HomeMy WebLinkAbout20100513Comments.pdfWELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
(208) 334-0318
IDAHO BAR NO. 3283
RECEIVED
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UTiLITIES GOMM¡S~iON
Street Address for Express Mail:
472 W WASHINGTON
BOISE ID 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
IDAHO POWER COMPANY TO INCREASE ITS )
RATES FOR ELECTRIC SERVICE TO )
RECOVER ITS 2010 CASH CONTRIBUTION TO )
DEFINED BENEFIT PENSION EXPENSE. )
)
)
CASE NO. IPC-E-I0-8
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilties Commission, by and through its
Attorney of record, Weldon B. Stutzman, Deputy Attorney General, and in response to the
Notice of Application and Notice of Modified Procedure issued in Order Nò. 31055 on
April 22, 2010, submits the following comments.
BACKGROUND
On March 15,2010, Idaho Power Company fied an Application for an order approving
an increase in rates, effective June 1,2010, to allow recovery of the Company's 2010 cash
contribution to its defined benefit pension expenses. In February 2010, the Commission issued
Order No. 31003 directing the Company to establish a balancing account to track the difference
between cash amounts contributed to its pension plan and the amounts included in rates. The
Company's Application states that its actuary has determined that a cash contribution is
necessary to its pension plan for the year beginning Januar 1,2009. The Company expects the
STAFF COMMENTS 1 MAY 13,2010
contribution amount to be $5,822,145 as of September 15,2010. The amount allocated to the
Idaho jurisdiction, minus a small reimbursement from a separate IDACORP subsidiar, is
$5,416,796.
Idaho Power's Application seeks approval of $5,416,796 in pension cost recovery over a
one-year amortization period to allow recovery contemporaneous with the Company's 2010 cash
contributions to the defined benefit pension plan. The Company proposes to proportionately
divide the Idaho-allocated share of the 2010 cash pension payments by total Idaho base revenues
forecast for the period June 2010 through May 2011. The Company also proposes to recover the
2010 contributions by an equal percentage rate applicable to all base biling components within
each customer class rate schedule. This approach results in a rate increase of. 77% for each class
of customers served by Idaho Power. The Company's proposed revised taiff sheets are
Attachment 1 to its Application.
STAFF ANALYSIS
Staff has reviewed the Company's Application and the testimony and exhibits of Jeanette
Bowman, along with other information provided by the Company and third paries and does not
object to the Company's request to increase rates by 0.77% or $5,416,796 anually to fud its
employee pension plan. Although Staff supports the increase in this case, Staff is also concerned
about the implicit risks faced by customers due to the volatilty of contributions required for
defined benefit pension plans.
The Company's Application complies with the directives previously issued by this
Commission. Idaho Power has not made a cash contribution to its pension plan since the 1994
plan year, and in the subsequent rate case, Case No. IPC-E-03-13, the Commission allowed the
Company to include in its anual revenue requirement the amount that it was actually
contributing to the pension plan, which was zero. Order No. 29505, p. 21. The Commission also
notified Idaho Power that it could apply for a ratemaking adjustment when the Company began
making new contributions to the pension plan.
On March 20,2007, Idaho Power fied a request for an Accounting Order (Case No.
IPC-E-07-07) that allows the Company to (1) change from accrual accounting to cash accounting
to determine future contributions to the defined benefit pension plan, and (2) defer future defined
benefit pension plan contributions and record them as a regulatory asset with ratemaking
treatment of such asset to be determined in subsequent revenue requirement proceedings. In
STAFF COMMENTS 2 MAY 13,2010
Order No. 30333, the Commission approved the Company's request and reaffirmed that the
"ERISA minimum funding requirement made as a cash contribution may be properly included in
the Company's revenue requirement." The Commission fuher stated in that Order:
This treatment meets the requirements of SF AS 71 to defer these expenses
as it is probable that the regulating entity wil allow recovery of prudently
incured amounts in future rates. As stated in the Company's Application
and Staff comments, we find that the proper ratemaking treatment of the
regulatory assets should be determined in subsequent proceedings. When
the Company's actuaries notify the Company of ERISA minimum funding
requirements, the Company can evaluate the circumstances for ratemaking
purposes and make a filing requesting ratemaking treatment, if needed.
Order No. 30333, p. 4.
Idaho Power's actuaries have informed the Company that a cash contribution in the
amount of $5,092,774 was due to the plan on January 1,2009. From that date, the contribution
increases at an anual effective rate of 8.15% until payment. If the payment is made on
September 15,2010, the final due date, the amount due would be $5,822,145. Upon learing of
the pending contribution, Idaho Power filed a request with the Commission for authority to
implement an anual tracking mechanism, similar to the Power Cost Adjustment (PCA), to
recover its defined benefit pension expense (Case No. IPC-E-09-29). Staff and the Company
subsequently agreed, and the Commission approved in Order No. 31003 issued on February 17,
2010, that rather than create a tracking mechanism with separate line items on customers' bils, it
would be more appropriate to create a regulatory balancing account in which the deferred cash
contributions would be recovered in rates through amortization. The Company's current
Application is a culmination of several cases and Orders which have led to the rate recovery
methodology included in the Application, which Staff and the Commission have previously
supported.
The amount required to be funded on September 15,2010 is a system-wide amount.
After allocating $46,078 to subsidiaries and 6.22% to the Company's Oregon jurisdiction, the
remaining Idaho jurisdictional pension expense is $5,416,796. The Company has requested, and
Staff supports, a 12-month amortization period to recover this amount. Rather than using a
straight-line amortization methodology which produces twelve equal monthly amortization
expenses, the Company calculates a monthly amortization rate based on forecasted revenues
from June 1, 2010 through May 31, 2011. The percentage of the anual revenue the Company
forecasts to receive in each month is then divided by the anual forecasted revenue for the test
STAFF COMMENTS 3 MAY 13,2010
period. The resulting percentage is then applied to the pension expense to come up with the
monthly amortization rate. Staff does not believe that shaping the amortization to coincide with
revenues is necessar because pension expense is not tied to customer usage. Staff recommends
that the Company use a straight-line amortization rate, which would equate to a monthly
amortization expense of$451,400 if the Company fuds the contribution on September 15.
While a longer amortization period would mitigate the impact of the rate increase, Staff
believes the proposed 12-month amortization in this case is appropriate. A longer amortization
period would allow the balance in the regulatory deferral account to car over into futue years
when the Company wil be required to make larger pension contributions. The estimated
contribution for the 2010 plan year is $44.2 milion. The Company has indicated it wil seek rate
recovery for future contributions in a future proceeding. Although funding levels for 2011 and
beyond have not been determined, it is likely that they wil be similar to the 2010 levels for
several years to come. The higher funding levels are attributable to poor market returs over the
past several years, and to the aging workforce of Idaho Power and the increasing benefit
payments made to retired employees. The following table indicates the estimated payments that
will be made to retired employees in the coming years:
Fiscal Year Ending Expected Payment
December 31, 2009 $18,273,132
December 31,2010 $19,447,951
December 31, 2011 $20,775,650
December 31,2012 $22,640,911
December 31, 2013 $24,698,866
December 31,2014 to December 31, 2018 $156,991,685
The pension plan assets not only have to provide for the future benefits of its curent employees,
but must also provide for the previously accrued retirement benefits of retired employees.
Also contributing to the expected increase in pension contributions is the demographics
of the active employees at Idaho Power. Fifty-two percent of the active paricipants in the
pension plan are over the age of 45 years old, while forty percent have 15 or more years of
service with Idaho Power. As these employees retire from the Company, the benefit payments
they receive wil be paid from the plan assets. These factors, combined with recent poor market
performance, wil require Idaho Power to continually fud increasing amounts to its retirement
plan to keep it solvent.
STAFF COMMENTS 4 MAY 13,2010
It is the high level of expected contributions that leads to Staffs concerns about whether
Idaho Power has the appropriate retirement plan for its employees, given that customers
ultimately wil have to pay for it. A defined benefit pension plan, like Idaho Power's, is a plan
where the benefits employees receive at retirement are determined by a defined formula based on
the employee's age, salar, and years of service. The retirement benefit is not contingent on
investment returns, which leaves the employer to bear all of the investment risk. Generally
speaking, if the investments in the plan underperform, the amount of the required contribution
wil increase. When the investments on the plan assets underperform and required contributions
increase, the customers bear the burden of the increased contributions through increased rates for
electric service. Staff does not believe that customers alone should bear the burden of
investment risk. There may also be other types of retirement plans that are more suitable for
regulated utilties.
Staff is aware that Idaho Power needs to provide a total compensation package that
includes retirement benefits to retain and attract valuable employees. It is not Staff s
recommendation at this point to reduce those benefits, but rather to explore other options that
wil provide a similar level of benefits while eliminating the volatilty of the anual
contributions, thus eliminating the need for periodic rate adjustments. Staff is committed to
working with the Company and other interested paries to examine and determine the following:
(a) the appropriate investment risks that should be passed on to customers; (b) if shareholders or
employees should be assigned a portion of the investment risk; or (c) if another type of
retirement plan is preferable.
Rate Design
The Company proposes to allocate the revenue requirement increase in this case
uniformly to the various customer classes based on each class's curent allocation of base
revenue. Staff supports the Company's proposal. This uniform revenue spread is consistent with
the base revenue class allocation approved by the Commission in Case No. IPC-E-09-30, the
Accounting Order to Amortize Deferred Tax Credits and Approve Stipulation, and is consistent
with the most recent cost of service approved by the Commission.
Staff also supports the Company's proposal to increase rate components within individual
customer classes. The approved Stipulation in Case No. IPC-E-09-30 specified that customer
charges would not increase in the residential and small commercial classes. Consequently, Staff
STAFF COMMENTS 5 MAY 13,2010
believes that only the energy component in these classes should increase in this case. The
uniform increase in rate components for all other customer classes is also consistent with the
previously approved stipulation and maintains the rate component relationships established by
the Commission in Idaho Power's last general rate case.
Customer Notice and Press Release
The Press Release and Customer Notice were included in Idaho Power's Application.
!
The Press Release was issued on March 15,2010, while the Customer Notice was distributed to
customers as a billng insert during the billng cycle ending April 21, 2010. In addition to
describing the current filing, these customer communications also describe proposed rate
changes associated with the recovery of Advanced Metering Infrastructure investment (Case No.
IPC-E-I0-06) and the annual Fixed Cost Adjustment (Case No. IPC-E-I0-07).
Customer Comments
As of May 11,2010, twenty-two Idaho Power customers had submitted written
comments regarding the proposed increase in rates, all of which opposed any increase in rates.
While most of the submissions were opposed to proposed increases associated with Advanced
Metering Infrastructure investment and the Fixed Cost Adjustment, seven customers commented
solely on the pension increase. The primar concerns were that customers should not pay for
increases in pension benefits, especially under the current economic conditions, or questioning
why customers should have to pay for pension benefits at alL. However, Staff notes that Idaho
Power is not requesting an increase in its retirement benefits, but only to recover the cash
contributions required to pay for the accrued benefits of its existing pension plan.
STAFF RECOMMENDATION
Staff recommends that the Commission approve the Company's Application and
proposed tariffs to increase customer rates to recover contributions made to the Company's
pension plan. Staff also recommends that the Company use a straight-line amortization to
recover the deferred amounts in the regulatory asset account. Staff fuher recommends that the
Commission direct Idaho Power to continue working with Staff and other interested paries to
determine other retirement benefit options.
STAFF COMMENTS 6 MAY 13,2010
Respectfully submitted this 13ti day of May 2010.
Q/w~
Deputy Attorney General
Technical Staff: Donn English
i:umisc:comments/ipce i O.8wsde.doc
STAFF COMMENTS 7
~
MAY 13,2010
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 13TH DAY OF MAY 2010,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-E-I0-08, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
LISA D NORDSTROM
DONOV AN E WALKER
IDAHO POWER COMPANY
POBOX 70
BOISE ID 83707-0070
E-MAIL: lnordstromtiidahopower.com
dwalkertiidahopower .com
TIM TATUM
GREG SAID
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: tatumtiidahopower.com
gsaidtiidahopower.com
~.\"Qe
SECRETARY
CERTIFICATE OF SERVICE