20101001Application.pdf

LISA D. NORDSTROM
Lead Counsel
InordstromC&idahopower.com
etlDA~POR(I
An IDACORP Company
October 1,2010
VIA HAND DELIVERY
Jean D. Jewell, Secretary
Idaho Public Utilties Commission
472 West Washington Street
P.O. Box 83720
Boise, Idaho 83720-0074
Re: Case No. IPC-E-10-25
IN THE MATTER OF IDAHO POWER COMPANY'S REQUEST FOR
ACCEPTANCEOF ITS 2011 RETIREMENT BENEFITS PACKAGE
Dear Ms. Jewell:
Enclosed for filng please find an original and seven (7) copies of Idaho Power
Company's Application in the above matter.
In addition, enclosed are nine (9) copies each of Gregory W. Said's, Darrel
Anderson's, and Sharon Gerschultz's testimonies filed in support of the Application. One
copy each of Mr. Said's, Mr. Anderson's, and Ms. Gerschultz's testimonies have been
designated as the "Reporter's Copy." In addition, a disk containing a Word version of the
aforementioned testimonies is enclosed for the Reporter.
Very truly yours,
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Lisa D. Nordstrom
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Enclosures
1221 W. Idaho St. (83702)
P.O. Box 70
Boise, ID 83707
LISA D. NORDSTROM (ISB No. 5733)
DONOVAN E. WALKER (ISB No. 5921)
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
Telephone: [phone]
Facsimile: [phone]
InordstromCâidahopower.com
dwalkercæidahopower.com
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iuiu OCT-i PH~: 07
Attorneys for Idaho Power Company
Street Address for Express Mail:
1221 West Idaho Street
Boise, Idaho 83702
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MAnER OF IDAHO POWER
COMPANY'S REQUEST FOR
ACCEPTANCE OF ITS 2011
RETIREMENT BENEFITS PACKAGE.
)
) CASE NO. IPC-E-10-25
)
) APPLICATION
)
COMES NOW, Idaho Power Company ("Idaho Power" or "Company"), and in
accordance with Idaho Public Utilties Commission ("IPUC" or "Commission") Order No.
31091, hereby requests that the Commission issue its order accepting the Company's
2011 Retirement Benefits Package on or before February 28, 2011. However, the
Company does not request recovery of additional pension plan contributions from
customers at this time. In support of this request, Idaho Power states as follows:
i. BACKGROUND
1. Earlier this year, the Company requested recovery of its anticipated 2010
cash contribution to its defined benefits plan. The Commission in Order No. 31091
APPLICATION - 1
allowed a rate change for recovery of $5.4 milion per year. The Commission Order
also stated:
Idaho Power is advised that, previous orders not
withstanding, approval of the Company's pension
contributions in this case does not guarantee Commission
approval of future pension plan contributions. Authority for
the balancing account and regulatory account remain in
place. However, further justification is required before
additional rate recovery for future contributions wil be
authorized. During the next three years, Idaho Power
anticipates additional payments to its employee pension plan
of approximately $68 milion. Staff Comments, p. 4. During
2014-2018, the payments may total nearly $157 millon. Id.
It is unreasonable for Idaho Power's customers to be solely
responsible for large contributions to the Company's defined
benefit pension plan. Many employers in recent years have
replaced their defined benefit plans with pension programs
that place greater responsibilty and investment risks on
employees. Idaho Power must similarly consider changes to
its retirement plan and address shareholder and employee
liabilties in the assignment of pension plan investment risk.
The Commission wil not approve recovery of additional
pension plan contributions from customers without evidence
that Idaho Power has carefully reviewed alternatives to
reduce the burden placed on customers.
Order No. 31091 at 3.
2. Since Order No. 31091 was issued in May 2010, the Company has
reviewed not only its pension plan but the totality of its 2011 retirement benefits
package, including costs, benefits, and risks associated with the package. This filing is
intended to provide the Commission with evidence that the Company has evaluated the
costs of its retirement benefits package, has considered and implemented changes, and
has a prudent retirement benefis package with a reasonable cost burden for Idaho
Power customers. The Company does not request recovery of additional pension plan
contributions from customers at this time.
APPLICATION - 2
II. RETIREMENT BENEFITS PLAN OVERVIEW
3. Idaho Power offers a competitive retirement benefits package that
includes three benefit components: (1) a defined contribution or 401(K) benefit plan, (2)
a defined benefit (pension) plan, and (3) a retiree medical benefit plan. The current
retirement benefits package represents approximately 9.1 percent of a new salaried
employee's base pay. Of that amount, approximately 33 percent is associated with the
401 (k) benefit plan, approximately 65 percent is associated with the defined benefit
plan, and approximately two percent is associated with the retiree medical benefit plan.
4. The Company places additional weight on the defined benefi plan
because it rewards and incents longevity, which in turn faciltates the development and
retention of knowledge and expertise. As a result, the Company maintains a skiled
workforce with less time and expense incurred for training and developing new
employees. The Company expects a significant loss of skiled works over the next
decade; 56 percent of all current employees wil be eligible for retirement by 2020.
Further, 74 percent of current leaders wil be eligible for retirement by 2020 and 67
percent of employees that currently hold positions classified as critical operations roles
wil be eligible for retirement by 2020. A similar workforce pattern exists for the utilty
industry as a whole. For this reason, it is imperative that the Company have the abilty
to attract and retain skiled workers that wil be able to fill these critical roles in the
coming years.
5. The Company's three component approach to an overall retirement
benefis package was specifically developed to balance market risk between the
Company and its retirees. The 401 (K) benefi plan and retiree medical benefits
APPLICATION - 3
components of the retirement benefis package place all market and inflationary risk on
retirees. The retiree medical component ensures that retirees have access to a health
care plan, but has eliminated the Company's exposure to increases in health care plan
costs which have significantly outpaced the overall Consumer Price Index ("CPI").
Health care costs are projected to continue this trend of increasing at a faster pace than
the overall CPI growth rate. The Company encourages employee participation in the
401 (K) benefit portion of the retirement benefits package through matching contributions
as an incentive to save for such future cost increases. The only portion of the
Company's retirement benefits package that has market risk implications for the
Company is the defined benefi portion of the package. However, the Company has
removed its inflationary risk associated with the defined benefit component by not
having a cost of living adjustment feature. This portion on the overall package operates
as a simple annuity with inflationary risk borne by retirees.
6. The Company considers its current retirement-related benefits to be a
competitive package that supports employees' financial needs in retirement while
appropriately sharing the market risk between the Company and its employees.
Maintaining a competitive retirement benefits package allows the Company to recruit
and retain its highly skiled workorce. Further, the competitiveness of Idaho Power's
retirement benefits package supports the Company's intent to maintain a flexible
workforce that can easily adjust work duties and assignments to meet the changing
demands and operational needs, which in turn keep Idaho Power's costs of service
lower.
APPLICATION - 4
II. RETIREMENT BENEFITS PLAN CHANGES FOR 2011
7. On September 16, 2010, the Company's Board of Directors voted to
reduce the cost of the retirement benefits package for new employees hired after
January 1, 2011, by 13 percent from the previous approximately 9.1 percent of a new
salaried employee's base pay to approximately 7.9 percent of a new salaried
employee's base pay. Because of reductions to the cost of the defined benefit plan,
approximately 38 percent of new costs wil be associated with the defined contribution
401 (K) benefit plan, approximately 59 percent wil associated with the defined benefit
plan, and the remaining 3 percent wil associated with the retiree medical benefit plan.
Adjusting the prospective retirement benefits package cost to 7.9 percent of salaried
employees' base pay moves Idaho Power's overall retirement benefits cost to
approximately 80 percent of the representative employment market cost as a
percentage of total salaried employee pay of 9.9 percent. In other words, Idaho
Power's overall retirement benefits wil be 80 percent (7.9/9.9 = 80%) of comparable
costs for comparable companies going forward.
8. Consultant Towers Watson (formerly Towers Perrin) has completed its
benchmark analysis which compares the retirement benefits of 700 companies,
including 92 energy industry companies. The analysis compares Idaho Power's
retirement benefis available to new salaried employees to the retirement benefits
available to new salaried employees of the sampled companies. The metric used in this
evaluation is a value based on retirement benefits as a percentage of base pay. Idaho
Power ranks slightly below its energy industry peers and slightly above the all industry
company category. Further, the Towers Watson analysis provides a detailed summary
APPLICATION - 5
of the costs of retirement benefit packages offered by a more narrow set of peer group
companies consisting of twelve similar-sized and geographically proximate electric
utilties. The results of that analysis are shown on page 3 of Exhibit No. 1 of Ms. Sharon
Gerschultz's testimony that accompanies this Application.
9. The Company wil begin to experience cost savings resulting from the
changes to the retirement benefits package beginning in 2011. However, because the
changes to the retirement benefits package apply to only new employees, the cost
savings associated with the modified retirement benefits package wil grow over time as
a larger proportion of the Company's workorce becomes subject to the new benefits
calculation. Once the workforce is fully transitioned, these changes wil potentially result
in approximately $1.97 millon annually of future cost savings.
10. With the modifications to the defined benefit plan component, Idaho
Power's retirement benefit package is more aligned with trends in the utilty industry.
Under its revised plan, Idaho Power's retirement benefits package costs would rank well
below its energy industry peers and slightly below the all industry company category.
The new plan design results in Idaho Power ranking 11 th in its 12-company peer group,
with ten companies above and two below, as shown on pages 4-5 of Exhibit No. 1 to
Ms. Gerschultz's testimony.
IV. ALTERNATIVES TO THE DEFINED BENEFIT PLAN
11. As part of its retirement benefits package review, Idaho Power considered
increasing its 401 (K) benefit plan and reducing its defined benefit plan. Because the
Company is already below the representative market, alternatives that shifted weighting
between plans but did not reduce current retirement benefits would not decrease costs
APPLICATION - 6
in the long term. While the present values of both plans were very similar, the costs and
contributions for the 401 (K) benefit plan would be higher in the near term as compared
to the defined benefit plan. The 401 (K) benefit plan provided more benefit to a less
experienced employee, tending to attract a less experienced workforce than a defined
benefit plan. While a shift in benefits from the defined benefit plan to the 401 (K) benefit
plan may be appropriate in the future, Idaho Power does not believe such a shift is
appropriate for the Company given its present workforce demographics.
12. Idaho Power also considered implementation of a cash balance plan but
identified a number of issues that made it an unattractive option. A cash balance plan
would increase plan contributions in the near term due to greater costs associated with
younger and less-tenured employees. A cash balance plan is also likely to reduce
employee retention due to increased portabilty, a significant risk given the current age
demographics of the Company's workforce. Further, moving to a cash balance plan for
new employees would also create a significant difference in retirement benefits between
new and existing employees, and would create additional accounting and plan
administrative costs. Consequently, Idaho Power does not believe it is appropriate to
adopt a cash balance plan at this time.
V. MODIFIED PROCEDURE
13. Idaho Power has no objection to this Application being processed under
Modified Procedure, i.e., by written submissions rather than by hearing. RP 201, et seq.
If, however, the Commission determines that a technical hearing is required, the
Company stands ready to present testimony and support the Application in such
hearing.
APPLICATION - 7
14. In support of this Application, Idaho Power has submitted the pre-filed
direct testimony of three witnesses. Mr. Gregory W. Said, Idaho Power's General
Manager of Regulatory Affairs, describes the purpose of the filing, distinguishing
between the Company's requested acceptance of the retirement benefits package and
a future pension funding request. Mr. Darrel Anderson, Idaho Power's Executive Vice
President of Administrative Services and Chief Financial Officer, describes the
components of the Company's retirement benefits package and testifies to the process
Idaho Power uses to review and modify its retirement benefit costs and risks over time.
Ms. Sharon Gerschultz, Idaho Power's Director of Compensation and Benefits, outlines
the analyses conducted as part of the annual retirement benefis review process and
the changes to the Company's retirement benefits package that were approved by
Idaho Power's Board of Directors on September 16, 2010.
15. The Company respectully requests that the Commission issue its order
accepting Idaho Power's 2011 Retirement Benefits Package on or before February 28,
2011, to allow suffcient time to prepare and process a pension funding docket prior to
June 1, 2011.
Vi. COMMUNICATIONS AND SERVICE OF PLEADINGS
16. Communications and service of pleadings with reference to this
Application should be sent to the following:
Lisa D. Nordstrom
Donovan E. Walker
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
Inordstromcæidahopower.com
dwalkercæidahopower.com
Gregory W. Said
Tim E. Tatum
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
gsaidcæidahopower.com
ttatumcæidahopower.com
APPLICATION - 8
VII. REQUEST FOR ACCEPTANCE
17. Idaho Power respectfully requests that the Commission issue its Order
accepting the Company's 2011 Retirement Benefits Package on or before February 28,
2011. With acceptance of the plan, the Company would anticipate that recovery of plan
costs wil reasonably follow in accordance with previous Commission orders.
DATED at Boise, Idaho, this 18t day of October 2010.
~I!'f~
LISA D. NORDST OM
Attorney for Ida: :wer Company
APPLICATION - 9