Citizens Energy quizzed on exec pay levels

Citizens Energy Group has enjoyed a certain amount of public good will over the last 125 years as a not-for-profit, charitable trust.

The gas utility’s structure was to protect the public’s interest from takeovers by tycoons of the day such as John D. Rockefeller and his Standard Oil Co.

But rising incentive pay to the trust’s top brass recently has conjured up images of an investor-owned utility—and the scrutiny of regulators.

Lykins

The Indiana Utility Regulatory Commission and the state’s utility consumer counselor are questioning executive pay levels of the increasingly diversified utility as part of two cases pending before the commission.

One is in relation to Citizens’ request to buy Westfield’s water and sewer utilities for $91 million; the other is a request to raise water rates in Indianapolis by $3 a month for the average residential customer.

Last December, IBJ reported that Citizens CEO Carey Lykins earned $2.84 million in salary, bonus and incentive pay for the year ended September 2012—compared to $1.5 million in 2011.

He got a $133,000 bonus tied to the success of Citizens’ buying and integrating Indianapolis’ water and sewer utilities in a $1.9 billion deal in 2011.

But most of the jump in pay was due to $916,000 awarded Lykins through an executive incentive plan. Such incentives are paid on a two-year cycle and link pay to performance measures as well as customer satisfaction.

Citizens uses data collected by consulting giant Mercer of what executives of similar responsibilities made at firms with comparable revenue and dynamics.

But IURC Chairman James Atterholt wants to know more.

Last month, he included questions about Citizens’ pay levels in a list of more than 30 questions sent to the Indianapolis-based utility regarding its request to buy the Westfield water/wastewater utilities. The questions cited IBJ’s reporting.

“Please indicate whether bonuses are, or will be, paid to employees of Citizens Energy Group or any of its affiliates if Citizens Water and Citizens Wastewater are successful in the acquisition of Westfield’s water and sewer utilities,” Atterholt wrote.

Citizens replied that it “does not contemplate” the payment of bonuses or incentives to its executive team as a result of the Westfield deal. But it has the discretion to pay performance bonuses to non-officers for efforts “above and beyond their normal workload” in support of the Westfield acquisition.

“Citizens certainly respects the commission’s inquiry,” the company said in a statement. “We look forward to receiving approval from the commission for this important acquisition, so we can continue providing the excellent service Westfield customers expect, while making the necessary capital investments to accommodate community growth.”

The $2.84 million paid last year to Citizens’ Lykins was short of the $4.68 million paid to Carl Chapman, CEO of the investor-owned gas and electric utility Vectren in 2012.

But Evansville-based Vectren Corp. is a larger company, with operating revenue of $2.2 billion compared with $696.4 million at Citizens.

Vectren had profit of $159 million last year; Citizens had a loss of $11.8 million.

“Citizens has long hid behind the ‘public charitable trust.’ Kudos to the IURC for raising the issue of executive compensation in the face of tough economic times for consumers,” said Kerwin Olson, executive director of Citizens Action Coalition.

More pay questions in water-rate case

Meanwhile, the state’s Office of Utility Consumer Counselor has invoked the executive pay levels as it challenges Citizens’ rate-hike request for Indianapolis water customers.

Citizens seeks $2.93 million from ratepayers to go toward short-term pay incentives for executives.

But the OUCC wants the IURC to reduce that amount by $1.6 million.

The OUCC also wants to limit what Citizens can recover for executive-incentive pay to $57,598. That’s $460,657 less than the $518,255 Citizens is seeking.

The reason, the OUCC argues, is because Citizens is basing most of the incentive pay on goals accomplished in Citizens’ gas and steam utilities—rather than on water utility performance.

Thus, “the water case is not the right venue,” said Anthony Swinger, OUCC spokesman.

The agency has not focused on executive pay levels as part of the Westfield utilities purchase, however. Rather, it is concerned about issues such as ensuring that any premium Citizens pays above the utilities’ appraised value will not be recoverable through rates, for example.

Bigger scope justifies higher pay?

It could be argued that Citizens executives are entitled to higher pay given the company’s rapid diversification in recent years into the water and sewer utility business.

Besides buying the Indianapolis water assets, the Westfield acquisition will give it 10,600 more water customers and 9,600 additional wastewater customers. Citizens’ operating revenue has already grown 50 percent from 2011 to 2012.

Still, not everyone is convinced that Citizens’ rising executive-pay levels are appropriate.

Olson said the commission is well aware of promises of savings made to the city of Indianapolis from transferring its utilities to Citizens. Those savings were to come by eliminating duplicative back-office functions among the utilities and from the ability to leverage the larger size of the combined entities in purchasing supplies, for example.

“It’s unconscionable that in Indy, Citizens would use the increased revenues resulting from the transfer to increase executive compensation rather than reduce the burden on captive ratepayers, many of whom are living in poverty and struggling to get by on a daily basis,” Olson said.

But Citizens said it has already outperformed its original annual synergy savings estimate of $60 million, which was to have been realized in the third year after the transfer.

The utility said it achieved annual synergy savings of nearly $90 million in just the first year after acquiring the Indianapolis water/wastewater utility.•