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.