utilities under scrutiny
Firms face pension deficits
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
There are concerns
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
"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
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
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
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
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
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
"We don't have a heck of a lot we can say about it,"
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
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.