Customers, workers lose in utility deregulation

By Eric Nalder

The winners and losers in the nation’s wave of utility deregulation are clear.

The winners? Shareholders and executives. The losers? Customers and workers.

Over a decade of deregulation, the frequency and duration of outages have crept up, maintenance of aging infrastructure has been deferred, line workers have been laid off – and CEOs’ salaries have risen an average of 150 percent nationwide, a Hearst Newspapers investigation has found.

The results were evident when Hurricane Sandy hit the East Coast last month.

For example, the tree-lined suburban town of Weston, Conn., knew all too well what to expect. It was the third major storm Weston had suffered in just over a year. Once again, hundred-year-old trees smashed into power lines, throwing the town into the surreal darkness of a lengthy power outage.

Connecticut Light & Power lineman Keith Boczer was among the first on the scene, taking cover as trees were “falling all over the place.” His crew was “minimal,” and Boczer, 55, felt “handcuffed.” He remembers when an outage like this one would be attacked by much larger crews.

The number of CL&P linemen has shrunk 60 percent over the past three decades, while the number of people served by the utility has increased 40 percent.

Charles Shivery’s first full year as chairman of the board, CEO and president of Northeast Utilities, CL&P’s parent company, was 2004. That year, his compensation totaled $1.9 million. In 2011, Shivery’s compensation totaled $9,685,241 – a more than fivefold increase in seven years. In that time, the company’s stock price has risen from $14.49 to more than $35 a share, and Shivery has reduced the utility’s workforce by 16 percent.

Cutbacks hurt response

As Boczer attacked the tangle of downed trees and lines, he faced a maddening shortage of replacement transformers. It would be the second week after the storm before the crews would make much progress.

Why? Frank Cirillo, an official with the International Brotherhood of Electrical Workers in Connecticut, said staff cutbacks have degraded every aspect of response, including the supply room, where parts such as transformers must be obtained. One clerk handles every request, Cirillo said.

“It’s like a million people at a Stop N’ Shop and there is one (expletive) cashier.”

In contrast to Sandy’s wrath, skies were clear and calm in San Mateo, Calif., last April. Jennifer Tello discovered in an instant that utility reliability problems aren’t just storm-related.

The 24-year-old woman found herself crying into the face of her gasping father: “Dad, if you can hear my voice, just stay with me.”

Enrique Tello, breadwinner for his wife and adult daughter, had been electrocuted by a 12,000-volt Pacific Gas & Electric line that fell into his back yard. When he died later that evening, Jennifer Tello was a month away from giving birth to his grandson.

According to PG&E, a duck hit the line and caused it to fall. The state is investigating not just how that could happen, but also why the line stayed hot after it fell when it should have automatically gone dead. It was still sparking when police arrived, the police report said.

“This was a maintenance issue,” said George Choulos, the Tello family’s attorney.

For the previous eight years, the chairman, CEO and president of PG&E was Peter Darbee. Darbee’s compensation ranged from $6 million the year he took over, down to $1.9 million in 2004, when the company was emerging from bankruptcy, and up to $9.5 million in 2011. He retired two months before Tello died, with a $500,000 per year pension.

Electric utilities’ “reliability is getting worse,” said a U.S. Department of Energy report published this year at Lawrence Berkeley National Laboratory in California. The lab’s research showed that nationwide, reliability – measured by length and frequency of outages – deteriorated at an average rate of 2 percent a year between 2000 and 2009, according to the report and its lead researcher, scientist Joseph Eto.

“This is a real trend,” he said.

Big jump in CEO pay

During a five-month investigation, Hearst Newspapers found four primary and interrelated factors – cited again and again in interviews, studies and other research – that drive investor-owned utilities’ problems with reliability:

» Aging infrastructure

» A shrinking workforce that has curtailed both maintenance and response to storms

» Persistent failure to trim and remove trees near power lines

» A culture change that has placed profits above reliability

Investor-owned utility CEOs’ pay packages are increasingly based on profit and stock performance, with very little or none of their compensation dependent on reliability for ratepayers.

Executive pay vs. shareholder return

Between 2000 and 2011, the 150 percent increase in CEO pay packages at investor-owned utilities brought the average to more than $6 million a year, according to a survey conducted for Hearst by Longnecker & Associates, a Houston compensation consulting firm.

From 1999 to 2002, utilities cut their manpower costs by shedding 13,000 electrical power-line installers and repairers, one-fifth of the total, according to data obtained by Hearst from the Bureau of Labor Statistics. The number of utility linemen remains well below pre-2000 levels.

“We’ve gone from having dependability and reliability being the gold standard of the companies to profitability and money,” said Jim Hunter, director of the utility department at the Internation Brotherhood of Electrical Workers in Washington D.C.

“There needs to be a national inquiry into the reliability and efficiency of our electric supply,” said U.S. Sen. Richard Blumenthal, D-Conn.

A recent industry-sponsored study found some unnamed utilities improved in recent years, though the voluntary data came from a more limited sample than the one used by Eto in the Berkeley study.

Rodney Robinson, director of reliability management at Westar Energy and chair of the industry’s Distribution Reliability Working Group, which sponsored the industry study, said, “It’s not getting much better, let’s say it that way. It is staying flat. … Every utility that I’ve talked to, their worst cause is aging equipment.”

Embarrassed on TV

On a calm night last December, a corroded and neglected splice on a PG&E wire failed, sending San Francisco’s Candlestick Park into darkness during a nationally broadcast “Monday Night Football” game.

It was a visible and embarrassing signal of a huge problem. A quarter of the nation’s major outages in the last decade didn’t involve weather. They were caused by maintenance issues, equipment failures, generation deficiencies, system overloads and rolling blackouts, according to a Hearst analysis of federal data.

“The distribution systems are getting older … faster than they are being replaced,” said Mark Joseph, an attorney for the Coalition of California Utility Employees.

The nation’s power grid was built out during a growth period in the 1960s and 1970s, meaning much of it is at least a half-century old, said Bhavin Desai, who is conducting a survey to help utility executives decide where to spend their limited infrastructure budgets. Everything is aging, from power poles to major substation transformers, which price out “in the millions,” Desai said.

Nevertheless, storms remain the biggest cause of lengthy outages, according to federal data. And the ability of electric utilities to respond to them has been crippled by lack of spending to upgrade equipment, and payroll cutbacks.

Edison Electric Institute, the lobbying and trade organization for shareholder-owned utilities, touted the efficiencies of a smaller workforce in a 2004 report, saying “the number of restoration workers deployed after major storms has decreased fairly dramatically.”

Many utility executives realized by the mid-2000s that their staffing cuts were too deep. In March 2006 the industry formed the Center for Energy Workforce Development, to stem a growing problem: The workforce was aging and there were too few young replacements, leading to what one union official called a “silver tsunami” of departing linemen.

Today, even with some increased hiring, the average age of line workers is still increasing. Training new linemen takes years because working with electricity is a dangerous job that requires advanced skills.

The bottom line

Every utility CEO gets annual marching orders from the board of directors’ compensation committee, and the carrots are hefty incentive payments, records show.

Houston’s CenterPoint Energy was heavily criticized for the 2008 outage following Hurricane Ike that left some customers without power for 19 days. Yet “for 2011, our Chief Executive Officer’s only performance objective was related to our core operating income,” said the company’s proxy statement.

CenterPoint’s CEO, David McClanahan, received nearly $6.5 million last year. Company spokesman Floyd LeBlanc said McClanahan is in a position too high in the corporation to be held financially responsible for electricity reliability.

What happened to the electric utility industry was a “goofy partial deregulation,” said University of Houston energy economics instructor Ed Hirs. New laws created stand-alone generating companies. Electricity retailers were allowed, in some states, to sell power over other companies’ wires. But traditional utilities, regulated by state commissions, remained.

Lawmakers were promised lower electricity prices, but in the 14 states where power is sold in a competitive market – including Texas, New York and Connecticut – “deregulation appears to have had little impact on rates,” said a 2011 Connecticut Legislature report.

Some solutions

Experts cited three improvements that would improve reliability: More consistent data, modernized equipment and courageous leadership.

Lawrence Berkeley Laboratory issued a report in 2008 saying researchers couldn’t make “meaningful comparisons” of utilities because many report their outage data using disparate methods. Hearst examined the methods used by the three most populous states – California, Texas and New York – and they don’t resemble each other.

“You cannot manage something effectively unless you can measure it,” the 2008 report said.

The Energy Department is drafting rules requiring uniform reporting, but utilities are wary.

“Most of them have been burned in the past,” said Eto at Lawrence Berkeley, who hopes “fair” comparisons will soon be possible. “The data gets used against them.”

High-tech equipment solutions are now readily available. Some utilities obtained grants from the Obama administration’s recession recovery program. A few are building extensive networks of “looped” wire systems throughout their systems that give customers two sources of power. More have been taking the initial step of installing new meters and switches that will automatically report outages and help repair them.

Houston’s CenterPoint Energy got one of the largest single grants, $200 million. It is “phase one,” said spokesman LeBlanc, of “moving to the intelligent grid.”

As for trees, nearly all states’ laws are inadequate to enforce the prevention of vegetation growing too close to wires, said Stephen Cieslewicz, a California utility consultant who has fought nationally for tougher rules.

The tree issue is also a function of utilities’ maintenance budgets, squeezed to improve bottom lines.

Retired PG&E boss Darbee believes courageous leadership must come from utility CEOs, regulators and the public.

“It’s easy to point to the companies and say it is all you,” he said. “But willingly or unwillingly, we’ve all had a hand it it.”