20070928Leckie direct.pdf

BEFORE THE RECEI
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IDAHO PUBLIC UTILITIES COM~I~~g~UBUC
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IN THE MATTER OF THE APPLICATION OF
PACIFICORP DBA ROCKY MOUNTAIN
POWER FOR APPROVAL OF CHANGES
TO ITS ELECTRIC SERVICE SCHEDULES
CASE NO. PAC-07-
DIRECT TESTIMONY OF JOE LECKIE
IDAHO PUBLIC UTILITIES COMMISSION
SEPTEMBER 28 , 2007
Please state your name and business address
for the record.
My name is Joe Leckie.My business address is
472 West Washington Street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission (Commission) as an auditor in the Utilities
Division.
What is your educational and experience
background?
I graduated from Brigham Young University with a
Bachelors of Science degree in Accounting.I worked for
the accounting firm Touche Ross in its Los Angeles office
for approximately one year.I then attended law school
and graduated from the J. Rueben Clark School of Law at
Brigham Young Uni versi ty with a Juris Doctorate degree.
I am licensed to practice law in the State of Montana.
practiced law in the State of Montana for approximately 25
years.I have been employed at the Commission as an
auditor since March 2001.I have attended the annual
regulatory studies program sponsored by the National
Association of Regulatory Utilities Commissioners (NARUC)
at Michigan State University in August of 2001.I ha ve
attended several other training courses sponsored by NARUC
on regulatory accounting and auditing.
CASE NO. PAC-E- 07 - 5
09/28/07
LECKIE, J.
STAFF
(Di) 1
Staff's recommendations in those areas of the rate case
Would you please summarize your contribution to
that you personally reviewed?
I personally reviewed the following areas and
recommend the following adjustments that have an effect on
the revenue requirement:
1 )The recommendation to remove $3,500,000 (system)
from Company adjusted rate base for the
anticipated annual lease payment for a coal
lease.
2 )The recommendation to remove $1,932,285 (system)
from the Company s rate base for the Company
interest in Dragline #757 at the Jim Bridger
Coal mine.
3 )The recommendation to remove $2 750,000 (system)
of incentive pay from the total Company
employee expense.
4 )The recommendation to remove $125,000 (system)
from lease expense for lease payment reductions
given to sub lessees of space rented by the
Company in the One Utah Center in Salt Lake
City.
5 )The recommendation to remove MEHC change-in-
control (CIC) transition expenses of $424 691
(system) for the costs associated with changing
CASE NO. PAC-E- 07 - 5
09/28/07
LECKIE, J.
STAFF
(Di) 2
the Company s accounting reporting system from a
fiscal year reporting period to a calendar year
reporting period.
6 )The recommendation to remove MEHC transition
expenses in the amount of $2 784,177 (system)
paid to employees who received severance
payments when their employment was terminated
wi th the Company.
How are your recommended adjustments shown and
included in Staff's recommended revenue requirement?
All of my recommended adjustments are included
In Staff's proposed revenue requirement as shown in Staff
witness Harms ' Staff Exhibit Nos. 108 through 112.
Would you please explain your recommendation to
remove $3,500,000 (system)from the Company s adjusted
rate base for the anticipated annual lease payment?
The Company included in its revenue requirement
calculation as part of adjusted rate base, an addition of
$3,500,000 (system) for a coal lease.See page 8. 9 of
McDougal Exhibi t No. 11.The Company sets forth a
description of its adjustment to Miscellaneous Rate Base
in Footnote 2 on page 8. 6 of the Company s Exhibi t No. 11.
It states the following:
2 - The Company is prepared to participate
in an auction to lease Cottonwood coal
reserves from the Utah Trust Lands
Administration. Upon Completion of the
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 3
successful bid, the company plans to
extract the coal for use in its electric
generation operations. In order to secure
the mineral rights through a successful
bid, the company estimates that it will
have to submit 5 annual payments of $7
million to the Utah Trust LandsAdministration, beginning in calendar year2007. This adjustment reflects the first
annual payment into results.
The Company is including in its adjusted rate base an
anticipated cost that is not yet ripe for inclusion.
the time of the filing of this testimony, the auction has
not taken place.There is no assurance that the Company
will be successful in the auction.The addition of this
amount in rate base at this time does not qualify as a
known and measurable adj ustment .The outcome of the
auction is not known , and the actual bid has not been
legally accepted.Because of the unsettled nature of this
adjustment, it should not be included in the Company
rate base amount.
If the Company were to be successful in the
auction , and were awarded the mineral rights for the bid
it anticipates making, the first installment of $3,500,000
(system) still should not be included in rate base because
the addition would not meet the criteria used by Staff for
proforma inclusion in rate base.It is not a generating
or transmission facility and its value is not in excess of
$100 million system, the criteria used by Staff for
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 4
proforma adjustments to rate base.
Why have you recommended that rate base be
reduced for Dragline #757 at the Jim Bridger coal mine?
The rate base of the Jim Bridger Mine s property
in service is included in the Company s rate base value.
Since the Company is a 2/3 owner of the mine (the other
1/3 is owned by Idaho Power) only 2/3 of the mine s total
rate base is included.Also, the mine used a
beginning/ending average to determine its 2007 rate base
value which is the value included by the Company.
Staff conducted an on-site audit of the mine
property in service as part of the audit for this rate
case.During the visit, it was noted that the dragline
was setting idle.Through audit questioning, it was
determined that the dragline was not being used, had not
been used for some time, and that it was to be sold.The
dragline was sold in 2007.This is the same dragline that
was setting idle when Staff visited the mine in 2003.
Staff determined that the dragline was not used and
useful , and it should be removed from the mine s rate base
value as included on the Company s books.
The undepreciated value of the dragline on the
mine s books is $5,796,912 (system) .The undepreciated
cost of the dragl ine was included in the mine s beginning
rate base value, but because it was sold in 2007, was not
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 5
included in the ending rate base value.Therefore only
one-half (1/2) of the undepreciated balance should be
removed and is the basis for the adj ustment .
The Company is a 2/3 owner of the mine (the
other 1/3 is owned by Idaho Power) .When the Company
2/3 interest in one-half of the undepreciated dragline
balance are determined , the Company s rate base is
overstated by $1 932 285 (system).See Staff Exhibit No.
105.
The Company realized a gain on the sale of the
dragline of approximately one million dollars.Thi s gain
was recorded as a reduction of maintenance expense on the
mine s books.This treatment of the gain gives the
ratepayers the benefit of the gain.
Why have you recommended that the incentive pay
for the Company s employees be reduced by $2 750,000
(system) ?
The Company has included $27.5 million (system)
in the rate case as the budgeted amount the Company may
pay for incentive pay in 2007.Company witness Wilson in
his pre-filed testimony testified that this amount would
be awarded to the Company s employees on the basis of the
individual employees achievement of predetermined
performance levels.
The general principle governing whether
CASE NO. PAC-07-09/28/07
LECKIE, J.
STAFF
(Di) 6
incentive pay is included in rates or excluded as a below
the line expense is whether the payment of the incentive
pay is based upon benefits flowing to the ratepayers.
the ratepayers receive the benefit of the promoted
performance , then the incentive pay is included in rates;
but if the promoted performance improves the financial
performance of the Company and benefits the shareholders,
then the incentive pay should not be included.
The Company has established measurements that
are used to evaluate individual employees performance.
the employees ' performances produce benefits to the
ratepayers, then that portion of the incentive pay that is
awarded to the employees based on that performance would
be included in rates.I f the employees ' performance
produces benefits to the shareholders in the form of
increased profits , then that portion of the incentive pay
that is awarded to the employee based on that performance
should be excluded from rates.
Company witness Wilson indicates that the
awarding of incentive pay is unrelated to financial
standards, but that all the incentive pay is based only on
those performance goals that benefit ratepayers.He uses
the 2007 goals of Richard Walje, President of Rocky
Mountain Power , as an example of an employee s performance
goals.
CASE NO. PAC-07-
09/28/07
LECKIE , J.
STAFF
(Di) 7
Staff reviewed wilson Exhibit No. 22, Richard
Walj e ' s 2007 goals.Part 5 of that exhibit are the goals
that relate to financial matters.The first two bullet
points of the section are U (A) chieve targeted Rocky
Mountain Power net income " and U (A) chieve targeted
operating expense budget"These two goals focus directly
on the financial performance of the Company.I f these
goals were achieved , then the resulting benefits would
flow directly to the Company s shareholders.
Also on page 5 of Wilson s testimony, he states
that U Note that all employees are expected to operate
within their respective budgets, but corporate financial
performance and returns are not a factor in determining
the compensation amount.This testimony is not
internally consistent.I f employees were expected to
operate at a minimum level of performance , the failure to
meet that expectation would have an affect on the
employee s incentive pay.Operating within an established
budget is a financial performance that is an essential
element of achieving financial objectives that benefit
shareholders.
Why would the benefits flow directly to the
Company s shareholders?
The Company would establish its budgets so that
the revenues and expenses would at a minimum achieve
CASE NO. PAC-07-09/28/07
LECKIE, J.
STAFF
(Di) 8
sufficient profits to ensure the Company would earn its
rate of return.The rate of return goes to the
shareholders.If the Company is then able to achieve its
budgetary goals and targets, the shareholder is the party
who receives the immediate benefit for the Company
achievement by receiving a greater rate of return.
, however , the Company is able to achieve its
budgetary goals and targets over extended periods, then
this achievement may benefit ratepayers as the Company
seeks new rates in a rate case; but viewed in the short-
term, the shareholder is the beneficiary of the Company
employees achieving the Company s goals and targets
regarding expenses and budgets.
Is it Staff's position that the Company should
not be able to include any of the incentive compensation
as a recoverable expense?
No, it is clear that a great portion of the
incentive pay is awarded to the employees for performance
measures and goals that have an effect on service to
ra tepayers .Because the ratepayers benefit from these
employees performances, a portion of the incentive pay
should be included in the Company s above the line
expenses.Staff recommends that 90% of the incentive pay
be included as an appropriate employee expense, and
included in rates.The remaining 10% of incentive pay is
CASE NO. PAC-07-09/28/07
LECKIE , J.
STAFF
(Di) 9
attributable to the achievement of financial obj ecti ves
and goals that benefit shareholders and Staff therefore
recommends it be removed from the revenue requirement.
What is the reason for the reduction in the
lease expense for the Utah One Center?
The Company has a lease for office space in the
One Utah Center where it houses its Salt Lake Office
operations.The Company has unoccupied space in the lease
that has been released to subtenants.The Company
subleases 78,924 sq. ft. of space for annual revenues of
$2,010,904 (system) .The revenues received for the
subleasing is a reduction in the total annual lease
expense.
The Company has provided community and economlC
incentives in the total amount of $125,000 (system) as
rental reduction to two of its subtenants.This reduces
the annual revenues from subleasing by $125,000 (system).
The granting of reduced rent for community and economic
incentives, although admirable, is not an appropriate
expense for customers to pay.This treatment is
consistent with Commission policy for donations.Moving
this reduction in the sublease revenues below the line
reduces the annual lease expense by $125,000 (system) .
Why have you not allowed any of the transition
cost associated with the Company changing its financial
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 10
reporting period from a fiscal year (April 1 to March 31)
to a calendar year?
The Company requested the right to defer the
costs associated with this change in a previous case
before the Commission.In Order No. 30225 (Case No.
PAC-06-11), the Commission allowed these costs to be
deferred but required the Company demonstrate the benefits
before the Company could recover these costs.
The total cost the Company has incurred for this
transi tion was $424 691 (system).The Company included
all these costs in O&M expenses.The Company was required
by the Commission to show any benefits to the ratepayers
by this change when the Company sought recovery of these
costs.Company witness McDougal stated in his testimony
that the Company could show benefits to the ratepayers in
the reduction of Administrative and General Costs, but not
in this area specifically.
These costs were incurred so that the Company
books would synchronize reporting periods with MEHC and
its other affiliates.Any benefits that flow from this
change, provide benefits only for the internal flow of
financial information between the Company and MEHC, and
have no effect on the ratepayers.Ratepayers will not see
any difference in their service by this change.
Therefore , without any showing of tangible benefits to
CASE NO. PAC-E- 07 - 5
09/28/07
LECKIE , J.
STAFF
(Di) 11
customers, Staff recommends this expense not be recovered
from customers and $424,691 (system) should be removed
from the revenue requirement.
Are you recommending the removal of any of the
transitional severance pay that the Company has asked to
amortize in this case?
Yes, I am recommending that $2 784 177 (system)
of the total severance pay be removed from the amount of
authorized transition cost to be amortized in the case.
The Company has asked to amortize a total of $39,522,007
(system) of severance payments made to employees who left
their employment as part of the MEHC transition.
The Company originally asked to defer these
costs as part of Case No. PAC-06-11.And in Order No.
30255 the Commission allowed the Company to defer and seek
recovery of these cost in a future rate case.The
Commission also indicated that the Company must be able to
produce supporting documentation showing the benefits of
such costs to the Company and customers.
Company witness Wilson presented Exhibit Nos. 25
and 26 detailing the severance payments made and the cost
savings to the Company through the reduced wage and salary
cost of the severed employees.In those exhibits the
Company segregated the severance compensation paid to
executive employees and to non-executive employees.
CASE NO. PAC-07-
09/28/07
LECKIE , J.
STAFF
(Di) 12
Then in Company witness McDougal's Exhibit No.
, page 17.the Company summarized the data from the
Wilson exhibits and determined the total severance pay it
would seek to recover.The Company used a three (3) year
amortization schedule and is asking to recover $13,174,002
(system) per year in rates.
Staff has prepared Staff Exhibit No. 106 as a
comparison of the severance compensation paid to the non-
executi ve and executive employees.This allows a
comparison of the compensation paid vs. the saving
achieved in each class of employees.Staff Exhibit No.
106 shows that for the non-executives class of employees,
the amount of severance paid was less than the savings
realized from not paying the employees for continued
employment.Severance compensation was paid in the amount
of $28,170,716 (system) and savings were realized in the
amount of $32,008,881 (system).Therefore all of the
severance pay for the non-executive employees is covered
by associated savings and all the severance compensation
for the non-executive employees should be included in the
amortization of these costs.
The numbers in Staff Exhibit No. 106 also show
that the severance compensation paid to the executive
class of employees was more that the amount of savings
realized.Therefore Staff capped the allowable executive
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 13
severance pay by the amount of the savings.The
executives were paid $11 387,114 (system) in severance
compensation and the Company only realized $3,496,455
(system) in saving by discontinuing employment of the
executive employees.
The Company in Wilson s testimony set forth
reasons why the executive class of compensation was higher
on the average than the average paid to the non-executive
class.Al though the Company statements may be correct, an
analysis of each class of employees ' severance pay should
be able to show that the cost-reduction benefits to the
ratepayer are greater than the cost the ratepayer is asked
to pay in rates.The savings in each class of employees
should be greater than the cost of that class ' severance
compensation.Therefore, Staff capped the amount of the
severance pay in each class at the lower of the actual
amount paid or the savings realized.
When the cap is applied to the amount of
severance paid, the total amount of severance pay Staff
recommends be included in the revenue requirement is
$31,667 171 (system).See Staff Exhibit No. 106.
Staff Exhibit No. 107 is the same format as
witness McDougal used in Exhibit No. 11, page 17.only
wi th an additional column showing Staff's numbers for the
severance compensation.Staff Exhibit No. 107 shows that
CASE NO. PAC-07-09/28/07
LECKIE , J.
STAFF
(Di) 14
Staff did not include recovery of any severance paid
before the beginning of 2006.The actual transition of
the Company to MEHC was completed in April 2006.Any
severance costs occurring in 2005 are too far removed from
the transaction close to be adequately associated with the
transition.
Staff Exhibit No. 107 shows that the recommended
amount the Company should recover for its transition costs
is $31 169,477 (system) .Staff agrees that three years is
an appropriate amortization period; therefore, the
amortized amount that should be included in the revenue
requirement is $10,389,826 (system).Staff has decreased
the annual amortization by $2,784,177 (system) and it is
this amount that Staff recommends be removed from the
revenue requirement.
Are there other areas of your review that impact
the revenue requirement and need to be discussed for this
case?
Yes, I reviewed the costs associated with the
powerdale Hydroelectric Facility decommissioning included
as part of McDougal Exhibit No. 11 , page 8.12.Deferral
and amortization of these decommissioning costs were
authorized by order No. 30344 in Case No. PAC-07-
Although I am not recommending a cost adjustment to the
revenue requirement in this case, this item is being
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 15
discussed further by Staff witness Carlock in her
testimony related to the Multi-State Process (MSP).
Does this conclude your direct testimony in this
proceeding?
Yes, it does.
CASE NO. PAC-07-
09/28/07
LECKIE, J.
STAFF
(Di) 16
PACIFICORP
CASE NO. PAC-O7-
Jim Bridger Mine Dragline #757
Description Amount
Bridger Mine PacifiCorpBooks Books
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$ 13 595 850
$ (7,798 938)
ill!ii;
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-YllitW~'iII'4, "
Dragline Original Cost
Less Accumulated Depreciation
Undepreciated Balance $ 5 796 912
Amount in beginning rate base balance but not
in ending balance for 2007 rate base amount.
(Undepreciated balance is divided by 2)
$ 2 898,456
PacifiCorp s Interest (2/3 of Mine)$ 1 932 285
Exhibit No.1 05
Case No. PAC-07-
J. Leckie, Staff
9/28/07
PACIFICORP
Case No. PAC-O7-
Determination of Severence Compensation Adjustment
Non Executive Totals
Number of Employees Receiving
Severence in Rate Case (as of 3/9/07 234 243
% of total Employees Severed 96,
Severance Compansation per
Attachment for Onsite Request 4
(Severed employees through 5/31/07)888 843 861 087 749 930
Severance Compensation for Employees
leaving between 3/9/07 to 5/31/07
718 127 1,473 973 192 100
Severance Compensation included in
Rate Case (Severed employees through
3/9/07)170,716 387 114 557 830
% of Total Severance Compensation by
class of employee 71.28.
Savings attributed to Severed
Employees 008 881 3,496,455
Severance Compensation Capped by
Savings (Lesser of Actual Severance
Paid or Savings)170 716 3,496,455 667 171
Average Severance Compensation per
Employee 120 388 388,495
Exhibit No. 106
Case No. PAC-07-
J. Leckie, Staff
9/28/07
PACIFICORP
Case No. PAC-O7-
Determination of Change-in-Control Severence Compensation Adjustment
Comparison of Company Schedule to Adjusted Schedule
Company as per Staff Adjusted
Exhibit 11
667 171
925 013
(5,467 764)
045 057
169,477
174 002 389 826
784 177
Severance paid in 06
Severance - related SERP
Calendar Year 05 deferral
Less backfilled and non-regulated employees
Additions in Calendar Year 07 through 3/9/07
Total Change-in-Control Severance deferral allowed
Amortization of deferral -3 year amortization
Difference between Company and Staff annual amortization
Exhibit No.1 07
Case No. PAC-07-
J. Leckie, Staff
9/28/07
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 28TH DAY OF SEPTEMBER 2007
SERVED THE FOREGOING DIRECT TESTIMONY OF JOE LECKIE, IN CASE
NO. PAC-07-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
mSTIN BROWN
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
MAIL: iustin.brown(illpacificorp.com
DATA REQUEST RESPONSE CENTER
P ACIFICORP
825 NE MULTNOMAH STE 2000
PORTLAND OR 97232
MAIL: datarequest~pacificorp.com
(ELECTRONIC COPIES ONLY)
JAMES R SMITH
MONSANTO COMPANY
PO BOX 816
SODA SPRINGS ill 83276
MAIL: iim.r.smith~monsanto.com
ERIC L OLSEN
RACINE OLSON NYE BUDGE & BAILEY
PO BOX 1391
POCATELLO ill 83201-1391
MAIL: e1o~racine1aw.net
CONLEY E WARD
MICHAEL C CREAMER
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
MAIL: cew~givenspursley.com
BRIAN DICKMAN
MANAGER, ill REGULATORY AFFAIRS
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
MAIL: brian.dickman~pacificorp.com
RANDALL C BUDGE
RACINE OLSON NYE BUDGE & BAILEY
PO BOX 1391
POCATELLO ID 83201-1391
MAIL: rcb~racinelaw.net
MAURICE BRUBAKER
KATIE IVERSON
BRUBAKER & ASSOCIATES
1215 FERN RIDGE PARKWAY
SUITE 208
ST LOUIS MO 63141
MAIL: mbrubaker~consu1tbai.com
ki verson~consu1tbai. com
ANTHONY Y ANKEL
29814 LAKE ROAD
BAY VILLAGE OH 44140
MAIL: tony~yanke1.net
DENNIS E PESEAU, Ph.
UTILITY RESOURCES INC
1500 LIBERTY ST SE STE 250
SALEM OR 97302
MAIL: dpeseau~excite.com
CERTIFICATE OF SERVICE
BRAD M PURDY
ATTORNEY AT LAW
2019 N 17TH STREET
BOISE ID 83702
MAIL: bmpurdy(0hotmai1.com
KEVIN B HOMER
ATTORNEY AT LAW
1565 SOUTH BOULEVARD
IDAHO FALLS ID 83404
MAIL: kbh~khomer1aw.com
TIMOTHY SHURTZ
411 S. MAIN
FIRTH ID 83236
MAIL: tim(~jdahosupreme.com
SECRETARY
CERTIFICATE OF SERVICE