20110415Second Reply Comments.pdf

esIDA~POR~
An IDACORP Company
LISA D. NORDSTROM
Lead Counsel
InordstromRiidahopower.com
April 15, 2011
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 THE APPLICA TlON OF IDAHO POWER COMPANY
FOR ACCEPTANCE OF ITS 2011 RETIREMENT BENEFITS PACKAGE
Dear Ms. Jewell:
Enclosed for filng please find an original and seven (7) copies of Idaho Power
Company's Second Reply Comments in the above matter.
Very truly yours,
Jf~lJ. t-~
Lisa D. Nordstrom
LDN:csb
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]
Inordstromcæidahopower.com
dwalkercæidahopower.com
RECEIVED
2011 APR is PM 3: 22
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
) SECOND REPLY COMMENTS
)
COMES NOW, Idaho Power Company ("Idaho Powet' or "Company"), and in
response to comments of the Idaho Public Utilties Commission Staff ("Staff') and the
Industrial Customers of Idaho Power ("ICIP") filed in this docket on April 8, 2011,
submits the following Second Reply Comments.
i. IDAHO POWER'S SUPPLEMENTAL REPORT COMPLIES
WITH THE IDAHO PUBLIC UTILITIES COMMISSION'S ("COMMISSION")
DIRECTIVE AND APPLIES REASONABLE ASSUMPTIONS
The Company is in agreement with the Commission Staff that it has complied
with Commission Order No. 31091, as well as the Commission's January 24, 2011,
directive to provide additional information regarding its 2011 Retirement Benefits
Package. Second Staff Comments at 5. The Company's Supplemental Report:
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 1
Retirement Benefits Risk Analysis ("Supplemental Report") filed on February 18, 2011,
included an analysis of the potential investment risk associated with various investment
strategies. This type of analysis is difficult because it requires making assumptions - a
lot of them. Mr. Randy Lobb's statement at the January 24, 2011, workshop effectively
summarized what should be expected from such an analysis: "In projecting the future,
you have a wide range of assumptions that you could make and a wide range of
outcomes." Workshop Tr. at 52. Both Staff and Idaho Power agree that forecasting
investment and employee benefit scenarios would likely be "a little inconclusive" and is
unlikely to give "a definitive answer on what the best plan is and what the least costly
plan or what the greatest risks are for any particular plan going forward." Id. at 50-53.
Rather, "it's going to give you more information about market conditions and certainly
what types of programs shift risk to what sort of parties." Id. at 52.
Not knowing the future with any certainty, Idaho Power and its actuaries made a
number of educated assumptions to complete the analysis found in its Supplemental
Report. The Commission Staff questioned several of the assumptions but did not offer
any alternatives in its Second Comments filed on April 8, 2011.
A. Investment Rate-of-Return Assumptions. To determine the range of
economic conditions in its analysis, the Company used a historical period of 1972 to
2009 to simulate the various possible investment returns under various economic
conditions, including both good and bad investment markets. The Company then
adjusted the returns downward to account for current interest rates. Staff believes it is
not necessary to adjust long-term potential returns downward based on current interest
rates because "a 37 -year period should be sufficient to show a variety of potential
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 2
market returns, and future adjustment reduces the integrity of the assumptions and their
results." Second Staff Comments at 3.
With regard to the Company's investment return assumptions used in its
Supplemental Report, it is important to note that higher assumed interest rates translate
into higher overall returns, resulting in lower future funding obligations for the pension
plan. Therefore, because the hypothetical defined contribution plans analyzed by the
Company had fixed returns of 8 percent (modeled at the request of Staff and ICIP) and
7 percent, the Company's defined benefit plan would be even more attractive with
higher investment return assumptions. With that said, the Company views its interest
rate adjustment as conservative and quite reasonable when current interest rate levels
are compared to historical interest rates.
According to Ibbotson Associates, a leading authority on asset allocation with
expertise in capital market expectations, the rate of return on intermediate-term
government bonds from 1972 through 2009 was 7..8 percent. If the Company did not
make an adjustment for the current interest rate environment, an asset allocation of 100
percent bonds would be expected to generate (on average) a 7.8 percent return going
forward, which would nearly satisfy the Company's actuarial return assumption of 8
percent. That is not realistic because .the current yield on the 10-year U.S. Treasury
Bond is 3.6 percent, or less than one-half of the 7.8 percent historical number.1 The
Company's projections include an improvement from current levels to a projected bond
return in excess of 5 percent; however, a 7.8 percent projected return on the fixed-
income portion of the portolio from the current starting point is just not reasonable.
1 Ibbotson SBBI 2010 Classic Yearbook, Table C-5, Intermediate-Term Government Bonds: Total Returns,
p.258.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 3
Further, the Company's assumed total rate-of-return is already on the high end of the
range of assumptions utilized by similar plans, and using an even higher expected rate-
of-return would likely draw scrutiny from the Company's auditors, actuaries, and
possibly federal agencies such as the Pension Benefit Guaranty Corporation,
Department of Labor, and Internal Revenue Service.
B. Employee Count. In its Supplemental Report, Idaho Power projected a 3
percent annual growth in eligible employee count, which results in a total eligible
employee count of 2,619 in year 2019 as compared to 2,007 eligible employees in
2010. Staff indicated that it believes it is "unlikely the Company wil need to add an
additional 612 employees by 2019." Second Staff Comments at 4.
The Company's projected 3 percent annual growth in eligible employee count is
reflective of the Company's actual historical eligible employee growth rate. The
Company has no reason to believe that it wil experience a level of employee growth
during the analysis period different from the assumed leveL. However, if the actual level
of employee growth is less than the assumed level, the financial impact that fewer
employees would have on the Company's pension plan would be similar to that which
would exist under a substitute defined contribution plan. That is, required future
contributions associated with different levels of employee counts would change in
similar proportions under each of the plan designs analyzed by the Company.
C. Wage Increase. Idaho Power's Supplemental Report also assumed an
annual wage increase of 4.5 percent through 2019. Staff noted that annual utilty wage
increases are increasingly scrutinized by regulators in recent years and believes the
Company's assumption is unreasonable. Second Staff Comments at 4.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 4
The Company views the annual wage increase assumption of 4.5 percent to be
reasonable based upon historical rates of inflation. According to Ibbotson Associates,
the annualized rate of inflation from 1972 through 2009 (the same 37 -year period used
to represent potential market returns) was 4.5 percent.2 It is true that inflation has been
muted in recent years, but it also true that there is a growing concern in the financial
community regarding the re-emergence of inflationary pressures. Further, it should be
noted that this assumption represents individual participants' expected changes in
salary due not just to inflation but also to promotions and merit salary increases for
employees that are below market rates of pay.
Staff argues that although the assumptions were consistent for comparing the
defined benefi and defined contribution plans, the assumptions may increase the
projected cost of a defined contribution plan more than they would increase the
projected costs of the defined benefits plan. Id. As described above in Subsections A
through C, the Company views the assumptions challenged by the Staff as either being
conservative in nature or as having similar impacts across each of the plan designs
analyzed.
II. TIME PERIOD USED FOR COMPARISON PURPOSES
Both Staff and the ICIP were critical of the time period over which Idaho Power
analyzed investment risk and plan costs. Staff does not believe the nine-year projection
included in Idaho Power's Supplemental Report adequately assesses the risk
associated with a pension plan, which is less costly initially because market volatilty
does not have the same impact on the asset balance of the plan in the early years. Id.
2 Ibbotson SBBI2010 Classic Yearbook, Table C-7, Inflation, p. 270.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 5
The model that Miliman, Idaho Powets actuary, utilzes does not generate
actuarial projections, including estimates of future contributions beyond ten years. Due
to the uncertainty and limited value of projections longer than ten years, Millman does
not currently utilze models for longer time periods. The most recent formal actuarial
valuation for Idaho Powets pension plan is 2010; therefore, the Company ilustrated
forward projections for the future nine-year period 2011 through 2020.
If a nationally recognized benefits valuation expert like Millman believes it is
inappropriate to place reliance on a model beyond ten years, Idaho Power is not in a
position to suggest otherwise. Idaho Power understands the desire of Staff and the
ICIP for a longer comparison period; however, the Company simply cannot rely on the
accuracy of any further extrapolation of projections based on current conditions over a
longer period of time.
II. COMPONENTS OF THE RETIREMENT BENEFIT PACKAGE
On pages 4 and 5 of the ICIP's Comments Regarding Idaho Powets
Supplemental Report, ICIP presents its understanding of the roles of the defined benefit
plan and 401 (k) plan in the Company's retirement benefits package. Based on ICIP's
comments, it is not clear to the Company that ICIP has a correct understanding of the
relationship between the Company's 401 (k) plan and the defined benefi plan.
The Company's retirement benefis package includes three components: (1) a
defined contribution or 401 (k) benefit plan, (2) a defined benefit pension plan, and (3) a
retiree medical benefi plan. Eligible employees can participate in all three components
of the retirement benefits package. In total, according to the Towers Watson analysis,
the Company's retirement benefits package was shown to have a cost below market.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 6
The Company's analysis in the Supplemental Report looked at replacing the
defined benefit portion of the package with a defined contribution plan that would
provide the same total level of benefits at retirement. If implemented, that change
would increase the benefit level associated with the existing 401 (k) plan from 4 percent
of base pay to a level closer to 10 percent in order to replace the discontinued benefits
from the defined benefit portion of the package. That is, the defined contribution
alternatives analyzed would expand the benefits associated with the current 401 (k) plan
and eliminate the defined benefits plan.
It should also be noted that the original creation of the existing 4 percent defined
contribution plan was the result of a previous risk mitigation effort relative to the defined
benefit plan. Whereas the Company's defined benefit plan had routinely allowed post
retirement inflation adjustments to beneficiaries, similar to the inflation adjustments in
the Public Employees Retirement System of Idaho plan, a decision was made in 1994
to eliminate such adjustments. Employees were directed to utilze the defined
contribution plan and contribute their own dollars in addition to the company match in
order to provide for the impacts of inflation on their retirement income. It is important to
realize that the existing 401 (k) defined contribution plan is offered to supplement the
elimination of a feature previously provided in the defined benefit plan.
The Company believes that the alternatives analyzed in the Supplemental Report
are reasonable and support its proposal in this docket. Further, the plan alternatives
analyzed in the Supplemental Report are consistent with those discussed and agreed
upon by all parties, including ICIP, at the workshop held on February 10, 2011.
. IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 7
iv. EQUIVALENT BENEFITS BETWEEN PLAN ALTERNATIVES
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. In
doing so, 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.
Yet ICIP states that "without a complete analysis of the Company's
compensation levels compared to its competitors, it is unreasonable to assume that the
Company's matching contribution must keep its employees in the same position as they
would be under the defined benefit program." ICIP Comments Regarding Idaho
Powets Supplemental Report at 6. As explained in its Application and testimony,3
Idaho Power conducts a detailed review of its employee compensation annually to
assess how the Company compares to its peers, industry generally, and the local
economy. Exhibit No. 1 to Ms. Gerschultz' testimony shows that the costs Idaho Power
incurs associated with retirement benefits is well below the energy services industry
average, and it is also below the average for all industry across the country. In order to
move below the national average for all industry, Idaho Power reduced the expenses
associated with the defined benefit plan by 20 percent.
Moreover, the ICIP's statement contradicts its position at the January 24, 2011,
workshop. At the workshop, Mr. Donn English presented the Staffs position with regard
to the Company's request. Mr. English stated that "we didn't feel that the Company
needed to necessarily reduce benefits." Mr. English went on to say, "(w)e felt the
3 See Application at 5-6 and Gerschultz Direct Testimony at 5-6.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 8
Company should just evaluate other options (and) that could provide the same level of
benefits but reduce the volatilty and rates." Workshop Tr. at 7. All parties represented
at the workshop, including ICIP, generally agreed with the Staffs position that any
option evaluated should provide the same level of benefits. ICIP's position was made
explicitly clear when Mr. Greg Adams later stated "(w)ithout repeating a lot of what Mr.
English said on behalf of Staff, i'll just say that we agree 1 00 percent with the Staffs
position in this case." Workshop Tr. at 33.
v. ASSIGNMENT OF RISK
According to Staff, the Company's Supplemental Report "does not go far enough
in addressing the potential risks customers face during a period of declining market
returns, nor does it adequately address the assignment of risk between shareholders
and employees." Second Staff Comments at 4.
The Company believes that when it seeks recovery of prudently incurred defined
benefit plan costs in the future, the Commission should not ignore the benefits that
customers received by assuming some investment risk. As explained in the Company's
Reply Comments filed on December 28, 2010, the level of risk borne by customers has
resulted in significant customer benefits through the return on assets contributed to the
plan. These benefits were particularly evident during the years 2004 through 2010 in
that no customer costs related to the defined benefit plan occurred until the spring of
2010. The growth in plan assets due to the assumption of market risk is precisely the
reason that the Commission could provide no current recovery of pension costs from
2004 to the spring of 2010; however, the Company was stil able to provide a
competitive benefit to its employees.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 9
Essentially (and expressed in nominal dollars), the Company's customers have
received more than $600 milion in value from approximately $100 millon of plan
contributions from 1976 through 2009. This performance would not have been possible
without the assumption of some market risk. If the same dollars as were contributed to
the trust fund had been invested at a risk free rate, the plan value would be markedly
less. Had the Company sought to minimize or eliminate investment risk while at the
same time providing the same level of benefits to employees in order to remain
competitive, the cost to customers would have been significantly higher.
The ICIP's table on page 7 of its Comments and the Staffs discussion on page 4
of its Comments incorrectly suggest that the year-to-year changes in the value of plan
assets over time is entirely due to market volatility. The value of plan assets over time
is also significantly impacted by benefit payments and plan expenses. For example, in
the ten years between 1998 and 2008, plan assets were reduced by approximately
$149 millon for benefit payments and plan expenses. The Staff and the ICIP ignore the
benefits of the investment risk assumed by the plan while overstating the customer
impact of volatility.
While the Staff and the ICIP refer to "assigning risk between shareholders and
employees," that idea misinterprets the roles of shareholders and customers in funding
retirement benefis. Shareholders provide capital to construct plant to serve customers
in exchange for the opportunity to earn a return on their investment over time.
Customers provide funding for reasonable utilty operations and maintenance expenses,
including labor expenses like retirement benefits, through rates. Because shareholders
have no opportunity to earn a return on pension contributions, it would be improper to
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 10
assign pension costs and risk to them. Under the present regulatory model, risk should
be assigned between employees and customers.
VI. PUBLICLY AVAILABLE DATA
The ICIP submits that customers should be made aware how large the
Company's estimated contributions to its pension fund wil be in the next nine years,
and how much customers wil be asked to contribute. ICIP Comments Regarding Idaho
Powets Supplemental Report at 8, n. 2. Idaho Power conducted a review and analysis
of the extent of publicly available information and materiality of the information in the
Supplemental Report and disclosed publicly as much information as possible in this
case without creating significant compliance concerns under Regulation FD
promulgated by the Securities and Exchange Commission ("SEC") pursuant to the
Securities Act of 1933, which addresses the selective disclosure of information by
publicly traded companies. In addition to Regulation FD concerns, public release of the
information in advance of its disclosure through SEC-authorized means also creates
liabilty concerns under Section 1 O(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder.
Following Idaho Powets submission of its February 18, 2011, Supplemental
Report, on February 24, 2011, the Company filed with the SEC and posted to the
Company's Internet website its annual report on Form 10-K for the year ended
December 31, 2010,4 containing detailed disclosure of certain aspects of its retirement
benefit plans.5 While it is nearly impossible to predict how much pension expense the
Commission will allow Idaho Power to collect in rates over any future time period, the
4 Idaho Powets 2010 Annual Report is available at: http://ww.idacorpinc.com/financialsJannlreps.cfm.
5 See, in particular, Note 11 - "Benefi Plans" to the financial statements included in the 2010 Annual Report.
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 11
Company's estimated contributions to its pension fund through 2015, as well as other
information relating to the Company's retirement benefit plans, are now publicly
available in its 2010 Annual Report. See 2010 Annual Report at 47 and 121-130.
VII. CONCLUSION
In its Application and testimony, Idaho Power demonstrated that the costs of its
2011 Retirement Benefits Package were well below the comparable costs incurred by a
peer group of companies and were also below the comparable costs for all industries.
In the Supplemental Report, the Company demonstrated that its current targeted
allocation of investments that support the pension portion of retirement benefits
provides an opportunity to meet the actuarial target of 8 percent, while reasonably
managing the range of volatilty in average annual returns around the 8 percent target.
The Company, with its 2011 Retirement Benefits Package, reduced pension
related retirement benefits for new employees by 20 percent. The expected average
annual funding obligation for new employees over the next nine years is $1.2 millon per
year. The expected average annual funding obligation for new employees over the next
nine years that would occur if the Company moved to a defined contribution plan would
be $4.2 millon per year based upon an actuarial expectation of a 7 percent annual
return on investments. If a defined contribution plan could earn returns equal to a
defined benefit plan, the expected average annual funding obligation could be $3.6
milion per year, $2.4 milion per year greater than expected under the Company's
current plan.
The Company's investment portolio associated with its defined benefit plan
appropriately balances risk and returns at a lower cost than the modeled defined
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 12
contribution plan alternatives. The analyses presented in the Supplemental Report
demonstrate that the level of risk borne by Idaho Powets customers related to a defined
benefit plan is reasonable and is likely to result in lower costs over time as compared to
other alternatives.6
As evidenced by the information filed by the Company in this docket, Idaho
Power believes that it has acted reasonably and prudently to develop a market
competitive retirement benefits package that wil meet the Company's operational and
financial objectives and wil serve in the best interests of its customers. 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 15th day of April 2011.
£.o~~
LISA D. NORDTOM
Attorney for Idaho Power Company
6 Public Employee Retirement Systems of Idaho, Outline of DB/DC Study Findings, January 2011. (Finding
that "DC Plans generally have a higher cost of investment fees and administrative fees" and "switching to a DC plan
does not necessarily save the State money.")
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 13
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 15th day of April 2011 I served a true and correct
copy of IDAHO POWER COMPANY'S SECOND REPLY COMMENTS 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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U.S. Mail
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FAX
-- Email Weldon.Stutzmancæpuc.idaho.gov
Industrial Customers of Idaho Power
Peter J. Richardson
Gregory M. Adams
RICHARDSON & O'LEARY, PLLC
515 North 27th Street
P.O. Box 7218
Boise, Idaho 83702
Hand Delivered
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FAX
-- Email peter(irichardsonandoleary.com
greg(irichardsonandoleary.com
Dr. Don Reading
Ben Johnson Associates
6070 Hil Road
Boise, Idaho 83703
Hand Delivered
-- U.S. Mail
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FAX
-- Email dreading(imindspring.com
IDAHO POWER COMPANY'S SECOND REPLY COMMENTS - 14