Rebuttal Testimony Of La Doolittle

1Q.

Please state your name and business address:

2A.

My name is Lea Anne Doolittle. My business address is 825 N.E. Multnomah, Suite

3

1800, Portland, OR 97232.

4Q.

What is your current position at PacifiCorp dba Utah Power and Light (“Company”)

5

and your previous employment history with the Company?

6A.

I have been employed as the Compensation Director since 1993 in the Human

7

Resources Department. I joined NERCO, Inc. in 1982 and worked there until 1990

8

when I transferred to PacifiCorp. I have held various positions in the Human

9

Resource departments for these businesses but for the majority of my career I have

10

been directing the design and administration of compensation programs.

11Q.

What are your responsibilities as the Director of Compensation?

12A.

My primary responsibilities are to ensure that the Company attracts, retains and

13

motivates qualified employees. To this end I am responsible for overseeing the design

14

and administration of the Company’s compensation programs including: base salary,

15

short and long term incentives, international compensation, relocation and

16

performance management. This involves analyzing competitive pay practices,

17

establishing and administering pay programs which will allow the Company to

18

compete successfully for labor, motivate employees to perform at the highest levels

19

and reward them for such performance, and retain qualified and strong performing

20

employees.

21Q.

What is your educational background?

22A.

I received a Masters Degree in Management (Business) from The Atkinson School at

23

Willamette University in 1980 and a Bachelors degree in Sociology from the

24

University of Redlands in 1977. In addition, I achieved Certified Compensation

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1

Professional status from the American Compensation Association (ACA) in 1982 and

2

have kept this certification current through attending various educational programs

3

and seminars. I have also been teaching in ACA’s certification program since 1984 and

4

have taught Masters degree course work in Compensation for Marylhurst College.

5Q.

Have you previously testified in regulatory proceedings?

6A.

Yes, I testified before this Commission in 1998.

7Q.

What is the purpose of your rebuttal testimony?

8A.

I will respond to several of Committee of Consumer Services’ witness Schultz’s

9

recommendations regarding PacifiCorp’s incentive compensation and Supplemental

10

Executive Retirement Programs. I will also respond to Committee witness Brosch’s

11

recommendations regarding PacifiCorp’s stock-based incentive compensation

12

programs. Finally, I will respond to the Division’s witness Peel’s comments regarding

13

severance compensation.

14Q

How is your testimony organized?

15A.

I begin by explaining the Company’s compensation philosophy to provide the

16

foundation for my rebuttal testimony. Next, I provide comments on the Company’s

17

incentive compensation programs which demonstrate that these are in fact “pay-at-

18

risk” and that the customer-based performance measures used to calculate 1998

19

incentive awards were consistent with the type of goals the Commission has previously

20

stated they would support for inclusion in revenue requirement. I will then address

21

stock based compensation, Supplemental Executive Retirement Programs and

22

severance.

23Compensation Philosophy 24Q.

What is PacifiCorp’s general compensation philosophy?

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1A.

In order to attract, retain and motivate qualified employees, the Company’s policy is to

2

provide total remuneration, which is equal to the average remuneration provided by

3

our competitors for labor when performance is at desired levels. When performance is

4

less than desired, employees should make slightly less than the average remuneration,

5

and when performance is better than desired levels, employees should earn slightly

6

more than average remuneration. The Company’s objective is to generally provide the

7

same components in our total remuneration package that are included in the packages

8

our competitors for labor provides. These components generally consist of base

9

salary, short and long-term incentives, and health, welfare and pension benefits. The

10

use of long term incentives by our competitor companies is more prevalent with senior

11

management personnel. PacifiCorp also uses long-term incentives to attract and retain

12

senior executives.

13Q.

How does the Company set base salaries for each job?

14A.

At least annually the Company collects market data for comparable jobs and we

15

calculate the average data point for total cash compensation. Total cash compensation

16

includes both the base salary and the incentive provided to employees. In a few

17

companies, base salary equals total cash compensation because they do not use

18

incentive pay. However, for most companies, total cash compensation for each job

19

includes short-term incentive pay.

20

Average competitive compensation establishes the total amount that an

21

employee performing that job at PacifiCorp should earn from both base salary and

22

guideline incentive. To determine the competitive base salary for the job, the Company

23

discounts the average total cash compensation by the Company’s guideline annual

24

incentive level. I will use two examples to illustrate this concept:

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1 2 3 4 5 6 7

Competitive Total Cash: Discounted by Guideline Incentive: Math calculation Equals Competitive Base Salary:

Example 1 $40,000 10% $40,000/1.10 $36,363

Example 2 $70,000 15% $70,000/1.15 $60,869

As you can see, for either example the base salary alone fails to provide cash

8

compensation at a competitive level. However, the individual knows that, given

9

expected performance, he or she can earn total cash compensation that is competitive

10

in the marketplace.

11Incentive Compensation (Short-Term Or Annual Incentives) 12Q.

How is annual incentive pay structured?

13A.

It is in the area of incentives that some variability in total remuneration may occur

14

from one period to the next based primarily upon performance. The Company’s

15

annual incentive programs are intended to put some of the competitive total

16

remuneration “at risk”. As previously mentioned, the portion of pay “at risk” is the

17

guideline (or target) incentive percentage assigned to the job. Many classifications

18

may earn from zero incentive up to two times the guideline incentive. This upside

19

opportunity is provided to help offset the risk associated with incentive compensation.

20

In exceptional performance years the incentive may be up to two times the guideline,

21

but on average over several years, the incentive is generally very near the guideline

22

level. If the individual fails to earn the full guideline incentive, that individual will be

23

paid less than the competitive total cash compensation in the marketplace for that year

24

and less total remuneration.

25

In 1998, the workforce was paid about 96 percent of the competitive average

26

total cash compensation because many of the employees received less than the full

27

guideline incentive award.

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1Q.

Should the Company’s total cash compensation expense for the test year be included in

2

the revenue requirement?

3A.

Yes. The expense in the 1998 rate year is the total O&M amount the Company paid

4

employees for cash compensation. That amount represents total compensation which

5

is at or below the competitive average and is appropriately included in the revenue

6

requirement for reasons explained more fully below.

7Q.

Have you reviewed the direct testimony of Committee witness Schultz regarding

8

PacifiCorp's incentive compensation programs?

9A.

Yes. Mr. Schultz recommends that the Commission deny recovery of a significant

10

portion of the amounts paid to PacifiCorp’s employees under the incentive

11

compensation plans.

12Q.

What is the basis for Mr. Schultz’s incentive compensation recommendation?

13A.

Mr. Schultz identifies several reasons for his recommendation. The first is that

14

incentive compensation is “extra compensation”. The second is that the Company

15

should not “force the ratepayer to pay the expense for incentive compensation on an

16

assumption that a benefit is derived”. The final reason is that many of the goals “were

17

financial” and others “were normal tasks”.

18Q.

Did Mr. Schultz acknowledge that the incentive program in question was similar to

19

what was allowed by the Commission in the 1997 rate case?

20A.

Yes.

21Q.

What was the Commission’s specific conclusion in the 1997 rate case (Docket No. 97-

22

035-01)?

23A.

The Commission referred to Docket No. 90-035-06 and stated:

24 25

“…The Commission directed the Division to determine whether incentive plans might be formulated in a manner making recovery of expenses in rates

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1 2 3 4 5 6

acceptable. In that Docket, the Commission stated that an incentive plan should be tied to performance measures directly benefiting ratepayers if ratepayers are asked to fund it”. Further, the Commission referred to the order in Docket No. 95-049-05, a U.S. West Communications, Inc., rate case and makes the point:

7 8 9 10 11 12 13 14 15 16 17 18 19 20Q.

“If the expenses of an incentive plan are to be recovered in rates, the plan’s primary goal must be enhancement of customer service.” Finally, the Commission concludes: “Since the (PacifiCorp’s) plan includes goals benefiting ratepayers and no expense is claimed to meet purely financial goals, which the Commission believes do not benefit ratepayers, we need make no finding about the appropriateness of the plan’s design. The Company and its management consultant testify that total cash compensation is targeted to the market average. The Committee has produced no evidence to the contrary. On the basis of the record we conclude that incentive plan expenses were associated only with non-financial goals. These benefit ratepayers. Consequently, we do not accept the adjustment proposed by the Committee”. Were the 1998 incentive awards determined using goals which are consistent with the

21

position that the Commission has taken?

22A.

Yes. While the Company had an Earnings Per Share (EPS) factor as a portion of the

23

incentive formula in 1998, none of the 1998 incentive plan costs were driven by the

24

corporate-wide measure of financial performance (i.e., EPS). The costs under

25

consideration are those associated with the same type of “line-of-sight” operational

26

effectiveness and customer service goals which existed in the 1997 rate case. In fact, the

27

Company has designed our incentive plan to specifically comply with the requirements

28

stated by the Commission.

29Q.

Do you agree with the Committee that 42 percent of the incentive plan goals are

30

financial?

31A.

As I stated earlier, none of the 1998 incentive costs were based upon any corporate

32

measure of financial performance. All of the costs are based upon “line-of-sight”

33

measures. By “line-of-sight” we are referring to measures which an employee can

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1

directly impact. In CCS Exhibit 2.4, Mr. Schultz provides a partial list of the goals for

2

13 of 50 groups or teams who had goals in 1998. Of these 13 groups, 11 are power

3

plants. This list categorizes the goals into 7 groups: Financial; Vision and Values;

4

Safety; Environmental; Customer Service/Satisfaction; Performance; and Other.

5

The list indicates that 42 percent of the goals are “financial”. These goals are

6

not financial in the sense intended by the Commission. They are not based upon some

7

corporate measure of financial performance such as EPS but are directed at containing

8

costs. The type of goals characterized as “financial” for the power plants are bus bar

9

costs and managing within the Operations and Maintenance (O&M) budget. Effective

10

management of both of these factors is critical to achieving an operationally effective

11

and well-managed organization. The goals for all of the 11 power plants also include

12

an equivalent availability goal which is referred to in the Committee’s list as a

13

“performance” goal and constitutes 20 percent of the total goals.

14

The Company fully believes that these 3 goals greatly benefit customers.

15

Keeping generation costs low and maintaining high equivalent availability are the types

16

of goals which are consistent with better serving customers. A “customer survey”

17

does not make sense for a power plant like it might for the customer call center.

18

However, we don’t need a survey to know that customers want low power costs and

19

these are the focus of the line-of-sight measures used by the Company’s power plants.

20

The list of 13 groups used by Mr. Schultz failed to include one of the largest

21

groups in the Company, Customer Operations. This group performs all of the

22

customer hook up and line functions. The goals and weightings for this group

23

included:

24 25

Goal Increase Customer Satisfaction

Weighting

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1 2 3 4 5 6 7 8 9 10

The Company believes that these goals for Customer Operations constitute a fair

11

balance between customer satisfaction, maintenance and cost controls and are all

12

consistent with benefiting the customer by managing an efficient operation with strong

13

customer satisfaction in a cost-effective manner.

14

as measured by Survey Reduce Unnecessary Inventory Budget Management And one of the following as applicable: a) Tree Trimming b) Internal Customer Survey c) Substation Maintenance & Residential Connects

30% 10% 20% 40% 40% 40%

In summary, a review of all the group line-of-sight goals reinforces the fact that

15

our goals have been established in a manner which is fully consistent with the

16

Commission’s guidelines.

17Q.

Please describe the Company’s annual incentive programs and how they are designed.

18A.

Of the four incentive programs operated by the Company in 1998, the program with

19

the most eligible participants was the Electric Operations PerformanceShare

20

Program. This program was designed to allow eligible employees the opportunity to

21

earn their full target incentive opportunity on the basis of achieving line-of-sight

22

goals which improve the operational effectiveness of the business and customer

23

service. All regular part- and full-time employees in the Electric Operations business

24

unit were eligible to participate in this program provided they were not eligible for

25

another incentive program (such as a sales incentive program). Line-of-sight goals

26

were established for each major work group within Electric Operations. Employees

27

also have the opportunity to earn awards above target incentive levels if certain

28

corporate financial goals are achieved. The formulas for calculating incentive awards

29

from this program are as follows:

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1

Begin Confidential

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1

Begin Confidential

3

Group Award Formula: Eligible Earnings

4

Group X Guideline Incentive Percentage

Group Individual Group X Performance X Performance = Performance Factor Modifier Award

Corporate Award Formula: Eligible Earnings

Corporate X Guideline Incentive Percentage

Corporate Individual Corporate X Performance X Performance = Performance Factor Modifier Award

5

In this program, if an employee’s guideline incentive percentage was 10 percent and

6

the maximum opportunity was 20 percent, the first 10 percent would be the Group

7

Guideline Incentive Percentage in the above formula. Their opportunity to earn above

8

the guideline incentive is calculated by the second formula above. In 1998 there was

9

no payout under the Corporate Award Formula.

10

I might note that the Company has changed its incentive programs since 1998

11

and all employees, except officers, now participate in the PerformanceShare Program.

12Q.

Does the annual incentive expense for the Electric Operations PerformanceShare

13

Program included in the 1998 test year include compensation paid to employees for

14

accomplishment of their line-of-sight goals?

15A.

Yes.

16Q.

Does the annual incentive expense for the Electric Operations PerformanceShare

17

Program included in the 1998 test year also include compensation paid to employees

18

for accomplishment of corporate financial goals?

19A.

No.

20Q.

Please explain.

19Page 10 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 20

1A.

In 1998 all teams in Electric Operations were able to achieve all or at least part of their

2

line-of-sight performance goals and therefore all employees received a portion, if not

3

all, of their guideline incentive award from the plan. None of the upside opportunity

4

portion was paid out, as the corporate performance goal was not achieved.

5

Consequently, the entire amount included in the 1998 test year expense for Electric

6

Operations' annual incentive represents awards paid for accomplishment of line-of-

7

sight goals.

8Q.

Please describe the Company's other annual incentive plans.

9A.

The Global Sales, Marketing and Energy Trading (GSMET) Annual Incentive

10

Program had 231 employees participating in 1998. This program was designed to

11

allow eligible employees the opportunity to earn 75% of their guideline incentive

12

opportunity on the basis of achieving line-of-sight goals that improve customer

13

service and operational effectiveness. The remaining 25% was based upon achieving

14

the Corporate EPS goal for the year. All regular part- and full-time employees in the

15

GSMET business unit were eligible to participate in this program, provided they were

16

not eligible for another incentive program (such as a sales incentive program).

17

Because GSMET was a relatively small organization, one set of goals applied to the

18

entire employee group. The formula for earning incentive awards in 1998 was as

19

follows: Guideline Award

X [(

Corporate Component

X

25%

)+(

Business Unit Component

X

75%

)] x

Individual Performance Modifier

= Award

20

As can be seen from this formula, 75 percent of the guideline award was based upon

21

line-of-sight goals without any consideration of the Corporate (EPS) component. To

22

earn or exceed the full guideline award level, however, requires that corporate

21Page 11 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 22

1 2

performance meet or exceed the desired level. In 1998, the GSMET organization met 30 percent of their line-of-sight goals

3

resulting in awards to employees equal to 22.5 percent of their guideline incentive

4

before the Individual Performance modifier. The Corporate Component was not

5

achieved in 1998.

6

There were 981 employees participating in the Corporate Staff Annual

7

Incentive Program in 1998. This program provided eligible employees the

8

opportunity to earn up to 25% of their guideline incentive opportunity on the basis of

9

achieving line-of-sight goals that improved operational effectiveness and internal

10

customer service. The remaining 75% of their guideline incentive opportunity was

11

based upon achieving the Corporate EPS goal for the year. All regular part- and full-

12

time employees in the corporate staff organizations were eligible to participate in this

13

program provided they were not eligible for another incentive program. The formula

14

for earning incentive awards in 1998 was as follows: Guideline Award

X [(

EPS Component

X

75%

)+(

Work Group Component

X 25%

)] X

Individual Performance Modifier

= Final Award

15

All of the staff organizations met most of their line-of-sight goals resulting in awards

16

of 25 percent or less of the guideline incentive. The EPS Component was at zero.

17

The Executive Incentive Program, in which all PacifiCorp executive officers

18

except Mr. Spalding were eligible to participate, was designed to allow officers to

19

earn their guideline incentive opportunity if the established performance targets were

20

achieved. Of the 22 officers eligible for this program, 3 were eligible to earn incentive

21

awards exclusively on the basis of reaching the EPS objectives. However, there were

22

19 officers who were eligible to earn their awards based upon a formula that was

23Page 12 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 24

1

partially EPS based and partially based on the line-of-sight goals established for their

2

business unit. The formula for calculating awards under this program was:

Guideline Award

X [(

EPS component

X

EPS Weighting Factor

)+(

Business Unit Component

X

Business Unit Weighting Factor

)] X

Individual Performance Modifier

3

In 1998, the EPS Component was zero, therefore 3 individuals received no award.

4

The other 19 officers qualified for an award of up to 50 percent of their guideline

5

incentive based upon accomplishing all or part of their line-of-sight goals.

6End Confidential

25Page 13 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 26

= Final Award

1End Confidential 2Q.

Does the annual incentive expense for the GSMET, Corporate and Executive annual

3

incentive programs included in the 1998 test year include any compensation paid to

4

employees for accomplishment of corporate financial goals?

5A.

No. In the case of each of these annual incentive programs, the expense included in

6

the 1998 test year relates only to accomplishment of line-of-sight goals.

7Q.

Please describe the type of group line-of-sight goals contained in the annual incentive

8

programs.

9A.

For the purpose of this testimony, I will highlight some of the group goals that were in

10

effect in 1998. In customer operations, which included about 2,173 employees who

11

work on the construction and maintenance of power lines and the distribution of

12

power to customers, the 1998 performance goals were as follows: Goal Weighting Increase Customer Satisfaction as measured by Survey 30% Reduce Unnecessary Inventory 10% Budget Management 20% And one of the following as applicable: a) Tree Trimming 40% b) Internal Customer Survey 40% c) Substation Maintenance & Residential Connects 40%

13

Each of the Company’s power production plants, which in total included

14

approximately 1,653 employees, have incentive plan goal measurements and weights

15

which were applicable to the facility in which the employee worked. However, while

16

the measurements and weights may have been unique, the goals in each plant were

17

generally the same. These are:

27Page 14 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 28

Goal

Weighting

Equivalent Availability Improvement

Varies by Plant

O&M Bus Bar Improvement

Varies by Plant

Total Bus Bar Improvement

Varies by Plant

Safety Performance and Improvement

Varies by Plant

Vision and Values (Plant Efficiency and Productivity Improvement through improved communication, training and the implementation of process enhancements)

Varies by Plant

18

This is a representative sample of the types of line-of-site goals that were in effect

19

during 1998. The linkage between these line-of-sight goals and the customer is

20

obvious. Some of the groups were successful in meeting 100 percent of their goals

21

while others were only able to partially achieve the stated goals.

22

The inclusion of line-of-sight goals in the Plan design was specifically to benefit

23

the customer through customer service, operational effectiveness and cost

24

management. Further, having put a portion of competitive pay “at risk” and requiring

25

that employees earn their guideline incentive award based upon achieving these

26

customer-focused performance goals also benefits the customer.

27Q.

Do you agree with Mr. Schultz’s assertion that there was no evidence that the “so-

28

called” goals were attained?

29A.

No. As I explained above, the meeting of line-of-sight goals was necessary for the

30

payouts in 1998. The Committee was provided with over 200 pages of the specific

31

1998 performance goals for each group/team. These included a description of the goal

32

along with the performance scale and weighting. Additionally, the Committee was

33

provided with a description of how each group performed against the established

34

goals.

35

The fact that actual performance against goals did not result in each group

29Page 15 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 30

1

achieving 100 percent or more of target should be indication enough that not all of the

2

goals were accomplished and that the goals are in fact measurable. In reality, over a

3

thousand employees received 25 percent or less of their target award because goals

4

were not fully achieved.

5Q.

Do you agree with Mr. Schultz’s characterization of the Company’s incentive

6

compensation plan as “extra compensation”?

7A.

As I explained above, absent award of the guideline incentive that employees were

8

eligible to earn under the annual incentive programs, the Company’s total cash

9

compensation would be below the competitive level necessary to attract, retain and

10

motivate qualified employees. Annual incentives are not “extra compensation” when

11

one examines the average compensation paid in the marketplace. The incentive

12

programs described above provide the mechanism for allowing employees to earn a

13

portion of this competitive average level of compensation. To suggest that the

14

Company should not be allowed to recover the market average level of compensation

15

is not appropriate, as this is what it costs the Company to attract and retain qualified

16

employees.

17 Q.

How did the Company introduce incentive compensation to avoid it being “extra”

18

compensation?

19A.

The Company took numerous steps over a period of time by freezing and slowing base

20

salary growth while gradually increasing the guideline incentive levels. For example,

21

in 1996, the Company eliminated the entire 4 percent merit pool and increased target

22

incentive levels by a similar amount. This pay is now “at risk” and is only earned when

23

performance goals are achieved.

24Q.

Please summarize your testimony on annual incentive programs.

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1A.

The awards actually paid under the 1998 incentive program were “at risk”

2

compensation and were based upon line-of-sight goals that are consistent with the

3

types of goals the Commission has previously stated it would allow to be included in

4

rates. The 1998 annual incentive costs should be included in rates.

5Long-Term Incentive Compensation 6Q.

Are you familiar with Committee witness Brosch’s recommendations regarding

7

PacifiCorp’s long-term incentive compensation plans, referred to by the witness as

8

stock-based compensation?

9A.

Yes. Mr. Brosch proposes that stock-based compensation costs be eliminated from

10

PacifiCorp’s revenue requirement. The costs to which he refers are the costs of

11

restricted stock grants to senior executives.

12Q.

Please describe the Company’s long-term incentive compensation programs.

13A.

The Company previously had a program called the PacifiCorp Long Term Incentive

14

Plan (LTIP). Under the LTIP the Company provided restricted stock awards to

15

executives if certain performance criteria were attained. These restricted stock awards

16

vested over 4 years if the conditions of vesting were satisfied. All long-term incentive

17

restricted stock grants prior to 1998 were made under the LTIP. The LTIP has since

18

been retired except to govern the vesting of prior grants of restricted stock.

19

The LTIP was replaced by the Stock Incentive Plan (SIP). The SIP is an

20

omnibus plan under which the Company has made all post 1997 grants of restricted

21

stock. The SIP is also the plan under which all stock option grants are made. Because

22

stock option grants were not included in 1998 costs consistent with a previous

23

Commission decision, all future reference to long-term incentives in this testimony will

24

relate to restricted stock grants.

33Page 17 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 34

1Q.

Why does PacifiCorp offer long-term compensation plans?

2A.

Long-term compensation is a customary part of an executive’s total compensation

3

package. The Company offers long-term incentive compensation to executives for

4

two reasons. First, long-term incentive compensation is typical at the executive level

5

and candidates expect some long-term incentive compensation as part of total

6

remuneration. If the Company did not offer such compensation, we would not be

7

competitive. As previously discussed, the Company’s compensation policy is to

8

provide average, fully competitive compensation in order to recruit and retain qualified

9

employees, including executives. Second, the Company has structured its long-term

10

incentive plan to put a large portion of senior management's competitive compensation

11

“at risk” over a period of several years. This greatly assists in the retention of senior

12

management. The Company used performance based restricted stock awards as our

13

primary long-term incentive vehicle in 1998. Restricted stock awards are a common

14

form of long-term incentive in the utility industry. Performance based restricted stock

15

awards are a powerful motivator due to the requirement that they vest over time,

16

encouraging a greater focus on longer term goals. We expect that accomplishment of

17

longer-term goals will be reflected in an improvement in the way we do business, as

18

well as appreciation of the stock price.

19Q.

Why does Mr. Brosch recommend elimination of stock-based compensation costs from

20

revenue requirement?

21A.

Mr. Brosch concludes that the incentive plans are based on financial criteria which

22

aligns the interest of Company management with shareholders and therefore, should

23

not be included.

24Q.

Are the costs represented in Mr. Brosch’s testimony associated with long term

35Page 18 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 36

1

incentive plans?

2A.

No. Based upon the 1997 rate case and the Commission supported position taken by

3

Ms. Cleveland, the Division’s witness, the Company has excluded all of the costs

4

associated with long term incentive compensation.

5Q.

What are the costs referred to by Mr. Brosch in his testimony?

6A.

The costs Mr. Brosch erroneously has referred to as long term incentive costs actually

7

relate to some specialized retention agreements we have in place for certain executives

8

and key employees. In some special circumstances, the Company has utilized restricted

9

stock rather than cash as a retention tool. The latest example of this was in 1998

10

during the Early Retirement offering. There were several key managers (not officers)

11

who were eligible to take the early retirement program and it was determined by the

12

Board of Directors that it would be detrimental to the Company to lose some of these

13

individuals. Therefore, they approved a grant of restricted stock to 10 individuals in an

14

attempt to retain them for several years. The stock would vest at 50 percent in 2000

15

and 50 percent in 2001. Most of the individuals accepted the retention agreements and

16

have remained with the Company. Therefore, none of this was a performance based

17

incentive payment which is why the Division’s witness Cleveland had not excluded

18

similar retention costs during the 1997 rate case but had excluded the performance

19

based payments.

20Q.

Do you agree with Mr. Brosch’s recommendations?

21A.

No. Mr. Brosch has inappropriately classified these restricted stock retention costs as

22

long term incentive costs. Occasional use of stock solely as a retention tool is part of

23

the cost of doing business and should not be eliminated. This was the conclusion

24

reached by Ms. Cleveland in the 1997 rate case and there is no reason a similar

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1

conclusion should not reached in this case.

2 Q.

What is your recommendation?

3A.

I recommend that the Commission include the costs associated with the retention-only

4

restricted stock as described above.

5Q.

Does this mean that the Company accepts the exclusion of long term incentive related

6

costs?

7A.

The Company continues to stand by its position as stated in the 1997 rate case. This

8

position is that there is a total amount which the Company must provide in the form of

9

remuneration to attract and retain qualified executive talent. Further, it is preferable to

10

deliver this compensation in a variable/at-risk manner rather than building it solely into

11

base salary. By having this compensation tied to performance factors such as increased

12

shareholder return is in the best interest of both customers and shareholders. Utility

13

ratepayers benefit from efficient and effective operations, strong leadership and

14

satisfactory shareholder performance. The Company cannot exist without

15

shareholders. If shareholders are satisfied with the financial performance of the

16

Company and are willing to provide additional investments, ratepayers also benefit.

17Supplemental Executive Retirement Plan (SERP) 18Q.

Have you reviewed the direct testimony of Committee witness Schultz regarding

19

PacifiCorp’s Supplemental Executive Retirement Plan?

20A.

Yes. Mr. Schultz recommends that the Commission deny recovery of the costs of the

21

Company’s Supplemental Executive Retirement Plan (SERP) stating that this is an

22

extra form of compensation.

23Q.

Do you agree with Mr. Schultz’s recommendation?

24 A.

No. The SERP is a necessary form of compensation which is considered to be part of

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1

the total remuneration package provided by the Company in order to attract and retain

2

qualified executives. Most organizations, including utilities, offer similar programs to

3

their executives. In fact, according to a study conducted by Hewitt Associates, a

4

Human Resources consulting firm, in 1999, over 70 percent of the 40 utilities surveyed

5

have a Supplemental Executive Retirement Program.

6Q.

Why is the SERP a necessary form of compensation?

7A.

The Company offers a retirement benefit to its employees. This benefit is targeted to

8

be at the average level of competitor utilities. The retirement benefit consists of two

9

major parts: the defined benefit pension plan and the K Plus program, which includes

10 11

the 401(k) match and the Company ESOP contribution. The general objective of the defined benefit pension plan is to provide

12

retirement income from social security and the Company pension plan equal to 60 – 70

13

percent of the employee’s final average pay assuming retirement at age 62 with 30

14

years of service. For higher paid employees it is age 65. An earlier retirement age or

15

fewer years of service will result in a reduced benefit.

16

Unfortunately, there are some executive employees whose qualified defined

17

benefit pension combined with social security could never reach 60 – 70 percent of

18

final average pay, even if the employee attained age 65 with 30 years of service. This

19

is because there are strict legal limits as to how much income can be recognized in

20

calculating a qualified retirement benefit.

21

The Company, like our competitors, has determined that they should make-up

22

this benefit gap for these executive employees by providing them with the same

23

relative replacement level of retirement benefits assumed to be provided to someone

24

less senior in the organization through the defined benefit pension plan.

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1

In order to achieve this objective, the Company provides this “make up”

2

portion outside of the qualified retirement plan in the form of a non-qualified benefit or

3

Supplemental Executive Retirement Benefit. If the Company failed to offer this non-

4

qualified benefit we would find it difficult to attract and retain qualified executives.

5Severance 6Q.

Do you agree with the DPU’s proposed adjustment to remove the cost of severance

7

expenses in the rate year?

8A.

No.

9Q.

What is the basis for the DPU's recommendation?

10A.

The DPU’s witness Peel states that the expense for Mr. Buckman’s severance should

11

be removed.

12Q.

Why do you disagree with the DPU’s position?

13A.

It is very common for companies like PacifiCorp to have an established severance plan

14

or employment contract which sets forth the level of severance benefits for which an

15

executive would become entitled if the employment situation is not successful or

16

employment is terminated. It is extremely difficult if not impossible in this time of

17

merger and acquisitions to recruit and retain executives without providing a severance

18

security. Turnover at the executive levels of large companies is at an all time high.

19

An Executive Severance Survey conducted in 1998 by Hewitt Associates, a

20

Human resources consulting firm, indicates that of 214 companies surveyed 75 percent

21

had formal severance programs for executives and the remaining 25 percent have

22

informal practices. A review of 1998 proxy statements for 42 utilities indicated that all

23

but 2 had a severance provision in place for the CEO.

24

Providing severance protection is therefore very common and an expected

43Page 22 – REBUTTAL TESTIMONY OF LEA ANNE DOOLITTLE 44

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benefit for executives and a necessary cost of doing business.

2Q.

Do you agree with the witness that Mr. Buckman’s severance costs should be borne by

3

the shareholders?

4A.

No. As previously stated, severance costs should be considered a necessary part of the

5

cost of doing business. To claim that the shareholders should bear the full

6

responsibility of these costs rather than the rate payers because of a renewed focus on

7

the Company’s “core” business would only make sense if Mr. Buckman had

8

exclusively supported the non-regulated business. Mr. Buckman, in fact, was

9

responsible for providing leadership and direction to the entire Company. Therefore,

10

the Company’s methodology for assessing which costs should be allocated to the

11

regulated and non-regulated part of the business, and to each state, should be used to

12

determine the portion of Mr. Buckman’s severance that should be borne by customers.

13Q.

Is the level of Mr. Buckman’s severance out of alignment with competitive practice?

14A.

No. Mr. Buckman’s total severance costs were well in line with the level of severance

15

provided to other CEO’s in the utility industry. In fact, the review of 42 utility proxy

16

statements, referred to earlier, revealed two times salary and bonus is the least amount

17

of severance reported in a non-change-in-control separation situation.

18Q.

Please summarize your conclusions regarding Mr. Buckman’s severance costs.

19A.

Mr. Buckman’s severance costs are in line with competitive practices for individuals at

20

this level and should be allowed in rates.

21Q.

Does this conclude your testimony?

22A.

Yes.

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