Labor got on well with monopoly.
But now, if experience is any guide,
expect a stiff fight for benefits, jobs, and wages.
At this very moment, utility chief executive officers (CEOs) are planning for the future. These plans may include buying and selling assets, merging or spinning off business units, outsourcing functions, and pursuing a mix of regulated and unregulated business activities. Some of these plans or their execution will inevitably collide with union interests. John J. Barry, president of the largest utility union, the International Brotherhood of Electrical Workers (IBEW), predicts that utilities that cooperate with labor will prosper in a deregulated environment. For those that do not, he warns, the "prognosis is bleak."1
While much of the U.S. economy is nonunion, many employees in regulated industries are unionized. Indeed, unions have prospered under regulation. It discouraged new entrants and made it easier for unions to organize an industry. And by restricting or eliminating price competition, regulation excused employers from having to cut labor costs to compete (em a factor that reduced the pressure on unions at the bargaining table. As a result, unions have been able to capture a significant share of revenues at regulated companies.
Now comes deregulation. If experience in other, similar industries is any guide, unions in the utility industry will use their leverage to influence mergers, protect jobs, preserve wage levels and benefits and union coverage, and seek large severance packages for jobs that are lost. Perhaps even more significant for CEOs, unions may try to restrict utilities' ability to sell assets or to move into unregulated businesses, unless they let the unions represent the new ventures.
High Flyers Lose Clout
Before 1978, the interstate airline industry fell under comprehensive economic regulation administered by the Civil Aeronautics Board, which controlled entry and exit from markets and limited the number of carriers operating in each market. There was essentially no price competition; the industry operated as a cartel. Airline unions captured a significant amount of the airlines' cartel profits in the form of high labor costs, a product of relatively high wages and restrictive work rules. The unions achieved similar labor cost structures at the major airlines through pattern labor agreements. While airlines were able to improve productivity by introducing new technology (em such as jets and
computers (em labor costs remained relatively high as a percentage of overall costs. With little or no price competition, the airlines lacked much incentive to take a tough stance in negotiations. Strikes were extremely rare; the common wisdom held that an airline could not operate if struck.
The Airline Deregulation Act (ADA) repealed economic regulation. Carriers were free to enter and exit markets and compete on price. New low-cost, nonunion entrants entered the fray. Deregulation also prompted a spate of merger activity. Weaker carriers were absorbed by larger ones. The industry came to be dominated by three airlines: American, Delta, and United.
The new competitive pressure to reduce labor costs produced considerable labor strife. In the mid-1980s, carriers were able to negotiate temporary wage concessions to help cash flow, sometimes two-tier wage scales with lower wages for new hires. They were not able, however, to achieve significant or permanent work-rule changes.
By the mid-1980s and early 1990s, several carriers had taken a more confrontational approach with their unions in an attempt to achieve permanent and dramatic restructuring of labor costs. These efforts led to strikes at several airlines, including Pan Am, TWA, Continental, United, Alaska Airlines, and Eastern. The most protracted strike ultimately put Eastern out of business. The Eastern strike marked what was probably the first use of a corporate union campaign to resist change. In such a campaign, the union attacks by fostering litigation, petitioning regulatory agencies to investigate the firm, generating adverse media coverage, building coalitions with consumer or civil rights groups, and targeting consumers, investors, shareholders, and other constituencies.2
American Airlines flight attendants staged the last significant airline strike at Thanksgiving in 1993. The airline predicted that many flight attendants, as well as pilots and machinists, would cross the picket lines. In fact, the vast majority of flight attendants struck, and other unions honored their strike.
Direct confrontation has not worked for airline management. Indeed, as the airline industry has become more concentrated, the large airlines consider their ability to operate during a strike highly improbable. This dynamic has further reduced their leverage with labor. Today, an airline's principal leverage is to threaten not to grow or even to shrink, resulting in job loss, unless unions agree to moderate their demands. Airlines have obtained significant and lasting concessions only by giving up significant chunks of equity to employees and agreeing to union seats on boards of directors or restrictions on fundamental management prerogatives to restructure. Since the mid-1990s, unions have exercised leverage to restrict airline business strategies by including broad-scope provisions in collective bargaining agreements to require successorship, prohibit outsourcing, and bar layoffs. These restrictions on management actions, in effect, make the unions partners on future decisions regarding the scope of the business and enhance job security for union members.
Since deregulation, airline unions, especially the pilots' union, have sought to blunt or block business strategies they perceived as harmful to their members' long-term interests or security. One early example, engineered by the Air Line Pilots Association (ALPA), was the ouster of Richard J. Ferris as the president of United and the dismantling of his diversification into leisure-related businesses such as car rentals, travel agencies, and hotels. The pilots were concerned that United's holding company was draining the airline of profits to underwrite unwise business ventures. ALPA may have also been concerned that the diversification strategy would dilute its leverage and that the holding company, Allegis, would be better able to withstand a strike at United if it received revenue from other business units.
Unions have also moved aggressively after deregulation to organize nonunion entrants and previously unrepresented groups at the established airlines. Fifteen years after deregulation,
circumstances may be coming full circle, with unions again removing labor as a point of competition among the major carriers. Ironically, while the airline unions once opposed deregulation, they may wind up with a greater say over the direction of their employers than their counterparts in any other industry.
a Rocky Road
As in the airline industry, trucking once operated under economic regulation of entry, exit, and pricing. Before trucking deregulation in 1980, the Teamsters union had largely succeeded in establishing uniform wages and benefits through national and regional master freight agreements covering most major trucking companies. There were few strikes. After deregulation, the industry faced stiff competition from new, nonunion entrants and from the expansion of existing nonunion firms. Although the Teamsters granted some concessions to failing unionized firms to preserve employment, the 10 years following deregulation plunged hundreds of trucking firms into bankruptcy. Many of these were liquidated. By some estimates, union coverage plummeted from about 60 percent in the 1970s, before deregulation, to about 25 percent by 1990.
Today, all the dominant carriers in the truckload segment of the industry are nonunion. However, in the less-than-truckload (LTL) and package-delivery segments, where the capital requirements of the typical network of hub-and-spoke distribution centers create a greater entry barrier, seven of the top 10 firms of 1979 have disappeared, and five unionized carriers dominate.
The major LTL carriers have sought to improve their
competitive position by seeking more flexible contracts with the Teamsters and by forming nonunion trucking subsidiaries. The major trucking firms (em which bargain on a national, multi-employer basis with the Teamsters (em launched a major push in 1994 to obtain significant contract concessions. This effort led to a 24-day nationwide strike in April 1994, which significantly weakened both the unionized firms and the Teamsters. The carriers estimate that the strike cost them, collectively, $1 billion in addition to market share lost to nonunion firms.
The Teamsters have also launched new organizing initiatives, especially at Overnite, the largest nonunion LTL firm. As the target of one of the Teamsters' first corporate campaigns, Overnite has suffered several union election victories, two changes in chief executive officer, and a worsening financial situation.
Telecommunications: Merger Bends
to Labor's Voice
The telecommunications industry has undergone significant restructuring due to the breakup of AT&T and the emergence of new, nonunion competitors to AT&T's long-distance service, notably Sprint and MCI.
During this period, the principal unions in the telecommunications industry, the Communications Workers of America (CWA) and IBEW, have been able to establish pattern agreements at the Baby Bells and AT&T. Efforts to depart from the pattern agreements have met with stiff resistance. NYNEX, for example, attempted to break away and obtain concessions during bargaining in 1989. In addition to a bitter four-month strike, CWA and IBEW mounted a comprehensive corporate campaign against NYNEX. CWA claimed to have spent $28 million on its efforts. The campaign included harassing company officials and outside directors, organizing consumer boycotts and mass demonstrations, and intervening in legislative and regulatory proceedings, such as opposing a $360-million rate increase NYNEX sought from the New York Public Service Commission. The rate increase was denied.
The unions were also responsible for allegations regarding transactions with affiliates, leading to an investigation by the Federal Communications Commission. This investigation led to a $1.4-million fine and a refund of $35 million in allegedly excess profits. In a post mortem of the 1989 NYNEX strike, CWA emphasized the importance of intervention in regulatory proceedings. Of particular significance to utility restructuring, and reminiscent of ALPA's successful pressure on United to return to its core business, CWA also highlighted its opposition to NYNEX's use of the regulated telephone business as a "'cash cow' for its unregulated subsidiaries" as part of "schemes to ... reduce the unionized workforce through attrition, contract labor, and shifting growth to unregulated subsidiaries."3 Bell Atlantic's similar effort to break the pattern in 1995 provoked another CWA corporate campaign and, eventually, preservation of the pattern.
In an ironic twist, NYNEX and Bell Atlantic announced their merger shortly thereafter. In a recent interview, CWA president Mort Bahr indicated that his union would not oppose the merger. However, he also stated that the CWA would seek a successorship agreement and affirmation that the merged company would adopt NYNEX's neutrality agreement. According to Bahr, NYNEX agreed not to oppose CWA attempts to organize NYNEX's cellular business.4 In that same interview, Bahr indicated that CWA was trying to obtain successorship and neutrality agreements with AT&T, which would allow the union to follow AT&T's investment in other businesses. CWA's interest lies in AT&T Wireless, where the union sees growth; meanwhile, the unionized company continues to shrink. Because AT&T has refused these demands, CWA is threatening a campaign of advertising, leafletting, and boycotting focused on AT&T Wireless.
Railroads: A Long Haul
Railroads were substantially deregulated in 1980. As in the airline and trucking industries, the railroad business subsequently became more concentrated. Today, more than 80 percent of the nation's rail lines and employees are found in five carriers,5 which have experienced increased competition both among themselves and from the deregulated trucking industry.
The major railroads have historically bargained nationwide on a multi-employer basis. This bargaining structure has largely succeeded in keeping wages and benefits uniform across the industry. Rather than seeking wage and benefit concessions from their unions, railroads have sought to reduce their labor-cost structure by improving productivity through work-rule relief, buyouts of employees rendered surplus by work-rule changes, and merger efficiencies. These work-rule changes largely were achieved after two brief rail strikes in 1991 and the intervention of Congress to impose labor settlements. Unlike other industries, the railroad industry can seek government intervention under the Railway Labor Act to end or head off a strike.
Beginning in the late 1980s, some regional railroads attempted to break away from the national pattern and negotiate collective bargaining agreements more suited to their particular competitive situations. These efforts caused significant strikes that were resolved only after additional government intervention.
Major railroads have also responded to the new freedoms of deregulation by selling off portions of their rail systems with less traffic to new, largely nonunion, startup railroads, which feed their traffic to the major carrier. The rail unions vigorously resisted these efforts for more than 10 years. In particular, the unions wanted the railroads to require a purchaser of rail lines to agree to take the seller's employees, unions, and collective-bargaining agreements. In most cases, such a successor obligation would have rendered line sales uneconomic. While the unions ultimately proved unsuccessful at stopping the line-sale movement, they succeeded in making labor a central issue in many such sales and increasing transaction costs.
Poised for a Shock
The state of labor relations in the electric utility industry at this moment parallels that of the airline, railroad, trucking, and telecommunications industries at the threshold of deregulation. Labor relations in the electric utility industry have been relatively stable in the sense that, historically, most contract negotiations have been resolved without strikes. Utilities have faced no strong impetus to compete on the basis of price and, therefore, no impetus to compete on the basis of lower costs, including labor costs. Price competition has been limited by regulation and protected markets. Increased costs from labor settlements have generally been passed on to the ratepayer. As a result, electric utility employees enjoy higher wages and benefits than employees with similar skill levels in other industries. But that comfortable and secure world is about to change.
Unions in the electric utility industry seem well aware that deregulation promotes new business strategies that will conflict with their interests. This idea is implicit in the message of IBEW's president. No one can argue with the general proposition that labor-management cooperation in facing the challenges of deregulation is a good thing. But what does a union mean by "cooperation," and on what terms? By their very nature, unions seek to raise wages and benefits above levels that would be set in a competitive market. Why else have a union? That is their modus vivendi.
Unions in other deregulated industries have also spoken of "cooperation," but were often unable or unwilling to cooperate in the ways sought by management. At the airlines, cooperative efforts only yielded short-term, temporary relief from high wage levels, unless management ceded ownership or fundamental prerogatives to the union. The Teamsters gave some wage and work-rule relief, but proved willing to let hundreds of trucking firms fail and union coverage decline rather than make deep concessions. The railroad unions resisted work-rule changes, even as railroads lost market share to trucks and sold light-density rail lines that could no longer be operated economically, rather than agree to modest productivity improvements. Railroads only realized significant work-rule changes through government-imposed resolution of labor disputes. When NYNEX and later Bell Atlantic attempted to break from pattern labor agreements to better compete in a less-regulated environment, they were hit with corporate campaigns that forced them to remain with the established pattern.
Thus, while there certainly will be instances of cooperation, unions can also be expected to confront management by objecting to deregulation initiatives, seeking to be a player in mergers, requesting government-imposed labor-protection benefits, opposing business strategies that are perceived to weaken the union, resisting significant work-rule changes in collective bargaining, and trying to organize nonunion elements of a utility's business.
The IBEW: Organizing Against Deregulation
Organized labor does not support deregulation in the utility industry. The electric utility unions, principally IBEW, have appeared before state legislatures and federal and state agencies opposing deregulatory initiatives or cautioning against potential adverse side effects. Though obviously concerned about job losses among its membership, the IBEW deemphasizes these concerns, focusing instead on issues with broader public appeal (em the safety and reliability of electricity service, rates, and environmental issues. The IBEW also joins in coalitions with nonlabor groups, such as consumer and environmental groups, to promote these broader themes.
Comments the IBEW recently filed with the Federal Energy Regulatory Commission (FERC) on that agency's reexamination of its merger policy in Docket No. RM96-6-000 prove that the union realizes the inevitability of some deregulation and increased competition.6 So, rather than oppose deregulation outright, the IBEW urges the FERC to adopt a more restrictive merger policy that addresses a broader range of considerations, including assurances that the merged company "will continue to provide reliable service" and take into account "the social stability of the communities in which the companies operate."7 The IBEW also urges the FERC to critically examine claimed efficiencies to determine whether they are "ephemeral." It specifically recommends that the FERC require the merged company to submit inspection and maintenance plans and require periodic compliance filings to make sure that the plans are being adhered to. Finally, the IBEW recommends that applicants for merger approval be required to submit "economic impact statements" detailing how the planned merger will affect employees (em particularly with respect to job losses and relocations (em and the steps that the applicants will take to mitigate those impacts, such as retraining or relocation programs and severance packages. The union recommends that merger applicants "account for the costs of those programs to their own balance sheets." The IBEW appears to suggest that the expenses involved in addressing such employee impacts be treated as stranded costs to be borne exclusively by utility shareholders.
Because many utility actions will still require approval from the FERC or state utility commissions, unions will seek to influence the political process. Unions may also intervene in other regulatory proceedings, such as rate cases. Their participation and stances in the regulatory process can enhance their leverage in unrelated areas, such as bargaining for a new contract. For example, since mergers require various regulatory approvals, unions may intervene to oppose, or support (but at a price), the merger or raise labor-protection issues. The IBEW has, in fact, suggested that labor-protective conditions like those required in railroad mergers should be considered for utility workers who are adversely affected by mergers or restructurings:
"[A] portion of any monies received by utilities for stranded assets should be required to be used for the compensation, restructuring of jobs, and retraining or reemployment measures for stranded workers who have based important personal and career decisions on a higher level of industry stability. In sum, considerations must be given equally to workers as well as investors who made decisions based on reasonable expectations governed by requirements for a more fully franchised industry."
As a practical matter, the economic impact statement and mitigation measures that the IBEW proposed to the FERC as merger conditions would be a form of labor protection. If these conditions are adopted, merged utilities would be required to provide severance benefits for employees who lose their jobs due to the merger.
The IBEW's comments also raise questions about the interplay of the FERC's regulatory scheme and federal labor law. For example, a utility's impact statement could promise that each dismissed employee will receive $25,000 severance pay. This commitment becomes a condition of the utility's merger approval; however, the utility has an obligation under labor law to bargain with the union over severance. Does the FERC's merger approval override that bargaining obligation? Or does the $25,000 figure become the floor for bargaining with the union?
The IBEW's apparent suggestion that shareholders rather than ratepayers should bear the costs of labor-protection benefits also raises significant questions regarding how, and whether, such costs will be allocated among various groups for rate purposes. Such allocation issues are beyond the scope of this article, but the fact that unions are prepared to raise them in regulatory proceedings indicates another card that labor might play.
Unions may also attempt to frustrate business strategies they perceive as threatening. During recent contract negotiations with Consolidated Edison Co., IBEW leaders evinced concern that deregulation will pressure the utility to cut costs by subcontracting or selling certain operations and buying back power from the nonunion purchaser at a lower price.8 To guard against erosion of their strength, the unions may seek restrictions on management's right to sell utility assets or redirect capital into nonregulated businesses. Like its peers in other deregulated industries, the IBEW has placed top priority on job security, subcontracting prohibitions, successor clauses, and other contractual protections against business strategies that will diminish its membership.
The Battle is Joined
Mergers aside, electric and gas utilities have already taken steps to reduce costs to meet the challenge of new competition. Although they have not resorted to wage reductions and two-tier wage structures as airlines and trucking firms were forced to do, utilities have sought to reduce labor costs by downsizing and changing work rules to increase the productivity of their remaining employees. These efforts may encounter stiff resistance from unions, such as corporate campaigns. For example, Washington Gas Light (WGL), the local gas distributor for the Washington, DC, area, sought more flexible work rules in bargaining with the Independent Union of Gas Workers (IUGW) in 1995. After the IUGW rejected the utility's contract offer and authorized a strike, WGL locked out the 1,100 employees (half its workforce) represented by IUGW. The union hired corporate campaign specialist Ray Rogers and has been waging a corporate campaign against WGL ever since. This campaign has not only attacked WGL, its CEO, and members of its board of directors, but has targeted WGL's principal bank.
Unions will also become increasingly concerned about nonunion utilities, especially if they have the potential to become low-cost providers that can compete with unionized utilities. Unions will view the growth of the nonunion segment of a company's business activities as a threat to their power, because the utility can better weather a strike if it receives revenue from nonunion affiliates. Unions will worry about future growth concentrating on unregulated business activities, while the number of employees in the regulated utility business remains static or declines. As demonstrated by CWA's efforts at NYNEX and AT&T, unions can be expected to pressure utilities for permission to organize the employees of new businesses, particularly if the union is losing members in the regulated portion of the business.
For example, in response to the proposed merger of Baltimore Gas and Electric Co. (BG&E) with the unionized Potomac Electric Power Co., IBEW recently announced its intent to organize employees at nonunion BG&E. Unions may also try to use their leverage at unionized utilities to obtain neutrality agreements that cover nonunion affiliates or even utility suppliers or contractors.
Increased organizing activity (em and the increased use of corporate campaigns and other nontraditional methods of pressuring employers (em would also be consistent with the initiatives recently proclaimed by AFL-CIO president John J. Sweeney. The broad-scale attacks on such companies as Eastern Air Lines, NYNEX, and Overnite stand as harbingers of the future shape of conflict.
As in other industries, the impact of deregulation on labor relations in the electric utility industry will evolve. Labor unions have already been through several deregulations and are developing strategic approaches to protect their interests in the utility industry. In planning its business strategies for the deregulated era, electric utility management must likewise develop a new strategic approach for addressing labor issues. t
Ronald Johnson is a partner in the Washington, DC, office of Akin, Gump, Strauss, Hauer & Feld, L.L.P., where he has served in both the Energy and the Labor and Employment Sections. The views expressed here are a product of the author's and the firm's experience in both areas of practice. Although this article focuses on electric utilities, many of the same issues will face gas and mixed gas/ electric utilities.
Merger Insurance for Employees
What's Good for Railroads ...
Unlike organized labor in other industries, railroad workers threatened by mergers have enjoyed a measure of security through labor protective conditions imposed by the Interstate Commerce Commission (ICC), now superseded by the Surface Transportation Board.
The protective conditions developed by the ICC require the merging railroads to give advance notice of proposed coordinations and to enter agreements with the unions that represent affected employees before concluding merger-related transactions. The ICC conditions also require the merged carrier to guarantee pay and fringe benefits for employees for up to six years after the employee is adversely affected by a merger-related transaction. Other benefits can include moving expenses, retraining, and separation allowances. While costly, these protective conditions have taken some of the political heat off rail unions to otherwise oppose mergers or related restructuring.
Why are these protections relevant? Today, the International Brotherhood of Electrical Workers is suggesting that regulatory agencies should address labor protection in some similar fashion in the case of electric utility mergers.
1. J. Barry, "Divided We Fall," Electric Perspectives, vol. 18, no. 6 at 59 (Nov.-Dec. 1994).
2. See generally, C. Perry, Union Corporate Campaigns (1987).
3. Holding the Line in '89: Lessons of the NYNEX Strike, Labor Resource Center 29 (1991).
4. Daily Labor Report, No. 106 at C-J (June 3, 1996).
5. A number that may shrink to four with the recent approval by the Surface Transportation Board of the merger between Union Pacific and Southern Pacific.
6. IBEW's early recognition of its need to be a player in deregulation is also illustrated by its invitation to FERC Commissioner James J. Hoecker to speak on electric utility restructuring at a May 1996 IBEW meeting.
7. Comments of the IBEW on Notice of Inquiry, FERC Docket No. RM96-6-000 at 15 (filed May 7, 1996).
8. "Con Ed and Union in Talks to Avert a Strike at Midnight," by Steven Greenhouse, The New York Times, p. 22, col. 1, June 22, 1996.
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