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Labor Costs and the Rate Case

Incentives, staffing, and benchmarking in a tight economy.

Fortnightly Magazine - March 2012

or her achievement of individual and companywide goals. A recent Towers Watson survey of utility compensation, which was cited in a decision by the Indiana Public Service Commission, reported that, “93 percent of the individuals in exempt-level positions were eligible for annual incentives.” 3,4

Third, through a variety of mechanisms, including hiring freezes and severance programs, many utilities have reduced employee headcount in recent years. The BLS reports that total employment in utilities fell from around 600,000 in 2001 to 555,000 as of November 2011. 5 However, as with all workforce initiatives, utilities must be careful that any changes made don’t compromise safety, reliability, and quality of service.

At the same time that utilities seek to rework their employee compensation plans to better control costs, they’re also facing a wave of retirements and, as a result, a shortage of qualified workers in many areas. Between 2009 and 2015, approximately 46 percent of skilled technicians and 51 percent of engineers in the utility sector will become eligible for retirement. 6 Some employees have deferred retirement in light of economic conditions; still, the replacement of these skilled workers is a growing problem. Moreover, industry-wide goals to “replace aging infrastructure and achieve modernization objectives” 7 mean that utilities will need to add staff over and above the replacements for those retiring—including, perhaps, different resources at a time when younger qualified workers and trainable employees are in short supply.

In fact, utilities across the country are participating in new initiatives for identifying and training qualified candidates; the Center for Energy Workforce Development’s members include more than 80 energy-related enterprises, including utilities, but it takes time to adequately prepare employees for certain industry roles. For example, it can take 10 to 12 years to fully train a lead lineman. 8 Meanwhile, many U.S. universities have scaled back their electrical engineering programs, and many foreign graduate students are finding attractive opportunities in their home countries, causing the pipeline of engineering talent to run low. 9 These labor market conditions limit the talent pool available to utilities and put upward pressure on the levels of compensation needed to attract and retain qualified employees.

Tools for Regulator Review

In determining rate changes, regulators must take into account the full range of economic challenges and the remedies that utilities are employing to combat them. More specifically, regulators should focus on total compensation, plus the trend of expenses in the recent past.

In particular, however, regulators must stay mindful of factors that tend to make a simple apples-to-apples comparison perhaps less indicative than it might otherwise appear, such as: 1) offsetting tradeoffs between cash- and non-cash compensation schemes; 2) the financial value of goals achieved or missed under incentive compensation plans; 3) employee productivity as affected by conservation or efficiency programs; and 4) how industry benchmarking can be affected by the diversity of economic conditions among local utility service territories.

When regulators evaluate individual components of employee compensation, they must be careful to account for the fact that companies are changing the mix of cash and non-cash compensation. Increases in one component