20101215Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
R:ECEt\/
lUtO DEC 14 PH 4= 36
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 FOR )
ACCEPTANCE OF ITS 2011 RETIREMENT )BENEFITS PACKAGE. )
)
)
)
CASE NO. IPC-E-IO-25
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 No. 32092 on October 15,2010,
submits the following comments.
BACKGROUND
On October 1, 2010, Idaho Power Company fied an Application with the Commission
requesting the Commission accept the Company's 2011 retirement benefits package. The
Company does not request recovery of additipnal pension plan contributions in this Application.
Earlier this year the Company requested authorization to recover in customer rates its 2010
cash contributions to its defined benefits plan. The Commission approved the request in Order
No. 31091, but directed the Company to review appropriate changes to its pension plan.
Specifically, noting that Company pension payments may total nearly $157 milion during
STAFF COMMENTS 1 DECEMBER 14,2010
2014-2018, the Commission stated that "it is uneasonable for Idaho Power's customers to be
solely responsible for large contributions to the Company's defined benefit pension plan." Order
No. 31091, p. 3. The Commission directed the Company to "consider changes to its retirement
plan and address shareholder and employee liabilties in assignment of pension plan investment
risk." Id Finally, the Commission stated .that it "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." Id
The Company's Application states that its 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 benefits package with a
reasonable cost burden for Idaho Power customers." Application, p. 2. The Company's
retirement benefits package includes three components: (1) a defined contribution or 401(k)
benefit plan, (2) a defined benefit pension plan, and (3) a retiree medical benefit plan. The 401(k)
benefit plan and retiree medical benefits components place all market and inflationary risk on
retirees. The Application states that the defined benefit portion of the package places market risk
on the Company, although as explained later, this risk is passed on to customers. The Company
removed inflationar risk by not including a cost of living adjustment feature in the defined
benefit portion. Application, p. 4.
The Application states that the Company's board of directors voted to reduce the cost of
the retirement benefits package for new employ~es hired after January 1, 2011, from
approximately 9.1 % of a new salaried employee's base pay to approximately 7.9%. As a result,
the defined contribution 401 (k) benefit portion wil comprise approximately 38% of the new
retirement benefit costs, and the defined benefit portion wil comprise 59%. The remaining 3%
wil be associated with the retiree medical benefit plan. Application, p. 5. Because the changes to
the retirement benefits package applies only to new employees, the cost savings from the
modification will be minimal initially but wil grow over time as a larger proportion of the
Company's workforce is included in the new benefits calculation. The Company expects the
changes to result in approximately $1.97 millon anual savings once the Company's workforce is
fully transitioned to the modified benefit plan. Application, p. 6.
STAFF COMMENTS 2 DECEMBER 14, 2010
STAFF REVIEW
Staff reviewed the Company' s Application and the accompanying testimony of Gregory
W. Said, Darel Anderson, and Sharon Gershcultz, along with information obtained through
production requests. Staff also reviewed previous Idaho Power cases dealing with pension
accounting and pension contributions as well as Commission Orders in those cases. Based upon
its review, Staff believes that Idaho Power Company failed to comply with the Commission's
Order. Staff views the Company's evaluation as incomplete for the following reasons: (1) it
results from flawed instruction from Mr. Andersoo;(2) it began with a flawed premise, and (3) the
evaluation did not adequately consider all available alternatives. Staff believes the Company's
evaluation of its Retirement Benefits Package was affected by a predetermined end result that led
the Company to exclude other viable retirement benefit options in its analysis. Based on this
conclusion, Staff recommends that the Commission reject the Company's request for acceptance.
If the Company's benefit plan review is accepted by the Commission, Staff believes it would be
inappropriate for the Commission to pre-approve any costs associated with the 2011 Retirement
Benefits Package for rate recovery in customer rates, as suggested by the Company.
In these comments, Staff summarizes the three plans included in the Idaho Power 2011
Retirement Benefits Package, addresses Staffs understanding of the Commission's directive in
Order No. 31091, explains why Staff believes the Company's evaluation was incomplete and
based on a flawed premise and directions, discusses the erroneous assumptions used in the
Company's evaluation, and provides a sampling ofother alternatives that the Company should
include in future evaluations.
Summary of Retirement Benefits Package
The Retirement Benefits Package offered by Idaho Power consists of three pars: (1) a
defined contribution or 401(k) benefit plan,(Z) a defined benefit (pension) plan, and (3) a retiree
medical benefit plan. The Company claims that the retirement benefit packages currently
represents approximately 9.1 % of a new salared employee's base pay, and as modified, represents
approximately 7.9%. These calculations and the assumptions used in the calculations could not be
verified by Staff because they were completed bya third pary consultant using a proprieta
database. The Company contends that the information is confidential, as it did with much of the
information requested by Staff in this case.
STAFF COMMENTS 3 DECEMBER 14,2010
Defined Benefit Pension Plan
The Pension Plan of Idaho Power Company was established in 1943 and is available to
regular, temporar, and part-time employees who are 18 years of age or older and have completed
12 consecutive months of employment. The defined pension benefit paid at retirement under the
curent plan is based on three main determinants: (i) the number of years of service credited for
the employee, (2) the "Final Average Earnings" 'of the employee, and (3) the employee's age at
retirement. As described in the Direct Testimony of Darel Anderson, the Final Average Earings
is the average total earings during the highest 60 consecutive months in the final 120 months of
service with the Company. The pension payout formula applies a factor of 1.5 percent to the
number of years of service to derive a benefit percentage. The benefit percentage is then
multiplied by the Final Average Earings to determine the final anual pension payout. Under the
plan as modified, the 1.5 factor is reduced to 1.2. The plan has a minimum anual benefit level
equal to $144 for each year of credited service. If this amount is greater than the anual benefit
derived under the above formula, the employee will receive the greater amount. Employees must
accumulate five years of service to be fully vested in the plan.
Employees are eligible to retire early at age 55, provided they have completed ten years of
service. Normal Retirement Age under the plan is age 65, however employees can retire at age 62
without receiving a reduced benefit. Employees who retire prior to age 62 receive a reduced
benefit based on their age at retirement.
The 401 (k) Defined Contribution Plan
The Idaho Power Company Employee Savings Plan is a401(k) plan established in 1979
where employees can contribute the lesser of 100% of the base salary and anual bonuses or the
anual limitation under Internal Revenue Code §415(c), which was $49,000 in 2009 but is
adjusted anually for cost-of-living. Employee Contributions can be classified as a 401(k)
Deferral (pre-tax), a 401(k) Roth Contribution (after-tax), or a Savings Plan (after-tax). Employee
Contributions are then matched by the Company. ata rate of 100% of the first 2% of employee
eligible pay contributed, and 50%. of the next 4% of employee eligible pay contributed.
Employees who contribute 6% of eligible pay wil receive the maximum match of 4%.
Contributions greater than 6% of eligible pay are not matched.
STAFF COMMENTS 4 DECEMBER 14, 2010
Employees become eligible to enter the plan immediately upon becoming age 18, and are
immediately eligible for matching contributions. Matching contributions become 100% vested
after only one year of service.
Retiree Medical Benefit Plan
The Company maintains a self-fuded insurance plan for its employees and retirees.
Employees who retired prior to Januar 1, 2003, or who retired with 30 years of service effective
Januar 1, 2010 can maintain coverage in the insurance plan at reduced rates which are subsidized
by the Company. Employees who retired prior to January 1, 1984 are exempt from paying
premiums. Effective January 1, 2004, employees hired after Januar 1, 1999 will have access to
the group health plan, but at full cost and without any Idaho Power contribution.
This plan is also available to non-employee directors of Idaho Power Company.
The Commission's Directive
Upon completion of Case No. IPC-E-I0-08, where Idaho Power was allowed to recover
approximately $5.4 milion for its 2010 pension contribution, the Commission stated in Order No.
31091:
Idaho Power is advised that, previous orders not withstading, approval of
the Company's pension contributions in ,tllis case does, not guarantee Commission
approval of future pension plan contribu.tions. 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, that payments may total neatly $157 milion 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 investmenb'isks 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. (emphasis added) i
i The statement in this Order that "During 2014-201 8,the payments may total $ 1 57 milion" mistakenly misinterprets
Staffs comments to imply these payments represent expected plan contributions. Instead, the $157 milion represents
expected payments to retirees, which in tum reduce the,assetÆofthe pension plan trst and can potentially lead to
larger contributions to replace those assets.
STAFF COMMENTS 5 DECEMBER 14,2010
The language above clearly and definitively instructs the Company to review its defined benefit
pension plan and consider changes to the plan to address the assignment of pension plan
investment risk. Staff believes the directive by the Commission could not be more clear.
Nonetheless, Company witness Said states, intiis Oirect Testimony, pages 5-6 that his "read of the
Commission Order language is that the Commission wants to refresh its understanding of the
Company's management of retirement benefitspackage costs over time to ensure that such
management is prudent and resulting costs are reasonable." Staff believes that, while a refresher is
helpful, the Commission is aware of other retirement benefits provided by Idaho Power, as those
benefits have been discussed in great detail in previous general rate cases. In Order No. 31091,
the Commission specifically directed Idaho Power to address the cost to customers and assignment
of investment risk associated with the defined, benefit pension plan.
The Company merely reviewed its retirenient benefits package in the same maner as it
had done in the past, without altering its review and evaluation in light of the Commission's
explicit directive. Both Mr. Anderson and Ms. Gerschultz testify that the instructions for the
review of the retirement benefits package this year were similar to the instructions in prior years.
Mr. Anderson's instructions to Ms. Gerschultz were "to provide the Office of the CEO with
comparisons of the Company's overall retirernent benefits package costs to a representative
sample of comparable employers' retirement benefits package costs as a representative market."
Direct Testimony at 5. He then "asked her to'm'ake recommendations for changes to the
Company's retirement benefits package based upon the Company's desire to remain competitive
to the representative employment market, but with an eye toward perpetuating a package which
encourages employee retention," and "to recognize that retirement benefit portabilty is not in
alignment with the Company's employee retention goals and may not be in the best interests of its
customers." The instructions disregard the 'directive of the Commission to address the assignment
of investment risk between shareholders and'emploiees, and to review alternatives that reduce the
burden placed on customers. Idaho Power's focus was fully on employee retention and not
shareholder liabilties in the assignment of risk.
In response to Production Request NO.9 from the Industrial Customers ofIdaho Power,
the Company states that it "believes that shareholders of the Company are not willng to pay for
costs associated with levels of pension planlhvestinentrisk that are greater than what would be
found to be prudent and reasonably collected frbmcustomers." Apparently because Idaho Power
predetermined that shareholders are unwillingtô accept any of the investment risk associated with
STAFF COMMENTS 6 DECEMBER 14, 2010
the defined benefit plan, the Company did not address the Commission's directive regarding
allocation of risks in its evaluation. The Company fuher stated in that response that it "strives to
operate the business in a cost-effective and prudent maner acceptable to regulators. More
specifically, the Company reviews its RetireinentBenefits Package anually to ensure these same
operational objectives are met." The Companyfurler stated that:
Mr. Anderson's instructions to Ms. Gerschultz regarding her annual review of the
Company's Retirement Benefits Package were not solely prompted by the Idaho
Public Utilties Commission's directive in Order No. 31091. The Company
believes it is appropriate to review its retirement benefits regardless of a
Commission directive to do so. However, Mr. Anderson believes that his annual
instructions to Ms. Gerschultz regarding evaluation of retirement benefits are
consistent with Commission directiv'esregatding such evaluation.
It is clear that the Company did not change its evaluation process based on the Commission
directive, and instead focused on business as usual, and did not address the specific areas of
concern discussed by the Commission.
Idaho Power mentions in its Application and testimonies that in reviewing the entire
retirement benefits package, investment risk is allocated between the Company and the employees.
The Application states that "the Company's three component approach to an overall retirement
benefits package was specifically developed to balance the market risk between the Company and
its retirees." Application, p. 5. The Company'niaintains that the investment risk with the 401(k)
defined contribution plan and the inflationar risk with the retiree medical plan are borne by
employees while the investment risk for the defined benefit pension plan is borne by the
Company. However, it is misleading to state, that the Company bears the investment risk of the
defined benefit pension plan. The Company bears no investment risk because Commission Order
No. 31003 allows for a regulatory balancing, account for cash contributions and provides for the
amortization of the balance in such account, including caring charges. Given this regulatory
authority, all investment risk associated with the defined benefit pension plan is borne by Idaho
Power's customers. Staff believes it was this assignment of risk that prompted the Commission's
directive to the Company in Order No. 31091 "to address shareholder and employee liabilties in
the assignment of pension plan investment risk."
The Company also claims that avoidance of risk may also mean avoidance of any
associated reward, and that customers have received rewards for bearng the risk of the defined
benefit pension plan. In the twenty year period prior to the creation of a regulatory asset and
STAFF COMMENTS 7 DECEMBER 14,2010
balancing account established in Order No. 31003 for Case No. IPC-E-09-29, the Company has
contributed approximately $26.5 milion tøthe defined benefit plan while recovering
approximately $44 millon from customerS in rates. In addition, the Company has capitalized
nearly $8 milion during that same period, and received a retur on its investment and additional
depreciation expense in rates. This ilustrates that customers have not benefitted from the
associated rewards of investment risk as pension costs embedded in rates exceeds the actual
contributions to the pension plan trust.
The Company's Evaluation
In its annual review of the retirement benefits package, Idaho Power contracted with
Towers Watson, using a benchmark analysisthatcompares the retirement benefits of700
companies, including 92 energy industry companies. Idaho Power then compared its retirement
benefits to a select group of 12 peer companies. Staff requested to see the benchmark analysis but
the Company declined to provide it, stating that it was proprietar information to Towers Watson.
The Company does indicate that the summar plan data for the comparable group of the 92
companies in the energy service industry ilustrates that only 24 of them have a traditional defined
benefit plan similar to Idaho Power's. Ofthetw~Hve companies in the peer group, only four have
a defined benefit plan similar to Idaho Power's. Staffalso asked to see this sumar plan data,
but it was not made available. Given this infoniation, it is apparent that Idao Power is one of the
few remaining companies that maintain a traditional defined benefit plan. Staff believes it is
unreasonable for Idaho Power to continue to place the burden of investment risk associated with
traditional defined benefit plans squarely on the shoulders of customers.
Ms. Gerschultz explains the factors shè considered in evaluating potential modifications to
the Company's retirement package on page 7.ofherDirect Testimony:
The most importt factor I considered was the independent market data
that indicated that the Company was already below the representative
employment market costs. I tried to balance this first factor with a second key
factor that I considered - Mr. Anderson's detailed instructions that the Company
should maintain a market competitive .retirement benefits package. The final
factor that I considered was the relative portabilty of different retirement
options. Specifically, my focus was on the direction that I received from Mr.
Anderson emphasizing that the retirement. benefits package should encourage
longevity in the Company's workforce to promote the retention of its skiled
workers.
STAFF COMMENTS 8 DECEMBER 14,2010
Ms. Gerschultz's evaluation and analysis of alternative plans seems entirely predicated on the
concern that the Company's retirement benefits must encourage employee retention. The
Company seems to sumarily dismiss defined contribution plans from future consideration.
Because the maximum vesting period ållowed by law canot exceed six years, and because
defined contribution plans are fully portable upon termination of employment, the Company
implies that defined contribution plans lead to higher employee turnover. However, the Company
provides no evidence that portbilty of retirement benefits will lead to increased turnover. In fact,
retention of employees is accomplished in,many ways, and many times is outside the Company's
control. Salaries, paid tÌme off, work envitonment,corporate culture, and opportunity for
advancement are all reasons for employees to remain with an employer that are within the
employer's control. Other reasons, such as location, quality of life, spouse's employment, costs
and variables in the housing market, and a good public school system are further reasons for Idaho
Power's employees to remain with Idaho Power.
Idaho Power's argument that its retirement benefits package should promote retention by
limiting portbilty is inconsistent with a primary feature in par of its retirement package. The
matching contributions to the 401 (k) plan become 100% vested after only one year of service. If
employee retention is the main goal of Idaho Powêi-'s retirement benefits package, it arguably
would warrant a far less generous vesting schedule on employer contributions. Staff also notes
that the Company's turover rate, excluding retirements, is 2%, a full percentage point less than
the national average in 2009 according to the Bureau of Labor Statistics. This is evidence that
turover does not seem to be a significant,issue fotthe Company.
Upon completion of its review, theCotnpany decided to reduce the benefit formula in the
pension plan from 1.5% per year of service to 1.2%, 'stating that once the workforce is fully
transitioned, the Company wil save approximately $ 1.97 milion in anual pension costs. The
Company suggests that customers wil realize the savings immediately from the changes in the
defined benefit pension plan. Customers wil not realize an immediate benefit in 2011 because the
changes only apply to new employees hired after Januar 1, 2011. The plan has a 12-month
eligibilty period before employees can paricipate, so there will be no savings at least unti 2012.
Because the changes only apply to new employees, and the Company must stil fud the benefit
accrual under the higher formula for existing employees, customers will not realize any material
savings for several years. It could take 25-30 years for the workforce to be fully transitioned,
STAFF COMMENTS 9 DECEMBER 14,2010
meaning existing employees are no longer' aptive in the plan, so the Company and customers wil
not realize the estimated $1.97 milion benefit 'for quite a long time.
The Company prepared an analysis ilustrating that if seven percent of pay were
contributed to a defined contrbution plan, it wôuld provide the same level of retirement benefit as
the existing defined benefit pension plan for the average employee. The average employee
assumes an age 35 years old, an anual salary of $50,000 with a pay increase of three percent each
year. The seven percent contributed would have to ear an annual retur of eight percent to
produce the same payout as the defined pension plan. If five percent of compensation were
contributed to the defined contribution plan,thé employee would have to ear an average of ten
percent on the investment to produce the equivaIen.tpay out of the defined pension plan. Staff
believes this demonstrates that the Company can provide the same level of retirement benefits for
its employees without placing undue investment risk on its customers.
If employee retention is the primary goal of Idaho Power's retirement package, Staff
believes there are many defined contribution plan formulas that may provide greater contributions
to employees based on age, years of service, or position classification. Staff recommends that
further evaluation of the retirement benefits package should include the option ofa new
comparabilty, cross-tested defined contribution plan, where older employees and employees in
critical operations roles may receive a larger contribution than ran and file employees.
Staff is aware that the Commission does not intend to supersede the Company's
operational decision-making process, and that the Company's directors are ultimately responsible
for approving retirement benefits availableto Idaho Power's employees. The Commission's
responsibilty is to determine the prudency and reasonableness of the retirement benefits package
and the amounts recoverable from customers tmuughrates. Staff believes this is why the
Commission issued its order directing the Company to evaluate its defined benefit pension plan
and consider alternatives that reduce the burden on customers and address shareholder and
employee liabilties in the assignment of pension plan investment risk. As stated previously, the
Company's modified pension plan does very little toreduce the burden on customers, and the
assignment of investment risk was not seriously addressed in the evaluation.
STAFF COMMENTS 10 DECEMBER 14,2010
STAFF RECOMMENDATION
After reviewing the Application, testimony, and all other information made available, Staff
; ~ .' ¡
recommends that the Commission reject the Company's request for acceptace of its retirement
benefit package evaluation with implied inclusion in future rates. Staff also recommends that the
Commission direct Idaho Power, in future evaluatiops, to provide Staff all requested information
in its entirety without redaction. Idaho Power should inform its third pary consultants of expected
Commission reviews prior to engaging those third pary's services, and remind them of the
Commission's right to review relevant information.
Respectfully submitted this \L\V- day of December 2010.
(¿~
Weldon B. Stutzman
Deputy Attorney General
Technical Staff: Terri Carlock
Donn English
i:umisc:commentslipcelO,25wstcde comments
STAFF COMMENTS 11 DECEMBER 14,2010
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 14TH DAY OF DECEMBER 2010,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-E-I0-25, 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: lnordstrom(iidahopower.com
dwalker(iidahopower.com
PETER J RICHARDSON
GREGORY MADAMS
RICHARDSON & O'LEARY
PO BOX 7218
BOISE ID 83702
E-MAIL: peter(irichardsonandolear.com
greg(irichardsonandoleary.com
GREG W SAID
TIMETATUM
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: gsaid(iidahopower.com
ttatum(iidahopower.com
DR DON READING
6070 HILL RD
BOISE ID 83703
E-MAIL: dreading(imindspring.com
.,'~~
SECRETARY7
CERTIFICATE OF SERVICE