20100217final_order_no_31003.pdf

Office of the Secretary
Service Date
February 17, 2010
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO IMPLEMENT A
TRACKING MECHANISM TO RECOVER
ITS DEFINED BENEFIT PENSION
EXPENSE
) CASE NO. IPC-09-
ORDER NO. 31003
On October 20, 2009, Idaho Power Company (Idaho Power; Company) filed an
Application with the Idaho Public Utilities Commission (Commission) requesting approval on or
before February 12, 2010 of a mechanism to track and recover annually the Company s defined
benefit pension expenses. The Application does not seek current approval of future expenses
associated with the Company s qualified defined benefit pension plan, nor is it requesting that
current rates be changed at this time. The Commission in this Order denies the Company
request for an annual tracking mechanism and provides clarification of pension expense
recovery.
BACKGROUND
Idaho Power s defined benefit pension plan was established in 1943 and continues as
part of the Company s total compensation package for eligible employees. As of January 1
2009, Idaho Power had 2 085 active employees in the plan and a total of 3 533 plan participants.
In 1986, the Company adopted Statement of Financial Accounting Standard (SF AS)
87. The Standard addresses pension funding issues from an accrual perspective in an attempt to
better match the compensation cost of an employee s pension benefits with the time period over
which the employee earns those benefits and to provide for greater comparability between
companies from year to year. Prior to the adoption of SF AS 87, pension expense was based on
the amount a company chose to contribute to its plans during the year. After the adoption of
SFAS No. 87 in 1986, the Company filed general rate cases in 1994 and 2003 that dealt with
pension funding issues. With the Company s 1994 general rate case filing, the Company
included pension costs based upon the SF AS 87 accrual perspective in test year O&M expenses
rather than cash contributed to the plan. The amount approved was approximately $2 million per
year.
ORDER NO. 31003
In its 2003 general rate case, Case No. IPC-03-, Idaho Power again included in
its test year defined benefit pension plan expense derived from the accrual methodology
provided for in SF AS 87. The Commission Staff recommended that the Commission reject the
accrued SFAS 87 amount to be included in the Company s revenue requirement because the
Company did not have any actual cash contribution requirements during the test year and would
not be required to fund contributions for the foreseeable future. The Company in rebuttal
testimony retracted its proposal.
In 2007, Idaho Power filed an application with the Commission (Case No. IPC-07-
07) seeking clarification that the Company could expect to recover pension costs based on cash
contributed to the plan and could account for defined benefit pension expenses on a cash basis
rather than the accrual basis that the Company used from 1994 until 2003. 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 also requested authority to defer
future cash contributions it would make to its defined benefit pension plan and to record these
future defined benefit pension plan cash contributions as regulatory assets.
On June 1 , 2007, the Commission issued Order No. 30333 authorizing the Company
to account for its defined benefit pension expense on a cash basis, and to defer and account for
accrued SF AS 87 pension expense as a regulatory asset. As part of its Order, the Commission
acknowledged that it is appropriate for the Company to seek recovery in the Company s revenue
requirement of reasonable and prudently incurred defined benefit pension expense based on
actual cash contributions. The Commission also stated "when the Company s actuaries notify
the Company of Employee Retirement Income Security Act of 1974 (ERISA) minimum funding
requirements, the Company can evaluate the circumstances for ratemaking purposes and make a
filing requesting ratemaking treatment, if needed.
Idaho Power s actuary has informed the Company that a contribution is required for
the tax year beginning January 1 2009. The required contribution will be $5 418 662 if paid by
October 15 2009, but if not paid by October 15 2009, interest will accrue until the extended due
date for Idaho Power s federal income tax return of September 15 , 2010. The Company did not
make an October 15 2009, payment.
ORDER NO. 31003
TRACKING MECHANISM
Idaho Power contends the requirement to make cash payments is expected to continue
over the next several years, but the amounts may vary dramatically from year to year. Therefore
the Company requests authorization to implement a defined benefit pension expense tracking
mechanism that has similar components to those of the Power Cost Adjustment (PCA)
mechanism. That is, the proposed mechanism will include a forecast component and true-up
component.
As reflected in its Application, the Company will recover its forecasted annual cash
payments toward defined benefit pension expense through rates based upon an actuarial
determination of those anticipated required contributions. Each year, the Company will compare
the revenue collected through the tracking mechanism s forecast component rate to the actual
cash contributions to defined benefit pension expense during the year. Any difference will be
refunded or collected from customers over the subsequent 12-month period in the true-up
component. The Company recommends that a carrying charge equal to the Commission-
approved interest rate for deposits be applied each month based on the balance in the regulatory
asset account.
The Company proposes a March 1 through February 28 (February 29 in leap years)
annual test period with rate adjustments becoming effective each June 1. The Company
proposes to make an annual filing under the tracking mechanism on or before April 7 of each
year with the associated rate adjustment effective June 1.
Idaho Power requests that it be allowed to recover its defined benefit pension expense
as a percentage rate applied to all base revenue in a manner similar to the Energy Efficiency
Rider, Schedule 91. Attachment 1 to the Application contains the Company s proposed
Schedule 53 detailing the purpose and applicability of the proposed tracking mechanism.
A CCO UNTIN G TREATMENT
The Commission may require costs that are normally expensed to be deferred under
SF AS 71 , Accounting for the Effects of Certain Types of Regulation.SF AS 87 pension
expenses were authorized for deferral under Commission Order No. 30333 , Case No. IPC-07-
07. In order to qualify for deferral, SF AS 71 requires that a utility be able to demonstrate that
future revenues will be provided to permit recovery of the previously incurred cost." In order to
meet the conditions for deferring pension costs under SF AS 71 , some mechanism must be in
ORDER NO. 31003
place that assesses whether the actual costs during the recovery period exceeded the amount in
rates, tracks any shortfall or excess, and adjusts rates accordingly.
Idaho Power believes that the proposed tracking mechanism will meet those
requirements. Absent such a tracking mechanism, inclusion of pension contributions as test year
expense in a general rate case will most likely cause pension expense to become ineligible for
deferral under SF AS 71. Derecognition of its deferred pension expense regulatory asset would
result in serious negative consequences to Idaho Power. At a minimum, the Company contends
it would be forced to write off the $33 million balance of deferred pension expense (as of
September 30 , 2009). Idaho Power s equity would also likely decrease by $92 million in
addition to the retained earnings impact of derecognizing the regulatory asset for deferred
pension expense. Both of these accounting changes could have negative impacts on customers.
On November 17, 2009, the Commission issued Notices of Application, Intervention
Deadline, and Modified Procedure in Case No. IPC-09-29. The deadline for filing Petitions to
Intervene was November 27, 2009. There were no petitions filed. The deadline for filing written
comments was January 14 2010. Commission Staff was the only party to file comments. Staff
recommends that the Commission deny the Company s request for the proposed pension tracking
mechanism. Following Staff comments, the Company requested a meeting with Staff to clarify
Staffs position. On January 29, 2010, the Company filed reply comments setting forth specific
language that the Company and Staff believes will satisfy SF AS 71 requirements if the proposed
tracking mechanism is denied.
ST AFF COMMENTS
On January 14 2010, Staff filed comments. Staffs 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 s Application, as well as additional concerns
regarding the Company s Application. Staff recommends that the Commission deny the
Company s request for the proposed pension expense tracker. Recovery of pension expense
Staff contends, continues to be appropriately dealt with in rate cases. Staff supports a reasonable
amortization of actual deferred cash contributions. This recovery method, Staff states, will meet
the requirement of SF AS 71 to recover the deferral balance in future rates. The amortization can
change as needed to recover the remaining deferral balance of actual cash contributions.
ORDER NO. 31003
Staff generally prefers traditional regulation to cost trackers, limiting the use of cost
trackers to extraordinary circumstances where it can be proven that a tracking mechanism is in
the public interest. However, recognizing that situations do exist whereby a cost tracker may be
necessary, Staff applies three distinct criteria to review a tracking mechanism:
1. The expense is largely outside the control of the utility;
2. The expense is unpredictable and volatile, and;
3. The expense is substantial and recurring.
The choice to sponsor and adopt a defined benefit pension plan over other available retirement
plan alternatives is a choice that is made solely by management of a utility. The benefit formulas
that calculate the projected benefits an employee will receive upon retirement, the actuarial
assumptions regarding expected return on plan assets, turnover rates, and future pay increases
are all established with management input and have a significant effect on the amount of
contributions that are required each year.
Furthermore, a defined benefit pension plan already places economic risk on utility
customers. The primary element of a defined benefit plan is that the benefit at retirement is
defined, thereby placing all the investment risk upon the employer. When the employer is a
regulated utility that recovers the retirement expense through rates, then that risk is shifted to the
customers. If a cost tracking mechanism is established that guarantees that a utility will be able
to recover 100% of all contributions to a defined benefit pension plan, then all the economic
financial, and investment risk is borne by the customers of that utility. With the shift in risk from
the utility to the customers, a corresponding decrease in return on equity would need to be
evaluated.
The third criteria used by Staff to determine if a cost tracker is in the public interest is
whether or not the expense is substantial and recurring. Although pension expense can be
substantial and recurring, the differences between the test-year cost and the actual cost must have
a material effect on the utility s rate of return. With the approved deferral accounting treatment
the difference will be minimal. Under traditional ratemaking, known and measurable
adjustments to test year expenses are recognized to account for expenses that will occur beyond
the test year. Any underrecovery or overrecovery of pension costs will not likely have a material
impact on the utility s rate of return. For these reasons, Staff does not believe that the criteria
cited as necessary to establish a tracking mechanism for pension expense have been met.
ORDER NO. 31003
In supporting its argument for the implementation of a pension expense tracking
mechanism, the Company contends that SF AS 71 requires a tracking mechanism because of the
previously deferred SF AS 87 pension expense arising from Commission Order No. 30333 in
Case No. IPC-07-07. In that Case, Idaho Power requested authorization to account for pension
expense on a cash basis, i., remove SF AS 87 pension expense from its financial statements and
to record it as a regulatory asset. Furthermore, Idaho Power requested authority to defer any
future cash contribution to the pension plan.
In that case, Staff was concerned with the requirements of SF AS 71 , the accounting
standard that would allow the Commission to approve any deviations from generally accepted
accounting principles (GAAP). 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 in future rates. The concerns with the requirements of
SF AS 71 in that case were discussed with the Company before proposing a solution that both the
Company and Staff agreed would satisfy the requirements of SF AS 71. Staff stated in its filed
written comments in that case:
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 Staff s concerns about SF AS 71 , Staff
believes it would be (permissible J 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 be equivalent and the regulatory asset account
will zero out on its own, then the SF AS 71 requirements will be satisfied.
The Company s reply comments in that case also confirm that the requirements of SF AS 71 will
have been met "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.
ORDER NO. 31003
During the course of the IPC-07-07 proceedings Staff had frequent
communications with Idaho Power regarding SF AS 71 and future recovery of pension
contribution in rates whenever the time came that the Company was again required to fund the
pension plan. At that time, Staff informed the Company that it was not supportive of a tracking
mechanism.
In the current filing, Idaho Power contends that, without a tracking mechanism, the
Company will not likely be able to apply the SF AS 71 methodology to the deferral of SF AS 87
pension expense. This will require it to derecognize approximately $33 million, the balance of
the regulatory asset account created by the deferral of SF AS 87 pension expense as of September
, 2009. The Company also contends that it will be required to derecognize an additional $92
million in equity related to the accumulated other comprehensive income (AOCI) in the equity
section of the balance sheet for SF AS 158. SFAS 158 requires the Company to record a liability
for its unfunded projected benefit obligation, which is defined as the difference between the
market value of the plan s assets and the actuarially determined projected benefit obligation.
The accounting entries to record the unfunded projected benefit obligation also include a
corresponding decrease, net of deferred taxes, in the AOCI on the balance sheet.
SF AS 71 states that before a utility can capitalize or defer a cost that would have
otherwise been expensed, two conditions must be met. The first condition is that it must be
probable that future revenue in an amount at least equal to the capitalized cost will result from
the inclusion of that cost in allowable costs for rate-making purposes." The footnotes of the
statement define the term "probable" with its "usual general meaning, rather than in a specific
technical sense, and refers to that which can be reasonably expected or believed on the basis of
available evidence or logic but is neither certain nor proved." The second criterion of SFAS 71
states that "Based on available evidence, the future revenue will be provided to permit recovery
of the previously incurred cost rather than to provide for expected levels of similar future costs.
Staffs assertion in Case No. IPC-07-07 still holds true today. Because the agreed-
upon accounting entries in that case use the cash contribution as an offset to the regulatory asset
created by deferral of SF AS 87 pension expense and because, over time, the cash contributions
and the accrued pension expense under SF AS 87 will be similar, the regulatory asset will trend
toward zero. SF AS 71 requires only that it will be probable that future revenues will be allowed
to recover the capitalized cost; a specific recovery mechanism is not dictated. With amortization
ORDER NO. 31003
of the deferred cash contributions and because the capitalized cost will tend to zero-out over
time, it is more than probable that future revenues will be allowed to recover those costs.
Staff applies the same logic to the second criterion of SF AS 71 because future
revenue will be provided to permit the recovery of the previously incurred cost. Staff continues
to believe that the deferral of cash contributions and the amortization of those costs in rates
through the normal ratemaking process is an appropriate recovery mechanism. It meets the
requirements of SF AS 71 and allows the Company to recover reasonably incurred pension costs.
An additional tracking mechanism is not necessary. Staff believes a mechanism with forecast
and true-up provisions is inappropriate for these expenditures. The three criteria for a tracking
mechanism discussed above have not been met. Staff supports a reasonable amortization period
of actual deferred balances. As stated by the Company in its IPC-07-07 reply comments, page
9 ". . . a carrying charge rate and amortization period for the deferred expense associated with the
cash contributions would be determined in a future proceeding." To restate, Staff does not
believe the cost tracker meets this intent, nor is the proposed cost tracker necessary or
appropriate.
Staff Recommendation
After reviewing the Company s Application and all other available information, Staff
recommends that the Commission deny the Company s request for the proposed pension tracking
mechanism. In doing so , Staff recommends that the Commission reaffirm its commitment in
Order No. 30333 that reasonable and prudently incurred cash contributions based on the ERISA
minimum funding requirements may be properly included in the Company s revenue
requirement. Staff also recommends that in a future rate case the Company be allowed to
recover a reasonable amortization of the deferred balance associated with the cash contributions
of its defined benefit pension plan after the costs are actually incurred and deferred.
IDAHO POWER REPLY
On January 29, 2010, Idaho Power Company filed reply comments. The Company
relates that on January 21 , 2010, Company representatives met with Staff to seek clarification on
a number of issues raised by Staff in its comments. Specifically, the Company sought to confirm
its understanding of Staffs recommendations with regard to the Company s future recovery of
pension expenses and to explore how Staff s recommendation would be implemented.
ORDER NO. 31003
As a result of the January 21 , 2010 discussion the Company represents that Staff
would support the following treatment of deferred pension expense:
1. The Company will establish a balancing account that would track, on a
cumulative basis, the difference between cash amounts contributed to the
pension plan and amounts included in rates.
2. An appropriate amortization period for deferred cash contributions will be
evaluated during a revenue requirement proceeding and will begin
simultaneously with the approved period for recovery.
3. There may be circumstances where the Company could choose to
contribute in excess of the minimum amount required by ERISA or prior
to the final due date of the minimum payment; such contributions, while
potentially subject to longer amortization, will not be disallowed solely
because they are made sooner than legally required.
4. The Company will not be expected to expense its prudently incurred cash
contributions prior to the Commission s review during a revenue
requirement proceeding and inclusion in rates.
5. As part of a revenue requirement proceeding, the Company may request
the inclusion of imminent, but as yet unpaid, contributions that have been
finally determined by the Company s actuary as "known-and-measurable
expenses to be incurred.
6. The Company should earn a carrying charge on the unamortized balance
of deferred cash contributions at the Commission-approved interest rate
for deposit.
The Company has evaluated Staff s recommendation as stated in its comments and as
clarified at the meeting on January 21 , 2010, and is satisfied that the recommendation meets both
of the requirements for continued deferral under SF AS 71. SF AS 71 provides that a previously
incurred cost may be deferred if: (1) it is "probable that future revenue in an amount at least
equal to the capitalized cost will result from inclusion of that cost in allowable costs for
ratemaking purposes" and (2) "future revenues will be provided to permit recovery of the
previously incurred cost rather than to provide for expected levels of similar future costs. . . .
The use of a balancing account that tracks the difference between cumulative cash contributions
and amounts collected in rates, the Company contends, will provide adequate evidence to
conclude that it expects future revenue equal to the amount capitalized. Recovery that is derived
ORDER NO. 31003
from amortization of the deferred cash contributions provides recovery of previously incurred
costs and satisfies the second requirement.
While the Company continues to believe that its proposed tracking mechanism better
matches recovery of pension costs with the Company s cash outlays to fund the pension, the
Company is not opposed to the recommendations included in Staff s comments as clarified in the
Company s reply. Further, the Company is satisfied that Staffs proposed methodology would
meet the deferral requirements of SF AS 71. Should the Commission choose to adopt Staff s
recommendations, the Company requests that the Commission provide the following
clarifications:
1. The regulatory asset account previously authorized for the deferral of cash
contributions will be considered a balancing account for the purpose of
tracking the difference between cumulative cash contributions to the
pension plan and amounts recovered in rates; and
2. The timing of the amortization of the deferred cash contributions as well
as the amounts will be matched to the collection of those costs in rates;
and
3. The amounts contributed in excess of the ERISA mInImum, while
potentially subject to longer amortization, will not be disallowed solely
because they are made sooner than they are legally required to be paid;
and
4. The unamortized balance of deferred cash contributions will earn a
carrying charge at the Commission-approved interest rate for deposit.
COMMISSION FINDINGS
Idaho Power has requested approval of an annual tracker mechanism for
recovery of defined pension benefit expenses. Staff contends that the requirements for
justifying establishment of a tracking mechanism have not been satisfied and recommends
that the Company s tracker proposal be denied. Staff recommends instead the deferral of
cash contributions and the amortization of those costs in rates through the normal
ratemaking process. The Company agrees that Staffs proposal (as clarified in reply
comments) would satisfy SFAS 71 requirements.
The Commission has reviewed and considered the filings of record in Case No.
IPC-09-, including the comments and recommendations of Commission Staff and the
Company s reply. We have also reviewed Order No. 30333 in Case No. IPC-07-
ORDER NO. 31003
wherein we authorized Idaho Power to account for its defined pension expense on a cash
basis and to defer and account for accrued SF AS 87 pension expense as a regulatory asset.
The Commission continues to find that the public interest may not require a hearing to
consider the issues presented in this case and that the issues raised by the Company s filing
may be processed by Modified Procedure, i., by written submission rather than by
hearing. IDAPA 31.01.01.204.
It appears from Idaho Power s reply that although the Company prefers an
annual tracker mechanism, it agrees that the accounting treatment of SF AS 87 pension
expense recommended by Staff will satisfy SF AS 71 requirements, if clarified as
requests. We find the tracking mechanism recommended by the Company is not justified
nor required. We authorize the clarified treatment of defined pension expense as detailed
above in our summary of the Company s reply. We find this approach satisfies the SFAS
71 requirements. Furthermore, we adopt the four points of clarification requested by the
Company in its reply comments, as set forth above.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over Idaho Power
Company, an electric utility, pursuant to the authority and jurisdiction granted in Title 61
Idaho Code , and the Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described and qualified
above, IT IS HEREBY ORDERED and the Commission does hereby deny Idaho Power
Company s request for a tracking mechanism to recover its defined benefit pension expense.
IT IS FURTHER ORDERED that the Company s cash contributions to its defined
benefit pension plan will be deferred and the amortization of those costs will be reflected in rates
as clarified above.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7)
days after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code 9 61-626.
ORDER NO. 31003
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this /71-
day of February 2010.
//
1::. .iiESIDENT
~1l
MARSHA H. SMITH, COMMISSIONER
ISSIONER
ATTEST:
bls/O:IPC-09-29 sw2
ORDER NO. 31003