CUB Victory Will Save Customers More Than $20 Million/Year

On Monday, the Public Utility Commission (PUC) ruled in CUB’s favor in a case that decided whether utility shareholders can earn a profit on the company’s pension contributions. This decision will prevent Oregon utilities from increasing rates in order to increase shareholder profits. So in this year alone, it means a $24 million savings for Oregon ratepayers.

This docket began in 2012, and has lasted almost three full years. While ratemaking treatment of a utility’s pension plan is an obscure regulatory docket, CUB realized that a great deal was at stake. (See earlier article for more details.) If the utilities won, rates would go up by more than $20 million each year – for many years to come. 

Note that this money is not additional money being invested in the pension plan or in the utility system. This rate hike would have simply been an increase to the profits of utility shareholders. It represented an ongoing transfer of wealth from Oregon utility customers to utility shareholders, many of whom live out-of-state.

Here’s the deal. NW Natural, PGE, Pacific Power, Avista Utilities, and Cascade Natural Gas were looking to change the ratemaking treatment of their pension plans. Under PUC regulation, utilities make a profit by investing shareholder dollars in the utility’s ratebase (power plants, wires, pipelines, computers, and other capital equipment) earning a rate of return on that investment. Pension contributions have never been considered ratebase and utility shareholders have not earned a profit on contributions to the utility’s pension fund. The utilities proposed changing this system, so an element of the pension contributions (called the “prepaid pension asset”) would be added to the ratebase and the utilities would get to earn a rate of return on this portion of the contributions. 

When the case began in 2012, the utilities tried to present it as a simple policy issue that related to future pension funding, not historic pension funding. They claimed that the Pension Protection Act of 2006 combined with the Great Recession had fundamentally changed pension accounting for the utilities. Shareholders were suddenly being required to contribute tens of millions of dollars into the utility’s underfunded pension programs and were not being adequately compensated for “investing” this money. And this would not change in the foreseeable future as the funding requirements would continue.

CUB collected approximately 20 years of pension data from each of the five utilities and then studied that data. What we discovered was that while the utilities’ initial, simple story had a great deal of appeal, we could show that this docket was not a simple policy dispute. In fact, CUB argued that it required a historic review of decades of pension funding – since the prepaid pension asset has accumulated over the life of the pension plan. 

While the utilities claimed that the Pension Protection Act of 2006 (PPA) and the Great Recession were at the root of the need to change pension recovery, CUB was able to show that two of the utilities had greater pre-paid pension assets before the 2006 law was passed and the Commission cited this in its order:

We are not persuaded that the new federal funding requirements under the PPA, coupled with the 2008 economic recession, constitute sufficiently changed circumstances to warrant modifications to our FAS 87-based recovery. The evidence shows that these events did not disproportionally and systematically affect the utilities’ prepaid pension assets. In fact, two of the Joint Utilities’ prepaid pension asset balances peaked in 2005, before the PPA and 2008 financial crisis.

CUB argued that the utilities were simply being opportunistic. The PPA and the recession caused a need to make contributions to their pension plans and they were using this to try to increase their profit margin. The PUC also agreed with us on this one:

At the outset, the timing of the requested policy change appears opportunistic…Seeking to include the actuarial balances in rate base now while the Joint Utilities have prepaid pension assets is arbitrary and would produce an unbalanced result.

CUB demonstrated that much of the prepaid pension asset came, not from shareholder contributions, but from the pension funds themselves gaining returns in excess of the projected returns. Once again, the PUC agreed that:

…placing the current prepaid pension asset balances in rate base would allow them to earn a return on amounts that do not necessarily represent shareholder investments.

This is a huge victory and I would like to give a big shout out to the regulatory staff that joined me in working on this issue. Jaime McGovern, Senior Policy Analyst, Sommer Templet, Staff Attorney, and former Regulatory Director and General Counsel, Catriona McCracken all lent their time and expertise to this project. Additionally, I would like to acknowledge the CUB Board of Governors who supported our time-consuming work on a seemly obscure issue. And to all the staff, members, and supporters of CUB – thanks for helping us do our work, obscure or otherwise; it takes us all to save millions of dollars!

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