Pacific Gas and Electric
Index
1. Background and Facts on PG&E
2. Environment Change and Implication
3. Structure of Board of Director
4. The Board’s Relationship with CEO & Management
5. Internal structure for compensation
6. PG&E’s Monitoring Mechanism Mistakes
7. Effects of Unethical Activities on Different Stakeholders
8. Situation Analysis
9. Preventing the Illegal or Unethical Activities
10. Conclusion
Background and Facts on PG&E
Pacific Gas and Electric (PG&E) is the utility plant that provides natural gas and electricity to the majority of
On
PG&E’s Initial Response
After PG&E reported the pollution to the California Government, a program was started to purchase every piece of property thought to be affected. They utilized medical records (those Erin Brockovich found) to determine which households had illnesses that could be related to the contamination and made offers on their properties. These records were obtained by physicians paid for by PG&E as a “courtesy precaution” to those in limits of the contaminated wells. Once purchased, however, PG&E had the majority of the homes and buildings destroyed claiming issues with vandalism.
The Lies Begin….
PG&E created and distributed flyers to local residents discussing the use of “chromium” in their facility. The type of chromium used was conveniently left out and the wording seemed deliberately misleading:
“Chromium occurs in two forms. The form that is present in groundwater can cause health effects in high doses. The cleanup program, however, will result in chromium levels that meet the very conservative drinking water standards set by the EPA. In addition, the form of chromium that will be left on soils after irrigation is nontoxic. In fact, chromium in this form is a naturally occurring metal that is an essential ingredient in the human diet, one that is often included in multiple vitamin/mineral supplements.”(lawbuzz.com)
This choice of words could lead people to think that the chromium PG&E used actually possessed health benefits! The omission of the type of chromium used, however, was not the only misleading point. The flyer gave readers the impression that the detection of abnormal levels of chromium was a new or recent event when it was known by the plant since at least 1965 according to the Plaintiffs’ Trial Brief. (lawbuzz.com)
Fox TV ran a series on May 23 through 26 of 1994 investigating what PG&E knew and when. The following are quoted from transcripts of an interview with a representative for PG&E (lawbuzz.com):
Fox Reporter: What did PG&E know and when did officials know it?
PG&E Rep: It wasn’t discovered until 1987 when, through a routine environmental survey, which we do on all our sites such as this, the Company discovered it.
Fox Reporter: But this man, Victor Moore, worked at the Hinkley plant for more than 32 years and he says that a fellow worker found the contamination in 1965, across the street from the plant… We wanted to talk to
The reporter did press the issue to uncover the reasons for a 22year discrepancy and the PG&E official responded by indicating that senior management was not informed until 1987. “The suggestion that senior management in San Francisco didn’t know what was happening at Hinkley for 35 years is the biggest lie of all” (Plaintiffs’ 6/6/94 Trial Brief: lawbuzz.com) The evidence suggested that high levels of chrome 6 contamination found in 1987 could not have been new information to PG&E regardless of what senior management claimed to know.
To make matters worse, PG&E released more flyers to explain how their compression stations worked. It stated, “Small amounts of chromium were commonly added by industries to cooling towers to prevent corrosion and scaling.”(lawbuzz.com) This statement, again, would lead residents to believe that they were safe if only “small amounts” were used. Trial briefs, however, state that an estimated 65 tons of chromate-based corrosion inhibitors were released into unlined ponds before they were lined by PG&E in 1972. This lead to basin peak levels of 1000 to 5000 times the safe limit for drinking and more than 50,000 times the safe level for inhalation!(lawbuzz.com) Once the chromium dispersed in the unlined ponds, nothing could prevent its migration into wells supplying homes, farms, and ranches in the area. When PG&E knew this, they advised neighbors of their plant to “…avoid drinking your well water, but it is safe to use for all other domestic purposes such as bathing and watering animals and plants”! (lawbuzz.com) They new how much chrome 6 was used and had enough facts by this time to know that this was completely untrue.
Before this flyer was issued, PG&E met with citizens on
Sadly, residents were not safe. More and more people developed illnesses ranging from respiratory ailments, cancer, and death. Children suffered from cancers usually seen in the elderly and women in their 20’s and 30’s were requiring hysterectomies and mastectomies. Many were infertile or gave birth to children with severe birth defects
Erin Brockovich, who initially began researching the case, worked for Ed Masry’s law firm. They took on the case and negotiated for an arbitration procedure instead of a trial that could drag on for years. A settlement of $250 million was first offered by the Plaintiffs, but rejected by PG&E. They argued that harm could not be proven and were not going to compensate for “fear of harm”. Well prove harm they did, to the tune of $333 million dollars as well as an ordered environmental cleanup! PG&E was also ordered to discontinue use of chrome 6.
Environment Change and Implication
As of December 1992, PG&E operated 173 electric generating units and 85 generating stations, 18,450 miles of transmission lines and 101,400 miles of distribution system. In the later 1990s, under electricity market deregulation this utility sold off most of its natural gas power plants. The utility retained all of its hydroelectric plants, the Diablo Canyon Nuclear Power Plant and a few natural gas plants, but the large natural gas plants it sold made up a large portion of its generating capacity. This had the effect of requiring the utility to buy power from the energy generators at fluctuating prices, while being forced to sell the power to consumers at a fixed cost. However, the market for electricity was dominated by the Enron Corporation, which, with help from other corporations, artificially pushed prices for electricity ever higher. This led to the
With a critical power shortage, rolling blackouts began on
PG&E emerged from bankruptcy in April 2004, after distributing $10.2 billion to hundreds of creditors. Its 4.8 million electricity customers are expected to pay an average $1,300 to $1,700 each in above-market prices through 2012.
PG&E was one of the most profitable companies on the Fortune 500 list for 2005 with $4.5 billion in profits out of $11 billion in revenue.
Structure of Board of Director
The Election of the Board
There are 16 members on the board. 75% of the board is composed of directors who are neither current, former officers nor employees of the company. Each member has a photo along with their credentials posted in the proxy.
Board of Committees
This board is responsible for overall affairs of the corporation. The board has delegated certain authority to several permanent committees.
Executive Committee
Subject to the provisions of law and certain limits imposed by the Board of Directors, This committee may exercise any of the power and perform any of the duties of the board.
Audit Committee
This committee is responsible for the review of the accounting and financials.
The Financial Committee
This committee reviews the records and long term financial objectives, policies and actions required to carry these out.
Nominating & Compensation Committee
This committee reviews and makes recommendations to the Board of Directors regarding the selection of nominees to serve as advisory directors and directors of the company, and the compensation benefits, policies and practices of the company. The compensation for the CEO is established by the full board. The committee reviews and approves the compensation of officers and non-officers of the company and reviews long range planning for executive development and succession.
Election of Nominees by shareholders for the Board of Directors
Individuals must have relevant experience to PG & E’s business operations, and who will represent the best interests of PG & E and its shareholders.
Public Policy Commission
This commission advises The Board of Directors regarding public policy, issues which could reflect the company’s customers, shareholders, employees, and communities the company serves. The committee reviews the corporate policies and practices to improve the quality of the environment, address shareholders rights, and corporate democracy issues.
The Board’s Relationship with CEO & Management
PG &E Board Members and the CEO, all have something to gain from covering up the Contamination of the water supply at Hinkley- MONEY. The top management was afraid to damage shareholders profits and they did not want to risk losing their own bonuses, stock options. The firm wanted to maximize the firm’s value and wealth.
Corporate Governance which is a set of mechanisms is used to determine and control the strategic direction and performance of the organization. Governance is also thought as a means a corporation uses to establish order between forms owners and its top-level managers whose interests may conflict. Corporate governance was supposed to encourage and support ethical behavior in the firm.
The Board and CEO used managerial opportunism looking out only for themselves. What did the shareholders the Board Members, and CEO have to lose? Currently, there are 267,000 shareholder accounts. Shareholders own 100 shares. Shareholders are allowed to attend the proxy meetings, or vote sign, date and return the information.
Internal structure for compensation
Directors
When outside directors are non-employees that receive a retainer on a quarterly basis of $ 5,500 plus a $ 1,000 fee to attend meetings, an additional $ 625.00 is given when a director chairs a meeting.
Retirement Plan
Non-employee Directors must have 5 years on the board –they are then entitled to receive quarterly payments equal to the number of quarters served on the board.
Stock Ownership
The compensation for the Directors in stock options per year is 2,000. If the corporation does well, the directors make more money in the value of the stock receive and the dividend usually rise with more profits. (Shareholders do well the officer compensation rises). If the shareholders do not do well the officer compensation declines, a portion of the officers compensation is “incentive compensation” based on company financial performance. The greater the officers management responsibility the larger the share of his or her compensation risk if the company does bad. One half of the target total compensation is tied directly to financial performance for shareholders. The compensation for the officers is comprised of a base salary, annual incentive, long term incentives and benefits.
Performance incentives
The success in meeting EPS (Earnings per share), is along with the units of employees success in meeting the corporate individual objectives, cost control, quality of customer service, and operational efficiency. Awards for CEO and Chairman of the board are based on EPS performance objectives. The Nominating Committee can modify or eliminate awards if the overall company performance is unsatisfactory. Each year a target award is set on participating employees’ job responsibilities and salary level. Stock options are based on the company’s ability to sustain financial performance over a 3-10 year period.
Retirement
Retirement is composed of lifetime benefits. The benefit formula is 1.6 percent of the average of the three highest combined salary and annual incentive awards during the last ten years of service multiplied by years of credited service.
PG&E’s Monitoring Mechanism Mistakes
The Pacific Gas and Electric (PG&E) company used chromium-6 as an anti-corrosion agent in its compressor plant located in the San Bernadino County town of
Chromium can occur in various forms, but trivalent chromium and hexavalent chromium are the most common forms found in the environment.
Trivalent chromium or chromium-3 occurs naturally and is a mineral essential to human health. It can be found in air, water, rocks, soil, and food items, such as broccoli, cheese, meats, and cereal.
Industrial processes produce hexavalent chromium or chromium-6. In this form, chromium has been linked to severe health problems, including lung cancer and cancer of the septum in the nasal passage.
PG&E, instead of the relatively benign and expensive chromium-3, they were using the highly toxic and often lethal chromium-6. And, because as a cost-cutting
measure they haven't properly lined the retaining pool where the chromium is being dumped after use; the chromium has seeped into the ground water of Hinkley.
Fox TV ran a series on May 23 of 1994 investigating what PG&E knew and when. One of the interviews, PG&E representative said that “It wasn’t discovered until 1987 when through a routine environmental survey”. However it was known for maybe 30 years.
According to information from circulating within the company, In-house documents showed that decade before the danger became public, managers in the
Company-paid doctors treated those who became ill but told patients that there was no connection between the generating plant and their illnesses. When the water board ordered an environmental cleanup, the managers of the plant assured a meeting of 200 worried citizens in 1988 that the chromium they were using was harmless to their health.
Effects of Unethical Activities on Different Stakeholders
Many people and domestic animals in the high desert town of
Situation Analysis
The following discussion covers PG&E’s response to the situation, response from the industry as well as by Government and Statutory bodies. This is followed by analyses of whether the responses where adequate, and if they would ensure that similar violations will not occur.
PG&E’s Response:
Initially, PG&E’s response was a lackadaisical attitude to the effect of the Chromium-6 (or Cr+6) situation on the company, both financially, and more importantly, the company’s image as a responsible corporate citizen. It appeared as if top management distanced themselves from the situation, and the general pervading attitude was one of the intimidation, flaunting the substantial financial prowess of PG&E to take the position of “one-thousand-pound Gorilla”, rather than seriously consider a comprehensive engagement of the stakeholders as later discussed in the conclusion to this paper.
The following are some responses by PG&E even before the Erin Brockovich case, that suggest the company, and indeed senior management, was aware of the potential effect of the pollution activities at Hinkley;
• Covertly buying up houses of affected residents’ to “cover-up” link to pollution effects, as many of the houses were destroyed in acts of supposed vanadalism.
• Commissioned a scientific study by consultants to write up a “doctored” follow up report in 1987, reversing earlier research by a Chinese scientist, Jiandong Zhang, that linked Cr+6 wastes to elevated cancer risks in an industrial city in China. The validity of this follow up report came in to question as it was purportedly authored by Zhang, who did not speak English, and whose name was misspelled in the report in supposedly authored.
• PG&E had embarked on a “damage-control” campaign by distributing information flyers to Hinkley residents, which was deliberately misinforming by suggesting that Chromium pollution by PG&E was non-toxic, and a recent occurrence at that time, whereas it had been going on for decades.
Following the Erin Brockovich case, which ended up costing the company a record $333 Million settlement, PG&E’s responses remain quite interesting. The company never formally admitted wrongdoing, specific to the Brockovich case, and more importantly for corporate irresponsibility. The impact of the Erin Brockovich case, or indeed the movie, was completely disregarded, and no mention was found on publicly available company information. However, it should be mentioned that the company was careful not to openly and actively campaigned against the movie, especially as Julia Roberts won the prestigious Oscar award for her role as Brockovich.
It is believed that the overshadowing effect of the California Energy crisis in the late 1990’s, which largely contributed to PG&E filing for bankruptcy, somewhat shielded and deflected attention away from the company from broader consequences of the Cr+6 pollution debacle. Notably, the company now boasts an actively robust community-focused approach, with websites strongly promoting pro-environment and pro-community initiatives. In fact, a recent website posting indicates a final additional settlement of $295 million for Cr+6 litigation in 2006, following a decade of legal negotiations with various communities in
Industry’s Response:
There are no well articulated or collective responses from the industry, particularly around Cr+6 contamination in
Nonetheless, several companies are believed to have similarly being engaged in CR-6+ contamination, just by virtue of their manufacturing operations at the time. These include; Lockheed-Martin, Menasco Aerosystems, Drilube, Excello Plting, Sears Roebuck & Co, North American Air, Andrew Jergens Co, and Knickerbocker Plastic Co, Boeing, Xerox, and ITT industries among notable companies. Not only was PG&E not an isolated case in the Cr+6 contamination issue, the company’s response was not altogether unusual for large corporations either.
Of note, and not long after the PG&E case, Lockheed in 1996, forged a secret, out-of-court settlement of $60 Million to over 1,300 Burbank, CA residents related to Cr+6 contamination. Lockheed also spent $275 Million on cleanups, and paid roughly $100 Million in health claims to workers & residents. Lockheed’s executive, after being pressed on the issue, reluctantly admitted discharging wastewater containing Cr+6 in manufacturing processes during the 1960s, but had since moved the operations to
Similar to PG&E, and in response to better sensitivity to community stakeholder issues, most companies in PG&E’s industry now have extensive coverage of environmental and community focused activities on their websites. Many proactively engage in dialogue with the communities in which they are located in the spirit of the common gains approach enumerated in the conclusion of this paper.
Response by Government / Regulators:
In an interesting view of the effects of globalization, scientific research on the effects of Cr+6, that is the basis of most decisions during the Brockovich case was based on pioneering work by scientists in Germany, and perhaps more notably, in China, then still considered as an “Iron Curtain” country by the western world. At the time of the case, the US EPA did not formally consider CR+6 a carcinogen if ingested in drinking water, which favored PG&E’s position. However, a 1987 scientific report by Chinese scientists, led by Dr. Zhang, indicated elevated cancer risks for Chinese industrial cities with high Cr+6 contamination, which supported Brockovich’s case.
Arguably in response to the landmark case, there was a push by Federal and State lawmakers which resulted in several studies to be instituted, and in particular a notable study, involving leading experts from the
The foregoing has added to the bureaucratic red tape, and time it takes to develop a comprehensive response to situations of this nature. This is further exacerbated by ongoing scientific debate over the carcinogenic effect of Cr+6 in different forms. While unanimously agreed as being potent when inhaled, research remains inconclusive about Cr+6’s effects when ingested in water. Of note, Chromium Maximum Level (CML) is measured for total Chromium in drinking water, and NOT specifically for Cr+6. Following the Brockovich case, the state of
Another government response, particularly in cities in the state of CA, with preponderance for Cr+6 plumes was stricter monitoring of drinking water supply sources. Despite not having a coherent Cr+6 standard, water authorities in cities like Burbank, and Los Angeles were reported to have engaged in “blending” their dinking water supply, by purchasing with untainted water and diluting the Chromium level down, to reduce potential effects of Cr+6, even if not officially declared as being carcinogenic.
Are the Responses Adequate?
Even if somewhat inconclusive, the responses have generated great debate across several stakeholder communities. The cause of the consumer community has been helped significantly by media attention, particularly following the Brockovich movie. However, it can be argued that illegal activities perhaps continue today in one shape or form, until they draw sufficient stakeholder attention.
Also, the monetary penalties are typically not as grave as the non-monetary public image effects suffered by companies like PG&E, and more importantly, the personal effect and losses borne by the affected individuals. The cascading effect of these responses includes drawing attention to associated issues, such as global warming, as well as helping to shape policy and ethical corporate behavior. For instance, PG&E now reports findings of Cr+6 contamination detection, and other environmental issues on its website, and goes further to announce remediation steps and information on contingency plans.
Preventing the Illegal or Unethical Activities
There are choices in dealing with the illegal or unethical activities. The first is to acknowledge the concerns of the other side. When a firm is responsible for anything that could cause harm, one way to turn the public against it and destroy its reputation is to lack empathy for what those harmed might be going through. In this case, children were sick and dying and what little concern the PG&E representatives showed was enraging to citizens. Their main concern was obviously getting themselves out of the situation without liability.
The second is to encourage joint fact finding. PG&E instead went to extraordinary lengths to cover up what “facts” there were available. Another option would have been to inform the proper officials and begin to aid in an investigation to determine what went wrong and how much harm was truly done. Unbiased second parties could have given them a better idea where they stood years before this turned into the disaster it had. PG&E would have maintained more control in the end as they would have a say in the time, and methods of clean up as well. They ended up being ordered to do it anyway and at such a greater cost as so much time had elapsed and damage done.
The third is to “offer contingent commitments to minimize impacts if they do occur; promise to compensate knowable but unintended impacts”. (Susskind & Field, p37) PG&E denied to the bitter end that their actions resulted in the illness and death of Hinkley citizens even with the overwhelming amount of evidence to the contrary. If they took the position of offering to compensate, they, again, may have maintained more control of the outcome. Their denial only brought about more fear in the victims because they were receiving conflicting information and did not know what to believe. All they knew was that they were ill and saw PG&E as the culprit. Once the evidence was in that chrome 6 was what was making the citizens sick, PG&E could have set up a system to compensate according to damages actually incurred. By offering to compensate for future damage if it had occurred, they would be able to require proof of link to the chrome 6 and compensate accordingly rather than paying millions in punitive damages as they were forced to do by the court. Although the comparative dollar value of their liability is speculative, chances are, PG&E’s financial burden could have been substantially reduced and these people could have gotten the proper diagnosis and medical attention they needed much sooner. Although they may still have been extremely angry, they would have at least observed an effort on the firm’s part to help the innocent parties.
The fourth is to accept responsibility, admit mistakes, and share power. PG&E did none of these things. They tried to deny responsibility after covering up their actions for 30 plus years; lied about their wrong doing and the knowledge of the harm it could cause; and tried to by off any sources of alternative power to conceal dishonest activities. Overall, this is a perfect way to lose on all fronts, including that of corporate reputation.
The fifth is to act in a trustworthy fashion at all times. Not much to add on this point. From 1965 PG&E knew of the contamination and did not address it. After discovery, they lied to the citizens about the risks, then bought and destroyed their properties to cover up the damage. They concealed documents, refused compensation even when legitimate offers were proposed, and denied liability until a judge found otherwise.
The sixth is to focus on building long-term relationships. There was no attempt on PG&E’s part to do this. From beginning to end, their actions served only to selfishly avoid responsibility and, in turn, destroy their image. Although the initial reaction may be to protect a firm financially from liability, the future ramifications of this choice can be devastating. For PG&E, the lawsuits continued and they lost billions. It became one of the most notorious firms in
Conclusion
Accidents happen, but there are choices in dealing with disasters such as this when they occur. PG & E infuriated the public by choosing to us a cover up method during this crisis. PG & E could have used The Mutual Gains Approach, which would have been a positive strategic management decision to use that would have created a win/win situation for PG & E as well as the community in
There is a strategic approach called “The Mutual Gains Approach”. This is a principle which has six steps that a firm can use to help it through a catastrophe such as the faced at Hinkley.
First, when a firm is involved in anything that could cause harm, one way to turn the public against it and destroy its reputation is to lack empathy for what those harmed might be going through.
Second one is to encourage joint fact finding. PG & E could have informed proper officials and begin to aid an investigation to determine what went wrong and how much harm was done. “Unbiased second parties could have given them a better idea where they stood years before this turned into the disaster it had. PG & E would have maintained more control in the end and would have a say in the time and methods of clean up.
The third is to “offer contingent commitments to minimize impacts if they do occur: promise to compensate knowable but unintended impacts”. PG & E denied to the end that their actions resulted in the death and illness of the Hinkley citizens even with the overwhelming amount of evidence. If they had taken the position of offering to compensate, they may have had more control over the outcome. Their denial only brought more fear into the victims because they were receiving conflicting information about and did not know what to believe.
The fourth is to accept responsibility, admit mistakes, and share power. PG & E did none of these things. They tried to deny responsibility after covering up their actions for 30 plus years: lied about their wrong doing and knowledge of the harm it could cause and tried to off any sources of alternative power to conceal dishonest activities. Overall, this was a perfect way to lose on all fronts, including that of corporate reputation.
The fifth is to act in a trustworthy fashion at all times. From 1965 PG & E knew of the contamination and did not address it. They lied to the citizens about the risks, and bought and destroyed the properties to cover up the damage. They concealed documents, refused compensation even when legitimate offers were proposed, and denied liability until a judge found otherwise.
The sixth is to focus on building long term, relationships. There was no attempt on PG & E’s part to do this. From beginning to end, their actions served only to selfishly avoid responsibility, and in return, damage their image. Although the initial reaction may be to protect a firm financially from liability, the future ramifications of this choice can be devastating.
When corporate mistakes or accidents occur, how the firm chooses to address the situation and address the public and remedy the problem can make or break the outcome. IF PG & E had used The Mutual Gains approach, it would have saved face and shone in the community eyes as a responsible, outstanding firm that cared for the interest of the public, people’s health affected by the chemical in question, EPA, and given the firm an outstanding positive image in the community.
References
1. http://www.lawbuzz.com/famoustrials : “Erin Brockovich:
2.
3. http://www.mindfully.org/Pesticide/Hexavalent-Chromium-Health.Hazards.htm
4. http://www.money.cnn.com/2001/04/06/news/pacificgas/
5. NYTimes.com: Holson, Laura M.: “Pacific Gas and Electric Finds No Sympathy”,
6. Wikipedia.org: “Pacific Gas and Electric Company”.
7. http://pcg.cleint.shareholder.com/investors/financial_reports/EdgarDetail.cfm?companyID
8. http://en.wikipedia.org/wiki/Pacific_Gas_and_Electric_Company
9. www.pge.com
10. Chromium cleanup standards stiffened Mary Jo Patterson. The Star-Ledger:
11. Chrome-Plated Fraud: How PG&E’s Scientists-For-Hire Reversed Findings of Cancer Study. EWG Report: http://www.ewg.org/reports/chromium/part1.php
12. Troubled Waters Chip Jacobs and Kevin Uhrich.
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