Sunday, March 28, 2010

Darbee's Shaky Finger on the Trigger of PG&E's Rate Design Begins to Terrify the Customers

    • Radical change in pricing strategy is generally not a favored approach in any business, but especially not utilities.  The revenue extraction model has long preferred slow and steady to abrupt and impetuous.
    • Adding to the chaos of perhaps the most tumultuous month in PG&E's history since its bankruptcy and taxpayer bailout earlier in the decade, last week Peter Darbee lurched to another "Hail Mary" rate proposal. 
    • Now he wants to raise his "average" residential customers' monthly bills by 14% in order to bring the residential top tier down by 40%.  And if Darbee's redistribution formula goes through, it will be applied not just to current costs but to whatever portion of his $5+ billion of rate increases he gets approved later this year by the CPUC.
    • Set aside the Lake Wobegon problem, where all of PG&E's customers now seem convinced they pay more than average.  This latest and greatest idea is not likely to go down well with those customers who know that natural gas prices -- the primary factor in the cost of generating electricity in California -- have plummeted in the past two years. NYMEX gas quotes are now below $4, compared to their peak well above $13 in 2008
    • Embedded in the new PG&E plan is a ratcheting down of the lowest priced residential "baseline" quantities from 60% to 55% of "average" consumption in each climate zone, and an increase of 4.6% for small business customers.  Oh, and a new, regressive monthly $3 fixed charge per residential customer irrespective of that customer's consumption. 
    • Not that Darbee didn't need to do something.  In a few short weeks he has managed to incite a ratepayer revolt in the San Joaquin Valley, extremely valuable territory for any utility in terms of future California population growth.  Somehow he managed to let his top residential rate -- the air conditioning rate -- climb up to 49.9 cents per kwh.

      • Ignore the irrigation districts and municipalities poised to get into the public power business, the investor-owned Southern California Edison Company -- which provides service to some Valley communities but actually has less low-cost hydro than PG&E -- has managed to hold its top residential rate to 29 cents per kwh!
      • Darbee's Central Valley customer uprising may have found its Lexington in the unlikely venue of Bakersfield on March 2.  PG&E's spokesman told a public session of the Kern County Board of Supervisors -- whether from stress, Stockholm Syndrome, or insurrectionist sympathies (employee morale has turned rancid during Darbee's five years as CEO) -- that local customers pay higher costs to keep bills low in the Bay Area and other temperate parts of the company's service territory.
      • "The blunt acknowledgment that PG&E rates are unfair left many observers stunned," the Bakersfield Californian reported, noting that the Supervisors unanimously voted to place an advisory measure on the ballot to determine whether to replace PG&E with a municipal utility district.
      • Within the week, PG&E's Senior Vice President for damage control was in the pages of the Californian with an op-ed, followed by a full page ad the next day, insisting that the whole thing was just a big misunderstanding:  
      This is not a situation of Kern County versus the Bay Area. Recent public discussion has suggested that customers in Kern County are paying more than customers in other parts of our service area. In fact, Kern County households in 2009 paid a lower average rate than households did, on average, in the rest of PG&E's service area.
      As of December 2009, 42 percent of our customers in this area are part of our CARE (California Alternate Rates for Energy) program, which helps keep electricity costs low for those who are enrolled. Kern County has one of the highest levels of participation in this electricity program in the state, and nearly twice that of our systemwide average.
      • PG&E asked for Kern County support for its February sleight-of-hand rate proposal, which would reduce Tier 5 and Tier 4 rates by 5.5 and 3.7 cents per kwh, respectively, while raising Tier 3 rates by 4.3 cents per kwh.  "Working together, we can solve this," the op-ed intoned.
      • Apparently not.  Bakersfield is not exactly a hotbed of let's-expand-the-role-of-government philosophy, but under the headline "Time for PG&E to Settle Down, Get Its Story Straight" the Californian editorialized a few days later:
      Increasingly skeptical Kern County power users are rapidly coming to the conclusion -- right or wrong -- that they're guinea pigs in an experiment gone badly wrong, and PG&E seems incapable, whether because of incompetence or a deep-seated culture of arrogance and evasiveness, of convincing us otherwise.
      No wonder municipal and regional governments up and down the state have started exploring the wisdom of energy independence. PG&E is so worried, it has spent $36 million writing and promoting Prop. 16, which if passed would make it exceedingly difficult for municipalities to establish their own utilities.
      • So Darbee upped the ante last week. He apparently hopes the rest of his customers won't notice, at least not before the June 8 election.  Or that his shareholders won't question -- at least not before their May 12 vote on his bloated pay package -- just what kind of business judgment they're getting from their $10.559 million CEO.
      • Meanwhile, the California Manufacturers & Technology Association and the California Farm Bureau both joined the California Association of Realtors, the Agricultural Energy Consumers Association and a growing list of local business groups opposing Proposition 16.

      (Photo credit:  Darbee, Genesis Photo Agency) 


      Sunday, March 21, 2010

      Bad Timing: Darbee's $10.559 Million Paypalooza Faces Advisory Shareholder Vote May 12

      Today's scorching editorial against Proposition 16 in the San Jose Mercury News, hometown newspaper to a business culture many consider the most advanced in the world, makes clear that March has been a very bad month (with 10 days still to go) for PG&E's embattled CEO, Peter Darbee.

      While each of the newspapers that has taken up Proposition 16 has attempted to outdo its competitors in heaping scorn on the manipulative debasement PG&E has brought to the initiative process, the Merc is the first to specifically call out Darbee as the mastermind behind this brazen assault on his own electricity customers.

      If Shakespeare made a soothsayer's warning to Julius Caesar to "beware the Ides of March" resonate through the ages, consider what has befallen Darbee over the course of the first three weeks of the month:
      • March 1 marked his prideful confession of the real thinking behind Proposition 16, veering miles off his political consultants' message to boast to Wall Street.  The written transcript doesn't do justice to this debacle.  Real gawkers will go to the raw audio, found here at 2:39:21 to 2:44:09.
      • March 2 was the meltdown of the PG&E corporate profile in Kern County, a hotbed of customer revolt against high air conditioning rates and an early warning sign of distemper throughout the Central Valley.  The local spokesman admitted in a public hearing of the Kern County Board of Supervisors that PG&E's rates are unfair and that Valley customers are charged excessively in order to subsidize the Bay Area.  The Kern Supervisors voted unanimously to put an advisory measure on the ballot to replace PG&E as the local utility.
      • March 8 was when PG&E filed its Preliminary Proxy Statement, detailing Darbee's $10.6 million pay package for 2009 -- some 8% more than Goldman Sachs paid its CEO -- and announcing an advisory vote on the company's Executive Compensation Plan at the May 12, 2010 shareholder meeting in San Ramon.  CalPERS and other shareholder activists had successfully forced through a "say on pay" resolution at the 2008 meeting, but this will be the first time it has been implemented.
      • March 11 marked the San Diego Chamber of Commerce Energy and Water Committee's vote on Proposition 16:  22 to 0 to oppose, with 4 abstentions.  Perhaps no surprise, given PG&E's acknowledgment that its top tier residential rates are 49 cents per kwh compared to 29 cents for the Southern California investor-owned utilities, but an early indicator that PG&E's jihad against local governments doesn't play well south of the Tehachapis.
      • March 17 was the California Public Utilities Commission informational hearing on Proposition 16, which somehow Darbee deemed too unimportant to attend.  Odd behavior for the CEO of a regulated business which is dependent upon its regulator for its entire cash flow and which, for the first time in the CPUC's 99-year history, is attempting to unilaterally write its own business advantage into the State Constitution.  You'd think publicly communicating PG&E's rationale would be in the job description of a $10.6 million CEO.
      March 31 is the intended date for a Final Proxy Statement.  Even allowing for the forensic cleanup that might be applied to the disclosures in the March 8 filing, unless the shareholder vote is canceled outright there are several features likely to trigger controversy between now and the May 12 meeting: 
      • the size of Darbee's take is driven by what are considered to be comparable companies, but the PG&E Board's Compensation Committee has managed to define this peer group so that it is dominated by multi-state and multi-national companies that derive significant portions of their revenue from competitive energy markets and consequently entail a much higher level of business risk.
      • no recognition is given to the fact that PG&E derives all of its revenue from its regulated business, that its regulatory risk is concentrated in one state rather than across multiple jurisdictions, and that it benefits from a bankruptcy settlement that obligates its regulator to maintain a level of generosity that will assure at least a single "A" investment grade rating for its debt.
      • Darbee has packed the four-member Compensation Committee with two of his telephone company cronies from his days at PacBell, including the Committee Chair.  Even with the two other members, the Committee is completely devoid of any professional experience in the regulated electricity or natural gas business.
      • the Committee, which met four times in 2009, is unavoidably dependent upon its "independent executive compensation consultant" but had to replace said independent consultant after determining that "in order to avoid potential conflicts of interest, its consultant should provide no other services to PG&E Corporation or its affiliates."  Apparently, discovery of $996,000 of other work being done for Management compared to $118,000 for the Committee stretched the concept of "independent" too far, and in September 2009 the Committee switched consultants.
      • although PG&E shareholders adopted a resolution in 2006 restricting golden parachutes, the policy apparently did not restrict platinum arrangements with Darbee:  he's entitled to $10.0 million upon termination for cause; $27.6 million upon death or disability; $29.5 million upon resignation or retirement;  $34.2 million upon termination without cause; and $48.1 million upon change in control and other triggering events.
      Awkwardly, these measures along with the excess service credits Darbee has received in the PG&E Corporation Supplemental Retirement Plan (16.5 years of credit after 6.5 years of participation) appear to be in substantial conflict with the "Guiding Principles" released by the Conference Board Task Force on Executive Compensation -- a group of 13 business leaders on which PG&E board member  David R. Andrews served and whose web site prominently displays the endorsement of CalSTRS.

      (Photo credits:  Caesar, QED Book Publishing; Darbee, Genesis Photo Agency)

      Sunday, March 14, 2010

      Peter Darbee's Weird Prop. 16 Soliloquy: Blame Underlings, Ignore Bad Polls, "Diminish" Voting

      In politics and on Wall Street, sudden access to large sums of other people's money can awaken an aura of self-regarding genius in the previously uncelebrated dullard.  This process is intensified by the echo chamber of sycophants and parasites hovering around the prince like a swarm of black flies.  What follows is a verbatim transcript of Peter Darbee's bizarre, rambling explanation of the thought process behind Proposition 16, delivered at PG&E's March 1, 2010 Investor Conference in New York with the elan of someone about to spend a political "education" war chest of $25 - 35 million. 

      The raw audio can be found at 2:39:21 through 2:44:09 of the March 1, 2010 webcast, accessible after registration on the investors page of PG&E's web site. 

      QUESTION FROM THE FLOOR:  Just a general question on the proposition you're focused on.  I'm just curious, kind of, as to why use the political capital on that proposition now versus everything else going on.  Just what was the decision making behind that and what's the real -- a little more color to the benefit of, of that proposition getting done?

      PETER DARBEE:  Sure.  Back when we were in the midst of the SMUD battle, which cost us between $10 and $15 million to defend, I spoke with Nancy McFadden (editor's note:  a PG&E Senior Vice President) and said, you know, in this situation it wasn't required that the voters have a vote.

      She said 'No it wasn't.'  We actually kind of maneuvered the SMUD Board into saying 'all right, we'll let the voters vote on this' and of course they did and voters rejected that.  And so I said, you know, it seems to me that it be appropriate to that there, that the voters be able to vote in every situation, which to date they haven't had to, whether its municipalization or with community choice aggregation.  So I said why don't you go off and work on that awhile and see what you can come back to us with in that regard?

      And so this is now, SMUD was I think five years ago.  So this was about 18 months, maybe two years later, she said 'we think we have an idea and this is it:  that we have an initiative."

      We'd sponsor it and it would require a vote of the electorate, which seems imminently feasible, you know, and appropriate that the electorate, as opposed to government bureaucrats, would make the decision that, that voters would vote on whether they want a change in their utility.

      And so she made that proposal at that time and we considered it and we looked at the different things in front of us and one of the thoughts was we're aiming towards a June election and that it was a more favorable time to do it than as opposed to a November election.  As the time approached it also occurred to us that people aren't very pleased with the job that government is doing these days in general, you know, across the board.

      And so it was an appropriate time for there to be a referendum:  do we think it's appropriate for government to take over utilities?  Of course most of them have no experience in that regard and they haven't done such a good job of managing those things that they do have experience in managing.  So that, that was a second factor that drove it to us.

      And the idea was to diminish, you know, rather than year after year different communities coming in as this or that and putting this up for vote and us having to spend millions and millions of shareholder dollars to defend it repeatedly, we thought that this was a way that we could sort of diminish that level unless there was a very strong, you know, mandate from voters that this was what they wanted to do.

      The polling at the time showed that first of all initiatives usually fail, affirmative initiatives usually fail.  And in the preliminary voting, polling on this, before education which is the two ways these things are done, it didn't quite get to 51% but I think it was high 40's.  After their education, the numbers became very strongly and positive in the favor of an initiative.  Voters liked it.  And as this has become, you know, more generally the awareness has increased out there among the voting populace after a discussion about it, it looks like we have a very good shot of winning on it.

      So it was really a decision about could we greatly diminish this kind of activity for all going forward rather than spending $10 to $15 million a year of your money to invest in this.  The answer was yes!  The June time frame looked ideal and in the context of what everything that is happening with government today -- the dysfunctionality of it -- we concluded that it was a very ideal time!

      The result is going to be there's going to be some flap.  It will take place between now and June.  And then the voters will have their ability to make their case one way or another.  And then, presumably, you know, we'll mend any broken fences after that.

      (Photo credit:  Darbee, Genesis Photo Agency)

      Sunday, March 7, 2010

      Does PG&E Fully Understand the Recklessness of Peter Darbee's Proposition 16 Gamble?

      I wrote the following "guest editorial" for the March 5 edition of the subscription newsletter, California Energy Circuit.  Their deadline requirements prevented me from including the following statement which Peter Darbee made in response to a question at the March 1, 2010 PG&E investors conference in New York:
       "There's going to be some flap.  It will take place between now and June. And then the voters will have their ability to make their case one way or another.  And then, presumably, you know, we'll mend any broken fences after that."
      By John Geesman

      It takes a peculiar level of recklessness to make the kind of seemingly one-sided bet which PG&E chief executive officer Peter Darbee has placed on Proposition 16 in this June’s election.

      Darbee’s political consultants have convinced him that a sufficiently large campaign budget can bamboozle a majority of voters into believing that locking monopoly protection into the State Constitution is an awesome way to prevent tax increases. Depending upon your view of Republican primary voters -- who are likely to dominate turnout because of hotly contested races for governor and U.S. senator -- this may or may not be a plausible strategem.

      But the likelihood of blowback from inflaming PG&E’s relations with local governments, regulators, and legislators -- not to mention customers -- has reinforced Darbee’s “doofus” image among the diaspora of talented ex-PG&E employees (and more than a few current ones) who are widely placed throughout California’s energy industry. They believe he has misunderstood the nature of the utility business, its quasi-public service nature, and its dependence upon the goodwill of powerful external stakeholders. From this perspective, even if he wins his cynical gamble, there will be lasting negative consequences for PG&E for years to come.

      What would Proposition 16 actually do? Under existing law, most local governments can annex new areas for the expansion of electricity service with the approval of a simple majority of the voters in the area to be annexed. Proposition 16 would embed in the state constitution -- meaning that it can only be changed by another statewide election -- the requirement that the approval come from “two-thirds of the voters in the territory being served and two-thirds of the voters in the territory to be served.” A similar requirement would be written into the constitution for the formation of any new publicly owned electric utility.

      In addition, any local government pursuing community choice aggregation -- an electricity procurement process created with PG&E’s support by statute in 2002, when the investor-owned utilities were too weak financially to procure for themselves -- would also require an election with two-thirds voter approval before proceeding. The ability of any customer to opt out of a community choice program provided by existing law would be preserved.

      That’s the simple part. Sloppy drafting -- ballot initiatives aren’t vetted like bills that have to go through legislative committee hearings -- of a “grandfather clause” to exempt existing municipal utilities within their current territories relied on an outmoded “sole provider” definition. With the proliferation of third party distributed generation, solar power purchase agreements, and direct access accounts, it may be empirically impossible to qualify for that exemption. How do you prove a negative, especially in court?

      That means that in the 48 communities currently served by munis, every new connection -- every new home buyer, every new business -- could be subject to an election requiring the approval of two-thirds of the voters. Unsurprisingly, the California Association of Realtors was one of the first opponents of Proposition 16.

      PG&E has announced that it will spend up to $35 million in order to pass Proposition 16. To succeed, it will need to persuade voters of two preposterous suppositions:

      1. Eliminating customer choice is good for you --This may prove difficult, as most Americans seem to be hardwired with the belief that more competition means lower prices. With PG&E currently seeking 10 different rate increases (totaling more than $5 billion) at the CPUC, on top of what are already some of the highest rates in the U.S., you don’t need to be an economist to be skeptical of a monopoly’s pricing claims. Given the miserable condition of the California economy, most people want to bring as much downward pressure on electricity prices as possible.

      2. Skimming off ratepayer money to manipulate voters will protect taxpayers -- Of course, PG&E insists that the $35 million comes from the shareholders only. But how many of the voters are gullible enough to respond to those Nigerian email offers? The indisputable truth is that PG&E’s rates are set by the CPUC to provide capital to invest in needed infrastructure. If rates are so generous that PG&E can create a $35 million slush fund for political adventurism, something is seriously wrong.

      So Darbee has made his P.T. Barnum bet, and even Abraham Lincoln spoke of the possibility that you can fool all of the people some of the time. But win or lose, Darbee is eventually going to have to face the California Senate leadership, who wrote to him last December questioning his company’s integrity and urging him to abandon the ballot measure. His less than astute silence to date makes them look like impotent blowhards, not a good thing.

      His threat to cut off electricity deliveries to the Marin Energy Authority if it proceeds with community choice aggregation -- withdrawn after the gesture failed to intimidate the county supervisors -- may end up pulling the CPUC into the Proposition 16 fray. A strategy that seemed to work for Vladimir Putin in resolving gas disputes with Ukraine just doesn’t translate that well in California. It may not amuse commissioners responsible for enforcing the law.

      Spending $35 million to indoctrinate voters that California needs more plebiscites around major electricity decisions may prove more than a bit shortsighted, especially for someone with as much risk exposure as Peter Darbee and PG&E. 

      (Photo credit:  Darbee, Genesis Photo Agency)