Water Industry News

Arizona Public Service Co facing scrutiny over bonuses, ads and rate hike

Ken Alltucker
The Arizona Republic
Apr. 9, 2006 12:00 AM

Arizona Public Service Co. handed out $29.9 million in employee bonuses, spent more than $2 million on out-of-state travel and plunked down $410,000 on season tickets and luxury boxes in 2005 and 2006.

At Chase Field, the power company's logo is splashed near the left-field scoreboard and along cup holders affixed to stadium seats.

Another $3.3 million was spent on industry membership dues and contributions to community groups and universities.

Such expenditures are standard fare in corporate America where style, image and perks go hand in hand with the product or service a company sells.

But APS faces heightened scrutiny over its spending habits as it seeks to recover hundreds of millions of dollars from ratepayers in emergency and general rate cases before the Arizona Corporation Commission. Regulators are demanding detailed accounts of the company's expenses, down to rental-car receipts and hotel bills.

These inquiries raise the larger question of whether the Phoenix-based utility's spending represents corporate largesse at the expense of ratepayers or legitimate company costs that also benefit the community.

"If there's an emergency, then APS should act accordingly," Commissioner Bill Mundell said. "They need to take steps to continue to reduce costs. If APS wasn't a monopoly and they were any other business, they would be cutting costs across the board."

APS officials say the expenses are justified and have little to do with the company's financial pickle.

The real issue, they say, is mounting fuel bills that threaten to sink the company's corporate rating to junk status, a move that could cost the utility and its customers tens of millions of dollars in higher borrowing costs to pay for the lines, wires and plants that power the Valley.

"The reason we are in this financial situation right now is that we haven't recovered our fuel costs," said Don Robinson, APS' vice president of planning.

Robinson said slashing or even eliminating marginal costs associated with advertising, sports sponsorships and travel for a company that takes in $2.2 billion a year would do little to improve its overall financial situation.

"It has virtually no material impact. It would not change our rate request one dime," Robinson said.

The company is seeking an immediate emergency rate increase of about $230 million that would raise the typical residential bill 11 percent. The commission finished its hearing on the request last month. A judge is expected to issue a recommended order, and the commission can accept, amend or reject the order.

The emergency case is unusual in Arizona. It's a strategy typically reserved for smaller, sometimes bankrupt, water companies. The last major utility to seek an emergency rate increase was APS in 1983, when it nearly ran out of cash while building the Palo Verde Nuclear Generating Station west of Phoenix.

APS officials say they need an emergency rate increase solely to pay the company's fuel costs. The more detailed questions about expenses and bonus pay likely will play a central role in the company's request for a general rate increase of 21.3 percent for residential customers. The commission is expected to decide the general rate case in late 2006 or early 2007.

"Advertising, executive pay, all of those things are reasonable discussion on the part of the commissioners to make sure APS is doing their part," said commission Chairman Jeff Hatch-Miller. "At the end of the day, we have to let them recover the cost of (fuel) and earn a small profit."

Bonus pay: Rewards for accomplishing goals

The most costly item in regulators' sights is APS' bonus pay.

In January, the same month APS took the unusual step of seeking an emergency rate increase, the utility's board approved $29.9 million in bonuses for everybody from top-level managers to electrical line repairman to secretaries. The only group of employees excluded from incentive pay: executive officers.

APS officials defend the payouts as appropriate. Even though the executives were not paid bonuses, the board of directors opted against cutting incentives for the rank-and-file who met established goals.

"If the incentive is earned based on the measurement that is set by the board, then it ought to be paid," said Jack Davis, APS' chief executive officer. "Some years there are zero payouts. Other years there are 100 percent payouts."

Of the $29.9 million in bonuses, $1.9 million went to senior managers, $8.7 million to mid-level managers and supervisors and $19.3 million to lower-level workers.

The bonuses, for work performed in 2005, represented a slight drop from the $33.8 million paid the year before. The main difference: Top executives last year received bonuses of $4.3 million.

Commissioner Mundell, who requested a detailed breakout of APS' bonuses, said the utility should consider deeper bonus cuts, starting with high-ranking managers.

"I think the first step should be upper management. If the emergency continues, they need to take steps to continue to reduce costs," Mundell said.

Corporate compensation analysts say bonuses are typically used to reward productive employees. Eliminating such payouts could create problems for a company that wants to attract and keep talented workers.

"Taking away that option may be a morale problem, but it also ties the hand of management who want to offer something when things go well," said Peggy Schiffers, a Jacksonville, Fla.-based compensation consultant who has advised a dozen electrical utilities and cooperatives on pay policies.

Davis said APS' board created incentive pay more than a decade ago as a way to reward workers who meet goals and improve productivity.

The policy has worked, Davis said, allowing the utility to cut the payroll while serving the second-fastest-growing utility service territory in the nation.

In January 1994, the company's 6,970 workers repaired lines and wires, read meters and ran power plants for the utility's 640,926 customers.

Since then, the company shed 459 positions and added more than 360,000 customers.

Other factors have contributed to the improved productivity, including technology advances.

But Davis and others credit the employee bonuses as a vital tool for encouraging employees to work harder and more efficiently.

"Every single employee in the company has a scoreboard," Davis said. "It has created a significant amount of efficiency in the company, and it allowed us to lower prices in the late '90s and early 2000s."

Advertising: Educating and building goodwill

Regulators also have scrutinized a wide range of non-labor expenses from advertising to professional sports team sponsorships to non-charitable contributions.

APS advertises across the Valley on billboards, television stations, newspapers and other media. The company has spent more than $14 million on advertisements and sponsorships over the past two years.

Regulators are reviewing those expenditures to see if there's any room to save a few bucks.

"Why do monopolies advertise when they don't have to compete with anybody?" Commissioner Kris Mayes asked. "That is money that can go to other things, including natural gas storage in Arizona or paying for infrastructure."

APS officials said the company seeks to recover from ratepayers only a fraction of its advertising costs, and those costs are for public-service efforts.

Of the $700,000 in advertising-related costs APS wants to pass along to customers, $200,000 was for television spots to offer energy-conservation tips such as installing ceiling fans or recommending air-conditioner checks to ensure maximum efficiency.

Another $130,000 went to the costs of producing the ads, while $270,000 covered the salaries of employees involved in producing the ads. The remaining $100,000 went toward miscellaneous costs.

Robinson noted that the company takes a frugal approach toward buying ads and other expenses not directly related to producing and delivering electricity. For 2006, the company reduced its overall advertising budget by about $600,000.

"We look at all of our expenses all of the time," Robinson said. "We understand that all of the costs we incur (are) on behalf of the customer."

Sports: Supporting home teams big and small

APS has spent millions of dollars to support professional sports teams, college athletics and local universities that are a key source of employees.

The utility and its parent company, Pinnacle West, have sprinkled money in community efforts in ways large and small.

It supported the Arizona Diamondbacks' effort to establish a professional baseball franchise in a new downtown stadium that helped trigger redevelopment of surrounding blocks.

It contributes to youth sports programs and has built basketball courts and baseball fields.

"They set a high bar for corporate citizenship," said Katie Pushor, president and chief executive officer of the Greater Phoenix Chamber of Commerce. "They play a very important, behind-the-scenes role as it relates to corporate contributions and community involvement."

Diamondbacks President Rich Dozer said support from companies such as APS is important, especially as the Valley loses corporate muscle with local companies merging or moving.

"Many of those big community partners have gone away," Dozer said. "The banks aren't locally owned any more. There are very few (large) companies that are locally owned and controlled."

Dozer said it can be difficult for the Valley's sports franchises and community groups to gain the attention and financial support of out-of-town companies.

"There are more challenges," Dozer said. "The final decisionmakers are not necessarily living in Phoenix or vested in Phoenix."

But regulators want to draw a distinction between charitable purposes and other costs they consider frivolous.

Ratepayers should not be required to help pick up these costs, either directly or indirectly, through higher electricity bills, Mayes said.

"There's a huge difference between the Boys and Girls Club and putting your logo on a baseball stadium," Mayes said.

The company spent $410,000 last year and this year on company-owned season tickets for the Phoenix Suns and college sporting events such as the Fiesta Bowl and Insight Bowl. The company purchases these tickets as a perk for employees, customers and charities.

About $200,000 went toward luxury suites at Chase Field, US Airways Center and Arizona State University.

Even though the company is not seeking to pass along the cost of sports tickets to ratepayers, Mundell wants the utility to consider eliminating those expenses. He reasoned that every dollar APS saved could go toward alleviating its cash crunch.

"Why is it necessary to advertise in a ballpark during an emergency? Why is it necessary to have sponsorships? It seems to me it's business as usual when it comes to expenses," Mundell said.

Ending those sponsorships may not be so easy or quick. APS' contracts with the Suns and the Diamondbacks won't expire until 2012. Pacts with the Coyotes and the Cardinals expire this year.

Even though the company won't ask customers to pick up the sports-related costs, Robinson the sports investments aren't just for fun and games. APS can reach fans of the Suns, Diamondbacks or NASCAR with public-service messages.

"Customers get a benefit out of it," Robinson said. "We use some of the sponsorship time that we get to run energy efficiency and conservation messages."

Prudent scrutinizing or nickel-and-diming?

So far, the expenses examined by state regulators represent a small portion of the company's overall request. If APS receives everything it's asking for, the increases would boost customer bills more than 25 percent and raise more than $500 million.

Some observers wonder whether the commission's efforts amount to regulatory nitpicking.

"I think the Corporation Commission would be wise to work with them rather than shine the spotlight on corporate contributions and com- munity relations," Pushor said.

California state regulators last fall approved an emergency rate increase for fuel costs incurred by the state's largest utility, Pacific Gas & Electric Co.

Most of the debate centered on the amount of the fuel increase and ways to protect lower-income customers who would have trouble paying the higher bills, according to Carrie Camarena, deputy general counsel at the Berkeley-based Greenlining Institute.

"The commission's focus here was the low-income folks who would be more affected than others," Camarena said.

California agreed to make a discounted energy program available to a wider group of low-income residents who earned wages up to 200 percent of the poverty level.

Arizona regulators say the issue of the utility's expenses will remain an important part of the debate.

"We want to know what is APS doing to tighten their belt to offset some of the increasing costs," Hatch-Miller said.

Reach the reporter at ken.alltucker@arizonarepublic.com or (602)444-8285.