Corporate Collapse Pacific Gas and Electric Company

12 Pages   |   2,734 Words
Table of Contents
 
Introduction. 3
Pacific Gas & Electric Co. 3
The Scandal 3
Parties involved. 4
Impact on External Environment. 5
Financial Performance of the Company. 7
Conclusion. 9
Appendix. 11
Bibliography. 12
                                                                                                                                              

Introduction

Pacific Gas & Electric Co. used to be one of the top utility companies in California. Despite holding a significantly powerful position in the public sector utility market, the company has been involved in massive problems over the years (CNN, 2001). The recent scandal, which has hit the company most, is the one that erupted after the 2010 San Bruno gas pipeline explosion. This report will highlight some of the main discussion points related to the company as well as the scandal that affected its reputation all across North America. The reason, this became such a huge issue, was due to the involvement of judicial bodies within the entire scenario.
The report will attempt to explain not only the scenario that occurred after the scandal, but it will also try to assess the major reasons which led to this occurrence. Most of the data that will be presented is going to be secondary data, and the report will also provide a linkage with the financial performance and value of its stock price in the time frame of this scandal. The report will also some instances, where it becomes visible how people in the top management positions can take advantage of their authority and discretion. This not only allows them to take excessive benefits but also harm others in the entire process.  
 

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Pacific Gas & Electric Co.

Pacific Gas and Electric Company (“Utility”), a public utility operating in northern and central California, is a subsidiary of PG&E Corporation. Major revenues are achieved with the help of sale and delivery of electricity and natural gas to customers. Its main regulator is the California Public Utility Commission (“CPUC”) and the Federal Energy Regulatory Commission (“FERC”). In addition, the Nuclear Regulatory Commission (“NRC”) is also a key regulator as it is tasked with overseeing the licensing, construction, operation, and decommissioning of the Utility’s nuclear generation facilities (Pacific Gas, 2013).

The Scandal

As mentioned earlier, Pacific Gas & Electric Co. used to be one of the top utility companies in California. However, the company became embroiled in a sensational scandal which has disrupted it since the news leaked out. The scandal erupted on the morning of September 9, 2010. The blast was so severe that it destroyed 38 homes and also killed eight people in the process (Elias, 2015).
The explosion was caused when a 30-inch natural-gas transmission line that had been  installed in 1956 burst open. In the initial stage, there was no fire but soon a fire broke out at the place of incidence. Several people lost their life as a result of this incident and more than three dozen homes also disintegrated. Those who were able to flee the area and survive the incident, report that the heat of the blast was very high. Many of them felt their back burnt a lot as they tried to run way from that specific area in order to save themselves. There have also been reports that claim that the incident was so severe in its intensity that easily compares to the feeling of an earthquake with the ground shaking like tremors.  
Initially, there were several rumors regarding the blast and its reason for the occurrence. Eventually, an investigation was launched by the the National Transportation Safety Board. The board eventually concluded that the rupture occurred because there was a weakly welded pipeline. Not only was the pipeline badly welded the records of PG&E showed that these were all smooth with no welding done on any pipeline. If this negligence had not occurred, things would not have unraveled in this particular manner. To add further, the company also neglected its duty to shut off natural gas feeding. After a period of 95 minutes since the blast had occurred the supply was finally stopped by the management. Such an incident proved to the several stakeholders, as well as the investigating agencies that the PG&E's safety management of its pipelines was overall deficient and ineffective (Eversley, 2014).

Parties involved

The first and the foremost blame was put on the poor management of PG&E itself. If their records had been updated earlier, this particular scenario might not have occurred at all. Later on, the federal board also concluded that due to the ineffectiveness of California's Public Utility Commission in regulating the power utility this gross negligence occurred in the first place. This is because it is the responsibility of the California’s Public Utility Commission because their jurisdiction covered all but the southern one-third of California (Eversley, 2014). Another federal count alleges that PG&E lied to the National Transportation Safety Board in that agency's investigation, which further exacerbated the situation for the company.
Initially, the court with support from the California’s Public Utility Commission fined the management of Pacific Gas and Electric Company a huge fine of $1.3 billion in gas-pipeline improvements. This was a very successful settlement which would have benefited the population of California. However, the president of this commission, Michael Peevey, did not participate in this voting process. This is because Mr. Peevey and Vice President of Pacific Gas and Electric Company, Brian Cherry, had sent e-mails to commission members occupying high positions to get a better judge who would be a little lenient to the company (Derbeken, 2014). Eventually, both of these people were successful in substantially reducing the fine amount to a paltry sum of $1 million fine (Elias, 2015). 
There has also been evidence regarding the interference and judge tampering with regards to court proceedings. One reason that has been cited by many reports regarding the reduction of fine to a paltry sum of 1 million dollars is that the management of Pacific Gas was able to bribe and influence Commission members that in turn helped in reducing these damages to a small amount. It has also been mentioned by these reports that several judges and Commission members were used to change the final verdict to a sum that is not only insulting to the memory of those that perished but it also increases doubts regarding the effectiveness of regulatory bodies in the country (City News Services, 2014).

Impact on External Environment

Although those, who lost their lives and houses in the fire, cannot be fully rehabilitated there were some good things about the scenario as well. The most important thing that was concluded by the researchers was that after the 2010 scandal regulatory agencies had to start becoming a little more cautious in their approach towards future prevention of such horrible incidents (Howell, 2015).
For instance, National Transportation Safety Board had to review its high-pressure lines in urban areas after this incident occurred. Now, the companies, which are installing such pipelines in America, have been given specific standard operating procedures that must be followed. One such company is the Atco Pipelines. This company plans to start construction on a new southwest Edmonton natural gas transmission pipeline in a few months’ time. These new pipelines will contain the best available technology and materials. The pipelines will now be coated with superior material and they will also have inspection tools in built into the material itself. Also, the pipelines are being designed to benefit the people of Edmonton as they will aid in the growth of the total area and its population. The good feature of these is that all the pipelines will be durable for at least 50 years (Howell, 2015).
Another positive thing that has come out after the incident is the importance that organizations and stakeholders now place on full disclosures between parties. In December 2014, city of San Bruno asked the California Public Utility Commission to order PG&E Co. to release 65,000 email messages exchanged between PG&E and agency officials between 2010 and 2014. This goes on to prove that even after so many years have passed since the incident, there is still a lot of concern regarding full disclosure of things that went wrong afterward. The reason why these emails have been requested is that it has been explained that the Commissioner, Mr. Peevey, was constantly involved with officials of Pacific gas and Electric Company to ensure that the organization received minimal fines from the court. Already, more than 40 messages have been disclosed to the general public that prove improper communication took place between Commission members and the management of Pacific Gas (City News Services, 2014). Once these documents are made public, they will help in enlightening the population about corporate scandals with authentic data. Also, it will lead to others getting discouraged, and corporations are likely to become a little more cautious in future years.  
The shareholders of a company are its real owners. In this case, it becomes imperative for every shareholder to be aware of the management and its operations in running the company because ultimately the management is working to increase shareholder’s value. Therefore, one impact that has also occurred after the incident is that auditors and shareholders have realized it is not only necessary but also a duty on their part to ensure that the management is conducting operations of a company in a proper manner. As auditors, the work must not only be to identify the problem areas and incorrect policies of the company that may create a corporate scandal but it must be their responsibility to help the company’s management avoid making such grave mistakes in the first place. On many occasions, auditors can easily look at the records and see what are the loopholes that must be covered otherwise future operations of the company become endangered (HassabElnaby, 2007). 
Just like auditors, shareholders must also be held the responsible, and they must attend corporate meetings of shareholders whenever they occur (Li, 2010). This will help in keeping them updated with the company’s operations, and they can also ensure that things are running properly. Moreover, such practices are likely to keep the management also in check otherwise they are encouraged to keep doing whatever they want to do with minimal interference from anyone.
It must be the responsibility of each and every individual in a society to play their part in prevention of such incidents. People can simply contribute by being vigilant and reporting such incidents to authorities in a timely manner so that these mishaps are easily avoided. These things will help in keeping a check on the company otherwise they can do whatever they want in the absence of such measures. 

Financial Performance of the Company

This section will discuss some of the main points that come up when the financial data of the company is checked to see the consistency of its performance over the years.
This chart evaluates the company’s stock price over the five-year period from 2010 to the present day. Currently, the stock price of Pacific Gas and Electric Corporation is worth $55.83 whereas the stock price has almost consistently stayed at a much lower level before 2014. The price, however, has seen a significant jump since 2014 began. It seems that the company has been performing quite well but if the financial data is looked at, things do not seem to be this way at all. The year to date percentage increase is reported at 4.86%. This would ideally mean that this company is at least improving its performance by this same amount on a year-to-year basis. However, this is not the case at all. 
 
SOUCE: (CNN Money, 2014)
If the financial ratios are measured over the past five year period nothing, comes out to be positive over these time durations. The Earning per share of the company has substantially decreased over the past five years. From $3.2 per share earnings to only $1.83 per share earnings the decline is substantially felt by a massive 42.8%.
Similar trend comes out when the return on total assets is looked at. In 2008, the company had a return of more than 2.8% on its total assets but this same figure has declined to only 1.49% that is an abysmal performance. This means more than 48% decline has been felt by the Return on its total assets. As far as the Sales to total assets figure is concerned, there is a similar trend here as well. It seems that the company was finding it difficult to continue its operations after the scandal erupted in 2010 (Pacific Gas, 2013).    
FINANCIAL HIGHLIGHTS ($)
  2013 2012 2011 2009 2008
EPS 1.83 1.92 2.1 2.82 3.2
Return on Assets 1.49% 1.58% 1.72% 2.42% 2.87%
Sales / Total Assets 28.05% 28.68% 30.06% 30.07% 31.20%
 
Excel Sheet attached
After looking at both the stock price as well as the financial performance of the company, it can safely be stated that there has been gross over valuation as far as the company’s stock price is concerned. There is little to no evidence in the company’s financials that justify this jump in the stock price even if we restrict the performance to 2013 numbers. Moreover, given that there has been considerable debate regarding the company and its ethical issues in the press it is highly likely that the recent jump was simply due to the reduction in fine amount that led investors to feel a little better now that the company had to only pay a small fine. This does not mean the company is worth that much. It simply showcases that whenever an investor, who has been owner of few shares of a corporation, gets to hear about any positive development there are chances that he or she may buy the same stock again which then increases its total price in the market. Many financial researchers and analysts call this phenomenon the “sentiment driven the stock market” (Financial Dictionary, 2015).  

Conclusion

There are several conclusions to be drawn from this entire discussion. The first point that comes out is that all utility companies need to be very careful in their operations. They are providers of necessities for the people. Unless they do their jobs in an efficient manner, these incidents will keep repeating themselves. Moreover, there must be a strong check and balance on these companies that must be kept by the regulators. If this does not happen there are chances that things can go wrong even when utility and energy companies are careful. It is not only necessary that these companies are regulated properly but they must also be assisted in dealing with any such situations in future otherwise it can be difficult for such companies to take entire responsibility on their shoulders.
Another conclusion that is quite evident here is that the sanctity of the judicial system is the most important thing. If one decision has been finalized then there should not be any need to revisit them and even if due to the appeals, such decisions are revisited, external influences must be reduced to a minimum otherwise the partiality of courts and its members is at stake. If the court of law cannot put these entities accountable for their crimes then others will also be encouraged to continue doing same thing because they know that there are always back channels that will be used whenever anything goes wrong.
 

Appendix

   

Source: (Pacific Gas, 2013)
 

Bibliography

City News Services. (2014). San Bruno Asks PUC to Order Release, Review of 65,000 Pacific Gas and Electric Emails. Retrieved January 3, 2015, from http://patch.com/california/sanbruno/san-bruno-asks-puc-order-release-review-65000-pacific-gas-and-electric-emails
CNN. (2001, April). PG&E Seeks Bankruptcy. Retrieved December 30, 2014, from CNN: http://money.cnn.com/2001/04/06/news/pacificgas/
Derbeken, J. V. (2014). PG&E Fined $1.05 million in Judge-Shopping Scandal. Retrieved January 3, 2015, from http://www.sfgate.com/news/article/PG-E-fined-1-05-million-in-judge-shopping-scandal-5907233.php
Elias, T. D. (2015). PUC chief departs, but bad decisions live on. Retrieved January 7, 2015, from http://www.sddt.com/Commentary/article.cfm?Commentary_ID=109&SourceCode=20150106tzc&_t=PUC+chief+departs+but+bad+decisions+live+on#.VKyhPdKUe-0
Eversley, M. (2014). PG&E fined $1.4B for San Bruno pipeline blast. Retrieved January 5, 2015, from http://www.usatoday.com/story/money/2014/09/02/pge-san-bruno-gas-explosion-fine/14979593/
Financial Dictionary. (2015). Market Sentiment. Retrieved January 6, 2015, from http://financial-dictionary.thefreedictionary.com/Market+Sentiment
HassabElnaby, H. R. (2007). Audit Committees Oversight Responsibilities Post Sarbanes-Oxley Act. American Journal of Business , 22 (2).
Howell, D. (2015). Atco to build new Edmonton gas transmission pipeline this year. Retrieved January 7, 2015, from http://www.edmontonjournal.com/Atco+build+Edmonton+transmission+pipeline+this+year/10706637/story.html
Li, Y. (2010). The Case Analysis of the Scandal of Enron. International Journal of Business and Management , 5 (10), 37-41.
Pacific Gas. (2012). Annual Report. Retrieved from Pacific Gas: investor.pgecorp.com/files/doc_downloads/2012_Annual_Report.pdf

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