20110408Second Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
RECEIVED
21! 1 APR -8 AM 9: 54
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-10-25
SECOND COMMENTS OF
THE COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Weldon B. Stutzman, Deputy Attorney General, and in response to Procedural
Order No. 32207 on March 16,2011, submits the following supplemental comments.
BACKGROUND
On October 1,2010, Idaho Power Company filed an Application with the Commission
requesting the Commission accept the Company's 2011 retirement benefits package. The Company
does not request recovery of additional 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
SECOND STAFF COMMENTS 1 APRIL 8, 2011
2014-2018, the Commission stated that "it is unreasonable 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." ¡d.
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." ¡d.
On October 15,2010, the Commission issued Notice of Application and Notice of Modified
Procedure establishing a 60-day period for filing written comments, followed by a
14-day responsive comment period. The Commission Staff and the Industrial Customers of Idaho
Power (ICIP) filed comments on December 14,2010 recommending that the Commission reject the
Company's Application. Idaho Power fied responsive comments on December 28,2010. On
December 30,2010, ICIP fied a Motion for Leave to File Sur-Reply Comments, with the
comments attched. On January 6, 2011, Idaho Power fied a motion to allow responsive comments
to ICIP's Sur-Reply comments and also fied its comments in response to the Sur-Reply comments.
The Commission subsequently determined to convene a workshop "to provide the paries an
opportunity to clarify statements and concerns expressed in their written comments, and provide the
Commission the opportunity to ask questions to clarify the record." Notice of Workshop, p. 2. The
Notice of Workshop was issued on January 12,2011, and the workshop was held on January 24,
2011. At the workshop, Idaho Power offered to provide additional information and analysis and
stated a wilingness to work with Staff and ICIP to reach agreement, if possible, on the extent of
additional information and the schedule to produce it.
On Januar 26,2011, the Commission issued Order No. 32169 directing the parties to
"discuss presentation of additional information and material to the Commission and to propose a
schedule to complete the Commission's review in this case." Order No. 32169, p. 2. Pursuant to
that Order, Idaho Power on February 18,2011, fied its Supplemental Report: Retirement Benefits
Risk Analysis (supplemental report) providing additional information regarding retirement benefits
for its employees.
STAFF REVIEW
Staff reviewed the Company's supplement report and has some of the same concerns as
discussed in its original comments fied on December 14,2010. The overall cost ofIdaho Power's
SECOND STAFF COMMENTS 2 APRIL 8, 2011
retirement benefits and the associated investment risks passed on to customers have not been
completely addressed. In Order No. 31091, the Commission directed the Company to consider
changes to its retirement plan, address shareholder and employee liabilties in the assignment of
pension plan investment risk, and review alternatives to reduce the burden placed on customers.
Although Staff does not agree with the Company's evaluation because of questionable assumptions
and the short time period used for comparson purposes, nevertheless, the Company did comply
with the Commission's order. In these comments Staff addresses problems with the Company's
supplemental report, and reiterates its concerns with the risks of the pension plan that are borne
solely by customers.
Supplemental Report
The analytical framework of the supplemental report consists of two pars:
1) A forward-looking assessment of the potential investment risk associated with a number
of investment strategies, ranging from low risk to high risk, under a range of economic
conditions; and
2) A nine-year projection of the incremental anual plan contributions or plan costs that
would exist under a range of economic conditions for the Company's existing pension
plan and for hypothetical defined contribution plan alternatives.
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 returs under varous economic conditions,
including both good and bad investment markets. This information provided the data necessary to
develop a forward looking assessment of potential pension fund returs. The Company then
adjusted the returns downward to account for curent interest rates. Staff believes it is not necessar
to adjust long-term potential returns downward for interest rates when a long-term 37-year historical
period is used to determine possible ranges of investment risk. A 37-year period should be
suffcient to show a variety of potential market returs, and further adjustment reduces the integrity
of the assumptions and their results. Because market returns are the primary driver of required
pension contributions, even small adjustments have a significant impact on the cost of the plan.
The Company concludes that a defined benefit pension plan is less costly than a defined
contribution plan. Staff believes the projected pension contributions ilustrated in Chars 5-6, and
the hypothetical defined contribution plan costs ilustrated in Chars 7-8 of the supplemental report
are based on questionable assumptions. The Company projects a 3 percent annual growth in
SECOND STAFF COMMENTS 3 APRIL 8, 2011
eligible employee count, which results in a total eligible employee count of 2,619 in year 2019,
compared to 2,007 eligible employees in 2010. Staff believes it unlikely the Company wil need to
add an additional 612 employees by 2019. The Company's calculations also assume an anual
wage increase of 4.5 percent. With the prevailng economic conditions, automatic wage increases
by utilty companies have come under serious scrutiny in recent years. Staff believes it is
uneasonable to assume a 4.5 percent anual increase through 2019.
The Company used the same assumptions for both the pension plan and the defined
contribution plan projections for comparative purposes, but the effect of the assumptions has a
disparate impact on the cost of both plans. The assumptions may increase the projected cost of a
defined contribution plan more than they would increase the projected costs of the pension plan.
When calculating the cost of a pension plan, many factors influence the total contribution, including
age and sex of the employee and number of years left until retirement. For a defined contribution
plan, the cost of the plan is based solely on employee compensation. Even though the assumptions
used were consistent for both plans, the potential inaccuracy of the assumptions makes the
conclusions of the report questionable.
The Company only used a 9-year projection to compare the costs and assess the risks
associated with the different plans. This projection indicates that the revised pension plan for new
entrants is less costly than a defined contribution alternative. However, the 9-year projection does
not adequately assess the risk associated with a pension plan. A pension plan is less costly in its
early stage primarily because market volatilty does not have the same impact on the asset balance
of the plan in the early years. As the plan's assets grow, market volatilty creates a greater risk,
which is ultimately passed on to customers. Attachment NO.1 of the Company's original reply
comments in this case ilustrates this point. At the end of2007, the Company's "old" pension plan
had an asset value of$409,577,546 compared to a value of just $291,077,937 one year later. The
negative investment return during 2008 caused upward pressure on pension contributions today.
These costs are ultimately paid by customers. Staff believes that customers need to be protected
from this type of risk. If the same negative investment return occured during the infancy stages of
the plan for new entrants, the impact of the investment loss would be less than $2 millon, compared
to the approximate $120 milion loss of the existing plan. The Company's supplemental report does
not go far enough in addressing the potential risks customers face during a period of declining
market returs, nor does it adequately address the assignment of risk between shareholders and
employees.
SECOND STAFF COMMENTS 4 APRIL 8,2011
Staff is cognizant of the inherent diffculty of projecting future pension contributions,
especially for long periods of time. Any result is based on multiple assumptions that may not be
accurate. Staff does not agree with all of the assumptions used by the Company, however, and does
not agree with the conclusions in the Company's supplemental report. Given all the economic
uncertainties and difficulties in predicting market returns, employees' retirement dates, and the
salaries and ages of new employees not yet hired, Staff believes the Company's report adequately
satisfies the Commission's request for additional information.
STAFF RECOMMENDATION
After reviewing the supplemental report filed by Idaho Power, and Commission Order No.
31091, Staff believes that the Company has complied with the Commission's directive. The
Commission ordered the Company to consider changes to its retirement plan, address shareholder
and employee liabilties in the assignment of pension plan investment risk, and to review
alternatives to reduce the burden placed on customers, and in that regard, the Company has
complied. Staff believes the Company could do more to address the assignment of risk.
Nonetheless, the supplemental report provides the Commission with additional information. Staff
intends to periodically review the Company's overall retirement benefits package, including the
level of benefits provided to employees and the associated risk of the defined benefit pension plan
that is ultimately borne by the customers.
Respectfully submitted this ß#- day of April 2011.
Q~
Weldon B. Stutzman
Deputy Attorney General
Technical Staff: Donn English
i:umisc:commentslipce i O.25wstcde supplemental comments
SECOND STAFF COMMENTS 5 APRIL 8, 2011
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 8TH DAY OF APRIL 2011, SERVED
THE FOREGOING SECOND 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
PO BOX 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¡'richardsonandoleary .com
GREG W SAID
TIMETATUM
IDAHO POWER COMPANY
POBOX 70
BOISE ID 83707-0070
E-MAIL: gsaid¡.idahopower.com
ttatumCfîdahopower.com
DR DON READING
6070 HILL RD
BOISE ID 83703
E-MAIL: dreadingCfmindspring.com
~b~SECRETAR --
CERTIFICATE OF SERVICE