Should natural gas customers pay for bonuses to executives for making more money for the utilitys stockholders?
Thats about an $8 million question in a rate case where Kansas Gas Service is seeking a $32 million a year rate increase.
The gas company argues that bonuses based on stock price and profitability allow Kansas Gas to hire top-quality executives who can run the company efficiently, which in turn benefits both the shareholders and ratepayers.
Customers benefit from this process because the company is able to deliver service with qualified employees and to meet a high level of performance, Kansas Gas Service president Bradley Dixon said in written testimony to the Kansas Corporation Commission.
The Citizens Utility Ratepayer Board, the state agency representing residential and small-business utility consumers, argues that the bonuses have the opposite effect, encouraging executives to maximize profits for stockholders by cutting corners on consumer issues such as safety and reliability.
If shareholders want to pay for it, fine, said Niki Christopher, a lawyer for CURB. Ive always kind of wondered why they give these top executives bonuses and then turn around and say theyre so strapped they need a rate increase.
The issue will be decided by the three members of the Kansas Corporation Commission, which is scheduled to take technical testimony in court-like hearings starting Nov. 7 in Topeka.
While Kansas Gas is seeking a $32 million increase in rates, the staff advising the commission is recommending that the company get $3.6 million. CURB is recommending a slight cut in the rates Kansas Gas gets now.
The bonus plans for employees represent about an $8 million expenditure. According to testimony in the case, Kansas Gas has two basic incentive compensation plans, based almost entirely on the profitability and stock price of Oneok Inc., Kansas Gas Oklahoma-based parent company.
• Short-term incentive Shared among all non-union employees, this bonus goes to individuals based on their personal performance and the performance of their work group and the company as a whole. The overall amount of the bonus pool is based 50 percent on stock earnings per share, 40 percent on the companys return on investment and 10 percent on safety measures.
• Long-term Incentive and equity (stock) compensation For upper-echelon employees only, this bonus program is based entirely on shareholder returns.
Both CURB and the Kansas Corporation Commission staff are recommending that commissioners remove most of the bonus programs from the rates customers now pay.
Following a dip in 2010, bonuses are on the rise again at the gas company, according to testimony filed by Andrea Crane, a consultant hired by CURB to analyze the Kansas Gas rate filing.
For 2011, the short-term bonus program paid employees nearly $4.5 million, up from $3.4 million in 2010 and $4.1 million in 2009.
The long-term and stock incentive programs paid executives almost $3.5 million in 2011, up from about $2.8 million in 2010 and $2.5 million in 2009.
That contributed to big gains for Oneoks corporate officers, Crane said in written testimony.
Mr. (John) Gibson, Oneok chairman and chief executive officer, had a base salary increase of approximately 9 percent from 2009 to 2011, while his stock awards increased from $2.8 million in 2009 to almost $4.2 million in (2011), Crane testified. Moreover, his total compensation increased from $7.1 million in 2009 to $8.2 million in 2011.
Crane also calculated that there were some big increases for the companys president, Terry Spencer, and Robert Martinovich, executive vice president and chief financial officer.
Total compensation for each of these two individuals more than doubled between 2009 and 2011, a period of increasing financial hardship for many Americans, Crane wrote.
Pierce H. Norton II, Oneoks executive vice president and chief operating officer, got a 58 percent increase in total compensation, and Curtis Dinan, Oneoks president for natural gas, got a 37 percent increase, Crane testified.
In a rebuttal to Cranes testimony, Dixon of Kansas Gas argued that the bonuses are the only way the company has to reward superior performance.
It permits the company to motivate employees and be competitive in attracting and retaining trained, qualified individuals, Dixon testified. This, in turn, supports the Kansas Gas Service mission of providing safe, reliable and affordable service.
In addition, he said its not the commissions role to be the utilitys business manager.
If the companys total compensation package is reasonable based upon a comparison with industry peer companies, then how the total compensation package is structured should be a matter for the utility management to decide, he testified.