20110316Anderson Di.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY TO INCREASE
ITS RATES FOR ELECTRIC SERVICE
TO RECOVER ITS 2010 PENSION CASH
CONTRIBUTION.
CASE NO. IPC-E-11-04
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
DARREL ANDERSON
1 Q.Please state your name and business address.
2 A.My name is Darrel Anderson and my business
3 address is 1221 West Idaho Street, Boise, Idaho.
4 Q.By whom are you employed and in what capacity?
5 A.I am employed by Idaho Power Company (\\Idaho
6 Power
II or \\Company") as the Executive Vice President of
7 Administrati ve Services and the Chief Financial Officer.
8 Q.Please describe your educational background
9 and work experience prior to joining Idaho Power.
10 A.I graduated from Oregon State University with
11 a Bachelor of Science Degree in Accounting and Finance in
12 1979. I am a licensed CPA in the state of Oregon (#4312
13 inactive). Before joining Idaho Power in 1996, I was the
14 Chief Financial Officer of Sisters of Saint Mary of Oregon.
15 Prior to joining the Sisters of Saint Mary of Oregon, I was
16 a senior manager of Audit Services for Deloitte & Touche and
17 was a firm-designated specialist in electric and gas utility
18 operations. I left Deloi tte & Touche in 1995.
19 Q. Please describe your work experience with
20 Idaho Power.
21 A.I joined Idaho Power in 1996 as a Controller
22 in the Finance Department. In 1998, I moved to Lacey,
23 Washington, where I served as Executive Vice President of
24 Finance and Operations at Applied Power Corporation, a
ANDERSON, DI 1
Idaho Power Company
1 subsidiary of IDACORP, Inc. In April 1999, I became Idaho
2 Power Company's Vice President of Finance and Treasurer.
3 From July 2004 to September 2009, I served as the Company's
4 Senior Vice President of Administrative Services and Chief
5 Financial Officer and was responsible for all financial and
6 treasury functions. Since being appointed Idaho Power and
7 IDACORP's Executive Vice President of Administrative
8 Services in October 2009, I continue to oversee Finance,
9 Treasury, and Administrative Services.
10 Q.What is the Company requesting in this
11 proceeding?
12 A.The Company is requesting recovery of the cash
13 contribution made to its pension plan in 2010 over a three-
14 year amortization schedule to begin coincident with a rate
15 change effective June 1, 2011. This request would increase
16 amounts currently included in rates from $5.4 million to
17 approximately $17.1 million annually, an increase of $11.7
18 million.
19 Q.Upon what basis is the Company requesting
20 recovery of the cash contribution to its pension plan
21 during the moratorium and outside a general rate case?
22 A.For a number of expense categories delineated
23 in the Stipulation filed in Case No. IPC-E-09-30 and
24 approved in Idaho Public Utilities Commission
ANDERSON, DI 2
Idaho Power Company
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1 The Company's retirement benefits package includes three
2 components:(1) a defined contribution, or 401 (k) benefit
3 plan, (2) a defined benefit pension plan, and (3) a retiree
4 medical benefit plan. The retirement benefits package
5 along with other employee compensation is structured in a
6 manner to attract and retain a highly skilled workforce
7 that can provide safe and reliable service to customers.
8 Q.As part of Order No. 31091 approving the
9 Company's 2010 request for recovery of a $5.4 million cash
10 contribution to the pension plan, the Commission directed
11 the Company to provide additional information regarding
12 potential retirement benefits al ternati ves that might
13 \\reduce the burden placed on customers. II Has the Company
14 complied with the Commission's directive?
15 A.Yes. On October 1, 2010 the Company filed
16 Case No. IPC-E-10-25 requesting acceptance of its 2011
17 Retirement Benefits Package. With that filing, the Company
18 presented information demonstrating that it has been
19 diligent in controlling the retirement benefit package
20 costs over the years and has made timely adjustments to its
21 retirement benefits in order to stay on the leading edge of
22 retirement benefit package costs. In its 2011 Retirement
23 Benefits Package, the Company reduced future pension costs
24 associated with new hires by 20 percent. On February 18,
ANDERSON, DI 4
Idaho Power Company
1 2011 the Company filed with the Commission a supplemental
2 report detailing analyses that the Company believes
3 demonstrate that the level of market risk borne by Idaho
4 Power's customers related to pension plan funding
5 obligations is reasonable and is likely to result in lower
6 costs over time as compared to other alternatives.
7 Q.Has the Commission issued an Order accepting
8 the Company's 2011 Retirement Benefits Package?
9 A.No. However, the Commission issued Order No.
10 32619 stating that the Company \\is not precluded from
11 filing for recovery of 2010 contributions to its pension
12 plan before this case (IPC-E-10-25J is completed. II
13 II. PENSION PLA FUING
14 Q.What factors does the Company consider when
15 determining the level of cash contributions to make toward
16 the pension plan?
17 A.The first consideration for any funding
18 decision is the amount required to be contributed by the
19 Employee Retirement Income Security Act (\\ERISA") as
20 amended by the Pension Protection Act of 2006 (\\PPA").
21 Beyond the minimum required amount, which is calculated by
22 Idaho Power's actuary, Milliman, Inc. (\\Milliman"), the
23 Company considers several factors in determining the amount
24 to fund. These factors include estimated impacts of the
ANDERSON, DI 5
Idaho Power Company
1 funding decision on plan funding ratios, future
2 contribution payments, Pension Benefit Guaranty Corporation
3 (\\PBGC") premiums, and the Company's available liquidity.
4 Q.What is significant about maintaining plan
5 funding ratios?
6 A.The PPA places certain benefit restrictions on
7 plans in which the funding level falls below 80 percent.
S These restrictions limit lump sum payment options available
9 to retirees and beneficiaries. Falling below the SO
10 percent target funding level also triggers certain
11 reporting requirements to the PBGC, which may be considered
12 a violation of debt covenants of Idaho Power and could
13 adversely impact the Company's liquidity.
14 Q.How does falling below an 80 percent funding
15 level impact future contributions?
16 A.Failing to meet the 80 percent funding level
17 reduces flexibility in funding by the plan sponsor as the
lS election to use pre-funding balances to offset future
19 funding requirements becomes unavailable.
20 Q.How do PBGC premiums influence the Company's
21 pension plan funding decisions?
22 A.For each plan year, for every $1,000 that the
23 value of the plan's assets (as defined by the PPA) falls
24 below the funding target, the Company is required to pay an
ANDERSON, DI 6
Idaho Power Company
1 additional $9 in variable PBGC premiums. Unlike plan
2 contributions, higher PBGC premiums do not increase the
3 value of plan assets available for benefits. Premiums only
4 increase the PBGC's available pool of funds to fund
5 benefits for plans whose sponsors are in default on their
6 plan obligations. The variable portion of PBGC premiums
7 incents plan sponsors to maintain a heal thy funding ratio
8 for their plans in order to avoid the higher premiums.
9 Q.How does the Company's available liquidity
10 impact the decision regarding the level of funding?
11 A.The Company's available liquidity must be
12 considered when determining the size of any contribution.
13 There may be times when funding amounts beyond the minimum
14 contribution could put undue stress on the Company's
15 available liquidity when consideration is given to all its
16 corporate funding needs.
17 Q.What was the Company's minimum 2010 funding
18 requirement as defined by ERISA?
19 A.The Company's actuary determined that the
20 minimum funding required in 2010 by ERISA was approximately
21 $5.8 million.
22 Q.Did the Company choose to fund only the
23 minimum cash contribution level required by ERISA in 2010?
ANDERSON, DI 7
Idaho Power Company
1 A.No. If the Company had only contributed the
2 required $5.8 million, its funding level at December 31,
3 2010, would have been below SO percent. This would have
4 triggered certain plan restrictions, notice requirements to
5 participants, and limitations on future funding
6 al ternati ves.
7 Q.How did the Company determine the appropriate
8 amount to contribute toward its pension plan in 2010?
9 A.The Company assessed the appropriate amount to
10 contribute in 2010 by modeling alternative funding
11 scenarios and projecting their impacts on expected funding
12 levels, short and medium-term funding requirements, and
13 PBGC premiums.
14 Ultimately , it was determined that making a $ 60
15 million contribution would maintain an SO percent funding
16 level (as defined in the PPA), would reduce PBGC premium
17 payments, and would approximate the required minimum
18 funding through 2011.
19 In evaluating alternative scenarios, it was
20 estimated that, over a ten-year period, total required
21 contributions would be approximately $11 million less by
22 contributing $60 million rather than the minimum required
23 $5. S million . Additionally , it was estimated that the
24 larger contribution in 2010 would result in savings
ANDERSON, DI S
Idaho Power Company
1 relating to the variable portion of PBGC premiums of nearly
2 $1 million for the years 2010 through 2012.
3 Q.Do prior Commission orders prohibit the
4 Company from contributing more than the minimum amount
5 required by ERISA?
6 A.No. In fact, in Order No. 31003, the
7 Commission clarified that \\amounts contributed in excess of
8 the ERISA minimum, while potentially subj ect to longer
9 amortization, will not be disallowed solely because they
10 are made sooner than they are legally required to be
11 paid...." Order No. 31003 at 10, 11.
12 Q. Was the $ 60 million contribution determined to
13 be adequate to avoid additional minimum funding
14 requirements during 2011?
15 A.No. While the contribution eliminated any
16 2010 plan-year contributions due in 2011, the amount was
17 determined by Milliman to be less than adequate to cover
18 the full minimum funding needs through 2011. A required
19 contribution for the 2011 plan year of $3 million is due by
20 October 15, 2011 . Additionally, a $5. 7 million required
21 contribution for the 2011 plan year is due by January 15,
22 2012. Idaho Power does not request recovery of these
23 anticipated 2011 plan contributions at this time.
24
ANDERSON, DI 9
Idaho Power Company
1 III. BACING ACCOUNT AN COST RECOVERY
2 Q. What is the current balance of the Idaho
3 jurisdictional balancing account used to track the
4 cumulative cash contributions to the pension plan and
5 amounts recovered in rates?
6 A.As of May 31, 2011, the Idaho jurisdictional
7 balancing account, which represents cumulative cash
8 contributions less cumulative amounts provided for in
9 rates, will have a balance of $51,461,138. The
10 determination of the projected May 31, 2011, balancing
11 account balance is shown on Exhibit No.1.
12 Q.Please describe what that balance represents.
13 A.This balance reflects Idaho jurisdictional
14 share of unrecovered cash contributions expected as of May
15 31, 2011. In September 2010, Idaho Power contributed $60
16 million to its pension plan. As can be seen on Exhibit No.
17 1, the Idaho portion of this contribution of $56,505,566
18 was added to the balancing account in October 2010. This
19 balance was reduced by the $5,416,796 of amounts expected
20 to be recovered between June 1, 2010, and May 31, 2011.
21 During the same period, the balancing account will have
22 earned carrying charges of $372,368 to arrive at the ending
23 balance.
ANDERSON, DI 10
Idaho Power Company
1 Q.Over what period of time is the Company
2 recommending that the cash contribution be recovered?
3 A.Based on the current economic environment and
4 in light of other requested rate actions, the Company is
5 recommending the current balancing account amounts be
6 collected over a three-year period. Although this
7 individual Application requests a rate increase, when
8 combined with the Fixed Cost Adj ustment request and next
9 month's Power Cost Adjustment request, the Company believes
10 that customers will see a net decrease in their rates on
11 June 1, 2011.
12 Further, the three-year period is consistent with
13 the three-year average period for pension related expenses
14 recently approved by Order No. 32196 in Rocky Mountain Case
15 No. PAC-E-10-07.
16 Q.Based on the three-year spread recommendation,
17 what impact does this have on the amounts that need to be
18 collected from customers?
19 A.Assuming a proj ected balance in the balancing
20 account of $51,461,138, a three-year amortization would
21 result in a request to collect $17,153,713 per year over
22 the next three years. When offset by the amount of
23 $5,416,796 currently being collected in rates, an increase
24 of $11,736,917 would be required. The determination of the
ANDERSON, DIll
Idaho Power Company
1 requested incremental pension funding to be collected from
2 Idaho customers is summarized in Exhibit No.2.
3 Q.Does the Company expect the requested annual
4 funding level of approximately $17.1 million to be adequate
5 to offset future cash contributions to the pension plan
6 associated with plan obligations beyond 2010?
7 A.Over the next several years, the Company
8 anticipates that it will be required to make additional
9 cash contributions to the pension plan beyond those
10 contemplated for recovery in this filing. However, the
11 Company views the Commission-authorized balancing account
12 as an effective tool to help smooth or normalize the level
13 of pension cost recovery to be included in customers'
14 rates. The Company intends to monitor the balancing
15 account balance in combination with pension funding
16 projections to determine whether or not the level funding
17 should be adj usted in the future.
18 Q.Does this conclude your testimony?
19 A.Yes, it does.
ANDERSON, DI 12
Idaho Power Company
BEFORE THE
IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-E-11-04
IDAHO POWER COMPANY
ANDERSON, DI
TESTIMONY
EXHIBIT NO.1
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BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
. CASE NO. IPC-E-11-04
IDAHO POWER COMPANY
ANDERSON, DI
TESTIMONY
EXHIBIT NO.2
Idaho Power Company
Idaho Jurisdictional Pension Cost Recovery
Idaho Balancing Account 182327
Expected May 31, 2011, Balance
2010 contribution $60,000,000
2010 subsidiary allocation (53,506)
Allocable contribution 59,946,494
2010 Idaho labor allocation 94.26%
2010 contribution - Idaho portion 56,505,566
Current Idaho recovery (5,416,796)
Unrecovered portion 51,088,770
Carring charges 372,368
May 31, 2011 Balance 51,461,138
Amortization period 3 years
Simple amortization 17,153,713
Less current Idaho recovery (5,416,796)
Incremental amortization $11,736,917
Exhibit NO.2
Case No. IPC-E-11-04
D. Anderson, IPCO
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