Rising projections, with few expenditures to date, paint an uncertain picture.
"In almost all cases, companies will have material events and changes requiring updated year 2000...
Ratepayers claim a piece of the overfunding, but there are two sides to the question.
The stock market has been kind to many utilities -blessing them with overfunded pension plans. That is not unusual among utilities. In fact, one energy utility reported a "funded" status 1 of almost $1.5 billion at the end of 1999.
One of the results of an overfunded plan may be pension expense credits (or "negative pension expense") flowing through a utility's income statement, contributing to earnings. The same energy utility noted above reported a negative pension expense of $23 million in 1999. The pension credits principally arise when the actual return on plan assets exceeds the expected return or from other factors such as actuarial gains.
So what is the news here?
Ratepayers and regulators may seek the benefit of a utility's overfunded plan in rate proceedings. Utilities filing rate applications using financial "base periods" and "test periods" that include pension expense credits on the income statement can be certain that ratepayers will seek to include those credits in the cost of service upon which rates are set. 2 Sound fair? Ratepayers think so!
The Claim: What Goes Up Must Come Down
Ratepayers paid the bill (often a very big bill) for employee pension expense when the plans were underfunded and when the utility converted from cash to accrual accounting. Thus, ratepayers believe they should receive the benefit when the plans are overfunded and a utility's pension expense is negative. The argument sounds particularly cogent when one considers that utilities generally follow accrual accounting both for "book" reporting (using generally accepted accounting procedures, or GAAP) and for ratemaking purposes, in statements filed with regulators.
The ratepayers' claims stem in part from the rules for accrual accounting contained in the Statement of Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for Pensions. 3 SFAS 87 requires firms to use accrual accounting for the recognition of pension expense, rather than the cash "pay as you go" approach. It also requires firms to recognize pension expense by matching pension plan costs to periods of employee service. Moreover, the SFAS 87 pension cost is composed of several elements: (current) service cost, interest cost, actual return on plan assets, amortization of unrecognized prior service cost, actuarial gain or loss, and amortization of the unrecognized net obligation or net asset existing at the date of implementation of the statement. 4 Actual cash contributions to the plan are recognized as balance sheet events, either reducing a utility's pension liability or increasing its pension asset. Hence, ratepayers argue that a utility's cash flow is irrelevant to the ratemaking treatment of pension expense.
Ratepayers also reason that utilities should not seek to collect pension expense on an accrual basis when it is positive (reflecting not actual cash payments, but rather accrual of various cost components) and then seek to change to a cash, or "no cash," basis when pension expense is negative.
But utilities see things differently.
The Defense: Only a Paper Gain
Utilities argue that any apparent gain from pension plan overfunding amounts to nothing