20091109_2757.pdf

DECISION MEMORANDUM 1
DECISION MEMORANDUM

TO: COMMISSIONER KEMPTON
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL

FROM: SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL

DATE: NOVEMBER 6, 2009

SUBJECT: CASE NO. IPC-E-09-29 (Idaho Power)
DEFINED BENEFIT PENSION EXPENSE – RECOVERY MECHANISM

On October 20, 2009, Idaho Power Company (Idaho Power; Company) filed an
Application with the Idaho Public Utilities Commission (Commission) requesting approval on or
before February 12, 2010 of a mechanism to track and recover annually the Company’s defined
benefit pension expenses. The Application does not seek current approval of future expenses
associated with the Company’s qualified defined benefit pension plan, nor is it requesting that
current rates be changed at this time.
BACKGROUND
Idaho Power’s defined benefit pension plan was established in 1943 and continues as
part of the Company’s total compensation package for eligible employees. As of January 1,
2009, Idaho Power had 2,085 active employees in the plan and a total of 3,533 plan participants.
In 1986, the Company adopted Statement of Financial Accounting Standards (SFAS)
87. That Standard addresses pension funding issues from an accrual perspective in an attempt to
better match the compensation cost of an employee’s pension benefits with the time period over
which the employee earns those benefits and to provide for greater comparability between
companies from year to year. Prior to the adoption of SFAS 87, pension expense was based on
the amount a company chose to contribute to its plans during the year. Since the adoption of
SFAS No. 87 in 1986, the Company has filed general rate cases in 1994 and 2003 that dealt with
pension funding issues. With the Company’s 1994 general rate case filing, the Company
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included in test year O&M expenses pension costs based upon the SFAS 87 accrual perspective
rather than cash contributed to the plan. The amount approved was approximately $2 million per
year.
In its 2003 general rate case, Case No. IPC-E-03-13, Idaho Power again included in
its test year defined benefit pension plan expense derived from the accrual methodology
provided for in SFAS 87. The Commission Staff recommended that the Commission reject the
accrued SFAS 87 amount to be included in the Company’s revenue requirement because the
Company did not have any actual cash contribution requirements during the test year. The
Commission in Order No. 29505 denied any recovery of defined benefit pension expense.
In 2007, Idaho Power filed an application with the Commission (Case No. IPC-E-07-
07) seeking clarification that the Company could expect to recover pension costs based on cash
contributed to the plan and account for defined benefit pension expenses on a cash basis rather
than the accrual basis that the Company had used from 1994 until 2003. In conjunction with the
Company’s request for clarification of its authority to utilize cash basis accounting for recovery
of defined benefit pension expense, the Company also requested authority to defer future cash
contributions it would make to its defined benefit pension plan and to record these future defined
benefit pension plan cash contributions as regulatory assets.
On June 1, 2007, the Commission issued Order No. 30333 authorizing the Company
to account for its defined benefit pension expense on a cash basis, and to defer and account for
accrued SFAS 87 pension expense as a regulatory asset. As part of its Order, the Commission
acknowledged that it is appropriate for the Company to seek recovery in the Company’s revenue
requirement of reasonable and prudently incurred defined benefit pension expense based on
actual cash contributions. To date, the Company has made no cash contributions and therefore
has not made a request for recovery. The Commission found it reasonable for Idaho Power to
defer the expense associated with the pension plan cash contributions and record them as a
regulatory asset. The Commission also stated “when the Company’s actuaries notify the
Company of Employee Retirement Income Security Act of 1974 (ERISA) minimum funding
requirements, the Company can evaluate the circumstances for ratemaking purposes and make a
filing requesting ratemaking treatment, if needed.”
Idaho Power’s actuary has informed the Company that a contribution is required for
the tax year beginning January 1, 2009. The required contribution will be $5,418,662 if paid by
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October 15, 2009, but if not paid by October 15, 2009, interest will accrue until the extended due
date for Idaho Power’s federal income tax return of September 15, 2010. The Company did not
make an October 15, 2009, payment.
TRACKING MECHANISM
The requirement to make cash payments, Idaho Power contends, is expected to
continue over the next several years, but may vary dramatically from year to year. Therefore, the
Company requests authorization to implement a defined benefit pension expense tracking
mechanism that has similar components to those of the Power Cost Adjustment (PCA)
mechanism. That is, the proposed mechanism would include a forecast component and true-up
component.
As reflected in its Application, the Company would recover through rates its
forecasted annual cash payments toward defined benefit pension expense based upon an actuarial
determination of those anticipated required contributions. Each year, the Company would
compare the revenue collected through the tracking mechanism’s forecast component rate to the
actual cash contributions to defined benefit pension expense during the year. Any difference
would be either refunded or collected from customers over the subsequent 12-month period in
the true-up component. The Company recommends that a carrying charge equal to the
Commission-approved interest rate for deposits be applied each month based on the balance in
the regulatory asset account.
The Company proposes a March 1 through February 28 (February 29 in leap years)
annual test period with rate adjustments becoming effective each June 1. The Company
proposes to make an annual filing under the tracking mechanism on or before April 7 of each
year with the associated rate adjustment effective June 1.
Idaho Power requests that it be allowed to recover its defined benefit pension expense
as a percentage rate applied to all base revenue in a manner similar to the Energy Efficiency
Rider, Schedule 91. Attachment 1 to the Application contains the Company’s proposed
Schedule 53 detailing the purpose and applicability of the proposed tracking mechanism.
ACCOUNTING TREATMENT
In order to qualify for deferral, SFAS 71 requires that a utility be able to demonstrate
that “future revenues will be provided to permit recovery of the previously incurred cost.” In
order to meet the conditions for deferring pension costs under SFAS 71, some form of a
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mechanism must be in place that assesses whether the actual costs during the recovery period
exceeded the amount in rates, tracks any shortfall or excess, and adjusts rates accordingly.
Idaho Power believes that the proposed tracking mechanism would meet that
requirement. Absent such a tracking mechanism, inclusion of pension contributions as test year
expenses in a general rate case will most likely cause pension expense to become ineligible for
deferral under SFAS 71. Derecognition of its deferred pension expense regulatory asset would
result in serious negative consequences to Idaho Power. At a minimum, the Company contends
it would be forced to write off the $33 million balance of deferred pension expense (as of
September 30, 2009). Idaho Power’s equity would also likely decrease by $92 million in
addition to the retained earnings impact of derecognizing the regulatory asset for deferred
pension expense. Both of these accounting changes could have negative impacts on customers.
The Company’s Application is accompanied by the supporting testimony of Company
witnesses Timothy E. Tatum, Manager of Cost of Service in the Pricing and Regulatory Services
Department, and Ken W. Peterson, Corporate Controller.
COMMISSION DECISION
Idaho Power recommends that its Application be processed pursuant to Modified
Procedure, i.e., by written submission rather than by hearing. Reference Commission Rules of
Procedure, IDAPA 31.01.01.201-204. The Company requests that the Commission use its best
efforts to provide a final Order on or before February 12, 2010, so that the first forecast filing can
be prepared before April 7, 2010. Staff is still assessing the Company’s Application, yet concurs
with the recommended procedure. Does the Commission find Modified Procedure to be
preliminarily acceptable in Case No. IPC-E-09-29?

Scott Woodbury
Deputy Attorney General

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