Utilities have no incentive to scrap pension plans

Galen Dean of Yucaipa has worked on and off for Southern California Edison Co. for 29 years. As he puts it, he’s done “pretty much everything except climb poles.�

When he retires in four years he expects to get about $1,500 a month from his Edison pension plan. And he has no problem with the fact that ratepayers will foot the bill for at least a portion of those payments.

“It’s totally justified,� said Dean, 59. “Our salaries are lower than what private enterprises pay. The pension helps make up for that. It’s just a cost of doing business.�

Well, yes. And no.

Utility pensions have come under scrutiny since I reported this month that Edison was asking ratepayers “to make a substantial contribution to the employee and retiree pension fund to address the losses in financial markets over the past few years.�

Edison is seeking a 7.5% rate hike for next year. The utility says it needs about $75 million to fund its pension plan, which is now about 11% lower than before the financial crisis hit in 2008.

Pacific Gas & Electric Co. in San Francisco and San Diego Gas & Electric Co. also say they’ll be turning to ratepayers this year to cover losses in their respective pension plans.

This is accommodated by the state Public Utilities Commission, which allows utilities to recoup “business costs� from customers.

Jason Seligman, an economist at Ohio State University who specializes in pensions, said it’s reasonable for regulated utilities to seek help from ratepayers for pension losses.

“But a pension loss is finite,� he said. “Once you recover the amount lost, that’s it. A rate hike can be infinite.�

What troubles Seligman about Edison’s proposed rate increase is that there’s no indication this is just a temporary burden on ratepayers.

“What happens after they recover the pension losses?� he asked. “Does the higher rate continue in perpetuity?�

That’s an excellent question. Utility rates tend to move in only one direction: up. Also, utilities tend not to refund money to ratepayers when their pensions do well.

Gil Alexander, an Edison spokesman, said by e-mail that “any collection in rates above the plan’s standard funding policy … must be returned to SCE ratepayers the following year, with interest.�

He said this means any rate increase related to the pension fund would go down. “If costs drop, the savings is applied to the same aspect of rates the following year,� Alexander said.

Of course, ratepayers may not see much of a decline in their power bills if other aspects of rates, such as technical upgrades, go higher.

In any case, unfunded and underfunded pensions, especially in the public sector, have long been a concern among economists who say promises have been made to workers that can’t be met. Some conservatives are calling for legislation that would allow states to declare bankruptcy and possibly walk away from their pension woes.

Meanwhile, most public pension funds are seeking additional revenue to remain solvent. The $228.5-billion California Public Employees’ Retirement System said last week that even though its investments grew 12.5% in 2010, it will seek higher contributions from the state and local governments.

The smaller California State Teachers’ Retirement System also said it requires a boost in contributions. The two funds lost a combined $100 billion in the fiscal year that ended in June 2009.

Utilities such as Edison that are for-profit companies represent a unique hybrid. Because of their natural monopolies they can pass along pension costs to customers without fear of losing business (unless people want to go without power).

While most other private companies have accepted that pension plans are unsustainable and have switched workers to 401(k) accounts, utilities face no such reckoning. As long as they can offload all financial risk to ratepayers, they can continue providing workers with pensions.

The big question that regulators and ratepayers should be asking at this point is whether recent market setbacks experienced by utility pensions represent an extraordinary circumstance, or whether they’re a harbinger of financial squeezes to come.

If the answer is the latter, we should all be prepared for continuing rate hikes to allow utilities to keep their pension promises to workers.

“It would surprise me if these pensions were sustainable,� said Patricia Wollan, a professor of finance at Rochester Institute of Technology who focuses on both pensions and utilities. “They’re very expensive, and we keep living longer.�

Dean, the Edison employee, told me that when he left the utility for a few years to try his hand at a software company, his salary rose by 25%. This illustrates, he said, how relatively low utility salaries are and why pensions are an important part of the compensation package.

That’s undoubtedly true. But just because this is how utilities have operated in the past, is it how they should keep operating in the future?

Edison International, parent of Southern California Edison, reported net income of $510 million for its third quarter ended Sept. 30, a 27% jump over the year-earlier period. The company said its utility and its unregulated power-generation subsidiary “delivered solid earnings growth.�

In December, Edison said it would raise its annual dividend payout to shareholders to $1.28 a share. The company reports its fourth-quarter earnings Feb. 28.

Seems to me this is a business that can handle employee compensation without exposing ratepayers to pension risks. If Edison and other utilities want to maintain pension plans, fine. Let them do it on their dime.

Chances are, though, they’d follow the lead of other private companies and transition workers to retirement accounts — either all employees or just new ones.

Ratepayers would still be on the hook for the higher salaries that would likely result. But I suspect this would be cheaper over the long haul than having to meet ever-growing pension obligations.

So how do we make such a change?

“Utilities have no incentive to change,� Wollan said. “The only way there will be change is if ratepayers get angry.�

This week, Gov. Jerry Brown appointed two new faces to the state Public Utilities Commission, including a prominent consumer advocate. Let them and their regulatory colleagues know how you feel by e-mailing [email protected].

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to [email protected]