Julia E. Sullivan is a partner in the Washington, DC, office of Akin Gump Strauss Hauer & Feld LP. She represents gas and electric utilities in regulatory proceedings. She received her law degree from American University’s Washington College of Law in 1988. Jennifer Good is a human resources consultant in Annapolis, Maryland. She received her Master’s Degree in Public Administration from Texas A&M University in 1985. She is an active member of the Society for Human Resources Managers, American Society for Training and Development, and International Society for Performance Improvement. Recovery of Executive Compensation Expenses in Utility Rate Cases The recent economic downturn has brought greater scrutiny to executive pay across the country, including within the utility sector. For this reason, it is more important than ever to have a fair and prudent compensation system in place and to carefully monitor pay practices, ensuring that executive pay remains competitive yet reasonable given current economic conditions. Julia E. Sullivan and Jennifer Good I. Introduction The recent economic downturn has brought greater scrutiny to executive pay across the country, including within the utility sector. For this reason, it is more important than ever to have a fair and prudent compensation system in place and to carefully monitor pay practices, ensuring that executive pay remains competitive yet reasonable given current economic conditions. Perceptions that executives may be over-compensated can undermine confidence in the utility’s public service ethic, driving negative outcomes in utility rate cases and lowering customer satisfaction. Such perceptions also can cause resentment among employees who may be facing pay freezes, benefit reductions, and even severances as load growth in many jurisdictions remains anemic. T his article offers practical advice to help utilities structure and present their executive compensation programs in a manner that will April 2011, Vol. 24, Issue 3 1040-6190/$–see front matter # 2011 Elsevier Inc. All rights reserved., doi:/10.1016/j.tej.2011.03.004 59
13
Embed
Recovery of Executive Compensation Expenses in Utility ... · typical utility employee, variable pay is generally 0 percent to 10 percent of total cash compensation. For utility executives,
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
A
Julia E. Sullivan is a partner in theWashington, DC, office of Akin
Gump Strauss Hauer & Feld LP. Sherepresents gas and electric utilities inregulatory proceedings. She received
Recovery of ExecutiveCompensation Expenses inUtility Rate Cases
The recent economic downturn has brought greaterscrutiny to executive pay across the country, includingwithin the utility sector. For this reason, it is moreimportant than ever to have a fair and prudentcompensation system in place and to carefully monitor paypractices, ensuring that executive pay remains competitiveyet reasonable given current economic conditions.
Julia E. Sullivan and Jennifer Good
her law degree from AmericanUniversity’s Washington College of
Law in 1988.
Jennifer Good is a human resourcesconsultant in Annapolis, Maryland.She received her Master’s Degree in
Public Administration from TexasA&M University in 1985. She is an
active member of the Society forHuman Resources Managers,
American Society for Training andDevelopment, and International
2. Atmos Energy, 2010 WL 3200341 at�91 (Ks. S.C.C. July 30, 2010). See also,e.g., Golden State Water Co., 2010 WL4912438 (Cal. PUC Nov. 19, 2010)(‘‘The level of rate increases soughtand executive compensation wereparticularly troublesome to thespeakers given the current economiccrisis and its personal impact onmany of Golden State’s customers.One sentiment expressed over andover again was that citizens of thestate and nation are being forced totighten their belts and Golden Stateshould do so as well. TheCommission is mindful ofratepayers’ concerns voiced at thepublic participation hearings and ourreview of Golden State’s applicationsis undertaken within the broadercontext of the current economicsituation.’’); Gas, Inc., 280 PUR4th 505(Az. Corp. Comm’n. 2010) (‘‘currenteconomic conditions should causeutility companies to reconsiderwhether it is appropriate to seekrecovery from captive ratepayers ofincentive programs, such asproviding stock options tomanagement and employees.’’).
3. Progress Energy Florida, 2010 WL867088 (Fl. PSC Mar. 5, 2010)(‘‘Especially in light of today’seconomic climate, we believe thatPEF should pay the entire cost ofincentive compensation, as itscustomers do not receive a significantbenefit from it.’’).
4. Baltimore Gas & Electric, 277 PUR4th365 (Md. PSC 2009).
6. Southern California Edison Co., 2009WL 801553 (Ca. PUC Mar. 12, 2009) (‘‘inlight of the current economic situationand the dire financial circumstancesmany Californians find themselves in,it is reasonable to limit the level ofexecutive compensation ratepayers areresponsible for provided suchreductions do not result in totalcompensation levels falling below theamount required for Edison to attractand retain employee’’).
7. United Illuminating Co., 2009 WL1640725 (Ct. DPUC June 3, 2009).
8. Pacific Gas & Elec. Co., 2004 WL1376593 (Ca. PUC May 27, 2004).
9. Id.
10. U.S. House of RepresentativesCommittee on Oversight andGovernment Reform, Majority Staff,Executive Pay: Conflicts of InterestAmong Compensation Consultants(Dec. 2007) (prepared for ChairmanHenry A. Waxman).
12. Northern States Power, 146PUR4th 1 (Mn. PUC 1993). But seeISO New England, 127 FERC � 61,254at 22 (2009) (‘‘We also find thatJoint Advocates have not supportedtheir claim that Mercer Consultinggave a biased report to ensurebeing re-hired. Mercer Consulting’smotivations are no different fromany other independent paidconsultant’s, including any that the
ront matter # 2011 Elsevier Inc. All rights r
Joint Advocates themselves wouldhire’’).
13. Nevada Power Co., 2009 WL1893687 (Nv. PUC June 24, 2009).
14. Dow Scott, INCENTIVE PAY: CREATING
A COMPETITIVE ADVANTAGE (World-at-Work Press, 2007).
15. International Society ofPerformance Improvement, Incentives,Motivation and Workplace Performance:Research and Best Practices (Spring2002).
16. Id.
17. Robert Greene, Variable Pay: Howto Manage it Effectively, at 4 (Society ofHuman Resource Management, April2003).
19. Hewitt Associates, U.S. WorkersCan Expect to See Slight Recovery inSalary Increases for 2010; Variable PayRemains Stable (August 11, 2009)(http://www.hewittassociates.com/intl/na/en-us/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=7126).
20. Id.
21. Id.
22. Id.
23. Northern States Power, 146 PUR4th1 (Mn. PUC 1993). But see WilliamsNatural Gas Co., 80 FERC � 61,158(1997) (‘‘the objections to including theaccrued cash awards are meritlessbecause the accrued cash awards arein fact known and measurable and notspeculative’’); West Virginia AmericanWater Co., 231 PUR4th 423 (W.V. PSC2004) (‘‘Indeed, incentivecompensation is a known andmeasurable expense in this case. It wascontained in the test year and shall beallowed for ratemaking purposes.’’).
24. Richard Blumenthal, 2008 WL5159064 (Ct. DPUC Dec. 3, 2008).
25. E.g., Potomac Electric Power Co., 263PUR4th 1 (D.C. P.S.C. 2008) (‘‘TheCommission rejects the Company’sproposal to average these costs overthree years. The Company has failed
to demonstrate the variabilityassociated with these costs andexplain why they should be averagedinstead of adjusted out of theCompany’s proposed test-yearexpenses.’’).
26. Florida Power & Light, 2010 WL1005321 (Fla. PSC Mar. 17, 2010).
27. Consumers Energy Co., 246 PUR4th177, 199-200 (Mich. PSC 2005).
28. See also, e.g., Michigan Cons. GasCo., 282 PUR4th 1 (Mi. PSC 2010) (‘‘theCommission observes that Mich Con’sproposed EICP remains 50% focusedon cash flow and shareholder valueand that many of Mich Con’s EICPgoals that benefit ratepayers arealready requirements imposed by theCommission’s Service Quality andReliability Standards. Thus, MichCon’s incentive compensation plandoes not provide additional benefits toratepayers commensurate with thecosts of the program.’’); NarragansettElec. Co., 281 PUR4th 161 (RIFSB 2010)(‘‘In this case, the Commission is notpersuaded that the $2.4 million costassociated with incentivecompensation is wholly for the benefitof ratepayers. The Commissionbelieves Mr. Effron’s testimony thatbenefits tied directly to the Company’sfinancial performance are not benefitsdirectly benefiting ratepayers andfinds the Division’s position to bemeritorious. Additionally, theCommission cannot justify increasingrates in order that NGrid attain higherprofits and higher stock prices orshareholder value. The Commissionfinds Mr. Dowd’s testimonyunpersuasive in establishing any linkbetween the Company’s attainment offinancial goals and ratepayerbenefits.’’); Progress Energy Florida,2010 WL 867088 (Fl. PSC Mar. 5, 2010)(‘‘incentive compensation tied to[earnings per share] should not bepassed on to ratepayers’’); EmpireDistrict Elec. Co., 2008 WL 1795006(Mo. PSC Mar. 26, 2008) (‘‘Weconclude that incentive compensationfor meeting earnings goals, charitableactivities, activities unrelated to theprovision of retail electric service,discretionary awards, and stockoptions should not be recoverable inrates.’’). In jurisdictions with
1040-6190/$–see front matter # 2011 Els
performance based rates, wherecustomers may benefit from ‘‘over-earnings,’’ regulators have shownmore flexibility regarding incentivepay. E.g., New England Gas Co., 2004WL 22677185 (RI PUC Aug. 23, 2004)(‘‘Because under the ESM ratepayersreceive 50 percent to 75 percent of overearnings, and 50 percent of mergersavings are shared with ratepayers, itappears fair and reasonable for 50percent of the incentive compensationrelated to achieving earnings, or$173,500 to be included in the ESM
calculation. However, in the future,the Commission will remain vigilantto insure that an incentive does notbecome too large, too easy to achieve,or become based on factors that are adetriment to ratepayers.’’).
29. Northern States Power, 146 PUR4th1 (Mn. PUC 1993). Similarly, inMinnegasco, 170 PUR4th 193 (Mn. PUC1996), the Commission stated:
The level and structure ofthese particular plans are likely tolead officers to focus their energyon corporate balance sheetsrather than the judgments anddecisions which can directlyaffect ratepayer service andsatisfaction. In situations inwhich short-term financial goalsmay conflict with the long-termpolicies necessary to achieve safe,reliable, and reasonable service,officers will be financiallyrewarded by seeking theshort-term financial goal.
evier Inc. All rights reserved., doi:/10.1016/j.
The Commission’s disallowance ofthe costs of these programs is notmeant to discourage incentivecompensation plans that areappropriately designed to stimu-late employee creativity, produc-tivity, and loyalty. Disapproval ofthe particular structure and termsof these plans does not mean thatthe Commission should, or wishesto, design utility compensationprograms in the future. This dis-allowance simply means that inthis particular case, where the planforms a very high percentage oftotal compensation, and the pro-gram incentives are questionable,the Commission will disallow allcosts except the small percent tiedto direct ratepayer benefit.
See also, e.g., Central Illinois Public ServiceCo., 2003 WL 23473070 (Ill. Comm.Comm’n. Oct. 22, 2003) (‘‘While therealso may be cases in which the Com-mission permitted a utility to recoverincentive compensation costs for aprogram that primarily conferred aclear benefit on the ratepayers, theCommission finds that the instant pro-ceeding is not such a case’’); New Eng-land Gas Co., 271 PUR4th 1 (Ma. DPU2009) (‘‘the Department finds that theCompany has failed to demonstratethat the Annual Incentive Plan forSUG’s corporate employees and theAmended Bonus Plan for SUG’s pre-sident and senior executive vice presi-dent are reasonably designed toencourage good employee performanceand will result in benefits to NEGC’sratepayers’’).
30. Boston Gas Co., 2010 WL 4391332(Mass. D.P.U. Nov. 2, 2010).
31. Detroit Edison Co., 270 PUR4th 134(Mi. PSC Dec. 23, 2008); New YorkState Elec & Gas Corp., 252 PUR4th165 (NY DPS 2006).
32. Empire District Elec. Co., 2008 WL1795006 (Mo. PSC Mar. 26, 2008).
33. Kansas City Power & Light, 2007 WL4302461 (Mo. PSC Dec. 6, 2007).
34. E.g., Gas, Inc., 280 PUR4th 505(Az. Corp. Comm’n. 2010) (‘‘a 50/50sharing of incentive compensationcosts provides a reasonable balancingof the interests between ratepayers
and shareholders. The equal sharingof such costs recognizes that theprogram is comprised of elementsthat relate to the parent company’sfinancial performance and costcontainment goals, matters thatprimarily benefit shareholders, whileat the same time recognizing thatapproximately 40 percent of theprogram’s incentive compensation isbased on meeting customer servicegoals. This offers the opportunity forthe Company’s customers to benefitfrom improved performance in thatarea.’’); Southwest Gas Corp., 270PUR4th 465 (Az. Corp. Comm’n. Dec.24, 2008) (same); Washington Gas Light,98 Md. PSC 508 (Md. PSC 2007)(allowing recovery of 50% of incentivecompensation’’).
35. Southern California Edison Co., 2009WL 801553 (Ca. PUC Mar. 12, 2009).
36. Richard Blumenthal, 2008 WL5159064 (Ct. DPUC Dec. 3, 2008).
37. Minnegasco, 170 PUR4th 193 (Mn.PUC 1996). Compare Southern CaliforniaEdison Co., 235 PUR4th 1 (Ca. PUC2004) (‘‘If SCE had decided that thetotal cash compensation received byexecutives should be in the form ofbase salary without any incentiveplan, there presumably would be noissue of ratepayer cost responsibilityas long as total compensation forexecutives is at market levels. In theabsence of any evidence that theexecutive incentive program itselfproduces outcomes that are contraryto ratepayer interests, we will notinterfere with the utility’s discretion toadjust the appropriate mix of basesalary and incentives.’’).
38. Order No. 719, FERC Stats. &Regs. �31,281 at �561; see also WholesaleCompetition in Regions with OrganizedElectric Markets, 128 FERC � 61,059 at�182 (2009).
39. Monongahela Power Co., 257PUR4th 186 (WV PSC 2007).
40. Minnegasco, 170 PUR4th 193 (Mn.PUC 1996).
41. Central Illinois Light Co., 2010 WL1868345 (Ill. Comm. Comm’n. Apr. 29,2010). See also, e.g., Investigation IntoAny And All Matters Related ToCommission Approval Of Participation
pril 2011, Vol. 24, Issue 3 1040-6190/$–see f
By Indiana End Use Customers InDemand Response Programs Offered ByThe Midwest ISO And PJMInterconnection, 2009 WL 605637 (Ind.URC Feb 25, 2009) (‘‘The Commissioncontinues to encourage, but notrequire, each RTO and ISO to ensurethat its management programs,including executive compensation,give appropriate weight toresponsiveness to customers andother stakeholders. If the RTO or ISOboard is well-informed about theneeds of customers and various
stakeholders, it will set criteria forperformance, appropriate goals andtargets for the organization and itsmanagement and institute measuresfor achieving those targets. Byfocusing our requirements on having awell-informed board, we decline tointrude further into boardprerogatives regarding managementcompensation.’’).
42. Williams Natural Gas Co., 77FERC � 61,277 (1996) (footnotesomitted).
43. Black Hills Power & Light Co., 55PUR3rd 65 (1964).
44. See, e.g., Entergy Arkansas, Inc., 258PUR4th 1 (Ark. PUC 2007) (‘‘EAIoffers no substantial evidence ofratepayer benefit which would justifyincluding these stock-drivenincentives in rates’’). See also, e.g.,Order at 134–35, Southern CaliforniaEdison, 2009 WL 801553 (Cal. PUCMar. 12, 2009) (‘‘We reject SCE’srequest to include $23.304 million in
ront matter # 2011 Elsevier Inc. All rights r
long-term incentives in its TYforecast. As DRA and TURN note,these incentives have not beenincluded in rates in the past and areclosely tied to stock performance ofthe parent company, EdisonInternational and, therefore, to non-utility activities’’).
45. Black Hills Power & Light Co., 31FPC 1605 (1964).
48. Connecticut Water Co., 2009 WL246929 (Ct CPUC Jan. 28, 2009); seealso, e.g., Southwest Gas Co., 270 PUR4th468 (Az. Corp. Comm’n 2008)(‘‘Without the SERP, the Company’sofficers still enjoy the same retirementbenefits available to any otherSouthwest Gas employee and theattempt to make these executives‘whole’ in the sense of allowing agreater percentage of retirementbenefits does not meet the test ofreasonableness. If the Companywishes to provide additionalretirement benefits above the levelpermitted by IRS regulationsapplicable to all other employees itmay do so at the expense of itsshareholders. However, it is notreasonable to place this additionalburden on ratepayers.’’).
49. Gas, Inc., 280 PUR4th 505 (Az.Corp. Comm’n. 2010). See also, e.g.,Providence Gas v. Malachowski, 656 A.2d949, 952 (R.I. 1995) (upholding PUCdecision finding SERP expenseexcessive and unnecessary). But see,e.g., Washington Utilities & Transp.Comm’n., 281 PUR4th 329 (Wash.UTC 2010) (‘‘The ultimate issue iswhether total compensation isreasonable and provides benefits toratepayers, not whether incentivecompensation is pay in stock orwhether compensation, particularlyfor executives, is similar to that ofother comparable companies. TheCompany’s SERP meets this test.Taken as part of the overallcompensation package, it is reasonableas a common feature of a marketcompetitive pay program in the utilityindustry.’’).