel asked Mr. Holm if the Staff would accept or
review any changes that might be necessary to bring
Staff's proposal , income tax proposal , into compliance
with IRS requirements for normalization versus
In your opinion, can the Staff's proposal
be brought into compliance with IRS requirements?
, I don t believe it can.
Could you please explain why?
The Staff's proposal has substituted
statutory rates for - - has substituted an effective tax
ratio based on the prior five years of history for the
flow-through.
2919 MACMAHON (D i - Reb
Idaho Power Company83676
statutory rates that the Company will pay its income
taxes at and that substitution has created a shortfall in
total tax expense.
So in your opinion, can Staff use
statutory rates for deferred taxes and a rate other than
statutory for the flow-through tax expense, for current
tax expense?
, it cannot.Both - - go ahead.
I was just going to say why not?
Okay.Current tax expense and deferred
tax expense are two components simply of total tax
expense and to leave one short while restoring the
deferred tax expense , keeping that intact with the
requirements in the Internal Revenue Code while leaving
the current tax expense short still creates indirectly
the same condition of an insufficient amount of tax
recovery that would be required under the Internal
Revenue Code.
And is this a normalization violation?
Yes, it is.
And could you explain why it would be?
The normalization rules require a legal
minimum of tax expense to be provided in a regulatory
proceeding in order to enj oy the benefits of accelerated
tax depreciation and this legally required minimum has
CSB REPORTING
Wilder , Idaho
2920 MACMAHON (Di-Reb)
Idaho Power Company83676
not been met by the Staff's methodology.
And in your opinion, is there any way that
the normalization rules can be met utilizing the
recommendations that Staff has made for the income tax
proposals in this case?
I do not believe there is any way to
reconcile the two methods.
In response to a question from Staff
counsel on redirect , Staff witness Holm testified that he
had discussed the capitalized overhead method change that
led to the 2002 tax deduction that's been discussed in
this case and he discussed this with personnel at
PacifiCorp and Avista and I believe he indicated that
both PacifiCorp and Avista had told him that they had not
considered handling it the way Idaho Power did.Does
that surprise you that either of those two companies
viewed the method change differently than Idaho Power?
No.Both Avista and PacifiCorp' s primary
jurisdictions are not in Idaho, so their regulatory
treatment, the method under which they would have
recorded this tax method change , would have followed the
normalization requirements that are found in Washington
and Oregon.Idaho has been for many years a flow-through
state with respect to these kinds of adj ustments .
And do you recall, I believe Mr. Holm
CSB REPORTING
Wilder , Idaho
2921 MACMAHON (Di-Reb)
Idaho Power Company83676
testified that he didn't discuss his specific
recommendations in this case with those companies; is
that consistent with your recollection of his
testimony?
Yes , I understand that he did not pose his
methodology specifically with them.
Is there any benefit for the capitalized
overhead method in Idaho Power's 2003 test year?
Yes.The flow-through method in this case
does result in an approximately $5 million reduction to
total tax expense contained in the Company's calculation
in its direct case.
MR. KLINE:That completes my additional
questions and Mr. MacMahon would be available for
cross - examina t ion.
COMMISSIONER SMITH:Thank you.
Do you have questions , Mr. Eddie?
MR. EDDIE:No questions.
MR. PURDY:No questions.
MR. COOKE:No questions.
COMMISSIONER SMITH:Mr. Ward.
MR. WARD:I think I've used up my
allotment, almost.I'll pass.
COMMISSIONER SMITH:I didn't realize
there was a limit.Mr. Miller.
CSB REPORTING
Wilder , Idaho
2922 MACMAHON (D i - Reb
Idaho Power Company83676
MR. MILLER:No questions.Thank you.
COMMISSIONER SMITH:Mr. Richardson.
MR. RICHARDSON:No questions.
COMMISSIONER SMITH:Mr. Budge.
MR. BUDGE:No questions.
COMMISSIONER SMITH:Staff.
MS. NORDSTROM:Before conducting the
cross, Staff would like a break to confer based on the
addi tional direct that the Company has presented.
COMMISSIONER SMITH:That seems entirely
reasonable.Shall we take a lunch break and come back at
1: 15?1: 15.
MS. NORDSTROM:Thank you.
(Noon recess.
CSB REPORTING
Wilder , Idaho
2923 MACMAHON
Idaho Power Company83676