I wrote a few days ago that one of the consequences of the destructive November 2018 California “Camp Fire” is that the state’s largest power company Pacific Gas and Electric could face over $30 billion in liability related to the fire. Yesterday, PG&E announced that it will file for bankruptcy on Jan. 29 after a required waiting period.
For the most part, utility companies are for-profit companies with shareholders and management incentive compensation typically tied to profit and/or stock share price.
The profit dynamics for utility companies are very different than most of the other for-profit companies. Rates to customers are regulated. Therefore, the ability to “move the needle” for revenue is limited.
Expenses, on the other hand, are within the control of management. As a general statement, there are no or minimal disincentives or material fines for utility companies to keep proper maintenance and upgrade of the distribution and transmission systems. The more that a utility company can reduce its operation and maintenance expense (“O&M expenses”), the more profit the utility company will make.
It is a known practice to financial analysts that covers the utility industry for utility companies to pump up expenses before a rate filing and then cut expenses after rate increases are approved. So, in fact, there is an inherent conflict of interest by executives of utility companies to reduce O&M expenses (at the inconvenience and risks to their customers) in order to maximize profit and, therefore, their incentive compensation.
It was also reported that PG&E CEO Geisha Williams, who had been in the job for less than 11 months, has stepped down. However, it is interesting to note that, according to Bloomberg, Ms. Williams had total annual cash compensation of $1.1 million and total calculated compensation (including stock options) of $8.6 million as of fiscal year 2017. Not a bad gig if you can get it.
Closer to home (i.e., New Jersey), JCP&L’s corporate parent is FirstEnergy and whose CEO is Charles Jones Jr. According to Bloomberg, Chuck Jones total annual cash compensation was $2.5 million and his total calculated compensation was $15.2 million for fiscal year 2017. Not bad for the CEO of a company that had requested a $12 billion bailout from Ohio in 2016 and took a financial hit of over $7 billion in 2016 for “asset impairment/plant exit costs” after several years of strategic mistakes.
In a free market, competition keeps companies “honest”. Consumers can “vote” with their purchase decision every day. If you don’t like the food or service at a restaurant, you can choose to go to other restaurants. However, utility companies are granted a franchise and operate as a monopoly (and, in theory, with the public interest). Customers cannot switch utility company if they are unhappy with the service.
This conflict of interest has now come home to roost in California. PG&E faces mounting scrutiny over the role its equipment has played in sparking the recent deadly and destructive blazes. Some believe that the fire started when a PG&E power line in contact with nearby tree. PG&E reported “an outage on a transmission line in the area where the blaze began" and that it found a downed line with tree branches on it.
Shareholders of PG&E have now taken a major hit to their pocketbook. The stock price of PG&E plunged about 50% when the stock market opened on Monday and is down by over 63% since the start of the Camp Fire.
The future for the customers of PG&E is not as clear. A bankruptcy’s primary goal is to protect creditors and deal with asset disposition in an orderly basis in order to emerge from the bankruptcy with a creditor-approved plan. The final arbiter of all this is the federal bankruptcy judge. Regulators and customers are not equal parties to this proceeding. The creditor-approved plan could include many options including the sale of assets and subsidiaries and, possibly rate increases that will no doubt be litigated.
It will be interesting to watch how all this plays out.
At the same time, perhaps it’s time for lawmakers to rethink whether for-profit utility companies operating as a monopoly with built-in conflict of interest (against customers and against public interest) should continue to be the business model for the utility industry.
