20101001Gerschultz Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S REQUEST FOR ACCEPTANCE
OF ITS 2011 RETIREMENT BENEFIT
PACKAGE.
CASE NO. IPC-E-10-25
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
SHARON GERSCHULTZ
1 Q.Please state your name and business address.
2 A.My name is Sharon Gerschul tz. My business
3 address is 1221 West Idaho Street, Boise, Idaho.
4 Q.By whom are you employed and in what
5 capacity?
6 A.I am employed by Idaho Power Company (~Idaho
7 Power" or ~Company") as the Director of Compensation and
8 Benefits in the Human Resources Department.
9 Q.Please describe your educational background.
10 A.I earned my Bachelor of Arts in Economics
11 from the University of California at Irvine and my Master
12 of Business Administration in Finance from the University
13 of Southern California.
14 I have earned the designations of Certified
15 Compensation Professional through World at Work and
16 Certified Employee Benefits Specialist through the Wharton
17 School of the Uni versi ty of Pennsylvania.
18 Q.Please describe your work experience.
19 A.I have been in the human resources
20 profession for seventeen years, specializing in
21 compensation and benefits. Prior to joining Idaho Power, I
22 was Boise Cascade Corporation's Compensation Manager.
23 Prior to employment at Boise Cascade, I worked for Qwest in
GERSCHULTZ, DI 1
Idaho Power Company
1 Denver, Colorado, first as Benefits Manager, then as its
2 Executi ve Compensation Manager.
3 i became employed with Idaho Power in 2005 in the
4 Human Resources Department as Director of Employment and
5 Compensation. In 2009, I became Director of Compensation
6 and Benefits. I am responsible for payroll, compensation,
7 health and welfare benefits, retirement programs, worker's
8 compensation, and short- and long-term disability programs.
9 Q.What is the scope of your testimony in this
10 proceeding?
11 A.My testimony describes:(1) the
12 instructions that I received from Darrel Anderson,
13 Executive Vice President of Administrative Services and
14 Chief Financial Officer, regarding my annual review of the
15 Company's retirement benefits package, (2) the analyses
16 that were conducted as part of the annual retirement
17 benefi ts review process, and (3) my recommended changes to
18 the Company's retirement benefits package that were
19 ultimately approved by Idaho Power's Board of Directors.
20 Q.Please describe your role with regard to the
21 Company's annual review of its retirement benefits package.
22 A.I oversee the Company's annual review of its
23 retirement benefits package.
GERSCHULTZ, DI 2
Idaho Power Company
1 Q.What instructions did you receive from Mr.
2 Anderson prior to your review of the Company's retirement
3 benefits package this year?
4 A.Mr. Anderson's instructions to me this year
5 were similar to the instructions provided to me for prior
6 years' reviews. I was asked to provide the Office of the
7 CEO with comparisons of the Company's overall retirement
8 benefits package costs to a representative sample of
9 comparable employers' retirement benefits package costs as
10 a representative market. I was further asked to make
11 recommendations for changes to the Company's retirement
12 benefits package based upon the Company's desire to remain
13 competitive to the representative employment market, but
14 with an eye toward perpetuating a package which encourages
15 employee retention. Mr. Anderson also asked me to consider
16 that retirement benefit portability is not in alignment
17 with the Company's employee retention goals and may not be
18 in the best interests of its customers.
19 Q.Please provide an overview of Idaho Power's
20 current retirement benefits package.
21 A.As Mr. Anderson has testified, Idaho Power
22 offers a competitive retirement benefits package that
23 incl ude s three bene fit components: ( 1 ) a de fined
24 contribution or 401 (K) benefit plan, (2) a defined benefit
GERSCHULTZ, DI 3
Idaho Power Company
1 (pension) plan, and (3) a retiree medical benefit plan.
2 The current retirement benefits package represents
3 approximately 9.1 percent of a new salaried employee's base
4 pay. Of that amount, approximately 33 percent is
5 associated with the 401 (K) benefit plan, approximately 65
6 percent is associated with the defined benefit plan, and
7 approximately 2 percent is associated with the retiree
8 medical benefit plan.
9 The Company considers its current retirement-related
10 benefi ts to be a competi ti ve package that supports
11 employees' financial needs in retirement while
12 appropriately sharing the market risk between the Company
13 and its employees. Maintaining a competitive retirement
14 benefits package allows the Company to recruit and retain
15 its highly skilled workforce. Further, the competi ti veness
16 of Idaho Power's retirement benefits package supports the
17 Company's intent to maintain a flexible workforce that can
18 easily adjust work duties and assignments to meet the
19 changing demands and operational needs which in turn keep
20 the Company's costs of service lower.
21 Q.How does the Company ensure that its
22 retirement benefits package remains competitive in the
23 marketplace?
GERSCHULTZ, DI 4
Idaho Power Company
1 A.The Company closely monitors trends in the
2 utility industry and attempts to ensure that its overall
3 retirement benefit package is within market ranges. The
4 Company has a contract with a third-party individual
5 consultant, Towers Watson (formerly Towers Perrin), to
6 provide a comparison of the cost (as a percentage of pay)
7 to Idaho Power of providing retirement benefits to the
8 corresponding costs incurred by a peer group of companies.
9 The Company reviews the Towers Watson information regarding
10 the cost of the retirement benefits package in the context
11 of the total employee compensation package. The Company's
12 main objective in this review is to ensure that the cost of
13 its retirement benefits package remains competi ti ve when
14 compared to other companies. A further comparison is
15 conducted evaluating the Company's retirement benefits to a
16 specific group of peer companies comprised of similar-
17 sized, investor-owned utilities and fellow intermountain
18 utilities.
19 Q.Has Towers Watson completed its 2010 review
20 of Idaho Power's retirement benefits package?
21 A.Yes. Towers Watson has completed its
22 benchmark analysis which compares the retirement benefits
23 of 700 companies, including 92 energy industry companies.
24 The analysis compares Idaho Power's retirement benefits
GERSCHULTZ, DI 5
Idaho Power Company
1 available to new salaried employees to the retirement
2 benefits available to new salaried employees of the sampled
3 companies. The metric used in this evaluation is a value
4 based on retirement benefits as a percentage of base pay.
5 Q.Have you prepared an exhibit that shows
6 where Idaho Power ranks with other companies based upon the
7 cost of its overall retirement benefits packages?
8 A.Yes. Wi th the assistance of Towers Watson,
9 I prepared Exhibit No.1, which summarizes the results of
10 the 2010 Towers Watson benchmark analysis. Page 1 of
11 Exhibit No. 1 provides a brief summary of the independent
12 market review conducted by Towers Watson. As can be seen
13 on page 2 of Exhibit No.1, Idaho Power ranks below its
14 energy services industry peers and above the entire Towers
15 Watson database which includes all industries. Further,
16 the Towers Watson analysis provides a detailed summary of
17 the costs of retirement benefit packages offered by a more
18 narrow set of peer group companies consisting of twelve
19 similar-sized and geographically proximate electric
20 utili ties. The results of that analysis are shown on page
21 3 of Exhibit No.1.
22 Q.After reviewing the results of the 2010
23 Towers Watson benchmark analysis, did you consider any
24 modifications to the current retirement benefits package?
GERSCHULTZ, DI 6
Idaho Power Company
1 A.Yes. After reviewing the results of the
2 2010 Towers Watson benchmark analysis and the instructions
3 that I received from Mr. Anderson, I considered a number of
4 factors as I analyzed potential modifications to the
5 Company's retirement benefits package.
6 Q.What were the main factors that you
7 considered in evaluating potential modifications to the
8 Company's retirement benefits package?
9 A.The most important factor I considered was
10 the independent market data that indicated that the Company
11 was already below the representative employment market
12 costs. I tried to balance this first factor with a second
13 key factor that I considered - Mr. Anderson's detailed
14 instructions that the Company should maintain a market
15 competi ti ve retirement benefits package. The final factor
16 that I considered was the relative portability of different
17 retirement benefit options. Specifically, my focus was on
18 the direction I received from Mr. Anderson emphasizing that
19 the retirement benefits package should encourage longevity
20 in the Company's workforce to promote the retention of its
21 skilled workers.
22 Q.Why is employee retention such an important
23 factor in the Company's decisions regarding employee
24 retirement benefits?
GERSCHULTZ, DI 7
Idaho Power Company
1 A.The Company expects a significant loss of
2 skilled works over the next decade. Many of these
3 employees are in leadership positions or are in positions
4 cri tical to operations. My recent analysis of the existing
5 Idaho Power workforce found that 56 percent of all current
6 employees will be eligible for retirement by 2020.
7 Further, 74 percent of current leaders will be eligible for
8 retirement by 2020 and 67 percent of employees that
9 currently hold positions classified as "Cri tical
10 Operations" roles will be eligible for retirement by 2020 .
11 Critical Operations positions are those that plan, design,
12 build, maintain, and support the plant and systems that
13 generate and reliably deliver energy to Idaho Power
14 customers. A similar workforce pattern exists for the
15 utility industry as a whole. For this reason, it is
16 imperative that the Company have the ability to attract and
17 retain skilled workers that will be able to fill these
18 cri tical roles in the coming years.
19 Q.What retirement benefits package
20 modifications did you consider?
21 A.I considered three different potential
22 modifications to the retirement benefits package: (1) shift
23 the Company's current benefit weighting from the defined
24 benefit plan to the 401 (K) benefit plan, (2) eliminate the
GERSCHULTZ, DI 8
Idaho Power Company
1 defined benefit plan and replace the defined benefit plan
2 with a cash balance plan for all new employees, and (3)
3 modify the defined benefit plan payout formulas for new
4 employees . Ultimately, my recommendation to the Office of
5 the CEO was to implement the third alternative, modify the
6 defined benefit plan payout formulas for new employees.
7 Q.Please provide an overview of the first
8 retirement benefits package modification that you
9 considered.
10 A.The first modification that I considered was
11 a simple shift of the Company's current benefit weighting
12 from the defined benefit plan to the 401 (K) benefit plan.
13 The main benefit that the Company would derive from such a
14 shift would be the benefit of more consistency in yearly
15 costs compared to the current structure. Increasing the
16 Company's contribution to the 401 (K) benefit plan and
17 reducing the defined benefit plan would not reduce costs
18 over time but would tend to produce more level costs year
19 over year due to less weight associated with the defined
20 benefit plan. The defined benefit plan's costs and
21 contribution requirements are directly impacted by general
22 financial market fluctuations.
GERSCHULTZ, DI 9
Idaho Power Company
1 Q.As you considered a shift in the weighting
2 from the defined benefit plan to the 401 (K) benefit plan,
3 what factors did you consider?
4 A.As I analyzed this modification, the primary
5 factor that I considered was keeping the entire retirement
6 benefits package competitive. Since the Company is already
7 below the representative market, in order to keep the
8 package competitive, I would need to develop an alternative
9 that did not result in a reduction of the current
10 retirement benefits by simply shifting the weighting
11 between plans. As I considered the scenarios that would
12 maintain the same value in the Company's retirement
13 benefi ts, I concluded that this approach would not result
14 in any material cost savings. That is, the costs of the
15 defined benefit plan and 401 (K) benefit plan would be
16 essentially the same between plans over the long run.
17 Q.Can you explain why you believe that over
18 time the costs of the defined benefit plan and 401 (K)
19 benefit plan would be the same?
20 A.Yes. If the goal is to provide similar
21 level of benefit at retirement for an average employee, the
22 Company would need to estimate the return that an employee
23 would be able to earn by investing the contributed funds in
24 the 401 (K) benefit plan. That return over time would be
GERSCHULTZ, DI 10
Idaho Power Company
1 similar to, or possibly lower than, that which the Company
2 would earn in the defined benefit plan. To obtain an
3 equivalent benefit at retirement for an average employee
4 starting with the Company, the present value of the total
5 Company contribution would be essentially the same under
6 both plans to achieve the same retirement benefit.
7 Q.Were there additional factors that you
8 considered?
9 A.Yes. I also considered the other factors
10 that I mentioned. The 40l (K) benefit plan is extremely
11 portable and has no cost to an employee who chooses to
12 leave the Company and join another company. This
13 particular plan design attribute of the 401 (K) benefit plan
14 does not support the Company's desire and Mr. Anderson's
15 guidance to emphasize and encourage longevity in the
16 Company's workforce.
17 Q.Were there any other conclusions that you
18 reached in your analysis of a shift between the defined
19 benefit plan and a 401 (K) benefit plan?
20 A.Yes. I reached two other conclusions.
21 First, I noticed that while the present value of both plans
22 were very similar, the costs and contributions for the
23 401 (K) benefit plan would be higher in the near term as
24 compared to the defined benefit plan.
GERSCHULTZ, DI 11
Idaho Power Company
1 Q.What was the second conclusion you reached?
2 A.As I further evaluated different scenarios,
3 I concluded that while the defined benefit plan provided a
4 very similar benefit as the 401 (K) benefit plan to an
5 average worker, it provided a higher level of benefits to
6 an employee with more years of experience while the 401 (K)
7 benefit plan provided more benefit to a less experienced
8 employee. This difference between plans was an additional
9 factor in my decision that a shift from a defined benefit
10 plan to a 401 (K) benefit plan was not an appropriate
11 al ternati ve. My analysis concluded that the defined
12 benefit plan would tend to attract and incent a more
13 experienced workforce, whereas the 40l (K) benefit plan
14 would tend to attract a less experienced workforce. As I
15 testified earlier, given the industry and Company's current
16 workforce demographics that could result in 57 percent of
17 the current workforce ~etiring in the next ten years,
18 attracting and retaining experienced workers is one of the
19 most critical objectives for the Company at this point in
20 time. My final conclusion based on all of the factors I
21 considered is that a shift in benefits weighting from the
22 defined benefit plan to the 401 (K) benefit plan may be
23 appropriate in the future, but, at this time, such a shift
24 is not appropriate for the Company. For this reason, I
GERSCHULTZ, DI 12
Idaho Power Company
1 fel t that this al ternati ve approach did not warrant
2 presentation to the Office of the CEO.
3 Q.Please provide an overview of the other two
4 modifications to the retirement benefits package that you
5 considered.
6 A.The other two al ternati ves that I evaluated
7 focused solely on modifications to the defined benefit
8 plan. The second alternative I considered would have
9 eliminated the defined benefit plan and replaced the
10 defined benefit plan with a cash balance plan for all new
11 employees. The third alternative evaluated would modify
12 the defined benefit plan payout formulas. Specifically,
13 alternative three would reduce the retirement benefit
14 percentage from the current 1.5 percent per year of service
15 to 1.2 percent per year for new employees hired after
16 January 1, 2011. Based on my evaluation of these two
17 al ternati ves, I felt both approaches warranted presentation
18 to the Office of the CEO.
19 Q.How does a cash balance pension plan differ
20 from the Company's current defined benefit plan?
21 A. There are two general types of defined
22 benefit plans: (1) ~final average pay plans," often
23 referred to as traditional pension plans, and (2) cash
24 balance plans. In general, final average pay plans provide
GERSCHULTZ, DI 13
Idaho Power Company
1 a specific benefit at retirement for each eligible
2 employee, while cash balance plans specify the amount of
3 contributions to be made by the employer toward an
4 employee's retirement account.
5 In a traditional pension plan, a participant's
6 benefi t is calculated by multiplying a percentage factor by
7 their final average pay and their years of service. The
8 result is an annual benefit amount, typically paid as a
9 single-life annuity each month, reduced for early
10 retirement and joint annuity elections.
11 In a typical cash balance plan, a participant's
12 account is credited each year with a pay credit as a
13 percent of compensation and an interest credit (either a
14 fixed rate or a variable rate that is linked to an index
15 such as the one-year Treasury bill rate). When a
16 participant becomes entitled to receive benefits under a
17 cash balance plan, the benefits that are received are
18 defined in terms of an account balance. Upon retirement,
19 this balance may be paid as a lump sum, an annuity, or in
20 some other form, depending on the plan provisions.
21 Under both programs, increases and decreases in the
22 value of the plans' investments do not directly affect the
23 benefit amounts promised to participants. Thus, the
GERSCHULTZ, DI 14
Idaho Power Company
1 investment risks and rewards on plan assets are borne by
2 the employer.
3 Q.Would the implementation of a cash balance
4 plan shift any market risk share from Idaho Power to its
5 employees?
6 A.No. Both the cash balance plan and the
7 defined benefit plans assign all investment risk to the
8 Company. However, with the design of Idaho Power's defined
9 benefit plan, the employee bears 100 percent of the
10 inflationary market risk because the plan does not include
11 a cost-of-living adjustment.
l2 Q.What was the Company's decision with regard
13 to its evaluation of potential alternatives to the current
14 retirement benefits package?
15 A.The Company has decided to implement
16 alternative three, a reduction in the benefit percentage
17 from the current 1.5 percent per year of service to 1.2
18 percent per year for new employees hired after January 1,
19 2011.
20 Q.Why did you recommend that the Company
21 continue the defined benefit plan on a modified basis
22 instead of moving to a cash balance plan for new employees?
23 A.While the implementation of a cash balance
24 plan could be accomplished in a manner competitive with the
GERSCHULTZ, DI 15
Idaho Power Company
1 market, the Company identified a number of issues that made
2 a cash balance plan an unattractive option. A cash balance
3 plan would increase plan contributions in the near term due
4 to greater costs associated with younger and less-tenured
5 employees. A cash balance plan is also likely to reduce
6 employee retention due to increased portability.
7 Portabili ty could someday be less of a risk factor if the
8 age demographic of Idaho Power's workforce changes.
9 However, today the negative impacts on retention of skilled
10 workers override the potential future benefits. Further,
11 moving to a cash balance plan for new employees would
12 create a significant difference in retirement benefits
13 between new and existing employees and would create
14 addi tional accounting and plan administrative costs.
15 I recommended to continue the defined benefit plan
16 on a modified basis because I believe this approach strikes
17 the right balance between managing cost and supporting the
18 Company's workforce obj ecti ves, as laid out for me by Mr.
19 Anderson. The modified defined benefit plan is more
20 aligned with the Company's understanding of market trends
21 and will result in long-term cost savings by adj usting the
22 retirement benefits available to a new salaried employee
23 from 9.1 percent of base pay to 7.9 percent, a reduction of
24 1.2 percent of pay and an over 13 percent reduction in
GERSCHULTZ, DI 16
Idaho Power Company
1 retirement benefits costs. The modified plan will also
2 resul t in additional cost savings by promoting the
3 retention of highly-skilled, fully-trained, long-tenured
4 workers. It also honors a commitment made to the existing
5 workforce.
6 Q.Will the changes to the Company's retirement
7 benefits package result in immediate cost savings?
8 A.The Company will begin to experience cost
9 savings resulting from the changes to the retirement
10 benefits package beginning in 2011. However, because the
11 changes to the retirement benefits package apply to only
12 new employees, the cost savings associated with the
13 modified retirement benefits package will grow over time as
14 a larger proportion of the Company's workforce becomes
15 subj ect to the new benefits calculation. A simple
16 calculation can be performed to estimate the potential
17 future cost savings by applying the resulting savings of
18 1.2 percent of pensionable earnings multiplied by the total
19 pensionable earnings of $164 million, which results in
20 approximately $1.97 million yearly savings once the
21 workforce is fully transitioned.
22 Q.Does the Company view the defined benefit
23 plan as an essential component to a competitive retirement
24 benefits package?
GERSCHULTZ, DI 17
Idaho Power Company
1 A.Yes. The Company's defined benefit plan
2 rewards and incents longevity, which in turn facilitates
3 the development and retention of knowledge and expertise.
4 As a result, the Company maintains a skilled workforce with
5 less time and expense incurred for training and developing
6 employees. The defined benefit plan is highly valued by
7 employees and provides a sense of financial security.
8 Based on current utility industry data, the Company
9 believes that its defined benefit plan is still a very
10 competitive benefit. The most recent survey of the
11 Company's designated peer group reveals that all of the
12 companies still have either a defined benefit plan or a
13 cash balance plan for at least some segment of the their
14 workforce and most still offer these plans to every new
15 employee.
16 Q.Besides the concern regarding attracting and
17 retaining a skilled workforce, are there other reasons that
18 the Company should ensure that its retirement package
19 remains at levels similar to other companies in the utility
20 industry?
21 A.Yes. The Company and its customers benefit
22 from having a workplace with strong employee relations
23 between management and the workforce. Idaho Power's
24 current workplace structure allows its employees to
GERSCHULTZ, DI 18
Idaho Power Company
1 maintain operational flexibility regarding assignments and
2 job duties. The flexibility that the Company currently
3 enj oys minimizes the costs of doing business. Further, as
4 I have looked at other utili ties, it is clear that the
5 Company's workforce structure has allowed it to avoid many
6 additional employee-related costs that other utilities
7 incur and must pass on to customers. In order to continue
8 to maintain a strong relationship with employees and the
9 associated lower costs benefits that the current work
10 structure provides, the Company must ensure that its
11 compensation programs, including the retirement benefits
12 package discussed here, remain competi ti ve in the
13 aggregate.
14 Q.Wi th the modification to the Company's
15 defined benefit plan formula, how will Idaho Power's 2011
16 retirement benefits package compare to plans currently
17 offered by its peer group as defined in the Towers Watson
18 benchmarking analysis?
19 A.Wi th the modifications to the defined
20 benefit plan component, Idaho Power's retirement benefit
21 package is more aligned with trends in the utility
22 industry. Under its revised plan, Idaho Power's retirement
23 benefits package costs would rank well below its energy
24 industry peers and slightly below the all industry company
GERSCHULTZ, DI 19
Idaho Power Company
1 category. A graphical illustration of this change in
2 ranking is shown on page 4 of Exhibit No.1. Additionally,
3 when compared to the 12-company peer group, the new plan
4 design results in Idaho Power ranking 11th, with ten
5 companies above and two below, as shown on page 5 of
6 Exhibi t No. 1.
7 Q.Does this conclude your testimony?
8 A.Yes, it does.
GERSCHULTZ, DI 20
Idaho Power Company
BEFORE THE
. IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-E-10-25
IDAHO POWER COMPANY
GERSCHUl TZ, DI
TESTIMONY
EXHIBIT NO.1
Independent Market Review
..Custom benchmark analysis performed by consultant
Towers Watson
2010 Employee Benefits Information Center data
used, consisting of 700 companies across all
industries, including 92 energy industry companies
Twelve Idaho Power peer group companies were
analyzed separately
Total Retirement Rewards were reviewed, including
~ Defined Benefit Pension Programs
~ Defined Contribution / 40 1 (k) Programs
~ Retiree Medical Programs
Values were calculated as a percent of pay
Based on benefits available to a new salaried
employee at time survey was conducted; most recent
changes not reflected
..
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Exhibit No. 1
Case No. IPC-E-10-25
s. Gerschultz, IPC
Page 1 of5
Summary of Current Retirement
Package Position for New Hires (today)
Combined Retirement
Program Costs
(as a percent of pay)
Energy Services
Industry Average 9.9%
Idaho Power 9.1%
Entire TW
Database Average 8.0%
2010 Towers Watson. All rights reserved. Proprietary - For Towers Watson and Towers Watson client use only.
Exhibit No. 1
Case No. IPC-E-10-25
S. Gerschultz, IPC
Page 2 of 5
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Summary of Proposed Retirement
Package Position for New Hires (as
of January 2011)
Combined Retirement
Program Costs
(as a percent of pay)
Energy Services
Industry Average 9.9%
Entire TW
Database Average 8.0%
Idaho Power 7.9%
2010 Towers Watson. All rights reserved. Proprietary - For Towers Watson and Towers Watson client use only.
Exhibit No. 1
Case No. IPC-E-10-25
S. Gerschultz, IPC
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