Analysis of Prepaid Pension Assets in Oregon Regulatory Settings
"The article delves into the complexities of Prepaid Pension Asset (PPA) inclusion in utility rates in Oregon. Issues such as incomplete records, inconsistent policies, and customer implications are discussed. The challenges faced by companies in shifting to accrual accounting and the varying treatment of PPA and Accrued Pension Liability (APL) add layers to the debate. The value fluctuations of PPA for utilities over time highlight the financial intricacies involved."
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Do Pensions need saving PREPAID PENSION ASSETS IN REGULATORY SETTINGS Jaime McGovern PhD Sr. Economist Oregon CUB
Oregons Pension docket One Oregon utilities applied to have the Prepaid Pension Asset (PPA) included in rates. Others followed suit. CUB argued to have this treated in a special investigation The PPA was ultimately litigated and NOT included in Oregon rates At the time, a first Jaime McGovern PhD Sr. Economist Oregon CUB
Complications and inherent assymmetries Companies requested 30 years ago to move from cash accounting to accrual (FAS87) accounting Records were incomplete Black box settlements made retrospective accounting impossible Jaime McGovern PhD Sr. Economist Oregon CUB
Factors in customers favor Not all utilities in Oregon were in a PPA position. Some were in a position of accrued pension liability (APL) Throughout the docket (2 years), the value of the PPA for each Utility moved significantly The Utilities had not had a consistent policy of treating under or over collection. The Utilities forecasted lower plan returns than customers would pay on the PPA. Jaime McGovern PhD Sr. Economist Oregon CUB
Pension Worksheet Status (cont.) Status Amount recovered (authorized) in rates (pre- tax) Amount recovered (authorized) in rates (post- tax) FAS 87 expense Actual interest rate A Pension Benefit Obligation K B Prepaid pension asset* L L1 M C Present value of plan assets in $** D Funding target in $ E Unfunded liability in $/funding shortfall N Actual return on plan assets F Target normal cost Assumptions O O1 O2 P Q R S T U V W G Minimum required contribution Assumed discount*** rate for Benefit obligation Benefit cost Expected return on plan assets Wage escalation assumed Years of amortization assumed Funding target percentage per year "at risk" under PPA (choose one Y/N) Tax benefit, in dollars of annual contribution Cash flow benefit of cash contribution Value of prepaid pension asset Accumulated Other Comprehensive Income/Expense H Credit balance I Annual contribution in $s I1 Contribution from shareholders in $s I2 Contribution from credit balance in $s I3 Capital cost of shareholder contribution I4 Debt financing cost of contribution J Funding status (choose one Y/N) J1 Underfunded J2 Overfunded J3 Fully funded J4 Funding target attainment percentage X
Prepaid pension asset accumulation Pension Plan Worksheet, in Millions of $s YEAR 2005 2006 2007 2008 2009 2010 2011 2012 $37 $29 $22 $18 $28 $27 $31 $35 Prepaid pension asset $31 $0 $0 $0 $25 $10 $20 $24 Shareholder Contribution $6 $6 $6 $6 $6 $6 $6 $6 Amount recovered in rates $7 $8 $7 $4 $15 $11 $16 $19 FAS 87 expense Jaime McGovern PhD Sr. Economist Oregon CUB
Long history Pension Plan Worksheet, in Millions of $s YEAR 1996 1997 1998 1999 2000 2001 Prepaid pension asset $2.5 $3.3 $6.0 $7.7 $13.2 $17.2 Contribution from shareholders $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Amount recovered in rates $0.0 $0.0 $0.0 -$0.3 -$0.5 -$0.5 FAS 87 expense -$0.8 -$0.8 -$2.6 -$1.8 -$5.4 -$4.1 Jaime McGovern PhD Sr. Economist Oregon CUB
$1.0 PPA $0.0 -$0.3 -$0.5 $0.0 $0.0 -$0.5 $0.0 -$1.0 -$0.8 -$0.8 -$2.0 -$1.8 FAS 87 expense Amount recovered in rates -$2.6 -$3.0 -$4.0 -$4.1 -$5.0 -$5.4 Jaime McGovern PhD Sr. Economist Oregon CUB -$6.0 1996 1997 1998 1999 2000 2001
In Summary, we found Putting the prepaid pension asset in ratebase would require ratepayers to finance expenses they already paid for The PPA is NOT an asset does not amortize down The Utilities can fund way beyond the minimum funding level The Companies did not have records to support the accumulation of the PPA Several of the Companies PPAs peaked before the Pension Protection Act or the Great Recession Several of the Companies PPAs dissipated greatly during the length of the docket The open-ness/closed-ness of the pension plan affected the likelihood to be in a PPA vs APL position Jaime McGovern PhD Sr. Economist Oregon CUB
Conclusion and recommendation in Oregon UM 1633 Inclusion of the PPA in rates is opportunistic and one sided Any transition into cash accounting or ratebased PPA would require a full retrospective of 30 years of pension funding and accounting, which is not possible http://edocs.puc.state.or.us/efdocs/HTB/um1633ht b161330.pdf jaime@oregoncub.org Jaime McGovern PhD Sr. Economist Oregon CUB
