20070320Application.pdf

" ,... ,' ,
, 1
IDAHO~POWER~
An IDACORP Company
I'.
" !. ""
'h'";~1 'J ~,O C '1' LUU, ,j', \ 1-
BARTON L. KLINE
Senior Attorney
\ \',,, " '
, ~~ 1
! '; '::'
,:.c
. --
0, l ",
March 20 , 2007
Jean D. Jewell , Secretary
Idaho Public Utilities Commission
472 West Washington Street
P. O. Box 83720
Boise, Idaho 83720-0074
Re:Case No. I PC-07 -
IN THE MATTER OF IDAHO POWER COMPANY'S APPLICATION
FOR AN ACCOUNTING ORDER CLARIFYING THE ACCOUNTING
FOR FUTURE PENSION OBLIGATIONS
Dear Ms. Jewell:
Please find enclosed for filing an original and seven (7) copies of Idaho
Power Company s Application for the above-referenced matter.
I would appreciate it if you would return a stamped copy of this transmittal
letter in the enclosed self-addressed, stamped envelope.
Barton L. Kline
BLK:sh
Enclosures
o. Box 70 (83707)
1221 W Idaho St.
Boise, 10 83702
BARTON KLINE, ISB # 1526
LISA D. NORDSTROM , ISB # 5733
Idaho Power Company
1221 West Idaho Street
O. Box 70
Boise, Idaho 83707
Telephone: [phone]
FAX Telephone: [phone]
. ,
"" I
" '
lGC,l IJJ\ ;~:O Ph Li= 2l~
\\:"., ;
\Scc i,
: "Jllv,U \ I:. \ '~'
Attorney for Idaho Power Company
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR AN
ACCOUNTING ORDER CLARIFYING
THE ACCOUNTING FOR FUTURE
PENSION OBLIGATIONS
) CASE NO. IPC-07-
APPLICATION
COMES NOW , Idaho Power Company ("Idaho Power" or the "Company ) and in
accordance with the provisions of Idaho Code 961-524, and RP 052, hereby applies for an
accounting order authorizing the Company to: (1) change from accrual accounting to cash
accounting to determine future contributions to defined benefit pension plans; and (2) defer
future defined benefit pension plan contributions and record them as regulatory assets
with ratemaking treatment of such regulatory assets to be determined in subsequent
revenue requirement proceedings. In support of this Application , Idaho Power states as
follows:
This Application is filed pursuant to Idaho Code 961-524 , which authorizes
the Commission to prescribe the accounting to be used by public utilities subject to its
jurisdiction.
Communications regarding this Application should be addressed to:
APPLICATION - 1
Barton L. Kline, Senior Attorney
Lisa D. Nordstrom , Attorney II
Idaho Power Company
O. Box 70
Boise, Idaho 83707
blkine (fY idahopower.com
Inordstrom (fY idahopower.com
Ric Gale , Vice President
Regulatory Affairs
Idaho Power Company
O. Box 70
Boise , Idaho 83707
rqale (fY idahopower.com
BACKGROUND
Idaho Power accounts for defined benefit pension expense in accordance
with Statement of Financial Accounting Standards (SFAS\FAS) 87 Employers Accounting
for Pensions FASB Statement No. 88 Employers ' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits FASB
Statement No.1 06 Employers ' Accounting for Postretirement Benefits Other Than
Pensions and FASB Statement No. 132(R) Employers' Disclosures about Pensions and
Other Postretirement Benefits.
Since the adoption of SFAS 87 in 1986, the Company has filed general rate
cases in 1994 and 2003 that dealt with pension funding issues. Prior to the 1994 general
rate case , Idaho Power recovered defined benefit pension expense based on a 1984 test-
year case.In that case , the allowed costs of $4 961 540 were based on actual
contributions made during the test year and charged to operations and maintenance , net of
known and measurable adjustments. In the 1994 general rate case, the allowed defined
benefit pension expense was based on the accrued 1994 SFAS 87 pension expense of
036 800.
In the 2003 general rate case, IPC-03-, Idaho Power included accrued SFAS
87 pension expense. The Commission Staff recommended that the Commission not allow
the accrued SFAS 87 amount to be included in the Company s revenue requirement. Staff
APPLICATION - 2
stated that its recommended SFAS 87 defined benefit pension expense adjustment "is a
reconciliation between cash and accrual accounting.In other words, although the
Company accrues a pension contribution on its books for financial reporting purposes
Idaho Power did not contribute to the plan for 2003 and therefore did not incur any actual
costs." (Tr, at 1505).The Commission found Staff's proposed adjustment to be
appropriate and removed the accrued SFAS 87 amount from the 2003 test year. However
in its Order directing the removal of the accrued amounts from the Company s revenue
requirement, (Order No. 29505) the Commission did not direct the Company to change to a
cash method to account for defined benefit pension expense.
In a general rate case proceeding decided in 2005 in Case No. UWI-04-
, United Water utilized the SFAS 87 accrual methodology to compute its defined benefit
pension expense. In that case , the Commission determined that using actual cash
contributions, not accrued obligations consistent with SFAS 87 , was the appropriate way to
determine the amount United Water could recover in rates for its defined benefit pension
expenses. (Order No. 29838).
RELIEF REQUESTED
In this Application Idaho Power is seeking clarification that the Company can
account for defined benefit pension expenses on a cash basis rather than the accrual
basis that the Company has used in the past. Commission approval of cash basis
accounting for recovery of defined benefit pension expense will improve the Company
capitalization ratios when the pension expense is deferred until contributions are made
rather than run through the income statement. Idaho Power believes that use of the cash
APPLICATION - 3
basis methodology is consistent with recent Commission ratemaking pronouncements
concerning the recovery of defined benefit pension expense in rates.
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 is also requesting authority to defer future cash contributions it makes to its
defined benefit pension plan and to record these future defined benefit pension plan cash
contributions as regulatory assets. The actual ratemaking treatment of these regulatory
assets would be determined in a subsequent revenue requirement proceeding.
This Application is not requesting current approval of future ratemaking
treatment of deferred expenses associated with the Company s defined benefit pension
plans. The Company is only requesting authority to implement regulatory accounting
practices.
The Company requests that this Application be processed under RP 201
seq.allowing for consideration of issues to be processed under Modified Procedure , i.e.
by written submissions rather than by an evidentiary hearing.
The Company further requests that the Commission use its best efforts to
provide a final order on or before May 1 , 2007.
WHEREFORE , Applicant Idaho Power hereby requests that the Commission issue
its Order authorizing Idaho Power to:
(1 )Account for future contributions to its defined benefit pension plan on a cash
basis.
APPLICATION - 4
(2)Defer future cash contributions to the defined benefit pension plan and to
account for such contributions as a regulatory asset subject to later review and approval
for ratemaking purposes in an Idaho Power revenue requirement proceeding.
In support of this Application Idaho Power has enclosed the direct testimony of Lori
Smith as Attachment 1 and the Company stands ready to present Ms. Smith's testimony in
support of this Application in a technical hearing if the Commission determines that such a
hearing is required.
Respectfully submitted this
("') t\.\.
y of M
Tfk
BARTON L. KLINE
Attorney for Idaho Power Company
APPLICATION - 5
BEFORE THE IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-O7- 67
IDAHO POWER COMPANY
ATTACHMENT
APPLICATION - 6
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR AN
ACCOUNTING ORDER CLARIFYING
THE ACCOUNTING FOR FUTURE
PENSION OBLIGATIONS
Case No. IPC-07-
(j'
DIRECT TESTIMONY OF
LORI SMITH
IDAHO POWER COMPANY
DIRECT TESTIMONY
LORI SMITH
Would you please state your name, business address , and present
occupation?
My name is Lori Smith and my business address is 1221 West
Idaho Street, Boise, Idaho. I am employed by Idaho Power Company as Vice
President of Finance and Chief Risk Officer.
What is your educational background?
I graduated in 1983 from Boise State University, Boise , Idaho
receiving a Bachelor of Business Administration degree in Information Sciences.
In 1999 , I was awarded the designation of Chartered Financial Analyst. I have
also attended numerous seminars and conferences related to utility accounting,
corporate finance and risk related topics.
Would you please outline your business experience?
From 1983 to 1986 , I was employed by Idaho Power Company and
assigned to the Materials Management Department. From 1986 to 1994 , I
served as a Financial Accountant and later as a Budget Accountant. I was
promoted to Business Analyst in 1994. In 1996 , I was promoted to Strategic
Analysis Team Leader. In 2000, I was named Director of Strategic Analysis. In
2003 , I was named Director of Strategic Analysis and Risk Management. In
2004 I was named to my current positions as Vice President of Finance and
Chief Risk Officer.
What are your duties as Vice President of Finance and Chief Risk
Office r?
Lori Smith , Di
Idaho Power
I oversee and direct four distinct areas within Idaho Power
Company. First, Strategic Analysis has the responsibility of regulatory
accounting, maintaining ongoing financial forecasts , performance of due
diligence activities, and development of capital raising strategies. Second
Financial Accounting and Reporting, which has responsibility for the general
ledger, property records, assuring the Company s compliance with Generally
Accepted Accounting Principles (GAAP) and external reporting (Securities and
Exchange Commission and New York Stock Exchange). Third , Corporate Risk
Management has the responsibility of implementing risk management tools
related to credit, market and operational risk along with exploring and
implementing hedging strategies. Last is the Corporate Support Area that is
responsible for developing, monitoring, and updating as appropriate the annual
budget for operating expenses and construction expenditures.
What is the scope of your testimony?
My testimony will describe recent Financial Accounting Standards
Board (FASB) developments that affect how Idaho Power accounts for defined
benefit pension plans. I will also provide information on potential FASB
developments that could affect future accounting for defined benefit pension
plans. I will describe the current regulatory treatment of the cost of the
Company s defined benefit pension plan , and summarize the Company s history
of recovering its defined benefit pension expense in rates. Finally, I will explain
Lori Smith, Di
Idaho Power
what the Company is requesting in this filing regarding the defined benefit
pension expense.
What are the recent FASB developments regarding accounting for
defined benefit pension plans?
Idaho Power accounts for defined benefit pension expense in
accordance with Statement of Financial Accounting Standards (SFAS/FAS) No.
Employers' Accounting for Pensions FASB Statement No. 88 Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits FASB Statement No.1 06 Employers' Accounting
for Postretirement Benefits Other Than Pensions and FASB Statement No.
132(R), Employers ' Disclosures about Pensions and Other Postretirement
Benefits.
The most recent development affecting the Company s accounting for
defined benefit pension plans came in September 2006, when the FASB issued
SFAS 158 requiring Idaho Power to record the net funded status of each of its
retirement and postretirement plans as assets or liabilities on the Company
balance sheet. Under SFAS 158 an asset is recorded for a plan when the
market value of plan assets exceeds the actuarially determined pension or
postretirement projected benefit obligation. A liability is recorded for a plan when
the projected benefit obligation exceeds the plan assets. Under this new
pronouncement, the difference between the amounts reported on the balance
sheet prior to the adoption of SFAS 158 and the amounts now required to be
Lori Smith, Di
Idaho Power
reported as assets and liabilities , or the funded status , should be recorded as an
adjustment to accumulated other comprehensive income (AOCI), net of deferred
taxes.
This changed accounting standard significantly affected the amounts
recorded on Idaho Power s balance sheet related to defined benefit pension
assets and liabilities and AOCI. AOCI is a component of equity on the
Company s balance sheet and is used in regulatory proceedings as a component
in determining Idaho Power s revenue requirement. Adjustments to AOCI in
accordance with the provisions of SFAS 158 would affect this calculation in future
rate proceedings. However, in Order No. 30256 issued on February 27 , 2007 in
Case No. IPC-06-, the Commission allowed the Company to defer AOCI
related to the adoption of SFAS 158 as a regulatory asset or liability thereby
mitigating the affect of SFAS 158 on the Company s capitalization ratios.
Have there been any other recent changes in the law that will affect
defined benefit pension plans?
Tax law changes have affected the contribution amounts. The
Pension Protection Act of 2006 was enacted in August of 2006. For defined
benefit pension plans , the Act revises the calculation of Employee Retirement
Income Security Act (ERISA) minimum funding requirement, increases the
maximum tax deductible contribution employers can make and places certain
restrictions on significantly under-funded plans. The new minimum liability
provisions will go into effect in 2008 and will result in more companies being
Lori Smith, Di
Idaho Power
required to make minimum liability contributions as well as to increase the
amounts of those required contributions. If the Pension Protection Act of 2006
had been effective in 2006 , Idaho Power would not have been required to
contribute for 2006 and would not be expected to be required to contribute for
2007.
Does the Company foresee any future FASB developments that
would affect the Company s accounting for defined benefit pension plans?
The Company is not able to predict possible FASB developments.
However, at this time there are no pending pronouncements with the FASB that
would affect the accounting for pensions and postretirement benefits. There has
been discussion about the possibility of a convergence with international
standards in the future and the FASB is planning for Phase 2 of the
Postretirement Benefits Project. The FASB staff anticipates discussing the plan
for Phase 2 with the FASB at a public Board meeting in the first quarter of 2007.
What is the current regulatory treatment of expenses associated
with Idaho Power s defined benefit pension plan?
Because the Company has prudently managed its pension assets
it has not been required to make cash contributions to its pension fund for some
time. The Company has accrued pension expense in accordance with SFAS 87
but the Company is not currently receiving recovery of SFAS 87 accrued
expenses in its rates.
Why is the Company filing this application?
Lori Smith , Di
Idaho Power
The Company is seeking to resolve two questions regarding rate
recovery of its defined benefit pension expense for the long term.
Since the adoption of SFAS 87 in 1986, the Company filed general rate
cases in 1994 and 2003 that dealt with pension funding issues. Prior to the 1994
general rate case , Idaho Power was recovering defined benefit pension expense
based on a 1984 test-year case. In that case, allowed costs of $4 961 540 were
based on actual contributions made during the test year and charged to
operations and maintenance, net of known and measurable adjustments. In the
1994 general rate case, the allowed defined benefit pension expense was based
on the 1994 SFAS 87 pension expense of $2 036 800.
In the 2003 general rate case, the Commission Staff recommended that
the Commission not allow the accrued SFAS 87 amount to be included in the
Company s revenue requirement. Staff stated that its recommended SFAS 87
defined benefit pension expense adjustment "is a reconciliation between cash
and accrual accounting. In other words, although the Company accrues a
pension contribution on its books for financial reporting purposes , Idaho Power
did not contribute to the plan for 2003 and therefore did not incur any actual
costs." (TR. At 1505). The Commission found Staff's proposed adjustment to be
appropriate and removed the accrued SFAS 87 amount from the 2003 test year.
However, in its Order directing the removal of the accrued amounts from the
Company s revenue requirement, the Commission did not direct the Company to
change to a cash method for accounting for defined benefit pension expense.
Lori Smith, Di
Idaho Power
With this application, the Company is requesting clarification that Idaho
Power can account for defined benefit pension expenses using a cash-basis
methodology rather than the accrual basis that the Company has used in the
past. In addition , if the Commission allows the change to cash basis accounting,
the Company requests authority to defer future cash basis contributions and to
record future defined benefit pension plan contributions as a regulatory asset
with rate making treatment to be determined in subsequent revenue requirement
proceedings.
What benefit does cash-basis accounting for defined benefit
pension expenses provide to the Company and its customers?
Commission approval of cash basis accounting for recovery of
defined benefit pension expense will improve the Company s capitalization ratios
when the pension expense is deferred until contributions are made rather than
run through the income statement.
Is the deferral authority requested in this application similar to the
rate making procedure the Commission recently approved in Order No. 30256?
Yes.
Is this request consistent with other Orders the Commission has
recently issued in regards to defined benefit pension expense recovery?
Yes. In August, 2005 the Commission issued Order No. 29838 in
Case No. UWI-04-4 allowing United Water to increase its charges to
customers. One of the adjustments the Commission made to United Water
Lori Smith, Di
Idaho Power
proposed test year operating expenses was concerning defined benefit pension
expense. In its direct case , United Water calculated its defined benefit pension
expense using the SFAS 87 accrual methodology. However, the Commission
found that:
It is not appropriate for the purposes of regulatory
reporting and rate recovery to use the FAS 87 accrual
calculation. FAS 87 was developed for the purpose of
having a standardized number for reporting pension
liability on a company s financial statements. Given
the speculative nature of the pension contribution
calculation, we find that the goals of regulatory
ratemaking and recovery are best met, under the
facts of this particular case, by allowing recovery of
the actual amounts of cash contributions that United
Water would have been required to contribute to the
plan for test year.
(Order No. 29838 p. 18).
Likewise , in its Final Order on Reconsideration in the United Water case
the Commission explained that they "continue to find the ERISA contribution
amount to more accurately reflect the actual recovery required in rates for
pension expense for the Company . (Order No. 29871 p. 10-11).
If the Commission provides the clarification requested in this
Application would there be any near-term impact on rates?
No. Idaho Power s defined benefit pension plan is adequately
funded at this time. No contributions need to be made in 2007. As a result, if
2007 is selected as a test year, there would be no revenue requirement impact
from this ruling. The Company s revenue requirement would not be affected until
Lori Smith , Di
Idaho Power
such a time as cash contributions are made to the pension plan and a request for
defined benefit pension contribution recovery is filed with the Commission.
What is the impact of this application on future ratemaking
treatment of pension expense?
At this time, Idaho Power is only seeking authority to use cash-
basis accounting for contributions to its defined benefit pension plan and to set
up a regulatory asset for future recovery of cash basis defined benefit pension
plan contributions. Like the Company s recent Application for an accounting
order to comply with SFAS 158 in Case NO. IPC-06-, nothing in this
Application is intended to request any approval regarding future ratemaking
treatment. It is not until the Company begins making cash contributions to the
defined benefit pension plan that Idaho Power would request recovery of these
cash contributions to the defined benefit pension plan in its rates.
Does this conclude your testimony?
Yes, it does.
Lori Smith , Di
Idaho Power