20070525Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DONOV AN E. WALKER
DA TE:APRIL 20, 2007
SUBJECT:IDAHO POWER'S APPLICATION FOR AN ACCOUNTING ORDER
CLARIFYING THE ACCOUNTING FOR FUTURE PENSION
OBLIGATIONS - CASE NO. IPC-07-
On March 20, 2007, Idaho Power Company filed an Application seeking an
accounting order to clarify the accounting for future pension obligations. On March 29, 2007
the Commission issued a Notice of Application and a Modified Procedure with a comment
deadline of April 19, 2007. Commission Staff filed comments partially agreeing ' with and
partially opposing the Company s Application. No other party filed comments. On May 2
2007 , the Company filed Reply Comments. Following the Company s reply, Staff and the
Company met and were able to agree on some mutually acceptable language for the
Commission s consideration.
THE APPLICATION
Idaho Power seeks an Order authorizing it to: (1) change from accrual 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. The Company states that it is not requesting current approval of future
ratemaking treatment of deferred expenses associated with the Company s defined benefit
pension plans, but is only requesting authority to implement regulatory accounting practices.
Idaho Power accounts for defined benefit pension expense in accordance with
Statement of Financial Accounting Standards 87 (SF AS/F AS 87). The Company states that, in
its 2003 general rate case, IPC-03-, the Commission did not allow the accrued SF AS 87
amount to be included in the Company s revenue requirement, however, the Commission did not
DECISION MEMORANDUM
direct the Company to change to a cash method to account for defined benefit pension expense.
Additionally, the Company refers to Case No. UWI-04-04 where United Water utilized the
SF AS 87 accrual methodology, and the Commission determined that using actual cash
contributions, not accrued obligations, was the appropriate way to determine the amount to
recover in rates for the defined benefit pension expense.
ST AFF COMMENTS
Commission Staff reviewed the Company s Application, the accompanYIng
testimony of Lori Smith, as well as the previous Commission Orders referenced in the
Company Application. Staffs comments review additional background regarding the
Company s treatment of pension expense, as well as the present Application and Staff concerns.
Staff recommended that the Commission approve that portion of the Company s request which
would allow the Company to capitalize the annual SF AS 87 pension expense as a regulatory
asset, thus removing it from the Company s income statement. However, Staff opposed and
recommended that the Commission deny the Company request to defer future cash
contributions. Staff recommended that the cash contributions be used to offset the regulatory
asset created by the capitalization of SF AS 87.
The impact of the Company s proposal would be to remove the SFAS 87 pension
expense from its income statement resulting in improved earnings and capitalization ratios. The
method in which the Company proposed to remove the SF AS 87 pension expense from its
income statement is to defer the expense and report it as a regulatory asset on its balance sheet.
The regulatory asset would accumulate each year as the SF AS 87 expense is calculated and
debited to the regulatory asset account.
SF AS 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 in future rates. In other words, Staff believes that if the Company
Application were approved, they would be deferring the SF AS 87 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 the test year.
DECISION MEMORANDUM
THE COMPANY'S RESPONSE
On May 2, 2007, the Company filed Reply Comments that, among other things
identified from the Company s perspective where the Staff and the Company agreed and
disagreed regarding the Company s Application. Essentially, the Company stated that it
appeared that both Staff and the Company agreed that removal of the accrued SF AS 87 pension
expense from the income statement is desirable and can be accomplished by taking the steps
required by SF AS 71 to properly qualify the accrued expense as a regulatory asset. However, the
Company stated that Staff s proposed accounting procedure would not accomplish its intended
purpose. The Company asked the Commission to adopt some specific language in the Order for
this matter that would allow the Company to satisfy SF AS 71 requirements and provide the
customer benefits described in Staff s comments.
AGREED PROPOSED LANGUAGE
Subsequent to both parties filing of comments, Staff and the Company agreed to
meet and discuss the differences they were having with regard to the Company s Application, as
it appeared that the two were in agreement on the desired outcome. The parties agreed to submit
the following as "agreed" language and if the Commission is inclined to grant the Company
Application, both parties ask for the inclusion of the following language in the Order.
Idaho Power Company requests an accounting order authorizing the Company to (1)
account for pension expense on a cash basis and (2) authorize the Company to defer the expense
associated with the pension plan cash contributions and record them as a regulatory asset with
actual ratemaking of such regulatory assets to be determined in subsequent revenue requirement
proceedings.
The Pension Protection Act of 2006 reVIses the calculation of the 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. Within this proceeding the Company and Staff agree that
allowing the Company to defer accrued SF AS 87 expense and thereby remove the SF AS 87
pension expense from the Company s income statement is reasonable and is properly recorded as
a regulatory asset under SF AS 71. The Company and Staff acknowledge that over the lifespan
of the Company s defined benefit pension program, accrued SF AS pension expense will match
cash contributions. Cash contributions will reduce the deferred regulatory asset. Consistent with
DECISION MEMORANDUM
prIor Commission Orders, the ERISA mInImUm funding requirement made as a cash
contribution will be properly included in the Company s revenue requirement. Any additional
cash contributions above the minimum should be evaluated on a case-by-case basis to determine
the proper regulatory treatment. This treatment meets the requirements of SF AS 71 to defer
these expenses as it is ,probable that the regulating entity will allow recovery of prudently
incurred amounts in future rates. As stated in the Company s Application and Staff comments
the proper ratemaking treatment of such regulatory assets should be determined in subsequent
proceedings. When the Company s actuaries notify the Company of ERISA minimum funding
requirements, the Company will evaluate the circumstances for ratemaking purposes and make a
filing requesting ratemaking treatment.
In summary, the Company and Staff both recommend that the Commission issue its
Order: (1) authorizing the Company to account for defined benefit pension expense on a cash
basis; (2) authorizing the Company to defer and account for accrued SF AS 87 pension expense
as a regulatory asset. The Company states it will never request a carrying charge be applied to
the deferral of the SF AS 87 balance nor will the Company be requesting amortization for the
SF AS 87 regulatory asset created; and (3) acknowledge that it is appropriate for Idaho Power to
seek recovery in the Company s revenue requirement of reasonable and prudently incurred
pension expense based on actual cash contributions.
COMMISSION DECISION
Does the Commission wish to approve the Company s Application and adopt the
proposed language agreed to between the Company and the Staff?
Does the Commission wish to address any other issue or matter regarding this
Application?
alA-
Donovan E. Walker
DECISION MEMORANDUM