HomeMy WebLinkAbout20050118Rosborough Direct.pdfBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF PACIFICORP DBA
UT AD POWER & LIGHT COMPANY
FOR APPROVAL OF CHANGES TO ITS
ELECTRI C SER VI CE SCHEDULES
CASE NO. P AC-O5-
) Direct Testimony of Daniel J. Rosborough
ACIFICORP
CASE NO. PAC-05-
January 2005
Please state your name, business address and present position with
PacifiCorp (the Company).
My name is Daniel J. Rosborough. My business address is 825 N.E. Multnomah
Suite 1800, Portland, Oregon 97232. My present position is Director of
Employee Benefits.
Qualifications
Briefly describe your education and business experience.
I have been employed by PacifiCorp for 22 years and I have served as the
Director of Benefits for approximately 12 years. I attended Lane Community
College and the University of Oregon.
Please describe your cu.rrent duties.
My responsibilities include the analysis, design, administration and compliance of
the Company s heath and welfare and retirement programs.
Purpose of Testimony
What is the purpose of your testimony?
My testimony addresses the Company s pension and welfare benefit costs. All
costs are presented on a system-wide basis. In the first section of my testimony, I
will describe two types ofPacifiCorp s pension costs the Company is seeking to
recover in this case. The Company proposes to recover in base rates $48.
million in annualized pension costs for PacifiCorp s defined benefit pension plan.
The Company is also seeking to recover in base rates $3.0 million in pension
expense associated with a contribution for the significant majority of employees
ofPacifiCorp represented by the International Brotherhood of Electrical Workers
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PacifiCorp
IBEW") Local 57. This is a separate pension plan negotiated with the IBEW.
In the second section of my testimony, I describe the Company s proposal to
recover in rates $110.4 million in medical, dental and other benefit coverage costs
and explain the major reasons for the increase in those costs. I also describe the
actions the Company is taking to control those costs.
Pension Expense
Who actually participates in the company retirement plans?
As of January 1 , 2004, the PacifiCorp Retirement Plan has approximately 4 150
active participants and the Local 57 plan approximately another 1 460. Of this
total of 5 610 participants, approximately 200 (4 percent) reside and work in the
state of Idaho.
Defined Benefit Pension Plan Expense
What is the plan s current funding status?
The plan is currently underfunded. This situation exists for two primary reasons:
unusually low interest rates (which means the current valuation of liabilities is
artificially high, thereby increasing the amount of "expense" that is required to
cover the cost of the Plan); and poor investment returns over the 2000 - 2002
period when most investment markets have performed poorly. Strong investment
performance in 2003 and significant cash contributions (the Company contributed
$61 million in April of 2004) have stabilized and actually improved the funded
status over the past 18 months. As of January 1 2004, the plan s funded status
was approximately 70 percent.
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PacifiCorp
How is the Company s pension expense determined?
The expense for the plan is determined annually by an independent actuary,
Hewitt Associates, as prescribed by the Financial Accounting Standards Board
through its accounting standard governing the calculation of pension expense
(SF AS 87). Under SF AS 87, the pension expense amount is calculated by the
actuary based upon the actual demographics of the participants in the plan, the
expected benefits to be paid, expected terminations and retirements, expected pay
raises, current interest rates for valuing the plan s liabilities, and a forecast of the
expected long-term rate of return on plan assets. Pension expense is calculated by
the actuary on a calendar year basis but SF AS 87 permits this calculation to be
used by companies utilizing a different fiscal year, such as PacifiCorp, provided
the fiscal year end is no more than three months divergent from the calendar year.
To the extent that actual investment returns and other experience with the plan
differ from the expectations, these differences are amortized into future expense
once they exceed a certain threshold.
What is the level of pension expense included in the Company s request?
The Company is seeking to recover $48.5 million in expected pension expense.
This is the amount of pension expense the Company expects to incur in FY 2006
(fiscal year 2006 ends March 31 , 2006). The amount is based on actual FY 2005
expense of $31.5 million which was a SF AS 87 actuarial calculation conducted by
the Company s actuary, Hewitt Associates. This calculation is included in the
actuarial report which is provided as Exhibit No. 13. The FY 2006 calculation
was developed using the actual 2005 expense as a baseline and incorporated an
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Pacifi Corp
expected actual investment return of 4 percent for calendar year 2004 (because the
actual calendar year through May 2004 was essentially zero to 1 percent positive
and 8 percent for 2005. The calculation also included an expected decrease in the
discount rate used to value the plan s liabilities from 6.25 percent, which is the
discount rate used in the FY 2005 calculations, to 6.00 percent. Page 1 of Exhibit
No. 14 explains the allocation ofFY 2004 and FY 2005 pension expense and page
2 of Exhibit No. 14 provides a reconciliation of projected FY 2006 pension
expense to actual FY 2005 pension expense. Both pages of this exhibit were
prepared by Hewitt Associates. The filing also requests recovery of$3.0 million
in pension expense related to contributions to the Local 57 Retirement Plan that
the Company intends to make in February of 2006.
Why is the expected cost rising so dramatically?
The PacifiCorp Retirement Plan expense increased dramatically from FY 2004
($14.8M) to FY 2005 ($31.5M) and is expected to increase dramatically again in
FY 2006 ($48.5M). The average increase between 2003 through 2006 is $23.
million per year. This is primarily due to investment losses which occurred
between 2000 and 2002 and discount rates that have now remained at historic
lows for several years. During those three years, the Plan experienced $450
million of asset losses (the difference between actual investment loss and the
amount of gain assumed by the actuary). Reflecting those losses has an obvious
and significant impact on pension expense. However, because we spread those
losses over the succeeding five years (spreading losses and gains to mitigate
volatility is allowed under SF AS 87 and is a common spread practice among large
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PacifiCorp
pension plans), the resulting increase in pension expense is smoothed over the
period. Thus, what could be a really dramatic increase in pension expense is
smoothed. But that also means that those losses continue to build into the
succeeding years' pension expense until each year is fully amortized , so it will
take until 2007 or 2008 for them to be fully recognized. The expense pattern for
the Local 57 Retirement Plan has been more steady and actually declined since it
reached $5.65M in FY 2004. We expect that the need for continuing
contributions will not reach FY 2004 levels for several years.
Are the pension plans of other utilities impacted by the same economic
conditions?
Yes. PacifiCorp is no different than other utilities, or plan sponsors in other.
industries for that matter. Trust fund investments over the 2000 - 2002 period
performed poorly for almost every large fund, and interest rate declines inflate the
liabilities of all pension plans. Investment returns were strong in 2003 which
helped asset growth, but interest rates remained very low, if not lower than in
2002, which means that liabilities of plans stayed very high.
What does the Company expect to happen to pension expense after FY 2006?
Using the same baseline data utilized in the FY 2006 analysis, we expect pension
expense for the PacifiCorp plan to increase to $48.9 million in FY 2007. This
analysis is based on an expected actual 8 percent asset return for 2006 and an
increase in the discount rate to 6.25 percent.
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PacifiCorp
Is the plan underfunded due to the Company offering benefits that are more
generous than those of other comparable utility companies?
No. The Company retains Hewitt Associates to conduct a comparison of its
benefit programs to those of other utilities every other year to ensure
competitiveness. The last such survey was done in mid-2002 and showed the
PacifiCorp Retirement Plan to be comparable to the average defined benefit plan
vallJe of other surveyed utilities. Attached as Exhibit No. 15 is an introduction to
the survey results and the page related to the evaluation of the defined benefit
plan. As the survey shows, PacifiCorp s defined benefit plan is within 2 percent
of the value of the average of all other plans included in the survey group.
Who oversees the money that is contributed to the Company s pension plan?
The Company has appointed a Committee (PacifiCorp Pension Investment
Committee) that has a fiduciary responsibility to oversee the prudence of the
investment of those assets and determine the asset allocation investment strategy.
All plan assets are held in a trust and those assets can only be used for the benefit
of plan participants. PacifiCorp s Committee has retained outside consultants to
assist in this function and has delegated the actual investment responsibility to
outside professional investment managers. The plan assets are broadly diversified
across asset classes and investment managers. Relative to comparable corporate
plans, over the last five years the PacifiCorp plan s investment returns have been
above those of the median peer plan.
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PacifiCorp
IBEW 57 Pension Expense
Please describe the IBEW 57 pension expense.
The Company contribution for this expense is subject to the collective bargaining
process. In accordance with that process, the Company made a $5 million
contribution in 2003 and $5.6 million contribution in 2004 and intends to make a
$2.0 million contribution in February 2005. As in the case of the Company
Retirement Plan, the Company proposes to include in rates the budgeted
contribution of$3.0 million for FY 2006. The reason for the lower test period
contribution (relative to 2003 and 2004 levels) is that the plan s investment return
was favorable in 2003 and the necessity of additional cash contributions has
lessened. When the plan was first established pursuant to collective bargaining in
1998-1999, the union and the Company agreed that the Company would
contribute 7 percent of eligible pay to the plan, but that favorable investment
returns would be recognized as lessening the need for contributions at that agreed
upon level.
Why is this pension expense separate from the defined benefit plan expense
discussed above?
Simply because it is a separate plan. The Local 57 plan was negotiated in
1998/1999 and effective July 1 , 1999. PacifiCorp is not the plan sponsor but is
contractually obligated through the collective bargaining process to make
contributions on the behalf of employees represented by Local 57 (who work in
Idaho, Utah and Wyoming) and eligible to participate. Prior benefits earned by
these same employees, and assets to pay the benefits, were transferred to this new
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PacifiCorp
plan in 2001 and those benefits are now the obligation of that Trust and not the
obligation of the PacifiCorp Retirement Plan.
The Trustees of the PacifiCorp/mEW Local 57 Retirement Trust now
manage these assets. There are four Trustees from PacifiCorp management and
four from Local 57 mEW leadership. The Trust employs professional actuarial
consultants, administrators, an attorney, an auditor and investment managers.
PacifiCorp provides funding to the plan based upon a collectively bargained
agreement and annual negotiations.
Medical, Dental and Other Benefit Coverage Costs
What level of medical, dental and other benefit costs are included in the
Company s revenue requirement in this case?
The Company expects to record $110.4 million in FY 2006 for medical, dental
and other benefit costs that it expects to incur. This represents an increase of $9.3
million over the equivalent FY 2005 expense of$101.1 million. These amounts
exclude costs associated with the Supplemental Executive Retirement Plan.
Please explain the reasons for the increase in these costs.
The increase in medical coverage costs is the primary reason for the increase in
these costs. PacifiCorp s health plans, like almost every other health plan in the
United States, have been experiencing significant increases in medical inflation.
The primary drivers behind the increases are:
A lesser degree of effectiveness of managed care plans. It is widely believed
that after several years of successful negotiations with providers to minimize
annual cost increases, the "market" has now turned and providers are being
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Pacifi Corp
more successful at negotiating increases with managed care networks;
Government mandates and continued cost shifting by government plans to the
private sector;
An aging population;
The cost of prescription drugs, compounded by very effective direct consumer
marketing;
Increased prevalence of chronic and high cost treatment; and
Development and expansion of new medical technology.
How do the medical cost increases that PacifiCorp has been experiencing
relate to the cost increases being experienced by other employers?
Over the past several years, PacifiCorp s record with respect to cost increases in
medical plans compared favorably to that of other employers. Exhibit No. 16
outlines the recent history of increases for PacifiCorp s primary health plans
relative to how a similar set of plans would have fared using national medical
inflation experience. As the exhibit demonstrates, PacifiCorp s plans have
performed better than the average plan experience. As illustrated in Exhibit No.
, PacifiCorp s electric operations group has experienced a five-year increase of
55.5 percent in medical costs while the national average for the same types of
plans have increased by 66.8 percent.
Has PacifiCorp made any changes to its medical programs or practices to try
to mitigate the cost increases?
Yes. Over the past few years, a number of changes have been incorporated into
the PacifiCorp plan design to attempt to mitigate cost increases, including:
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PacifiCorp
Implementation of a mail order prescription drug program. These programs
have proven effective at slowing the increases in this area, which for most
plans has been the most difficult cost challenge.
Expansion of geographic locations offering managed care plans. In areas
where a managed care plan can be supported, the Company has expanded
these offerings accordingly.
The plan has for several years included a fully paid physical exam benefit for
covered individuals. In order to continue to emphasize long term cost savings
and improved health through a "preventive medicine" approach, this benefit
was slightly improved in 2003.
The Company has continually expanded the educational materials and
resources for plan participants in order to make them better consumers of the
plan and better able to utilize plan benefits. Included in this arena are access
to a 24 hour Nurse Advice Line, an on-line health risk assessment tool and
access to specialty programs for transplants and other high costs claim areas.
Employee cost sharing has steadily increased over the past several years
through increases to annual out of pocket limits. During 2004, the company
paid 91 percent of the total plan cost and employees paid 9 percent. This will
be adjusted again in 2005 so that employees will be paying 10 percent of the
monthly cost of the plan.
Elimination of the $100 deductible medical plan. This plan option was the
least cost effective plan offered by PacifiCorp and is being eliminated in 2005.
Implementation of a Consumer Driven Health Plan and a Disease
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PacifiCorp
Management program. These plans are anticipated to be instrumental in
controlling the long term cost challenges of our programs.
In 2004, the Company implemented changes to the prescription drug program
to increase the employee s cost sharing and further encourage the use of
generic drugs.
Exhibit No. 17 provides a summary of survey results for the Company
health care programs, conducted in 2002 by Hewitt Associates. This survey data
demonstrates that PacifiCorp s plans are comparable to those offered by other
electric utilities.
Does this conclude your direct testimony?
Yes.
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PacifiCorp