CUB Fights for Sound Financial Planning, Sustainable Utility Pensions

You may have heard in the past few years of companies, and even cities, going bust. You may also have heard about underfunded pensions. Or, you may have heard about claims of overly generous benefits for state workers. You may also have heard that anyone who is investigating pensions is looking to break longstanding covenants between employers and employees, covenants that were made up to 50 years ago when employees were hired and promises of good pensions were made. What follows is a peek into the fascinating way that utility accounting, utility retirement planning, and general ratemaking regulation interact – and no aspect of it is simple, or pretty.

CUB has been investigating utility pension plans for more than a year, and our investigation has looked back several decades. Pension plans, unlike the retirement or 401k plan that you may have or be familiar with, promise a certain amount of benefit upon retirement, a secure retirement. Therefore, the future retiree, or recipient, does not have to worry about how much is being invested each month. She knows that she will have a certain amount to retire on, regardless of how the market performs, or how profitable the company is in a given year.

The pension investigation docket, UM 1633, was born when one of Oregon’s investor owned utilities asked for money from current ratepayers to pay a return (profit) on something mysterious called a prepaid pension asset. CUB was intrigued by this prepaid pension asset. We wondered what it was, where it had come from, and why it was so big (as pricey as some entire power plants).

What CUB uncovered, and continues to uncover, has shaped the conversation between the Oregon Public Utility Commission and the six investor owned utilities operating in Oregon (Portland General Electric, Pacific Power, Avista, Cascade Natural Gas, NW Natural, and Idaho Power Company) over the last six months. What we have determined is that the prepaid pension asset is a running tally of mixing two different types of accounting: cash accounting, and accrual accounting. Almost everyone is familiar with cash accounting, the kind that recognizes expenses as cash walks out the door (when bills are paid). Accrual accounting is more difficult to explain. Accrual accounting recognizes expenses as a company incurs them. For example, if you get a cavity filled by your dentist, but the dentist does not bill you for six months, until the bill comes through you have incurred the expense, but not paid it out yet.

This means that, in a given year, the accrual accounts and the cash accounts for the same item may not match exactly. Take pensions, for instance: in some years, the company may put a lot of cash into its pension fund, but the next year it may not. In either of those same years, the company may incur a high amount of pension expense (negotiate retirement packages with several employees) but not fund them until the next year. If the two accounting practices are being used simultaneously, such actions create a mismatch and generate a gap that, instead of being cleared out each year, accumulates as a running tally. Unfortunately, most of Oregon’s utilities have allowed this tally to accumulate over the past two and a half decades. This tally, the prepaid pension asset, is exactly what is at issue currently before the Oregon Public Utility Commission in UM 1633.

The prepaid pension asset grows when cash contributions exceed accrual expense in any given year. However, the prepaid pension asset also grows when cash contributions are zero, and the pension investments perform well, creating a negative pension expense. In theory, under accrual accounting, customers who are charged for pension expenses should receive a credit for this negative pension expense. However, Oregon utilities have generally taken a one-sided approach to pension expenses: adding the expense to rates when it is positive, but not subtracting it from rates when it is negative.

Under the proposal that the utilities have made, they would earn a profit on the difference between cash contributions and pension expense even when that expense was negative and not passed through to customers. CUB has been fighting hard against this for several reasons. First, when the cash contributions were less than the total accrual expense, the shareholders did not pay a rate of return to ratepayers. Second, the utilities are allowed to charge customers for pension expenses, so over the life of the pension plan the expense will fully compensate the utility for its pension costs.

Please understand that CUB fully supports providing a pension for those who work hard at our utility companies. CUB just wants to ensure that those employees’ pensions are efficiently provided and customers are fairly charged for the cost of the pension plan. But CUB does not believe that utility shareholders should earn additional profits off of the pension plan. It makes little sense to pay shareholders a return on equity (ROE – their profit margin) that is 9.5% after tax (13% before taxes) on contributions to pension funds that are expected to get a stock market return of 7.5%.

The bottom line here is that CUB believes utilities should manage their pension funds in a prudent manner, and if they do so, customers will pay the pension expense in order to fully compensate the shareholders for offering a pension. Once shareholders have been fully compensated, customers should not have to pay additional profits.

CUB is fighting hard to keep the requested profits on prepaid pension assets out of customer rates. This would add tens of millions of dollars each year to Oregon customer bills, but would do nothing to improve service.

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