Pipeline & Gas Journal...March 2010
The Mobil/Exxon purchase of XTO Energy has sparked new congressional interest in the environmental safety of horizontal shale gas drilling, a concern also lately exhibited by the Environmental Protection Agency (EPA) which has urged New York State to expand its analysis of the impact of shale gas drilling in the Marcellus area. A House energy & environment subcommittee held hearings on the XTO saloe on January 20 where the heads of both companies--Exxon Mobil and XTO--said they had a problem with a new piece of congressional legislation requiring natural gas producers to disclose the chemicals they use when fracturing gas deposits in shale. Both men said they had no problem making the disclosure; however, they would oppose including that disclosure requirement in the Safe Drinking Water Act, a law enforced by the EPA.
That is what the Fracturing Responsibility and Awareness of Chemicals Act (FRAC ACT) would do. It was introduced in both the House and Senate last summer. Both Rex Tillerson, Chairman and CEO, ExxonMobil Corporation and Bob R. Simpson, Chairman of the Board and Founder, XTO Energy Inc. opposed the bill. Tillerson explained he opposed EPA's involvement because "the devil is always in the details." Pressed by Rep. Diana DeGette (D-CO), one of the key sponsors, on what he meant by that, Tillerson expanded on his original statement by saying, "It means I don't know how the EPA is going to enact or implement the regulation that you are promoting in your bill." Neither the House nor the Senate has held hearings on the FRAC Act much less has a vote been taken.
The back-and-forth between DeGette and Tillerson is important because Exxon-Mobil insisted that a clause be put in the contract allowing ExxonMobil to cancel the deal if Congress passes a law making hydraulic fracturing "illegal or commercially impracticable." Neither Tillerson nor Simpson said the DeGette bill would do that; but Tillerson clearly implied that EPA regulatory involvement in hydraulic fracturing could be a problem.
Any congressional legislation seen as hamstringing new shale gas development would be a crimp in some pipeline expansions, undoubtedly. For example, Texas Eastern has announced two separate projects in anticipation of bountiful Marcellus shale gas. One expansion project could handle 300 million cubic feet of gas a day, the second 500 million cubic feet. According to Spectra Energy Corp. (which owns Texas Eastern) spokeswoman Wendy Olson, Marcellus gas would account for 80 percent of the first project's contracts and "a significant amount" in the second instance.
The production of Marcellus gas in New York State is already a red-hot political issue there.
There are only 15 shale gas wells in New York State, all of them vertical, according to Yancey Roy, spokesman for the NY Department of Environmental Conservation. That is what makes New York's draft Supplemental Generic Environmental Impact Statement (dSGEIS) for horizontal shale gas fracturing so important. It was published last September 30. The comment period closed at the end of December. Roy says the department is going through the 13,000 comments it received, some of them "ganged" signatures on single pieces of correspondence. Once the document becomes final, natural gas companies will be able to drill horizontally in Marcellus, and for the first time. The dSGEIS proposes first-time permitting conditions for horizontal hydraulic fracturing, including disclosure of liquids used.
New York City has already weighed in against drilling in sections of Marcellus containing drinking water sources for the city. Steven Lawitts, the city's top environmental official, said hydraulic fracturing represented “unacceptable threats to the unfiltered fresh water supply of 9 million New Yorkers.” Roy explains that New York City water sources account for a small portion of the Marcellus area.
Chesapeake Energy, a major producer in New York but not yet in the shale game there, complained that the dSGEIS's proposed regulatory requirements and mitigation measures "are both costly and, in some cases, unnecessarily onerous...and have left New York with relatively few producers willing to devote scarce capital to New York." However, the comments went on to say "Chesapeake is prepared to meet the extraordinarily high bar proposed in the dSGEIS."
Feds Encourage Annuities
Human Resource Executive online...March 3, 2010
The federal government's ostensible plan to begin selling annuities to both corporations and their employees through company-sponsored retirement plans has raised many concerns in the HR community.
By Stephen Barlas
The federal government seems ready to start "selling" annuity policies to American companies and their employees. The Departments of Labor and Treasury have asked for industry comment in an under-noticed "request for information" issued on Feb. 2 on how they can encourage employers to offer annuities to workers mostly with defined-contribution pension plans.
The concern -- especially after the 2008 market slide -- is that retirees are leaving the workforce with pensions that will be depleted before the end of their lives. Annuities, which both employers and employees have long turned their noses up at, are seen as a solution.
The RFI has produced some consternation in the business community, which is worried that the Obama administration might issue some sort of mandate, or de facto mandate, with regard to the inclusion of annuities in pension offerings. Kathryn Ricard, vice president for retirement policy at the ERISA Industry Committee, predicts a lot of businesses and trade association will respond to the RFI. Besides opposing any mandates, employers will argue that any new latitude for corporate "encouragement" of annuities should be done via clear rules, particularly in the area of company liability.
Besides the mandate and liability issues, employers will be worried about any additional costs they might face from incorporating annuities into pension offerings. Jody Strakosch, national director for MetLife's retirement products group, acknowledges that there may be corporate costs associated with establishingrecord-keeping platforms whereby corporate 401(k) managers such as Hewitt, Mercer and Vanguard increase their charges to reflect the additional cost of keeping up with the annuity portion of an individual's defined contribution plan.
But Strakosch doesn't think those costs would be substantial.
The Treasury, through the Internal Revenue Service, and Labor, through the Employee Benefits Security Administration, could conceivably change federal rules on either taxation and or ERISA without congressional action.
Modifications could be as simple as changing EBSA's Interpretative Bulletin 96-1, which details four general "safe harbors," pension-related areas that companies can educate employees about without straying into "investment advice" for which liability would be a concern. The Federal Register notice the two departments issued in conjunction with the RFI alluded to two ERISA Advisory Council reports issued in the past few years that endorsed the updating and expanding of 96-1 to respond to innovations in the financial marketplace as well as the baby boomer generation's move into the de-cumulation phase of their pensions.
Both Phyllis Borzi, assistant secretary at the EBSA, and Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, have spoken publicly about wanting to encourage greater use of lifetime payments as part of pension plans.
"They have both told us that bigger changes will require legislation, but that this is the beginning of the process," says Ricard. "The chances of them moving forward on this are very high. The fact [that] you saw them working together on this detailed RFI -- which contained 39 questions -- this early in their tenure showed they are pretty invested in this."
Both Ricard and Robyn Credico, director of the plan-management group in North America for Towers Watson, say companies have included annuities in pension-plan offerings in the past, but that take-up has been minimal, and for a number of reasons. Those include the often-confusing nature of the policies, their cost, difficulty of comparing products and concern that a policy holder might die soon after buying an annuity, and the more recent concern, buoyed by the AIG headlines, that insurance companies could fold, making any annuities worthless.
Beyond those concerns, adds Credico, companies that listed annuities in their plan documents either didn't know how to deliver them or else had a hard time finding a provider. "Now we all decide that it is a good idea to put annuities back in pension plans," she says, chuckling. "It is like fashion, where the lengths of hemlines change."
Credico does note, however, that insurance companies have reworked their annuity offerings to respond to some employer/employee concerns. For example, some policies offer death benefits. In fact, MetLife and Prudential, among the major annuity providers to employers, have -- over the past half-decade -- offered a number of new annuity products with various wrinkles.
Strakosch points out that, when 401(k) plans became popular a few decades ago, some plan participants were confused about the differences in equity classes and how mutual funds work. She says the confusion about annuities is at that same point, and will be erased as companies and industries do a better job of educating and communicating with employees.
Comments on the RFI are due May 3, 2010; see:
http://www.regulations.gov/search/Regs/home.html#documentDetail?R=0900006480a898af
March 3, 2010
The federal government's ostensible plan to begin selling annuities to both corporations and their employees through company-sponsored retirement plans has raised many concerns in the HR community.
By Stephen Barlas
The federal government seems ready to start "selling" annuity policies to American companies and their employees. The Departments of Labor and Treasury have asked for industry comment in an under-noticed "request for information" issued on Feb. 2 on how they can encourage employers to offer annuities to workers mostly with defined-contribution pension plans.
The concern -- especially after the 2008 market slide -- is that retirees are leaving the workforce with pensions that will be depleted before the end of their lives. Annuities, which both employers and employees have long turned their noses up at, are seen as a solution.
The RFI has produced some consternation in the business community, which is worried that the Obama administration might issue some sort of mandate, or de facto mandate, with regard to the inclusion of annuities in pension offerings. Kathryn Ricard, vice president for retirement policy at the ERISA Industry Committee, predicts a lot of businesses and trade association will respond to the RFI. Besides opposing any mandates, employers will argue that any new latitude for corporate "encouragement" of annuities should be done via clear rules, particularly in the area of company liability.
Besides the mandate and liability issues, employers will be worried about any additional costs they might face from incorporating annuities into pension offerings. Jody Strakosch, national director for MetLife's retirement products group, acknowledges that there may be corporate costs associated with establishingrecord-keeping platforms whereby corporate 401(k) managers such as Hewitt, Mercer and Vanguard increase their charges to reflect the additional cost of keeping up with the annuity portion of an individual's defined contribution plan.
But Strakosch doesn't think those costs would be substantial.
The Treasury, through the Internal Revenue Service, and Labor, through the Employee Benefits Security Administration, could conceivably change federal rules on either taxation and or ERISA without congressional action.
Modifications could be as simple as changing EBSA's Interpretative Bulletin 96-1, which details four general "safe harbors," pension-related areas that companies can educate employees about without straying into "investment advice" for which liability would be a concern. The Federal Register notice the two departments issued in conjunction with the RFI alluded to two ERISA Advisory Council reports issued in the past few years that endorsed the updating and expanding of 96-1 to respond to innovations in the financial marketplace as well as the baby boomer generation's move into the de-cumulation phase of their pensions.
Both Phyllis Borzi, assistant secretary at the EBSA, and Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, have spoken publicly about wanting to encourage greater use of lifetime payments as part of pension plans.
"They have both told us that bigger changes will require legislation, but that this is the beginning of the process," says Ricard. "The chances of them moving forward on this are very high. The fact [that] you saw them working together on this detailed RFI -- which contained 39 questions -- this early in their tenure showed they are pretty invested in this."
Both Ricard and Robyn Credico, director of the plan-management group in North America for Towers Watson, say companies have included annuities in pension-plan offerings in the past, but that take-up has been minimal, and for a number of reasons. Those include the often-confusing nature of the policies, their cost, difficulty of comparing products and concern that a policy holder might die soon after buying an annuity, and the more recent concern, buoyed by the AIG headlines, that insurance companies could fold, making any annuities worthless.
Beyond those concerns, adds Credico, companies that listed annuities in their plan documents either didn't know how to deliver them or else had a hard time finding a provider. "Now we all decide that it is a good idea to put annuities back in pension plans," she says, chuckling. "It is like fashion, where the lengths of hemlines change."
Credico does note, however, that insurance companies have reworked their annuity offerings to respond to some employer/employee concerns. For example, some policies offer death benefits. In fact, MetLife and Prudential, among the major annuity providers to employers, have -- over the past half-decade -- offered a number of new annuity products with various wrinkles.
Strakosch points out that, when 401(k) plans became popular a few decades ago, some plan participants were confused about the differences in equity classes and how mutual funds work. She says the confusion about annuities is at that same point, and will be erased as companies and industries do a better job of educating and communicating with employees.
Comments on the RFI are due May 3, 2010; see:
http://www.regulations.gov/search/Regs/home.html#documentDetail?R=0900006480a898af
March 3, 2010
Weighing the A/C facts
Aftermarket Business/February 2010
The Environmental Protection Agency (EPA) seems ready to inhibit retail sales of the soon-to-be-approved air-conditioning refrigerant expected to replace R-134a. The agency is about to publish a significant new use rule (SNUR) regarding HFO1234yf (R-1234), the R-134a replacement. The SNUR is half of a two-part regulatory approval process.
The other half is EPA approval of R-1234 within its significant new alternatives policy (SNAP) program. The SNAP proposed rule implied that the SNUR would restrict use of R-1234 by do-it-yourselfers (DIYers).
At the end of 2009, the EPA extended the comment period on the SNAP proposed rule to Feb. 1, 2010 because of a request from the Automotive Refrigerant Products Institute and the Automotive Aftermarket Industry Association (AAIA). Michael Conlon, a Washington attorney who represents the groups, asked for the delay because the aftermarket industry wants to be able to review the SNUR before commenting on SNAP requirements. At the time of publication, Conlon expected the SNUR to come out soon in the form of a direct final rule, meaning any DIYer restrictions would be a done deal, unless opponents raised their voices. “Procedurally, if someone objects to a direct final rule, EPA has to withdraw it and start over,” Conlon explains.
Margaret Sheppard, the EPA official heading the SNUR, did not respond to a request on that announcement’s timeline.
We already reported on the proposed SNAP, approving R-1234 as the “green” successor to R-134a, the current global auto air-conditioning refrigerant of choice, which is being phased out in Europe and is likely to disappear in the U.S. soon, in part because of the EPA’s vehicle emissions rulemaking, which aims to improve mileage and decrease GHG emissions from vehicle tailpipes.
SNAP and SNUR regulatory proceedings are “inextricably intertwined,” according to a letter sent to the EPA by the Automotive Refrigerant Products Institute (ARPI) and AAIA, because the SNAP proposed rule said: “Consumer exposure from filling, servicing or maintaining MVAC systems without professional training and the use of section CAA Section 609 certified equipment may cause serious health effects.” In their letter, the two trade groups argued that the EPA cannot regulate a new refrigerant under its new chemical program unless it finds that Section 609’s refrigerant regulations (within SNAP) are insufficient to the task. The stratospheric protection division, which has authority over Section 609, has done numerous previous rulemakings on alternative vehicle refrigerants, and has the technical expertise to decide whether R-1234 requires limitations on “do-it-yourselfer” (DIYer) use.
The EPA concern is that consumers who buy R-1234 and then work with their vehicle’s air-conditioning system might be overcome by the chemical’s toxicity, or its flammability. But DIYers would only be using a couple of cans to service their own auto. Moreover, a study done for the Society of Automotive Engineers by Gradient Corporation found that there was little if any risk of an explosion under the hood caused by R-1234. If there were flammability concerns, it would be with large quantities stored in a warehouse, or in a retailer’s backroom; but even that threat would be remote. EPA concern about toxicity seems a stretch, too, as an argument it leans on is that there is a danger when a refrigerant can is held upside down for a period, but not when it is right-side up.
Aside from DIYer use restrictions, which could be included in the upcoming SNUR, there is continuing concern with the proposed conditions of use in the SNAP proposal, which includes requiring automobile manufacturers to make changes to the design of air-conditioning systems to mitigate any potential leakages of R-1234. If those steps are finalized, that would mean that all the cars on the road today using R-134a COULD NOT be retrofitted to use R-1234 for reasons having to do with engineering complexity.
The Environmental Protection Agency (EPA) seems ready to inhibit retail sales of the soon-to-be-approved air-conditioning refrigerant expected to replace R-134a. The agency is about to publish a significant new use rule (SNUR) regarding HFO1234yf (R-1234), the R-134a replacement. The SNUR is half of a two-part regulatory approval process.
The other half is EPA approval of R-1234 within its significant new alternatives policy (SNAP) program. The SNAP proposed rule implied that the SNUR would restrict use of R-1234 by do-it-yourselfers (DIYers).
At the end of 2009, the EPA extended the comment period on the SNAP proposed rule to Feb. 1, 2010 because of a request from the Automotive Refrigerant Products Institute and the Automotive Aftermarket Industry Association (AAIA). Michael Conlon, a Washington attorney who represents the groups, asked for the delay because the aftermarket industry wants to be able to review the SNUR before commenting on SNAP requirements. At the time of publication, Conlon expected the SNUR to come out soon in the form of a direct final rule, meaning any DIYer restrictions would be a done deal, unless opponents raised their voices. “Procedurally, if someone objects to a direct final rule, EPA has to withdraw it and start over,” Conlon explains.
Margaret Sheppard, the EPA official heading the SNUR, did not respond to a request on that announcement’s timeline.
We already reported on the proposed SNAP, approving R-1234 as the “green” successor to R-134a, the current global auto air-conditioning refrigerant of choice, which is being phased out in Europe and is likely to disappear in the U.S. soon, in part because of the EPA’s vehicle emissions rulemaking, which aims to improve mileage and decrease GHG emissions from vehicle tailpipes.
SNAP and SNUR regulatory proceedings are “inextricably intertwined,” according to a letter sent to the EPA by the Automotive Refrigerant Products Institute (ARPI) and AAIA, because the SNAP proposed rule said: “Consumer exposure from filling, servicing or maintaining MVAC systems without professional training and the use of section CAA Section 609 certified equipment may cause serious health effects.” In their letter, the two trade groups argued that the EPA cannot regulate a new refrigerant under its new chemical program unless it finds that Section 609’s refrigerant regulations (within SNAP) are insufficient to the task. The stratospheric protection division, which has authority over Section 609, has done numerous previous rulemakings on alternative vehicle refrigerants, and has the technical expertise to decide whether R-1234 requires limitations on “do-it-yourselfer” (DIYer) use.
The EPA concern is that consumers who buy R-1234 and then work with their vehicle’s air-conditioning system might be overcome by the chemical’s toxicity, or its flammability. But DIYers would only be using a couple of cans to service their own auto. Moreover, a study done for the Society of Automotive Engineers by Gradient Corporation found that there was little if any risk of an explosion under the hood caused by R-1234. If there were flammability concerns, it would be with large quantities stored in a warehouse, or in a retailer’s backroom; but even that threat would be remote. EPA concern about toxicity seems a stretch, too, as an argument it leans on is that there is a danger when a refrigerant can is held upside down for a period, but not when it is right-side up.
Aside from DIYer use restrictions, which could be included in the upcoming SNUR, there is continuing concern with the proposed conditions of use in the SNAP proposal, which includes requiring automobile manufacturers to make changes to the design of air-conditioning systems to mitigate any potential leakages of R-1234. If those steps are finalized, that would mean that all the cars on the road today using R-134a COULD NOT be retrofitted to use R-1234 for reasons having to do with engineering complexity.
U.S. to work with China on EV development
Automotive Engineering/January 2010
The U.S.-China electric-vehicles initiative announced while President Obama was in China in November caught some in the American vehicle industry by surprise. The initiative covers four areas, initially thought to include standards, with the details of exactly what is going to be done in each still to be worked out. Extensive work already has been done in some of those areas within the U.S. auto community, and without Chinese participation.
There were mixed reactions to the announcement. One spokesman for a U.S. company says there was little "substance or thought behind it." He views the initiative as a public relations gesture.
But Brian Wynne, President of the Electric Drive Transportation Association, is very positive. He says the four areas were developed at a forum in Beijing in September organized by the U.S. Department of Energy and its Chinese counterpart, the China Ministry of Science and Technology. There were about 50 U.S. participants at that meeting.
"Listening to the Chinese talk was an enlightening experience," said Wynne. "Their industry is facing the same challenges from an economic and technical standpoint as our industry. If we can help each other, we will get there faster."
To the extent that there was some confusion or uncertainty about the announcement, it may have been because of some unclear verbiage in the White House press release, which mentioned as the four areas of cooperation joint standards, joint demonstrations, joint public awareness and engagement, and a joint technical roadmap.
Phyllis Yoshida, Deputy Assistant Secretary for International Energy Cooperation at the DOE, is intimately familiar with the initiative. She said the White House statement on the four areas should not have mentioned standards. In an interview with AEI, she emphasized there was no thought of forcing SAE International or any other EV standards group to go back and get Chinese input into nearly completed standards.
"Hopefully, we will get the Chinese to adopt the SAE standards," she said.
Instead of mentioning standards, the White House statement should have listed the testing of standards as one of the four areas, said Yoshida, adding that the U.S. is doing something similar with European countries and hybrids at Argonne National Laboratory.
Jack Pokrzywa, SAE Director of Ground Vehicle Standards at SAE, said SAE technical standards committees are on the cusp of delivering about 20 EV-related standards in the near term. He pointed out that the standards have been vetted by experts from countries around the globe.
SAE standards such as J2836/1 through /5 “Use Cases for Communication between Plug-in Vehicles and the Utility Grid"; SAE J2847/1 through /5 “Communication between Plug-in Vehicles and the Utility Grid”; and SAE J1772 “SAE Electric Vehicle Conductive Charge Coupler” provide foundation to the rest of the standards suite. "SAE and their partners—the Chinese Automotive Technology and Research Center (CATARC)—have a good working relationship focused on standards development, among other initiatives," Pokrzywa added.
Yoshida explained that the next step in implementation of the U.S.-China EV initiative is to sit down and talk again with the Chinese about specifics. "There has been some activity," she said. "We are already talking to them about cities in both countries which could participate in demonstrations."
Of course, the Big Three U.S. automakers are already deep into EV demonstrations funded in 2008 by the George W. Bush DOE. This past August, Ford Motor Co. announced it was moving forward with its demonstration project involving Escape plug-in hybrids using an intelligent vehicle-to-grid communications and control system. This new technology—which builds on Ford’s advancements such as SYNC, SmartGauge with EcoGuide, and Ford Work Solutions—allows the vehicle operator to program when to recharge the vehicle, for how long, and at what utility pricing rate.
Any joint U.S.-China EV demonstrations may be worth more to smaller, entrepreneurial U.S. EV start-ups such as Coda, Tesla, and Fisker, who have a much smaller presence, if they have one at all, in the booming Chinese market, as opposed to General Motors, Ford, and Chrysler, who have marketing arms, joint R&D operations, and other contractual links there.
Mark Duvall, Director of Electric Transportation, Electric Power Research Institute, which is a participant in two of the three DOE-funded EV demonstrations, explained that the Chinese and Americans have taken a different approach to vehicle electrification. Duvall was in Beijing for the September forum. The Chinese have taken a bottom-up approach, starting with scooters but have not taken a major step into manufacturing full function EVs, which is where the Big Three and even Tessler, Coda, and the other smaller companies have begun. So Duvall sees an opening for the smaller companies in China.
"Who is to say Tesla, Coda, Fisker, or someone else can't have a showroom in downtown Beijing," Duvall said.
The U.S.-China electric-vehicles initiative announced while President Obama was in China in November caught some in the American vehicle industry by surprise. The initiative covers four areas, initially thought to include standards, with the details of exactly what is going to be done in each still to be worked out. Extensive work already has been done in some of those areas within the U.S. auto community, and without Chinese participation.
There were mixed reactions to the announcement. One spokesman for a U.S. company says there was little "substance or thought behind it." He views the initiative as a public relations gesture.
But Brian Wynne, President of the Electric Drive Transportation Association, is very positive. He says the four areas were developed at a forum in Beijing in September organized by the U.S. Department of Energy and its Chinese counterpart, the China Ministry of Science and Technology. There were about 50 U.S. participants at that meeting.
"Listening to the Chinese talk was an enlightening experience," said Wynne. "Their industry is facing the same challenges from an economic and technical standpoint as our industry. If we can help each other, we will get there faster."
To the extent that there was some confusion or uncertainty about the announcement, it may have been because of some unclear verbiage in the White House press release, which mentioned as the four areas of cooperation joint standards, joint demonstrations, joint public awareness and engagement, and a joint technical roadmap.
Phyllis Yoshida, Deputy Assistant Secretary for International Energy Cooperation at the DOE, is intimately familiar with the initiative. She said the White House statement on the four areas should not have mentioned standards. In an interview with AEI, she emphasized there was no thought of forcing SAE International or any other EV standards group to go back and get Chinese input into nearly completed standards.
"Hopefully, we will get the Chinese to adopt the SAE standards," she said.
Instead of mentioning standards, the White House statement should have listed the testing of standards as one of the four areas, said Yoshida, adding that the U.S. is doing something similar with European countries and hybrids at Argonne National Laboratory.
Jack Pokrzywa, SAE Director of Ground Vehicle Standards at SAE, said SAE technical standards committees are on the cusp of delivering about 20 EV-related standards in the near term. He pointed out that the standards have been vetted by experts from countries around the globe.
SAE standards such as J2836/1 through /5 “Use Cases for Communication between Plug-in Vehicles and the Utility Grid"; SAE J2847/1 through /5 “Communication between Plug-in Vehicles and the Utility Grid”; and SAE J1772 “SAE Electric Vehicle Conductive Charge Coupler” provide foundation to the rest of the standards suite. "SAE and their partners—the Chinese Automotive Technology and Research Center (CATARC)—have a good working relationship focused on standards development, among other initiatives," Pokrzywa added.
Yoshida explained that the next step in implementation of the U.S.-China EV initiative is to sit down and talk again with the Chinese about specifics. "There has been some activity," she said. "We are already talking to them about cities in both countries which could participate in demonstrations."
Of course, the Big Three U.S. automakers are already deep into EV demonstrations funded in 2008 by the George W. Bush DOE. This past August, Ford Motor Co. announced it was moving forward with its demonstration project involving Escape plug-in hybrids using an intelligent vehicle-to-grid communications and control system. This new technology—which builds on Ford’s advancements such as SYNC, SmartGauge with EcoGuide, and Ford Work Solutions—allows the vehicle operator to program when to recharge the vehicle, for how long, and at what utility pricing rate.
Any joint U.S.-China EV demonstrations may be worth more to smaller, entrepreneurial U.S. EV start-ups such as Coda, Tesla, and Fisker, who have a much smaller presence, if they have one at all, in the booming Chinese market, as opposed to General Motors, Ford, and Chrysler, who have marketing arms, joint R&D operations, and other contractual links there.
Mark Duvall, Director of Electric Transportation, Electric Power Research Institute, which is a participant in two of the three DOE-funded EV demonstrations, explained that the Chinese and Americans have taken a different approach to vehicle electrification. Duvall was in Beijing for the September forum. The Chinese have taken a bottom-up approach, starting with scooters but have not taken a major step into manufacturing full function EVs, which is where the Big Three and even Tessler, Coda, and the other smaller companies have begun. So Duvall sees an opening for the smaller companies in China.
"Who is to say Tesla, Coda, Fisker, or someone else can't have a showroom in downtown Beijing," Duvall said.
The SEC's New Cop on the Beat
Financial Executive magazine/December 2009
This is a pre-edited version, not the version in FE's digital edition
If there were a corporate enforcement weathervane atop the Securities and Exchange Commission (SEC) headquarters on F St. NE in downtown Washington, D.C., it would have been gyrating wildly since new Obama Chairman Mary Schapiro and her enforcement chief, former federal prosecutor Rob Khuzami, took control of the agency’s financial police force earlier this year. Conventional wisdom said that the new Democratic hegemony in Washington stirred by a pissed-off public perception of at least American financial corporations stemming from last fall's near economic disaster would have launched the SEC down an aggressive enforcement path. Populist police on the prowl, holding leash-straining, fraud-sniffing dogs, that was the expectation. "People did expect last year’s election to result in a more aggressive SEC,” states Russ Ryan, a partner with King & Spalding and a former assistant director of enforcement at the SEC.
In an interview, Khuzami says, "Some think we should be doing more, and others think less. But I don't lead the division by adding up our supporters and detractors. Rather, our focus is on aggressively enforcing the laws against those who commit fraud and other misconduct."
Schapiro and Khuzami have rhetorically flashed their badges during their first year, announcing procedural and bureaucratic U-turns from the Chris Cox era. Enforcement cases have increased in number. New legal ground has been broken--depending on whom one talks to--with regard to accounting fraud charges. But so far--and that is an important caveat at this still early date--there has been a lot more flash than lash. The Obama SEC has so far taken a very reasonable, some would say--and one federal judge has publicly said so--timid, approach to corporate enforcement.
It is clear that the Obama SEC is bringing more cases, and is going after corporate officials, particularly, in some cases stretching the law beyond the bounds that constrained the George W. Bush SEC. By and large, under Chairman Schapiro and her enforcement chief, Rob Khuzami, the SEC is stepping up its pursuit of senior corporate officials," says Barry R. Goldsmith,a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and co-chair of the firm's Securities Enforcement Practice Group. "Many of these cases are being litigated and it remains to be seen how successful the Commission's stepped up focus on senior executives will be."
There have been two cases--one having to do with a financial restatement, the other with illicit foreign payments-- where Khuzami has charged corporate executives in legal areas where his predecessors in the Bush administration feared to tread. But in one of those cases the proposed fine was negligible. Moreover, in the Bank of America settlement Khuzami and Schapiro approved, a federal judge heatedly criticized them for not charging corporate officials, among other things.
This is a pre-edited version, not the version in FE's digital edition
If there were a corporate enforcement weathervane atop the Securities and Exchange Commission (SEC) headquarters on F St. NE in downtown Washington, D.C., it would have been gyrating wildly since new Obama Chairman Mary Schapiro and her enforcement chief, former federal prosecutor Rob Khuzami, took control of the agency’s financial police force earlier this year. Conventional wisdom said that the new Democratic hegemony in Washington stirred by a pissed-off public perception of at least American financial corporations stemming from last fall's near economic disaster would have launched the SEC down an aggressive enforcement path. Populist police on the prowl, holding leash-straining, fraud-sniffing dogs, that was the expectation. "People did expect last year’s election to result in a more aggressive SEC,” states Russ Ryan, a partner with King & Spalding and a former assistant director of enforcement at the SEC.
In an interview, Khuzami says, "Some think we should be doing more, and others think less. But I don't lead the division by adding up our supporters and detractors. Rather, our focus is on aggressively enforcing the laws against those who commit fraud and other misconduct."
Schapiro and Khuzami have rhetorically flashed their badges during their first year, announcing procedural and bureaucratic U-turns from the Chris Cox era. Enforcement cases have increased in number. New legal ground has been broken--depending on whom one talks to--with regard to accounting fraud charges. But so far--and that is an important caveat at this still early date--there has been a lot more flash than lash. The Obama SEC has so far taken a very reasonable, some would say--and one federal judge has publicly said so--timid, approach to corporate enforcement.
It is clear that the Obama SEC is bringing more cases, and is going after corporate officials, particularly, in some cases stretching the law beyond the bounds that constrained the George W. Bush SEC. By and large, under Chairman Schapiro and her enforcement chief, Rob Khuzami, the SEC is stepping up its pursuit of senior corporate officials," says Barry R. Goldsmith,a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and co-chair of the firm's Securities Enforcement Practice Group. "Many of these cases are being litigated and it remains to be seen how successful the Commission's stepped up focus on senior executives will be."
There have been two cases--one having to do with a financial restatement, the other with illicit foreign payments-- where Khuzami has charged corporate executives in legal areas where his predecessors in the Bush administration feared to tread. But in one of those cases the proposed fine was negligible. Moreover, in the Bank of America settlement Khuzami and Schapiro approved, a federal judge heatedly criticized them for not charging corporate officials, among other things.
Evidence of other mixed signals abound. The SEC agreed to a settlement with former AIG CEO Hank Greenberg in a case where the agency alleged Greenberg made material misstatements that enabled AIG to create the false impression that the company consistently met or exceeded key earnings and growth targets. But the $15 million fine ($7.5 million penalty/$7.5 million disgorgement), obviously substantial for mere mortals, was considered pocket change for Greenberg. He did not admit either guilt or innocence. Now he has started another insurance company. Michael Strauss, former chairman and CEO of American Home Mortgage agreed to pay an even smaller fine of $250,000 fine and $2 million in disgorgement to settle SEC charges that he fraudulently understated American Home Mortgage's first quarter 2007 loan loss reserves by tens of millions of dollars, converting the company's loss into a fictional profit.
Khuzamki notes the Greenberg penalty represents one of the largest, if not the largest, fines ever imposed on a corporate executive by the SEC. "In setting the appropriate fine level, we look at a variety of factors, including not just the personal wealth of the individual, but also the offense, the individual conduct, the strength of the evidence and likely result at trial, the impact on victims, other charges or settlements in the case, and other factors," he explains. "The goal is to achieve an appropriate level of deterrence, both for that individual and for others who might be contemplating similar action."
In terms of proposed settlements with corporations-- General Electric, Terex and Bank of America are prime examples--Schapiro and Khuzami have followed in the footsteps of the Bush SEC. "Sitting here today, no one can say based on the cases being pursued that it feels any different at the SEC than it did over the past couple years,” says Martin Wilczynski, a senior managing director at FTI Consulting and formerly an official in the SEC Division of Enforcement. He adds, however, "Everyone needs to hold off making an assessment until the transition is complete, the new leadership has settled in, and the reorganization is complete. Ultimately, people in industry expect the SEC will be reinvigorated."
So business's worst fears about a marauding SEC have not been realized, though some in the corporate community see cause for worry. Thomas Quaadman, executive director for financial reporting policy and investor opportunity at the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, says his organization made 23 recommendations earlier this year aimed at turning the SEC into a more efficient, effective agency. "Some of that is happening," he states. But the Chamber thinks it is wrong to start down a road where corporate officials are charged under the Sarbanes-Oxley "clawback" provision when the SEC acknowledges (as it did in the CSK Auto Corporation case) that a corporate executive did nothing wrong (more on this case below).
While Schapiro and Khuzami appear to be upping the ante on corporate officials, their biggest embarrassment in Year One was the criticism by federal judge Jed Rakoff who in September blistered the agency for agreeing to a supine settlement with Bank of America. Rakoff, in disallowing the settlement, argued that the SEC should have charged some B of A officials. Judge Rakoff called the $33 million settlement unfair and inadequate. Khuzami is unrepentant about the settlement, which he approved. He says he would not do anything different despite Rakoff's criticism. "I supported the Bank of
Nonetheless, Rakoff's criticism makes it likely that the SEC will take a tougher line on corporate accounting fraud settlements. Also pushing the agency in that direction was a report from the SEC Inspector General which came out at about the same time as Rakoff's decision. The report listed SEC failures in the Madoff case going back more than a decade. In addition, New York State Attorney General Andrew Cuomo is breathing down Schapiro's back. "In light of the Madoff debacle and the increasing competition that the SEC has received from first Spitzer and now Cuomo, the SEC knows that it cannot move slowly or it will be left in the dust by other agencies," says John Coffee, Adolf A. Berle Professor of Law, Columbia School of Law, an expert of corporate governance and securities law. "In the case of Bank of America, they had to do something or look like they were missing at the scene of the crime. But they ended up trying to get away with a cheap victory. Schapiro needs to recognize that attempt to settle only with the corporation when it is its officers who were misbehaving will only embarrass the Commission and make it look as if it had been captured by those it is suppose to regulate."
Again, amidst very mixed signals, the SEC has appeared to lay the groundwork in a couple of instances for a more expansive legal attack on corporate officials than was the case during the Bush administration. The SEC had already filed a case--prior to Rakoff's decision--using a murky Sarbanes-Oxley section 304 provision to seek a $4 million clawback from a former CEO who had never been accused of wrongdoing in a case where his company, CSK Auto Corporation, had previously settled with the SEC because of charges of accounting fraud, after restating three years’ worth of financial statements. "That seems like a change in policy," states Ryan, "and it is unmistakably more aggressive."
Khuzami argues that the CSK case does not represent a new legal battlefront against corporate officials. As far as CSK, Section 304 by its terms does not require a CEO or CFO to have engaged personally in misconduct," he emphasizes. "That couldn't be clearer. We are not breaking new ground, since Congress has very clearly authorized us to bring such actions."
In the second case, the SEC filed an enforcement action under the Foreign Corrupt Practices Act at the end of July alleging the former CEO and CFO of Nature's Sunshine Products were at fault for payments made by the company's Brazilian subsidiary in order to get product into Brazil. The SEC asserted claims directly against the two individuals even though they (like the former CSK CEO) were not alleged to have either involvement in or knowledge of the alleged misconduct, based solely on their "control person" Again, Khuzami deflects charges by Washington attorneys that he is opening a new legal front in the area of "control person" liability. "Not having been there (in the Bush SEC) at the time, I can't speak to historical policies or practices," he says.
Financial statements and accounting fraud remain high priorities for the enforcement division, Khuzami declares. "I haven't seen the statistics for FY2009, but historically they have accounted for 20-25 percent of all enforcement actions, and I don’t expect that to differ significantly in FY 2009," he states. "We continue to look closely at cases involving revenue recognition, understating expenses, manipulating reserves, and capitalizing costs that should be treated as income."
In order to better pursue accounting fraud and other cases, Khuzami and Schapiro have not only given more authority to junior attorneys, but they have been moving 40 percent of the management personnel in the enforcement division to the front lines. Thomas Gorman, a former senior enforcement counsel at the SEC and currently the co-chair of the American Bar Association white collar securities section, says that the new freedom for enforcement division staffers to issue formal orders of investigations on their own, without the approval of higher ups, poses a “real danger” for corporations. Gorman is an attorney with Porter Wright in Washington, DC. “Companies should really be concerned about this,” he emphasizes, "because it is a disincentive for enforcement to do a thorough preliminary investigation, which, in the past, often resulted in circumstances which looked nefarious on the surface not turning out to be illegal. The SEC’s concerns can frequently be resolved quickly. Now there is no real incentive to do a preliminary investigation.” And while the increase in the number of enforcement actions has been impressive, the quality of some of those—Bank of America, for example—has been less so. So focusing on numbers alone don’t tell the whole story.
Khuzami disputes Gorman's argument. "I don't think that is an accurate assessment," he states. "The decision by staff investigators to both open a case and to seek a formal order, which permits subpoenas to be issued, is reviewed by senior supervisors, and in addition we report the issuance of all formal orders to the Commission."
Top-level staff appointments have impressed many people. Khuzami's top deputy is Lorin Reisner who served as an Assistant United States Attorney for the Southern District of New York from 1990 to 1994. The head of the New York Regional Office is George Canellos. From 1994 through 2002, he was a criminal prosecutor in the Justice Department office Reisner had previously left. "These are seasoned litigators who know how to bring cases and hopefully they will select them carefully," notes Goldsmith. "As former prosecutors who are used to exercising discretion and know that you need evidence and not just allegations, I don't expect them to go hog wild. On the other hand, corporate executives need to be sensitive to the fact that the SEC is now far more focused on individual culpability at senior levels than it has been in recent years."
Details of proposal to combine fuel-economy and GHG limits released
Automotive Engineering/October 2009
There are more than a few pieces of controversy buried in the Obama administration’s 600-plus-page proposed rule (excluding supporting documents) dictating a uniform U.S. standard for fuel economy and for tailpipe emissions of greenhouse gases for model years 2012 through 2016.
There is not likely to be much argument about the numbers for 2016: the average for all passenger cars, SUVs, and light trucks must be at least 250 g/mi of CO2 equivalent emissions, and the corporate average fuel economy (CAFE) standard is set at 35.5 mpg. But the proposed rule will be contested by both auto manufacturers and environmentalists on whether the new standards will make cars less safe, whether CO2 emissions for electric vehicles are properly accounted for, whether the tailpipe tests are accurate, and many other issues.
The proposed rule from the U.S. EPA and NHTSA (National Highway Traffic Safety Administration) puts flesh on the bones of a conceptual agreement reached last May between those agencies, the state of California, and automakers. A uniform national GHG/CAFE standard would avert the need for automakers to sell separate fleets for California (and states adopting the California GHG standards), with the so-called “California cars” requiring higher CAFE numbers than the federal government was supporting: 35 mpg by 2020. The Alliance of Automobile Manufacturers agreed to accept a higher CAFE standard sooner, in 2016, in return for one national GHG/CAFE standard.
Charlie Territo, spokesman for the Alliance, says the 35.5 mpg average for all autos sold in 2016 was exactly what the Alliance expected. That number could turn out, however, to be as low as 34.1 mpg if the automakers take advantage of certain credits that will be available for improvements in air-conditioning systems and for selling flex-fuel vehicles. What the Alliance did not agree to last May were the interim CAFE averages for years 2012-2015. Territo declined to say whether the Alliance is happy with the interim-year numbers. “We have 60 days to review those figures,” he said. “The document is 1000 pages long.”
But one industry official in Washington says the industry’s ability to actually meet those 2016 numbers will depend on 1) new fuel-efficiency technologies working as expected, and 2) consumers swallowing the costs of those technologies, with the knowledge that they may recoup those costs via resultant fuel savings over a period of years.
The federal government believes that all the technology needed to get today’s autos to 2016 GHG/CAFE levels already exists. But Jim Kliesch, a Senior Engineer at the Union of Concerned Scientists Clean Vehicles Program, said the problem is that auto manufacturers “are not packaging these technologies together.” So they might use cylinder deactivation in one model, continuously variable transmission in another, stoichiometric direct fuel injection in another. Kliesch points approvingly to Ford EcoBoost technology, a combination of turbocharging and direct fuel injection, which the company is phasing in to 90% of its models by 2013. The V6 EcoBoost provides up to a 20% increase in fuel economy with no loss in engine performance, according to Ford.
The EPA and DOT assessed the cost and benefits of applying 35 technologies to various “footprints” and came up with a GHG/CAFE target for each one. Footprint is determined by multiplying the vehicle’s wheelbase by the vehicle’s average track width. For example, the Honda Fit has a 40-ft2 footprint. The 2016 targets for the Fit and any other models (from Honda or any other automaker) with that footprint are 214 g/mi of CO2 equivalent and 41.4 mpg. The 53-ft2 Chrysler 300 would have targets of 270 and 32.8 mpg. These are “targets”; the actual requirements for each footprint will depend on the number of units produced within each footprint.
This footprint-based assessment, pushed by NHTSA, has the potential to result in manufacturers producing lighter cars, which could have a negative effect on auto safety. The proposed rule states: “…there is still risk that manufacturers will rely on downweighting to improve their fuel economy (for a given vehicle at a given footprint target) in ways that may reduce safety.” For example, an automaker with two models in a given footprint might be inclined to stop production of the heavier (and theoretically safer one in terms of mass) to meet that footprint’s target.
Beyond concerns about safety, GHG and CAFE testing methods are also an issue. To measure fuel consumption, NHTSA uses a dynamometer to measure the amount of CO2 and other carbon compounds emitted from the tailpipe; it does not directly measure the amount of fuel consumed during a vehicle test. It is difficult to directly measure how much fuel is consumed by an auto for a number of reasons—for example, because it is very difficult to precisely measure the small amount of fuel that is consumed over a 7.5-mi dynamometer test run.
The carbon exhaust measurement method, carried out in a dilution tunnel, is “very precise,” said John German, Senior Fellow and Program Director, International Council for Clean Transportation and a former Honda America executive. The carbon content of the test fuel is then used to calculate the amount of fuel that had to be consumed per mile to produce that amount of CO2. In addition to the shortcomings of a 7.5-mi test distance, the dynamometer test also suffers some external shortcomings, related to the conditions under which the test is run, including the fact there is no hard acceleration at high speeds; air-conditioning is not considered; and there is no testing of the vehicle in cold weather.
Leaving out A/C systems is a disincentive when it comes to improving CAFE performance, since manufacturers don’t get credit either for substituting greener refrigerants or, more importantly, given the impact on fuel use, for such mechanical features as cycling the compressor on and off, which most A/C systems are not capable of doing, according to German.
These shortcomings explain why the two agencies state in the proposed rule: “Both EPA and NHTSA are interested in developing programs that employ test procedures that are more representative of real-world driving conditions, to the extent authorized under their respective statutes. This is an important issue, and the agencies intend to address it in the context of a future rulemaking to address standards for model year 2017 and thereafter.”
While the emphasis in the proposed rule is on better performance of conventional gasoline vehicle engines, its treatment of plug-in hybrid and electric vehicles has sparked a controversy, too. The proposed rule, for example, does not count heat-trapping emissions associated with generating electricity—from coal plants, for example—to charge those vehicles. For the purposes of calculating GHG emissions for a given manufacturer’s fleet, the EPA would assign a value of zero emissions to every plug-in and electric vehicle. Kliesch said those types of vehicles should be held accountable for their share of such emissions.
NHTSA and EPA jointly will hold three public hearings on the proposed rule: Oct. 21 in Detroit; Oct. 23 in New York; and Oct. 27 in Los Angeles.
EPA GHG Emission Requirements Could Affect Interstate Pipelines
Pipeline & Gas Journal/November 2009
Pipelines dodged one Environmental Protection Agency greenhouse gas (GHG) bullet temporarily but may get hit by another.
The EPA's final rule issued on Sept. 22 on who has to report GHG emissions to the EPA leaves out the interstate pipeline industry, although it is not clear whether the industry, which had protested its initial inclusion in the proposed rule, is out of the woods entirely or whether the agency is simply refining reporting requirements for pipelines, and will publish them in the near future. The more potentially significant EPA GHG action, however, was its Sept. 30 proposed rule which would actually require industrial sources of GHG emissions to reduce those emissions below certain levels. Again, the application of this second, proposed rule to the pipeline industry is unclear, according to Terry Boss, a senior vice president with INGAA.Pipelines are responsible for two sources of GHGs: carbon dioxide from the internal combustion engines which run compressors, and methane from the compressors themselves. The proposed rule limiting emissions would apply to any industrial source – and its chief targets, of course, are power plants, refiners and industrial manufacturers – which emits more than 250 tons a year of GHGs from any source. Boss says he thinks interstate pipelines will exceed that floor, but he is not sure how dramatically. If it is over the threshold, a pipeline company might have to install what is referred to as "best available control technology." That could be costly. The costs of controlling nitrogen oxide, which is not a GHG, but is the subject of another proposed rule the EPA issued last summer, is expensive, and might parallel the costs of controlling carbon dioxide and methane emissions. To address a state requirement, an INGAA member was recently required to reduce NOx from existing IC engines for several facilities. At one facility, low emissions combustion (LEC) NOx control was installed on three larger engines (3,400 hp each) with a total capital investment (TCI) cost of over $3.4 million.
Of course, simply reporting GHG emissions to the EPA would presumably be less costly. Nonetheless, INGAA took issue with a number of the reporting elements of the EPA proposal issued last summer, particularly the requirement that the calculations be done via "direct measurement." INGAA proposed an alternative using emission factor based approaches to estimate fugitive emissions. When the EPA published its final rule on GHG reporting, it admitted that the pipelines (and the oil companies who are in the same category, for purposes of GHG reporting) made some good points.
"These alternatives will provide similar coverage of vented and fugitive methane and other GHG emissions in the oil and gas sector, while concurrently taking into account industry burden," the agency said. "Where applicable, EPA will also consider the applicability of engineering estimates, emissions modeling software and emissions factors rather than relying so extensively on the use of direct measurement. EPA will consider optimal methods of data collection in order to maximize data accuracy, while considering industry burden."
Untangling the Knot
Human Resource Executive magazine...October 16, 2009 (Cover story on health care reform)
ByStephen Barlas
By
For all the heated rhetoric devoted to the congressional battle over healthcare reform, or maybe because of it, any final bill -- if there is one -- probably will affect the status quo among large employers (especially self-insured ones) only at the margins. Smaller employers may bleed some dollars, but very few of them are headed for the economic emergency room as a result.
"There is a lot of noise out there, shouting and screaming," says Delia Vetter, senior director of benefits at EMC Corp. in Hopkinton, Mass. "But there is nothing in the House or Senate bills that is going to create any concerns for us at a very surface level."
The corporate world has hoped that any omnibus healthcare reform bill would detour around company health-insurance plans, and that has essentially happened. The concern now is the potential for collateral damage from any new, national individual market served by a federally-run public plan, which may or may not come to fruition.
Meanwhile, many of the other potential bugaboos bouncing off trade-association press releases have been over-inflated. For example, new federal mandates prohibiting annual and lifetime caps in corporate plans, or outlawing co-pays for preventive services, would have almost no effect on self-insured plans and perhaps only marginal impact on fully-insured plans. Nor would the taxation of so-called "Cadillac" corporate plans drive many companies anywhere near the brink.
In fact, companies have been so busy playing defense against the bloated bogeymen in the congressional proposals that they haven't had the time, resources or energy to play offense -- this despite a recognition that the healthcare cost-and-delivery equation needs to change.
Johnna G. Torsone, executive vice president and chief human resource officer for Stamford, Conn.-based Pitney Bowes, says, "We almost all agree that the current system is unsustainable."
Few Incentives for Change
There was talk on Capitol Hill earlier this year, when the healthcare reform bill got rolling, about the dire need to "bend the cost curve," a goal applauded by business, by changing the way physicians and hospitals are paid. Instead of basing payment on volume of services, as is the case now, fees would be determined by the quality of care provided, and the health outcomes.
"Payment reform is not part of the package," says Vetter. Neither are incentives for employer adoption of healthcare information technology. Vetter, for example, says EMC has reduced its rate of healthcare-cost increases from double digits seven years ago to "mid-single digits" today.
This has been accomplished via a holistic approach to employee wellness that includes a bevy of personalized programs, including personal healthcare management options around the use of healthcare information technology.
These include programs such as SmartBeat, a Web-based hypertension-monitoring program offered in partnership with the Center for Connected Health, in which employees use wireless devices to monitor and self manage their blood pressure and confidentially share data with their healthcare providers through a "personal health record" offered by EMC in partnership with WebMD Health.
Although the stimulus bill Congress passed last winter appropriated nearly $20 billion to help doctors and hospitals purchase healthcare IT, there was nothing in it for companies that spend on electronic health initiatives.
Nor are there incentives in the emerging House or Senate bills that corporate HR departments can take to their CEOs to help make the case for adoption of programs like SmartBeat and HealthLink, EMC's interactive employee-health portal. "Many employers don't understand the power of integrating technologies to drive consumer behavior, and manage overall health," says Vetter.
Aside from shortcomings in the area of system reform and health IT incentives, the emerging House and Senate bills do nothing to change the nation's thinking about healthcare.
"What is troubling to me is that you do not hear enough in the public debate about the need to incent, inform and educate individuals about their responsibility to take ownership for their health and healthy behaviors and to use the system more effectively and efficiently to drive disease prevention, not just disease management," says Torsone.
"It is a moral hazard not to be honest about this or none of us may ultimately get adequate care in the future."
Lacking a "Wellness Offensive"
Like EMC, Pitney Bowes has been a leader in propagating a "holistic" approach to wellness programs. PB has gone so far as to redesign its buildings' stairwells so as to make them an inviting venue for exercise, which the company exhorts employees to get for at least 30 minutes a day. Before PB agrees to pay for stomach-reducing bariatric surgery, it will ask the employee to first consider going through a structured weight-loss program.
"We have had several high-visibility executives go this route and their success has been viral, in a way," says Torsone. "But in the public discussion about healthcare reform, I don't hear this talked about. Period."
While corporations have had somewhat of a free hand to create wellness programs, Randy Vogenberg, a principal at the Institute for Integrated Healthcare, an organization whose clients include the National Business Coalition on Health and its 60 affiliate coalitions around the country, explains that some human resource departments are counseled by their legal departments not to go too far.
The legal line can be blurry, based on foggy and sometimes conflicting state and federal laws. For example, one company recently won a federal district court decision against an employee who sued because of a corporate prohibition against smoking. Congress could have chosen to clarify federal law in this area as part of healthcare reform, opening a much wider wellness highway for corporate HR departments. Yet there are zero initiatives in any bill on this score.
The only wellness provision in both the House and Senate bills to pass through committees establishes a grant program -- which may or may not be funded through an appropriation -- for community wellness programs.
Vogenberg explains that some community wellness programs exist in various forms, with some sponsored by poverty centers, hospitals, federally funded healthcare clinics and other groups. But the relatively small number of people who take advantage of those programs are the self-motivated, and the bigger question is not how you fund more of these programs, but how you get the "unmotivated" -- the much larger group in need of such help -- to participate.
The two Senate committee bills each have one small provision on corporate wellness programs. The Senate Health, Education Labor and Pensions Committee increases the cap on the premium concession companies can award employees who participate in wellness programs.
The draft of the Senate Finance Committee bill turns a current corporate tax deduction for wellness programs into a tax credit. It is not clear whether either of these provisions will make it into a final bill, if in fact there is a final bill.
Again, wellness incentives are skimpy in the House and Senate bills, in part because the Congressional Budget Office has found it difficult, for arcane statistical reasons, to credit wellness provisions with "savings" to the federal government.
However, the business community hasn't exactly played offense on behalf of wellness, either. Some individual companies, such as Safeway, have made the case for wellness incentives. But in general, the larger business community and its trade associations have marshaled most of their political resources to oppose a public plan and taxation of employee health benefits. There's been little time or money left over for wellness advocacy.
A Question of Caps
In terms of federal mandates within some of the proposed legislation that would have a major impact on companies, the top one, according to Vogenberg, is a requirement that companies eliminate caps on annual and lifetime health costs that they will pay. He says almost all companies have these caps, which are all over the place in terms of dollar value and what they include. Some have caps that include drug expenditures; some don't.
"When I was at Aon Consulting," says Vogenberg, "we did a study of specialty pharmacy and medical benefit designs, which found that the most critical factor when determining out-of-pocket expenses [cost sharing] for both employers and employees was where annual and lifetime caps were set."
Jack Mahoney, a physician and consultant on strategic health initiatives for Pitney Bowes, says the company does not require co-payments for preventive care, nor does it have an annual cap on health-insurance expenditures. PB does have a $2 million lifetime cap. But in the past five years, according to Mahoney, only one of the company's 35,000 employees has exceeded the cap.
"Most large companies have fairly generous caps," he says. Moreover, Mahoney adds, a potential mandate that insurance companies extend coverage to everyone, regardless of pre-existing conditions, has stirred much debate but would have almost no impact on the cost of corporate health insurance plans.
Such a mandate would not apply to corporations because the Health Insurance Portability and Accountability Act already requires that companies cover all new hires unless a health problem was not covered under an employee's previous policy with another employer.
The requirement to cover all enrollees, regardless of pre-existing conditions, in a so-called "public plan" would probably result in higher healthcare costs for the private sector. The corporate concern here is that the 46 million Americans now without insurance would pay relatively low premiums in a public plan because of low fees imposed by the federal government on hospitals, physicians and other providers. Those providers would theoretically increase their fees to employers to compensate for the low government rates.
In addition, some healthy workers with good but fairly expensive corporate coverage might defect from employer-provided health insurance plans to a cheaper policy in the public plan, forcing companies to pay fees for that desertion (the Senate HELP bill puts a price tag of $750 per full-time employee) and, perhaps more troubling to employers, leaving corporate plans with an older, sicker group to cover.
Some of those 46 million Americans lacking coverage are employees of small businesses. Any health insurance reform legislation would require companies with employees over a certain total, maybe 25, to provide insurance. If they didn't, they would have to pay a fee (again, $750 has been mentioned) to help underwrite the cost of the individual policy the employee would purchase from the public plan.
Given that the cost of a policy for an employee would be considerably more than $750, Torsone says, some companies might shrug at the fee. They'd be wise to think longer-term, she adds.
"From a shareholder perspective, if one is thinking short term, a corporate officer might be compelled to say, 'For a $750 fee, why wouldn't I let employees go to a public plan?'" she says. "But, long-term, one would worry about the design and cost of that public plan and whether companies will be affected by adverse selection and have to pay for a public plan through higher taxes."
The impact of a public plan on the private sector depends considerably, of course, on the details of how the plan would work. Those are still very much up for grabs.
So, too, are the specifics of what might constitute a Cadillac health plan, whose value above a certain "average" dollar level would be taxable. The Senate Finance Committee's serious consideration of a Cadillac tax has generated fear among the Fortune 500. But here, too, false fears may be afloat. "We do not have any Cadillac plans," says Torsone.
Paul Dennett, senior vice president of healthcare reform at the American Benefits Council, says that if a Cadillac plan was valued at $25,000, that would be 50 percent to 60 percent higher than the average plan offered by the Federal Employees Health Benefit Program. The FEHBP value is a benchmark of sorts for what constitutes a reasonable average family health-insurance plan.
"Very few corporate plans are at the $25,000 level," Dennett says. "In any case, many plans that are over $20,000, for example, are not Cadillac plans. They are high-cost because of where employees are located, because a large percentage of employees are older or early retirees, or because the employer has a small group."
October 16, 2009
Copyright 2009© LRP Publications
U.S. Health Care A Work In Progress
Financial Executive magazine...September 2009
As Congress prepares to duke it out when returning from recess on details of a
The health-care reform legislation snaking its way through Congress is not nearly as venomous as some in the corporate community initially worried it would be. In truth, it is not close to being “transformative,” in the sense that it makes major changes in the way health care is delivered and how costs are controlled. So existing corporate health insurance programs will stay in place, as is, for the most part, which is the good news, so it seems — for now.
But the bill might bite some small businesses. There is likely to be a requirement that businesses over a certain threshold size either provide insurance, or that all individuals whose companies don’t provide insurance purchase a policy — like automobile insurance is required — from state-based cooperatives, where private insurers will compete for these estimated 46 million new “customers,” said to be the uninsured.
In the latter instance, companies would subsidize the costs of some employees’ premiums. If a threshold is set for required company coverage, it will be above $500,000 a year in payroll, and probably higher. The House’s Affordable Health Choices Act, for example, requires employers above $500,000 that do not provide insurance to pay an 8 percent payroll tax.
These taxes would help fund the subsidies for employees and the unemployed who go to nonprofit state insurance cooperatives or health insurance exchanges to purchase individual policies.
If private plans offered in the states have to vie for this new lollapalooza of a market with a federal government plan(s), referred to as a “public option,” — where the federal government creates a government-run insurance option to compete with private plans in efforts to drive down costs to consumers — private insurers may end up shifting some of their costs to private employers.
Yet some believe low, government-negotiated reimbursements will harm rural health-care providers and physicians would make up the gap in revenue by trying to negotiate higher reimbursements from private employers buying coverage from private plans.
As company premiums rise, younger, healthy employees could defect from reasonably good corporate plans to cheaper “public” plans.
That loss would be a double whammy on corporate costs.
The U.S. Chamber of Commerce Senior Manager of Health Policy James P. Gel-fand explains: “We especially don’t want younger, healthier employees to leave because that raises costs for everyone in the employer plan, and eventually you get to a death spiral and the plan ends.”
The big concern for employers — especially large companies that already provide good health benefits — is that insurers will take a loss on policies extended to the formerly uninsured and then try to make up that lost revenue by increasing premiums for employers. Following closely in second place is a concern that companies and their employees, either directly or indirectly, will have to pay the lion’s share of the $1 trillion bill that will come due after 10 years of coverage of the nearly 46 million so-called uninsured.
WHO to Tax
In terms of the 10-year costs and the revenue-raising options, the House bill has been much more problematic. The Congressional Budget Office estimated that the House plan could raise the
The tax increases honchoed by Ways and Means Chairman Rep. Charles Rangel (D-N.Y.) would have made married couples making $350,000 subject to a 1 percent income surtax. The levy would rise to 2 percent for those making above $500,000 and 3 percent for those with incomes of $1 million or more. If those surtaxes stay in a final bill, which is likely, the starting income level will probably be upped considerably, to maybe $1 million a year, though the level of surtax is anyone’s guess.
Members of the Blue Dogs barked at the new taxes, too. Given their ability to stop a bill in the House, their yapping forced Senate Finance Committee Chairman Sen. Max Baucus (D-Mont.) and top Republican Sen. Charles Grassley (R-Iowa) to both cut costs and come up with revenue sources different from the House’s to win support in the upper house from Senate Democrats politically aligned with the House Blue Dogs.Any Senate plan will have to be even more moderate to attract Republican votes, which will probably be needed, even though Democrats theoretically have a 60-vote filibuster-proof majority.
But two senior Democrats, Sens. Robert Byrd (D-W.Va.) and Ted Kennedy (D-Mass.), have been sick and may not be able to get to the Senate floor to vote. (Editor note: by publication time, Sen. Kennedy had passed away.) So Baucus and Grassley are heading toward raising revenue by taxing generous employee insurance plans, an idea the unions have fought, and which business groups have also been unenthusiastic about.
Such a tax would bring in considerable revenue and encourage companies to offer plans with higher out-of-pocket costs, forcing employees to be — or so the reasoning goes — smarter health care consumers. That would help constrain costs, possibly.
An alternative, pushed by Sen. John Kerry (D-Mass.), would tax the insurance companies that offer those expensive policies, not the employers or the employees. In that instance, of course, the insurance companies would likely pass along the cost of that tax to employers in the form of higher premiums. “The Senate Finance Committee is likely to define the framework of the possible for negotiations this fall,” states Paul Dennett, senior vice president for Health Care Reform at the American Benefits Council (ABC), most of whose members are large corporations.
Dennett says the Finance Committee’s emerging approach “is the most favorable” from an employer’s standpoint. There will not be a requirement that employers provide health insurance, nor will there be a minimum benefit package companies have to supply if they voluntarily offer insurance.
But in the event employees found company policies too pricey — the Senate Health, Education, Labor and Pension Committee set the threshold at 12.5 percent or more above the employee’s wage — they could buy a cheaper policy from the state-level cooperatives, and the company might have to subsidize that premium. If a company did not provide insurance, it would probably have to pay either a payroll tax surcharge or a fixed amount per employee.
Where’s the Cost Containment?
The big issues have been how to raise $1 trillion and whether employers should be dunned for not providing health insurance. Totally absent from the debate has been a serious discussion of significant measures that would help private employers reduce their health insurance costs. Even the Blue Dogs, who devoted reams of press releases to the cause of cost containment, had nothing to say of specific substance on the issue.
“Ninety-five percent of the discussion has been on how to cover the uninsured and who should pay for it,” agrees Michael Thompson, a principal in PricewaterhouseCoopers’ Human Resources Services practice. “There is no doubt business has been playing defense.”
“Business has been so concerned about possible negative impacts of the legislation that we haven’t had the time or resources to advocate building on the good things companies are doing, such as wellness programs,” concedes the Chamber’s Gelfand.
Thompson explains that one of the few corporate cost containment measures in the prospective legislation is one that will provide federal grants of some indeterminate amount for local community wellness programs. These would probably be pilot programs to begin with — where local companies, physicians, hospitals and even supermarkets get together to help employees either prevent or mitigate chronic conditions such as diabetes, cardiovascular disease and cancer, to name a few.
Restraining health-care costs tops business’s agenda. Martin Reiser, manager, Government Policy, Xerox Corp., explains that according to government estimates, during 2008-18, average annual health spending growth (6.2 percent) is anticipated to outpace average annual growth in the overall economy (4.1 percent). “Consequently, if we fail to address these underlying costs and improve our health-care system, rising health-care costs will threaten the viability of
Randy Vogenberg, principal at benefits-consulting firm Institute for Integrated Healthcare, estimates that employer health-care costs are averaging a 15 percent increase a year, with the range approximately 12 percent to 22 percent, not including some outliers, who do much better or much worse.
But so far, the Democrats who control Congress — with barely a cross word from President Obama — have focused on covering the uninsured, not on “bending the cost curve,” the other major objective proclaimed at the start of this political effort.
The good news, at this point, is that most larger companies, those with 100-plus employees — that is, employers who offer fairly substantial health insurance already — will not have to change their health-benefit programs appreciably because of minimum benefit standards prescribed by Congress. Congress is unlikely to actually set a minimum benefit plan beyond requiring no-cost-sharing preventive care and no annual or lifetime limits.
Roger Chizek, director of
Equally importantly, Congress will not change the terms of the Employee Retirement Income Security Act (ERISA), which allows companies to self-insure and not be bound by individual state requirements having to do with benefit packages.
Options for Control
Moreover, what was seen as an early threat by Democrats to require all employees with generous health plans to report some or all of that benefit as income has dissipated, though it has not disappeared. The House rejected this approach while the Senate Finance Committee will adopt some truncated form, applying income taxation to employer plans of a fairly high value, maybe $25,000 a year or more.
PwC’s Thompson says taxation of employee health insurance would require actuaries to come up with a way to value each of a companies’ health plans and compare it to some base level established by Congress for taxation purposes, and then report the “overage” to the Internal Revenue Service, as is currently the case for high-value, corporate-paid life insurance policies. Those IRS reports could then be subject to audits as to whether the “inputed” amounts were reasonably determined, and could even lead to regulations on how COBRA (Consolidated Omnibus Budget Reconciliation Act) rates (which are expected to be the basis for any calculation) are determined.
“This could be a very complex process that I don’t think anyone has the appetite for,” says Thompson. In addition, companies would have to pay Medicare and FICA taxes on the portions of that employee income.Some have argued that taxing high-value, employer-provided plans would, in fact, force employees to shed less optimal features, and maybe accept higher-deductibles and co-pays, forcing them to become more careful health-care consumers. Penny-pinching employees, theoretically, could put a damper on health cost increases.
But Gelfand says the way to beat down health-care costs is to give companies more leeway and incentives to institute wellness programs and to change the way health-care providers are paid — away from fee-for-every-service and toward fees for continuums of care — where physicians, hospitals and allied health providers would get one global fee, for example, for caring for someone who just had a heart attack.
“Medicare should be where this starts,” he says. “In the end, when the health-care system is completely fixed, there should be no more fee-for-service, where providers are paid based on the quantity of services they provide.”
Companies have also embraced consumer-driven, high-deductible health insurance plans as a way to keep health insurance costs in tow. Deloitte’s Center for Health Solutions found that the cost of consumer-directed health plans increased by only 2.6 percent in 2006 among the 152 major companies it surveyed. (That’s about a third the rate of increase for traditional plans.)
Medtronic offers a consumer-directed plan as one of its three options, and about 20 percent of employees have signed on. This may be one of the reasons Medtronic’s employee health insurance costs have been increasing about five percent a year.
Medtronic is deep into wellness programs, too, where employees are offered premium reduction incentives to participate in smoking cession, weight loss, dietary revamping and other programs that have a major impact on reducing insurance costs for cardiovascular diseases, diabetes and cancer, to name a few “high expense” chronic diseases.
“Wellness programs are one of the silver bullets we have, but there are a lot of constraints on us in terms of using those programs,” Chizek says.
But the bill being developed by Congress skimps badly on wellness program expansion. There are a couple of provisions that have been broached, such as turning a current corporate tax deduction for wellness programs into a tax credit and increasing the cap on the premium concession companies can award employees who participate in wellness programs (now 20 percent). These may or may not make it into a final bill.
It is more likely that federal funding of community-based wellness programs will be part of any final legislation, although the funding level for those grants is unclear. Even so, it would be years before their results could be applied nationwide.
When the health-care debate began in earnest earlier this year, President Obama and members of Congress promised a paradigm shift, a new world order where health-care costs for companies would decline as uninsured Americans were handed policies and physician and hospital costs were straight-jacketed. In fact, with regard to medical cost-containment in the private sector, any final bill is likely to be a paradigm whiff.
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