Pollution Payday: Analysis of executive compensation and incentives of the largest U.S. investor-owned utilities
DTE Energy
DTE Energy is a utility holding company that serves electric and natural gas customers in Michigan, and also owns a gas pipeline and storage business segment. DTE Energy’s executive compensation consists of three elements: base salary, annual incentive awards, and long-term incentive awards. The Board of Directors’ Organization and Compensation Committee (O&C) has the responsibility to determine and approve the CEO’s compensation and makes all decisions regarding the compensation for the named executive officers (NEOs). O&C members include a retired Duke Energy executive and a retired CEO of the Columbia Pipeline Group (since acquired by TransCanada). Several of the O&C members have been directors for over a decade.
DTE Energy retains an outside consulting firm, Meridian Compensation Partners, to advise the O&C Committee. DTE Energy also retains an external consulting firm to conduct a market study to compile a peer group and collect data on compensation practices. DTE Energy’s peer group includes 18 other utilities as well as nine other companies such as Kellogg, Whirlpool, and Sherwin-Williams.
DTE Energy says that it annually adjusts and reviews its base salary for executives to reflect the market. In 2018, the base salary for then-CEO Gerard M. Anderson was $1,344,231. Anderson served as CEO until June 30, 2019 and was succeeded by Gerardo Norica. Norcia’s base salary for 2019 was $1,009,856.
The O&C Committee also sets annual individual performance measures, metrics, and targets for the NEOs, also referred to as short-term plans. Twenty-two different measures are used to calculate the annual incentive payout. Twenty percent of the annual compensation is determined by DTE Energy’s operating earnings per share (EPS), and another 20% by its adjusted cash flow. In 2019, NEOs were rewarded if they achieved an EPS between $5.97 and $6.33, and for an adjusted cash flow between -$765 million and $209 million.
Other annual measures include customer complaints to the Michigan Public Service Commission (with achievements for a range of 1,827 to 2,786), tree trimming mileage (3,800 to 4,400), and fossil power plant reliability – which is a measurement of the percentage of time that the coal-fired units at the Monroe and Belle River facilities are incapable of reaching 100% capacity, excluding planned outages. The coal-plant reliability metric incentivizes the utility to maintain, at ratepayer cost, coal plants that the utility could be planning for accelerated closure in order to save customers money and achieve its carbon emission reduction goals for 2030 and 2050. Ameren recently eliminated a similar metric and says that it is instead implementing renewable energy and energy storage performance incentives.
DTE Energy’s long-term plan rewards executives with ownership of stock. It measures long-term incentives by total shareholder return of DTE Energy versus its peer group (80% weight), and by the company’s funds from operations (FFO) to total debt ratio (20% weight). The FFO to debt ratio is used by credit rating agencies to analyze a company’s financial risk.
The long-term reward measurement is different for DTE’s electric utility subsidiary’s CEO, Trevor Lauer. His long-term plan includes a 20% weighted average of DTE Electric’s three-year average return on equity (ROE). Under the 2016 to 2019 long-term incentive plan, DTE Energy paid Lauer 175% of the reward for achieving the maximum threshold of 10.7% ROE. DTE Electric achieved a 2016 to 2018 ROE average of 10.4%, so Lauer received a 140% payout for this category.
Despite DTE setting a goal to achieve net-zero carbon emissions from its electric company by 2050, which replaced a 2017 commitment to an 80% carbon reduction goal, the company has not established financial incentives for executives to reduce greenhouse gas emissions.
DTE Electric sought ROE increase, executive compensation cost recovery from Michigan ratepayers
The ROE measures how much a utility is allowed to earn in profits on capital expenditures, and is determined by state regulators. Using the ROE as a financial instrument to reward Lauer increases his incentive for DTE Electric to increase capital investments, and to lobby for DTE Electric’s regulators at the Michigan Public Service Commission (PSC) to increase the company’s ROE at the expense of ratepayers.
In DTE Electric’s most recent rate case, the utility proposed a 10.5% ROE. The PSC, however, reduced the utility’s ROE from its current 10% to 9.9%, which took effect on May 15, 2020. The Administrative Law Judge (ALJ) in the matter found that DTE Electric had not demonstrated an increased risk in attracting capital and had not established the reasonableness of including the gas and water companies in its proxy analysis.
Executive compensation expenses were a point of contention in the rate case despite previous orders preventing the utility from recovering compensation expenses associated with attaining financial measures. In a May 2019 order, the PSC said, “incentive compensation tied to financial performance measures has not been shown to benefit ratepayers.” Nevertheless, Michigan Attorney General Dana Nessel’s office found that in addition to including costs for incentive compensation in operations and maintenance accounting, DTE included capitalized costs of short-term and long-term incentive compensation in its rate base projections.
Attorney General witness Sebastian Coppola said DTE’s incentive plans are “too heavily skewed toward measures that directly benefit shareholders as opposed to customers.”
Coppola recommended that the PSC remove all capitalized incentive compensation costs associated with financial measures from the rate case. The ALJ not only agreed, but recommended that the PSC order DTE to:
“immediately provide the Commission with a report in this docket identifying the amount of incentive compensation attributable to financial measures DTE has included in rate base at least over the last five years, and direct DTE to clearly exclude such amounts from rate base in its next rate application. The Commission may also want to initiate an investigation to determine what faulty managerial or other decision-making process led DTE to flagrantly ignore the Commission’s numerous decisions on this expense category.”
The PSC agreed with the Attorney General and the ALJ, and disallowed $44 million in executive compensation expenses from rates. The regulators said in the order that they were “profoundly concerned as to why DTE Electric would think it would be acceptable to capitalize financial-based employee compensation incentives under rate base.” The order further said,
“The fact that DTE Electric booked these incentive compensation costs to rate base without being ‘caught’ by parties or the Commission in prior proceedings does not render them reasonable and prudent now, nor does their removal from rate base for rates being set on a going-forward basis constitute retroactive ratemaking … the Commission has been unwaveringly clear that ‘incentive compensation tied to financial performance measures has not been shown to benefit ratepayers.” (emphasis added)
While DTE Energy has maintained promised levels of executive compensation throughout the COVID-19 pandemic, it has also begun disconnecting customers who have been unable to pay their bills during the crisis. DTE could use half the compensation that it paid former CEO Gerry Anderson in 2019 – still leaving over $6 million for CEO compensation – to cover the arrearages of 6,768 senior and low-income customers who were 90 or more days late on their payments as of August 16, 2020, according to data DTE submitted to Michigan regulators.
| CEO compensation ranking among utilities studied, 2019 | 6/19 |
| Compensation ratio: CEO to median employee, 2019 | 57:1 |
| Percent change in CEO compensation, 2017-2019 | -23.3% ($3,690,728) |
| Maximum payout of performance-based shares as a percentage of target, 2019 | 200% |
| Is DTE Energy’s executive compensation structure aligned with decarbonization? | No. DTE Energy is among the many investor-owned utilities that have established goals to reduce their greenhouse gas emissions, specifically a 50% by 2030, 80% by 2040, and net-zero by 2050 commitment. However, DTE’s goals are not yet reflected in the company’s executive compensation policies. |
| Is there evidence from SEC filings that DTE Energy is using misleading financial metrics to determine executive compensation? | No. |
| What key perquisites or benefits do DTE Energy executives receive? | DTE Energy provides the Chairman and CEO with company vehicles and each with a security driver. Use of the company’s leased aircraft is permitted for business purposes. The company provides limited use of corporate event tickets. Home security monitoring is also provided for some NEOs, as are non-qualified supplemental retirement plans. |