20040622English Direct.pdf

FECEfVED
i! !="n
, ~." ,..
- lc-'
2;:;01 JUH2 Pi') 1:52
UTl
~:'
;;i LiislON
BEFORE THE
IDAHO PUBLIC UTiliTIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN
THE STATE OF IDAHO.
) CASE NO. AVU-O4-) AVU-O4-
DIRECT TESTIMONY OF DONN ENGLISH
IDAHO PUBLIC UTiliTIES COMMISSION
JUNE 21 , 2004
Please state your name and business address for
the record.
My name is Donn English.My business address
472 W. Washington , Boise, Idaho 83702.
By whom are you employed and in what capaci ty?
I am employed by the Idaho Public Utilities
Commission (Commission) as an auditor in the accounting
section.
What is your educational and experlence
background?
I graduated from Boise State University in 1998
with a BBA degree in Accounting.Following my graduation
accepted a posi tion as a Trust Accountant wi th a penslon
administration , actuarial and consul ting firm in Boise.
a Trust Accountant, my primary duties were to audit the
day-to-day financial transactions of numerous qualified
retirement plans.In 1999 I was promoted to Pension
Administrator.As a Pension Administrator , my
responsibilities included calculating pension and profit
sharing contributions, performing required non-
discrimination testing and filing the annual returns (Form
5500 and attachments) In May of 2001, I became a
designated member of the American Society of Pension
Actuaries (ASPA)I was the first person in Idaho to
receive the Qualified 401 (k) Administrator certification
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D.
STAFF
(Di) 1
and was one of only nlne people in Idaho with the Qualified
Pension Administrator certification.In 2001 I was
promoted to a Pension Consultant, a position I held until
2003 when I joined the Commission Staff.
Wi th the American Society of Pension Actuaries , I
served on the Education and Examination Committee for two
years.On this committee I was responsible for writing and
reviewing exam questions and study materials for the PA-
and PA-2 exams (Introduction to Pension Administration
Courses), DC-, DC-2 and DC-3 exams (Administrative Issues
of Defined Contribution Plans - Basic Concepts, Compliance
Concept s and Advanced Concept s) and the DB exam
(Administrative Issues of Defined Benefit Plans)I have
also regularly attended conferences and training seminars
throughout the country on numerous pension issues.
Since joining the Commission Staff (Staff), I
have attended workshops at the Institute of Public
Utilities at Michigan State University sponsored by the
National Association of Regulatory Utility Commissioners.
These workshops included many different topics, such as
lncome taxes, depreciation, Sarbanes-Oxley, and rates of
return on equity.
Have you previously testified before this
Commission?
Yes , I have provided wri t ten and oral
CASE NOS. AVU-04-1/AVU-04-
06/21/04
ENGLISH , D.
STAFF
(Di) 2
testimony in Idaho Power Company s general rate case (Case
No. IPC-03-13) , primarily regarding treatment of pension
expense and pre-paid pension costs for regulatory recovery.
My testimony in that case also presented arguments against
recovery of miscellaneous organizational dues and
chari table contributions , interest expense and legal
expenses.
What is the purpose of your testimony in this
proceeding?
The purpose of my testimony in this proceeding
to present Staff's position regarding penslon expense,
depreciation expense, pro forma deferred income tax
adj ustments relating to recent accounting methodology
changes, legal expenses and certain miscellaneous expenses
found in the Company s Application.
Are you sponsoring any exhibi ts wi th your
testimony?
Yes , I will be sponsorlng Exhibit Nos. 121-127.
ELECTRIC SECTION
Pension Expense
Please describe Avista Corporation (Avista;
Avista Corp.; Company) pension plan.
Avista Corp. sponsors a tradi tional def ined
benefit pension plan in which participants will receive a
set monthly income upon retirement that is based on their
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D.
STAFF
(Di) 3
years of serVlce and their final average earnings.This
plan is fully funded by Avista Corp.Assets in the Plan
are secured in a trust and guaranteed by the Pension
Benefits Guaranty Corporation.
Please describe the Company s treatment of
penslon expense in its current rate filing.
Avista proposes to use a pension expense of
$14 000,000 on a total system-wide basis (Falkner Direct,
page 24)The amount of Idaho s electric jurisdiction
penslon expense proposed to be recovered in this rate case
is $2,095,423.
How was this amount calculated?
During the 2002 test year, the Company s Net
Periodic Pension Cost (NPPC) on a total system-wide basis
was $9,277 622.The Company has estimated that for 2004
the NPPC will be $13,600,000 using an estimate of actual
rates of return on assets of 3.88%, compensation increases
of 5% and a discount rate of 6.25%.In its Application
the Company rounded this estimated $13.6 million amount up
to $14 million , and then made a pro forma adjustment to
lncrease penslon expense by $4 615,000 system-wide or by
$691,039 for the Idaho electric jurisdiction (Exhibit No.
, page 8 of 10, Column ac) I have included Company
witness Falkner s Workpaper No. ac6 that illustrates this
calculation in my Exhibit No. 121, page 3 of
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLI SH, D.
STAFF
(Di) 4
Does Staff agree with the Company s penslon
expense?
No.Staff disagrees wi th the Company s treatment
of pension expense.The pro forma adjustment is based on
an estimated pension expense that was calculated uslng
speculative assumptions that may or may not hold true.
Specifically, the Company uses an 8 percent actuarial
assumption of future rates of return on assets; however
for 2004 the Company uses an estimated actual return on
assets of only 3.88%.It is impossible to predict wi th any
certainty the actual investment performance of the plan
assets for 2004.Therefore , this adjustment is not known
and measurable and should be rej ected by the Commission.
Furthermore , I do not believe that the recovery of FAS
expense is appropriate in this case.
Please describe FAS 87 expense.
FAS 87 expense lS a reference to Statement of
Financial Accounting Standard No. 87 and is synonymous with
Net Periodic Pension Cost.The Statement was issued by the
Financial Accounting Standards Board to alleviate long-
standing controversy regarding how to report for pension
liability.It mandates the use of Net Periodic Pension
Cost for reporting pension expense on a company s financial
statements.The NPPC is an accrual of pension expense for
a given year , but it is not the actual amount of cash that
CASE NOS. AVU-04-1/AVU-04-
06/21/04
ENGLISH, D.
STAFF
(Di) 5
a company is required to contribute to a penslon plan to
meet its minimum funding liability and avoid interest and
penalties.It is also important to note that FAS 87 makes
no mention of regulatory accounting.
Has there been any perceived problems wi
FAS 87?
There has been a growlng concern amongYes.
accounting professionals regarding the use of FAS 87 and
the potential for manipulation of financial statements.
Just last year , the Financial Accounting Standards Board
agreed to put further review of FAS 87 on its formal
agenda.Though the Board has not made any changes to the
Statement, the concern lS still present.
What was the actual cash amount that Avista was
required to contribute to the pension plan during the 2002
test year?
The Employee Retirement Income Security Act
(ERISA) and section 412 of the Internal Revenue Code
mandate the required minimum contribution necessary for
plan sponsor to meet its funding obligations.A completely
different calculation is used to determine the mlnlmum cost
for a given plan year.Avista s 2002 ERISA required
minimum contribution was $7 481 201 on a total system-wide
basis.
Please briefly describe ERISA.
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLI SH , D.
STAFF
(Di) 6
ERISA was enacted by Congress in 1974 to ensure
some level of security in employee benefit plans. Since its
enactment, penslon plans are subj ect to intense federal
regulation because of the long-term nature of the benefit
obligation and the resulting potential for changed
circumstances.One of many ERISA requirements is the
systematic advanced funding requirements to protect
employees against employer defaul t .ERISA mandates the
minimum amount that must be funded each year to a pension
plan to avoid a funding deficiency.
How is this amount calculated?
The first step of the calculation is to determine
the Normal Cost for the year.The Normal Cost is the
annual cost of the plan uslng the plan s actuarial cost
method as established in the plan document.The Normal
Cost is a calculation that takes into consideration the
present value of future benefits, the actuarial value of
the Plan s assets, any unfunded liabili ties and the present
value of the Company s future payroll.This information is
used to calculate an accrual rate that is then mul tiplied
by the Company s current payroll to produce the Normal
Cost.By adding or subtracting any charges or credi ts to
the Normal Cost one can obtain the Annual Cost.The
Minimum Required Contribution is the lesser of the Annual
Cost or the difference between the Full Funding Limitation
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D.
STAFF
(Di) 7
and any credit balance.This minimum contribution is the
amount that a company must fund in order to avoid a funding
deficiency in the Funding Standards Account.
Is this Minimum Required Contribution the amount
that Avista Corporation actually contributed to the Plan
for the 2002 plan year?
In its discretion, Avista contributed anNo.
additional $4 518,799 beyond the minimum required amount
for a total of $12 million.
What amount of pension expense do you believe
appropriate for Avista Corporation to recover in rates?
I believe that it is appropriate for the Company
in this case to recover only the amount that it was legally
required to contribute to the Plan.For the 2002 test
year , this amount was $7 481 201 system-wide and $1 120 217
for the Idaho electric jurisdiction.However , Staff has
pro formed our adjustment to update the pension expense to
2003 actuals.The 2003 system-wide mlnlmum penslon
contribution was $8,694 685 with $1,301 921 allocated to
Idaho s electric jurisdiction.Staff's adj ustment reduces
the Company s proposed pens ion expense from $14 , 000, 000
$8,694 685, resulting in a decrease to Idaho revenue
requirement of approximately $867 000.
Are you suggesting that this Commission adopt a
policy that only the ERISA required minimum contribution be
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLI SH , D.
STAFF
(Di) 8
accepted for rate recovery?
I am not necessarily recommending a strict policy
of only accepting the ERISA required minimum amount for
rate recovery purposes, but I do believe that the ERISA
minimum contribution is the best starting point in
determining the amount to allow for recovery.When deal ing
with the different pension calculations , it is important to
remember that these ~costs n we are referring to are
artificial numbers that have no connection to real-world
values.These costs do not accurately estimate the value
of the plan s liability to pay benefits, the Company
legal liability should the plan be terminated , or the value
of benefits accumulated under the plan.These calculations
are simply a means by which the federal Tax Code and the
ERISA regulations dictate the level of funding in a plan
for purposes of tax deductions and minimum funding rules.
The calculation methodologies consist of using inaccurate
data and speculative assumptions and running them through
an overly precise formula to produce a cost calculation.
Therefore, there is no accurate contribution value, and we
are forced to rely on a number that is produced by the
calculations.Given this speculative nature of penslon
contributions , I believe it is wise for the Commission to
reserve some discretion in determining amounts to be
recovered through rates based on the individual facts and
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLI SH , D.
STAFF
(Di) 9
circumstances of each case.Given the large requested rate
increase in this case, funding at the ERISA minimum level
lS appropriate.
Please explain Exhibi t No. 121.
Exhibit No. 121 consists of four pages.The
first two pages are simple line graphs that compare
Avista s NPPC and the ERISA minimum contributions since
1995. The following two pages are workpapers of Company
witness Falkner illustrating Avista s pro forma penslon
adj ustments.As depicted by the graphs, the contributions
between 1995-2001 were consistently under $4 million.
2002 , Avista s contributions began trending rapidly upward.
My investigation of Avista ' s pension contribution
history focused on reasons for this upward trend other than
poor market performance ci ted by Company wi tness Falkner
(Falkner direct, pages 24-25)During my review I noticed
that the actuarial assumption for future rate of return on
assets was lowered from 9% in 2001 to 8% in 2002.Anyt ime
an assumption is changed during a test year, it raises
suspicions.The effect of the impact of this assumption
change is shown on Exhibit No. 121 , page 2 and is
approximately $1.35 million in 2002 and $1.56 million in
2003.At the time of the assumption change, the Plan
average actual return Slnce 1995 had been approximately
percent.In 2003, the Plan experienced a weighted average
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D.
STAFF
(Di) 10
return of approximately 24.5%.Though Avista changed the
actuarial assumption for the test year and increased FAS
penslon expense, I do not believe it was an attempt by the
Company to manipulate the expense or game the system.
believe the change of the rate of return assumption was the
resul t of short - term uncertainty in the equi ties market.
This reasoning, however, violates the process in which one
determines actuarial assumptions.Actuarial Standard of
Practice No. 27 written by the Pension Committee of the
Actuarial Standards Board states that in determining long-
term rate of return assumptions, one should look at
expected long-term returns and not give undue weight to
recent past history.
To change the rate of return assumption because
of poor market performance ignores the fact that the
markets have historically always trended back toward their
long-term averages.Many companles were compelled to
reduce their assumed returns during recent years, but these
changes are premature given that the markets have
historically always rebounded.
Because the Net Periodic Pension Cost increased
by approximately $10 million over a three-year period, and
the change in assumptions accounted for only approximately
$1.5 million of that increase, it was the downturn in
equity markets between 2000-2002 that created the dramatic
CASE NOS. AVU-04-1/AVU-04-
06/21/04
ENGLI SH, D.
STAFF
(Di) 11
lncrease I do not believe it is appropriate for
ratepayers to bear the burden of increased rates to cover a
pension expense that is created by a short-term downward
trend in the market.
That said, I believe this assumption change lssue
is not the most important pension concern in this
proceeding.The primary issue before the Commission
involves the use of the ERISA required mlnlmum expense for
rate recovery and not the Net periodic Pension Cost.
Why do you support the use of the ERISA required
minimum expense in this case?
I support the ERISA mlnlmum contribution because
the funding calculation method uses a smoothed value of
plan assets.A smoothed value recognizes gains and losses
on plan investments over a five-year period.While the
market losses of 2000-2002 are phased into this
calculation , so are the market gains of 2003.In contrast,
FAS 87 expense accounts for market gains and losses in the
year that they occurred.During periods of market
volatility, the FAS 87 expense has the potential to
fluctuate because it completely captures the galns or
losses of a specific year. The ERISA minimum contribution
should remain more consistent because only 20% of current
market gains or losses are factored into the calculation
together with 20% of each of the four previous years ' gains
CASE NOS. AVU-E- 04 -l/AVU-G- 04-06/21/04
ENGLISH, D.
STAFF
(Di) 12
and losses.Thus, from a consistency standpoint, the ERISA
required minimum contribution is the most reasonable.
Allowing Avista to recover more than the ERISA minimum
contribution may cause over-recovery of pension costs paid
and would not be reasonable.
Has this Commission ever approved a penSlon
expense other than NPPC 87 for ratemaking purposes?
Just recently the Commission issued OrderYes.
No. 29505 in Case No. IPC-03-13 in which the utility was
allowed to collect only its cash contribution under ERISA
as the pension expense included for rate recovery.The
ERISA required mlnlmum contribution had been $0.00 for many
years and was expected to remain $0.00 for qui te some time.
It was this expense level that was included in rates in
Order No. 29505 at 21.
Depreciation Expense
Please explain Staff's posi tion on the Company
proposed depreciation expense.
During the course of it's audi t, Staff noticed
that the depreciation rates the Company proposed were
significantly higher than rates more recently approved by
this Commission.The Company has used a depreciation study
from 1997 , which Staff believes may be outdated.
Did you compare the depreciation rates proposed
by Avista to other states that Avista operates in?
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D.
STAFF
(Di) 13
Yes, I compared Avista s depreciation rates
currently in place in Idaho to the rates that were recently
approved by the Washington Utilities and Transportation
Commission in Docket No. UE-991606.The rates approved in
that docket were stipulated to by all parties.
Why are different depreciation rates used in
different states?
Calculating depreciation rates is very similar to
calculating pension expense.The calculations are based on
numerous assumptions, such as remalnlng life, salvage value
and removal costs.Though the formulas are quite precise,
the resul t is only as good as the assumptions.Therefore,
two different depreciation experts could calculate
different depreciation rates.However , logic dictates that
plant in Idaho will not depreciate faster than the same
plant in Washington.
What is Staff's depreciation expense proposal for
the Company in thi s case?
Staff proposes that the Commission adopt the same
depreciation rates that are effective in Washington.The
resul t of this adj ustment decreases Idaho s electric
revenue requirement by approximately $676,000.
How does Staff's proposed overall depreciation
rates compare to Idaho s other large utilities?
Staff's proposed composi te depreciation rate for
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D.
STAFF
(Di) 14
Avista s electric utility is 2.47 %.This amount
reasonable and within the range of other utilities
currently operating in Idaho.
Has the Company expressed its willingness to
accept the same depreciation rates in effect in Washington
for use in Idaho?
In a meeting on June 2 , 2004, the CompanyYes.
gave a verbal agreement to accept Washington rates in Idaho
as a means of mitigating the overall rate lncrease and for
consistency of depreciation rates between states.
3 .Income Tax
Please explain Staff's posi tion regarding lncome
tax expense and deferred income tax.
At issue is the Company s change in methodology
when accounting for income taxes.Due to recent changes by
the Internal Revenue Service , certain plant and inventory
that once were required to be capitalized can now be
expensed and deducted.In following the IRS's new
allowable methodology, Avista calculated the amount of
previously capi talized plant and inventory and deducted
those amounts in a single year, resul ting in a windfall
benefit to the Company.
Does Staff approve of this change in methodology?
Staff believes that the Company prudentlyYes.
applied for approval to change its methodology and receive
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D.
STAFF
(Di) 15
the benefits that accompanied that change.Since the
Company is using a 2002 test year with pro forma
adjustments, and the tax benefit was received in 2003,
Staff believes it is appropriate to make a pro forma
adjustment to reflect deferred income tax.Inclusion of
the deferred income tax as a pro forma adj ustment to rate
base allows customers to receive a portion of this benefit
now since the tax expense will increase and the deferred
tax balance will decrease in the future as the timing
difference turns around.
Is the Company proposlng to keep this benefit for
shareholders?
The Company normalized the benefit and to that
extent, ratepayers would have received the proper benefi
had this windfall occurred prior to the test year.For
this reason deferred income tax is pro formed in Staff'
proposal.
Please explain normalization.
Normalization is a distinct method of reflecting
income tax expense In a regulatory environment.Us ing thi
method , all lncome tax costs related to items in a current
period will be computed, .whether paid in the current year
or paid in a later year.This normalization method creates
a deferred income tax expense and the associated
accumulated deferred income tax liability is subtracted
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D.
STAFF
(Di) 16
from rate base.The rate base reduction provides the
benefi t currently to customers.However , these timing
differences will reverse in the future, and at some point
the tax expense deductions will turn around and taxes will
increase causing customer rates to increase.Without
Staff's pro forma adj ustment, customers would pay too much
in rates for taxes over time.
Are customers golng to pay higher rates because
of this accounting change?
Wi thout Staff's proposed adj ustment, yes.Part
of the rates paid by prior and current customers included
an amount for income tax expense.The Company recalculated
its reduced income tax expense for prior years and
collected the refund, so customer rates were higher than
necessary in past years.However , Staff is not trying to
recapture past customer overpayments, but rather prevent
customers from having to pay twice when the timing
differences reverse themselves.Changes in the deferred
income tax account will reflect these differences.
What do you propose to ensure that customers are
not harmed by future tax increases resul ting from this
methodology change?
Avista has normalized the 2003 tax methodology
change that resul ted in a windfall.Therefore, tax expense
after 2003 will be properly reflected in the deferred
CASE NOS. AVU-E- 04 -1/AVU-04-06/21/04 ENGLISH, D.
STAFF
(Di) 1
lncome tax balance and future tax expense.However , the
2002 test year does not reflect normalization of the 2003
tax methodology change going forward. Therefore, Staff has
increased the Idaho electric jurisdictional portion of the
Company s deferred income tax balance, thus reducing total
rate base by $9,966,000.This incorporates the pro forma
effect of the tax methodology change in the 2002 rate base.
Staff Exhibit No. 122 shows the adjustment amounts as
calculated by the Company and provided to Staff in response
to Production Request No. 218.The net effect of this
adjustment on the Idaho electric revenue requirement is a
reduction of $1 442 000.
Legal Expenses
Please describe Exhibi t No. 123.
Exhibi t No. 123 is a list of legal expenses that
Staff proposes to remove from the electric test year
expenses.Line 1 of Exhibit No. 123 removes $14,035 from
the test year for legal expenses allocated to Idaho for the
operations of Avista Labs.These expenses were incurred by
the subsidiary and should be directly assigned to that
subsidiary.Line 2 removes $1 326 from the test year legal
expenses allocated to Idaho related to the operations of
Avista Communications.Again , these expenses were incurred
by the subsidiary and should be directly assigned to that
subsidiary.
CASE NOS. AVU-E- 04 -l/AVU-G- 04-
06/21/04
ENGLISH, D.
STAFF
(Di) 18
Line 3 of Exhibit No. 123 removes from the test
year $74 363 in legal expenses allocated to Idaho that the
Company incurred during the bankruptcy proceedings of Enron
Corp.Though these expenses were prudently incurred , they
were an extraordinary expense that the Company will not
incur beyond the test year.Therefore, Staff has removed
Idaho s jurisdictional allocation of these expenses.
Line 4 of Exhibit No. 123 removes from the test
year $478,980 in legal expenses related to the Federal
Energy Regulatory Commission (FERC) investigation into
electrici ty trading practices.Again, though the Company
may have prudently incurred these expenses, the
investigation has been completed and these expenses are not
likely to recur beyond 2003.
Please explain the FERC investigation and why
these expenses should not be included in customers ' rates.
In February 2002 , the FERC initiated a fact-
finding investigation of potential manipulation of electric
and natural gas prices by Avista Corp. and its affiliate
Avista Energy in the California energy markets.The FERC
was specifically interested in whether or not Avista Corp.
and any of its affiliates participated in trading
strategies that were similar to those practiced by Enron.
Avista incurred significant legal expenses defending itself
and allocated $478,980 to Idaho s electric jurisdiction.
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D.
STAFF
(Di) 19
In April of 2004 , after filing its Application
wi th this Commission to increase base rates, Avista
Corporation received notice from the Federal Energy
Regulatory Commission that its investigation into any
alleged improprieties committed by Avista Corporation and
its affiliates had been concluded.The Federal Energy
Regulatory Commission cleared Avista of any wrongdoing.
Given that these activities should not be associated with
the normal provision of electricity and should not recur in
the future, Staff has removed these expenses on the grounds
that they are non-recurring.However , the Company
revenue requirement still includes a substantial level of
other legal expenses for Idaho s electric jurisdiction.
Miscellaneous Expenses
Please explain Exhibi t No. 124.
Exhibit No. 124 lists several miscellaneous
expenses discovered during Staff's audi t that Staff
believes are inappropriately charged to ratepayers.These
expenses include such items as Christmas and Fourth of July
parties for employees, and contributions to various
charities and social organizations that promote the
Company s public image or should be allocated to
affiliates.
The largest single expense item on the list is
expenses incurred by Avista Corporation pertaining to
CASE NOS. AVU-04~1/AVU-04-06/21/04 ENGLI SH, D.
STAFF
(Di) 20
corporate strategy.A review of this report indicated that
approximately 75% of the report dealt with non-regulated
operations of Avista Corporation.Staff also reviewed the
minutes of the Board of Directors meetings to evaluate the
percentage of the Board's time spent discussing non-
regulated operations for this report.Staff believes that
corporate strategy benefi ts all subsidiaries of Avista
Corp, regulated and non-regulated alike.Therefore, Staff
has allocated 75% of these expenses to affiliates.
Does this conclude your testimony regarding
Avista Corporation s Application to increase its base rates
for electrici ty in Idaho?
Yes.
GAS SECTION
Pens ion Expense
Did Staff make any adj ustments to pension expense
for Idaho s gas jurisdiction?
Avista included an adjustment increase Yes.
$170,068 for Idaho gas operations that reflects the use of
the 2004 estimated Net periodic Pension Cost.Based on the
arguments previously mentioned in Section 1 of my electric
testimony, Staff has adjusted the Company s proposed 2004
estimated $14 million pension expense to the 2003 ERISA
required minimum contribution of $8,694 685.This equates
to an Idaho gas jurisdiction amount of $320,409.The
CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D.
STAFF
(Di) 21
effect of this adjustment reduces the Idaho gas revenue
requirement by approximately $214 000.
Depreciation Expense
Please explain Staff's adj ustment to depreciation
expense for Idaho s gas jurisdiction.
As I discussed in Section 2 of my electric
testimony, the Company has accepted rates in other states
that are significantly less than those rates booked in
Idaho.By applying the rates approved in Washington State
to Idaho s gas jurisdiction , the proposed revenue
requirement is reduced by $44,000.
Income Tax
Did Staff take issue wi th the treatment of the
income tax methodology change and pro form the associated
deferred income taxes in this case for Idaho s gas
jurisdiction?
The recent change in methodology discussedYes.
In Section 3 of my electric testimony also applies to gas
plant and inventory.Again , because the test year in this
proceeding is 2002 , and the tax methodology change was made
in 2003, there is a timing difference making a pro forma
adj ustment necessary for customers to receive any portion
of this tax benefit in this case.Staff has pro formed the
change in the deferred income tax amount in rate base to
reflect known and measurable changes in deferred taxes and
CASE NOS. AVU-E- 04 -l/AVU-G- 04-06/21/04 ENGLI SH, D.
STAFF
(Di) 22
therefore capture this tax change on a going forward basis.
Staff's adj ustment to the deferred tax balance reduces
Idaho s gas jurisdictional rate base by $2 639,000. The net
effect this adjustment has on revenue requirement is a
reduction of $382 000.Exhibit No. 125 prepared by Avista
in response to Production Request No. 218 illustrates the
calculation for this adjustment.
Legal Expenses
Does Staff take exception to any legal expenses
proposed to be recovered from Idaho gas customers in this
proceeding?
During the course of our audi t, StaffYes.
discovered several legal expenses that should have been
directly assigned to affiliates or were for extraordinary
events that will not recur , similar to the arguments listed
in Section 4 of my electric testimony.Specifically, Staff
discovered $16,537 in legal fees allocated to Idaho s gas
jurisdiction related to the bankruptcy filing of Enron
Corpora t ion.Other legal fees removed from test year
expenses were $3,136 and $303 incurred by Avista Labs and
Avista Communications respectively but were allocated to
Idaho s gas jurisdiction.These expenses and the total
adjustment are shown in Exhibit No. 126.This adjustment
reduces the Idaho gas revenue requirement by $19,976.
CASE NOS. AVU-04-1/AVU-04-06/21/04
ENGLISH , D.
STAFF
(Di) 23
Miscellaneous Expenses
Do you have any other adjustments to Idaho s gas
jurisdiction?
There were several miscellaneous expensesYes.
pertaining to the promotion of corporate image, holiday
lunches and charitable organizations that Staff believes
were mistakenly included above-the-line.These expense
reductions are listed in Exhibi t No. 127 and reduce Idaho
gas revenue requirement by $110,650.
Does this conclude your direct testimony in this
proceeding?
Yes, it does.
CASE NOS. AVU-E- 04 -l/AVU-G- 04-06/21/04
ENGLISH , D.
STAFF
(Di) 24
$16 000 000
$14 000 000
$12 000 000
$10 000 000
$8,000 000
$6,000 000
000 000
000 000
History of Avista Pension Costs
1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
-+-
Net Periodic Pension Cost (FAS 87)
---
ERISA Required Minimum Contribution
Exhibit No. 121
Case No. A VU-04-
A VU-04-
D. English, Staff
6/21/04 Page 1 of
$16 000 000
$14 000 000
$12 000 000
$10 000 000
~ $8 000 000
000 000
000 000
000,000
History of Avista Pension Costs
Including Effect of Assumption Changes
1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
-+-
Net Periodic Pension Cost (FAS 87)
---
Net Periodic Pension Cost (after assumption change)
-.-
ERISA Required Minimum Contribution
Exhibit No. 121
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04 Page 2 of 4
- - - -.. '. :
~J KV\ -e.. o..c~
AVISTA UTILITIES
Payroll Loading Adjustment
And Pension Pro Forma
Twelve Months Ended December 31. 2002
Amount Amount - Pension
Incurred Cleared Difference !IQforma
Payroll benefits $27,017,214 $25,100,071 $1,917,143 $4,255,953
Payroll taxes 898,062 552,000 . 346,062
. Payroll time off 10,735,046 303,348 431,698
Total $43,650,322 $40,955,419 $2,694,903 255,953
(1) ,2004 projected pension costs less 2002 actual pension costs for the utility.
2004 projection
2002 actual
Difference
Allocation to utility
Net increase to utility
$14,000,000
- -
385,000
615,000
92.22%
$4,255,953
2002 Washington Electric Labor
2002 Total Company Labor
% of total
$ 24 615,596.
- $ 79,844~620.
30.829%
Payroll loading adjustment allocated to Washington Electric $830,812 $1,312,068
2002 Idaho Electric Labor
2002 Total Company Labor
% of total
. 12,964,290.
$ 79,844 620.
16.237%
Payroll loading adjustment allocated to Idaho Electric $437,571
,/ '
(( $691,039
----
Exhibit No. 121
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04 Page 3 of 4
Ky1l ~ S
VISTA UTILITIES
Payroll Loading Adjustment
And Pension Pro Forma
Twelve Months Ended December 31. 2002
Amount Amount Pension
Incurred Cleared Difference roforma
Payroll benefits $26,075,545 $24 158,402 $1,917 143 255,953
Payroll taxes 898,062 5,552,000 346,062
Payroll time off'10,735,046 10,303,348 431,698
Total $42,708,653 $2,694 903 $4,255,953$40,013,750
(1) 2004 projected pension costs less 2002 actual pension costs for the utility.
2004 proJection
2002 actual
Difference
Allocation to utility
Net increase to utility
$14 000,000
385,000
$4,615,000
92.22%
$4,255,953
2002 Washlngton Gas Labor
2002 Total Company Labor
. % of .total
$ 7,273,797.
$ 79,844,620.
110%
Payroll loading adjustment allocated to Washington Gas $387,717$245,506
2002 Idaho Gas Labor
2002 Total Company Labor
% of total
$ 3,190,949.
$ 79,844,620.
996%
Payroll loading adjustment allocated to Idaho Gas $107,688 $170,068
Exhibit No. 121
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04 Page 4 of
AVISTA UTILITIES
E'"wECTRIC ADJUSTMENT SUMM:.ZffiY
TWELVE MONTHS ENDED DECEMBER 31, 2002
(000' S OF DOLLARS)
Line
No.DESCRIPTION
RJ:., ""\1ENUE S
Total General Business
In terdepartmental Sal
Sales For Resale
Total Sales of Electricity
Other Revenue
Total Electric Revenue
EXPENSES
Production and Transmission
Operating Expenses
Purc:.1-:lased Power
Depreciation and ~~ortization
Taxes
Total production & Transmission
Distribution
Operating Expenses
Depreciation
Taxes
Total Distribution
16 Customer Accounting17 Customer Service & Information18 Marketing
ro"Administrative & General
Operating Expenses
Deprecia tion
Taxes
Total Admin. & General
Total Electric Expenses
"'-",
Operating Income before FIT
Federal Income Taxes
Current Accrual (at 35%)
Deferred Income Taxes
Amortized ITC
SETTLEMENT EXCHANGE POWER
NET OPERATING INCOME
RATE BASE
PLANT IN SERVICE
Intangible
Production
Transmiss ion
Distribution
General
Total Plant in Service
ACCUMULATED DEPRECIATION
ACCUM. PROVISION FOR AMORTIZATION
Total Accurn. Depreciation & Amort.
GAIN ON SALE OF BUILDING
DEFERRED TP..xES
TOTP..L RATE BASE
IDAHO
DFIT - OVERHEADS
ELECTRIC
System Washington Idaho
. $0
Exhibit No. 122
Case No. A VU-04-(9,966)(9,966)A VU -04-
($9,966)($9,966)D. English, Staff
6/21/04 Page 1 of
:00 --
'--~-,
A VIST A.UTILITIES
Accumulated Deferred Taxes Related to Overheads
Electric
Balance at December 31 , 2003
Distribution
Hydro
Kettle F aHs
Kettle Falls CT
Other Production
Rathdrurn
Transmission
Total
Allocation Notes:
Prod uctionlTransmission
Net electric distribution plant - AMA
" . --'---"
Alloc
Basis
Electric
System IdahoWashinqton
($17 045,977)($1 O ~65,497)($6 380,480)
381 480)873 813) 507 667)
(276 112)(181 ,102)(95 010)
(550 810)(361 276)(189 534)
(247 318)(1.62 216)(85 102)
126 676)(738 987)(387 689)
836,293)516 225)320;068)
($27,464 666)($17,499 116)($9 965 550)
- 1 100.000%
1 00.000%
65.590%
62.569%
34.410%
37.431%
.~.
Exhibit No. 122
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04 Page 2 of 2
DMF file: OverheadsDFIT Bk.xlsSheet: El
VISTA CORPORATION
STAFF ADJUSTMENTS TO LEGAL EXPENSES
A VU-O4-
Line Adjustment
Avista Labs
Avista Communications
Enron Corp. Bankruptcy
FERC Investigations
Amount
Allocated to
Electric
Utility per
A vista
590
742
Electric
Allocated to
Idaho
Electric
Jurisdiction
035
326
Allocated using a 35.880% allocation factor per Avista Response to Audit Request No. 20
$ 209 768
$ 1 334 950
363
$ 478 980 *
$ 568 704
Exhibit No. 123
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04
AVISTA CORPORATION
STAFF MISCELLANEOUS ADJUSTMENTS
AVU-04-
VENDOR DESC Account No.Total Transaction Electric
Memberships Directly Charged to Idaho
Jobs Plus 930.000 089
Concerned Business Inc 930.000 067
Bonner County EDC 930.000 218
Coeur D'Alene 930.500 207
Silver Valley EDC 930.500 207
Greater Sandpoint Chamber 930.094 880St. Joe Development Foundation 930.000 804Post Falls Area 930.758 610
Greater Hayden/Hayden Lake 930.500 402
Less than$500 930.222 787Total Directly Charged to Idaho 574 272
Memberships Allocated to Idaho Total Electric
Spokane Regional 930.225 578
Western Energy Institute 930.000 157
National Hydropower Association 930.810 810
PNUCC 930.827 827
Northwest Gas Association 930.968 509Valley Vision 930.000 067Washington Roundtable 930.844 669
Inland Northwest Partners 930.14.080 320
Inland Northwest HVAC Assn 930.500 034
Foundation for Water 930.000 000
Spokane Area Economic 930.100 103
Downtown Spokane Partnership 930.000 022
Corporate Executive Board 930.000 875Financial Executives 930.055 196University of Idaho 930.000 156Spokane Convention 930.000 609
Better Business Bureau 930.817 1,462
Spokane Valley 930.650 327Philanthropy Northwest 930.1,400 006Boston College/CCC 930.200 863AWB930.25 160 834Idaho Association of 930.020 733
CTED/Economic Development 930.000 719
Pullman Chamber of Commerce 930.800 644
Marketing Executives 930.750 539
International Economic 930.640 460
Forest Resources Assoc Inc 930.620 620
ClealWater Economic 930.600 483Kettle Falls Generating 930.600 600Spokane Area 930.500 359
Washington Economic 930.500 381Less than $500 930.341 772
Total to be allocated to Idaho 253 007 206 733
Allocation factors 35.446%Total Allocated to Idaho 279
Total of Account 930.111 551
Charitable, Civic/Community Organizations Total ElectricAnne Marie Axworthy 930.725 583Debbie Simock 930.733 590Wampum930.200 965
Spokane Symphony Association 930.598 481
Resource Planning Unlimited 930.060 853
Anne Marie Axworthy 930.730 587
Elect AI French for President 930.500 402
Kristine Meyer 930.566 455Philanthropy Northwest 930.000 804
Davenport District Art Board 930.500 402Adventures in Advertising 930.539 238Adventures in Advertising 930.572 460
EDS Corporation 930.963 383
' Adventures in Advertising 930.636 511
Judith L Cole 930.566 455
Judith L Cole 930.826 664Women of Avista Corp 930.800 644Charges $500 or greater 930.514 12,477
Allocation Percentage 930.35.446%
Idaho Allocation of Charges $500 or Greater 930.423Idaho allocation of Charges less than $500 930.501Idaho Direct Charges of $500 or less 930.169
Total of Account 930.15,093
Other Miscellaneous
Bain & Company 923 164 835 246 325
Avista Summer Picnic 923 246 391
Spokane Indians Summer Picnic 923 304
Annual Trailblazer Dinner 926 318 146Avista Christmas Luncheon 921 317 849Total Other Miscellaneous 226,020 261 788
Total Miscellaneous Adjustments 542,115 388,431
Exhibit No. 124
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04
""-'" -, -?"""'-= '
VI STA UTILITIES
GAS ADJUSTMENT SUMMARY
TWELVE MONTHS ENDED DECEMBER 31, 2002
(000' S OF DOLLARS)
Line
No.Description
RE\lENUES
Total General Business
Total Tr~sportation
Other Revenues
Total Gas Revenues
EXPENSES
Exploration & Development
Production
Ci ty Gate Purchases
Purchased Gas Expense
Net Nat. Gas Storage Trans
Total Production
Underground Storage
Operating Expenses
Deprecia tion
Taxes
Total Underground
Distribution
Operating Expenses
Deprecia tion
Taxes
Total Distribution
Storage
Cus tamer Accounting
Cus tamer Service & Information
Sal es
Administrative and General
Operating Expenses
Depreciation
Taxes
Total Admin. & General
Total Gas Expense
Opera ting Income before FIT
Federal Income Taxes
Current Accrual (at 35%)
.AInort ITC
Deferred FIT
NET OPERATING INCOME
RATE BASE
PLANT IN SERVICE
Underground Storage
Distribution plant
General Plant
Total Plant in Service
ACCUMOLATED DEPRECIATION
Underground Storage
Distribution Plant
General Plant
Total Accum. Depreciation
DEFERRED TAXES
GAS INVENTORY
GAIN ON SALE OF BuILDING
-.--.----.
TOTJI...L RATE BASE
IDAHO
DFIT - OVERHEADS
GAS
System Washington Idaho
. 0
(2, 639)(2 639)
($2 , 639)($2,639)
, Exhibit No. 125
Case No. A VU-04-
A VU-04-
D. English, Staff
6/21/04 Page 1 of 2
,-";.._--"-..
AVISTA UTILfTIES
Accumulated Deferred Taxes Related to Overheads
Gas
Balance at December 31. 2003
Alloc Gas
Basis stem Washin ton Idaho
Gas - Distribution NDP 222 196 ($5 583 036 639 160
Total ($8 222 196)($5 583,036 ($2 639 160)
Allocation Notes:
Net distribution plant - AMA
Gross
AID
Net
Percent
NDP
272 912 059
242 578
190 669 481
100.000%
185 314 508
845 482
129,469,026
67.902%
(1) Source is Gas Utility Plant (G-PL T-12A) from Results of Operations
597 551 (1)
(26 397 096)(1)
200,455
32.098%
Exhibit No. 125
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04 Page 2 of 2
DMF file: OverheadsDFIT Bk.xls
Sheet Gas
AVISTA CORPORATION
STAFF ADJUSTMENTS TO LEGAL EXPENSES
A VU-O4-
Gas
Amount
Allocated to Allocated to
Gas Utility Idaho Gas
Line Adjustment per Avista Jurisdiction
Avista Labs 185 136
Avista Communications 983 303
Enron Corp. Bankruptcy 710 537
976
Exhibit No. 126
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04
AVISTA CORPORATION
STAFF MISCELLANEOUS ADJUSTMENTS
AVU-04-
VENDOR DESC Account No.
Memberships Directly Charged to Idaho
Jobs Plus 930.
Concerned Business Inc 930.25
Bonner County EDC 930.
Coeur D'Alene 930.
Silver Valley EDC 930.
Greater Sandpoint Chamber 930.25
SI. Joe Development Foundation 930.
Post Falls Area 930.
Greater Hayden/Hayden Lake 930.
Less than$500 930.
Total Directly Charged to Idaho
Memberships Allocated to Idaho
American Gas Association 930.
Spokane Regional 930.
Western Energy Institute 930.
Northwest Gas Association 930.
Valley Vision 930.
Washington Roundtable 930.
Inland Northwest Partners 930.
Inland Northwest HVAC Assn 930.
Spokane Area Economic 930.
Downtown Spokane Partnership 930.25
Corporate Executive Board 930.25
Financial Executives 930.
University of Idaho 930.
Spokane Convention 930.
Better Business Bureau 930.
Spokane Valley 930.
Philanthropy Northwest 930.
Boston College/CCC 930.
AWB 930.
Idaho Association of 930.
CTED/Economic Development 930.25
Pullman Chamber of Commerce 930.
Marketing Executives 930.
International Economic 930.25
Clearwater Economic 930.25
Spokane Area 930.
Washington Economic 930.
Less than $500 930.
Total to be allocated to Idaho
Allocation factors
Total Allocated to Idaho
Total of Account 930.
Charitable, Civic/Community Organizations
Anne Marie Axworthy 930.
Debbie Simock 930.
Wampum 930.
Spokane Symphony Association 930.
Resource Planning Unlimited 930.
Anne Marie Axworthy 930.
Elect AI French for President 930.
Kristine Meyer 930.
Philanthropy Northwest 930.22
Davenport District Art Board 930.
Adventures in Advertising 930.
Adventures in Advertising 930.
EDS Corporation 930.
Adventures in Advertising 930.
Judith L Cole 930.
Judith L Cole 930.
Women of Avista Corp 930.
Charges $500 or greater 930.
Allocation Percentage 930.
Idaho Allocation of Charges $500 or Greater 930.
Idaho allocation of Charges less than $500 930.
Idaho Direct Charges of $500 or less 930.
Total of Account 930.
Other Miscellaneous Expenses
Bain & Company
Avista Summer Picnic
Spokane Indians Summer Picnic
Annual Trailblazer Dinner
Avista Christmas Luncheon
Total Other Miscellaneous
Total Miscellaneous Adjustments
Total Transaction Gas
000 911
000 933
000 782
500 293
500 293
094 214
000 196
758 148
500
222 434
47,574 302
Total Gas
137 393 825
225 647
000 6,473
968 247
000 933
844 745
080 2,752
500 1,466
100 997
000 978
000 740
055 565
000 555
000 391
817 355
650 323
1,400 259
200 222
160 215
020 189
000 185
800 156
750 139
640 118
600 117
500
500
341 331
333,543 128 111
30.791%
447
48,749
Total Gas
725 142
733 143
200 235
598 117
060 207
730 143
500
566 111
000 196
500
539 301
572 112
963 580
636 125
566 111
826 162
800 156
514 037
30.791%
935
112
208
255
164 835 045
246 721
304
318 1,431
317 431
226 020 646
622 651 110 650 Exhibit No. 127
Case No. A VU-04-
A VU -04-
D. English, Staff
6/21/04
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 21ST DAY OF JUNE 2004
SERVED THE FOREGOING DIRECT TESTIMONY OF DONN ENGLISH, IN
CASE NO. A VU-04-l/A VU-04-, BY MAILING A COpy THEREOF POSTAGE
PREPAID TO THE FOLLOWING:
DAVID J. MEYER
SR VP AND GENERAL COUNSEL
VISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
KELLY NORWOOD
VICE PRESIDENT STATE & FED. REG.
AVIS T A UTILITIES
PO BOX 3727
SPOKANE WA 99220-3727
CONLEY E WARD
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
DENNIS E PESEAU, PH. D.
UTILITY RESOURCES INC
1500 LIBERTY ST SE, SUITE 250
SALEM OR 97302
CHARLES L A COX
EV ANS KEANE
111 MAIN STREET
PO BOX 659
KELLOGG ill 83837
BRAD M PURDY
ATTORNEY AT LAW
2019 N 17TH ST
BOISE ill 83702
, ,\('
SECRET ARY
CERTIFICATE OF SERVICE