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It's time to retire utilities' 'bulletproof' pension system

There's nothing unusual about Southern California Edison's request for a 7.5% rate hike, partly to cover its pension fund losses. But at a time when few people have guaranteed retirement benefits, why can't utility workers share the pain?

January 18, 2011|David Lazarus

The reaction of Claremont resident Randy Scott was typical of the many e-mails I received last week after reporting that Southern California Edison wants to jack up people's electricity rates in part to cover its pension losses in the stock market.

"Unbelievable!" he said. "How can the PUC even approve this request?"

It turns out there's nothing unusual about a utility passing along its pension costs to ratepayers. What is unusual is that this means such pension funds face virtually no risk, even when financial markets take a bath.

Edison is seeking a 7.5% rate increase for 2012. In a recent notice to customers, the company cited the usual reasons for higher bills — improvements to the power grid, technical upgrades, things like that.

But it also said a rate hike is needed "to make a substantial contribution to the employee and retiree pension fund to address the losses in financial markets over the past few years."

As I wrote: Since when is it the responsibility of ratepayers to cover a utility's bad investments? Nobody's stepping in to bolster the 401(k) accounts of all those of us without the relative security of a pension plan.

Russ Worden, Edison's director of regulatory affairs, said the company's pension fund is part of its overall compensation program. "It's what we use to attract and retain employees," he said. For that reason, Worden said, Edison is justified in asking ratepayers to pay the tab for market setbacks.

So what does the California Public Utilities Commission say?

"It's typical for utilities to have customers pick up the cost of pensions," said Mark Pocta, a program manager at the Division of Ratepayer Advocates, the commission's watchdog arm. "That's traditionally how it's been done."

Indeed, a spokeswoman for Pacific Gas & Electric confirmed that the San Francisco utility also turns to ratepayers to fund its pension plan. She said the amount sought in any given year will typically depend on how the pension fund is faring in the market.

Be that as it may, this practice raises a number of questions, not least the propriety of sticking ratepayers with utility workers' pension costs at a time when the vast majority of U.S. workers have been switched to 401(k) retirement accounts.

One reason for that change is what critics say is the unsustainability of guaranteed pensions. Too often in the past, large employers like airlines and steelmakers have been unable to keep pensions fully funded and have turned to the federal Pension Benefit Guaranty Corp. for assistance.

Pensions are still relatively commonplace for public-sector workers like police officers, firefighters and teachers, although there's been talk in Sacramento about beginning a transition to 401(k)s. Pensions are now a rare commodity in the corporate world. Utilities are one of the few industries to still offer them.

Transferring workers to 401(k)s has given them more control over their retirement money. But it's also exposed people to greater risk. If the market tanks — as was the case in 2008, when the recession wiped out about a fifth of all assets in U.S. retirement plans — you're on your own.

Utility workers apparently face no such anxiety. In good years, the utility's pension fund reaps whatever gains it accrued in the market. In bad years, well, ratepayers will just pick up the slack.

The pensions are, in other words, bulletproof.

"That's generally the case," the PUC's Pocta acknowledged. But he said regulators still examine every requested rate hike carefully.

A utility that was found to have invested recklessly may not receive all the funds it desires, Pocta said. But as far as pension funds are concerned, that's seldom the case. Pocta said most utility pensions are invested in meat-and-potatoes holdings like stocks and bonds.

I suppose many workers (myself included) suffer from pension envy. My 401(k) took a pounding in the recession. With Social Security looking increasingly dodgy, I'd sleep a whole lot better at night if I knew my family could look forward to a guaranteed pension check each month.

So it's not that I begrudge utility workers their pensions. No doubt their unions fought long and hard for every scrap of compensation workers and retirees enjoy. But I wonder if perhaps they couldn't share the pain a bit.

In Edison's case, employees are fully vested for their pensions after just three years with the company. They also receive a 25% discount on their power bills.

Not to be mean, but perhaps Edison employees could forgo that discount after any year that their pension fund experienced a loss. Additional cash from workers paying their entire power bill (like the rest of us have to) would be applied to the pension.

For that matter, why are ratepayers still on the hook for these pension plans at all? There was a time, I suppose, when utilities depended on pensions to find and hang on to competent workers. With California's unemployment rate topping 12%, I'm thinking this isn't much of a problem nowadays.

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