Before the Minnesota Public Utilities Commission State of Minnesota

Transcription

1 Rebuttal Testimony Jill H. Reed Before the Minnesota Public Utilities Commission State of Minnesota In the Matter of the Application of Northern States Power Company, a Minnesota corporation For Authority to Increase Rates for Natural Gas Utility Service in Minnesota Docket No. G00/GR-0- Exhibit (JHR-) Employee Compensation and Benefits June, 0

2 Table of Contents I. Introduction 1 II. Response to OAG Recommendations III. Summary and Conclusions i Docket No.G00/GR-0-

3 I. INTRODUCTION Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Jill H. Reed. My business address is 1 Nicollet Mall, nd Floor, Minneapolis, Minnesota 01. Q. HAVE YOU PREVIOUSLY PROVIDED TESTIMONY IN THIS PROCEEDING? A. Yes. I filed Direct Testimony on behalf of Northern States Power Company, a Minnesota corporation ( Xcel Energy or the Company ) on several topics related to employee compensation and benefits. Q. WHAT IS THE PURPOSE OF YOUR REBUTTAL TESTIMONY? A. I am responding to the recommendations regarding incentive compensation contained in the direct testimony of Mr. Raymond Smith of the Office of the Attorney General Residential and Small Business Utilities Division ( OAG ). Mr. Smith characterizes our Annual Incentive Plan ( AIP ) as a bonus plan and recommends denying recovery of any costs related to our AIP, a disallowance of $, in employee compensation. Q. DO YOU AGREE WITH MR. SMITH S RECOMMENDED ADJUSTMENT? A. No. Our AIP is part of a reasonable overall compensation program whose targets are set to deliver market-competitive compensation based on performance which in total, provides benefits to our customers. The AIP payments cannot properly be characterized as bonuses whose cost should be ignored based on economic conditions. Rather, the costs related to our employee compensation, including the AIP, are reasonable and necessary costs of providing safe, reliable, low-cost utility service to our gas customers. 1 Docket No. G00/GR-0-

4 Q. HOW HAVE YOU ORGANIZED YOUR REBUTTAL TESTIMONY? A. First, I discuss the AIP and the Company s need to provide competitive compensation to attract and retain talented employees and, in particular, clarify that this need is ongoing despite events that took place in 00. Next, I describe how the costs of our AIP qualify for recovery pursuant to Minnesota Public Utilities Commission ( Commission ) precedent, and I discuss ratepayer protection built into the AIP. Finally, I describe the steps the Company took in 00 to address the downturn in the economy, and why it is improper to single out reasonable employee compensation costs for disallowance based on economic conditions. II. RESPONSE TO OAG RECOMMENDATIONS Q. PLEASE PROVIDE AN OVERVIEW OF THE NEED FOR THE COMPANY TO PROVIDE COMPETITIVE COMPENSATION. A. There are 1 natural gas utilities within the United States, 1 and five in Minnesota (not counting municipal utilities). In order for Xcel Energy to provide the highest level of safe and reliable service to its natural gas customers, we must be able to attract, retain, and engage the talented employees who make it possible to achieve excellent overall utility operations. Thus, it is essential that the compensation we provide to employees be competitive with what other utilities especially those similarly-situated to the Company offer. Xcel Energy s total compensation levels, based on the 00 study referenced in my direct testimony, are comparable to those of other utilities only when the AIP is included. 1 Source: Docket No. G00/GR-0-

5 Q. WHY IS THE EMPLOYEE COMPENSATION PACKAGE SET UP WITH THE AIP PAYMENT SEPARATE FROM AND IN ADDITION TO BASE SALARY? A. The AIP is designed to be an incentive based upon individual employees meeting specific goals related to customer service, safety, the environment and reliability. Thus, the separate payment of AIP provides additional encouragement for employees to focus on customer service and sound operations. Q. WHAT WOULD BE THE ALTERNATIVE IF THE AIP WAS NOT PAID SEPARATE FROM AND IN ADDITION TO BASE SALARY? A. If we did not have an AIP, then, as I noted in my direct testimony, the most reasonable alternative would be to increase base salaries to reflect the amount that would ordinarily be paid out under the AIP. This alternative would be necessary to keep and attract talented employees in light of the study s findings that without the AIP our total compensation would lag the overall utility market by an average of 1 percent. When compared to similar-sized utilities, the Company s total cash compensation levels without its AIP would fall below the competitive market by an average of 1 percent. If we were to increase base wages to provide market-competitive compensation, this increase in base wages and the resulting higher rates would be accompanied by the loss of the ratepayer benefits currently provided by AIP. Q. HAS THE COMMISSION IDENTIFIED ACCEPTABLE CRITERIA FOR AN ANNUAL INCENTIVE COMPENSATION PROGRAM? A. Yes. In the Company s 1 electric and natural gas rate cases (Docket Nos. E00/GR-- and G00/GR--) the Commission identified the acceptable criteria of an incentive compensation plan: quantifiable goals Docket No. G00/GR-0-

6 relating to safety, customer satisfaction, productivity, cost control, and individual employee performance. The Commission also stated that the Company must demonstrate that its incentive plan produces tangible benefits for ratepayers without an improper transfer of financial risk from shareholders. Q. DOES THE COMPANY S AIP MEET THE CRITERIA IDENTIFIED BY THE COMMISSION? A. Yes. Our incentive plan has quantifiable goals and produces the Commission identified benefits for ratepayers. First, the AIP focuses on Individual, Business Area, and Corporate objectives that promote overall customer satisfaction, reliability, safety, and environmental goals, along with efficient and cost-effective operations. Annual incentive compensation is only received if the employee demonstrates that the employee has met his or her annual objectives, which engages employees to accomplish specific goals. Second, in contrast to an approach that includes incentive compensation, a pure base salary approach lessens the link between pay and performance. In particular, base salaries are paid whether annual performance objectives are met or not. Sole reliance on base salary would significantly limit the Company s ability to engage and reward its employees for superior performance. Thus, eliminating incentive compensation would lead to the loss of efficiencies that result from the Company s ability to engage and reward specific employee accomplishments toward core objectives. Docket No. G00/GR-0-

7 Further, the annual refund mechanism ensures that there is no improper transfer of financial risk from shareholders to ratepayers. Q. PLEASE EXPLAIN THE REFUND MECHANISM AND HOW IT PROVIDES PROTECTION FOR RATEPAYERS. A. If actual incentive compensation paid in 0 (or in future years) is less than the Test Year level, the Company will annually refund the difference to Minnesota gas customers. This refund mechanism was approved by the Commission in the Company s 1 electric and gas rate cases noted previously and has been in place since that time. We are not requesting any change to this refund mechanism in this case. Q. THE PERFORMANCE OBJECTIVES YOU CITED ABOVE INCLUDE BENEFITS TO BOTH RATEPAYERS AND SHAREHOLDERS. HAVE YOU CONSIDERED THIS POTENTIAL SHAREHOLDER BENEFIT IN THE AMOUNT OF COST RECOVERY YOU ARE SEEKING IN REGARD TO THE AIP? A. Yes. Our proposal in this proceeding balances the interests of shareholders and customers. We have excluded from the revenue requirement long-term incentive compensation, other bonuses, and incentive compensation exceeding percent of base compensation. Q. HAS THE COMMISSION PREVIOUSLY APPROVED RECOVERY OF AIP COSTS? A. Yes. The Commission has previously approved recovery of AIP costs in our last two gas rate cases, Docket Nos. G00/GR-0-1 and G00/GR-0-1. In addition, this same general approach was approved by the Commission in our last electric rate case, Docket No. E00/GR-0-, when the Commission approved a 0 percent target incentive amount. We Docket No. G00/GR-0-

8 have used the same general approach in this case that was approved previously. Q. HOW DO YOU RESPOND TO MR. SMITH S CHARACTERIZATION OF THE AIP AS A BONUS PROGRAM? A. The AIP cannot be properly characterized as a bonus program. Rather, it is a portion of overall compensation needed to make our compensation package equivalent to that of other utilities. Payment of the AIP is conditioned on an employee meeting several performance goals that are designed predominately for achieving customer satisfaction and operational excellence. AIP is not a bonus to an employee s total cash compensation package, but is an integral part of an employee s total cash compensation package. Q. MR. SMITH IDENTIFIES REDUCTIONS IN COMPENSATION THAT SOME EMPLOYEES HAVE ENCOUNTERED IN OTHER INDUSTRIES. WHAT STEPS DID XCEL ENERGY TAKE WITH REGARD TO EMPLOYEE COMPENSATION DURING THE RECENT ECONOMIC DOWNTURN? A. During 00, we took many steps specific to employee compensation in response to the economic downturn. Our merit increase for 00 was presented in this case as a percent increase. However, implementation of this increase was delayed until July 1, 00. Because employees did not begin receiving the increase until July 1, our actual merit wage increase for 00 was approximately 1. percent, which is comparable to the 1. percent surveyed wage increase referenced by Mr. Smith from the U.S. Bureau of Labor Statistics ( BLS ). Docket No. G00/GR-0-

9 In addition, during calendar year 00, we did not make AIP payments related to 00. The amount of the unpaid AIP included in current rates was fully refunded to our customers. We also managed our workforce labor dollars through attrition, i.e., as employees left the organization, we did not replace many of them, but instead added job responsibilities onto existing employee workloads. In addition, other cost saving measures were implemented such as elimination of non-bargaining health savings account contributions. Clearly the Company took steps to reduce compensation during the economic downturn. Our request for a rate increase reflects these actions. In particular, the lack of any AIP payment for 00 is reflected in the four-year average target calculation that results in setting the revenue requirement at 0 percent of target in this case. Q. YOU NOTED THAT MR. SMITH CITES DATA FROM THE BLS. DO YOU BELIEVE THIS IS THE BEST DATA TO USE IN COMPARING THE COMPENSATION OFFERED BY XCEL ENERGY TO THE MARKET? A. No. Since the Company is a public utility and we are trying to attract employees with utility background and utility-related interests, I believe it is more appropriate to compare our total compensation to that of other utilities. The 00 study referenced in my direct testimony not only compares the Company to other utilities, but also to more similarly-situated utilities based upon revenue. As I noted in my direct testimony, that study shows that our current compensation levels, even including the Annual Incentive Plan at target levels, are still 1 percent below the market for other utilities, and percent below the market for similar-sized utilities. Docket No. G00/GR-0-

10 Q. DO YOU BELIEVE PROHIBITING RECOVERY OF AIP COSTS DUE TO ECONOMIC CONDITIONS WOULD BE BENEFICIAL TO RATEPAYERS? A. No, I do not. Our need to attract and retain employees with the technical expertise necessary to safely manage, operate, and maintain our gas utility system, such as engineers, technicians and managers, exists independent of economic conditions. Moreover, if we were unable to provide competitive compensation, then ultimately many of our current employees would leave the Company. As I mentioned in my direct testimony, this problem would be further magnified in light of the expected departure of our aging workforce. The BLS has identified the departure of the aging utility workforce in the Utilities section of its Career Guide to Industries, 0- Edition, which indicates that more than 0% of the utility industry workforce is age or older, with many of these workers either retiring or preparing to retire within the next ten years. Thus, our plans to attract and retain the technical expertise necessary to safely manage, operate and maintain our gas utility system relies upon our ability to provide competitive total cash compensation, which includes the AIP. Just as it would be inappropriate for an incentive mechanism to improperly transfer financial risk from shareholders, it would also be inappropriate to shift the cost of providing service to the shareholders. The costs associated with employee compensation, including AIP, is a necessary cost of providing utility service that should be included in our rates. See Docket No. G00/GR-0-

11 III. SUMMARY AND CONCLUSIONS Q. PLEASE SUMMARIZE YOUR CONCLUSIONS. A. The Company s AIP is a necessary cost of providing service to our customers and in combination with base pay, is needed to provide a market-competitive benefit that allows the Company to attract, engage, and retain skilled employees. The AIP is designed to provide benefits to ratepayers, and it includes protections for ratepayers. Without a competitive total-compensation package, the Company would experience difficulty attracting new employees and retaining existing employees, which would be a critical problem given the industry s aging workforce and the increased level of competition for qualified utility workers. For the reasons I discussed above, it is appropriate and consistent with Commission precedent to allow the Company to recover our proposed AIP costs in rates. Q. DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY? A. Yes, it does. Docket No. G00/GR-0-