The San Bruno Explosion: Were the Wrong People Penalized?

Pacific Gas & Electric's shareholders have to pay more than $2 billion in penalties and remedies, because PG&E's executives mismanaged the company's gas transportation system.  So ruled the California Public Utility Commission, responding to the San Bruno pipeline explosion that killed eight, injured 50 more and wiped out a neighborhood.  The errors were made by executives, but the commission penalized shareholders.  This disconnect, between decision-maker and penalty-payer, is common.  But is it unavoidable?

We regulate to induce performance.  We set rates to reflect prudent costs; we disallow from rates imprudent costs.  We apply penalties for mismanaged outages.  We jigger the return on equity when results exceed or fall short of standards.  In all these examples, we aim our arrows at the shareholders.  Using spurs, a ranch hand stings a horse's sides to make it run.   Using "just and reasonable" ratemaking, the regulator stings the shareholders' returns to make management perform. 

But the decisions we judge are not made by shareholders; they are decisions made by board members, executives, middle managers and employees.  Regulators rarely apply their powers to those people.  We assume instead that stinging shareholders produces performance by executives and managers on down.  How solid is that assumption?  Below are three examples of this disconnect between actor and consequence.  Each is so firmly embedded in the status quo we consider it normal.  But each deserves rethinking. 

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Effective regulatory litigators ask “How can I help the agency make the best decision?” This article presents a set of principles that, if applied by practitioners and decision-makers, will help lawyers advocate effectively and help agencies advance their statutory missions. I have organized these principles according to the nine typical stages of litigation.
“Regulatory capture” is a ringing phrase, too casually used. But because it is a hyperbolic phrase, it is too readily dismissed. With a careful definition, regulatory capture can be anticipated, detected, and resisted. Regulatory capture does not include illicit acts—financial bribery, threats to deny reappointment, promises of a post-regulatory career. These things all have occurred, but they are forms of corruption, not capture. Nor is regulatory capture a state of being controlled, where regulators are robots executing commands issued by interest groups.
In this proceeding before the Mississippi Public Service Commission, Entergy proposes to sell its transmission facilities to ITC at a gain. The transaction is a “spin-merge” transaction in which Entergy shareholders will end up owning 51% of ITC, along with their shares of Entergy.

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Regulating Public Utility Performance:  The Law of Market Structure, Pricing and Jurisdiction

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Preside or Lead?
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