Why Utilities Will Not Be Accountable: The Debra Reed Paradox

Executive Compensation is an issue given little shrift by regulators, yet it turns out to be a fundamental cause for utility unaccountability.  Take, for example, Sempra CEO Debra Reed’s most recent bonus.  The same year a broken Sempra Energy storage well created the biggest natural gas leak in U.S. history, Sempra’s top executive is reported to have scored a $16.1 million payout — her largest salary ever.  Even more concerning is that, according to Bloomberg News, Reed’s compensation was the largest of any utility executive in the U.S. in the Standard & Poor’s 500 Index that have reported pay for the 2015 fiscal year.   In a nutshell, the most massive utility mishap in California history had almost no impact upon the utility’s top management salary.

The Los Angeles Times reports that Sempra’s board cut CEO Debra Reed’s pay by $130,000 — while awarding her a bonus of $3.17 million, meaning that her executive penalty for presiding over an elemental corporate fiasco comes to about eight tenths of 1% of her pay.   Others on Reed’s management team also have been docked, according to the proxy. They are President Mark A. Snell, Executive V.P Steven D. Davis, CFO Joseph A. Householder and General Counsel Martha B. Wyrsch. Altogether, they’re being deprived of about $157,000, but they’re still getting about $3.9 million in bonuses, combined.

Just to provide some context as to the seriousness of the methane leak, Southern California Gas Co.’s Aliso Canyon field leaked the equivalent of a year’s worth of greenhouse-gas emissions from more than 500,000 cars and forced thousands of residents to temporarily relocate. The disaster resulted in the release of 100,000 tons of methane, making it the largest methane leak in U.S. history.  Sempra, whose companies serve more than 32 million consumers, faces more than 83 lawsuits including one filed by California’s attorney general related to the Aliso Canyon leak. State and federal agencies including the U.S. Environmental Protection Agency are investigating.   The company also faces regulatory fines and penalties, and even a criminal complaint from the Los Angeles County district attorney.

Financially, the company has taken a hit as well.  In 2015, the holding company’s net income reached $1.35 billion on revenue of $10.2 billion, a gain of 16% in profit over 2014. But the stock declined about 16% on the year, more than some utility stock benchmarks, with a late-year slide beginning soon after the leak was discovered. Yet, the Sempra Board still chose to pay CEO Reed a record bonus,

According to the LA Times, Sempra’s defense is that Reed’s compensation goals were set in 2014, and the Porter Ranch leak wasn’t discovered until more than nine months into the year. Company spokesman Doug Kline implied that more action could be taken on Reed’s compensation once all the facts are in, but “the … investigation is still under way.” But Sempra’s compensation committee could easily have put Reed’s (and other executives’) bonus on hold until the investigation was complete, especially in light of the evidence that knowledge of the problems with SoCal Gas’s storage infrastructure grew under her watch, as did the failure to take prompt and decisive action.   It didn’t; probably because safety and customer satisfaction is not even secondary as a consideration of Reed’s performance — these factors are not even mentioned among the CEO’s seven goals for 2015.

In the past, SDCAN has repeatedly raised the skewed incentives inherent in executive compensation as worthy of Commission review.  Yet, the regulators have been loath to take on this issue.   In 2011,  SDCAN’s principal submitted testimony that concluded:

“SDG&E management ignored its alleged “needs” from the 2008TY rate case and slashed spending.  However, the increased net profits resulting from the underspending was directed towards increasing executive bonuses and inflating shareholder returns. But, after enriching its managers and shareholders, Sempra pleads poverty in the current rate case, claiming that extremely pressing needs justify double-digit increases above inflation in many cost categories, including the very operational expenses that management cut in 2010.  This strategy was developed by then-SDG&E President and CEO Debra Reed and is continued by the current President-CEO Jessie Knight.  Mr. Knight was apparently successful in securing some operational efficiencies from his managers.  Unfortunately, none of the benefits of those efficiencies were shared with customers.  And SDG&E resists reflecting any of the 2010 savings in its 2012 Test Year.  Ms. Reed was rewarded for her efforts to boost shareholder earnings by being named the following year as CEO of Sempra Energy, replacing Donald Felsinger.  During this same time period of the Reed/Knight tenure, SDG&E’s electric rates jumped well ahead of the other two major utilities in the state:  SCE and PG&E.  As of 2011, the state indicates SDG&E’s residential average rates are 18.4 cents per kWhr.

SDG&E’s executives have received disproportionately high payouts even relative to non-executive SDG&E employees. From 2003-2010 SDG&E’s executives received ICP payouts that totaled, on average, 71% more than their target payout while SDG&E’s non-executives during the same received payouts that totaled, on average, less than 40% more than their target payout.  In 2012, SDG&E’s projected average bonus paid to executives will average $140,952, while non-executive employees can expect an average payout of $12,155.”

The Public Utilities Commission declined to make necessary executive compensation reform in 2012 and dodged the bullet again in 2015, when the CPUC staff initiated a settlement of the Sempra Utilities general rate case.   Until regulators begin to take on the perverse incentives of utility executive compensation, you will continue to have unaccountable utilities who disassociate rate and safety performance from their top managers’ salaries.


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