The Association of U S West Retirees



Ariz. utilities under scrutiny
Firms face pension deficits
Ken Alltucker
The Arizona Republic
Friday, December 9, 2005 

At least three major Arizona utilities are facing a combined pension funding shortfall of more than a half-billion dollars, and state regulators want some answers.

Arizona Public Service Co.'s $472 million funding gap represents the biggest shortfall among the state's largest regulated utilities. The Phoenix-based utility wants to recover $218 million of that as part of a 20 percent rate hike request before state regulators.

Other utilities have big gaps, too. The parent company of Tucson Electric Power reported a shortfall of $37 million, and Southwest Gas' pension is underfunded by $76 million.

The utilities say that the gaps primarily are due to stock market fluctuations and that there's no danger that current or retired employees will be left without retirement checks or health benefits.

Still, state regulators are debating whether these shortfalls should trigger closer scrutiny of the pension policies of all of Arizona's largest utilities to ensure that companies have the proper safeguards to protect pensions, health care and other benefits."It's disturbing that some of the state's largest utilities have underfunded pensions," Arizona Corporation Commissioner Kris Mayes said. "It is a problem across the country and across corporate America, so it doesn't take a leap of imagination to believe it is a problem among the utilities."

Pension funding has been a hot topic nationwide with baby boomers nearing retirement, and President Bush is urging companies to fulfill their promises by setting aside enough money for retirement plans. The national debate has centered on the concern that some major corporations, particularly in the hard-hit airline and steel industries, may attempt to avert pension obligations through bankruptcy or other legal moves.

There are concerns

Nobody says that Arizona's utilities are in danger of stiffing their workers. But there are concerns that more ratepayers will be asked to shoulder the burden of pension shortfalls by paying higher rates for electricity, natural gas or water.

Last month, APS sought a 20 percent increase in electricity rates to pay for everything from new power plants and lines to pension costs. About 2 percent of that would be funneled into the company's pension fund, which covers nearly 12,000 current and retired workers.

The Corporation Commission has started the exhaustive process of deciding how much money APS is entitled to recover from its customers. Commissioners say the Phoenix-based utility's pension costs merit close examination.

"There is a question as to whether they're entitled to a dime," Commissioner Marc Spitzer said.

APS said its pension gap mirrors many large companies that have seen their funds suffer in recent years due to fluctuations in the stock market. The funds have been hit particularly hard because of lower interest rates.

Pension obligations are measured as a snapshot of the amount of money needed to pay future pensions with interest rates used as a divisor. So, the lower the interest rate, the larger the future obligation.

"We can't control the stock market, and that puts a dent in our (fund)," said Don Brandt, APS' chief financial officer.

Arizona's utilities are by no means unique in their pension woes.

Study finds shortfalls

A study by Standard & Poor's 500 index released in 2004 found that the vast majority of companies that offer a defined-benefit pension plan faced a shortfall. Of 339 big companies counted in the S&P 500 survey, almost 86 percent were underfunded.

Only three Arizona companies were included: Allied Waste Industries, Phelps Dodge Corp. and APS. Of those three, APS had the most significant shortfall.

Brandt said APS has sought to narrow the gap by stepping up its payments. The company paid $120 million more than its minimum requirement under federal law from 2000 to 2005, he said, adding that the APS pension fund boasted higher investment returns than the S&P 500 index over that time period.

But the utility's request to raise rates will be a critical way to "lessen the deficit," Brandt said.

Southwest Gas and Tucson Electric parent company UniSource also have swelling pension deficits.

Southwest Gas ponied up $17 million to its pension fund this year, far more than the $5 million to $10 million annual payment the Las Vegas-based natural-gas company typically contributes. The company's plan covers 2,500 active employees and 700 retirees.

"You're dealing with the ebbs and flows of the stock market," said Roy Centrella, Southwest's chief accounting officer. "We see this as a normal cycle."

UniSource's board of directors recently approved a measure to pay another $5 million this year toward its pension deficit. That payment and the fund's performance will help the Tucson-based utility narrow its $37 million deficit to less than $30 million, according to Vice President Steven Lynn.

Policy scrutiny urged

Since learning that the pension plans of at least three utilities are short hundreds of millions of dollars, Mayes has urged her fellow commissioners to scrutinize the pension policies of Arizona's 58 largest regulated utilities.

"We need to ask who pays for this," Mayes said. "I would tend to believe the shareholders need to cover this expense."

Whether Mayes can muster enough political support from other commissioners remains unclear.

Commissioner Bill Mundell favors a broader look at all utilities, but he said the commission first must concentrate on APS because of the amount of its deficit.

Corporation Commission Chairman Jeff Hatch-Miller and Spitzer say it's the federal government's job to oversee pension funding. They don't want the commission to dabble in pension oversight.

"We don't have a heck of a lot we can say about it," Hatch-Miller said.

Yet all commissioners agree that any utility that seeks to bail out its pension deficit by charging customers higher rates will get a tough look.

In the APS case, commissioners plan to examine whether the utility returned too much to shareholders in the form of stock dividends.

Also, Mayes wants to know if APS set aside a "rainy day" fund when the stock market surged and interest rates were higher in the late 1990s.

"I'm particularly concerned about the underfunding at APS in light of the fact that they've asked for a 20 percent increase in rates and have been issuing dividends on a regular basis," Mundell said.