How Would It Look?

Some time ago in this space I brought you the story of a tragic natural gas line explosion in California, and how the utility company who owned the lines had been accused of giving all of its senior management personnel lavish wages, raises and bonuses using the money that they claimed was being used to upgrade the line and improve safety measures. At the time it seemed fantastical, the stuff of Dilbert cartoons and comedy scripts about unscrupulous business leaders, more concerned with fattening their bank accounts than they were with the safety of thousands of innocent people. Now it turns out that things were actually much worse than that…

According to a story in this week’s Los Angeles Times, the utility company in our story, Pacific Gas and Electric (PG&E) had indeed requested permission from the Public Utilities Commission to use $5 million worth of ratepayer (customer) money on the gas line replacements and upgrades, as I reported in the earlier post. However, it turns out that this was the second time all of this had happened; the Company had also requested $5 million in 2007 to perform the same work, and had given it to their senior managers as wages and bonuses that time too…

The Times does not speculate on how many more times PG&E might have tried the same maneuver before they were finally caught, or whether they ever would have been had a tragic and completely preventable disaster not occurred. I believe that we are justified in asking that question under the circumstances, however; and if I was one of the people whose lives and property were placed at risk so that a bunch of very wealthy people could become a little bit wealthier, the question would be more of a lawsuit and less of a rhetorical device…

The thing that puzzles me the most about the situation is that no one inside or outside the company seems to have questioned these rather questionable decisions. Some sources have claimed that amount of the misappropriated funds goes as high as $100 million and took place over a much longer period, and the fallout from the scandal has resulted in national attention of the very worst kind, changes in Federal law governing gas pipeline safety, and indictments that could result in fines of as much as $1.4 billion, none of which even considers the ongoing civil trials for injuries, wrongful death, and destruction of private property…

Popular culture fantasies (and nightmares) aside, most companies in real life will tend to avoid wildly irresponsible actions even when the possibility of natural gas explosions isn’t present, if only to avoid being the subject of countless blogs, Internet news stories, television programs and eventually even books and movies in which the intelligence of their leadership is compared unfavorably to that of a newborn gerbil. In the case of a publicly-held or investor-owned company there is a very real chance of a stockholder’s revolt (or the equivalent) during which the entire senior management team and the Board of Directors who were supposed to be supervising them will all effective get fired, and even a private company would have to be worried about banks refusing to loan them money (because they might not be around long enough to pay it back), investors refusing to buy their bonds (ditto), or vendors refusing to sell them anything on credit (see above)…

Nor would any reasonably sane businessperson expect the sort of misbehavior PG&E has been accused of remaining confidential during the Internet age. Exposure and scandal were already a problem generations ago – look up the curious events that happened at the Watergate complex in the early 1970s, if you don’t believe me – but today it’s a virtual certainty that anything the company does will leak out eventually. The era when any company could go about its business and not care about how any of its actions would look in the media has been gone for decades, or possibly centuries, and it is far past time that managers of all types and levels stopped making choices that even a rodent born a few minutes ago would consider insane…

Don’t Answer That…

Suppose for a moment that your business held monopoly control over a product that the people living in your community needed to survive – and, in fact, were required by law to make some use of. Let’s also imagine that there is no real alternative product; even minimizing use of your product would require a huge investment of capital, to the extent that the residents would probably not be able to save enough money over the life of the equipment they would have to buy to avoid doing business with you to pay for the cost of that equipment. Under those conditions, would you attempt to quietly rake in your huge (and unavoidable) profits while keeping a low profile, or would you openly attempt to screw so much money out of your “customers” that they start politically agitating against you – and charge so much that the alternative technology starts to become affordable?

Before you answer, consider the strange case of the Salt River Project (SRP) in Arizona. A story being reported this week in the Arizona Republic claims that the SRP, a privately-held company that controls electrical service to a large number of areas in Central Arizona is expecting to make about $25 million less in net revenue this year than was originally projected, and are considering raising rates to make up the difference. Please note that the shortfall is not in gross sales, or gross income, or even gross revenue; we’re talking a reduction in net revenue, money the company actually gets to keep. Also, please note that the SRP has already raised its rates four times in the past 15 months, citing higher fuel costs. That sort of thing is hard to explain given that even after the recent hikes in the price of oil, fuel is still about half of what it cost last summer…

This doesn’t even consider the fact that utility companies in Arizona routinely charge 300% more for electricity in the summer months, when everyone needs the power to run their air conditioners (and evaporative coolers) to stay alive; we’re just talking about increases over previous years. It isn’t legally feasible to go without power either; most of the communities in the SRP area of operations have ordinances that allow a landlord to evict someone who hasn’t got water and power turned on. It’s doubtful that any of this would be allowed to happen anywhere other than Arizona, where the state government is so corrupt that attempts to make it illegal to bribe your state legislators routinely fail to pass. But leaving aside all of the legal, moral and ethical aspects of the question, I have to question the intelligence of the people running SRP…

Investment in home solar power systems has been prevented mostly by economic concerns; most such systems are so expensive that you’ll need to replace the system before you can save enough money to cover the cost of buying it in the first place. But if the SRP raises the cost of their service too far, that equation will change – and if they annoy their customers enough, an increasing number of people will also install solar panels just to deny SRP their business. Can the people at SRP really be stupid enough not to see that squeezing out the largest possible short-term profit will eventually destroy them? Can they really be short-sighted enough to ignore the danger inherent in violating the Second Law of Business that badly?

***Sigh.*** You’d better not answer that…