20110107Response to ICIP Sur-reply Comments.pdf

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]
Inordstrom(ãidahopower.com
dwalker(ãidahopower.com
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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 MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
ACCEPTANCE OF ITS 2011
RETIREMENT BENEFITS PACKAGE.
)
) CASE NO. IPC-E-10-25
)
) IDAHO POWER COMPANY'S
) RESPONSE TO SUR-REPLY
) COMMENTS OF THE INDUSTRIAL
) CUSTOMERS OF IDAHO POWER
)
COMES NOW, Idaho Power Company ("Idaho Powet' or "Company") and
submits the following Response to the Sur-Reply Comments of the Industrial Customers
of Idaho Power ("ICIP") filed in this docket on December 30,2010.
I. PROPOSED DEFINED CONTRIBUTION PLANS
The Commission Staffs ("Staff') and ICIP's initial Comments dated December
14, 2010, first raised the idea that defined contribution plans could be structured to
reward employees unequally for their employment with the Company. They
recommended defined contribution plans that would provide greater contributions for
longevity, older employees, and employees in critical operations. Staff Comments, p.
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER - 1
10; ICIP Comments, p. 8. In its Reply Comments filed on December 28,2010, Idaho
Power indicated that it believed the defined contribution alternatives identified by Staff
and the ICIP could be discriminatory and therefore unlawful under the Employee
Retirement Income Security Act of 1974 ("ERISA"), as amended, and associated
Treasury Regulations, including Treas. Reg. Section 1.401(a)-4 (which was intended to
be cited as 26 C.F.R. Section 1.401(a)(4)-4 and is one of many regulations defining the
discriminatory parameters of qualified retirement plans). Idaho Power Reply
Comments, p. 11.
In response, the ICIP's Sur-Reply Comments describe Idaho Powets
interpretation of Treas. Reg. Section 1.401(a)(4)-4 as "weakly asserted," "speculative
and inconclusive,
II and a "hypothetical problem it appears to have not even yet fully
considered." ICIP Sur-Reply Comments, pp. 2-3. Tellngly, the ICIP did not provide any
legal arguments of its own to rebut Idaho Powets interpretation of the federal
regulations with which such plans must comply.
Idaho Powets reference to Treas. Reg. Section 1.401 (a)-4 was intended to
highlight the potential complications associated with Staff and ICIP's seemingly "off the
cuff' suggestions relative to modifying the defined contribution plan's design. Changes
to any qualified plan design require careful consideration, taking into account the
particular plan's abilty to pass applicable discrimination tests, including, but not limited
to, those under Code Sections 401 (a)(4), 410(b), and 414(s). Certain plan design
changes would cause discrimination issues and thus threaten the plan's qualified status,
which of course is a paramount consideration. It is inappropriate to imply that
implementation of a cross-tested plan or tiered matching contribution rates would in fact
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER - 2
be workable from a legal standpoint and/or would replace the value provided by the
defined benefit plan.
These legal constraints limit the abilty to structure defined contribution plans to
obtain both cost and operational objectives previously stated. A shift from a defined
benefi plan to a defined contribution plan wil not save money and actually increases
the unfunded liabilty as new employees are shifted to a new plan. This conclusion is
consistent with Idaho Powets analysis as previously set forth in the testimony of Sharon
Gerschultz (p. 11) and the Company's Reply Comments (p. 10), as well as reported
statements regarding potential changes to the Public Employee Retirement System of
Idaho ("PERSI"). See, Idaho Statesman, December 23, 2010 (reporting statement that
shifting new employees to a new pension plan would increase the unfunded liabilty).
II. EMPLOYEE RETENTION VERSUS ATTRACTION
The Comments of the Staff and the ICIP criticized Idaho Power for not providing
evidence "that portabilty of retirement benefits wil lead to increased turnover." Staff
Comments, page 9. The Company first became aware on December 16, 2010, of a
pertinent Towers Watson report when it was referenced in a trade publication. This
December 2010 report did not exist during the discovery period in this docket and Idaho
Power only learned of its existence after Staff and the ICIP had submitted their
Comments. Due to its applicabilty to the issues presented in this docket and the
timeliness of the report, Idaho Power retrieved the publicly available report from
ww.towerswatson.com and included it as Attachment NO.3 to its Reply Comments.
The ICIP's Sur-Reply Comments focus on attracting prospective employees.
While this is certainly of concern to the Company, especially as skiled employees retire,
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
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the ICIP misses the point. Defined benefit plans promote retention of experienced
employees in a way that more portable defined contribution plans cannot. All other
things being equal, mid- to late-career employees are less wiling to switch jobs when
the size of the retirement benefit is so closely linked to continued employment.
According to the Towers Watson Retirement Attitudes: Attraction and Retention
survey of more than 3,000 employees conducted in May and June of 2010, almost three
in five (59 percent) employees at organizations that sponsor a defined benefit plan cite
their retirement program as an important reason they decided to stay with their current
employer, compared to only 32 percent of those that sponsor a defined contribution
plan. Idaho Power Reply Comments Attachment NO.3, p. 2. Because defined benefit
plans reward and incent longevity, which in turn faciltates the development and
retention of knowledge and expertise, the Company continues to place additional weight
on the defined benefit plan. As a result, the Company maintains a skiled workforce with
less time and expense incurred for training and developing new employees.
II. RECOVERY OF PRUDENT EXPENDITURES
The Commission's Order No. 31091 directed Idaho Power to "consider changes
to its retirement plan and address shareholder and employee liabilties in the
assignment of pension plan investment risk." As explained in its Application, testimony,
and Reply Comments, Idaho Power has done this analysis and has made changes that
increase employee liabilties for investment risk. Idaho Power Reply Comments, pp. 2
and 8. The ICIP appears to dismiss outright all variations of defined benefit plans as
being imprudent without any substantive analysis, and despite the fact that its defined
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
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contribution plan design may be unable to achieve vital operational objectives or may
increase customer costs to fund retirement benefits.
Idaho Power views this docket as the Commission's invitation for the Company to
explain the retirement benefits package it believes best suits the overall needs of the
employer, the employees, and its customers. The Company believes its 2011
Retirement Benefits Package as presented in this docket achieves this end. As
explained in its Reply Comments, Idaho Power wants to offer a retirement benefits
package valued at a level the Commission believes is reasonable to be recovered from
customers as a prudent labor expense. Idaho Power Reply Comments, p. 3. Moreover,
the Company wil continue making adjustments to keep costs to a reasonable level as
the Commission may determine over time.
The ICIP's discussion of the U.S. Constitution's Fifth Amendment Takings Clause
makes Idaho Powets point, albeit from a different approach. If reasonable labor
expenses are recovered in customer rates, the rates are not confiscatory. A Takings
Clause violation only occurs if a reasonable level of labor expenses are NOT recovered
in customer rates and confiscatory rates result.
As previously stated in its Reply Comments, the Company believes that it is not
the desire of the Commission to replace the Company's operational decision-making
process, including decisions regarding retirement benefits, but rather to monitor the
Company's decision-making process to ensure that the costs associated with those
decisions are prudently incurred and in the best interests of customers. Ultimately, the
Commission's duty is to determine a reasonable level of retirement benefits for recovery
in customer rates that wil allow Idaho Power to employ a workorce that can provide
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
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safe, reliable service to customers. Once a reasonable cost level (inclusive of
investment risk and reward) has been established, it should not matter whether
retirement benefits take the form of a defined benefit plan or a defined contribution plan
or both, as long as the expenses stay within that reasonable cost leveL. As
demonstrated in the Company's testimony and pleadings, the Company took a
comprehensive look at how changes to its entire retirement benefits package would
impact other factors such as overall cost, market competitiveness of its benefits,
employee satisfaction, and employee retention - as well as compliance with laws and
regulations governing employee compensation. The Company's 2011 Retirement
Benefits Package reduces the level of market risk ultimately borne by customers while
appropriately balancing the overall costs, benefits, and risks associated with the plan.
Retirement benefits are a reasonable and prudent labor expense required and utilzed
to provide safe and reliable service to customers. A denial of a reasonable and prudent
labor expense required and utilzed to provide service to the public amounts to an
unlawful taking.
iv. CONCLUSION
Defined benefit plans have in no way become obsolete as seems to be ICIP's
suggestion on page 5 of its Sur-Reply Comments. Defined contribution plans and
defined benefit plans are not "either ot' propositions; in fact, these plans work well in
tandem and need not work to the mutual exclusion of one another. There has
undoubtedly been an overall decline in the use of defined benefit plans in recent years
for several reasons, including the market performance impact on plan assumptions
(which vary widely from plan to plan), the complexity of administration, and the
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER - 6
perceived popularity of Code Section 401 (k) plans. However, this decline does not lead
to the conclusion that the maintenance of a defined benefit plan by Idaho Power or any
other entity is inappropriate, nor that the cost of maintaining such is unreasonable.
There is no evidence to suggest that elimination of Idaho Powets defined benefit plan
could be adequately replaced by a defined contribution plan in terms of cost, employee
satisfaction, and effectiveness in retention.
As evidenced by Idaho Powets pleadings and testimony, the Company has set
its 2011 Retirement Benefits Package at a competitive cost level that is less than the
median offerings of similarly situated utilty peers. Idaho Power has carefully
considered not only the allocation of costs and investment risks between customers and
employees but also the operational imperative to maintain safe, reliable service with an
engaged, qualified, experienced, and flexible workforce. Therefore, Idaho Power
respectfully requests that the Commission issue its Order accepting the Company's
2011 Retirement Benefits Package as a reasonable approach to providing employee
benefits.
DATED at Boise, Idaho, this 6th day of January 2011.
t?jZ (k~LISA D. NOR TROM
Attorney for Idaho Power Company
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER - 7
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 6th day of January 2011 I served a true and
correct copy of IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER upon the
following named parties by the method indicated below, and addressed to the following:
Commission Staff
Weldon B. Stutzman
Deputy Attorney General
Idaho Public Utilties Commission
472 West Washington
P.O. Box 83720
Boise, Idaho 83720-0074
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~ Email Weldon.Stutzman(ãpuc.idaho.gov
Industrial Customers of Idaho Power
Peter J. Richardson
Gregory M. Adams
RICHARDSON & O'LEARY, PLLC
515 North 2¡th Street
P.O. Box 7218
Boise, Idaho 83702
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~ Email peter(ãrichardsonandoleary.com
greg(irichardsonandoleary. com
Dr. Don Reading
Ben Johnson Associates
6070 Hil Road
Boise, Idaho 83703
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~ Email dreading(imindspring.com
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Lisa D. Nordst
IDAHO POWER COMPANY'S RESPONSE TO SUR-REPLY
COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER - 8