20071026Wilson rebuttal.pdf

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2001 OCT 26 Art 10: 49
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF ROCKY
MOUNT AIN POWER FOR APPROVAL
OF CHANGES TO ITS ELECTRIC
SERVICE SCHEDULES
Rebuttal Testimony
of Erich D. Wilson
CASE NO. PAC-07-
ROCKY MOUNTAIN POWER
CASE NO. PAC-07-
October 2007
Please state your name, business address and present position with the
Company (also referred to as Rocky Mountain Power).
My name is Erich D. Wilson. My business address is 825 N.E. Multnomah, Suite
1800, Portland Oregon 97232. My present position is Director, Human
Resources.
Are you the same Erich D. Wilson that previously submitted testimony in
this proceeding?
Yes.
Purpose of Rebuttal Testimony
What is the purpose of your rebuttal testimony?
The purpose of my testimony is to respond to adjustments proposed by
Commission Staff witness Mr. Joe Leckie, individual customer Mr. Timothy
Shurtz, and Monsanto witness Mr. Michael Gorman that would reduce the amount
of incentive compensation expense, that would reduce or eliminate the severance
payments for which the Company has sought recovery, and that would reduce the
Company s requested pension expense (associated with the Company s shift in
formula design to a cash balance approach) included in the Company s revenue
requirement in this proceeding.
Compensation Adjustment
Please briefly describe the Company s compensation and benefits
philosophy.
The philosophy ofPacifiCorp, and its parent MidAmerican Energy Holdings
Company, is to provide a total compensation and benefits package that enables an
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Rocky Mountain Power
employee to receive compensation and benefits comparable to the average
provided by our competitors for labor when an employee performs at an
acceptable level. Employees will earn less than the average remuneration when
performance is less than acceptable and, conversely, will earn higher than the
average remuneration when performance is better than desired levels. The
Company s objective is to generally provide the same components in our total
remuneration package as are included in the packages provided by our
competitors for labor. This allows us to attract and retain the quality of employee
necessary to provide the high level of service demanded by and owed to our
customers, without incurring excessive or unreasonable labor costs.
When reviewing any expenses associated with any single portion of this
compensation package, it is essential to recognize that each portion is part of an
integrated total package. The total compensation package must be viewed as a
whole, otherwise employees would be compensated at a level below the market
with no opportunity to earn at or above the market, regardless of performance.
Please describe the adjustment to the Company s employee compensation
plan proposed by the Commission Staff and the recommendation of
individual customer Mr. Timothy Shurtz.
Commission Stafftakes the position that the Company should not be permitted to
recover incentive compensation that is provided to its employees based on goals
that are not focused on achieving customer benefits. Mr. Shurtz recommends that
the Commission not permit recovery of any incentive compensation. Commission
Staff quantifies the disallowance by stating 10 percent of the incentive
Wilson, Di-Reb - 2
Rocky Mountain Power
compensation plan is based on goals that do not benefit customers. It is Staff's
position that these goals benefit the shareholder and should not be recovered.
Do you agree with their rationale and proposed adjustment to the incentive
elements of the compensation package?
No. Neither Commission Staff nor Mr. Shurtz provide any empirical data or
verifiable evidence suggesting that the structure ofthe program is not market
competitive or unreasonable. Furthermore, Mr. Shurtz offers no analysis of the
Company s compensation package and instead simply makes a general assertion
that no incentive compensation should be collected through rates.
Why is the Company s compensation package reasonable?
Historically utility incentive compensation programs have been challenged by
intervening parties on grounds that the programs are not designed to achieve goals
that benefit customers, but rather goals that benefit shareholders. However
following the acquisition of PacifiCorp by MidAmerican Energy Holdings
Company, the Company considered adjusting the structure of its incentive
program. This restructuring resulted in a program that is tied directly to achieving
goals that result in customer benefits, as well as one that enables the Company to
attract and retain the talent needed to continue providing safe and reliable service
to customers.
In this filing the Company is only seeking recovery for the level of
incentive that is deemed by the market as competitive and at the market average
for where the Company competes for its labor. Customers benefit from having
exceptional individuals leading the organization, and it is appropriate for the
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Rocky Mountain Power
Company to seek recovery of the incentive compensation. Performance that
warrants incentive compensation above the market target levels will be absorbed
by the Company and not sought in rate filings.
Doesn t the Commission Staff recognize the change in the compensation
program by only recommending a disallowance of 10 percent?
While the Company would agree the Commission Staffs recommendation to
disallow only 10 percent of the plan is likely a recognition of the change in plan
objectives, the Company strongly believes that the recommendation is not
supported by the evidence in this case.
What about the fmancial goals identified by Commission Staff?
Although there is a financial goal outlined in Company witness Mr. A. Richard
Walje s individual goals, as shown in my direct testimony, this goal is both a
measure of Mr. Walje s overall performance and award, but it is also structured in
such a way that the focus of his efforts is on improving the effectiveness
efficiency and operations of the business, all of which have a direct connection
and benefit to the customers we serve.
What message is the Company receiving if the Commission does not permit
full recovery of the Company s compensation package.
In addition to denying the recovery of a prudently incurred cost of providing safe
and reliable electric service, acceptance of Commission Staffs adjustment and
Mr. Shurtz s recommendation would be an indication that our employees should
be compensated at a level below the market with no opportunity to earn at or
above the market, regardless of performance.
Wilson, Di-Reb - 4
Rocky Mountain Power
Severance Adjustment
Please describe Commission Staff's proposed adjustment to the Company
severance expense.
Commission Staff adjusts the severance paid to non-executives by $7.9 million.
Commission Staff witness Mr. Leckie states that through his calculations, the
severance paid to non-executives was less than the realized savings and that all
non-executive severance amortization should be allowed in rates. He further
analyzed the executive severance and concluded that the cost of severance paid
was more than the realized savings. Mr. Leckie also removes all severance costs
incurred prior to 2006.
Do you agree with Mr. Leckie s proposal to reduce the severance plan
expense allowed to be recovered in rates?
As stated in my direct testimony, the Company believes that its severance
program is a necessary component of its overall compensation package and was
utilized to provide benefits to customers. For ratemaking purposes in this case
the Company is willing to accept Mr. Leckie s position based on his cost benefit
calculations. Company witness Mr. Steven McDougal will provide the details
regarding the impact of this adjustment on the revenue requirement in this case.
Did Mr. Shurtz propose an adjustment to the Company s severance plan
expense?
Yes. Initially, Mr. Shurtz provided a general recommendation that the
Commission should not permit the Company to recover its severance costs
because there is no benefit to customers. Following the filing of his testimony,
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Rocky Mountain Power
Mr. Shurtz filed a response to a data request from the Company indicating that he
supports the Commission Staffs proposed adjustment for severance expense
which the Company has also accepted. Accordingly, the Company does not
believe there is a need to respond to Mr. Shurtz s direct testimony on this issue.
Please describe Monsanto s proposed adjustment to the severance plan
expense.
Monsanto s witness Mr. Gorman contends that the severance costs incurred by the
Company prior to filing its application for deferred accounting should be
disallowed because it is retroactive ratemaking. He also claims that the
Company s allocation of severance to Idaho is overstated because of a mismatch
in jurisdictional allocation factors.
Do you agree with Mr. Gorman s rationale and proposed adjustment to the
severance plan expense?
No. Mr. Gorman does not challenge the prudence of the severance plan nor the
amount. The Company provided a severance plan to its employees as a means of
maintaining its competitive market position, which as I have stated previously,
enables the Company to attract and retain the labor needed to provide operational
efficiencies and customer service. The severance plan was utilized as a result of a
change in control-the MidAmerican Energy Holdings Company acquisition of
PacifiCorp. Actions taken as a result of the transaction were made by the
Company s new owners with the purpose of efficiently structuring the
organization to better serve our customers. As such, as discussed in further detail
in my direct testimony, the severance plan is a reasonable and integral component
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Rocky Mountain Power
of the Company s overall compensation package that it offers its employees, and
the severance expense sought by the Company in this filing is fair and reasonable.
Company witness Mr. Steven McDougal also addresses the other aspects of Mr.
Gorman s proposal.
Pension Plan Expense Adjustment
Please describe Mr. Gorman s proposed adjustments to the pension plan
expense.
Mr. Gorman does not challenge the amount or prudence of the Company
pension plan expense. However, he does request the Commission reject the
adjustment based upon his contention that the Commission does not require cash
contribution amount, but rather an amount that is fair and reasonable, and that the
Company has not demonstrated that their proposal to increase pension costs to
reflect cash contribution is fair and reasonable.
Do you agree with Mr. Gorman s rationale and proposed adjustment to the
pension plan expense?
No. Mr. Gorman s proposal is precisely what this Commission should avoid.
Fair and reasonable does not equate to "the lower of' two options. As I stated in
my direct testimony, the Company follows accrual accounting guidelines to
account for its pension plan; however, in a given year the cash contribution may
be significantly different than the accrued expense. If the Company is only
allowed to recover "the lower of the cash contribution or an annual pension
expense" the Company will not recover the full cost of providing this necessary
employee benefit.
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Rocky Mountain Power
Does this conclude your rebuttal testimony?
Yes.
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Rocky Mountain Power