20040220Holm Direct.pdf

RECEIVED
2004 February 20 PM 4:59
IDAHO PUBLIC
UTILITIES COMMISSION
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS INTERIM
AND BASE RATES AND CHARGES FOR
ELECTRIC SERVICE.
) CASE NO. IPC-O3-
DIRECT TESTIMONY OF ALDEN HOLM
IDAHO PUBLIC UTILITIES COMMISSION
FEBRUARY 20, 2004
Please state your name and business address for
the record.
My name is Alden Holm.business address is
472 West Wa street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed the Idaho Public utili ties
Commission (Commission) as a senior auditor in the
accounting section.
What lS your educational and professional
background?
ed from Boise state Universi in 199
wi th a B. A. degree in Accounting.In 1998, I completed
a Masters Degree in Public Administration from Boise state
Uni versi ty.Prior to joining the Commission Staff in
2000 , I worked for two years as an accountant at the Boise
Metro Chamber of Commerce and two years as an accountant
at Roc Mountain Audio Visual, Inc.I have attended the
annual regul es program sponsored by the
National Association of Regul utili ties Commissioners
(NARUC) at Michigan State University.I am also a member
of the Finance and Accounting Subcommittee of NARUC.I am
a Certified Public Accountant licensed in the state of
Idaho.
What is the purpose of your testimony in this
pro
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
I am responsible for overseeing the Commission
Staff'(Staff) audit of Idaho Power Company (Idaho Power)
and the 2003 test year.I will present many of Staff'
revenue rement adj ustments and I have
Staff's summary revenue requirement exhibits.I am
Staff's main revenue requirement witness so I will address
any revenue requirement issues not addressed elsewhere.
My testimony outlines Staff's proposed
adjustments to Idaho Power s revenue requirement as filed
in this case.The adjustments can be broken into four
maln categories ~ a review of Idaho Power s proposed test
year and additions to that test year, salaries and
incentive pay, income taxes, and other adjustments.
will discuss each of these items individually.
What exhibits are you sponsoring?
I am sponsoring Staff Exhibit Nos. 101 through
107.These exhibits outline Staff's proposed revenue
rement and ustments to Idaho Power s proposed
test year.
will you please reVlew Staff Exhibit No.1 01 ?
Certainly.This exhibit highlights Staff'
revenue requirement calculations.The first page is the
Table of Contents for Staff Exhibit No. 101, identifying
each schedule in the exhibit.Schedule 1 shows the
overall revenue Staff witnessrement for Idaho.
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
Kei th Hessing will address the jurisdictional separation
study.
The total Idaho revenue requirement proposed by
staff is $498,758,249.Thi s re res an overall base rate
lncrease of $14,796,880 or 3.Due to the timing of
this case, some of the adjustments were finalized after
the cost of service, allocation to classes and rate design
studies were essentially complete.Therefore, a revenue
requirement of $499,161,903 resulting in a revenue
increase of $15,200,534 and a 3.average lncrease In
rates was utilized for these studies.The differences do
not change the policy positions taken by Staff witnesses
Hessing and Schunke.Staff recommends these changes be
incorporated, if accepted, by the Commission in its final
order in this case.
Did you prepare an exhibit that shows how your
calculation of the revenue requirement was made?
Staff it No. 101 shows how the systemYes.
revenue requirement was calculated.Schedule 1 of the
exhibi t shows the calculation of the overall system and
Idaho revenue requirements using Idaho Power s proposed
test year , Staff adjustments, Staff's proposed rate of
return, and Staff's recommended distribution of costs and
revenues between Idaho and the other jurisdictions.The
rest of the schedules in Staff it No. 101 the
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
details supporting Schedule Those schedules show the
total amount per Idaho Power s books using the actual and
forecasted test year as filed in Column A, any Idaho Power
normaliz ustments in Column B, Idaho Power
annualizing adjustments in Column C, Idaho Power s known
and measurable adj ustments in Column D , other adj ustments
in Columns E, and Staff's proposed adjustments in Column
The totals in Column G transfer over to the
appropriate place in Schedule
PROPOSED TEST YEAR AND IDAHO POWER ADDITIONS TO THE TEST
YEAR
Please explain how Idaho Power presented its
2003 test year.
Idaho Power has proposed a test year based on
six months of actual expenses and revenues (January 2003
through June 2003) and six months of forecasted or
budgeted revenues and expenses (July 2003 through December
2003) .Idaho Power states that s test year lS
appropriate because it provides the most current
information and allows Idaho Power time to better split
out transactions between companles affiliated with
IDACORP , Inc.(IDACORP) .However , the 2003 test year
chosen by Idaho Power limits customer sharing of a
substantial benefit Idaho Power received dur 2002 due
to a si ficant tax adjustment scussed in
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
LaMont Keen s direct testimony, page 26 , lines 1-5).Use
of the 2003 forecast months also limits the ability of
staff and the other parties to review actual amounts
during the fourth er, specifically December and year-
end adjustments, before filing testimony in s case.
Did the parties to this case discuss the test
year and its complications?
At the prehearing conference, Idaho PowerYes.
represented that it would allow the Commission Staff to
review the actual data and present updated information on
a supplemental basis if necessary before the Commission
made its I decision.Staff will continue to
data and recommend changes as necessary.
Please explain Staff's changes to Idaho Power
proposed test year.
As part of our proposed revenue requirement
Staff has adjusted Idaho Power s test year to reflect
actual non-ope rat revenues, expenses and rate base
amounts through November 2003 with a forecast for December
2003.This change represents a benefit to customers of
about $6.5 million because even though the rate base
accounts increased slightly, the actual expenses were
significantly less than the forecasted amounts and the
other revenues were Sl ficant y higher.
Staff did not rece actual account totals for
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
December 2003 in time to fully audit and incorporate the
actual figures in our testimony and exhibits.Because
Idaho Power s forecast through November 2003 was
overstated about $1.3 million per month, Staff has
adjusted the December 2003 revenue and expense forecast by
the average amount each account was over- or understated
in previous monthly forecasts.This forecast adjustment
resul ts in a revenue requirement decrease of an additional
$1.3 million.Staff will review the impact of the
December actual financial amounts as this case continues.
IDAHO POWER'S PROPOSED TEST YEAR ADJUSTMENTS
Based on your ew of Idaho Power s proposed
test year adjustments, what does Staff recommend regarding
each proposed adjustment?
The Commission Staff has placed Idaho Power
proposed adjustments into three categories.First, there
are some adj ustments Staff accepts as reasonable.Second,
there are ustments proposed by Idaho Power that have
meri t, but for a variety of reasons require a
modi fica tion.Finally, there are proposed adj ustments
that Staff does not accept.I will discuss each
adjustment category and each adjustment individually.
Idaho Power-Proposed Adjustments That Should Be Adopted
Which Idaho Power adjustments does Staff
recommend the ssion adopt?
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
staff recommends the Commission adopt the
following six Idaho Power adj ustments:
The first Company adjustment relates to
general advertis expense in Account 930.This
account contains expenses relating to advertising and
image enhancement including, the advertisements promoting
Idaho Power s need for a rate increase that aired last
year.Idaho Power has removed all the 930.expenses from
the rate case so that customers will pay for none of these
items.staff supports this reduction of $452,109 as
reasonable and necessary.
Idaho Power makes an adjustment for a 2002
prescription drug expense that was booked during 2003.
This amount was appropriately removed after Idaho Power
was billed late and posted the amount during 2003.staff
accepts the adjustment of $280,107 to reduce 2003 test
year expenses.
Idaho Power makes an adjustment of $728,766
to Account 182 for the incremental security costs that it
deferred as a result of Order No. 28975 , Case No.
IPC-E-01-41.staff witness Leckie testifies to these
costs in greater detail.
There are items relating to the Prairie
Power Acquisition Adjustment that continue to be
amorti zed.Idaho Power proposes to reduce rate base by
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
$422 264 for this adjustment.staff witness Leckie will
further discuss this issue in his testimony.
staff accepts the adjustment relat to the
addi t onal Cable One revenue of $ 346, 1 71.Idaho Power has
added the amount to the test year to replace a billing
that was missed during the year 2003.
staff witness Leckie will discuss the Asset
Retirement Obligation adjustment proposed by Idaho Power.
This adjustment requires $106 million be added to
accumulated depreciation and $1.58 million be removed from
rate base to reverse the effects of Idaho Power
implementation of statement of Financial Accounting
standards (SFAS) No. 143 , Accounting for Asset Retirement
Obligations.Idaho Power is required to implement SFAS
143 in order to comply with Generally Accepted Accounting
Principles but not for ratemaking purposes.Therefore,
this adjustment appropriately reverses the effect of the
SFAS 143 Mr. Leckie.lementat scussed
Idaho Power Proposed Adjustments That Should Be Changed
Which Idaho Power adj ustments have merit but
should be attributed a different dollar amount than that
proposed by Idaho Power?
The following seven Company adjustments need to
be revised.These adjustments are summarized on Staff
t No. 102, Schedule
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
The first adjustment relates to an increase
in operating payroll for known and measurable changes.
Idaho Power proposes to increase the payroll expense
$2,913,the ected December 2003 payroll to
forecast the salary expense through 2004.staff supports
this adjustment if the actual December 2003 payroll amount
is used instead of the proj ection.By using the actual
December amount, Staff reduces the adjustment to $860 590.
This is discussed in greater detail later in my testimony
on page 24.See line 1 of Staff Exhibit No. 102, Schedule
Schedule 2 of Staff Exhibi t No. 102 des
addi tional details.
Idaho Power also proposes to increase its
operating expense by $2,241,595 for forecasted general
salary increases during 2004.Once again , the original
adj ustment was based on the forecasted payroll amount.
Staff would support this adj ustment if it were based on
the actual December payroll tead of the forecasted
December payroll.Staff proposes to reduce the adjustment
to $2 124 920.This is also discussed later in my
testimony under the Salaries and Incentive Pay section on
page 25.See Staff Exhibit No.1 02 , Schedule 1 , line 2
and Schedule 3 for calculation details.
2003, Idaho Power filed Case No.
IPC-E-03-7 to its tion rates for its plant.
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
Idaho Power filed this rate case based on the depreciation
rates that it requested in that case.Staff and the other
parties in the Case No. IPC-E-03-7 have subsequently
reached a s ation that was the Commission
in Order No. 29313.Staff recommends accepting the
depreciation expense change, but proposes that the change
be based on the stipulated rates approved by the
Commi s s ion.This change will result in a decrease to
accumulated depreciation of $2,205,647 and a decrease to
depreciation expense of $4,411,294 from Idaho Power
orl I fil See Staff Exhibit No.1 02, Schedule 1,
lines 3-4, and Schedule 4, for calculation details.
Idaho Power requests recovery of $4 953 for
intervenor funding payments made to the Land and Water
Fund of the Rockies related to Case No. IPC-E-01-13 on
Demand Side Management.In addition, Idaho Power requests
recovery of another $5,335 it paid to the Idaho Irrigation
rs Associat dur 2003 in the Power Cost
Adjustment, Case No. IPC-E-03-5.It is not reasonable for
Idaho Power to be allowed recovery of these entire amounts
in the test year as if they occur each and every year
until the next rate case.Instead, Staff proposes
recovery of a yearly amortization of $2,017 over five
years to avoid over-recovery.will discuss this
adjustment in greater det I later in my test
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
pages 35 and 36.See Staff Exhibit No.1 02 , Schedule 1
line
The next Idaho Power adj ustment removes some
membersh and contributions Idaho Power has determined
to be unreasonable based on past Commission decisions.
These memberships include the Idaho Mining Association
the Idaho Water Users Association and the Wyoming
Taxpayers Association.The contributions removed were for
Kenneth Berain and a company called Global Insight in the
amoun t 0 f $ 2 8 , 384 .Staff supports this adjustment and
recommends that additional cont ibutions in the amount of
$322,177 also be removed.Staff witness English will
discuss the additional items Staff is recommending for
removal.See Staff Exhibit No.1 02, Schedule 1, line
Idaho Power s American Falls bond interest
adjustment increases the variable interest rate amount to
be included in rates based its forecast of increased
interest rates.actual rest rate trends, Staff
recommends the amount be reduced by $29,419 instead of
increased by $297 436 as requested by Idaho Power.Staff
witness English discusses this adjustment in his
testimony.See line 7 of Staff Exhibit No.1 02 , Schedule
Staff witness Leckie will discuss Idaho
Power s proposed adj ustments that relate to the known and
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
measurable changes to physical plant of approximately
$18.4 million.Staff recoIT~ends a different methodology
to calculate the known and measurable plant adjustment
that results in an addition to rate base of approximately
$1.4 million instead of the proposed $18.4 million.See
line 8 of Staff Exhibit No. 102 , Schedule
Idaho Power-Proposed Adjustments That Should Not Be
Approved
Finally, which Idaho Power adjustments does
Staff recommend the Commission deny outright?
Staff recommends the Commission the
following proposed adjustments.These adjustments
are shown on Staff Exhibit No. 103.
Idaho Power makes an adjustment for property
and liability insurance as a known and measurable change
during the year 2004.Staff does not support this
adjustment because the amount of the lncrease is not known
and measurable; it y an est of the new policys s
costs that may go into effect sometime during 2004.
addi tion to a price change, Idaho Power states that the
coverage amounts may also change some coverage amounts
may increase while others may decrease.The costs of the
policies are not known at this time; they are simply
estimated.Therefore, Staff removes the $364,014 of
ased costs from Idaho Power s requested
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
revenue requirement.See line 1 of Staff Exhibit No. 103.
The next adj ustment is based on the same
proj ected 2004 increases in liability and property
insurance mentioned above.Because the policies will
expire during 2004 and may be renewed at a higher rate,
Idaho Power suggests that the estimated amount should be
annualized and included in the test year expenses.staff
does not support this adjustment because the amount of the
lncrease is not known and measurable and is simply an
estimate of the new policies that will go into effect
sometime dur 2004.Therefore, these forecasted
increased costs should be excluded.See Staff Exhibit No.
103 , line
The next adj ustment proposed Idaho Power
increases the amount of incentive pay from zero to
$5,114,821.After December 2003, Idaho Power updated its
proposed incentive payment amount to $4,837,358 based on
the actual year-end payroll amount tead of the
forecasted amount.Staff does not support this adjustment
because it is inappropriate to establish and charge
customers for incentive pay based primarily on the returns
earned by shareholders.This incentive pay format can be
used to increase shareholder returns at the possible
expense of ratepayers.Staff also believes Idaho Power
employees are compensated adequately with the base salary
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
and benefits.I will discuss the salary and incentive pay
in detail below.See line 3 of Staff Exhibit No.1 03.
Idaho Power proposes an operat penslon
expense increase of $2,170,163 to the test year.Staff
does not support s adjustment because we do not believe
Idaho Power should collect funds from customers when it
does not make contributions to the pension fund.staff
wi tness English will discuss this adj ustment.See line
of Staff Exhibit No.1 03.
Staff witness ish will also address the
proposed d pension ustment of $17,800, 77 Idaho
Power requests to rate base.Staff does not believe Idaho
Power should receive a return on this amount when
customers and market conditions provided the prepaid
expense.See line 5 of Staff Exhibit No. 103.
Finally, Staff witness Leckie will discuss
Idaho Power s annua lZ adj us tmen t .This adjustment
lncreases rate base $19,779,389 and expenses by
$873,129.Staff believes it is not reasonable to collect
this from ratepayers because the adjustment is not
consistent with the thirteen-month average rate base
methodology.See line 6 of Staff Exhibit No. 103.
SALARIES AND INCENTIVE PAY
Did you prepare an exhibit conta
information Idaho Power s salary and benefits
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
package?
Staff Exhibit No.1 04 contains informationYes.
relat to the salaries of Idaho Power employees.Page
has three charts.The fi st chart shows the average Idaho
Power salary since 1996 and the yearly change.The second
chart compares the Idaho Power average salary with the
average salaries of classified employees of the state of
Idaho for two years.Finally, there is a chart that
compares the average employee turnover for Idaho Power
versus classified state employees.
The next three pages f the exhibi are salary
surveys Staff has obtained to use as a comparison for
Idaho Power salaries.The first survey shows the average
salary in Boise Idaho to be $46,386.The second survey
shows the average salary in Boise to be 85.0 f the
national average.Finally, the Department of Labor shows
the average cash compensation to employees to be $17.
per hour or $36,442 per year.While these surveys may not
directly tie to Idaho Power s employees ' salaries, Staff
believes they provide at least some basis for comparison.
Please describe Idaho Power s salary and
benefi ts package for its employees.
Idaho Power has a generous salary and benefit
package compared to the average Boise salary.
to Idaho Power, the purpose of the hi r salary and
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
benefi ts is to attract and retain highly qualified
employees.Idaho Power has been very successful at
employee retention.For example, employee turnover was a
mere 2.comparison, the state of Idaho,dur 2003.
tradi tionally known as a stable employer with excellent
benefi ts, has had turnover rates in the range of
over the last few years.
Idaho Power sets base salaries on the 5
percentile of various salary surveys.The maj ori ty of the
surveys are nationa .That means that the salaries are
mostly based on a national level even Idaho has
tradi tionally been a lower- income state.In addition to
an excellent salary, Idaho Power pays most of the health
insurance benefits for employees.Idaho Power provides
typical paid time off for vacations, sickness and
holidays.It also offers service awards, education and
train benefi ts,ife and disability insurance programs,
an employee assistance plan and a penSlon an fully
funded by Idaho Power without any contribution from
employees.Idaho Power also offers an additional 401 (k)
retirement plan that matches up to of a participating
employee s salary.staff witness English will describe
these two retirement plans In more detail.
Dur 2003, the average base salary of Idaho
Power oyees was $59,173.That compares well to the
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
average salary of $46 386 for a full-time worker in Boise
(htj::.p:J/yvY!1rV~ClL?C::ClJ~~c::QIl1/?Clli:l~Y=~~~~~Y/ClLcl=Ll2E)~?/ttc:::l=-
79 fid- 68 8 6 RANAME-SALARY Real-time salary survey for
Bo se, ID. January 28, 2004 shown as Staff Exhibit No.
104, page 2 of 4) and the average salary of $33, 891 for a
classified state of Idaho employee.Change in oyment
Compensa on Sl~plement, Idaho Division of Human
Resources, October 1 , 2003 , page The Idaho Power base
salary does not include any additional amounts paid as
incenti ve pay to employees.Staff has reviewed additional
salary surveys that the average salary for all
workers in the United states $36,442 (Staff Exhibit No.
104 page and that the average salary in Bolse,
Idaho 85.the national average (Staff Exhibit No.
104 , page 3 of 4) .
Did you review salaries and benefits for Idaho
Power s executives?
Idaho Power uses a consultant to prepare aYes.
survey of the cash and benefits that similarly sized
regulated and non-regulated utility companies paid to
their executives.Idaho Power Company pays its executives
a base salary comparable to a 5 percentile of the
comparable companies.Staff believes it is reasonable to
pay executives on a national scale because they are often
ted na ly, even though Idaho Power has promoted
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
most executives internally.In addition , executives that
work for other IDACORP entities have at least a portion of
their salary and benefit costs allocated to the
ate IDACORP entity.This shifts some of the costs
away from ratepayers.
Some executives also have additional
compensation benefits that relate to IDACORP performance
goals.other than the incentive plan discussed below
these additional benefits are appropriately paid
IDACORP or from shareholder funds, not ratepayers.
Staff believes that IDACORP shareholders should pay for
all incent s that are based on IDACORP goals.
Is Staff proposing any adjustments to these
salary or benefit items that Idaho Power pays its
employees or executives?
While the base salary and benefits are veryNo.
generous, they should not be adj usted unless the
decides to allow the s as a
ratepayer expense.If Idaho Power customers pay for the
incentive payments, the total cash compensation to be
included in rates should be reduced to the 5 percentile
ins tead 0 f the 6 percentile (essentially reducing base
pay instead of eliminating the incentive pay) .A fair
overall compensation package does not require both 50
percentile salary and a seven payment to
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
be paid for by ratepayers, especially when the 5
percentile is based mostly on national salary levels.
Idaho Power s Incentive Payments Plan
Please describe the exhibi t you
regarding Idaho Power s Incentive Plan (the Plan)
Certainly.staff Exhibit No.1 05 contains
information regarding the Plan.Page 1 shows the Salary
Structure Adjustments all employees have received since
1995 and the average amounts paid out each year as
incenti ve payments.Page 2 is a memorandum responding to
an audit request and is quoted later in my test
Pages 3-5 contain a letter that went out to all employees
explaining the new incentive plan and the amount of the
Salary Structure adj ustment for 1995.Finally, pages 6-
are taken directly from Idaho Power s Employee Handbook
and explain in greater detail how the Plan works and how
employees will be rewarded under the Plan.
Please descr loyeeIdaho Power s 2003
Incenti ve Plan and its requested recovery amounts.
The Plan was designed to incenti vize employees
to think like IDACORP owners and to provide additional
compensation when IDACORP earnings goals are exceeded.
All designated employees of IDACORP, Inc. and its
subsidiaries, except IDACORP Energy, are eli Ie to
partic in the Plan.The Plan is desi to reward
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
Idaho Power employees with additional compensation when
IDACORP's earnings per share reach a desired amount.
accomplish the Plan s goals, the Plan pays employees an
addi t onal per of their base salary when IDACORP'
earnlngs per share reach certain levels.In other words,
as IDACORP's earnings per share increases, the incentive
pay for employees lncreases.Most employees are eligible
to earn incentive pay from to 15 of their base pay
depending on the earnlngs per share.The percentage range
lS Sl ficantly higher for managers and for executives.
In Idaho Power loyee Handbook,oyees
are encouraged to think like shareholders and make
decisions that are in the best interest of shareholders.
In the section that explains how employees can lncrease
their incentive pay, the Handbook states, Earnings
common stock focuses attention on thinking like an owner. /I
The Incentive Compensation section of the Idaho Power
loyee Handbook,s s In orl I) is also
incl uded as Staff Exhibit No.1 05, pages 6-17.
Can you describe how the incentive pay system
was set up and implemented?
Certainly.According to the information Staff
recei ved from Idaho Power, the incentive payment program
was emented in 1995.To initiate the program, Idaho
Power decided to move from paying oyees base salaries
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
at the 6 percentile to the 5 percentile and use the
difference as incentive pay.In his direct testimony, Mr.
Ric Gale states, "After the incentive was added to the
compensation pac , the benchmark for the base pay was
reduced to the 5 percentile
" .
Ric Gale Direct
Testimony, page 7 , lines 17-19.That implies that
employees had their base salaries reduced so they would
receive the same amount of money when the incentive
payments kicked in.However, when asked for a list of
employees that had their base pay reduced when the Plan
, Idaho Power replied that there were none.
Moreover,
There was never intent to implement anate ft from the 60 Lh to the 5
percentile; as such no employee s pay
was reduced. Rather, employees in
classifications that were significantly
over market had their pay " frozen (i. e. ,
no pay increases of any type) until the
market caught up with actual pay.
IPC response to Staff Audit Request #42 , Meredith
Obenchain, November 17, 2003.See Staff Exhibit No.1 05,
page 2, for the entire response.
In other words, when daho Power states that pay
was placed "at risk," they ly that salaries were
reduced.Ric Gale Direct Testimony, page 7, 1
reality, there were no reductions to any employee
salary.Instead, Idaho Power states that some employees
simply did not get the annual ralses they were used to
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
recei ving.However , during 1995 , the first year of the
incenti ve payments, all employees were given a 2.
General Wage Adjustment to maintain the competi ti veness of
Idaho Power s s lar es to the national salary
survey Idaho Power was using at the time.See Staff
Exhibi t No. 105 , page It seems that the majority of
employees simply received the incentive pay as additional
compensa tion and lost nothing from the switch to the
incenti ve plan.
The amount of incentive pay has varied from year
to year as e per share have varied.The level 0
payment also varles by the employees ' level of management
responsibili ty.Regular employees have received between
of their base salary as incentive payments.and 15
Managers have received between 5.and 20 , and officers
have received between of their base salaries asand 80
incenti ve payments.The CEO has received between 0 and
100 of his base s lary as
In its Application, Idaho Power asks to recover
approximately $5.million for employee incentive pay.
Idaho Power subsequently updated its forecast of incentive
payments to 837 358 instead of the original $5 114 821.
This amount represents the middle level or the expected
target of the possible award and would be approximately
of base pay for most employees.
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
Please explain Staff's recommendation on Idaho
Power s incentive payments adjustment.
As I mentioned above, Staff does not support the
incenti ve s adjustment for two reasons.Firs t,
Idaho Power compensates its employees adequately without
the incentive pay.The base salary and benefits are
already generous when compared to local salaries and
wages.Second, the group that receives the direct
benefi ts resulting from the incentive payments to
employees - the shareholders of IDACORP - should pay for
the incentive compensation.Some of Idaho Power
execut addi tional compensation from IDACORPs rece
that is not passed on to ratepayers.These incentive
payments should be treated like those additional executive
incenti ve plans and paid for by IDACORP shareholders.
Ratepayers do not directly benefit when IDACORP's earning
goals are achieved or exceeded and thus should not fund
s program.
A portion of all incentive payments is
capi talized.In order to remove all the effects of the
incentive pay, an adjustment of $7 741,747 to the rate
base as well as an adjustment of $230 594 to annual
depreciation expense are required to completely remove the
costs associated with the capitalized incentive payments.
In addition to the removal of the talized amounts and
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
the associated depreciation expense, the underlying
$5,114,821 expense Idaho Power requests for recovery in
the 2003 test year should be removed.
You mentioned earlier that Staff had some other
adj ustments to salary expense.Can you describe those
adjustments now?
Certainly.As I mentioned above, Idaho Power
has proposed to increase its salary expense based on the
projected December 2003 amounts.This adjustment takes
into consideration all the salary increases employees have
recei ved dur the year 2003 and annualizes the salary
expense to the 2003 year-end level.Idaho Power proposed
to increase the amount by $2 913 244.staff has reviewed
the actual December 2003 payroll amount and it is
significantly lower than the proj ected amount.We believe
it is reasonable to lncrease the base salary expense using
the actual amount instead of the proj ected amount.
the actual payroll expense, the correct
calculated to be $860,590 instead of the $2,913,244
originally proposed by Idaho Power.Therefore, Idaho
Power s base salary adj ustment should be reduced by
052 654.See Staff Exhibit No.1 02 , Schedule 1 , line
1, and page 2, for calculation details.
What is the final adjustment to salaries you
would like to propose?
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
As I mentioned above, the general salary
structure adjustment should be corrected.This adjustment
is based on the annual raise all employees receive at the
end of the year.The amount has traditionally been about
three percent (3 ).Once agaln, the original adjustment
was based on a forecasted payroll amount increased by the
three percent (3 ).This adjustment would be justified if
it were based on the actual December payroll instead of
the forecasted December payroll.However, because the
actual payroll amount of $2,124,920 is less than the
projected amount of $2,241,595, the payroll expens
increase must be less than originally requested.
Therefore, Idaho Power s test year expense should be
reduced by $116,675.See Staff Exhibit No.1 02, Schedule
, line 2 , and page 3 , for calculation details.
INCOME TAXES
Did Staff prepare an exhibit relat to income
taxes?
staff Exhibit No. 106 shows Staff'Yes.
calculations relating to income taxes.Schedule 1 shows
the effective tax rate calculation and the gross-
calculations as proposed by Idaho Power and Staff.
Schedule 2, pages 1-2 show the deferred taxes calculations
proposed by Idaho Power and Staff.Finally, Schedule 3
shows Staff's calculat of the average additional tax
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
assessments.
Please provide an overVlew of Idaho Power
income tax philosophies.
Idaho Powe r emp a group of tax professionals
who are charged with reducing current lncome tax amounts.
The federal tax regulations are complex and allow a wide
variety of deductions that permit companles to push tax
expense from current periods into future periods.The
acceptable methodologies used to calculate the deductions
are not always clear right after the tax laws have been
passed.es exercise some discretion toTherefore,
interpret the laws and maximize deductions in the current
period.Idaho Power appropriately maximizes these
deductions and seeks to utilize all available methods to
push income tax expense into the future knowing that the
Internal Revenue Service (IRS) will ultimately determine
the appropriate deduction calculation methodolo es and
t Idaho Power s fil These ts are conducted
regularly and often result in additional tax payments.
In its present Application, Idaho Power requests
to recover income taxes at statutory rates adjusted for
various items.These items include di fferences between
tax and book amounts,permanent di fferences and regula tory
items.Some these items are fairly stable,while
others can dramatically between years.The result
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
is an effective tax rate that can vary from year to year.
Staff supports Idaho Power s efforts to reduce
its current income tax expense.However, for rate sett
purposes, Idaho Power has the opportuni ty to benefit from
significant swings in income tax expense while withholding
these benefits from customers when choosing its test year.
For example, during 2002, Idaho Power received a tax
benefi t of more than $31 million dollars and booked a
sizeable reserve that could materially benefit Idaho Power
and its shareholders later when the 2002 IRS audit is
final.See LaMont Keen s Direct Test , page 26, lines
1-5.Staff believes rates should be set to better reflect
the benefits and risks of income tax expense fluctuations.
Please describe the tax benefit referred to in
Mr. Keen s testimony.
Certainly.After the terrorist attacks in
September 2001 and the subsequent economic impacts, the
ss and the President passed Ie slation that
allowed certain businesses additional tax benefits.One
of these benefits allowed Idaho Power to allocate indirect
overhead costs to inventory and expense them in the
current period.Idaho Power refiled several returns from
prlor years using the new methodology.This allowed Idaho
Power to collect a refund on taxes paid in prior years and
push tax expense to future dates.As a result of
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
the refiled tax returns, Idaho Power received
approximately $41 million cash during 2002 as a tax
refund.Of that amount, Idaho Power flowed to earnlngs
about $31 million and created a reserve of $10 million to
keep in case of an assessment by the IRS at a later date.
If the IRS approves of the manner Idaho Power calculated
the revised income taxes, it will not assess additional
tax and the 10 million reserve will also be flowed to
earnlngs.Any additional assessment will reduce the
reserve.
Idaho Power continues to calculate its income
tax expense using the same overhead cost methodology
during 2003.This tax benefit of approximately $5 million
provides a benefit to customers during 2003 and is
included in the test year.The amount will continue to
decrease each year, and eventually the lncome tax that was
avoided or refunded will have to be paid back at a later
date.Staff is concerned that Idaho Power has taken the
large benefit for shareholders and used 2003 as a test
year so that it could keep the tax refund for itself while
customers pay the higher taxes now and in the future when
timing differences reverse.
Please describe Idaho Power s calculation for
income tax.
In its test year, Idaho Power uses statutory
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
ra tes to calculate income tax.It then uses the estimated
deductions and additions (including the $5 million for
overhead costs I mentioned above) for 2003 to reduce or
add to income tax expense.
How does Staff propose to calculate the lncome
tax expense?
staff proposes to smooth out the significant
swings in income tax expense by using the average
effective rate over the last five years including 2003.
This allows Idaho Power and its customers to take
advantage of the aggressive tax strate es Idaho Power
uses.It also reduces Idaho Power s ability to game the
test year process to its advantage by keeping the
unprecedented 2002 flow-through tax benefits for its
shareholders and passing through to customers IRS tax
audit payments made in 2003.
If the average effective rate is used, how does
it compare to the rate proposed by Idaho Power?
Over the last f years, the average effective
rate for Idaho Power s above the line income tax expense
has varied dramatically.The federal rate has been as
high as 37.in 2001 and as low as negative 4.
2002, the year of the large tax benefit.Other than 2001,
it has been below the statutory rate of 35 tha t Idaho
Power is request Staff proposes uss case.
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
average rate of 25.24 .This rate smoothes out the
significant tax swlngs in the last five years and provides
a more realistic basis for tax expense over time to use In
the test year for ratema A three-year average would
produce an effective federal tax rate of 22.14 .Al though
Idaho Power is on a three-year IRS audit cycle, these tax
changes and tax rate are not tied to the audit cycle.
staff believes a three-year average weights the lower rate
in 2002 too heavily when the tax benefit results from
changes in refil mult e tax years.The different
time frames and dollar supports us an average
over the year period rather than the three year audit
period to be more representative over time.See Staff
Exhibi t No.1 0 6, Schedule 1, for calculation details.
Did you adjust the state income tax rate as
well?
The state rate has been as high as 10.Yes.
in 2001 and as low as .in 2002.staff proposes use
the average rate over a f year period including 2003 of
62% as opposed to the 5.proposed by Idaho Power.See
Staff Exhibit No.1 06, Schedule 1, for calculation
details.
Does the rate change requlre change
deferred taxes we II?
Yes.adj us ted the test year deferred tax
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
changes using the lower averaged rate.This lower rate
reduced deferred taxes by $352,405.See Staff Exhibit No.
106, Schedule 2, pages 1-2, for calculation details.
I f Staff was so concerned about the large
benefit received during 2002,doesn t Staff propose to
amortize it instead of averaging the tax rates?
Staff considered an amortization of the tax
benefi t, but chose the al ternati ve because amortization
might have required Idaho Power to restate its financial
statements for 2002 and 2003.By us the average
effecti ve tax rate, we are loo forward instead of
backwards.This allows customers to benefit from the
lower effective rate now since they will pay more later as
timing differences reverse.Idaho Power should not have
to restate any financial statements by using Staff'
proposed methodology.
Does chang the income tax rates used in the
test year requlre to the gross-up factor as well?
Staff proposes to use the same rate forYes.
the gross-up factor as that used to calculate the
effective tax rate for the test year tax expenses.Unless
there are extenuating circumstances, it is generally
appropriate to use the same rate for the test year tax
expense and for the gross-up factor because that is the
best representat of tax expense.The gross-up factor
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
is there fore reduced from 1.642 to 1.446.See Staff
Exhibi t No.1 0 6, Schedule 1, for calculation details.
Do you have any other adjustments relat
income taxes?
Another area that concerns Staff relatesYes.
to the IRS audits I mentioned above.These tax audits can
often result in additional tax payments made by Idaho
Power.By its choice of test year , Idaho Power can
propose to pass the costs associated with additional tax
assessments to customers while enjo the benefits of
the lower taxes in other periods.In this rate case,
Idaho Power is proposing to include in the revenue
requirement $2.9 million dollars of additional tax
payments relating to tax years 1998-2000.These tax
payments associated with audited tax years need to better
match the tax time frames for the audited years when the
cost is included in rates.Customers should not be
red to pay the I tax s when they
not oy the tax benefit in rates.Idaho Power knows
when it will be audited and evaluates the total revenue
requirement shortfall including the additional tax
payments in its choice of the test year.
To more fairly match tax benefits and post-audit
payments, Staff proposes to average the additional
assessments in a manner similar to that used for the
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
effecti ve tax rates.This will continue to encourage
Idaho Power to pursue aggressive tax positions and allow
customers and Idaho Power alike to benefit.Because the
IRS audits Idaho Power tax years every third year, with
any large assessments appearing every three years, Staff
proposes to average the assessments over three years.
This will smooth out the additional payments for both the
customers and Idaho Power.staff also proposes to average
the additional state income tax payments over three years.
By averaging out the additional payments, Idaho Power
will not lose its incen ti ve to fi Ie its income taxes
aggress ly but will share benefi ts ~ not just additional
payments - with ratepayers.In order to effect this
adjustment, $1,960,529 should be removed from federal
income tax test year expenses and $ 55 , 846 should be added
to the state income tax amount Idaho Power requests to
recover for the additional tax assessments.See Staff
it No. 106, Schedule 3, for tional calculation
details.
OTHER ITEMS
Do you have any other adjustments to Idaho
Power s test year?
During the year 2003, Idaho Power hadYes.
three unusual cases before the Commission that were
in nature and not likely to reoccur in the near
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
future.In addition to utilizing internal Idaho Power
employees, each of these cases required the use of outside
consul tants.
The first case I would like to address is the
depreciation expense case (IPC-E- 03- 7) .This was the
first depreciation review since Idaho Power s last rate
case approximately ten years ago.In this case, Idaho
Power hired a depreciation expert at a cost of $21 772
(Staff Exhibit No. 107, line 1).In Case No. IPC-E-03-
staff recommended and the parties accepted ation
that Idaho Power file another cia tion in five
years to ew those rates again.
The second case relates to Staff's investigation
of the IDACORP Energy- Idaho Power relationship
(IPC-E-01-16) .This case has been complicated and lengthy
but the issues involved are expected to be decided soon.
On February 17, 2004, a Joint Motion and st ation were
filed with the s case to an end.
For this case, Idaho Power hired a consultant resulting in
a cost of $53 228 during 2003 (Staff Exhibit No. 107 , line
2) .
Finally, Idaho Power has incurred expenses
relating to the current rate case (IPC-E-03-13).Dur ing
2003, Idaho Power paid its expert witness, Dr. Avera,
$24,720 for his work (Staff it No. 107, I 3) .
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
All three of these cases are unusual in that
they are infrequent and will not occur during a typical
year.However, Idaho Power has included these additional
costs in its pro forma expenses for the 2003 test year.
It is not reasonable to assume that these cases will be
repeated next year or each year in the near future.
Therefore, the costs should not be reflected in a single
year in their entirety as an annual cost.staff proposes
to amortize the expenses associated with these cases over
fi ve years instead of expens them all at once.This
will allow Idaho Power to recover the tures and
customers to pay these costs only once instead of the
total amount year after year until the next rate case.
staff proposes removlng four-fifths of the outside
consul tants expense associated with each case to reflect
this amortization.That results in a reduction of $79,7 6
to test year expenses.See Staff Exhibit No.1 07 for
calculat on details.
Did you review the ustment for recovery of
intervenor funding?
Idaho Power has requested recovery ofYes.
956 for intervenor funding paid during 2003 to the Land
and Water Fund for the demand side management review case
(IPC-E-O -16).Idaho Power s proposed recovery
methodology would occur dur 004 and Idaho Power would
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
continue to recover that amount every year after that
until the next rate case.Staff proposes that the
Commission allow Idaho Power to recover these costs over
five years.This amortization allows Idaho Power to
recover one-fifth ($991) of the expense in the test year.
Idaho Power was also ordered to pay intervenor
funding to the Idaho Irrigation Pumpers Association, Inc.
in the amount of $5 335 for its involvement in the 2003
PCA case (IPC-E-03-5).This case ended after Idaho Power
had finalized its rate case fil and was not included in
the test year.staff proposes that the Commission allow
Idaho Power to recover one-fifth of the amount ($1,067) in
the test year.This adjustment will allow Idaho Power to
recover its expense once rather than year after year until
the next rate case.The net effect of these two
adj ustments is to reduce the revenue requirement
$8,067.
In the al ternat , if the sslon wishes to
grant a faster recovery of these two amounts, the 2004
Purchased Cost Adjustment (PCA) surcharge could be used as
the method to recover these intervenor costs.This would
allow Idaho Power to quickly recover these costs and only
recover them once.
Is there any other item you would like to
discuss?
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
I have received many questions fromYes.
customers and others regarding the relationship between
Idaho Power and IDACORP.In every audit, Staff spends a
great deal of time t transactions between the
utili ty and its affiliates.In general, we were pleased
that Idaho Power has implemented a system of tracking the
flow of goods and services between IDACORP and its
affiliates.The accounting system set in place seems to
allocate costs and benefits between companies in a
reasonable and effective manner.The executives appear to
make an honest effort to appropriately assign their time
to the different companies.For example during 2003, CEO
Jan Packwood billed almost 86 of hi s time to entities
outside of Idaho Power.That means Idaho Power customers
will currently pay about of his salary.Other
employees use time reporting to allocate time, and
therefore salaries and overhead expenses, between
affiliates.Idaho Power conducts a s each year
determine if all costs are being allocated appropriately
to its affiliated companies.These costs include
lnsurance expense, special proj ects, and purchases from
affiliates.Staff will continue to review the Idaho Power
Company - IDACORP relationship and all affiliate
transactions in every audit and rate case.
s conclude your rect testDoes
CASE NO. IPC-03-02/20/04 (Di)HOLM , A.Staff
proceeding?
Yes, it does.
CASE NO. IPC-03-02/20/04 HOLM , A.Staff (Di)