Unions and Indianapolis Power & Light and Retirement Benefits and Energy & Environment and Utilities

Union says utility owes $115M

November 19, 2007

In a case with huge financial implications for Indianapolis Power & Light and Virginia parent AES Corp., a labor union and 16 IPL retirees have asked regulators to force the utility to pay up to $115 million to back-fund a retirement plan it spun off in 2001.

IPL also should resume annual funding of the IPALCO Enterprises Voluntary Employee Beneficiary Association, the International Brotherhood of Electrical Workers Local 1395 states in a complaint filed Nov. 13 with the Indiana Utility Regulatory Commission.

The VEBA plan has lost millions of dollars in assets and has had to slash life and health insurance benefits for its 1,600 participants since IPL spun off the trust six years ago and stopped funding it. It created the trust as part of a 1995 rate case, after the commission said IPL could raise its electric rates in part to fund retirement benefits.

The complaint alleges IPL has violated the terms of that rate settlement by continuing to collect $19 million annually from Indianapolis' 460,000 electric customers for a plan it no longer manages or funds.

"After years of loyal service to IPL, retirees' health benefits have been slashed and their costs have steadily increased because the VEBA Trust has not been properly funded," said David Williams, business manager of Local 1395. "For 12 years, Marion County ratepayers have been paying to fund the VEBA Trust. Yet, IPL failed to use any of the ratepayer funds to pay into the Trust since [IPL] was acquired by AES in 2001."

Attorneys for the union argue that a resumption of funding should not be a burden for IPL because it continues to collect VEBA money from ratepayers.

"It's almost $20 million a year that ratepayers have already paid. We're not talking about IPL coming up with new money," said Todd Richardson, an attorney for Indianapolis law firm Lewis & Kappes.

Retirees and at least one former IPL executive have grumbled for years that the $19 million likely is flowing to utility giant AES to pad profits and enrich its shareholders.

That Lewis & Kappes has signed on as IBEW's co-counsel is significant. The firm represents some of the state's largest corporations in utility rate matters before the IURC. Though industrial customers are not a party to the complaint, another of their most seasoned attorneys--Lewis & Kappes' John "Jack" Wickes--is working on the case.

Focus is on settlement

Wickes and Richardson are focused on the 1995 rate settlement, upon which IPL electric rates are still based. The settlement hiked the burden on ratepayers about $60 million more a year--or about $78 more annually for the average residential customer. IPL argued convincingly the rate hike was justified in part by the rising cost for air-pollution controls and on the need to create the VEBA plan for retirees.

A few years earlier, the Financial Accounting Standards Board had issued new accounting and financial reporting requirements for post-retirement benefits. The short of it: IPL and other employers who'd previously recognized expenses in the year they were paid out to retirees, under a "pay as you go" method, would be required to report costs on an accrual basis.

That meant putting in place an annual allocation of projected expenses to cover future benefits.

IPL argued the VEBA was advantageous in that annual contributions generated investment income and brought certain tax advantages, and that it was a tool to recruit quality employees.

Initial projections for VEBA funding were $11 million a year. Later, that was revised to $19 million, based on a review of the settlement now gathering dust in state archives.

But, "once cut afloat, it is our understanding there was no external source of income" for VEBA, Wickes said. No income except for investment income the pot of VEBA money generated. That became a problem when the stock market began to fizzle.

"By ceasing to make contributions to the VEBA Trust, IPL has failed to follow through on the commitments and representations it made in that proceeding in order to secure substantial rate relief, and therefore has violated the settlement and related rate order and has acted unlawfully," the IBEW complaint states.

Rate policy on IPL's side?

Crystal Livers-Powers, a spokeswoman for IPL, said the utility generally disputes the facts the union presents in the case.

In August, IPALCO Enterprises disclosed in a filing with the Securities and Exchange Commission that a party, which it did not identify, demanded IPL resume funding the VEBA and back-fund it to 2001.

In a statement provided to IBJ following that disclosure, IPL said the spinoff of the VEBA plan was done lawfully and "disclosed to all IPL employees, retirees, state and federal regulators and to the investing public.

"Rates for a utility are set during a snapshot in time and the utility's operations are reviewed by regulators on a regular basis. Included in the rates are the utility's costs. The components of these costs are constantly changing and are left to the utility to manage consistent with its obligation to provide adequate and reliable service to customers," IPL stated.

Under traditional "cost-based" rate-making in Indiana, if a regulated monopoly no longer incurs a particular cost, such as the VEBA, in many instances it can simply use money dedicated to the obsolete cost for something else. Obsolete costs can be challenged during the next rate case.

Generally, "you can't go in and tweak your rates on a single issue," said Anne Becker, former Indiana utility consumer counselor, now an attorney at Indianapolis law firm Stewart & Irwin.

That excludes rising costs of fuel, which utilities can seek to recover through fuel cost adjustments they file with the commission.

In base rates, though, utilities can continue to recover costs long after they've expired. Take Merrillville-based Northern Indiana Public Service Co.'s Dean Mitchell Generating Station. The station was mothballed in 2001 but costs to run it are still part of its 1980s rate case that stands today, observers said.

"As a matter of general rate-making, I understand the point," Richardson said.

But the 1995 rate case that set up VEBA funding was part of a settlement with various parties, including the Office of Utility Consumer Counselor, the city of Indianapolis and Citizens Action Coalition.

"What we're trying to do is enforce a settlement agreement. That [VEBA] was a contested issue in that case as to how much they would be able to recover from ratepayers."

Otherwise, said Wickes, "it's a great way to create an instant $20 million [annual] profit."

Fund, retirees stretched

The VEBA plan and its participants have suffered since IPL spun it off in 2001.

Assets at the beginning of last year fell to $88.6 million versus $95 million at year-end 2004. It reported benefit claims in 2005 of $11.7 million versus $10.6 million in 2004. A 2006 report is not yet available.

In 2005, the plan's administrator warned that benefit reductions would be necessary "to extend the long-term viability of the plan."

The cuts were necessary "because if current trends continue, there will not be sufficient funds in the VEBA Trust to provide benefits throughout the retirement of covered participants."

So administrators last year eliminated prescription-drug and medical coverage for dependent children. They hiked the deductible for drugs, slashed life insurance coverage, and required spouses of IPL retirees to begin making monthly contributions for coverage.

That's been hard for 41-year IPL employee Carl Taylor, 67, who retired in 2001 as a line-splicing supervisor. His 54-year-old wife hasn't reached Medicare age and her VEBA coverage costs have risen to $303 a month from virtually nothing, before the cuts.

Their prescription deductible, which started out at $3 per person, is now $265 per person. And the plan cut his life insurance benefits to $5,000 from $30,000.

"We thought we had a well-planned retirement," he said.

IPL spun off the VEBA just as it was launching several rounds of early retirements, which eventually lightened its payroll by more than 500 people. But there was another thing happening back then: The stock price of AES, which had just acquired IPALCO for $2.2 billion, was plummeting. At one point, it fell 90 percent, devastating the value of employees' and retirees' 401(k) plans.

"It is our understanding AES had cash flow issues in the 2001 time period and they were looking [for income]," Richardson said. "I don't think that [VEBA spinoff] is a coincidence of timing."

Wickes said the outcome of the case before the IURC has implications for those other than current VEBA participants, as many future IPL retirees will also be eligible for coverage. "So this action, if we're successful, will make sure that this trust doesn't run out of money before they retire."

The IPL retirees bringing the complaint against the utility are Norman Akers, Greenwood; Bill Bennett, Speedway; James E. Collins, Indianapolis; Michael T. Dillon, New Palestine; Morris Fix, Indianapolis; James W. Gaither, Indianapolis; Donald R. Greer, Speedway; Herbert L. Howard, Indianapolis; Robert L. Jerrell, Indianapolis; Mark Keefe, Indianapolis; Gary W. Pearson, Indianapolis; Johnny Richee, Indianapolis; Robert Strother, Indianapolis; Terry Swisher, Indianapolis; Carl D. Swopes, Martinsville; and Richard L. Wirey, Greenwood.

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