B-2. Pension and Non-Pension Post Retirement Benefits Application. BCUC Workshop. February 4, 2013

Transcription

1 B-2 Pension and Non-Pension Post Retirement Benefits Application BCUC Workshop February 4, 2013

2 Introductions 2

3 Content Approvals sought Background on PNG s post retirement benefit plans Pension and non-pension retirement benefits expense explanation of actuarial calculations Cash versus accrued expense & recovery in cost of service (& USGAAP recognition of regulatory assets) NPPRB history of expense recovery and the RCA Alternatives for the historical unrecovered NPPRB 3

4 Approvals Sought Pension: Rate base treatment of the after-tax value of PNG s pension asset NPPRB: equivalent to other cash versus accrual expense timing differences equivalent to other BCUC regulated utilities Recovery of the historical unrecovered NPPRB expense will not be otherwise recovered in expense going forward lack of approval for recovery results in hit to retained earnings 4

5 PNG s Post Retirement Benefit Plans Pension: Bargaining unit employees are members of the registered defined benefit plan Other employees have the one-time choice of the registered defined contribution plan or the registered defined benefit plan Members of the defined benefit plan whose benefits would exceed the registered pension plan maximums become members of the non-registered supplemental retirement plan 5

6 PNG s Post Retirement Benefit Plans Non-Pension Post Retirement Benefits: Benefits plan was amended commencing 2004 to reduce costs of benefits provided Pre 2004 retirees (31 members) receive: Extended medical coverage, dental benefits, MSP premiums & life insurance Post 2004 retirees (123 members of which 17 are retired) receive: Extended medical coverage, MSP premiums, Health Spending Account & life insurance Extended health benefits and life insurance coverage significantly reduced relative to the plan pre-2004 Cash cost of retiree benefits was $186,000 in

7 Accrual versus Cash Why accounting standards use accrual accounting for pension and NPPRB expense: The actuarial calculations provide a reasonable estimate of the obligation in the period in which it arises (as opposed to when the obligation is settled) Differences in timing between the accrued expense and the cash settlement can be material Legislation for registered pension plans impose cash funding requirements in recognition of what would otherwise be very material timing differences Recognition of assets and liabilities arising as a result of timing differences between expense and cash settlement in the provision of utility service is universal: Working capital Historical deferred income taxes PP&E 7

8 US GAAP and Regulatory Assets USGAAP allows a rate regulated entity to use rate regulated accounting (RRA) RRA allows balance sheet recognition of the deferral mechanisms used for rate setting However, USGAAP requires evidence that these regulatory deferrals will be recovered in rates Evidence might include Commission orders, decisions, written policies USGAAP has specific provisions for the recognition of a regulatory asset relating to NPPRB: the recovery of this asset through rates must be done within 20 years of recognition and the amortization cannot be back end loaded PNG recorded a regulated asset relating to NPPRB: Up to 2011, NPPRB was recovered in rates on a cash or partial accrual basis rather than on a full accrual basis different adoption dates of future employee benefit accounting in CGAAP and USGAAP 8

9 NPPRB Historical Expense & Recovery Thru 2003, PNG requested and the Commission approved remaining on the pay-as-you-go method of NPPRB as a method of controlling PNG s rate increases In 2004, PNG requested and the Commission approved moving to a partial accrual method where PNG recovered both its cash costs of retiree non-pension benefits and its current service costs of NPPRB The Commission s approval was contingent on PNG contributing the current service costs recovered in rates into trust for the plan beneficiaries; the only structure available was the Retirement Compensation Arrangement ( RCA ) In 2011, PNG requested and the Commission approved moving to the full accrual method for recovery of NPPRB expense 9

10 The RCA In addition to registered pension plans, Canada Revenue Agency ( CRA ) has approved one trust structure for payment of post-retirement benefits, the RCA Under the RCA rules, each contribution to the trust must be match with an equal contribution to a refundable tax account CRA pays no interest or return on the refundable tax account Effectively, at the end of each year, the balances in the trust account and the refundable tax account are trued up: 50% of income earned in the trust account is contributed to the refundable tax account 50% of the amount withdrawn from the trust account to pay benefits is refunded to the trust account from the refundable tax account 10

11 Alternatives for NPPRB Do Nothing No prospect of recovery of historical unrecovered expense Egregious decision - PNG writes off $2.5 million (pre-tax) or almost 25% of its 2013 return on equity PNG would have to consider possible legal avenues Use 2012 RRA Proposal Use equal and offsetting amortization of DIT and NPPRB unrecovered balances Future income tax expense previously recovered in rates used to offset unrecovered NPPRB expense If not combined with approval of wind-up of RCA structure, funds become stuck in the RCA earning poor returns regardless of PNG s riskiness in the future Per Pension Application Historical unrecovered NPPRB expense amortized in to rates over 13 years Current customers pay historical expense Retains flexibility to commence winding up RCA structure when PNG s risk profile deemed acceptable Significantly more administration required than 2012 RRA proposal 11