20090529English Direct.pdf

BEFORE THE '." ..-...."l /'i i:..
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IDAHO PUBLIC UTILITIES CONMl$SlP.N"riJ,¡\
.'1
IN THE MATTER OF THE APPLICATION )
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-E-09-1/
AUTHORITY TO INCREASE ITS RATES) AVU-G-09-1
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC )
AND NATURAL GAS CUSTOMERS IN THE )STATE OF IDAHO. )
)
)
DIRECT TESTIMONY OF DONN ENGLISH
IDAHO PUBLIC UTILITIES COMMISSION
MAY 29,2009
1 Q.Please state your name and business address for
2 the record.
3 A.My name is Donn English. My business address is
4 472 W. Washington, Boise, Idaho 83702.
5 Q.By whom are you employed and in what capacity?
6 A.I am employed by the Idaho Public Utilities
7 Commission as a senior auditor in the Utilities Division.
8 Q.What is your educational and experience
9 background?
10 A.I graduated from Boise State University in 1998
11 with a BBA degree in Accounting. Following my graduation,
12 I accepted a position as a Trust Accountant with a pension
13 administration, actuarial and consulting firm in Boise. As
14 a Trust Accountant, my primary duties were to audit the
15 day-to-day financial transactions of numerous qualified
16 retirement plans. In 1999, I was promoted to Pension
17 Administrator. As a Pension Administrator, my
18 responsibilities included calculating pension and profit
19 sharing contributions, performing required non-
20 discrimination testing and filing the annual returns (Form
21 5500 and attachments). In May of 2001, I became a
22 designated member of the American Society of Pension
23 Professionals and Actuaries (ASPPA). I was the first
24 person in Idaho to receive the Qualified 401 (k)
25 Administrator certification and I am one of approximately
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1 ten people in Idaho who have earned the Qualified Pension
2 Administrator certification. In 2001, I was promoted to a
3 Pension Consultant, a position I held until 2003 when I
4 joined the Commission Staff.
5 With the American Society of Pension
6 Professionals and Actuaries, I served on the Education and
7 Examination Committee for two years. On this committee I
8 was responsible for writing and reviewing exam questions
9 and study materials for the PA-1 and PA-2 exams
10 (Introduction to Pension Administration Courses), DC-1,
11 DC-2 and DC-3 exams (Administrative Issues of Defined
12 Contribution Plans - Basic Concepts, Compliance Concepts
13 and Advanced Concepts) and the DB exam (Administrative
14 Issues of Defined Benefit Plans). I have also regularly
15 attended conferences and training seminars throughout the
16 country on numerous pension issues.
17 While with the Commission, I have audited a
18 number of utilities including electric, water and gas
19 companies and provided comments and testimony in several
20 cases that dealt with general rates, accounting issues,
21 pension issues and other regulatory issues. In 2004 I
22 attended the 46th Annual Regulatory Studies Program at the
23 Institute of Public Utilities at Michigan State University
24 sponsored by the National Association of Regulatory Utility
25 Commissioners (NARUC). Since then I have regularly
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1 attended NARUC conferences and meetings, primarily the
2 meetings of the Subcommittee of Accounting and Finance.
3 Q.What is the purpose of your testimony in this
4 proceeding?
5 A.The purpose of my testimony in this case is to
6 address system operating costs that are allocated to
7 Idaho's gas and electric jurisdictions. I will also
8 present the Staff recommended revenue increase in base
9 rates for Avista Utilities' Idaho Gas jurisdiction. This
10 increase in base rates will ultimately be offset by a
11 proposed decrease in the weighted average cost of gas
12 (WACOG) in Staff witness Elam's testimony, for no change in
13 the net billing rate for the residential class. First, I
14 will propose adjustments that decrease both gas operating
15 expenses and electric operating expenses included in the
16 Company's filing. Secondly, I will address the Company's
17 proposed gas rate base, and additionally, I will propose
18 adjustments that are related specifically to the Company's
19 proposed Idaho Electric revenue requirement. Finally, I
20 will address the Company's proposed accounting treatment
21 for deferring a carrying charge on the difference between
22 pension expense accrual, as calculated under Statement of
23 Financial Accounting Standards No. 87 (FAS 87), and the
24 actual cash contribution made to the plan by Avista
25 Utilities.
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1 Q.What is the Staff's recommended revenue
3
2 requirement for Avista's Idaho Gas jurisdiction?
A.Staff recommends an increase in base rates of
4 $1,894,000, or 2.06% on annual revenues of $91,767,000.
5 This revenue increase is calculated with a Return on Equity
6 of 10.5% and an overall rate of return of 8.55% as
7 discussed in further detail in Staff witness Carlock's
8 testimony. Staff's proposed rate base of $90,028,000 is
9 slightly less than the rate base proposed by Avista of
10 $90,491,000. Staff Exhibit No. 109, Schedule 1 compares
11 the results of Staff's recommendations to those proposed by
12 the Company. The adjustments made by Staff to the
13 Company's case will be discussed in greater detail later in
15
14 my testimony.
Q.Please discuss the difference in the Conversion
16 Factor proposed by the Company and that recommended by
17 Staf f as shown on Staf f Exhibit No. 109, Schedule 1,
19
18 line 6.
A.The conversion factor is an additional adjustment
20 needed to account for the increase in revenue that triggers
21 additional increases in the Company's tax liability, and
22 other revenue contingent items like the Commission
23 regulatory fees and the Company's uncollectible expenses.
24 The calculation of the conversion factor is shown on Staff
25 Exhibit No. 109, Schedule 2. The difference in the
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1 conversion factors arises from different IPUC assessment
2 rates used to determine the Commission's regulatory fees.
3 At the time of its filing, the Company used the 2008
4 assessment rate of 0.2507%. However, on May 7, 2009 the
5 Commission issued Order No. 30780 which established an
6 assessment rate of 0.1662% of gross Idaho operating revenue
7 derived from intrastate utility business. Staff updated
8 the new assessment rate on line 4, producing a new
9 conversion factor of 0.639336. Because the conversion
10 factor is the same for both gas and electric operations,
11 this adjustment effects both gas and electric revenue
12 requirements.
13 Q.Are you sponsoring any other exhibits with your
14 testimony?
15 A.Yes, I will also be sponsoring Staff Exhibit Nos.
16 110-115 which will illustrate the adjustments Staff has
17 made to the Company's pro forma case to develop the pro
18 forma net operating income recommended by Staff. Staff
19 Exhibit No. 110 shows ten adjustments that impact both gas
20 and electric operating results. The Idaho Gas Adjustments
21 on Staff Exhibit No. 110 are then displayed in a columnar
22 fashion on Staff Exhibit No. 111. Column B of Staff
23 Exhibit No. 111 is identical to the Pro Forma Total column
24 in Company witness Andrews' Exhibit No. 10, Schedule 2,
25 page 8, which illustrates the Company's request and becomes
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1 the starting point for all of Staff's adjustments.
2 System Adjustments Allocated to Idaho Gas and Electric
3 Jurisdictions
4 Non-Executive Labor Expense
5 Q.Pleàse describe the first adjustment on Staff
6 Exhibit No. 110.
7 A.Line 1 reflects Staff's adjustment to non-
8 executive labor expenses. Executive Labor has been removed
9 and is discussed in a separate adjustment reflected on line
10 2. In Andrews' adjustment PF-1, the increases paid to
11 employees in March of 2008 are first annualized, and then
12 an adjustment is made to reflect the increase paid in March
13 of 2009. An additional adjustment is made to reflect an
14 increase in wages to be paid in March of 2010, and the
15 Company proposes to recover 8 months of the increased 2009
16 expense and an additional 4 months of the 2010 increase to
17 reflect what it believes to be the estimated labor expense
18 for the proposed rate year ending June 30, 2010. The
19 Company calculated estimated labor expense increases of
20 3.8% in 2009 and 2010 for its administrative staff, and
21 used the contractually obligated 4% wage increase for its
22 collective-bargaining union employees. Consistent with
23 Staff's treatment of the proposed test year in this case, I
24 have removed all increases associated with 2010 to reflect
25 the annual labor expenses for the year ending December 31,
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1 2009. Additionally, at the time of its filing, the Board
2 of Directors had not formally approved a wage increase for
3 2009, so the Company's 3.8% was an estimate of what was
4 believed to be the appropriate increase for 2009. The
5 Board of Directors subsequently approved a wage increase of
6 2.5% for 2009 for administrative staff, while the union
7 employees received their 4 % increase as mandated by
8 contract.
9 In addition to removing the 2010 increases, I
10 have also reduced the 2009 increases to the amount actually
11 paid in March of 2009, and annualized those increases as if
12 they were in effect for the whole year. The effect of this
13 adjustment reduces Non-Executive Labor expense for the
14 Idaho Gas operation by $75,573 and increases Net Operating
15 Income by $49,000 as shown in Column s-l of Staff Exhibit
16 No. 111. The effect on Net Operating Income for Idaho
17 Electric Jurisdiction is shown on Staff witness Vaughn's
18 Exhibit No. 118.
19 Executi ve Labor Expense
20 Q.Will you please describe the adjustment on line 2
21 of Exhibit No. 110 for Executive Compensation?
22 A.Yes. Line 2 represents Staff's adjustment
23 removing all increases for executive compensation proposed
24 by the Company over the test year amounts. Similar to the
25 Company's approach with non-executive labor, the Company
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1 included in its request an increase for 2009 and 2010 for
2 its executives. Subsequent to its filing, the executives
3 of Avista decided to forego any increases in base salary
4 for 2009. I have removed all of the proposed salary
5 increases for executive labor to reflect this decision to
6 forego increases in 2009, and to remove the estimated
7 increase for 2010 to be consistent with Staff's use of the
8 year ending December 31, 2009. Additionally, I annualized
9 the current base salaries of all executives as of March 31,
10 2009 to reflect a full 12 months of their current pay. The
11 effect of these cumulative adjustments reduces Idaho Gas
12 expenses by $31,051 and increases Net Operating Income for
13 Avista's Idaho Gas jurisdiction by $21,000 as shown in
14 Column s-2 of Staff Exhibit No. 111. Again, the effect of
15 this adjustment on the Idaho Electric Jurisdiction's Net
16 Operating Income is reflected on Staff witness Vaughn's
17 Exhibit No. 118.
18 Q.Given the number of negative comments from
19 customers regarding executive compensation, is there
20 anything else you would like to add on the topic?
21 A.Because of the current economiccondi tions and
22 the multitude of customers expressing their displeasure
23 with the salaries paid to Avista executives, I will explain
24 Staff's critical approach in analyzing the reasonableness
25 of the executive compensation package, and its impact on
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1 residential customer rates. The amount of executive labor
2 requested to be included in Idaho Gas rates by the Company
3 is 0.20% of annual revenues. On the average Idaho
4 residential monthly gas bill, this means that 10.78 cents
5 goes toward executive labor under the Company's proposal.
6 For Idaho electric customers, the amount requested to be
7 included in rates by the Company is 0.34% of annual
8 revenues, or 15. 84 cents per month on the average
9 residential bill. With Staff's proposed adjustments, Idaho
10 customers using both gas and electricity from Avista will
11 be paying less than 27 cents per month toward executive
12 salaries. Removing all executive salaries from customer
13 rates for gas and electric service would save customers
14 approximately $3.00 per year.
15 Furthermore, Staff's proposal for executive labor
16 expense, in this case, is 0.76% increase over the executive
17 labor currently embedded in rates based on 2007 expense.
18 This is a relatively small increase considering that an
19 additional executive position was added during 2008. On
20 average, executive compensation actually decreased by over
21 $22,000 per executive since the last general rate case.
22 Q.Why do you believe customers have a general
23 misunderstanding of the impact executive labor has on their
24 utility rates.
25 A.On March 24, 2009, Avista issued its annual proxy
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1 statement. Wi thin this proxy statement, Avista is required
2 to list the compensation components of its top 5 officers.
3 Many news outlets in northern Idaho and eastern Washington
4 have reported the total compensation of these officers
5 without regard to how that compensation is paid. Total
6 compensation in the proxy statement consists of base
7 salary, stock awards, option awards, incentive plans, death
8 and disability plans, and gains on pension and non-
9 qualified deferred compensation earnings, and a multitude
10 of other benefits. For example, it was reported that
11 Avista President and CEO Scott Morris received total
12 compensation of $2,221,905 in 2008. However, as shown on
13 Staff Exhibit No. 112, Idaho customers only paid
14 approximately 8.3% of that total, while other jurisdictions
15 contributed as well. It should also be noted that
16 approximately three-fourths of the total compensation
17 reported for Mr. Morris in the proxy statement was charged
18 to non-utility operations of Avista.
19 Adding to the customers' frustration is the
20 current economic conditions of northern Idaho as described
21 in the testimony of Staff witness Thaden. At a time when
22 many customers are experiencing declining incomes, Avista
23 executives are reporting compensation packages that could
24 make people envious. However, when compared to other
25 utility providers of comparable size, Avista executives are
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1 paid below average for the management of a business with
2 $1.5 billion annual revenue.
3 Non-Executive Incentive Expense
4 Q.Will you please describe the adjustment labeled
5 Non-Executive Incentive Expense on line 3 of Exhibit No.
6 110?
7 A.Yes. Line 3 reflects Staff's adjustment to the
8 Company's proposed level of employee bonuses, ultimately
9 reducing employee bonuses for non-executive employees to
10 the level accrued during the historical test period.
11 Q.Please briefly describe the Company's Employee
12 Incentive Plan.
13 A.The Company's main employee incentive plan
14 consists of two steps. The initial step in the issuance of
15 bonuses is determined when Standard Performance
16 Expectations are met. These Standard Performance
17 Expectations are based on customer satisfaction ratings,
18 average restoration time and average outage per customer.
19 Once the Standard Performance Expectations have been
20 achieved, the actual payouts are dictated by O&M cost
21 savings.
22 Q.How did the Company develop its proposed level of
23 incentive payments to be included in rates?
24 A.Actual incentives paid and the associated payroll
25 taxes for years 2003 through 2007 were adjusted by the
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1 Consumer Price Index (CPI) for the year the incentives were
2 paid to restate those costs in 2008 dollars. The Company
3 then computes a six-year average of incentive payments and
4 compares that to the incentive expense included in the test
5 year to determine its pro forma adjustment. The Company's
6 proposed adj ustment increases the incentive expense by
7 $1,175,087 for the total system, or $73,238 for the Idaho
8 Gas jurisdiction and $295,137 for the Idaho Electric
9 jurisdiction.
10 Q.Why do you object to the Company's proposal for
11 its employee incentive plan?
12 A.My first obj ection relates to the use of a six-
13 year average to determine the annual level of incentive
14 expense in this case. As you can see on Staff Exhibit No.
15 113, the annual incentive payments have continually trended
16 downward over the past four years, and the test-year level
17 of incentive expense represents the lowest amount of any of
18 the previous six years. The use of the six-year average in
19 this case would effectively require customers who are in
20 the midst of a recession to pay for employee bonuses at a
21 level that was incurred during a time when economic
22 conditions were far superior than we are currently
23 experiencing. Furthermore, the Company has not provided
24 any evidence that incentive payments will be increasing in
25 the near future to justify the 30% increase over test-year
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1 accruals.
2 Secondly, because actual payouts are dictated by
3 utility O&M cost savings, bonuses will not be paid unless
4 shareholder earnings are achieved. The Company's Employee
5 Incentive Plan states that this O&M component focuses on
6 the context of cost management. Though not directly stated
7 as such in the Company's Incentive Plan, O&M cost
8 reductions at a time of increasing revenues has a direct
9 positive correlation to shareholder value. Additionally,
10 any incentive payments made due to any type of O&M
11 benchmark should be self-funding to the extent that any O&M
12 savings achieved should be sufficient to fund the incentive
13 payout.
14 Q.How has the Commission typically dealt with these
15 types of incentive plans?
16 A.I believe that both Staff and the Commission
17 acknowledge that incentive payments are an appropriate part
18 of a utility company's overall compensation package,
19 provided that the incentive payouts are not based on
20 increasing shareholder value. In Case No. IPC-E-05-28, the
21 parties agreed to a stipulation that stated "it is
22 reasonable to include an employee pay-at-risk or employee
23 incentive component in test-year revenue requirements so
24 long as such incentive component is based on goals that
25 benefit customers." The Stipulation further stated that
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1 "senior management pay-at-risk is appropriately excluded
2 from test-year revenue requirement."
3 Though this stipulation was filed as an agreement
4 between Commission Staff and Idaho Power Company, by
5 accepting the stipulation, the Commission has expressed its
6 intentions with respect to the treatment of employee
7 incentive plans. The Commission also affirmed in Order No.
8 30722 that "incentive pay is properly included in annual
9 revenue requirement if it is related to identifiable
10 customer benefits." The Commission further stated in that
11 Order that the customer benefits of "O&M management that is
12 reflected in rates set in annual rate cases does not create
13 the necessary nexus between incentive pay and customer
14 benefit."
15 Finally, I believe that the Commission is
16 cognizant of the public perception of Avista awarding
17 employee bonuses at a time when it is asking to increase
18 the rates it charges for gas and electricity, and
19 especially when many of its customers are struggling
20 financially. If Avista believes that today's financial
21 environment mandates the need for rate increases, those
22 rate increases should be mitigated by a concerted attempt
23 to lower costs and salary. The incentive plan creates the
24 perfect opportunity for Avista to generate funds internally
25 because the Company will undoubtedly experience salary
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1 savings through attrition. As employees retire, or leave
2 the Company, voluntarily or not, their replacements will
3 presumably be paid less. Avista could use these salary
4 savings from attrition to fund a portion of its incentive
5 plan.
6 Q.Given what you just stated about employee
7 incentives, what it your proposal in this case?
8 A.Because Staff has continually recognized the
9 benefit of an incentive plan in an employee's total
10 compensation package, I do not propose to eliminate 100% of
11 the incentive expense proposed by the Company. Also,
12 because the Company's incentive plan does not have a
13 component that directly relates to O&M savings, but rather
14 states that O&M targets must be attained before incentives
15 can be paid, there is not a specific component of the plan
16 that can be reduced. Therefore, my adjustment limits the
17 amount of employee incentive expense to that which was
18 accrued during the test year ending September 30, 2008.
19 This is a reduction of approximately $1.2 million system-
20 wide to the Company's proposal.
21 It should be noted that the remaining $2.8
22 million, with the exception of executive bonuses which I
23 discuss shortly, is comparable to the approximately $3.2
24 million in incentive expense that the Commission awarded to
25 Idaho Power in Case No. IPC-E- 08 - 10. Because Idaho Power
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1 has. approximately 2,000 employees compared to Avista' s
2 approximately 1,500 employees, on a per employee basis, the
3 amount I recommend for Avista is actually greater than that
4 approved for Idaho Power.
5 Executive Incentive Expense
6 Q.Does the test year incentive expense for Avista
7 include bonuses for its executives?
8 A.Yes, it does. Line 4 of my Staff Exhibit No. 110
9 illustrates the removal from test year incentive expense
10 the amounts included for Avista executives. This is
11 consistent with the Commission's affirmation that senior
12 management pay-at-risk be excluded from test year revenue
13 requirement, and is also consistent with Staff's treatment
14 of executive incentive expense for all other utilities
15 providing service in Idaho.
16 The Avista Executive Officer Incentive Plan is
17 similar to the incentive plan for all employees with
18 standard performance measures based on customer
19 satisfaction and reliability. However, the executive
20 incentive plan also has a Capital Spending Budget component
21 as well. Once the standard performance triggers are
22 achieved, 70% of the target award is based on earnings per
23 share targets and the other 30% on O&M cost per customer
24 benchmarks. Because the Executive Officer incentive Plan
25 does not payout until shareholder benchmarks are met, this
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1 plan should be paid for with shareholder money and not
2 charged to customers. Removing the executive incentive
3 payments from the test year reduces expenses by $311,028
4 for the total system, or by $19,385 for the Idaho Gas
5 jurisdiction and $78,118 for the Idaho Electric
6 jurisdiction.
7 Board of Directors Expense
8 Q.Please explain the adjustment on line 5 of Staff
9 Exhibit No. 110.
10 A.Line 5 represents the proposed adj ustment to
11 remove one-half (50%) of the Board of Directors' retainer
12 fees, travel and meetings expense. The Board of Directors
13 is the highest governing authority wi thin the management
14 structure at any publicly traded company. It is the
15 board's job to select, evaluate, and approve appropriate
16 compensation for the company's chief executive officer
17 (CEO), evaluate the attractiveness of and payment of
18 dividends, recommend stock splits, oversee share repurchase
19 programs, approve the company 1 s financial statements, and
20 recommend or discourage acquisitions and mergers. All of
21 these responsibilities illustrate that the primary
22 responsibility of the Board of Directors is to protect the
23 shareholders 1 assets and ensure shareholders receive a
24 decent return on their investment.
25 Because the board of directors' fiduciary
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1 responsibility is to protect shareholder value and the
2 board serves at the behest of shareholders, who have the
3 opportunity to elect or retain board members, it is
4 reasonable for shareholders to pay at least half of the
5 expenses associated with board fees, travel and meetings.
6 Q.Are there other reasons supporting your
7 adjustment to Board of Directors Expense?
8 A.Yes. During the course of Staff's audit, it was
9 noted that some board members fly to board meetings via
10 first class and receive limousine transportation from the
11 airport. Also, board retreats consisted of extravagantly
12 catered lunches and dinners, along with cruises on Lake
13 Coeur d' Alene. The expenses for these types of acti vities
14 were charged to ratepayer accounts and included in the
15 Company's test-year revenue requirement. I believe it is
16 inappropriate to pass these types of expenses onto
17 ratepayers, especially because these expenses do not relate
18 to the generation, transportation or distribution of
19 utili ty services. Staff's removal of one-half of all these
20 expenses acknowledges that as a publicly traded company,
21 Avista is required to have a board of directors and that
22 some level of expense charged to customers may be
23 appropriate. This adjustment reduces expenses by $595,617
24 system-wide or $37,122 for the Idaho Gas jurisdiction and
25 $149,596 for the Idaho Electric jurisdiction.
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1 Information Services Support Adjustment
2 Q.Please explain the adjustment listed on line 6 of
3 Exhibit No. 110.
4 A.This adj ustment is a two-part adj ustment to the
5 pro forma level of Information Services Support proposed by
6 the Company in Mr. Kopczynski's testimony. The Company
7 proposes to capture an additional $2.6 million system-wide
8 for labor and non- labor informational services costs
9 planned for 2009 above the test period levels. Mr.
10 Kopczynski states that an additional $1.3 million is needed
11 for an additional nine positions to support software
12 applications that have been utilized by the Company in
13 recent years. Five of those positions have currently been
14 filled by the Company, while the other four have not. Two
15 of those positions are not expected to be filled until
16 January 2010.
17 Many of the software applications the Company is
18 requesting additional labor dollars for were put in place
19 in 2008. Because the Company is currently using these
20 applications, while already providing reliable electric and
21 gas service to customers at its current staffing level, I
22 believe some of these positions may be unnecessary or
23 filling them could at least be delayed. My adjustment
24 removes approximately $560,000 system-wide for the four
25 unfilled positions, or $25,000 for the Idaho Gas
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1 jurisdiction and $156,000 for the Idaho Electric
2 jurisdiction.
3 Q.What is the second part of your adjustment?
4 A.The second part of my adjustment to Information
5 Services (IS) Support reflects the historical variance
6 between budgeted amounts and actual expenditures. Though
7 Staff generally believes that Avista's forecasts are an
8 accurate representation of the Company's intentions, during
9 the course of Staff's review a large variance existed
10 between 2008 budgets and 2008 actual expenses. The
11 Company's budget or IS Support for 2008 was $2.66 million
12 system-wide, although actual expenses totaled only $2.11
13 million, for a variance of 20.57%. By applying this
14 variance to the budgeted amounts for 2009, it would be
15 reasonable to reduce 2009 IS support by $550,000 system.
16 Q.Are there any specific examples in which you
17 believe the Company's estimates for Information Services
18 Support may be too high?
19 A.Yes. For example, in late 2008, the Company
20 implemented the ARCOS Rostermonster automated crew callout
21 mechanism for after-hour callouts, eliminating the need for
22 one-on-one callouts while creating operational
23 efficiencies. I have reviewed the Company's agreement with
24
25
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1 ARCOS, Inc. 1 The agreement calls for a fixed monthly
2 service fee, and a variable charge based on line usage.
3 After reviewing the invoices from ARCOS, Inc. for the first
4 three months of 2009, I believe the Company over-estimated
5 the annual variable charge for line usage. By annualizing
6 the March 2009 line usage data, the most recent data
7 available, it would appear that Avista overestimated the
8 amount it would need to pay to ARCOS by approximately
9 $38,000. Rather than proposing separate adjustments for
10 each of the applications and contracts, this adjustment
11 incorporates an expected variance between budget and
12 actuals for 2009.
13 It is also important to note that this adjustment
14 is not only a reflection of the budget variance, but also
15 recognizes the operational efficiencies gained but not
16 accounted for in the Company's case.
17 Q.What are the operational efficiencies that you
18 are referring to?
19 A.One of the difficulties of dealing with pro forma
20 test years is that forecasting expenses can be done with
21 relative accuracy based on historical trends and additional
22 planned projects. However, the benefits obtained by these
23
24 1 Details of the agreements were provided confidentially pursuant to
the Protective Agreement between Avista and IPUC Staff dated January 8,
2009. Avista claims this information is exempt from public inspection
under the Commission's Procedural Rule 067 and 233, and Idaho Code §
9-340D. )
25
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1 expenditures are not as easily identifiable, even though
2 they do exist. For example, Avista' s Outage Management
3 System, as described in Exhibit No.7, page 11, is a
4 software application utilizing a Geographical Information
5 System (GIS mapping system) that allows distribution
6 facili ties to be linked to individual customers service
7 points in a computer based model. Customers can report
8 outages quickly by speaking into the Company's Integrated
9 Voice Response (IVR) system. All customer calls are then
10 plotted in the GIS mapping system. The plotting of all
11 commonly affected customers associated with an outage
12 incident enables the Company to more accurately and
13 expeditiously predict the probable cause of the outage, and
14 thus reduce restoration time. In this specific example,
15 both the Company's IVR system and Outage Management System
16 have created efficiencies that are not quantified in the
17 Company's case.
18 When asked about the benefits of the IVR system,
19 the Company responded in an email on April 24, 2009 that
20 the efficiencies will be operational and difficult to
21 quantify. Although Avista also stated that it had no means
22 to quantify the benefits of the Outage Management System,
23 the Company did estimate that it would save approximately
24 two to four hours each day performing restoration of
25 service on normal daily outages.
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1 While the Company admits that operational
2 efficiencies will be achieved through nearly all of its is
3 applications, there is no attempt to quantify any of those
4 benefits that customers should receive. My calculation of
5 the variance between budgeted amounts and actual
6 expenditures, and the resulting adjustment serves as a
7 reasonable proxy to quantify those identified customer
8 benefits.
9 Legal Expenses
10 Q.Please explain the adj ustment to legal expenses
11 listed on line 7 of Exhibit No. 110.
12 A.The adjustment on line 7 consists of two separate
13 components: 1) the removal of 10% of legal expenses
14 related to corporate functions such as Securities and
15 Exchange Commission (SEC) compliance, securities litigation
16 and proxy statements and standards ¡and 2) the amortization
17 of legal expenses associated with the Gas Transmission
18 Northwest Corporation (GTN) natural gas rate case filed
19 with the Federal Energy Regulatory Commission (FERC).
20 Q.Please explain the adjustment for SEC compliance-
21 type issues.
22 A.As a publicly traded company, Avista Corporation
23 is required to file reports and comply with the laws and
24 rules set up by the SEC. Because Avista Corporation
25 consists of more than just Avista Utilities, the other
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1 subsidiaries that contribute to the Corporation should be
2 required to share in these types of corporate expenses.
3 The pressure for profit creates a risk to customers that
4 corporate management may shift the costs and burdens of
5 corporate operations so that the beneficial aspects flow to
6 the unregulated subsidiary and the burdensome aspects flow
7 to the regulated utility. Without the establishment of a
8 definitive percentage or allocation to be shared by
9 subsidiaries, the customers face the continual risk of
10 shouldering the burden of additional expenses required by
11 publicly traded companies.
12 Q.How did you determine that 10 percent was the
13 appropriate amount to remove from revenue requirement for
14 SEC compliance issues?
15 A.The President and Chief Executive Officer, the
16 Chief Financial Officer, the Vice President of Human
17 Resources and Corporate Secretary, the Controller and the
18 Vice President of Finance and Treasures all allocate 10
19 percent of their time and compensation to non-utility
20 operations. If the corporate executives have deemed that
21 10% of their time and attention should be assigned to non-
22 utility operations, then it is reasonable to also assign
23 10% of the securities related expenses to non-utility
24 operations. This adjustment reduces test year legal
25 expenses by $12,000 for the Idaho Electric jurisdiction and
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2
1 $3,000 for the Idaho Gas jurisdictions.
Q.Please explain the remaining adjustment to legal
4
3 expenses for the GTN rate case at the FERC.
A.During the test year, Avista paid approximately
5 $47,000 to Portland General Electric for its participation
6 in the GTN rate case with FERC. Staff typically removes
7 non-recurring legal expenses from test year revenue
8 requirement to ensure that the Company is not collecting an
9 annual amount each year for an expense that was incurred
10 for a nonrecurring event. Staff does not believe that GTN
11 will be filing annual rate cases with the FERC, and
12 therefore it would not be reasonable for Avista to recover
13 its legal expenses for this nonrecurring event each year.
14 However, because the Company incurred this expense in
15 response to a regulatory action, and because the expense
16 was prudently incurred to protect Avista customers, it
17 would be inappropriate to exclude this amount in its
18 entirety. Therefore, I propose reducing the Company's
19 legal expense related to the GTN rate case by 66.67%,
20 thereby allowing the Company to recover amounts spent over
21 a three-year period.
22 IPUC Regulatory Expense
23 Q.Please explain the adjustment to Regulatory
25
24 Expense on line 8 of Exhibit No. 110.
A.The IPUC Regulatory Expense included by the
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1 Company in this case was calculated by using the 2008
2 assessment rate multiplied by test year revenues. As
3 mentioned previously in my testimony, on May 7, 2009 the
4 Commission issued Order No. 30780 which established a new
5 assessment rate of 0.1662% for 2009. This adjustment
6 simply updates the Company's calculation. The effect of
7 this adjustment reduces Regulatory Expense by $62,541 for
8 the Idaho Gas jurisdiction and $139,497 for the Idaho
9 Electric jurisdiction.
10 Insurance Expense
11 Q.will you please explain the adjustment to
12 Insurance Expense listed on line 9 of Exhibit No 110?
13 A.When the Company was preparing its case, General
14 Liability Insurance Expense for 2009 was estimated to be
15 $4,668,084. However, after the filing was made, the actual
16 insurance contracts were executed and the actual insurance
17 expense was $138,143 less than the Company's estimate. I
18 have reduced the Insurance Expense for the Idaho Gas
19 jurisdiction by $8,610 and for the Idaho Electric
20 jurisdiction by $34,697 to reflect this known and
21 measurable change.
22 Miscellaneous/Promotional Items
23 Q.Please explain the adjustment listed as
24 Miscellaneous/Promotional Items listed on line 10 of
25 Exhibit No. 110.
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1 A.This adjustment is a catch-all for many
2 miscellaneous expenses that do not relate to the
3 production, transmission, or distribution of utility
4 services. The Company intended to remove many items that
5 were improperly booked to utility accounts in the
6 miscellaneous restatement adjustment in its Application.
7 However, during my review of test year expenses, I found
8 numerous expenses that should have also been removed.
9 These inappropriate expenses included things such as
10 chari table contributions and donations, sponsorships for
11 tables and booths and fund raising events, golf scrambles,
12 sympathy flowers for employees, retirement and holiday
13 parties, clothing with the Avista logo emblazed, and many
14 other items that, individually, are small dollar amounts.
15 The detailed listing of all these items has been provided
16 to the Company with Staff's workpapers. This adjustment
17 reduces expenses by $11,183 and $68,781 for the Idaho Gas
18 and Electric jurisdictions, respectively.
19 GAS RATE BASE ADJUSTMNTS
20 Q.Do you propose any adjustment to the Gas rate
21 base?
22 A.Yes. I propose an adjustment to decrease Idaho
23 Gas pro-forma rate base by $462,955.
24 Q.Please describe the basis for this adjustment.
25 A.The Company proposed a pro-forma rate base that
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1 included budgeted annual amounts for recurring certain
2 projects, known internally as ER's (Expenditure
3 Requisitions). The 2009 pro-formed amounts for Idaho were
4 based on an allocation of total system forecasts. Idaho
5 was allocated 21.83% of the forecasted amounts based on the
6 Company's direct plant allocation factor. Staff Exhibit
7 No. 114 illustrates the Company's 2009 system budgets and
8 the Idaho allocation. However, because Avista' s non-
9 contiguous Oregon gas distribution system is older and in
10 greater disrepair than the Idaho gas distribution system,
11 the Oregon system actually incurs a greater cost than the
12 allocation factors indicate. Over the four-year period
13 from 2005-2008, approximately 17% of the annual budget for
14 these ER's were incurred by the Idaho system, therefore, I
15 propose to use the historical four-year average for each ER
16 project which, in total, would reduce the Idaho Gas rate
17 base by $462,955 as calculated on Staff Exhibit No. 114.
18 Additionally, the depreciation expense in the amount of
19 $14,000, based on a composite depreciation rate of 3%,
20 associated with this adjustment has been removed.
21 Q.Why did you limit your historical average to four
22 years?
23 A.The Company changed its accounting system. in
24 January 2005. Though it was not impossible to retrieve
25 data prior to 2005, information subsequent to the
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1 conversion is obtained rather easily. The actual transfers
2 to plant for the four-year period since 2005 were readily
3 available and, on average, represent a fair and reasonable
4 amount to include in rate base.
5 Debt Interest Restatement
6 Q.Please explain the adjustment to taxes in Column
7 s-12 of Staff Exhibit No 111.
8 A.This adjustment restates debt interest using the
9 Company's pro forma weighted average cost of debt, as
10 outlined in the testimony of Staff witness Carlock. The
11 restated debt interest is then applied to Staff's pro forma
12 level of rate base for Idaho's gas jurisdiction to produce
13 a pro forma level of tax deductible interest expense. The
14 Federal income tax effect of the restated level of interest
15 for the period ending December 31, 2009 increases Idaho Gas
16 net operating income by $5,000.
1 7 SPECIFIC ELECTRIC EXPENSE ADJUSTMNTS
18 Q.Will you please explain Staff Exhibit No. 115?
19 A.Staff Exhibit No. 115 is a list of four
20 adjustments that I am proposing to reduce the pro forma
21 revenue requirement for Idaho's Electric jurisdiction.
22 These amounts have been provided to Staff witness Vaughn to
23 incorporate into her calculation of Staff's proposed
24 electric revenue requirement for Idaho.
25 Q.Looking at the first adjustment shown on Staff
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1 Exhibit No. 115, please summarize the Company's proposal
2 for the Asset Management Program.
3 A.As explained in greater detail in Company witness
4 Kinney's direct testimony, the Asset Management Program
5 attempts to manage key assets throughout their life to
6 provide the best value to customers by minimizing life
7 cycle costs and maximizing system reliability. Though the
8 Asset Management Program is relatively new, many of the
9 aspects of the plan consist of activities that the Company
10 has been doing for years, such as vegetation management,
11 transformer management and wood pole management.Avista
12 launched the program in March 2004 which essentially
13 combined many of the Company's asset conservation
14 activities under one umbrella, and thus allowing the
15 Company flexibility to shift funds from one aspect of the
16 plan to another if the Company deems it necessary.
17 Staff reviewed the asset management plan and
18 concluded that prudent management of the plan would provide
19 a stream of annual benefits through avoided costs well into
20 the future, and increase system reliability. In evaluating
21 the program, Staff met with Company representatives,
22 reviewed cost calculations, avoided costs and Internal
23 Rates of Return for each proj ect.
24 Q.Please explain the Internal Rates of Return.
25 A.The Internal Rate of Return (IRR) is a means of
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1 making an investment decision by calculating the IRR and
2 comparing it to a market interest rate (i). By definition,
3 the IRR is the discount rate at which the net present value
4 of future benefits will equal the net present value of the
5 cost, and is expressed by the formula:
6
7 Vp = Eo + Ei/(l+r) + E2/(1+r)2 +...+ En/(l+r)n = 0
8
9 Where Vp is the value of the costs in the current period and
10 E represents the future benefits which are then discounted
11 back to present value. If the discount rate (r, IRR) is
12 greater than an available market rate, then one would
13 conclude that the project is cost effective.
14 The Company compared the costs of each proj ect
15 within the Asset Management Program to the potential costs
16 of inactivity, or doing nothing. In each case, it was
17 determined that the program was cost effective.
18 Q.What annual level of O&M Expenses does the
19 Company request for its Asset Management Program?
20 A.Company witness Kinney states that the projected
21 2010 level of O&M expenses for the Asset Management Program
22 are $12,505,000 (system-wide) which is an increase of
23 $4,609,000 over the test year level of $7,896,000 (system-
24 wide.) However, Company witness Andrews' exhibits and
25 workpapers indicate a pro forma adjustment to Idaho's
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1 electric jurisdiction of $749,000 which is Idaho's
2 allocated portion of 50% of the 2010 projected expenses.
3 None of the 2009 O&M Expenses for the Program were included
4 in the Company's case. The Company was aware of this, but
5 in an attempt to mitigate the impact of the overall rate
6 increase, decided to omit the 6-rnonths of 2009 from its
7 request. Because Company witness Andrews only included
8 six-months of O&M Expense in her revenue requirement
9 calculation, Staff accepts the Company's pro forma
10 adjustment for the Asset Management Program.
11 Q.Then please explain your adj ustment to the Asset
12 Management Program.
13 A.My adjustment recognizes that the Asset
14 Management Program will provide benefits to customers that
15 have not been quantified or captured in the Company's case.
16 If the Company is going to pro form a higher level of
17 expenses, it must balance those expenses with the customer
18 benefits that they will achieve. During 2008, by my
19 conservative estimates from information provided to Staff
20 during an on-site audit, the Asset Management Program
21 achieved savings of $920,000 or 11.65% of historical test
22 period expenses. By applying the 11.65% as a proxy for
23 projected customer benefits to the pro forma level of O&M
24 Expenses included in the Company's case, the result is an
25 $87,259 reduction to Idaho's electric jurisdiction pro
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4
1 forma 2009 expense.
2 Q.Please explain the next adjustment on Staff
3 Exhibi t No. 115, line 2.
A.This adjustment reduces the Company's pro forma
5 O&M Expenses for production plant by $2,862,000 (system) or
6 $1,015,000 for the Idaho electric jurisdiction.
7 Q.What is the basis for this adjustment?
8 A.The Company's case included $25,721,790 (system)
9 for O&M expenses for production plant for the period from
10 July 1, 2009 through June 30, 2010. Consistent with
11 Staff's use of a pro formed test year ending December 31,
12 2009, the pro forma O&M Expenses for production plant are
13 $22,859,655 (system). This adjustment caps the level of
14 O&M Expenses for production plant at the proj ected level
16
15 for 2009.
17 efficiencies and benefits for customers for Information
Q.Similar to the adjustments you propose to capture
18 Systems Services and the Asset Management Program, do you
19 propose an adjustment to O&M Expenses to capture increased
21
20 efficiencies in production plant?
A.No. The Company's Production Property Adjustment
22 proposed by Company witness Andrews and described in
23 further detail in Staff witness Vaughn and Hessing's
24 testimonies attempts to capture those benefits, and thus a
25 separate adjustment is not necessary.
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1 Q.Please discuss the next adjustment on Staff
2 Exhibit No. 115, line 3.
3 A.This adjustment reduces the pro forma O&M
4 expenses associated with the mercury control proj ect at the
5 Colstrip generation facility as further described in the
6 direct testimony of Company witness Storro.
7 Q.What is the basis for this adjustment?
8 A.At the time of filing, the Company included in
9 its pro forma revenue requirement an estimated amount for
10 the Colstrip emissions control project, to begin in
11 December 2009. The latest estimates, provided to Staff on
12 May 12 by telephone conversation with Liz Andrews, indicate
13 that the annual expense will be $12.8 million. Because
14 Avista is only a 15% owner of Colstrip, its responsibility
15 towards the annual costs is $1.92 million
16 ($12,800,000*0.15). With the project beginning in December
17 of 2009, only 1/12 of this amount, $160,000 should be
18 included in the revenue requirement. This adjustment
19 reduces the O&M expense for the project by $436,659.
20 Q.Please explain the adj ustment listed as Ross
21 Court Building - Abandoned Project on Exhibit No. 115,
22 line 4.
23 A.As the Company outgrows is Corporate Headquarters
24 office building, it had planned to build an additional
25 office building on the north end of its campus. The
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1 Company incurred expenses during the test year in the
2 amount of $391,512 for architectural, engineering, and
3 consulting fees along with permits and other expenses.
4 Midway through 2008, the Company decided that the least
5 cost option would be to purchase an existing building off
6 campus, and move its call center to that location. This
7 adjustment recognizes that the project to build the new
8 office building has been abandoned, and that Company should
9 not include these expenses in annual revenue requirement.
10 Idaho's electric jurisdiction expenses have been reduced by
11 $136,649 to reflect that these expenses will not occur on
12 an annual basis.
13 PENSION EXPENSE
14 Q.Please summarize the Company's proposal for
15 pension expense.
16 A.As described in Company witness Thies' direct
17 testimony, the Company intends to contribute a
18 significantly greater amount to the pension plan than the
19 FAS 87 accrual expense included in rates. Though it was
20 originally thought that the Company would make a cash
21 contribution of $67 million to the pension plan in 2009,
22 the actual cash contributions for the year will be $45
23 million. Mr. Thies' concern was with the timing impact of
24 contributing substantially more to the plan than the
25 expense recognized in rates, and therefore requested
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1 deferral accounting treatment to recognize the time value
2 of money on the difference between the cash payment and the
3 level of accrued expense.
4 Q.Does Mr. Thies recommend the deferral of the
5 difference between the FAS 87 expense and the cash
6 contribution?
7 A.No. Recognizing that the difference between cash
8 contributions and FAS 87 expense, over time, will trend
9 towards zero, Mr. Thies is only proposing to create a
10 regulatory asset for the carrying costs on the cumulative
11 difference between payments to the plan and expenses
12 recovered in rates. In his direct testimony, he provides
13 an example by taking the difference of the $67 million
14 planned contribution for 2009 and the approximate $12
15 million expense currently included in rates ($55 million)
16 and multiplying it by the 8.8% requested rate of return to
17 arrive at a $4.8 million carrying charge for 2009.
18 However, that example was intended to only provide a scope
19 of the magnitude of dollars, and the detailed accounting
20 treatment is described further in his testimony.
21 Updating Mr. Thies' figures to account for the
22 reduced contribution in 2009, and recognizing that new
23 rates will be in effect for half of 2009, $2.55 million, or
24 approximately half of the $4.8 million, is more reflective
25 of the actual impact on a system basis.
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1 Q.How did you calculate the $2.55 million estimated
2 impact?
3 A.Recognizing that the current level of expense
4 included in rates for 2009 is $12.1 million annually for
5 six months, and the proposed level of expense of $18.2
6 million annually for six months, the total expense included
7 in rates for calendar year 2009 would be $15.15 million.
8 The Company intends to fund $45 million to the plan for
9 2009, or $29.85 million greater than collected in rates.
10 Multiplying the difference by Staff's recommended rate of
11 return of 8.55%, the estimated impact of the time value of
12 money would be $2.55 million.
13 Q.What is your position regarding Avista' s proposal
14 in this case to create a regulatory asset for the
15 difference between the contribution and the expense?
16 A.While Staff recognizes Avista's efforts to
17 maintain a solid pension plan, I do not believe that
18 Avista' s proposal is appropriate at this time. Staff would
19 be willing to work with all utilities sponsoring a defined
20 benefit pension plan to discuss the appropriate accounting
21 treatment, or even the necessity, of this type of pension
22 plan.
23 Q.What is your rationale for rej ecting the
24 Company's proposal?
25 A.First, the Company's pension plan assets
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1 experienced an investment return of negative 21% during
2 2008. This investment return has led to an additional $6
3 million (system) being requested in rates due to an
4 increased expense. During an economic recession that has
5 an increased impact on northern Idaho, customers are
6 already being asked to cover the Company's increasing
7 pension expense caused primarily by the recession itself.
8 An additional regulatory asset with a carrying charge
9 simply further increases these costs and hits customers
10 with a triple whammy, so to speak.
11 Secondly, I believe it may be time for companies
12 to evaluate whether or not a defined benefit pension plan
13 is the most prudent form of retirement benefit that a
14 utility can provide for its employees. The basic premise
15 of a defined benefit plan is that the future benefit is
16 defined, and therefore the employer bears all of the
17 investment risk. For a regulated utility that collects
18 pension expense in rates, that investment risk is
19 inherently passed on to customers. Current economic
20 condi tions have exacerbated the issue, as witnessed by the
21 Avista Pension Plan's decreasing assets and increasing
22 contributions. The question then becomes whether or not it
23 is prudent for customers to bear the direct burden of the
24 pension assets negative returns during recessionary times,
25 and not receive direct benefits when assets perform well.
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1 This asymmetrical relationship creates a natural imbalance
2 that reduces customer assets at a time when they need them
3 most.
4 Though Staff recognizes the important and
,5 necessary benefit of a plan to provide retirement benefits
6 to utility employees, now is the appropriate time to begin
7 evaluating other alternatives.
8 Q.Could you please explain the differences between
9 a pension expense and a pension contribution?
10 A.Certainly. The accrued expense is the Net
11 Periodic Pension Cost as calculated under FAS 87, and is
12 often referred to as FAS 87 expense, or just pension
13 expense. This is the amount accrued on the Company's books
14 and reported on the Company's financial statements. The
15 Financial Accounting Standards Board issued FAS 87 in
16 December of 1985 in an attempt to alleviate investors'
17 concerns regarding accuracy of a company's financial
18 statements and the potential for manipulation of pension
19 costs to affect those statements. The Board's objectives
20 in issuing the statement were:
21 1.To provide a measure of net periodic pension
cost that is more representationally faithful
than those used in past practice because it
reflects the terms of the underlying plan and
because it better approximates the recognition
of a cost of an employee's pension over that
employee's service period.
22
23
24
25
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1
2
3
4
5
6
2.To provide a measure of net periodic pension
cost that is more understandable and comparable
and is, therefore, more useful than those used
in the past.
3.To provide disclosures that will allow users to
understand better the extent and effect of an
employer's undertaking to provide employee
pensions and related financial arrangements.
4.To improve the reporting of financial position.
7 The net cost feature of FAS 87 means that the
8 recognized consequences of events and transactions
9 affecting a pension plan are reported as a Single net
10 amount on the employer i s financial statements. This
11 approach aggregates at least three items that might be
12 reported separately for any other part of an employer 1 s
13 operations: the compensation cost of benefits promised,
14 interest cost resulting from deferred payment of those
15 benefits, and the results of investing what are often
16 significant amounts of assets.
17 Under normal circumstances, companies have some
18 discretion as to how much they contribute to a pension plan
19 for a given year. There is a cost range and companies can
20 contribute any amount between the Required Minimum
21 Contribution and the Maximum Deductible Contribution.
22 Section 412 of the Internal Revenue Code mandates the
23 minimum funding, while section 404 mandates the maximum
24 funding.
25 Q.Could you briefly explain how that cost range is
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1 determined?
2 A.The first calculation determines the Normal Cost
3 of the year. The Normal Cost is the annual cost of the
4 pension plan using the plan's actuarial cost method, as
5 established in the plan document. The Normal Cost is a
6 calculation that takes into consideration the present value
7 of future benefits, the actuarial value of the plan's
8 assets, and unfunded liabilities and the present value of
9 the Company's future payroll. With that information, one
10 can then calculate an accrual rate that when multiplied by
11 the Company's current covered payroll will produce the
12 Normal Cost. After the Normal Cost is calculated, any
13 charges or credits are added or subtracted to get the
14 Annual Cost. The Minimum Required Contribution is the
15 lesser of the Annual Cost or the difference between the
16 Full Funding Limitation and any credit balance. The
17 Minimum Required Contribution is the amount that a company
18 must fund in order to avoid a funding deficiency in the
19 Funding Standards Account.
20 Q.You mentioned the term "Full Funding Limitation."
21 Could you please describe this limitation?
22 A.The Full Funding Limitation is a calculation that
23 compares the Actuarial Accrued Liability as calculated
24 under the Employee Retirement Income Security Act (ERISA)
25 of 1974, the Current Liability under the Omnibus Budget
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1 Reconciliation Act (OBRA) of 1987, and the Current
2 Liabili ty under the Retirement Protection Act (RPA) of
4
3 1994.
Q.Now that the minimum point in the cost range is
6
5 established, how is the maximum point determined?
A.The Maximum Deductible Contribution is an IRS
7 calculation that determines the deductibility under Section
8 404 (a) (1) (A) of the Internal Revenue Code. This
9 calculation is based on a comparison of any unfunded
10 liabilities and the Full Funding Limitation. A company may
11 choose to contribute to a pension plan any amount that is
12 greater than the Minimum Required Contribution but less
13 than the Maximum Deductible Contribution.
14 Q.What are the funding levels for the Avista
16
15 pension plan for 2009?
While the FAS 87 expense for 2009 is estimated toA.
17 be approximately $22 million, the Minimum Required
18 Contribution for 2009 is $0.00. However, because Avista
19 significantly contributed additional funds to the plan over
20 the past few years, the funding standard carryover balance
21 as of December 31, 2008 was nearly $30 million. This
22 amount reduces the Minimum Required Contribution. Without
23 this overfunding, I have estimated that the Minimum
24 Required Contribution for 2009 would be in the range of $16
25 million - $20 million, which is comparable to the $18.2
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1 million (system) FAS 87 expense being requested in this
2 case. The Maximum Deductible Contribution that Avista
3 could make to the plan for 2009 is in the range of $225
4 million to $250 million. As mentioned previously, Avista
5 will contribute $45 million to the plan for 2009.
6 Q.How did Avista determine that $45 million was the
7 appropriate level of funding for 2009?
8 A.The requirement that accounting information is on
9 an accrual basis does not necessarily mean that accounting
10 information and funding decisions are completely unrelated.
11 Employers may use accounting information along with other
12 factors in making financial decisions. Some employers may
13 decide to change their pension funding policies based in
14 part on the new accounting information, or new pension
15 regulations, such as the Pension Protection Act (PPA) of
16 2006, and the decision to fund a pension plan to a greater
17 or lesser extent is an economic decision.
18 The Pension Protection Act of 2006 adjusts the
19 Minimum Required Contribution set forth under ERISA in an
20 attempt to shore up the nation's ailing pension plans. The
21 effect of the PPA is to increase pension contributions in
22 order to eventually achieve a fully funded plan. For 2009,
23 it is required that pension plan assets be equal to 94% of
24 the proj ected liabilities. If this benchmark is not met,
25 the entire funding deficit must be added to the
CASE NOS. AVU-E-09-1/AVU-G-09-1
OS/29/09 ENGLISH, D. (Di) 43
STAFF
1 contribution and amortized over the next seven years in
2 order to be fully funded after the seven year period.
3 Avista has determined that a contribution of $45 million
4 will allow it to meet the 94% funding level benchmark, and
5 avoid additional mandatory contributions.
6 Q.Given the likelihood of increased pension expense
7 and funding levels in the near future, do you propose any
8 alternatives to a defined benefit pension plan?
9 A.In this case, my intent is not to propose any
10 changes to the Company's retirement benefits, but rather to
11 open the door for discussion of possible alternatives. One
12 example of an alternative would be a Money Purchase Pension
13 Plan. A Money Purchase Pension Plan is a defined
14 contribution plan where the employer contributions are
15 fixed, typically stated as a percentage of an employee's
16 income. Much like a 401 (k) plan, the investment risk would
17 then be shifted away from customers, while company
18 employees would continue to accrue retirement benefits. A
19 Money Purchase Pension Plan with a defined contribution of
20 10% of an employee's income would provide substantial
21 retirement benefits to the employee when coupled with the
22 existing 401 (k) and 401 (m) matching contributions. It
23 would also allow economic certainty because the
24 contributions would not fluctuate wildly from year to year.
25 Given the current levels of funding for the
CASE NOS. AVU-E-09-1/AVU-G-09-1OS/29/09
ENGLISH, D. (Di) 44
STAFF
1 pension plan, customers would actually pay less with the
2 defined contribution Money Purchase Pension Plan. Avista's
3 total covered compensation under IRC 401 (a) (17) for 2008
4 was approximately $132 million. A 10% Money Purchase
5 Pension Plan for 2008 would require a $13.2 million
6 contribution, as opposed to a $45 million contribution,
7 which is greater than one-third of the covered compensation
8 under the plan. Please note that I am not supporting a 10%
9 defined contribution, but rather using it for illustrative
11
10 purposes only.
12 to the current level of retirement benefits in this case?
Q.To reiterate, are you proposing any adjustments
13 A.No. However, given the rapidly increasing costs
14 of pension plans, the inherent customer risk associated
15 with them, and annual increases in wages and salaries,
16 Staff will continue to look at other alternatives and may
17 propose adjustments in future rate cases if trends continue
18 in the same direction.
19 Q.Does this conclude your direct testimony in this
21
20 proceeding?
22
23
24
25
A.Yes, it does.
CASE NOS. AVU-E-09-1/AVU-G-09-1OS/29/09
ENGLISH, D. (Di) 45
STAFF
AVISTA UTILIIES
AVU-G-09-01
Calculation of General Revenue Requirement
Idaho - Gas
(OOO's OF DOLLARS)
AVISTA STAFF
Line
No.IDAHO IDAHO
1 Pro Forma Rate Base 90,491 Pro Forma Rate Base 90,028
2 Proposed Rate of Return 8.80%Proposed Rate of Return 8.55%
3 Net Operating Income Requirement 7,963 Net Operating Income Requirement 7,697
4 Pro Forma Net Operating Income 6,213 Pro Forma Net Operating Income 6,486
5 Net Operating Income Deficiency 1,750 Net Operating Income Deficiency 1,211
6 Conversion Factor 0.638787 Conversion Factor 0.639336
7 Revenue Requirement Increase 2,740 1 Revenue Requirement 1,8941
8 Total General Business Revenues 91,767 Total General Business Revenues 91,767
9 Percentage Revenue Increase 2.99%Percentage Revenue Increase 2.06%
Exhibit No. 109
Case No. AVU-E-09-1
AVU-G-09-1
D. English, Staff
OS/29/09 Schedule 1
Exhibit No. 1Ö9
Case No. A VU-E-09-1
AVU-G-09-1
D. English, Staff
OS/29/09 Schedule 2
AVISTA UTILITIES
AVU-G-09-01 & AVU-E-09-01
Adjustments Allocated to Both Gas and Electric Jurisdictions
Line
No.Adjustment Description System Idaho Gas Idaho Electric
1 Non-Executive Labor $75,573 $298,255
2 Executive Labor $31,051 $123,548
3 Non-Executive Incentives $1,175,087 $73,238 $295,137
4 Executive Incentives $311,028 $19,385 $78,118
5 Board of Directors Expenses $595,617 $37,122 $149,596
6 Information Services $118,828 $59,379 $295,135
7 Legal Expenses $140,053 $23,377 $12,060
8 IPUC Regulatory Expense $62,541 $139,497
9 Insurance Expense $138,143 $8,610 $34,697
10 Miscellaneous/Promotional Items $161,075 $11,183 $68,781
EXhibit No. 110
Case No. AVU-E-09-1
AVU-G-09-1
D. English, Staff
OS/29/09
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8
AVISTA UTILITIES
A VU-G-09-01 & A VU-E-09-01
Allocation of President and CEO Compensation
Scott Morris Executive Compensation
¡¡Idaho Gas
Iildaho Electric
¡¡ Washington Gas
fI Washington Electric
mOregon Gas
fI Non-Utility Operations
Idaho Electric,
6.73%
Exhibit No. 112
Case No. AVU-E-09-1
AVU-G-09-1
D. English, Staf
OS/29/09
7,000
6,000
5,000
4,000
3,000
2,000
1,000
A VISTA UTILITIES
A VU-G-09-01 & A VU-E-09-01
Six Year History of Incentive Payments
Employee Incentive Payments 2003-2008 (OOO's)
2003 2004 2005 2006 2007 2008
Exhibit No. 113
Case No. AVU-E-09-1
AVU-G-09-1
D. English, Staff
OS/29/09
2~C
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EXfl6hNO. .114
Case No. AVU-E-09-1
AVU-G-09-1
D. English, Staff
OS/29/09
A VISTA UTILITIES
AVU-E-09-01
Electric Specific Adjustments
ADJUSTMENT DESCRIPTION
IDAHO
ELECTRIC
JURISDICTION
1. Pro Forma Asset Management Program
2. Pro Forma Operations & Maintenance Expenses
3. Pro Forma Colstrp Mercur Emissions Project
4. Ross Court Building - Abandoned Project
$ 87,259
$ 1,015,000
$ 436,659
$ 136,649
Exhibit No. 115
Case No. AVU-E-09-1
AVU-G-09-l
D. English, Staff
OS/29/09
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 29TH DAY OF MAY 2009,
SERVED THE FOREGOING DIRECT TESTIMONY OF DONN ENGLISH, IN CASE
NOS. AVU-E-09-1 & AVU-G-09-1, BY ELECTRONIC MAIL TO THE FOLLOWING:
DAVIDJ. MEYER
VICE PRESIDENT AND CHIEF COUNSEL
A VISTA CORPORATION
POBOX 3727
SPOKANE WA 99220
E-MAIL: david.meyertiavistacorp.com
DEAN J MILLER
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701
E-MAIL: joetimcdevitt-miler.com
CONLEY E WARD
MICHAEL C CREAMER
GIVENS PURSLEY LLP \
PO BOX 2720
BOISE ID 8370l-2720
E-MAIL: cewtigivenspursley.com
mcctigivenspursley.com
BETSY BRIDGE
ID CONSERVATION LEAGUE
710 N SIXTH STREET
POBOX 844
BOISE ID 83701
E-MAIL: bbridgetiwildidaho.org
CARRE TRACY
1265 S MAIN ST, #305
SEATTLE WA 98144
E-MAIL: carrietinwfco.org
KELLY NORWOOD
VICE PRESIDENT - STATE & FED. REG.
A VISTA UTILITIES
PO BOX 3727
SPOKAE WA 99220
E-MAIL: kelly.norwoodtiavistacorp.com
SCOTT ATKINSON
PRESIDENT
IDAHO FOREST GROUP LLC
171 HIGHWAY 95 N
GRANGEVILLE ID 83530
E-MAIL: scottatiidahoforestgroup.com
DENNIS E PESEAU, Ph.D.
UTILITY RESOURCES INC
SUITE 250
l500 LIBERTY STREET SE
SALEM OR 97302
E-MAIL: dpeseautiexcite.com
ROWENA PINEDA
ID COMMUNITY ACTION NETWORK
3450 HILL RD
BOISE ID 83702-47l5
E-MAIL: Rowenatiidahocan.org
BRAD M PURDY
ATTORNEY AT LAW
2019 N 17TH ST
BOISE ID 83702
E-MAIL: bmpurdytihotmail.com
Jo'~~SECRETARY 7 ..
CERTIFICATE OF SERVICE