20100114Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
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-E-09-29
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission (Commission), by
and through its attorney of record, Scott Woodbur, Deputy Attorney General, and in response
to the Notice of Application, Notice ofIntervention Deadline, Notice of Modified Procedure and
Notice of Comment/Protest Deadline issued in Order No. 30945 on November 17, 2009 in Case
No. IPC-E-09-29, submits the following comments.
BACKGROUND
On October 20,2009, Idaho Power Company (Idaho Power; Company) filed an
Application with the Idaho Public Utilties Commission (Commission) requesting approval on or
before February 12,2010 of a mechanism to track and recover anually 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 the Company
requesting that current rates be changed at this time.
STAFF COMMENTS 1 JANUARY 14,2010
Idaho Power's defined benefit pension plan was established in 1943 and continues as par
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 paricipants.
In 1986, the Company adopted Statement of Financial Accounting Standards (SFAS) 87.
That Stadard 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 ears those benefits and to provide for greater comparabilty 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. Since the adoption of
SFAS 87 in 1986, the Company has fied general rate cases in 1994 and 2003 that dealt with
pension fuding issues. With the Company's 1994 general rate case filing, the Company
included pension costs in test year O&M expenses based upon the SF AS 87 accrual perspective
rather than cash contributed to the plan. The amount approved was approximately $2 milion per
year.
In its 2003 general rate case Application, Case No. IPC-E-03-13, Idaho Power deviated
from the SF AS 87 accrued expense and requested anual recovery of the operating portion of the
Company's 2004 service cost of $10,173,344. The Commission Staff recommended that the
Commission reject the use of the service cost 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 fud contributions in the foreseeable future.
Furhermore, the Company had not contributed to the plan at all durng the previous eight years
while receiving $2 milion anually from customers through rates. The Company in rebuttal
testimony retracted its proposal. The Commission in Order No. 29505 did not include any
defined benefit pension expense in rates since no cash contributions were made.
In 2007, Idaho Power filed an Application with the Commission (Case No. IPC-E-07-07)
seeking clarification that the Company could expect to recover pension costs based on cash
contributed to the plan and account for defined benefit pension expenses on a cash basis rather
than the accrual basis that the Company had used from 1994 until 2003. In conjunction with the
Company's request for clarification of its authority to utilze 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.
STAFF COMMENTS 2 JANUARY 14,2010
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 par 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. Since the deferred accounting treatment for cash contributions was
approved in Case No. IPC-E-07-07, the Company has made no cash contrbutions and therefore
has not made a request for recovery. The Commission found it reasonable for Idaho Power to
defer the expense associated with the pension plan cash contributions and record them as a
regulatory asset. The Commission also stated "when the Company's actuaries notify the
Company of Employee Retirement Income Security Act of 1974 (ERISA) minimum fuding
requirements, the Company can evaluate the circumstances for ratemaking purposes and make a
fiing 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 wil be $5,418,662 if paid by
October 15,2009, but if not paid by October 15,2009, interest wil accrue until the extended due
date for Idaho Power's federal income tax retur of September 15,2010. The Company did not
make an October 15,2009 payment.
TRACKING MECHANISM
The requirement to make cash payments, Idaho Power contends, is expected to continue
over the next several years, but may var 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 would include a forecast component and true-up
component.
As reflected in its Application, the Company would recover through rates its forecasted
annual cash payments toward defined benefit pension expense based upon an actuarial
determination of those anticipated required contributions. Each year, the Company would
compare the revenue collected through the tracking mechanism's forecast component rate with
the actual cash contributions to defined benefit pension expense during the year. Any difference
would be either refunded or collected from customers over the subsequent 12-month period in
STAFF COMMENTS 3 JANUARY 14,2010
the true-up component. The Company recommends that a carying 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 Februar 28 (February 29 in leap years)
anual test period with rate adjustments becoming effective each June 1. The Company
proposes to make an annual fiing 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 maner similar to the Energy Effciency Rider,
Schedule 91. Attachment 1 to the Application contains the Company's proposed Schedule 53
detailing the purose and applicabilty of the proposed tracking mechanism.
ACCOUNTING TREATMENT
In order to qualify for deferral, SF AS 71 requires that a utilty be able to demonstrate that
"future revenues wil be provided to permit recovery of the previously incured cost." In order to
meet the conditions for deferring pension costs under SF AS 71, Idaho Power contends that some
form of a mechanism must be in 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 would meet that
requirement. Absent such a tracking mechanism, inclusion of pension contributions as test year
expenses in a general rate case wil most likely cause pension expense to become ineligible for
deferral under SF AS 71. The Company maintains that derecognition of its deferred SF AS 87
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 milion balance of
deferred SFAS 87 pension expense (as of September 30,2009). Idaho Power's equity would
also likely decrease by $92 milion in addition to the retained earings impact of derecognizing
the regulatory asset for deferred pension expense. Both of these accounting changes could have
negative impacts on customers.
STAFF REVIEW
Staff has reviewed the Company's Application and the accompanying testimonies of Ken
Petersen and Timothy Tatum, along with the records of Case No. IPC-E-03-13 resulting in Order
STAFF COMMENTS 4 JANUARY 14,2010
No. 29505 and Case No. IPC-E-07-07 resulting in Order No. 30333 as both were referenced by
the Company. 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.
Ultimately Staff wil recommend that the Commission deny the Company's request for the
proposed pension expense tracker. Recovery of pension expense continues to be appropriately
dealt with durng the course of a rate case. Staff wil support a reasonable amortization of actual
deferred cash contributions. This recovery method wil 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.
Statement of Financial Accounting Standards No. 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 expense. 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 earings, 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
Employee Retirement Income Security Act of 1978 (ERISA). The difference between those two
calculations is significant.
Following the Company's 1994 general rate case, the first general rate case since the
implementation of SF AS 87, the Company began recovering from customers $2,036,000
anually for pension expense. The Company's pension expense under SF AS 87 was actually
$3,040,000, 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 the 1994 general
rate case and Staff and the Commission were silent on the issue.
In Idaho Power's next general rate case (Case No. IPC-E-03-13) increasing pension
expense, among other reasons, was cited as the main driver for the need to raise rates. Although
Idaho Power states in its current Application that it included the accrued SFAS 87 pension
expense in the IPC-E-03-13 case, it was actually Idaho Power that initially proposed to abandon
STAFF COMMENTS 5 JANUARY 14,2010
SF AS 87 for ratemaking puroses, requesting an additional $2,170,160 in pension expense by
suggesting that Service Cost is a more appropriate measure of expense to be recovered from
customers. This proposal was made even though the Company was not permitted to contribute
any cash to the plan under Department of Labor Pension Guidelines for the previous eight years
and for several years into the foreseeable future due to a significant over-funding originating
from better than anticipated market returns over the prior decade. It wasn't until after Staff pre-
fied 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 Staffs recommendation in the case and ordered that the
Company be allowed to recover only the amount it had actually contributed to the pension plan
durng the test year, which was $0.00.
Because Idaho Power is now required to make annual cash contributions to the pension
plan which may var dramatically in amount, the Company is now seeking authorization to
implement a defined benefit pension expense tracking mechanism to guarantee that Idaho Power
recovers in its annual revenue no less than 100% of the actual cash payments made by the
Company to fund the plan. The proposed tracking mechanism would be similar to the Power
Cost Adjustment mechanism in that it would include a forecast component and a true-up
component. Under the proposed mechanism, the Company would recover through rates its
forecasted anual cash payments toward defined benefit pension expense based upon an actuarial
determination of those anticipated required contributions. Each year, the Company would
compare the revenue collected through the tracking mechanism's forecast component rate with
the actual cash contributions to defined benefit pension expense during the period. Any
difference would either be refunded or collected from customers over the subsequent 12-month
period in the true-up component.
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 best public interest. Generally speaking, cost trackers, especially those with forecasts, can
undercut the incentive to deter utilty waste and promote cost efficiencies. Cost trackers also
shift business risk from the utility and place it squarely upon the shoulders of the customers.
STAFF COMMENTS 6 JANUARY 14,2010
However, in 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 utilty;
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 the management of a utilty. The benefit
formulas that calculate the projected benefits an employee wil 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 by nature, already places economic risk upon
utilty customers. The primar element of a defined benefit plan is that the benefit upon
retirement is defined, thereby placing all the investment risk upon the employer. When the
employer is a regulated utilty 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 utilty. With the shift
in risk from the utilty 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. Though 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 wil be minimaL. In Idaho under traditional ratemaking, known and measurable
adjustments to test year expenses are recognized to account for expenses that wil occur beyond
the test year. Any under recovery or over recovery of pension costs wil not likely have a
material impact on the utilty's rate of return. For these reasons, Staff does not believe that the
above criteria necessary to establish a tracking mechanism for pension expense have been met.
In supporting its argument for the implementation of a pension expense tracking
mechanism, the Company contends that SFAS 71 requires a tracking mechanism because of the
previously deferred SF AS 87 pension expense arising from Commission Order No. 30333 in
STAFF COMMENTS 7 JANUARY 14,2010
Case No. IPC-E-07-07. In that Case, Idaho Power requested authorization to account for pension
expense on a cash basis, i.e. 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 otherwse be
expensed can be capitalized or deferred, it must be probable that the regulating entity wil allow
recovery of prudently incured 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 fied
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 wil be
comparable. Therefore, to address Staffs concerns about SF AS 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 wil ultimately be equivalent and the regulatory asset account wil
zero out on its own, then the SF AS 71 requirements wil be satisfied.
The Company's reply comments also confirm that the requirements of SF AS 71 wil have been
met "if the Commission concurs that it is reasonable to assume that the Company's 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 wil allow recovery of prudently incured cash contributions in future
rates."
During the course of the IPC-E-07-7 proceedings, Staff had frequent communications
with Idaho Power regarding SFAS 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 that
case, the Company never contested that the requirements of SF AS 71 wil not be met.
In the current filing, Idaho Power now contends that without a tracking mechanism, the
Company wil no longer be able to apply the SF AS 71 methodology to the deferral of SF AS 87
STAFF COMMENTS 8 JANUARY 14,2010
pension expense, requiring it to derecognize approximately $33 milion, the balance of the
regulatory asset account created by the deferral of SF AS 87 pension expense as of September 30,
2009. The Company also contends that it would be required to derecognize an additional $92
milion in equity related to the accumulated other comprehensive income (AOCI) in the equity
section of the balance sheet for SFAS 158. SFAS 158 requires the Company to record a liabilty
for its unfuded 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 unfuded 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 wil 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 criteria of SF AS 71
states that "Based on available evidence, the future revenue wil be provided to permit recovery
of the previously incurred cost rather than to provide for expected levels of similar futue costs."
Staffs assertion in Case No. IPC-E-07-07 stil 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 SFAS 87 wil be similar, the regulatory asset wil trend
towards zero. SFAS 71 only requires that it wil be probable that future revenues wil be allowed
to recover the capitalized cost, a specific recovery mechanism is not dictated. With amortization
of the deferred cash contributions and because the capitalized cost wil tend to zero out over
time, it is more than probable that future revenues wil be allowed to recover those costs.
Staff applies the same logic to the second criteria of SF AS 71 because future revenue wil
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 necessar. Staff believes a mechanism with forecast and true-up
STAFF COMMENTS 9 JANUARY 14,2010
provisions is inappropriate for these expenditures. The three criteria for a tracking mechanism
discussed above have not been met. Staff would support a reasonable amortization period of
actual deferred balances. As stated by the Company in its IPC-E-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 reaffrm 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 the Company be allowed to recover in a future rate
case 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.
Respectfully submitted this 7A
1,- day of Januar 2010.
Technical Staff: Donn English
Terri Carlock
i:umisc:commentsipce09.29swtcde comments
STAFF COMMENTS 10 JANUARY 14,2010
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 14TH DAY OF JANUARY 2010,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-E-09-29, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BARTON L KLINE
LISA D NORDSTROM
IDAHO POWER COMPANY
POBOX 70
BOISE ID 83707-0070
E-MAIL: bkline(ßidahopower.com
Inordstrom(ßidahopower .com
TIM TATUM
GREG SAID
IDAHO POWER COMPANY
POBOX 70
BOISE ID 83707-0070
E-MAIL: ttatum(ßidahopower.com
gsaid(ßidahopower .com
Jo~~SECRETAR
CERTIFICATE OF SERVICE