The Bold Solution and a Corporate Decision PG&E Got Right
SMITH BRAIN TRUST – California utility giant PG&E is putting to work a new strategy to keep its power lines from sparking the kinds of wildfires that have killed dozens across the state and leveled home after home. When fire risks are high, PG&E officials will simply pull the plug, cutting the power altogether until the danger subsides.
But should they?
“It’s a pretty amazing solution, but for a lot of people it probably sounds crazy,” says Charles E. Olson, visiting associate professor of logistics, business and public policy, and director of the Honors Program at the University of Maryland’s Robert H. Smith School of Business.
The new strategy follows a tough stretch for the San Francisco-based utility. PG&E says its equipment was likely to blame for last November’s massive Camp Fire, which created a wide swath of destruction and scorched the entire town of Paradise, killing 85 people.
“It is sensible, though mostly unprecedented,” Olson says. “Things have never gotten so extreme that any utility would consider routine shutdowns of a service that has been considered to be essential to our lives and to the economy for close to 100 years.”
Olson is a nationally recognized expert on public utility regulation, energy economics, and the cost of capital to public utilities. He has testified in hundreds of utility cases. Before coming to Maryland Smith, he was president of Zinder Companies, a public utility consulting firm. He has shared his expertise with more than 100 utilities, as well as industrial companies, state agencies, trade associations and environmental groups.
When Olson first heard about PG&E’s new approach to heightened fire risk, he thought of the ancient adage, “First, do no harm.”
“If there is danger, if the conditions are right, if the fuel is in the forest, if it’s dry and the winds are blowing and embers can be blown out of a campfire and a spark can ignite something, then the power can be shut off. There’s a lot less cost associated with not having a wildfire, than with being without electricity,” he says. “But it’s quite a price to pay.”
The price extends beyond mere inconvenience, he says. “There’s also a cost in terms of the uncertainty. People will wonder, ‘How long is this going to go on? And how often is it going to be repeated? And are we going to have to change our lives, in terms of how we do things? Are we going to have to move away to someplace where this doesn’t happen?”
Years of drought have taken a toll on California’s northern forests, making them highly susceptible to fire risk, and creating a particular challenge for PG&E. Some 5.4 million people live in fire-prone parts of the utility’s service area.
PG&E sought bankruptcy protection in January, after incurring more than $30 billion in potential damages from wildfires linked to its power grid.
Power – at least in PG&E service areas – is going to become a lot more expensive, Olson says, “because ultimately most of this has to be paid or by the rate payers.”
And likely, he says, there will be more consensus between government officials, utility companies and consumers about what risks to take and how to treat the environment. There’s likely to be less environmental pushback over forest clearing, for example, he says. “If you don’t log those forests, the fuel builds up,” he says.
What PG&E has gotten right
In the wake of the devastating Camp Fire, realizing the role that the utility’s equipment played in starting the fire and grappling with related expenses and liabilities that would number in the billions, the power company made some smart moves, Olson says.
“It began with getting rid of the chief executive officer, the chief operating officer and then declaring bankruptcy,” says Olson. “Those were the right things to do.”
PG&E has long maintained a system in which the chair of the board of directors is separate from the CEO. “That’s not typical in utilities or in American corporations,” Olson says. “But it’s a better system.”
The utility typically hires former – and usually retired – executives from another big utility firm to serve as chair of the board. That person oversees the board and the entire operation. “They’re typically a little bit more distant, handing day-to-day executive decision-making operations over to the CEO and COO.”
It lends itself to better self-governance and better oversight.
“It concentrates too much power to have one person be the chairman of the board and CEO, because that leads to replacement of board members largely at the desire of the CEO/board chairman. Whereas if you have a separate board director, decisions tend to be more objective,” Olson says. “That’s one thing that PG&E gets right.”
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