HomeMy WebLinkAbout20070503Reply comments.pdf, ,-' '--
IDAHO~POWER~
An IDACORP Company
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BARTON L. KLINE
Senior Attorney
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May 2 2007
Jean D. Jewell , Secretary
Idaho Public Utilities Commission
472 West Washington Street
P. O. Box 83720
Boise, Idaho 83720-0074
Re:Case No. IPC-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 the Reply
Comments of Idaho Power Company 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.
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Barton L. Kline
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Enclosures
O. Box 70 (83707)
1221 W. Idaho St,
Boise, ID 83702
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BARTON KLINE , ISB # 1526
LISA D. NORDSTROM , ISB # 5733
Idaho Power Company
1221 West Idaho Street
P. O. Box 70
Boise, Idaho 83707
Telephone: (208) 388-2692
FAX Telephone: (208) 388-6936
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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-
) REPLY COMMENTS OF IDAHO
) POWER COMPANY
COMES NOW , Idaho Power Company ("Idaho Power" or the "Company ) and
hereby responds to the Comments of the Staff of the Idaho Public Utilities Commission
Staff") filed on April 19 , 2007.
THE REASONS FOR THE COMPANY'S FILING
Generally Accepted Accounting Principles (GAAP) require that Idaho Power
account for defined benefit pension expense in accordance with Statement of Financial
Accounting Standards (SFAS\FAS) 87.
REPLY COMMENTS OF IDAHO POWER COMPANY -
In its 2003 general rate case, IPC-03-, Idaho Power proposed to use
SFAS 87 pension expense as an expense to be recovered in customer rates. The
Commission found that including accrued SFAS 87 pension amounts in rates was not
appropriate and removed the accrued SFAS 87 amount from the 2003 test year. (Order
No. 29505 p. 21). However, in directing the removal of the accrued SFAS 87 amounts
from the Company s revenue requirement, the Commission did not instruct the Company to
change to a cash method to account for defined benefit pension expense. At some point
the future, the Company s actuaries will advise the Company that a cash contribution to its
defined benefit pension plan is needed to comply with Employee Retirement Income
Security Act (ERISA) requirements.
Because the Company is still required by GAAP to treat accrued SFAS 87
amounts as a current expense in its financial disclosure documents and because the
Commission does not allow accrued SFAS 87 expenses to be recovered in rates , the
ongoing accrual of SFAS 87 pension expense and lack of income to offset the expense
accrual creates a mismatch on the Company s income statement, adversely affecting its
capitalization ratios and earnings.
To respond to this mismatch , the Company filed this case to obtain an
accounting order authorizing the Company to (1) account for defined benefit pension
expense on a cash basis; and (2) to authorize the Company to defer the expense
associated with defined benefit pension plan cash contributions and record them as
regulatory assets with actual ratemaking treatment of such regulatory assets to be
determined in subsequent revenue requirement proceedings.
REPLY COMMENTS OF IDAHO POWER COMPANY - 2
To obtain the customer benefits that will accrue if the above-described
mismatch is eliminated , the Commission s order in this case needs to contain language
confirming that defined benefit pension plan contributions are an appropriate item for
inclusion in the Company s revenue requirement and that it is appropriate for the Company
to seek recovery of pension costs in rates based on actual cash contributions to the
defined benefit pension plan.
The Company is not seeking a final ratemaking determination in this case.
The prudency of the Company s cash contributions to its defined benefit pension plan will
be determined in future ratemaking proceedings.
II.
WHERE THE COMPANY AND STAFF AGREE
In its Comments Staff acknowledges that removal of the SFAS 87 pension expense
from the Company s income statement will benefit customers.
It is uncontested that removal of the SFAS 87 pension expense
from the income statement will improve the Company
capitalization ratios , improve the Company s standing with
rating agencies and ultimately benefit customers , presumably
through lower borrowing costs. The amount of the benefit
received by customers is impossible to quantify. However
approving a regulatory asset for the Company s SFAS pension
expense will reaffirm the Company s financial position to rating
agencies and may assist, along with many other factors, the
Company receiving an improved bond rating.
(Staff Comments p. 6).
Both Staff and Idaho Power agree that removal of the accrued SFAS 87 pension
expense from the income statement is desirable and can be accomplished by taking the
steps required by SFAS 71 to properly qualify the accrued expense as a regulatory asset.
The steps required by SF AS 71 are discussed in more detail below.
REPLY COMMENTS OF IDAHO POWER COMPANY - 3
III.
WHERE STAFF AND THE COMPANY DISAGREE
Idaho Power Is Not Seekinq To Recover Accrued SFAS 87 Expenses In a
Manner Inconsistent with Commission Orders.
In its Comments on page 6, Staff acknowledges that allowing the Company to defer
accrued SFAS 87 expense and thereby remove the SFAS 87 pension expense from the
income statement is desirable. However, Staff's Comments indicate a concern that the
Company is acting improperly and attempting to recover accrued SFAS 87 expense (which
the Commission denied in the 2003 rate case) by means of deferral accounting. Staff'
concern is expressed on page 4 of its Comments:
In other words , if the Company s Application were approved
they would be deferring the SFAS pension expense for future
recovery, which is inconsistent with the Commission s intent in
Order No. 29505 that only allowed the Company to recover the
actual amount contributed to the plan during a test year, $0.00.
Staff's concerns are unwarranted. Idaho Power is not seeking to recover deferred
SFAS 87 pension expense in a manner that is inconsistent with prior Commission orders.
This is why Idaho Power did not propose an amortization schedule or request carrying
charges for an SFAS 87 deferral balance. Idaho Power recognizes that over the entire
lifespan of the Company s defined benefit pension program , accrued SFAS 87 pension
expense will match cash contributions made to ensure that the Company adequately funds
its pension program. So long as the Company is permitted to include its prudently incurred
cash contributions to its defined benefit pension program as a part of its revenue
requirement for ratemaking purposes , the Company is made whole and only actual cash
contributions are recovered from customers. This is consistent with Commission Order No.
29838 issued to United Water in Case No. UWI-04-
REPLY COMMENTS OF IDAHO POWER COMPANY - 4
Stated in accounting terms, authorizing the Company to create a regulatory asset
related to cash contributions made to the defined benefit plan would not result in an
increase in the net amount of the Company s regulatory assets. Cash contributions
recorded as a regulatory asset would result in an equal reduction to the amounts recorded
in the regulatory asset related to the SFAS 87 pension expense deferral. The result of that
entry would be a simple reclassification from one regulatory asset to another. Attachment
1 shows how this reclassification would be recorded.
However , as discussed in greater detail below , unless the Commission s order
provides reasonable assurance that cash contributions to the pension program can be
recovered in rates , neither the Company nor the Company s outside auditors could
conclude with reasonable certainty that a regulatory asset has been created and the
above-described resulting benefits of regulatory asset accounting would not be achieved.
Staff's Compromise Will Not Accomplish Its Intended Purpose
Staff proposes an alternative accounting procedure which it described in its
Comments as its compromise proposal. Staff's compromise proposal eliminates the
above-described mismatch by removing SFAS 87 pension expense from the income
statement by deferring the accrued expense and creating a regulatory asset. To this point
Staff's compromise proposal is identical to Idaho Power s proposal. However, Staff'
compromise proposal then requires that future cash contributions made to cover pension
obligations be credited against the accrued SFAS 87 regulatory asset. It appears that
under Staff's compromise proposal , future cash contributions made to cover pension
obligations, even cash contributions required by ERISA compliance , would not be included
in Idaho Power s revenue requirement and would only act as an offset against accumulated
REPLY COMMENTS OF IDAHO POWER COMPANY - 5
deferred SFAS 87 expenses. If this interpretation of Staff's compromise proposal is
correct , then Staff's compromise proposal would violate SFAS 71 and the deferred SFAS
87 accruals would not qualify as regulatory assets and could not be removed from the
Company s income statement.
As Staff correctly noted on page 4 of its Comments, SFAS 71 provides that before
costs which would otherwise be expensed can be capitalized or deferred , it must be
probable that the regulating entity will allow recovery of prudently incurred amounts
future rates. (Emphasis added). Unless the Company is permitted to include the cash
contributions it makes to cover its pension obligations in its revenue requirement for
ratemaking purposes , Staff's compromise proposal will not succeed in accomplishing its
stated goal of removing the SFAS 87 regulatory asset from the Company s income
statement. As previously noted , failure to accomplish this goal will deny benefits to
customers.
Staff's Opposition To Deferral of Cash Contributions Is Unwarranted
Staff opposes the Company s request that the Commission authorize the Company
to defer future cash contributions to cover ERISA-required pension obligations. (Staff
Comments p. 5). Staff's Comments indicate a misunderstanding of how cash pension
contributions are determined and paid.ERISA requirements drive the Company
obligation to make cash contributions to its defined benefit pension plan.ERISA
requirements can force pension contributions to be made in a very "lumpy" fashion.
Depending on annual investment performance projections and actuarial assumptions of
future pension obligations, required contributions can vary considerably from one period to
another. The dollar amount of contributions and the timing of when contributions will be
REPLY COMMENTS OF IDAHO POWER COMPANY - 6
required are not "smooth" or predictable and the contributions are mandated by federal law.
As a result, Idaho Power believes that the Company legally-required pension
contributions are the types of unpredictable expenses for which deferral accounting is
appropriate. Commission acceptance of Staff's position would leave the Company
exposed to non-recovery in rates of actual cash contributions that federal law requires
Idaho Power to make to its defined benefit pension plan.
The Company is not requesting a determination by the Commission in this case of
either a carrying charge rate or an amortization schedule for any deferred expenses
associated with cash contributions to the defined benefit pension plan. As noted in the
Staff's Comments, it may be several years before the Company is required to make a cash
contribution. When a cash contribution is required , the Company will file for an accounting
order to determine an appropriate carrying charge rate and amortization period for the cash
contribution.
The Company is not seeking to recover more than its cash contributions. It is
seeking a deferral of expense which would comply with SFAS 71 and create a regulatory
asset. If the Commission concurs that it is reasonable to assume that the Company
actual cash contributions to its defined benefit pension plan are reasonable expenses for
ratemaking purposes , then the Company and its outside auditors can reasonably conclude
that it is probable that the Commission will allow recovery of prudently incurred cash
contributions in future rates. This satisfies SFAS 71 and is consistent with the ratemaking
treatment United Water received for its cash contributions to its defined benefit pension
plan in Order No. 29838 issued in Case No. UWI-04-
REPLY COMMENTS OF IDAHO POWER COMPANY - 7
The Company Is Not SeekinQ A Final Ratemakinq Determination
This Case.
The prudency of the Company s cash contributions to its defined benefit pension
plan , particularly any proposed cash contributions that exceed minimum ERISA
requirements, will always be subject to Commission prudency review and approval in
revenue requirement proceedings. Idaho Power is not asking for a determination of those
ratemaking items in this application.
IV.
CONCLUSION
In Idaho Power s 2003 general rate case , the Commission reduced the Company
test year pension plan expenses to zero
, "
reflecting the actual pension plan expenses
incurred by the Company" and "to reconcile cash and accrual accounting." (Order 29505,
21) Idaho Power believes that the Commission s decision to deny inclusion of accrued
SFAS 87 expense in Idaho Power s revenue requirement was not intended to preclude
recovery of pension costs based upon cash actually contributed to the defined benefit
pension plan. The Company s belief in this regard is supported by the Commission
decision to allow United Water to include cash contributions in its revenue requirement.
(Order No. 29838). In this Application the Company requests that the Commission issue
its order:
(1 )Authorizing the Company to account for defined benefit pension expense on
a cash basis; and
(2)Authorizing the Company to defer and account for accrued SFAS 87 pension
expense as a regulatory asset. The Company will never request a carrying charge be
REPLY COMMENTS OF IDAHO POWER COMPANY - 8
applied to the deferral of SFAS 87 balance nor will the Company requesting amortization
for the SFAS 87 regulatory asset created; and
(3)Authorizing the Company to defer expenses associated with cash
contributions to the Company s defined benefit pension plan and account for the deferred
balance as a regulatory asset. A carrying charge rate and amortization period for the
deferred expense associated with cash contributions would be determined in a future
proceeding; and
(4)Finally, the Company is requesting that the Commission include language in
the final order in this case acknowledging that pension plan contributions are a reasonable
part of Idaho Power s cost of service and that it is appropriate for Idaho Power to seek
recovery of defined benefit pension costs based on actual cash contributed to the defined
benefit pension plan. If the Commission can provide such acknowledgement inthe order
then the Company and its outside auditors can reasonably conclude that it is probable that
the Commission will allow recovery of prudently incurred cash contributions in future rates.
This language will allow the Company to satisfy SFAS 71 requirements provide the
customer benefits described in Staff's Comments.
Respectfully submitted this 2- ~l day of May 2007.I~~
BARTON L. KLINE
Attorney for Idaho Power Company
REPLY COMMENTS OF IDAHO POWER COMPANY - 9
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this day of May, 2007, I served a true and
correct copy of the within and foregoing upon the following named parties by the
method indicated below, and addressed to the following:
Donovan Walker
Deputy Attorney General
Idaho Public Utilities Commission
472 West Washington Street
Post Office Box 83720
Boise, Idaho 83720-0074
) U.S. Mail , Postage Prepaid
(X) Hand Delivered
) Overnight Mail
) Facsimile
(X) Email Donovan.walker(Wpuc.idaho.qov
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Barton L. Kline
REPLY COMMENTS OF IDAHO POWER COMPANY - 10
BEFORE THE IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-O7-
IDAHO POWER COMPANY
ATTACHMENT
1823YY Other RA - Pension Plan Contributions 000 000
1823XX Other RA - Deferred Pension Expense
(To record the cash contribution* regulatory asset)
000 000
The contribution amount used is not an actual amount; it is, only being used for
demonstration purposes.