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IPL retirees band together to fight former employer: Utility argues it had right to spin off health-life plan

January 28, 2008

Removing a post-retirement health plan for retirees would amount to breaking a "solemn promise," a former top executive of Indianapolis Power and Light once told state regulators.

A dozen years later, those words are coming back to haunt the utility in a case before the Indiana Utility Regulatory Commission that seeks to force IPL to pay up to $115 million to back-fund a retirement plan it spun off in 2001.

The complaint, filed in November, also demands that IPL resume funding the plan to the tune of $20 million a year.

Attorneys for 16 retirees and the International Brotherhood of Electrical Workers Local 1395 recently asked the commission for a summary judgment against IPL, rolling out hundreds of pages of evidence and transcripts from 1995.

That was the year of IPL's last rate settlement, the settlement on which rates are still based today for its 460,000 electric customers. It allowed IPL to collect an additional $60 million a year from customers--largely to pay for new pollution control equipment, and to make a set annual allocation for the IPALCO Enterprises Voluntary Employee Beneficiary Association.

Previously, IPL accounted for the postretirement health and life insurance benefits on a "pay as you go" method that could vary significantly from year to year.

During testimony leading to the rate settlement with the state in 1995, former IPALCO Senior Vice President John Brehm was asked by attorneys for the state Office of Utility Consumer Counselor, which had opposed the accrual method of accounting for VEBA benefits, whether the utility could withdraw the plan later.

"That would be very difficult for the company to do. What you described would be theoretically possible, but the company could only do that if it were to go back on a solemn promise to its employees," Brehm stated.

IPL proved in 2001 that it was possible to cast off the VEBA. That's when the local utility was acquired by Virginiabased AES Corp., a giant utility company under financial distress. The VEBA was spun off and IPL ceased funding it. It is operated now by a private administrator and grows only to the extent it can generate investment income.

Yet, IPL still collects the approximately $20 million a year it used to apply toward the VEBA. It's not clear how IPL is using that money, although it is likely at least some of it flowed to AES in the form of dividends.

"It is contrary to the public interest to allow a regulated public utility to secure rate relief for a specific proposal, then cancel the project so that a new holding company can treat the eliminated expense as additional profit," argued attorneys for Indianapolis law firm Lewis & Kappes, which represents retirees and the IBEW.

"An acquisition by a new holding company like AES is not an event that should be recognized as a fortuitous juncture to shed obligations binding on a public utility under a commission-approved settlement."

IPL at press time was still preparing a response to the request for partial summary judgment. But IPL, last November, asked the commission to dismiss the case, arguing the 1995 rate settlement does not prohibit it from terminating its postretirement benefit plan.

The utility contends that the rate settlement merely authorized IPL to account for post-retirement benefits on an accrual basis but ultimately didn't define an agreed-upon level of expenses or VEBA contributions.

Attorneys for retirees argue otherwise, presenting numerous documents of estimated VEBA plan funding IPL presented in the 1995 rate settlement. These alone justify the request for summary judgment, said Lewis & Kappes attorney Todd Richardson.

IPL points to precedent in utility ratemaking in which costs are generally presented for a "test year."

"The commission must see the complaint for what it is: an attempt ... to serve their personal interests by destroying the utility's ability to curtail employee benefits or make other operational changes in management's continuing pursuit of efforts to keep customer rates low while retaining an attractive business for its investors."

According to the most recent publicly available data, the VEBA plan had assets of $88 million at the beginning of 2006, down from $95 million in 2004. In 2005, the plan's administrator warned benefit reductions would be necessary "to extend the long-term viability of the plan."

In response, administrators have eliminated drug and medical coverage for dependent children, raised deductibles for drugs, slashed life insurance coverage, and required spouses to begin making monthly contributions for coverage.
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