20101214Comments.pdf

Peter J. Richardson (ISB # 3195)
Gregory M. Adams (ISB # 7454)
Richardson & O'Lear, PLLC
515 N. 27th Street
P.O. Box 7218
Boise, Idaho 83702
Telephone: [phone]
Fax: [phone]
peter(ßchardsonandolear.com
greg(ßchardsonandolear.com
'ot:i'~
ini~nEC \ 4 PM~: 29
Attorneys for the Industrial Customers of Idaho Power
BEFORE THE IDAHO
PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER )
COMPANY'S REQUEST FOR )
ACCEPTANCE OF ITS 2011 RETIREMENT )BENEFITS PACKAGE )
)
)
CASE NO. IPC-E-1O-25
COMMENTS OF THE INDUSTRIAL
CUSTOMERS OF IDAHO POWER
COMES NOW, the Industrial Customers ofIdaho Power ("ICIP"), and pursuant to the
Idaho Public Utilities Commission's ("Commission's") Notice of Modified Procedure and Order
No. 32092, hereby fies these comments in the above-captioned matter. For the reasons set forth
below, ICIP respectfully requests that the Commission reject Idaho Power Company's ("Idaho
Power's" or the "Company's") request for acceptance of its 2011 Retirement Benefits Package.
ICIP does not advocate with these comments that the Company should abrogate existing
retirement benefits it already owes its existing employees or retirees. But ICIP objects to the
Company's proposal to continue offering a defined benefits. program to new employees, and the
Company's failure to even consider shareowner responsibility with regard to contributions
necessary to keep its underfuded pension account solvent.
IPC-E-1O-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 1
BACKGROUND
Earlier this year, the Company requested authorization to recover in customer rates its
2010 cash contributions to its defined benefits plan. See Case No. IPC-E-IO-08. The amount
allocated to the Idaho jurisdiction, minus a small reimbursement from a separate IDACORP
subsidiar, was $5,416,796, which constituted a 0.77% rate increase for each class of customers.
See Order No. 31091, at p. 1. The Commission approved the request, but expressed concern
regarding the obvious need for substantial future rate increases that wil be necessary to keep the
pension fud adequately fuded. Id. at p. 3. The Commission Staff noted that the Company
would need to make additional payments to its employee pension plan of approximately $68
milion for the plan years 2009-2011. Comments of the Commission Staff Case No. IPC-E-I0-
08, at p. 4 (May 13,2010). And the Company in fact made a $60 milion cash contribution to the
program in 2010, which it will presumably recover from ratepayers at some point. See Idaho
Power's Response to Commission Staff Production Request No. 23. This $60 milion cash
contribution is over ten times as large as any single contribution made by the Company since
1990. See id. According to the Commission Staff, "(t)he higher funding levels are attributable
to poor market returns over the past several years, and to the aging workforce of Idaho Power
and the increasing benefit payments made to retired employees." Comments of the Commission
Staff Case No. IPC-E-1O-08, at p. 4.
Thus, 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, at p. 3. "Many employers in recent years have replaced their defined benefit plans
with pension programs that place greater responsibility and investment risks on employees.
Idaho Power must similarly consider changes to its retirement plan and address shareholder and
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 2
employee liabilties in assignent of pension plan investment risk." Id. (emphasis added).
Finally, the Commission stated that it "will 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 now states that the Application and evidence submitted in this case
demonstrates the Company has complied with the Commission's directive in Order No. 31091.
The Application states that the Company's board of directors voted to reduce the cost of the
retirement benefits package for new employees hired after Janua 1,2011, from approximately
9.1 % of a new salaried employee's base pay to approximately 7.9%. The Company submits that
38% of new costs will be associated with the defined contribution 401(k) benefit plan,
approximately 59% wil be associated with the defined benefit plan, and the remaining 3% wil
be associated with the retiree medical benefit plan. Application, at p. 5. This constitutes a
reduction of only 6% of the proportion of retirement benefit costs associated with the defined
benefit plan because the curent defined benefit plan makes up 65% of the overall costs. Id. at p.
3. And because the changes to the retirement benefits package apply only to new employees, the
cost savings will "potentially" be only $1.97 milion anually, and that minimal savings may be
realized only several years from now once the Company's workforce is fully transitioned to the
modified benefit plan. Id. at p. 6.
In short, the Company asserts that only relatively minor adjustments to its defined benefit
plan are waranted. The Company's Application therefore requests "acceptance" of its 2011
retirement plan in the abstract without an accompanying request for approval of rate recovery for
its pension fud contributions. Id. at p. 9.
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 3
COMMENTS
A. The Commission's instructions that Idaho Power consider alternative retirement
benefits plans was proper because defined benefit plans have caused many large
companies to go bankrupt and are consequently no longer the norm in this Country.
Idaho Power's underperforming pension fud is not an uncommon problem for
companies with such traditional pension plans, and the Commission properly instructed Idaho
Power to act as any other rational Company would have to when it ordered Idaho Power to
reevaluate its retirement benefits plan. Retirement plans that guarantee a predetermined
retirement payment for retirees require the employer to assume the risk of underperformance of
the plan fud, and when the fud underperforms the employer must make major contributions to
the fund or reduce the benefit payments to retirees. i
Regulated utilities are in a unique position among private companes in their ability to
support defined benefit pension programs for their employees. With the support of regulatory
commissions these utilties are insulated from the risk of underfunded pension balances by
passing on to ratepayers, dollar for dollar, any underfuding. Compare this, for example, to
automakers that faced, and may face again, banptcy because of underfuded pension
obligations. If it were not for Troubled Asset Recovery Program stimulus fuds and governent
guarantees through the Pension Benefit Guaranty Corporation both General Motors and Chrsler
probably would have failed. As par of the reorganization for these companies, their pension
plans underwent serious revisions, even for existing employees. Some were closed to new hires,
ICIP refers to a defined benefit plans generally as plans that offer a fixed level of monthly
retirement income based upon a paricipant's salar, years of service, and age at retirement,
regardless of how the plan's investments perform. In contrast, benefit levels for those with
defined contribution plans depend on the contributions made to individual accounts (such as
401(k) plans) and the performance of the investments in those accounts, which may fluctuate in
value.
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 4
In the case of regulated utilities, it is the ratepayer that bears the burden of underfnded
pension programs, and the utility employer may have less incentive to abandon a defined benefit
plan. Yet this trend away from defined benefit plans exists even for utility companies, who like
Idaho Power, should also have a need for retention of specialized employees. According to the
U.S. Deparent of Labor, of the 2,448 tota utilty company retirement benefit plans reporting
with the Deparment's Form 5500 in 2007, only 342 of those plans were defined benefit plans,
which is approximately 14%. See U. S. Deparment of Labor, Employee Benefits Security
Administration, Private Pension Plan Bulletin: Abstract of2007 Form 5500 Annual Reports, at
p. 13 (June 2010), available at http://ww.doL.gov/ebsa/DF/2007pension planbulletin.PDF.3
Indeed, the opening statement of the pension plan bulletin states, "Over the past three decades, as
the private pension system has shifted from defined benefit (DB) plans toward 401(k) tye
defined contribution (DC) plans, the financing of benefits has shifted from employers to
paricipants." Id. at p. 1.
Thus, as the Commission noted in Order No. 31091, most employers in recent years have
replaced their defined benefit plans with retirement programs that place investment risks on
employees. Because Idaho Power is a state-sanctioned monopoly whose customers canot
simply buy electricity elsewhere, the competitive pressure to consider reducing the risk inherent
3
"Under Titles I and IV of the Employee Retirement Income Securty Act of 1974, as
amended (ERISA), and the Internal Revenue Code, as amended (Code), pension and other
employee benefit plans generally are required to fie anual returns/reports concerning, among
other things, the financial condition and operations of the plan." Pension Benefit Guaranty
Corporation: Annual Reporting and Disclosure; Revision of Annual Information Return/Reports;
Final Rule and Notice, 72 Fed. Reg. 64710, at 64710 (November 16,2007). "The Form 5500
Anual ReturReport is the primar source of information concerning the operation, fuding,
assets, and investments of pension and other employee benefit plans." Id. Thus, unlike the data
regarding 92 energy service companies in Idaho Power's consultat Towers Watson's database,
see Application at p. 5, the Department of Labor data regarding 2,448 utility companies should
encompass all utilities with a retirement plan covered by ERISA.
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 6
in a defined benefit program does not exist for Idaho Power to the extent that it would for
companies in a competitive industr. The Commission must fill that void to ensure that Idaho
Power's retirement benefits plan is prudent and fair to its customers. The Commission's
instruction that Idaho Power consider alternative retirement benefit plans similar to those of the
most companies which have replaced their defined benefit pension plans was entirely proper.
Simply put, the Company needs to seriously consider replacing its defined benefit pension plan
to protect its ratepayers from future rate increases.
B. Idaho Power ignored the Commission's instructions because it did not conduct a
thorough and unbiased analysis of the alternatives to its defined benefit plan which
would reduce the risk to its ratepayers by shifting responsibilty to shareholders or
employees.
In response to the Commission's instructions, Idaho Power utterly failed to conduct any
sort or special analysis to consider alternatives that would "address shareholder and employee
liabilties in assignment of pension plan investment risk." Order No. 31091, at p. 3 (emphasis
added). Indeed, Idaho Power even admits that "the benchmarking analyses performed ths year
did not differ materially from years past." Idaho Power's Response to Commission Staff
Production Request No. 10.
This failure to consider the Commission's direction flowed from the instructions of the
Company's Chief Financial Offcer, Darel Anderson, to the Company's Director of
Compensation and Benefits, Sharon Gerschultz. Mr. Anderson did not instrct Ms. Gerschultz
to consider a retirement benefits program that would "address shareholder and employee
liabilties in assignment of pension plan investment risk" or to otherwise consider "alternatives
to reduce the burden placed on customers." Order No. 31091, at p. 3 (emphasis added). Rather,
Mr. Anderson requested Ms. Gerschultz "make recommendations for changes to the Company's
retirement benefits package based upon the Company's desire to remain competitive to the
IPC-E-1O-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 7
representative employment market, but with an eye toward perpetuating a package which
encourages employee retention." Direct Testimony of Sharon Gerschultz, at p. 3 (Oct. 1,2010).
Mr. Anderson further instrcted "that retirement benefit portability is not in alignment with the
Company's employee retention goals and may not be in the best interests of its customers." Id.
With Mr. Anderson's instrctions, the Company's Compensation and Benefits division
considered thee types of plans: (l) a traditional defined benefit plan, (2) a defined contribution
plan, and (3) a cash balance plan. Ms. Gerschultz considered eliminating the defined benefit
plan and replacing it with a 401 (k) benefit plan, which would shift 100% of the investment risk
to employees. See id. at pp. 9-13. The 401(k) plan she analyzed, however, "provided more
benefit to less experienced employees," id. at p. 12, and did "not support the Company's desire
and Mr. Anderson's guidance to emphasize longevity in the Company's workforce," id. at p. 11.
Rather than consider another 40 1 (k) plan designed to reward longevity - for example, by
increasing the Company's matching contributions for employees with more years of service -
Ms. Gerschultz simply abandoned the possibility of replacing the traditional defined benefit plan
with any type of 401(k) plan and did not present that possibility to the Office of the CEO. Id. at
pp. 12-13. Indeed, the Office of CEO only considered the cash balance and the modified defined
benefit plans, both of which "assign all investment risk to the Company" and its ratepayers. Id.
at p. 15. Without considering any form of defined contribution plan shifting investment
responsibility to employees, the Office of the CEO selected the slightly modified, traditional
defined benefit plan.
Nothing in Idaho Power's filing demonstrates that it is impossible to reward longevity
without a retirement benefits program that places all retirement investment risk on the
IPC-E-1O-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 8
Company's ratepayers. The Company failed to fully analyze all alternatives, and therefore
simply ignored the Commission's instrctions.
c. Idaho Power's proposal to retain its traditional defined benefit pension plan for new
employees places it in the minority even among its own utilty peer group.
Idaho Power's own evidence demonstrates that it will be one of a limited number of
Companes remaining with a traditional defined benefit plan. Idaho Power contracted with a
consultant named Towers Watson to determine industry comparison data on retirement
programs. Although Idaho Power states much of this data is confdential and unavailable even to
those who have signed the protective agreement, Idaho Power indicated, "Of the 92 energy
services companies in the Towers Watson database, 66 companies, or 72 percent, have defined
benefit pension programs available to new salared employees. Thirty-six percent of these are
traditional defined benefit plans similar to Idaho Power's." Idaho Power's Response to
Industrial Customers of Idaho Power Production Request NO.1 (c) & (d). One can determine
that only 26%4 of the 92 energy services companies in Idaho Power's consultant's database have
a traditional defined benefit plan. The percentage is similarly low for the 12 peer companes
selected for custom analysis, of which only 34%5 have a traditional defined benefit plan similar
to Idaho Power's. See id, Request NO.2 c & d. Although this data from the database ofIdaho
Power's consultant is significantly higher than the 14% figure from the utilty-industry-wide data
compiled by the U.S. Deparment of Labor, it demonstrates that Idaho Power is in the small
minority of utilty companies that stil offer a traditional defined benefit program to new
employees.
4
5
36% of 72% = 26%.
50% of 67% = 34%.
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 9
D. Under Idaho Power's proposed retirement benefit program, the shareholders wil
take on no risk, and ratepayers wil be entirely liable for future contributions
needed to keep the pension fund solvent.
Idaho Power's modifications to its defined benefit program wil not result in significant
retirement program savings, and will not "reduce the burden placed on customers" by future
underperformances of the pension fud. Order No. 31091, at p. 3. The "potential" savings from
the proposed modifications of only $1.97 milion per year, which ratepayers wil not realize until
many years from now when the Company's workforce is fully transitioned, are a miniscule
savings in comparison to the continued risk to which the Company is exposing its ratepayers.
The Commission instructed the Company to "address shareholder and employee liabilties in
assignment of pension plan investment risk." Id. (emphasis added). Thus, the Company's
focus on the overall cost of its retirement programs in comparson to other forms of employee
compensation entirely missed the point because this analysis did not consider shifting investment
risk to shareowners or employees. See Application, at pp. 5-6.
"The modified retirement plan presented by Idaho Power is not intended to shift the risk
for pension fud underperformance from the 'ratepayers' or customers to the shareholders."
Idaho Power's Response to Industrial Customers of Idaho Power Production Request No. 9(f.
As a result, "the market risk associated with the defined benefit portion of the package is
ultimately boure by customers." Idaho Power's Response to Commission Staff's Production
Request NO.5. Rather than consider shifting that risk elsewhere, the Company merely devised a
plan whereby the "reduction of the defined benefit payout formula from the curent 1.5 percent
to 1.2 percent (per year of employee service) . . . (0 )ver time.. . . wil reduce the level of market
risk boure by customers." Idaho Power's Response to Industrial Customers of Idaho Power
Production Request No. 9(e). The Company therefore reduced its ratepayers' investment risk by
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 10
0.3% per year of employee service. "The Company believes that shareowners should not bear
any market risk associated with its retirement benefits package." Idaho Power's Response to
Commission Staff's Production Request No. 31. The Company's position on risk allocation is
quite simple - all risk should be on the ratepayers, not the Company's shareowners or
employees.
The Company's analysis included spreadsheets that compared the Net Present Value ofa
defined benefit plan versus a defined contribution plan and concluded "the costs of the defined
benefit plan and 401 (k) benefit plan would be essentially the same between plans over the long
ru." Direct Testimony of Sharon Gerschultz, at p. 10. But the conclusion in this analysis holds
true only if the assumed retu on investment in the pension fud of8.0% proves to be accurate.
Different actual returs on investment impact the results, and whenever the retu drops below
8.0% ratepayers may need to foot the bil for contributions to keep the pension fud solvent.
Over the past 20 years, the geometric mean for the retu on investment was 9.2%, butover the
past 10 years the retu was 6.6%. The market obviously goes up and down, and under Idaho
Power's proposed policy ratepayers are ironically likely to see a rate increase associated with the
pension fud underperformance at times when the market is down.
Before approving of this approach, it is importt for the Commission to recognize the
import of its decision in this case. Idaho Power is wisely asking for acknowledgement of its
2011 retirement benefits plan in the abstract without also asking for approval of recovery of
pension fud contributions in rates. It is clear that Idaho Power will need to recover substantial
pension fud contributions from ratepayers in the near future. The recent cash contribution of
$60 milion must come from ratepayers if shareowners wil not contribute. And the Commission
should consider that recent cash contribution when it decides whether it is prudent for Idaho
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 11
Power to continue offering new employees a defined benefit program in 2011. As Idaho Power
stated, it believes "that 'acceptace' of the Company's 2011 Retirement Benefits package
indicates that the Commission views the package strctue to be reasonable and in the customers'
best interests." Idaho Power's Response to Commission Staff's Production Request NO.9. ICIP
respectfully disagrees that this package is reasonable and in customers' best interests.
CONCLUSION
Idaho Power failed to adequately comply with Commission Order No. 31091 because its
evaluation was based on flawed instrction from Mr. Anderson and the flawed premise and
predetermined result that the Company must retain a defined benefit plan for new employees.
The evaluation was incomplete. ICIP respectfully requests that the Commission not approve the
2011 Retirement Benefits Package because to do so would imply the pension costs incured
under that plan for new employees would be prudently incured costs. Idaho Power has utterly
faih~d to demonstrate why it -unlike the vast majority of companies in this Countr, including
similarly situated utilities - must retain a traditional defined benefit program. The Commission
should therefore reject Idaho Power's 2011 Retirement Benefits Package, and require the
Company to devise a plan that shifts responsibility and risk to its employees or shareowners.
DATED this 14th day of December, 2010.
RICHARDSON AND O'LEARY, PLLC
By:Cv
P ter J. Richardson
egory M. Adams
ttorneys for the Industrial
Customers of Idaho Power
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 12
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 14th day of December, 2010, I caused a true and
correct copy of the foregoing COMMENTS OF THE INDUSTRIAL CUSTOMERS OF
IDAHO POWER to be served by the method indicated below, and addressed to the
following:
Jean Jewell
Idaho Public Utilties Commission
472 West Washington Street (83702)
Post Office Box 83720
Boise, Idaho 83720-0074
( ) U.S. Mail, Postage Prepaid
(x) Hand Delivered
( ) Overnight Mail
( ) Facsimile
( ) Electronic Mail
Lisa Nordstrom
Donovan Walker
Idaho Power Company
PO Box 70
Boise, Idaho 83707
(x) U.S. Mail, Postage Prepaid
( ) Hand Delivered
( ) Overnight Mail
( ) Facsimile
(x) Electronic Mail
Gregory W. Said
Tim Tatum
Idaho Power Company
PO Box 70
Boise, ID 83707
(x) U.S. Mail, Postage Prepaid
( ) Hand Delivered
( ) Overnght Mail
( ) Facsimile
(x) Electronic Mail
SignedQU it (Y\ Qlf\'t\
Nina M CÙris
IPC-E-I0-25 -- COMMENTS OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
PAGE 13