Isn’t it time to put Pacific Gas & Electric out of business?
California’s largest utility company, PG&E Corp. long has been one of the state’s most troublesome corporate citizens. The September 2010 natural gas explosion in San Bruno, Calif., in which the company bears responsibility for the deaths of eight people and the leveling of an entire neighborhood, is only its most spectacular misdeed.
This is the company that squandered $46 million in 2010 on an unsuccessful campaign to write a regional monopoly for itself into the state Constitution, via the ballot measure Proposition 16. The company that declared bankruptcy in 2001 because it didn’t like the terms it was offered for a taxpayer bailout after the state’s electricity deregulation scheme (concocted in part by, yes, PG&E) collapsed. That engaged in allegedly illegal back-channel contacts with former Public Utilities Commission President Michael Peevey and other PUC officials, compromising the commission’s regulatory work, according to emails later made public. That has been indicted on dozens of counts of violating federal law in connection with San Bruno, including obstructing the federal investigation into the blast.
PG&E diverted millions of dollars from $5 million in ratepayer funds earmarked in 2007 for gas infrastructure upgrades into pay raises for top executives instead, PUC President Michael Picker (Peevey’s successor) told a state Senate committee last month. The work was never performed, and subsequently, a gas line under San Bruno blew up.
On April 9, the PUC voted unanimously to levy $1.6 billion in fines and penalties on the company in connection with the San Bruno explosion. That’s the largest such assessment ever imposed on a utility in California, and one of the largest in the nation. Combined with earlier sanctions ordered by the PUC, it brings PG&E’s total state penalty to $2.2 billion.
But is it enough to improve PG&E’s behavior and performance? Picker is doubtful. His frustrations at the failure of PG&E to improve its safety record significantly since San Bruno poured out in an impassioned statement after the commission approved the penalties.
Picker observed that $2.2 billion was nearly the maximum that the PUC’s economic staff thought the utility company could bear without harming its finances to the point that customer rates were affected. But beyond financial penalties, he asked, “What are our tools” to sway PG&E’s actions? “Do shareholders, board directors, executive officers, senior managers or line staff respond to fines and penalties? How?”
Picker’s remarks point to a glaring flaw in all regulatory enforcement — the deterrent effect of corporate fines and penalties often is nil. They’re paid not by wrongdoing executives but by shareholders, who may themselves have been harmed by executive malfeasance. CEOs who are ushered out the door with lavish retirement packages give their colleagues a negative lesson: Screw up badly enough, and even if you lose your job you’ll be rich.
Picker asked whether a “safety culture” exists at PG&E. The overwhelming evidence says no. The 2011 report of the PUC’s independent review panel on San Bruno suggested that management’s safety efforts were focused more on PR and rhetoric than a genuine devotion to safety. Top management’s priority was “financial performance,” not “operational safety and performance.”
Of the executives in command at PG&E at the time of the San Bruno blast, Peter Darbee, the chairman and CEO of PG&E Corp., the utility’s parent holding company, retired a year later, with a golden handshake of some $35 million. Christopher P. Johns, who was president of Pacific Gas & Electric Co., the utility subsidiary, in 2010, is still its president today. His compensation was $3.3 million in 2010; it was $6 million in 2014. Of the 11 directors in place at the parent holding company at the time of the blast, eight still are directors, each collecting more than $200,000 in cash fees and stock awards in 2014, according to corporate disclosures.
Picker is asking the PUC staff to investigate how the commission might better instill a culture of accountability at its regulated utilities. He also asked at the April 9 meeting whether PG&E, which serves an enormous swath of Northern and Central California and operates the Diablo Canyon nuclear power plant, is “simply too large ... to succeed at safety.”
“The real issue isn’t the size of the company,” PG&E says in response to Picker’s comments. “The real issue is safety.” It asserted that it has “spent or committed to spend $2.8 billion in shareholder funds on this important safety work and we have made progress on a scale unmatched by any utility in the country.”
Yet the utility’s safety performance may actually have gotten worse since San Bruno. Picker pointed to statistics showing that PG&E violations of gas safety regulations soared in 2012 and 2013 (though not all the violations may have been the utility’s fault).
The questions raised by Picker about the limitations of utility punishments almost never get asked by utility regulators. They should be, says Scott Hempling, a Maryland-based expert on utility oversight.
“Commissions revoke franchises rarely — those of major utilities nearly never,” Hempling wrote in 2013. The harvest has been a culture of complacency at both the companies and the commissions, an assumption that “the incumbent’s tenure is lifelong.” The penalty for a utility’s inadequacy is “a fine and a second chance: the fine calculated to sting but not disable, the second chance wrapped in a rate increase to fund the fix.”
He advocates awarding utility franchises for only a set term, say 20 or 30 years, requiring each utility to bid periodically for the right to serve the public. That would create the sense of “survival based on excellence,” rather than mere tradition.
Some experts assert that the PUC already may have the authority effectively to break up PG&E or force it to cede its business to another company. Under California law, the commission awards a utility a fair rate of return (that is, profit) on capital investment that is “used and useful.” If the PUC were to conclude that PG&E’s safety record in the gas business was so poor that it was squandering its investment, it could award the company no rate of return on gas.
“The commission would be saying, ‘You get no money from us, but we would pay someone else to take it over,’” says Robert C. Fellmeth, a regulatory law expert at the University of San Diego. “PG&E would have no choice but to sell.”
The record suggests that decades of official indulgence of PG&E’s flaws have created a monster of indifference. The dangers go beyond gas distribution, for PG&E also operates the state’s only functioning nuclear power plant. Picker is right in calling for a fundamentally new look at utility regulation.
“This is really an exploration of what may be the limits of the PUC model,” he told me last week. “The debate about whether to remove the franchise is as important as whether it’s the right thing to do. I approach the question with great caution, because nobody’s gone there before.”
Michael Hiltzik’s column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at email@example.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.