STATE OF CONNECTICUT PUBLIC UTILITIES REGULATORY AUTHORITY DOCKET NO

Transcription

1 STATE OF CONNECTICUT PUBLIC UTILITIES REGULATORY AUTHORITY DOCKET NO. 1-- APPLICATION OF THE CONNECTICUT LIGHT AND POWER COMPANY DBA EVERSOURCE ENERGY TO AMEND ITS RATE SCHEDULES TESTIMONY OF JENIFER B. RIZZA ON BEHALF OF THE CONNECTICUT LIGHT AND POWER COMPANY DBA EVERSOURCE ENERGY NOVEMBER, 01

2 TABLE OF CONTENTS I. INTRODUCTION... II. PURPOSE OF TESTIMONY... III. CL&P S PENSION EXPENSE CALCULATIONS...

3 STATE OF CONNECTICUT PUBLIC UTILITIES REGULATORY AUTHORITY DOCKET NO. 1-- APPLICATION OF THE CONNECTICUT LIGHT AND POWER COMPANY DBA EVERSOURCE ENERGY TO AMEND ITS RATE SCHEDULES 1 I. INTRODUCTION Q. Please state your name, position and business address. A. My name is Jenifer B. Rizza. I am the Trust Investments Manager for Eversource Energy and its principal subsidiaries, including The Connecticut Light and Power Company dba Eversource Energy ( CL&P or the Company ). My business address is Selden Street, Berlin, Connecticut Q. Please summarize your education and professional experience. A. In, I earned a Bachelor s of Science degree in Finance from Fairfield University with a minor in economics. In 1, I earned an MBA from the University of Hartford with a concentration in Finance. From to 00, I worked in various portfolio reporting, analyst and trading positions at Aetna, Aeltus Investment Management and ING Investment Management. In 00, I joined the Treasury Group of Eversource Energy Service Company ( Eversource ) f/k/a Northeast Utilities Service Company ( NUSCO ), which provides centralized administrative services to the Eversource operating subsidiaries, including CL&P. I have been in

4 my current position since joining Eversource and am responsible for investment oversight and administration of the Company s pension fund, and post-retirement health and life trust assets as well as overseeing the 01(k) investment options. II. PURPOSE OF TESTIMONY Q. What is the purpose of your testimony? A. The purpose of my testimony is to explain and provide supporting information for the Company s 01 through 00 pension expense, as shown on Schedule C-.d of the Company s rate application. My testimony will explain the pension expense calculation methodology and the key assumptions impacting the projected pension expense for 01, 01 and My testimony is complementary to the testimony of Michael L. Shelnitz, which addresses the revenue requirements for the Company s requested level of pension expense Q. Please summarize your testimony. A. The Company s pension expense is calculated in accordance with accounting standards that are designed to require consistent measurement and recognition of pension obligations and assets among reporting companies. The expense is based on an actuarial valuation that determines the Company s liability to each pension plan participant, and 1 The Company s operating revenue deficiencies for 01, 01 and 00 in this rate case are proposed to be recovered over the following rate years: Rate Year 1 is May, 01 through May, 01 ( RY1 ), Rate Year is May, 01 through May, 00 ( RY ), and Rate Year is May, 00 through May, 01 ( RY ) (collectively, the rate years ).

5 includes assumptions on salary increases, discount rate and expected long-term rate of return on assets. The Company s actuary calculated CL&P s actual pension expense to be $0,,000 in the test year ended December 1, 01, and its projected expense to be $1,,000, $1,,000 and $,,000, respectively in each of the calendar years ended December 1, 01 through III. CL&P S PENSION EXPENSE CALCULATIONS Q. What is pension expense and what does it cover? A. Pension expense is an estimate of the current year s cost to the Company of providing pension retirement benefits to CL&P employees. These costs are accrued over the employees working careers and are used to pay pension benefits to employees after retirement. Benefits are determined based on years of service, age at retirement and final average pay for 1 each covered employee. For eligible employees, the benefits are administered through a pension plan that is sponsored by Eversource. There are approximately 0,00 retirees, current and former employees, and surviving spouses covered by the Eversource pension plan. Effective January 1, 01, the Northeast Utilities Service Company Retirement Plan (the "NUSCO Retirement Plan"), merged with and into the NSTAR Pension Plan (the NSTAR Plan ) with the NSTAR Plan as the surviving plan document. Effective July 1, 01, the merged document was renamed as the Eversource Pension Plan (the Plan ). The Plan merger was made with the intention to permit all assets of the legacy pension

6 plans to pay all the liabilities associated with each of the other plans, creating a single, merged plan for purposes of Section 1(l) of the Internal Revenue Code ("Code"). The separate benefit structures under the legacy plans remain intact and independent, and therefore, were not affected by the merger. 1 Q. Please describe how pension expense is calculated. A. The Company s pension expense is calculated in accordance with FASB ASC 1-0 (previously referred to as Statement of Financial Accounting Standard No., Employers Accounting for Pensions, or FAS ). The accounting standards are designed to require consistent measurement and recognition of pension obligations and assets among reporting 1 companies. In accordance with the standards, the components of pension expense are: (a) service cost, (b) interest cost, (c) expected return on Plan assets, (d) prior service cost, and (e) actuarial gains or losses: Service cost represents the cost of additional pension benefits earned in the current year based on projected employee pay. Interest cost is the expected growth of past liabilities that will occur in the current year. The expected return on Plan assets is an offset to pension expense representing the amount of earnings the pension assets are expected to earn in the current year. Expected return on Plan

7 assets is calculated by an actuarial firm that multiplies the expected long-term rate of return assumption by the market value of assets with an adjustment for expected cash flow during the year (contributions and benefit payments). Prior service cost is the amortization of the cost of prior benefit changes resulting from Plan amendments. This cost is amortized over the average future working lifetime of the Plan population and can increase or decrease Plan costs depending on the nature of the specific Plan change. Actuarial gains or losses are created each year as the difference between actual Plan experience and assumed Plan experience. For example, gains or losses are created when the expected return on Plan assets differs from actual asset return, when there are changes in assumptions (e.g., discount rate) and when actual demographic experience differs from expected experience. Actuarial gains and losses are amortized as a component of expense over the average future working lifetime of the Plan population The components of pension expense are first calculated by the actuary for each operating company participating in the Eversource Plan and also for each business segment within each company. Each business segment and company is then allocated its appropriate amount of Eversource costs.

8 Q. Please describe the assumptions that are used to determine the Company s projected rate year pension expense. A. Eversource employs the actuarial services of Aon Hewitt in determining projected pension expense. The actuary utilizes many assumptions in order to develop pension expense. The assumptions that are the most significant drivers of pension expense are the: (a) salary increase assumption, (b) discount rate, and (c) expected long-term rate of return on assets Q. Please explain how the salary increase assumption is determined. A. Since benefits payable under the terms of the Plan are based on final average earnings, the salary increase assumption is used to estimate the retirement benefit that participants will be entitled to at the time of retirement based on final average pay. The salary increase assumption used to determine pension expense for the Plan is determined in 1 consultation with Eversource s Human Resources Department. This consultation includes a review of available salary surveys and consideration of professional judgments about the direction of salary growth within Eversource. Consideration is given to both current salary increases and the level of increases built into the union contracts and the level of promotions. The Company and its actuary have used a salary increase assumption of. percent in projecting CL&P s pension expense estimates. This assumption includes the value of annual base salary

9 increases, incentive compensation and the impacts of projected promotions. Q. Please explain the use of the discount rate. A. The discount rate is used to discount the cash-flow stream of future benefit payments to determine their net present value. For financial reporting purposes, the Securities and Exchange Commission ( SEC ) requires the use of high-quality bond yields as a basis for the discount rate at the time of measurement. The SEC has also stated that discount rates should reflect the duration of a pension plan's liabilities. Using a yield curve approach is beneficial and appropriate because it is the most direct way to comply with the SEC s directive, and it is the standard practice in the industry. For these reasons, Eversource uses a yield curve approach. Under this approach, each cash flow of the liability stream is discounted at an interest rate specifically applicable to the time of the cash flow. For example, the cash payments expected to be made five years from now are discounted using the yield of a AA rated bond with five years to maturity, whereas cash payments expected to be made thirty years from now are discounted using the yield of a AA rated bond with thirty years to maturity. The present values of all of the relevant cash flows are totaled, and the single discount rate that produces the same present value of liabilities for the future cash flows is adopted as the discount rate. Effective January 1, 01, Eversource began using spot

10 rates to estimate the service and interest cost components of pension expense. Historically, these cost components were estimated using the same single weighted-average discount rate derived from the yield curve methodology described above. The spot rate methodology uses the same yield curve that is used to determine present value of liabilities, but provides a more precise measurement of service and interest costs by matching projected cash flows to corresponding spot rates along the yield curve. Because the discount rate assumption is impacted by changes in interest rates and shape of the yield curve, it is difficult to project changes from year to year Q. Please explain the expected long-term rate of return on assets. A. The expected long-term rate of return on assets is used to calculate the expected return on the Plan assets, which is used as an offset to pension expense. As its name indicates, the rate of return is a long-term rate that reflects the fact that Plan assets will be invested over long periods of time prior to being paid out as benefits. As such, year-to-year swings in returns should not have a great impact on the long-term rate of return on assets assumption. Even with very high returns in certain years, the SEC has publicly stated that any rate of return assumptions of percent or higher will be subject to heightened scrutiny. The Company and its actuary have used an expected long-term rate of return of. percent in projecting CL&P s pension expense estimates, and this is based on the Plan s asset allocation and expected return from each asset class.

11 Q. How do these assumptions for 01 and 01 compare with the assumptions used for the period 01 00? A. Table JBR-1 below summarizes these primary assumptions as included in calculating the actual 01, the projected 01 pension expense, and the projected pension expense for the three-year period of 01 through 00. The assumptions used for the 01 through 00 period are the same as the 01 test year assumptions, with the exception of the discount rate. The discount rate assumption is impacted by interest rate changes and, as stated earlier, it generally changes from year to year although the direction and magnitude of those changes are difficult to predict. For 01 and 01, the yield curve approach utilized by Aon Hewitt resulted in a weighted average discount rate of.0 percent and. percent, respectively. For the 01 through 00 projections, the latest yield curve available was as of December 1, 01, which results in a discount rate of. percent (as calculated by the Company s actuary) for 01 through 00 pension expense calculation. Table JBR-1 Key Pension Assumptions Discount Rate of Salary Increase Rate Return 01.0%.%.0% 01.%.%.0% 01.%.%.0% 01.%.%.0% 00.%.%.0%

12 Q. What is the actual and projected pension expense resulting from these assumptions? A. Based on the assumptions described above, the actuary calculated actual pension expense to be $0,,000 in the test year ended December 1, 01, and $1,,000, $1,,000 and $,,000, respectively in the calendar years ended December 1, 01 through Q. What caused the projected decrease in CL&P s pension expense from the test year to the rate years? A. Our rate year projections do not assume any changes to the salary increases, discount rates or rate of return on assets, and therefore, the projected decrease in pension expense is the result of the normal operations of the Plan. Because the Eversource Pension is a closed plan, its projected service costs will trend down slowly over time. In addition, assets are projected to grow at a faster rate (.%) than liabilities, which 1 improves funded status and reduces interest costs over time. Our projections assume that actual Plan experience will equal expected Plan experience, and therefore, no additional actuarial gains or losses are generated, and by 01 it is projected that prior service costs will be fully amortized. Table JBR- below shows the Plan s returns across broad asset classes from 01 through 01.

13 Table JBR Eversource Pension Plan Returns Asset Class Returns Returns Returns Returns U.S. Equity.%.% -0.% 1.% Non U.S. Equity 1.% -.% -.%.% Fixed Income 0.%.% -1.%.% Real Assets.%.% 0.%.% Private Equity 1.1%.% 1.%.% Hedge Funds.%.% -0.% 0.% Total Plan Returns 1.0%.1% 0.%.1% Q. Is the Company s rate year pension expense included in its cost of service schedules? A. Yes, the Company s revenue requirements for its pension expense for the three-year rate plan are shown in Schedule C-.d, which is supported by Mr. Shelnitz s testimony. Q. Does this conclude your testimony? A. Yes, it does. 1