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DEAR Detroit Edison and MichCon retirees working to presenre our hard earned benefits
An Alliance of DTE Energy Retirees 2 t.1 ZOOb
Commissioner J. Peter Lark Commissioner Laura Chappelle Commissioner Monica Martinez Michigan Public Service Commission 6545 Mercantile Way Lansing, Michigan 48909
Re: Letter and Comments regarding Detroit Edison's Report in Response to the Commission's Investigation of A&G Expenditures, Case No. U-14666.
Dear Commissioners:
DEAR DEAR (Detroit Edison Alliance of Retirees) consists of retirees of both Detroit Edison and MichCon. DEAR was formed in 2000 with the objective of assuring that retirement benefits earned by the employees of DTE, primarily pension and health care benefits, are properly funded, maintained, and paid by DTE.
DEAR is also a member of the National Retiree Legislative Network ("NRLN), a non-partisan coalition of retiree associations devoted to protecting pension plans and retirement health care benefits. The president of DEAR, Robert Foresta, is on the board of the NRLN, which has two million members nation wide and a staff that is based in Washington, D.C.
Reasons DEAR is Providing Comments On February 1,2006, Detroit Edison filed a report with the Commission in response to the Commission's investigation of A&G expenditures, entitled "The Detroit Edison Company's Administrative and General Expense Analysis" ("DE's Analysis").
Members of DEAR have experience in many of the issues that underlie A&G expenditures. It is DEAR'S considered concern that while Detroit Edison has explained away much of the difference in A&G expenses between it and Consumers Energy, Detroit Edison leaves the analysis short by suggesting that the bulk of the remaining difference is caused by high retirement benefits cost.
As this Commission knows, for many years retirement health care has been externally funded under the Commission's authority by monies collected from ratepayers, and monies so collected are intended to fund the benefits that retirees have earned from long service with Detroit Edison.
DEAR Board of Directors Bob Cabble + Bob Foresta + Mike Gavin + Charlotte "Charlie" Mahoney + J i Piana + Bob Pierce John Sangregorio + Kathy Sulliian + Bob Tompkins + Frank Torre + Cheryl VanWit + Alex Zakem
"By Retirees for Retirees"
DEAR is offering the Commission comments on DE's Analysis for the following reasons:
(I) To provide an accurate assessment and comparison of the retirement health care situation,
(2) To provide a more complete perspective from which to assess potential future actions by Detroit Edison regarding changes to or reductions of retirement benefits, and
(3) To prevent the "raiding" of the retirement health care fund by Detroit Edison in an attempt to convert funding requirements into additional profits.
DEAR's Perspective Historically, benefits to utility employees have been weighted lighter on the front end and heavier on the back end, to achieve the purpose of retaining specialized expertise over the long term. The Commission, in its wisdom, directed that such back-end benefits - particularly retirement health care - be externally funded rather than paid out of current cash, because internal funding would create "too great a temptation for utility management, a corporate raider, or aparent corporation to avail itselfof abundant cash." [Order in Case No. U-10040, December 8, 1992, page 17, emphasis added]
External funding, contributions to funds in anticipation of expenditures, and back-end loading of benefits make Detroit Edison's situation quite unlike that of auto manufacturers and other corporations recently in the news. However, in its DE Analysis Detroit Edison appears to be leaping on the bandwagon of public sentiment regarding high retirement health care costs.
DEAR's purpose is not to seek "more" for retirees, but rather to maintain the level of benefits earned by retirees. DEAR believes that these benefits are in fact deferred compensation, compensation already paid for by ratepayers.
DEAR hopes that the Commission will take the attached comments in the spirit in which they are offered - a good faith attempt to set the record straight and to assist the Commission and its Staff in the A&G investigation.
Attachment
cc: Michael E. Champley, Detroit Edison Thomas A. Hughes, Detroit Edison
Contact: Robert Foresta 13 120 Orange St. Southgate, MI 48 195-1 61 6 734-285-1242 dearalliance@,comcast.net
~ o b & Foresta President
DEAR'S Comments on DE's Analysis of A&G Expenditures
(Page numbers refer to DE's Analysis unless otherwise noted)
I. DE's Analysis Failed to Make an Obvious Adjustment That Accounts for Much of the Difference in Pension and OPEB Expenses: Adjusting for the Difference in Number of Employees
DE's Claims
In DE's Analysis [page 31, Detroit Edison identifies three factors that should be considered in a
proper side-by-side comparison of Detroit Edison to Consumers Energy:
1. Accounting differences 2. Differences in scale
a. Size of customer base b. Generation mix
3. Geographic based cost differences.
These factors are certainly valid. For "differences in scale," Detroit Edison considers only
number of customers and generation mix - not number of employees or number of retirees (a
point which will be addressed later in these comments). After adjusting for the three factors,
Detroit Edison concludes [page 41:
On this basis of comparison, it is apparent that the single largest differentiator in A&G expense between Edison and Consumers large enough to warrant detailed analysis is Employee Pensions and Benefits expense. Indeed, a deeper analysis highlights that the vast majority of this difference can be traced to pension and other post employment benefit (OPEB) expense . . . .
The sources of the differences in the level of pension and OPEB expense are varied and dependent on the underlying specific accounting and actuarial practices. The underlying benefit plan design, employee demographics, actuarial assumptions, funding and investment returns on assets heavily influence both of these expenses.
Detroit Edison goes on to identifl four "primary drivers" of differences in OPEB expenses
between Detroit Edison and Consumers Energy (page 4): interest cost, loss recognition, plan
design, and transition obligation. Later in DE's Analysis, Detroit Edison purports to examine
differences in OPEB expenses "in detail" [pages 20-291.
DEARys Review
So, what is wrong with how Detroit Edison sets up the examination of pension and OPEB
expenses? Two errors: (1) Detroit Edison's definition of "differences in scale" does not include
the one main factor that must be considered in comparison of absolute benefit dollars - namely,
number of people receiving such benefits; and (2), although DE's Analysis shows the difference
between Detroit Edison and Consumers Energy in number of employees [table on page 101, it
fails to use such an obvious normalizing factor to adjust for differences in a meaningful way.
Detroit Edison defines OPEB expenses as relating to "medical, prescription drug and life
insurance benefits for qualified retired employees," meaning "providing current active employees
with benefit programs used after their retirementy' [page 201. How many employees? The answer
is in the table in DE's Analysis on page 10. Therefore, the meaningful way to compare the
pension and OPEB expenses of Detroit Edison to Consumers Energy is to compare on a per
person basis. The following table shows the comparison that Detroit Edison could have and
should have made, but did not. Adjusted Employee Benefits and Pensions of $l38M equals
$2 12M times the ratio of employees (5 1 39 / 790 1).
Edison Detroit Consum After Adj Edison E n e m mff Empl Adi Lff
Employee Benefits and Pensions ($M) $212 $58 $154 $138 $80
Average Number of Employees 7,901 5,139
Thus, the purported difference between Detroit Edison and Consumers Energy of $1 54M shrinks
to $80M after correctly accounting for the difference in number of employees. This remaining
2
$80M difference would be further subject to Detroit Edison's application of distinguishing factor
#3 - geographical based cost differences - and other differentiating factors.
Taking the $80M difference unexplained by the simple adjustment for number of employees as a
starting point, one can apply reasonably some of the additional adjustments explained in DE's
Analysis:
Adiustment Factor $M
Starting difference $80
Geographical based costs - 10 Net financing of pension - 30 Net financing of OPEB - 6 Transition obligation + 10 Savings plan - - 13
Net Difference $3 1
Diff in Employee Pensions and Benefits after adjusting for number of employees
7% of $138M, derived from p. 18 due to DE larger population of retirees, p.22 2nd table on p. 26 2"d table on p.26 CE suspends savings plan, table p. 28
Remaining unexplained difference
In the table on page 3 of DE's Analysis, Detroit Edison summarizes the difference between it and /
Consumers Energy after making normalizing adjustments to A&G expenses. It concludes that
total A&G expense difference (after normalization) is $1 17M, of which $75M is due to Employee
Benefits and Pensions: "Almost 213 of the difference in A&G expense is attributed to Employee
Pensions and Benefits representing $75 million of the total difference" [page 191. However, by
including a simple adjustment to normalize for number of employees, DEAR'S review as
explained above has shown that only $.?IM of the difference between Detroit Edison and
Consumers Energy is due to unexplained differences in Employee Benefits and Pensions.
Further, to the extent that the OPEB fund is currently under-funded by Detroit Edison, the amount
offsetting costs due to "expected return on assets" [see pages 25 and 261 is less than it would be
otherwise. Therefore a fully funded OPEB fund would reduce the difference to much less than
$3 1M.
Conclusion
While $3 1M is no small sum, it does not support Detroit Edison's conclusion that "the bulk of the
unadiusted difference f$117M1 is due to pension and OPEB expense." Therefore, if Detroit
Edison has concluded that its Employee Benefits and Pensions are extraordinarily high, compared
to other companies, and if such a conclusion is not accurate, then any actions Detroit Edison takes
to reduce pension and retirement health care benefits will not be fact based and may well be bad
decisions - (a) bad for retirees in that their earned benefits would be lost and (b) bad for Detroit
Edison in that it would not realize the anticipated expense reductions from such cuts.
The Rhetoric in DE's Analysis of High Retirement Health Care Costs is Contradicted by Evidence Submitted by DE in Case No. U-14428 (post employment benefits equalization)
DE's Analysis
In the DE analysis, Detroit Edison puts much emphasis on what it has determined to be the high
cost of pensions and OPEB, compared to Consumers, calling these two areas "the single largest
differentiator in A&G expense between Edison and Consumers" [page 41 and stating that "the
bulk of the unadjusted difference [in A&G] is due to pension and OPEB expense" [page 51. The
DE analysis also speaks to the level of heqlth care expenses, specifically "recent health care cost
experience much higher than assumed in prior periods" [page 271, stating "Edison's higher health
care cost experience has resulted in its actuarial losses being larger than Consumers' " [page 271.
DEAR'S Review
In Case No. U-14428, in Exhibit AG-1, Detroit Edison was asked, "Please identify the annual
OPEB expenses recorded on DECo's books each year for the last ten years." Detroit Edison
responded with the following information shown in columns (a) and (b) of the following table:
1995 1996 1997 1998 1999 2000
MCN Merger 200 1 2002 2003 2004
(b) Net
Postretirement Cost
$ million No. of Yo
Change
DEAR has added columns (c) through (e) to show what the costs have been per employee. The
trend of these costs shows a significant decline fiom 1995 to 2000. Clearly these data, whether
viewed on an absolute or a cost-per-employee basis, cannot support Detroit Edison's claims
regarding health care cost escalation. Obviously, there are other factors affecting the level of
OPEB expenses that are more significant than only the claimed escalation in health care costs.
So, the open question is: Is Detroit Edison's attribution of differences in OPEB expenses to
escalation in "recent health care cost" a valid attribution, or is there another reason for such
differences?
In the same Exhibit AG-1, Detroit Edison provided its assumption on the rate of escalation of
health care costs that it uses in projecting OPEB expenses. There are separate rates for recipients
age 65 and below and those over age 65. Detroit Edison states that its assumed health care trend
is as follows:
Year - 2005 2006 2007 2008 2009 20 10 & later
Health Care Trend Rate Pre-66 Post-65
Conclusion
These escalation rates are quite modest, and do not appear to be excessive or alarming. They
certainly do not give reason for Detroit Edison to claim publicly that escalation in health care
costs are or will be any part of its financial or competitive problems.
Further, Exhibit AG-1 shows that during the 2005 to 2010 and later time frame, Detroit Edison
expects the return on its OPEB fund to be 9.00%. With 9% assumed growth of fund and less than
9% assumed health care trend rate, Detroit Edison's continued rhetoric of impending doom
regarding retirement health care is a mystery to DEAR. To the contrary, with such a robust
growth prediction of 9% and less than 9% escalation in health care costs, would it not be
beneficial to Detroit Edison to more fully fund the health care fund?
HI. Continuing Cuts in Health Care Benefits Results in Figuratively "Raiding" the Retirement Health Care Fund for Corporate Profits
Dangers of Internal Funding
Many years ago, the Commission had the foresight to require external funding for retirement
health care. In its order on December 8, 1992, in Case No. U-10040 the Commission stated:
"In the Commission's view, to charge ratepayers for SFAS 106 [retirement health care] costs without the utility's commitment to externally fund those costs would not be just or reasonable." [December 8, 1992, Order, page 1 71
The Commission warned that internal funding -mere accumulation of cash without a
requirement to externally fund the costs of retirement health care - would create "too great a
temptation for utility management, a corporate raider, or a parent corporation to avail itseIfof
abundant cash." [December 8,1992, Order, page 17, emphasis added]
Certainly, any reader of the Wall Street Journal has seen many reports during recent years
concerning how corporations are attempting to, and succeeding at, converting money intended to
cover future pensions and health care into current income.
The Commission's order in 1992, its continued oversight, and its findings in Detroit Edison's
recent rate case U-13808 have gone a long way in protecting the money in the pension and health
care funds that is intended to pay for benefits for retirees. There are still, however, ways that
Detroit Edison can convert pension and health care funds into short-term profits.
Loopholes
The first method of dipping into the cookie jar of external funds, which has been used by Detroit
Edison and which the Commission caught and addressed in its interim order on February 20,
2004, in Case No. U-13808, is the simple failure to contribute to the funds. Noting that Detroit
Edison made no contributions to the pension fund in 1998, 1999, and 2000 because the plan was
fully funded, the Commission required that it would authorize the collection of pension expenses
in rates, "but only on the condition that Detroit Edison agrees that it will make minimum annual
prorated contributions equal to that amount during the period these rates are in effect" [February
20,2004, Order, page SO].
Obviously, if Detroit Edison is collecting money from customers to cover pension expenses, but
not contributing the money to the pension fund, then that money is serving to increase Detroit
Edison's profits.
A similar occurrence of zero contribution to the OPEB trust fund, not yet addressed by the
Commission, is evidenced in the record in Case No. U-14428. Data provided by Detroit Edison
in Exhibit AG-1 shows the following:
Year - 1995 1996 1997 1998 1999 2000 200 1 2002 2003 2004
Contribution to OPEB Trust
$ million
If Detroit Edison is concerned about its ability to cover retirement health care costs, why did it
not contribute to the fund in 2003? Was Detroit Edison's decision to not contribute related to
considerations of meeting earnings targets?
The second method of converting external funds into short-term profits is to reduce health care
benefits to retirees and increase retiree premiums. For example, suppose Detroit Edison increases
health care deductibles for retirees such that Detroit Edison retiree health care expenses fall by $1
million in a year, say 2007. Since such a reduction is assumed to continue indefinitely, the
funding requirement would be reduced by the present value of $1 million annually over many
years - by $12M over 20 years (using Detroit Edison's discount rate of 6%, shown in Exhibit
AG-I). Thus, a $1 million reduction in benefits is highly leveraged into a $12 million reduction
in required funding. Then, because funding requirements are $12 million less, Detroit Edison can
contribute $12 million less into the fund in 2007, and still claim that retirement health care is fully
funded. The $12 million not contributed to the fund goes toward profits for the year 2007.
It is the leverage ofpresent value of funding requirements that provides a huge incentive for a
company - even one that has a mandatory external fund - to reduce health care benefits. That is
how DEAR believes the funding requirement is converted - or "raided" -to increase profits.
The example of a one year reduction of benefits in 2007 converts to a leveraged one-time
reduction of funding requirements in 2007. In the next year, if the corporation wants to use the
same conversion ploy, it must reduce benefits again. Therefore, one symptom of "raiding" of the
health care fund would be continual, yearly reductions in health care benefits and/or increases in
premiums, not commensurate with actual increases in health care costs. Retirees certainly have
experienced annual reductions in health care benefits and increases in premiums. On the basis of
data that Detroit Edison has shared with DEAR, these cost shifts to retirees appear unwarranted.
Conclusion
DEAR has attempted to get the factual basis for reduction of health care benefits to retirees and to
get sufficient information upon which to verify that the increases in the share of health care costs
that retirees pay have been done in accordance with prescribed rules, but has not been able to do
so. DEAR sees the incentive that Detroit Edison has to "raid" the health care fund - to "avail
itselfof abundant cash," as the Commission has phrased it - but looks to the Commission to
provide the remedies needed to prevent the destruction of retiree benefits.
IV. DEAR Proposes Remedies to Assist in the Enforcement of Proper Use of Retirement Health Care Funds
Impetus for Remedies
DEAR's comments in Sections I, 11, and TI1 above illustrate that the information conveyed in
DE's Analysis explaining A&G expenses is not always consistent with information that Detroit
Edison has conveyed in other forums. In addition, Detroit Edison has been directed by the
Commission in various orders to adequately fund the external fund for OPEB. The intent of
external funding is that the money in the funds is to be used to pay benefits that retirees have
earned for long-time service to Detroit Edison, particularly for retirement health care. From
DEAR's perspective there is an open question as to whether or not Detroit Edison's actions in
reducing retiree health care benefits and increasing premiums have been ways to convert some of
the value of the external fund into profits - to "avail itselfof abundant cash."
Proposed Remedies
Accordingly, DEAR proposes three remedies to assist in the enforcement of proper use of
retirement benefit funds:
1. Audit of retiree cost-sharing charges for health care. Many retirees have seen increases in health care premiums that do not appear to be commensurate with the known rules for cost sharing. Detroit Edison has not been forthcoming with information on exactly how increases in premiums have been calculated. Excessive increases in premiums would serve to reduce externalfinding requirements, and thus eflectively "raid" the externalfind, as explained in Section In.
Accordingly, DEAR proposes an audit task force headed by the Commission Staff with representatives of DEAR and of Detroit Edison.
2. Audit of changes in retiree health care benefits. Retiree health care benefits have continued to be reduced annually. This is a symptom consistent with converting external funds into corporate profits, as explained in Section III. Such reduction of benefits do not appear consistent with the relatively modest increase in health care rates that Detroit Edison has used to determine the required level of health care funding. It is also unknown whether or not increases in coverage of retirement health
care for active employees, and subsequent funding, is being covered by reductions in benefits to retirees.
Accordingly, DEAR proposes an audit of health care funding and benefit changes to ascertain that the externaljknd for retirement health care benefits is being used as the Commission anticipated. The same task force proposed in (1) above could take on this task as well.
3. Removal of loophole to "raid" the retirement health care external funds. DEAR's perspective is that as long as there is the ability to convert external funds to short- term profits by tactics such as not contributing to the funds, reducing benefits, and increasing premiums, the leverage of present value will provide a large incentive for Detroit Edison to continue to cut retiree benefits. Such a loophole must be closed to (a) protect the earned benefits of retirees and (b) protect customers by making sure that monies collected in rates are used for their intended purposes.
Accordingly, DEAR proposes for the Commission's consideration the following:
(a) To the extent that Detroit Edison does not contribute thejkll amount of money included in rates for pension and OPEB to the respective funds, that Detroit Edison's allowed return in the next rate case (or other appropriate proceeding) be reduced by a commensurate amount;
(b) To the extent that Detroit Edison reduces retirement health care beneJits for retirees or increases cost sharing for retirees above proper levels, that Detroit Edison's allowed return in the next rate case (or other appropriate proceeding) is reduced by the present value of the effect on the external retirement health care fund.
V. Summary
DE's Analysis of A&G expenses raises questions of consistency and of proper use of OPEB
funds. DEAR's comments above provide some insight into underlying issues. DEAR has
proposed remedies to clarify underlying issues and to close loopholes that provide the incentive
for Detroit Edison to convert external pension and OPEB funds to corporate profits.
DEARS ability to access Detroit Edison data and to analyze it does not rise anywhere near the
level of the Commission's ability. For these reasons we respectfully request and encourage the
Commission to examine the issues we have raised.