PUC should break up PG&E

Los Angeles Times - - BUSINESS - MICHAEL HILTZIK

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 of 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 frus­tra­tion with 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.”

Hem­pling 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.”

Don Bartletti Los An­ge­les Times

A SEC­TION of nat­u­ral gas pipe­line that landed on Glen­view Drive in San Bruno, Calif., is shown af­ter the Septem­ber 2010 ex­plo­sion that killed eight peo­ple.

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