20070420Comments.pdf

DONOV AN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5921
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, ID 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER CLARIFYING THE
ACCOUNTING FOR FUTURE PENSION OBLIGATIONS
CASE NO. IPC-O7-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of record
Donovan E. Walker, Deputy Attorney General, in response to Order No. 30287 , the Notice of
Application and Notice of Modified Procedure issued on March 29 2007, respectfully submits the
following comments.
BACKGROUND
On March 20, 2007, Idaho Power Company filed an Application seeking an accounting
order to clarify the accounting for future pension obligations.
Idaho Power is seeking 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
STAFF COMMENTS APRIL 19 2007
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 (SFAS/FAS 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 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.
STAFF ANALYSIS
Staff has reviewed the Company s Application and accompanying testimony of Lori
Smith, along with the records of Case No. IPC-03-13 resulting in Order No. 29505 and Case
No. UWI-04-4 resulting in Order No. 29838 as both were referenced by the Company.
Staff s comments are intended to provide the Commission with additional background regarding
the Company s treatment of pension expense, the purpose and effects of the Company
Application as well as additional concerns regarding the Company s Application. Ultimately
Staff will recommend that the Commission approve the Company s request to capitalize SF
87 amounts as a regulatory asset, thus removing it from the income statement, but deny the
Company s second request to defer future cash contributions.
Statement of Financial Accounting Standards No. 87 (SFAS 87) was issued by the
Financial Accounting Standards Board in 1987 to, among other things, provide a consistent basis
for which publicly traded companies accounted for pension expenses. Prior to 1987, companies
had a variety of options when recording pension expense making it difficult for users of financial
statements to adequately compare the expenses, and thus earnings, of one company to another.
The Company implemented the statement by accruing the Net Periodic Pension Cost, as
calculated under SF AS 87 and synonymous with SF AS 87 Expense, as an expense on the income
statement, while contributing the minimum required cash contributions as calculated under the
STAFF COMMENTS APRIL 19, 2007
Employee Retirement Income Security Act of 1978 (ERISA). The difference between those two
calculations is significant.
Following the 1994 general rate case, the Company s first general rate case since the
implementation of SF AS 87, the Company began recovering from customers $2 036 000
annually for pension expense. The Company s 1994 SF AS 87 was actuarially calculated at
040 000, however only $2 036 000 was expensed. The remaining $1 003 200 was capitalized
as overhead labor, allowing the Company to receive an annual return on the remaining amount
plus the annual depreciation expense associated with the pension expense included in capitalized
overhead. The Company s treatment of pension expense was not contested in that case and Staff
was silent on the issue.
In Idaho Power s next general rate case (Case No. IPC-03-, in 2003) increasing
pension expense, among other reasons, was cited as the main driver for the need to raise rates.
Though Idaho Power states in its current Application that it included accrued SF AS 87 pension
expenses in the IPC-03-13 case, it was actually Idaho Power that initially proposed to abandon
SFAS 87 for rate recovery, requesting an additional $2 170 160 in pension expense by
suggesting that Service Cost is a more appropriate measure of expense to be recovered by
customers. This was despite the Company not being permitted to contribute any cash to the plan
for the previous eight years due to a significant over-funding originating from better than
anticipated market returns over the prior decade. It wasn t until after Staff pre- filed direct
testimony arguing against Idaho Power s proposal that the Company retracted the proposal.
Staffs testimony in that case detailed the differences between Net Periodic Pension Cost as
calculated under SF AS 87, Service Cost, and the cash contribution range between the Required
Minimum Contribution and Maximum Deductible Contribution. See Tr. at 1496-1509. The
Commission agreed with Staff s recommendation in the case and ordered that the Company be
allowed to recover only the amount it had actually contributed to the pension plan during the test
year, which was $0.00.
The Company s Application requests that the Commission allow it to account for pension
expense on a cash basis. Application at 4. For financial reporting purposes, the Company is
required to account for pension expense by the standards that are set forth by the Financial
Account Standards Board, and thus the Company is required to calculate the SF AS 87 pension
expense. Though not explicitly stated as such, the impact of this proposal would remove the
SF AS 87 pension expense from its income statement resulting in improved earnings and
STAFF COMMENTS APRIL 19, 2007
capitalization ratios. The method in which the Company proposes 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.
Statement of Financial Accounting Standards No. 71 (SFAS 71) is the accounting
standard that would allow the Commission to approve any deviations from generally accepted
accounting principals (GAAP). SF AS 71 was intended to apply to the general purpose external
financial statements issued by enterprises which have regulated operations. It does not apply to
the financial statements submitted to the regulatory authorities. The pronouncement recognizes
that regulatory agencies will require deviations from GAAP for ratemaking purposes; however, it
emphasizes that regulatory accounting procedures not related to the economic effects of
ratemaking are not appropriate and GAAP must be followed.
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 amount in future rates. In other words, if the Company s 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, $0.00. The paradox
created by Idaho Power in its Application is that while claiming to be consistent with prior
Commission orders and accounting for pensions on a cash basis, the Company is seeking to defer
an expense that has already been explicitly denied by the Commission for recovery on a current
basis. Thus it could actually be construed as inconsistent with the Commission s recent orders
regarding pension expense to allow Idaho Power to create a regulatory asset to defer the SF
87 pension expense. However, Staff will propose a solution that addresses the concerns created
by SF AS 71 in the Staff Recommendation portion of these comments.
Company witness Smith states in her direct testimony, filed as Attachment A to the
Company s Application, that there will be no near-term impact on rates if the Application were
approved. Staff disagrees with this assertion. Although it is true that the Company is not
seeking recovery of the amounts at this time, and will not do so until a contribution is required
customer rates would still be affected by the deferral. Pension expense is one factor in
determining the Company s percentage oflabor-related expenses to capitalize as overhead. The
switch to cash accounting would require the Company to use the cash contribution instead of the
STAFF COMMENTS APRIL 19, 2007
currently used SF AS 87 expense to determine the operating percentage. If the overhead
percentage decreased, the Company would be expensing a larger percentage of its labor-related
costs. At the same time, the capitalized portion of labor-related expenses earns the Company a
return on its investment, and the Company is currently recovering depreciation expense
associated with the capitalized overhead. In order to account for the full elimination of SF AS 87
pension expense from rates, the Company would need to recalculate its operating percentage
which would lead to a decrease in rate base and depreciation expense going forward.
Furthermore, the regulatory asset account would improve the Company s capitalization
by increasing the equity portion in the Company s cost of capital. Because the Company s return
on equity is greater than the interest it pays on debt, approval of the Application will cause
upward pressure on rates. Though the amounts may be minimal, approval of the Application
reverses the impact of SF AS 87 on the capital structure and customer rates, so it should not be
ignored.
Staff is opposed to the second portion of the Company s Application seeking authority to
defer future cash contributions to the defined benefit pension plan and to account for such
contributions as a regulatory asset. Application at 5. The Company has ample opportunity to
recover the actual cash contribution in future rate cases as it has indicated that there will be at
least three, and possibly five, rate cases sought by the Company before any cash contributions
will be required. Idaho Power has also indicated that contributions will not need to be made to
the defined benefit pension plan until approximately 2010, depending on market performance
turnover and the amount of annual salary increases given to employees. Staff recommends that
the Commission deny the request to defer cash contributions to the pension plan as a regulatory
asset.
Deferred accounting treatment is a method in which the Commission may allow a
company to record on its books as a regulatory asset for future recovery a current expense that is
extraordinary and unusual in nature, mandated by regulatory authority and provides benefits to
customers. Contributing to a pension plan is neither extraordinary nor unusual, and under
normal regulatory practices, pension expenses are recoverable when they occur during a test year
that is used to set customer rates. It is premature for the Company to seek deferral of an expense
of an unknown amount, especially when it is also unknown when that cost will eventually be
incurred. Given the Company s recent statements that it intends to file annual rate cases in each
of the next four, possibly five years, the Company will not experience any regulatory lag and will
STAFF COMMENTS APRIL 19 2007
be able to recover the appropriate costs of the pension plan at the time funding resumes, thus
eliminating the need for deferral.
STAFF RECOMMENDATION
Staff proposes a compromise position that allows Idaho Power to remove the SF AS 87
pension expense from its income statements and thus improve its earnings and capitalization
ratios while simultaneously addressing Staff s previously expressed concerns. It is uncontested
that removal of the SF AS 87 pension expense from the income statement will improve the
Company s 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 87 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.
Over the life of a pension plan, the amount of SF AS 87 pension expense and the amount
of cash contributions are theoretically equivalent and without interference, the SF AS 87 expense
and the cash contributions over time will be comparable. Therefore, to address Staffs concerns
about SFAS 71 , Staff believes it would be permittable to allow the deferral of SF AS 87 pension
expense as a regulatory asset if the cash contributions when made are credited as an offsetting
entry to that regulatory asset. Given the presumption that the two expenses will ultimately
equivalent and the regulatory asset account will zero out on its own, then the SF AS 71
requirements will be satisfied.
However, this scenario also presents concerns to Staff. First, under this scenario the
Company receives the benefit of timing. The SF AS 87 expense will be debited to the regulatory
asset account for several years before an offsetting entry from cash contributions will be made
thus allowing the regulatory asset to become uncontrollably large. Secondly, the scenario only
works without interference and therefore the Company should not seek to recover an
amortization of the regulatory asset because the two offsetting expenses will balance each other
out in due time.
Staff also believes that the Company should not accrue a carrying charge on the
regulatory asset or include it in rate base. It would not be prudent to receive a return on an
artificially created asset implemented to improve the Company s financial status without
STAFF COMMENTS APRIL 19, 2007
incurring an actual expense. Furthermore, the regulatory asset account will presumably fluctuate
between a positive amount and a negative amount, and if a carry charge were granted to the
Company when the asset was positive, the Company would then be obligated to credit customers
with the same interest when the account becomes a liability. Staff believes the absence of
carrying charges or interest payments to customers is just and reasonable and is an equitable
solution for both the Company and customers, and would also appease Staff s concern regarding
the large regulatory asset that would be built up by the Company.
To summarize, Staff recommends that the Commission accept Staffs proposal to allow
the Company to capitalize the annual SF AS 87 pension expense by creating a regulatory asset
with the cash contributions used to offset that regulatory asset. Staff recommends denial of the
Company s request to defer future cash contributions. The accounting treatment of this
recommendation is illustrated in Attachment A. By accepting Staff s proposal, the regulatory
asset should not be amortized to customers; instead it would balance over time through journal
entries. Staff also recommends that the Commission deny carrying charges on the regulatory
asset, and that the ratemaking treatment and recovery of actual pension expense be determined at
a later date, presumably when the Company is required to contribute to the plan again.
Respectfully submitted this t 'i fI..- day of April 2007.
c::z IV
onovan E. Walker
Deputy Attorney General
Technical Staff:Donn English
i :umisc/comments/ipceO7. 7 dwde
STAFF COMMENTS APRIL 19, 2007
12/31/2007
1823XX Other RA - Deferred Pension Expense 950,435
253321 Other Def. Cr. - Accrued Pension Costs 950,435
(To record 2007 estimated SFAS 87 expense to reg asset - similar entry each year)
12/31/20XX
253321 Other Def. Cr. - Accrued Pension Costs 000 000
131XXX Cash 000 000
(To record cash contribution* to the pension plan)
926200 Opr A&G Pen & Ben - Pension 000 000
1823XX Other RA - Deferred Pension Expense 000 000
(To record the cash contribution* regulatory asset)
* The contribution amount used is not an actual amount; it is being used for demonstration only.
** This entry only effects the operating portion of the pension expense and entries will also need to be
made for the capitalized portion.
Attachment A
Case No. IPC-07-
Staff Comments
04/19/07
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 19TH DAY OF APRIL 2007
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-07-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BARTON L KLINE
LISA D NORDSTROM
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RIC GALE
VP - REGULATORY AFFAIRS
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
Jo f0~SECRETARY
CERTIFICATE OF SERVICE