20110527Wilson Di.pdf

RECEIVED
2011 MAY 27 AM": 08
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE )
APPLICATION OF ROCKY )
MOUNTAIN POWER FOR )
APPROVAL OF CHAGES TO ITS )1\ELECTRIC SERVICE SCHEDULES )
AN A PRICE INCREASE OF $32.7 )
MILLION, OR APPROXIMATELY )15.0 PERCENT )
CASE NO. PAC-E-l1-12
Direct Testimony of Erich D. Wilson
ROCKY MOUNTAIN POWER
CASE NO. PAC-E-l1-12
May 2011
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Please state your name, business address and present position with
PacifiCorp, dba Rocky Mountain Power ("Company").
My name is Erich D. Wilson. My business address is 825 NE Multnomah, Suite
4 1800, Portland, Oregon 97232. My present position is Director, Human
5 Resources.
6 Qualifications
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Please briefly describe your education and business experience.
I have been employed as the Director of Human Resources since March 2006.
From March 2001 to March 2006, I was the Director of Compensation for the
Company. Prior to coming to the Company, I held varous positions within the
area of human resources (operations, benefits and staffing), but for the majority of
my career I have directed the design and administration of compensation
programs. I received a Bachelor's degree in Economics (Business) from the
University of California at San Diego in 1992. In addition, I achieved the
Certified Compensation Professional status from the American Compensation
Association in 1999 and have kept this certification curent through attending
various educational programs and seminars.
Please describe your present duties.
My primar responsibilties include managing the Company's human resource
fuction, including compensation, benefits, compliance, staffing, training and
development, employee and labor relations, and payroll. I focus on assisting the
Company in attacting, retaining, and motivating qualified employees along with
the administration of all associated human resource programs and employee
Wilson, Di - 1
Rocky Mountain Power
1 experiences.
2 Purpose of Testimony
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What is the purpose of your testimony?
The purpose of my testimony is to provide an overview of the compensation and
benefit plans provided to employees at the Company and support the costs related
to these areas included in the test period. This overview focuses on our base pay,
anual incentive, pension and healthcare benefit plans. These plans are designed
to allow the Company to attact and retain the employee talent necessar to
deliver safe and reliable service at a reasonable cost. I also demonstrate that the
Company has prudently contained increases in labor costs since the last rate case,
and in particular, has kept increases in benefit costs at a competitive leveL.
How do the total labor costs in this case compare to the Company's last
general rate case, Case No. PAC-E-I0-07 (the "2010 General Rate Case")?
Total labor costs remain relatively flat from the year ended December 2009. The
Company has done an excellent job in keeping total labor costs under control. The
table below shows that the total wage and benefit expense in this case has
increased less than one percent compared to the costs approved by the
Commission in the 2010 General Rate Case.
However, when the wage and benefit expense comparson is performed on
a per megawatt-hour basis, as reflected in customer rates, costs in the curent case
are lower than the previous case.
Wilson, Di - 2
Rocky Mountain Power
PAC-E-l1-12 PAC-E-I0-7 Percent
CY2011 CY2010 Chan!!e
Total Wages and Benefits $540,267,965 $536,697,021 0.7%
MWLoad 58,122,263 57,449,828 1.2%
$/mwh Wages and Benefits $9.30 $9.34 -0.5%
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What factors have caused wage and benefit costs to increase less year after
year?
The Company continues to pay wages that are consistent with the practices in the
labor market. The economic challenges that began in late 2008 and which have, to
a lesser extent, continued though 2010 have been a key factor in keeping wage
increases at historically low levels. For example, the Company increased
employees' wages for the 12 months ended December 2010 by half of one percent
(0.5%) compared to the 3.0 - 3.5 percent range that has traditionally been seen in
the markets in which we compete for labor. In fact since December 2006
PacifiCorp's overall salaries have increased less than 2.3 percent over that four-
year period, from $468.2 millon to $478.8 milion as of December 2010.
When you compare employee compensation from December 2010 to
December 2006, PacifiCorp's total wage and benefits have decreased from $765.5
milion in 2006 to $710.8 milion in 2010, a reduction of $54.6 milion that is
more than a seven percent decrease over a four-year period.
In sum, market compensation data used to establish the Company's
compensation levels reflect the economic conditions of the market area. As a
consequence, the Company has recognized the economic conditions impacting its
service terrtory. Even beyond that, the Company has controlled compensation
Wilson, Di - 3
Rocky Mountain Power
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and benefit expense to such an extent that the total package is curently slightly
below the market average, a condition that the Company wil monitor closely.
Please briefly describe the Company's compensation philosophy.
Two fudamental principles underlie the Company's compensation philosophy.
First, the Company's primary goal in determining employee compensation is to
provide pay at the market average. Competitive compensation is critical to
attacting and retaining qualified employees in a competitive market, and allows
the Company to do so without incurng excessive or uneasonable costs. Thus,
the Company endeavors to provide the same general pay levels and components
in its total remuneration package as are included in the packages provided by its
competitors for labor.
Second, the Company believes that in order to encourage superior
performance, a certain percentage of each employee's market compensation must
be "at risk." The plan is not a bonus but an incentive to achieve performance that
in total wil provide competitive total compensation. Accordingly, under the
Company's Anual Incentive Plan, each employee has the opportity to receive
total compensation, including both base pay and at risk pay, at the market
average, so long as the employee performs at an acceptable leveL. However,
employees wil earn less than the average remuneration when performance is less
than acceptable and, conversely, wil earn higher than the average remuneration
when performance is exceptionaL.
Wilson, Di - 4
Rocky Mountain Power
1 Total Compensation
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How does the Company determine the total cash compensation package for
each position?
At least annually, the Company collects market data for comparable jobs and
calculates the average data point for total cash compensation by position. To do
so, we use a variety of compensation studies from varous experts/organizations,
including AONHewitt, Towers Watson, and Mercer. In addition, the Company
uses an on-line tool called MarketPay.com. MarketPay.com provides electronic
access to all of the compensation studies we have traditionally used and some
additional sureys, allowing us to more effciently perform information searches
and job and pay comparisons.
After the Company determines the appropriate level of total cash
compensation for a position, it then determines the portion of that compensation
that will constitute the "at-risk" portion that is, the "target" incentive pay. The
Company sets the "at-risk" portion by reviewing market compensation using the
varous compensation studies described above. The "at-risk" portion is tyically
in the 10-25 percent range; however, incentive pay for a few employees is set as
high as 75 percent. Generally speaking, the higher the position is within the
Company, the higher the percentage of pay at risk. The percentage of total
compensation not at risk is referred to as "base compensation."
How does the Company set goals for its employees that are then used to set
the incentive pay levels which make up the porton of at-risk compensation?
The anual goal setting process begins with discussions between the manager and
Wilson, Di - 5
Rocky Mountain Power
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employee in order to ensure that the employee establishes goals that align with the
business and operational objectives and focus on specific areas where the
employee can contribute to the objectives. In addition, the goal setting process
identifies areas where the employee can improve or develop for the year. The
goals are then documented with assigned measurements. The goals include
controlling expenses, because employees can reasonably be expected to control
costs, which benefits customers. The goals associated with this compensation do
not include net income or revenues for most employees as most employees are not
in a position to impact revenues. The Company has a separate plan, the Long-
Term Incentive Plan ("L TIP") that contains goals related to net income and
revenue for those employees' best in a position to impact those elements. The
Company does not include costs of L TIP in its rate requests.
Has the Company tailored its goals to benefit shareholders?
No. On the contrary, the Company's focus in setting goals is to operate a well ru
utility that benefits its customers, including improvements to operational
effciency and customer service, and the promotion of a safety cultue.
Has the Incentive Plan been successful?
Yes. Since placing a portion of total compensation at risk, the Company has seen
improvements in safety, customer service standards, and operational output.
These outcomes demonstrate that the Company's approach has been successful in
motivating employees in a way that results in customer benefits. While these
achievements may provide indirect benefits to the shareholder, that is not the
guiding principle in how the program is designed.
Wilson, Di - 6
Rocky Mountain Power
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Please explain the level of incentive compensation that is included in this
filing.
As shown in the testimony and exhibits of Company witness Mr. Steven R.
McDougal (see page 4.3.4 of Exhibit No.2), this Application includes a request
for total-Company incentive compensation in the amount of $30.0 millon. This
amount is calculated using the pro forma wages in this case multiplied by a thee-
year average of the actual payment rate. The Idaho porton of this expense is
approximately $1.3 milion.
What level of incentive compensation does the Company expect to payout on
a yearly basis?
The Company's pay philosophy is to provide 'total compensation at the market
average, and because target incentive compensation is set to market average, we
expect that we wil payout, on a yearly basis, the target levels of incentive
compensation.
While the Commission ordered that the 2009 and 2010 base pay wage
increases be adjusted in the last case's revenue requirement, do you believe
such an adjustment is warranted in this case?
No. As demonstrated in my testimony the Company aggressively manages its
total compensation package, since 2006 total wage and benefit costs are down
over seven percent, fuer adjustments are unwaranted. The Company continues
to tae the position that the base pay wage adjustments provided to the work force
are set at or slightly below market competitive levels. It is importnt to appreciate
that the level of wage increase as set by the Company does factor in economic
Wilson, Di - 7
Rocky Mountain Power
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conditions (employment and actual compensation trends) and therefore, any
adjustment to those expense levels would actually be double counting and
negatively impacting the Company's ability to both provide a fair and competitive
compensation and also attact the labor needed to meet the expectations and
obligations to its customers.
Does the Company use the metrics of the local econonmy in SE Idaho or for
that matter anyone service territory to set merit increases across its six state
system?
No, it is not unique for a Company which operates in multiple territories and
whose compensation philosophy is to attact and attain the talent necessary to
service the business and its customers to assess the entire labor market and from
the results gleaned from that robust assessment, set its levels in alignent to those
results. The Company does not directly pull isolated geographic comparison data,
nor would it be appropriate to do so. However, by assessing the entire labor
market, most if not all the companies deemed to be the Company's competitors
are captued, thereby representing a complete pictue enabling the Company to
demonstrate to the business and its customers the appropriate level of
compensation to provide to its employees.
Does the Company filing include annual incentive expense as part of the
MEHC cross charge?
Yes, there are expenses included in this filing that are related to the proporton of
time spent on PacifiCorp related matters by members of MEHC that are then
captued via the cross charge. Our customers receive significant value though the
Wilson, Di - 8
Rocky Mountain Power
1 leadership, ideas and exposure to other operational practices that are made
2 available though these key MEHC leaders. An example isMs. Cathy Woollums,
3 senior vice president of environmental services and chief environmental counsel
4 for MEHC, who is a witness in this case on the necessity of the Company's
5 investment in pollution control equipment. The Company has relied on her
6 experience, knowledge of environmental issues and participation with PacifiCorp
7 and its federal and state environmental regulators to design compliance and
8 implementation plans. The incentive plan for these individuals is strctued in the
9 identical fashion as described above, established with a focus on improving
10 customer service, operational efficiency and safety. Likewise this incentive plan is
11 the at-risk component of the compensation package which enables a market
12 average total compensation result.
13 Retirement Plans
14 Q.Please describe the Company's retirement plan.
15 A.The Company continues to strve to provide a competitive retirement plan
16 offering, while at the same time reducing the' volatility in expense tied to
17 retirement plans so as to benefit both the customer and employee. To mitigate
18 futue customer risk the Company moved from a defined benefit pIan to a defined
19 contribution plan in June 1, 2007. In doing so, the Company provides, for non-
20 represented employees hired prior to January 1, 2008, the ability to receive their
21 retirement through either a cash balance or though a 401k plan only design. A
22 choice was offered in 2008 and 41 percent of the eligible population elected the
23 401k plan design. All non-represented employees hired post Januar 1, 2008,
Wilson, Di - 9
Rocky Mountain Power
1 receive their retirement through the 401k plan. Retirement plan benefits for
2 represented employees are determined through the collective bargaining process,
3 through which the Company has maintained its focus to shift the retirement
4 approach from the traditional defined benefit todefined contrbution (401k) plans.
5 This shift wil benefit the customers over the long ru as the employees will bear
6 the risk of their retirement based on their investment choices and the Company
7 wil see reduced exposure to the plan required contrbutions that come as the
8 market encounters volatility.
9 Employee Health Benefits
10 Q.Please describe the Company's health care benefits.
11 A.As with all benefits, the Company attempts to provide employees with the same
12 level of health care benefits that are provided by the employers with whom the
13 Company competes for labor. In our case, this means offerig employees market
14 average health benefits. And of course the Company seeks to provide these
15 benefits as economically as possible.
16 Q.How does the Company ensure that it is providing these competitive benefits
17 as economically as possible?
18 A.The Company relies on the advice of its consultant, AONHewitt, to ensure that it
19 is securng market competitive benefits at the best possible rate. AONHewitt are
20 respected experts in their field and the Company has relied on them for many
21 years. With the help of AONHewitt, the Company periodically reviews and
22 adjusts the sharing of healthcare-related costs with employees in an effort to
23 stabilize cost, manage volatility, and respond to changing market practices.
Wilson, Di - 10
Rocky Mountain Power
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Has the Company faced any particular challenges in the past several years
relevant to its provision of health care benefits?
Yes. It is widely understood that health care costs have been rising sharply over
the past several years and in 2010 the passing of Health Care Reform occured.
As a result, the Company experienced significant increases in its health care
benefit costs and anticipates fuher required actions wil be necessar to comply
with Health Care Reform.
Has the Company taken any action to contain these cost increases?
Yes. Beginning in 2008 the Company made adjustments to the cost sharing and
plan design to reduce costs and to align with market practices. In particular, the
Company established a base medical plan. with a high deductible and a cost
sharing of 90/10 (Company/employee), with the employee share increasing in
subsequent years, for 2011 the sharing is set at 84/16. The Company continues to
offer choices in other plans, however, except for a $300 deductible plan that is
offered in rual areas, these plans are set at a cost sharig of 70/30. All new hires
as of January 1, 2008, have the option of selecting the high deductible plan or
opting out of coverage.
What is the Company's rationale for sharing healthcare-related costs with its
employees?
This strctual shift adheres to the Company's goal of providing competitiv:e
benefits to its employees, while doing so in a manner that is fair and prudent for
our customers.
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Rocky Mountain Power
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Please explain the level of health care costs included in this filing and
compare that to previous fiscal year expenses.
There continues to be a significant upward trend in healthcare costs in recent
years. For calenda years 2007,2008 and 2009 actual healthcare expenses totaled
$49 millon, $52 millon and $57.9 milion, respectively. Consistent with this
trend, the Company has included in this application healthcare expenses on a total
Company basis of $61.5 milion, as shown on page 4.3.4 in Exhibit NO.2. The
Idaho allocated share of health care costs is $2.5 milion.
AONHewitt has informed the Company that curent trends indicate the
rates for the Company's medical benefits are anticipated to increase fuer in
201112012 by between eight and 10 percent, respectively.
Has the Company included expense related to its supplemental executive
retirement program (SERP) in this filing?
No, the Company acknowledges the Commission's order removing SERP from
the last fied rate case. We stil take the position that these are not extra,
unecessary or excessive benefits. Our pay and benefits philosophy continues to
remain the same in that we provide programs/plans at the market average. The
Company honors its commitment to contiue to fud SERP expenses and the
SERP expense is a form of retirement/pension similar to the frozen benefit
expense of the non-union employee population who shifted on June 1,2007, to a
cash balance.
Wilson, Di - 12
Rocky Mountain Power
1 Summary and Conclusion
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Please summarize your testimony.
Rocky Mountain Power has done an effective job of managing wage and benefit
costs and has taken steps to control these costs to the benefit of its customers.
Since 2006 the Company has reduced total wage and benefit costs over seven
percent. Total compensation packages to employees, including benefits, are kept
in line with market data and changes have been implemented to keep benefit costs
under control. Employee total compensation packages are implemented in an
effective manner though rigid goal setting processes to achieve superior
performance for our customers. As a result, I urge the Commission to accept the
Company's level of wage and benefit costs as reasonable and prudent.
Does this conclude your direct testimony?
Yes.
Wilson, Di - 13
Rocky Mountain Power