You asked (1) how bonuses and other forms of incentive compensation are determined for executives of the United Illuminating (UI) Company, (2) how much compensation UI executives received in the past few years, and (3) how much of this amount was funded by the company's ratepayers.

SUMMARY

UI has incentive compensation plans for its executives and other managerial employees. The plans tie incentive compensation to performance on pre-set goals. There are financial goals such as earnings per share (EPS) as well as operational goals such as minimizing the frequency of blackouts. In the case of senior executives, the compensation is primarily tied to meeting or exceeding the financial goals.

Total (managerial and executive) incentive compensation payments have risen from $2,765,000 in 2003 to $7,999,000 in 2008. Incentive compensation for senior executives in 2007 (latest available data) ranged from $215,737 for the vice president of UI's electric system to slightly under $1.2 million for the president and chief executive officer of UIL (UI's parent corporation).

In 2006, the Department of Public Utility Control (DPUC) capped the amount of UI's total incentive compensation (for both executives and other managers) that could be recovered from ratepayers at just under $4 million. This amounted to approximately half of the amount of incentive compensation paid in 2008, although neither DPUC or UIL break out the proportion of the capped amount that is taken up by executives versus other management employees.

DETERMINATION OF INCENTIVE COMPENSATION

UI has incentive compensation plans for its executives as well as its other managerial employees. The plan for its non-executive managers employees has EPS and capital expenditure goals (the latter deals with expanding the company's rate base), as well as operational goals relating to reliability, customer service, safety, technology, and employee knowledge transfer.

The executive incentive plans lean more heavily towards achieving the company's financial goals than operational goals. In the case of the five most senior executives, the financial goals include EPS from UIL's continuing operations, UIL cash flow from continuing operations, and UIL capital expenditures. The operational goals are two measures of electric reliability measuring the frequency and duration of blackouts, the number of accidents that require employees to miss work, and the number of motor vehicle accidents.

The incentive compensation program for the five senior executives has short- and long-term awards. Short-term awards are paid in cash and long-term awards are generally paid in company stock or options. Payment of these awards depends on achievement of pre-established performance goals.

The compensation committee of UIL's board sets target compensation levels for senior executives that include base pay plus incentives payments. Typically during the first quarter of each calendar year, the committee establishes threshold, target, and maximum goals with respect to the incentive payments. The committee sets the goals so that there is an 80% probability of meeting the threshold goal; a 50% probability of meeting the target goal; and a 20% probability of meeting the maximum performance goal. The executives receive (1) no incentive payment unless the threshold goal met; (2) a payment equal to 50% of the target compensation for threshold level performance achieved; (3) a payment equal to 100% of the target compensation for target level performance achieved; and (4) a payment of up to 150% of target compensation for achievement of the maximum level of performance.

In the case of stock awards for the period 2007-2009, the incentive plan for senior executives is based upon attaining specified levels of total shareholder return (30% weight), net income (50% weight), and system reliability (20% weight). Final payout, if any, under the incentive plan is based on UIL's total shareholder return over the preceding three-year period relative to a group of previously defined peer companies; cumulative net income over the three-year period; and average system reliability over the three-year period.

AMOUNT OF COMPENSATION

Table 1 presents information on the incentives payments made to UI's senior executives in the period 2006-2007 as reported in UIL's proxy statements. The figures for stocks include options. The individuals covered are James Torgerson, UIL's president and chief executive officer, Anthony Vallilo, UI president and chief operating officer, UI executive vice president and chief financial officer, Richard Reed vice president of UI's electric system, Linda Randell, corporate secretary, who began her employment at UI on March 26, 2007, and Susan Allen (Ms. Randell's predecessor). Randell and Allen held additional titles.

In addition, in 2006 UIL paid Nathaniel Woodson $933,810 in cash incentives and $3.13 million in stocks and options. Woodson retired as UIL's chairman and chief executive officer on September 30, 2006. It paid Louis Paglia, who had served as executive vice president until March 31, 2006, a bonus of $328,351 and other cash incentives of $975,000.

Table 1: Incentive Compensation for Senior Executives 2006, 2007

In earlier years, UIL described the cash incentive payments for senior executives as bonuses and reported the number of stocks granted as incentive payments, rather than the value of these stocks. Table 2 presents cash compensation data for the period 2003-2005. In addition, Woodson received 47,896 shares of stock or options in 2005, 79,240 in 2004, and 100,000 in 2003. Nicholas received 5,000 shares or options in 2005 and 10,000 in 2003. In 2003, Paglia received 25,000 shares or options, Buckis received 5,500, and Allen received 5,000.

Table 2: Cash Compensation for Senior Executives 2003-2005

RATEPAYER'S SHARE OF INCENTIVES

In a 1995 decision (docket 95-02-03), DPUC noted that the allocation of executive compensation between ratepayers and shareholders for ratemaking purposes should reflect the fact that the interests of these two groups are not always the same. It also noted that a monopoly utility has no competition for its captive customers and can increase net revenues by reducing the quality of service or requesting higher rates. DPUC established a policy that allocates executive compensation between ratepayers and shareholders, and among regulated and non-regulated operations when applicable. (Historically the senior executives of UIL and other utility parent companies have had responsibilities regarding the non-regulated subsidiaries of the parent corporations). In the decision, DPUC stated that it will allocate to ratepayers of regulated operations only those levels and forms of executive compensation that will benefit them.

In 2006, DPUC capped the amount of incentive compensation (for both executives and other managers) at $3.994 million through 2009 (this was the company's three-year average for such compensation for 2002-2004). It argued that shareholders benefit from incentive compensation plans and that it is appropriate that shareholders contribute if expenditures exceed the cap. In 2008, the total amount of incentive compensation paid was $7.999 million. As a result, ratepayers pay for 49.9% of this compensation. Neither DPUC or UIL break out the proportion of the capped amount that is taken up by executives versus other management employees.

In December 2008, DPUC established reporting requirements for compensation paid to utility executives and members of utility boards of directors (docket 08-01-16). It required the companies to post this information on DPUC's website (www.ct.gov/dpuc/site/default.asp.) Among other things, DPUC ordered the utilities to provide information on bonuses, stock awards and options, total compensation, and the proportion of compensation charged to ratepayers.

KM:ts