BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA

Order Instituting Investigation on the

Commission’s Own Motion to Determine Investigation 15-08-019
Whether Pacific Gas and Electric
Company and PG&E Corporation’s
Organizational Culture and Governance
Prioritize Safety.

COMMENTS OF THE PUBLIC ADVOCATES OFFICE

ON THE JOINT ASSIGNED COMMISSIONER’S AND
ADMINISTRATIVE LAW JUDGE’S RULING ON PROPOSALS TO
IMPROVE THE SAFETY CULTURE OF PACIFIC GAS AND ELECTRIC
COMPANY AND PACIFIC GAS AND ELECTRIC CORPORATION

NOEL OBIORA NATHANIEL SKINNER, PhD

Attorney Program Manager

Public Advocates Office Public Advocates Office

California Public Utilities Commission
505 Van Ness
San Francisco, CA 94102
Tel: (415)-703-5987
Email: noel.obiora@cpuc.ca.gov
California Public Utilities Commission
505 Van Ness Avenue
San Francisco, CA 94102
Tel: (415) 703-1393
Email: Nathaniel.skinner@cpuc.ca.gov

July 19, 2019

309873120
 TABLE OF CONTENTS

Pages
I. INTRODUCTION ......................................................................................... 1

II. SEPARATING PG&E INTO SEPARATE GAS AND ELECTRIC

UTILITIES .................................................................................................... 3
A. A Gas-Electric Combination Raises Concerns About Having A
Safety Focus .............................................................................................. 4
B. Economies Of Scale And Scope Must Be Considered In Any
Potential Restructuring ............................................................................. 4
C. Depending On Size, Separate Utility Services May Not
Meaningfully Impact Customer Bills And Services ................................. 5
D. Conclusions About Gas-Electric Ownership ............................................ 6

III. ESTABLISHING PERIODIC REVIEW OF PG&E’S

CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY
(CPCN) .......................................................................................................... 6
A. PG&E’s Opposition To Commission Efforts To Remedy PG&E’s
Extensive Safety Failures Demonstrates The Need To Consider A
CPCN Review Process .............................................................................. 9
1. PG&E’s “Sense Of Entitlement” Comes From Its Expectation
That It Can Never Lose Its CPCN ....................................................... 9
2. A Utility’s Tenure Should Be Dependent On Performance .............. 10
3. Financial Success Has Not Aligned With Performance .................... 11
4. The Regulatory Community Acts As If It Has No Alternatives ....... 12
B. The CPCN Should Be Periodically Reviewed ........................................ 13
C. A Clear Definition Of The CPCN Review Process And Criteria
Will Create Market Certainty .................................................................. 13
1. Step 1: Define the job, the responsibilities, and the rights ............... 14
a) The utility's job: What services, what territory? ......................... 14
b) The Commission Must Establish Clear Metrics For Each
Dimension Of The Obligation To Serve ..................................... 15
c) CPCN Revocation: Criteria And Procedure .............................. 15
2. Step 2: Define the selection criteria .................................................. 17
a) Must haves .................................................................................. 17

i
 b) Must-not-haves ........................................................................... 18
c) Discretionary Items ..................................................................... 19
3. Step 3: Conduct The Competition .................................................... 19
(a) Issue An Order Starting The Process ..........................................19
(b) Hold Technical Workshops .........................................................20
(c) Issue Formal Requests For Proposals .........................................20
(d) Choose The CPCN Holder(s) ......................................................21
4. The Commission Should Coordinate Its PG&E Review With
The Bankruptcy Proceeding .............................................................. 21
5. The Commission Should Reject Attempts To Avoid CPCN
Accountability.................................................................................... 22
a) Infrastructure Investment ............................................................ 22
b) Stock Price .................................................................................. 22
6. Conclusion On Periodic CPCN Review: ........................................... 24
D. The CPCN Process Described In Part C Will Ensure The
Commission Is Aware Of Potential Competitors And Has A List
Readily Available .................................................................................... 24
E. The CPCN Review Process Costs Are Outweighed By The
Benefits Associated With The Review ................................................... 25

IV. AT A MINIMUM, PG&E CORP.'S HOLDING COMPANY

STRUCTURE MUST BE LIMITED TO THE PUBLIC UTILITY
ACTIVITIES AUTHORIZED BY THE COMMISSION .......................... 25
A. Should PG&E Have A Holding Company? ............................................ 25

V. THE COMMISSION SHOULD NOT LINK PG&E’S RATE OF

RETURN ON EQUITY TO SAFETY PERFORMANCE METRICS ....... 25

VI. THE COMMISSION CAN TAKE ADDITIONAL ACTIONS TO

ADDRESS THE CULTURE OF ENTITLEMENT .................................... 26
A. Use An Expressions-Of-Interest Process To Build A List Of
Potential CPCN Holders.......................................................................... 26
B. Design, And Require Incumbent Utilities To Execute, A “Living
Will” Providing For A Smooth CPCN Transfer. .................................... 26
C. Eliminate company-ratepayer conflict. ................................................... 27
D. Ensure internal compliance. .................................................................... 27

ii
 E. Issue A Periodic Scorecard On The Utility's Performance, With
Consequences For The Utility’s Bottom Line. ....................................... 28
F. Create a probationary status, and apply it to PG&E. .............................. 28
G. Eliminate The Practice Of Weakening Penalties And Fines Due
To Their Effects On The Utility's Finances. ........................................... 28

VII. CONCLUSION ........................................................................................... 28

iii
 TABLE OF AUTHORITIES

Pages
CASES

Covington & Lexington Tpk. Rd. Co. v. Sandford,

164 U.S. 578, 596-97 (1896) ............................................................................. 12
Market St. Ry. Co. v. R.R. Comm'n of Cal.,
324 U.S. 548, 567 (1945) ............................................................................ 12, 22

CPUC DECISIONS

D.15-04-023 ............................................................................................................ 22

PUBLIC UTILITIES CODE

Section 451 ......................................................................................................... 7, 22

Section 854.2 ............................................................................................................ 3

iv
I. INTRODUCTION
On June 18, 2019, the Joint Assigned Commissioner’s and Administrative Law
Judge’s Ruling on Proposals to Improve the Safety Culture of Pacific Gas and Electric
Company (PG&E) and PG&E Corporation (PG&E Corp) (June 2019 Ruling) was issued.
The Public Advocates Office at the California Public Utilities Commission (Cal
Advocates) submits these comments in response to this June 2019 Ruling. 1
Prior to the June 2019 Ruling, the Assigned Commissioners Scoping Memo and
Ruling (Scoping Memo) appropriately identified that PG&E “has had serious safety
problems with both its gas and electric operations for many years”, 2 and that “imposing
penalties on PG&E (the Commission’s standard tool for addressing safety problems) did
not seem to change the situation.” 3 These continued and ongoing failures are why the
Commission has identified that it “must evaluate whether there is a better way to serve
Northern California with safe and reliable electric and gas service at just and reasonable
rates.” 4
The June 2019 Ruling made four main proposals towards evaluating a better way
to serve Northern California with safe and reliable electric and gas service and
established a process for parties to comment on the proposals. In addition to the four
proposals, the Ruling offered parties the opportunity to “make additional proposals” and
“raise other policy, financial and legal issues” that parties believe are relevant and
significant to improving the safety culture of PG&E. 5 The Public Advocates Office
makes an additional proposal in Section V of these comments.
Section I through V of the comments address the questions posed in the June 2019
Ruling:

1
The Public Advocates Office was granted party status at the August 1, 2017 Prehearing Conference.
2
December 2018 Assigned Commissioner’s Scoping Memo and Ruling, p. 3.
3
December 2018 Assigned Commissioner’s Scoping Memo and Ruling, p. 6.
4
December 2018 Assigned Commissioner’s Scoping Memo and Ruling, p. 8.
5
June 2019 Ruling at 1.

1
 I) Separating PG&E into separate gas and electric utilities or selling
the gas assets;
II) Establishing periodic review of PG&E’s Certificate of Convenience
and Necessity (CPCN);
III) Modification or elimination of PG&E Corp.’s holding company
structure; and
IV) Linking PG&E’s rate of return or return on equity to safety
performance metrics.
V) Additional proposals, and other policy, financial and legal issues.

These proposals arise from the fact that the Commission has tried many
approaches to address PG&E’s poor safety performance and rules violations (these
violations include but are not limited to violations of federal pipeline safety regulations
and general orders, and restrictions on ex parte communications). In spite of past
Commission efforts, many lives have been lost, billions of dollars in property damage
have occurred, and PG&E remains on probation and under supervision by the Federal
court due to its criminal violations.
By the Commission’s own admission all other actions taken to date have failed to
adequately improve safety, and by PG&E’s own admission, its safety culture (after a
decade of fatalities and Commission efforts to change the utility’s behavior) is so poor
that it cannot assure safe operations of its system if there were any indication of a
significant change in its management or ownership structure:
[A] signal to employees that they might lose their jobs, or end up working
for a different company, with different management, in the foreseeable
future—and that, in turn, could hamper PG&E’s efforts to motivate changes
in safety culture now, as some employees would delay making positive
changes while they wait to see the outcome of the process the motion
recommends. 6

6
Opposition of Pacific Gas and Electric Company (U-39 M) and PG&E Corporation to Public Advocates
Office’s Motion to Amend June 18, 2019 Assigned Commissioner’s and Administrative Law Judge’s
Ruling (Hereinafter, “PG&E’s Opposition to Cal Advocates Motion to Amend”), p. 6.

2
 Since the Commission has already signaled it is considering these very changes
through this Investigation, even if it were credible, PG&E’s claims in this regard are
moot. Moreover, any uncertainty should be mitigated by the employee protections
granted in Public Utilities Code Section 854.2. 7
PG&E replaced members of its executive management in response to the 2010 San
Bruno disaster, the 2017 and 2018 Wildfires, and other failures. PG&E has had several
new Chief Executive Officers, Vice Presidents, and other parts of its management team
replaced in response to PG&E’s failures. 8 None of these have sufficiently changed the
behavior of the company.
In light of these facts, the Public Advocates Office urges the Commission to
consider other alternatives. For instance, in addition to considering whether and when to
review PG&E’s CPCN periodically, the Commission should take steps to ensure that any
such review is meaningful (i.e. it affords the Commission the full range of options,
including revocation of the CPCN) by taking the steps required to give it the option and
ability to transfer PG&E’s CPCN to one or more deserving performers. 9

II. Separating PG&E into Separate Gas and Electric Utilities

Section 2.1 of the June 2019 Ruling seeks comments about whether PG&E should
separate into gas and electric utilities “to address PG&E’s large size and to provide a

7
See,
https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PUC&sectionNum=854.2.
8
See,
https://www.pge.com/en/about/newsroom/newsdetails/index.page?title=20190403_pge_announces_new_
chief_executive_officer_and_appointment_of_a_refreshed_board_of_directors_new_leadership_focused_
on_enhancing_safety_culture_and_operational_excellence
Also see, https://www.sfchronicle.com/business/article/More-PG-E-leadership-changes-Top-gas-
executive-13935424.php
9
PG&E and PG&E Corp should have the opportunity to be the entity considered in this process.
Additionally, recently passed legislation regarding access to a wildfire fund sets a deadline for existing
corporations to exit bankruptcy before July 1, 2020 in order to access the fund. One or more newly
constituted electric companies would be able to request entrance to the wildfire fund. See, Assembly Bill
1054 (Holden) Section 3291 (CA 2019).

3
narrower safety focus.” 10 In their comments, parties are to address the benefits that result
from a combined gas and electric utility company under a single management, whether
such a separation would in fact enhance safety for each of the resulting two companies,
and the potential cost implications of such a separation for ratepayers.

A. A Gas-Electric Combination Raises Concerns About

Having A Safety Focus
A large combined gas-electric utility may suffer from split attention on gas and
electric safety issues. Although potentially compatible from a services point of view,
these two industries have divergent safety issues and challenges. The question, therefore,
is whether combined gas-electric utilities have better or worse safety records than their
peers, all else equal. Answering this question will require detailed analysis of similarly
and differently sized utilities to assess their safety records, and to understand if there is a
point at which a combined utility becomes too large and complex to appropriately focus
on the safety issues associated with each industry.

B. Economies Of Scale And Scope Must Be Considered In

Any Potential Restructuring
In considering if and how to alter PG&E’s current structure, the Commission
should evaluate how economies of scale and scope may affect customers in terms of cost
and quality of service. Issues of scope refers to the range of services offered, and
whether that includes services related to gas, electricity, or both. Scale refers to the
overall size of the successor utility or utilities, especially in terms of number of accounts
and the regions served. Dividing the utility by gas and electric service, whether for the
entire service territory, or across multiple new regions operated by distinct providers, will
require studies of common costs. 11 In addition, the Commission should consider any
integration benefits—the extent to which the electricity functions benefit the gas

10
June 2019 Ruling, p. 2.
11
Common costs include functions like shareholder relations, human resources, and customer care that
serve both the gas and electric functions PG&E as it is currently structured.

4
functions and vice versa, and the extent to which those benefits are increased or
diminished due to the holding company's common control of both efforts. 12
Economies of scope exist when a firm’s total cost of producing two or more items
is lower if produced together rather than separately. The question, therefore, is whether
limiting PG&E to either a gas or an electric business, and placing the business no longer
operated by PG&E in independent hands, would raise or lower costs.

C. Depending On Size, Separate Utility Services May Not

Meaningfully Impact Customer Bills And Services
Regarding economies of scale: there is no one-size fits all answer to the
appropriate scale of a gas or electric utility – or a combined gas and electric utility.
Financially viable utilities vary in load size and geographic territory dramatically.
Madison Gas & Electric in Wisconsin serves mostly a single city; it could fit multiple
times into PG&E's service territory. So the Commission should consider: For a given
service or set of services, what is the most economic size of the service territory?
PG&E's current size is not the result of any regulatory decisions based on economies of
scale; it is the result of dozens of incremental acquisitions over most of the 20th century,
all taking place under technologies, cost structures, and market structures that have no
resemblance to today's landscape or likely future landscape.
This discussion of territory size is not intended to invite breakaway efforts based
on cherry-picking or uneconomic bypass. The current practice of averaging costs across
an entire territory has benefits particularly for less densely populated areas, such as those
most prone to wildfires. At the same time, the cost-averaging tail need not wag the
service territory dog. If separating service territories based on economies of scale leads
to cost differences among those territories, the goal still should be to establish utilities
(whether they are owned and operated by private firms or public agencies) that are

12
Clear conclusions will be hard to produce, because even if these static efficiency studies show that costs
might rise, that rise could be offset by the dynamic efficiency contributions made by a different provider.
So, as with effects on competition, the more facts and analyses on these issues are necessary.

5
reasonably cost efficient at providing safe and reliable service while promoting the
State’s environmental goals.

D. Conclusions About Gas-Electric Ownership

The Commission should authorize the necessary studies for understanding these
issues in order to make clear now, that this proceeding is seriously considering the option
of separating the gas and electric utilities into independent companies if to do so would
enhance safety. Until these studies are concluded, the bankruptcy notwithstanding,
neither PG&E nor any potential acquirer of PG&E should assume, that PG&E will
remain a combined gas and electric company.

III. ESTABLISHING PERIODIC REVIEW OF PG&E’S CERTIFICATE

OF PUBLIC CONVENIENCE AND NECESSITY (CPCN)
The franchise created by a CPCN is a privilege granted by the government, not an
asset owned by the utility. 13 As this Commission stated, in opening this investigation
into PG&E’s culture:
The Commission, invested by the California Constitution and the Public
Utilities Code with police power to regulate public utilities, among other
actions sets rates, authorizes capital investments and operating budgets, and
awards franchises to companies such as PG&E. A ‘franchise to operate a
public utility … is a special privilege which … may be granted or withheld
at the pleasure of the State.’ Holding that franchise, PG&E must ‘comply
with the comprehensive regulation of its rates, services, and facilities as
specified in the Public Utilities Code.’ And the Commission must actively,
not passively, supervise and regulate public utilities. 14

This authority underlies the June 18, 2019 Ruling’s consideration of a periodic
review of a utility’s CPCN as a means to provide “additional incentive for the utility to

13
See New Orleans Gas Co. v. Louisiana. Light Co., 115 U.S. 650, 669 (1885) (franchise "belong[s] to
the government, to be granted, for the accomplishment of public objects, to whomsoever, and upon what
terms it pleases"); Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519, 595 (1839) (franchises are "special
privileges conferred by government upon individuals, and which do not belong to the citizens of the
country generally of common right").
14
“Order Instituting Investigation on the Commission's Own Motion to Determine Whether Pacific Gas
and Electric Company and PG&E Corporation's Organizational Culture and Governance Prioritize
Safety,” Investigation 15-08-019, 2015 Cal. PUC LEXIS 539 at § 3.4 (citations omitted).

6
do a good job.” 15 In California, a utility receives its franchise “in return for” its
performance. 16 The franchise thus is conditioned on meeting the Commission’s,
customers’ and the public’s expectations. 17 While the June 18, 2019 Ruling’s questions
about a periodic review of a utility’s CPCN are consistent with the authority identified
above, the Ruling does nothing to identify potential replacements for PG&E, without
which a CPCN review will be limited at best. The Commission must take full advantage
of its authority to issue and rescind franchises in order to address PG&E’s culture of
entitlement.
Section 2.2 of the June 2019 Ruling states that “[t]he idea behind having a
periodic review of a utility’s CPCN is … to reduce the utility’s sense of entitlement to its
monopoly position.” 18 Parties are then asked to comment on examples of the CPCN
review process improving safety or providing other benefits, the period of time for which
a CPCN should last, how the CPCN review process impacts raising capital or willingness
to invest in infrastructure, the impacts of not renewing a CPCN, and the cost
considerations of a CPCN review process.
PG&E’s response to the Public Advocates Office’s motion demonstrates the need
for a CPCN review process. PG&E rejects the suggestion that it has a safety culture that
should be examined for its “sense of entitlement” as a “diatribe.” 19
While the motion accuses PG&E of having a culture of entitlement, no
evidence has been presented to demonstrate that PG&E has had such a
culture in the past—much less that it has one today—or that past safety

15
June 18, 2019 Ruling at 3.
16
"In return for safe and reliable natural gas service, the Commission provides a relatively exclusive
franchise, recovery of all just and reasonable costs to serve customers, and a very low-risk and ample rate
of return." "Order Instituting Investigation on the Commission's own Motion into the Operations and
Practices of Pacific Gas and Electric Company to Determine Violations of Public Utilities Code Section
451, General Order 112, and Other Applicable Standards, Laws, Rules and Regulations in Connection
with the San Bruno Explosion and Fire on September 9, 2010," 2012 Cal. PUC LEXIS 39.
17
Id. at § 3.5 (“This investigation should begin with what the Commission, customers, and the public
should expect from PG&E when the State awarded PG&E its franchise and approved PG&E's rates.”).
18
June 2019 Ruling, p .3.
19
PG&E’s Opposition to Cal Advocates Motion to Amend, p. 2.

7
 incidents stemmed from such a culture. In actuality, the record in the
Safety OII directly contradicts PAO’s contention. The Safety and
Enforcement Division (“SED”), with the assistance of the NorthStar
Consulting Group (“NorthStar”), conducted an extensive evaluation of
PG&E’s organizational safety culture. This evaluation—after “nearly
900 information requests,” “250 interviews,” and “unfettered access to
PG&E personnel and executive management”—found that “PG&E
employees at all levels are committed to safety” and “no one desires to
be unsafe.”5 Rather than complacency, inattention, or entitlement,
NorthStar observed that PG&E was overly reactive to specific safety
incidents... 20

Contrary to PG&E’s assertion, the March 29, 2019 Update provided by NorthStar
criticizes PG&E, explaining that there “are indications that PG&E as an organization
continues to have a reactive, rather than proactive approach to potential issues and a
potential focus on productivity and performance targets relative to safety. These are
cultural issues that require ongoing focus.” 21 NorthStar also properly criticizes PG&E for
not having an Enterprise Safety Management System implemented across PG&E until
2021, over half a decade after this Investigation was opened. 22
PG&E’s failures in the last decade have occurred across nearly every aspect of its
operations, as highlighted in this Investigation: gas transmission (San Bruno), gas
distribution (including Mountain View and Carmel), transmission and distribution (2017
and 2018 wildfires), and regulatory interactions (ex parte communications investigations
and obstruction of justice). The sheer scope of PG&E’s failures, which caused over 100
fatalities and has cost tens of billions in direct financial damages to Californians, and its
combative defensiveness against considering CPCN revocation in the June 18, 2019
Ruling is the best argument for Commission action to address PG&E’s culture of
entitlement. Considered more broadly, the idea really is a periodic testing of whether the

20
Id., pp. 2-3.
21
NorthStar, “Assessment of Pacific Gas and Electric Corporation and Pacific Gas and Electric
Company’s Safety Culture, First Update”, dated March 29, 2019, p. I-2. See,
http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M277/K012/277012719.PDF
22
Id., p. II-2.

8
utility deserves its monopoly role.

A. PG&E’s Opposition To Commission Efforts To Remedy

PG&E’s Extensive Safety Failures Demonstrates The
Need To Consider A CPCN Review Process
The Commission initiated this OII out of concern that “the safety problems being
experienced by PG&E were not just one-off situations of bad luck, but indicated a deeper
and more systemic problem.” As the Commission went on to note:

The fact that imposing penalties on PG&E (the Commission’s standard

tool for addressing safety problems) did not seem to change the situation
reinforced this concern.
Thus, that PG&E has not responded to its imposition of penalties, has reinforced
the Commission’s concerns about PG&E’s safety culture. 23 Since PG&E has not
responded to standard tools or remedies, further remedies must be considered. Simply
put, since the Commission’s other efforts have failed to prevent PG&E’s unsatisfactory
safety culture, the remaining logical option is to consider a CPCN review process that
includes potential revocation.

1. PG&E’s “Sense Of Entitlement” Comes From Its

Expectation That It Can Never Lose Its CPCN
The June 2019 Ruling asserts that a utility with a government-granted monopoly
has a "sense of entitlement." 24 This sense of entitlement, embedded throughout an
organization, becomes a culture of entitlement. To convert an entitlement culture into a
performance culture, the Commission must make the utility’s tenure depend on
performance. A necessary approach is periodically testing whether the utility still
deserves its role. Because the purpose of that testing is to address entitlement, we need
first to understand the sources of entitlement; specifically, why a utility views its
Commission-granted CPCN as impossible to lose. This view is based on three premises,
each one supported by experience.

23
December 2018 Scoping Memo and Ruling, pp. 5-6.
24
June 2019 Ruling at p. 3.

9
 2. A Utility’s Tenure Should Be Dependent On
Performance
The Commission should honor its previous statements that the CPCN depends on
performance 25. PG&E’s poor behavior, however, has made clear the need to more
clearly define performance requirements. In particular, the Commission should address
the following definitional deficiencies:
• There is a lack of legal documentation—no contract or statute or
tariff or other document—that describes the operational
consequences of a utility's failure to meet its full set of
responsibilities.
• There is no explicit term of years, or performance triggers, after
which others can compete for a utility’s CPCN.
• There is neither a periodic review for performance sufficiency, nor a
public scorecard by which the Commission regularly specifies its
dissatisfactions.
• In PG&E’s case there is a history of wrongdoing, much of it
egregious, spanning over 20 years, without any hint of a
consequence to PG&E's tenure. Negative events produce penalties
but no probation, no warning that the company is risking loss of its
CPCN. Until now, there has never been a proceeding that addresses
the complete picture of unfitness.
• There is regulatory concern about the effect of penalties and fines on
the utilities ability to raise capital or attract sufficient investment to
make necessary upgrades to its system. This concern often results in
penalties or fines being reduced 26 and creates an explicit subsidy of
subpar performance—paid for by ratepayers. PG&E has faced
billions of dollars in penalties and fines over the last decade. 27

25
Supra, p.7, footnotes 13-17.
26
One of the factors considered in the San Bruno Investigation penalties was the maximum fine PG&E
shareholders could bear. In that proceeding the value was approximately $2.2 billion. The Commission
found that PG&E could raise sufficient equity to cover over $2.4 billion “without harming ratepayers or
its ability to raise equity for revenue-producing investments required to provide adequate and safe
service.” See, Decision (D.) 15-04-024, p. 57 and p. 230 Finding of Fact 29.
27
Based on a cursory review, the Public Advocates Office has identified nearly $2 billion in fines and
financial remedies paid by PG&E for events that terminated between 2008 and 2015 (some of the issues
apparently lasted nearly three decades, having first begun in the 1980s). This does not include any
potential fines and financial remedies associated with the 2017 and 2018 Wildfires or the approximately
$100 million in fines and financial remedies associated with PG&E’s ex parte communications rules
(continued on next page)

10
 Any rational company experiencing these facts would feel entitled.

3. Financial Success Has Not Aligned With

Performance
A disconnect between financial success and performance exists at all three levels
of the utility: corporate, executive, and worker.
Corporate: For most services, price follows quality. Not so for utility services.
The Commission sets rates based on what the utility expects to spend rather than how
well it does its job. So, when quality falls, the price stays the same. And with few
exceptions, each new investment project, each opportunity to increase the utility's profit-
earning rate base, goes to the utility rather than to the best performer. Finally, all that the
law requires of utilities in their performance of their duties is prudence, not the highest
value provided or best performance. At the corporate level, financial success is not
aligned with performance. 28
Executive: In a monopoly setting, shareholder value can conflict with customer
value. So, aligning executive compensation with shareholder value—stock price,
earnings or both—conflicts with the customer interest. There is no evidence that
shareholders respond to the Commission's penalties by making PG&E’s executives pay
shareholders back. To date, we do not have any evidence with PG&E that penalties make
any difference in executive behavior.
Worker: What enhances performance are people who work at jobs with
competent management that provide them with the necessary tools for success. When
compensation is top-heavy—high salaries and large bonuses going to executives with
only minor bonuses going to the workers, compensation is again severed from
performance as funds are drained from investments in the workers. Despite PG&E’s
claims in the PG&E Opposition that employees would “delay making positive changes,”

(continued from previous page)

violations.
28
Readers should not mistake this paragraph for a plea to return to flaws of "performance-based
ratemaking." The point is much broader: The utility's revenue stream does not reflect its performance.

11
the entitlement at PG&E lies with PG&E’s current management and not its employees. 29
As identified in the NorthStar Report, issued on May 8, 2017 in this proceeding, “Culture
is driven by management commitment; the behavior and personality of an employee’s
immediate supervisors and co-workers; and, to a lesser extent by “corporate speak.” 30

4. The Regulatory Community Acts As If It Has No

Alternatives
The regulatory community operates under an assumption, usually unstated, that
the utility is too big to fail. Underlying that assumption are two things: a perception that
there are no alternatives, and no effort to create alternatives. Essentially the need for
utility service is conflated with a need for a particular utility's service. This is wrong on
both legal and practical grounds. Courts have said that regulators have no constitutional
duty to guarantee a utility’s financial success, or even its viability. 31 Thus, the
Commission has no legal obligation to place PG&E’s financial status ahead of its
performance responsibility. As a practical matter, PG&E is neither indispensable nor
irreplaceable.

29
For example, the Mercury News described what they heard from employees as “a pervasive corporate
culture where employees were discouraged from reporting safety problems and feared retaliation if they
did.” See, https://www.mercurynews.com/2011/08/07/pge-workers-say-safety-warnings-ignored/
More recently, in the Order Instituting Investigation and Order to Show Cause on the Commission’s Own
Motion into the Operations and Practices of Pacific Gas and Electric Company with Respect to Locate
and Mark Practices and Related Matters (I. 18-12-007), a litany of management problems from 2012 to
2017 have been identified by the Commission’s Safety and Enforcement Division. This particular
investigation into PG&E’s practices is ongoing.
30
NorthStar Report, p. I-5. See,
http://www.cpuc.ca.gov/uploadedFiles/CPUC_Public_Website/Content/Safety/Risk_Assessment/PGE%2
0Final%20Safety%20Report%205-8-17%20NorthStar%20Consulting.pdf
31
See, e.g., Covington & Lexington Tpk. Rd. Co. v. Sandford, 164 U.S. 578, 596-97 (1896) ("If a
corporation cannot maintain such a highway and earn dividends for stockholders, it is a misfortune for it
and them which the Constitution does not require to be remedied by imposing unjust burdens on the
public."); Market St. Ry. Co. v. R.R. Comm'n of Cal., 324 U.S. 548, 567 (1945) ("The due process clause
has been applied to prevent governmental destruction of existing economic values. It has not and cannot
be applied to ensure values or restore values that have been lost by the operation of economic forces.").

12
 B. The CPCN Should Be Periodically Reviewed
In setting the term of the CPCN, the most important question is this: How long
does it take to show results? The answer will vary with the service. Too short a term will
encourage short-term thinking, as in picking low-hanging fruit to show benefits fast. It
will also discourage experimentation that might produce short-term failures but long-term
benefits. Too long a term can create the problem we have today: an incumbent in place
for so long that no one can imagine an alternative and therefore few alternative providers
approach to express interest.
The term need not, and should not, be based on the number of years it takes to
recover the company's investments. The Commission need not grant CPCNs for 60 years
just because the utility’s largest plant has a depreciation period of 60 years. Why?
Because there should be no dispute that the departing entity will recover its unrecovered
book costs regardless of when it departs—at the end of its term or prematurely.
Otherwise CPCN holders would have incentive to propose projects with long recovery
periods, just to extend their tenure. 32

C. A Clear Definition Of The CPCN Review Process And

Criteria Will Create Market Certainty
Effective regulation should infuse utility management with a sense of the
company’s need to compete to serve ratepayer’s, even though it is a monopoly. This
subsection describes how the Commission can do so by using the CPCN process. There

32
See, e.g., Directive 2014-23 of the European Parliament and of the Council (Feb. 26, 2014) [“EU
Directive 2014-23”] at ¶ 52:
The duration of a concession should be limited in order to avoid market foreclosure and
restriction of competition. In addition, concessions of a very long duration are likely to result in
the foreclosure of the market, and may thereby hinder the free movement of services and the
freedom of establishment. However, such a duration may be justified if it is indispensable to
enable the concessionaire to recoup investments planned to perform the concession, as well as to
obtain a return on the invested capital. Consequently, for concessions with a duration greater than
five years the duration should be limited to the period in which the concessionaire could
reasonably be expected to recoup the investment made for operating the works and services
together with a return on invested capital under normal operating conditions, . . .Contracting
authorities and contracting entities should always be able to award a concession for a period
shorter than the time necessary to recoup the investments, provided that the related compensation
does not eliminate the operating risk.

13
are three main steps: (1) Define the utility's job, its responsibilities, and its rights; (2)
define the selection criteria; and (3) conduct the competition.

1. Step 1: Define the job, the responsibilities, and the

rights

a) The utility's job: What services, what

territory?
A CPCN-holding utility has responsibility for providing to all paying customers a
given set of services within a defined geographic territory. PG&E’s service obligations
and geographic territories are defined in the statutes, General Orders, and decisions of the
Commission. However, there is no basis for assuming that that PG&E's entire current
array of services should be provided by a single company, on a monopoly basis,
throughout PG&E's entire current territory. Studying economies of scale and scope for
these services may convince the Commission that the most efficient result involves
multiple certificated utilities, each one providing certain subsets of those services within
smaller service territories. (This possibility lies behind the question some have asked—Is
PG&E too big to succeed?) Some service combinations could lower cost; some
combinations might not. Having too many certificated utilities might raise transaction
costs; having too few might mean the Commission forgoes the best providers, because no
single entity can be the best at everything.
As with the mix of services, there is no basis for assuming that PG&E or a
successor should cover, alone, the entire existing service territory.
Commission action item: Whether a service is more efficiently provided by a
monopoly utility or by a competitive market, and by a single certificate holder or multiple
ones, requires fact-gathering and analysis. The Commission should identify the
necessary studies and assign responsibility for them.

14
 b) The Commission Must Establish Clear
Metrics For Each Dimension Of The
Obligation To Serve
Under state statute and constitutional law, a regulated utility has a right to charge
rates calculated to provide a reasonable opportunity to earn a fair return on prudently
incurred investment that is used and useful to the customers. That return is fair if it is
commensurate with the business, financial, and regulatory risks associated with the
service. The more clearly the Commission defines this right, the less uncertainty
prospective CPCN holders will face, and the more attractive will be the opportunity to
serve.

c) CPCN Revocation: Criteria And Procedure

The Commission should create criteria for deciding whether PG&E should remain
the certificated utility, along with procedures for making that decision. Future
competitors for the role will also want to know these criteria and procedures. Recovery
of book cost should always be available, even when the revocation occurs for poor
performance, although it is appropriate to allow penalties or fines charged against that
recovery if warranted. But the CPCN agreement could also provide that if the
Commission chooses to replace the incumbent utility for reasons other than poor
performance (such as where another entity will perform better at lower cost), the
departing utility would receive, besides its book cost, some amount representing foregone
profits for some period of time. This option would make the certificated role more
attractive to those concerned about the absence of a clear trigger for revocation.
For the main qualifications of performance that lend themselves to being measured
(like safety, reliability, and customer service), the Commission can maintain a range of
financial consequences, leaving itself discretion on how to apply that range to particular
events. Factors influencing a specific penalty could include whether the event was one-
off, and whether it was acknowledged and quickly corrected; or whether instead it was a
repeat event reflecting a lack of internal discipline or poor practices. The Commission
could also put a utility on probation. During probation, the Commission could continue

15
to impose fines, lower the authorized return on equity, and disallow costs. Probation
should not be seen, however, as automatically granting to the poorly performing utility of
a "right to cure." An automatic right to cure effectively puts a thumb on the incumbent's
side of the scale, inviting it to dig a hole knowing it will have a sure chance to dig out of
it. There can also be partial revocations, where the incumbent loses its existing right to
provide a particular service. 33
For revocation, there need be no specific trigger. Revocation is appropriate when
the Commission finds that the incumbent no longer deserves the privilege of being the
government-appointed, government-protected provider of essential services. Identifying
a specific trigger threshold invites the utility to misbehave up to the trigger. A finding of
unsuitability is necessarily subjective. It must be supported by evidence and arrived at
through a fair procedure, but it should not be subject to a fixed test. PG&E’s
combination of felonies, safety rule violations leading to over 100 fatalities in under a
decade, obstructions of justice and ex parte communication rule violations justifies
Commission consideration of CPCN revocation as it appears that all other attempts at
fines and remedies over the last decade have failed to change behavior.
The possibility of revocation should be real enough to create and sustain in the
utility a culture of complete, uncompromised commitment to the consumer and the public
interest. The possibility of revocation also should not be seen as so high that qualified
candidates pass up the opportunity to compete. Nor should the Commission be seen as so
trigger-happy as to discourage a CPCN holder from undertaking the types of experiments
that might occasionally fail but also produce beneficial breakthroughs.

33
For a detailed discussion of different states' treatments of revocation, see Scott Hempling, Regulating
Public Utility Performance: The Law of Market Structure, Pricing and Jurisdiction, chapter 2.A.3
(2013).

16
 2. Step 2: Define the selection criteria
Selection criteria can include eligibility screens (must-haves and must-not-haves),
and discretionary items. Here is a recommended list for each category.

a) Must haves
i. A record of solid compliance with all laws and regulations.

ii. Clearly demonstrated track record of safe operations and a process for
continual improvement. For example: a focus on proactive maintenance
rather than reactive; timely performance of inspections and corrective
actions after inspections; creating a safe environment for employees,
contractors, and the public.

iii. An internal organization committed to and skilled at identifying safety-

related risks and carrying out cost-effective safety risk mitigation plans.

iv. Third-party audited procedures for maintaining the health and safety of
employees.

v. An internal disciplinary system that makes wrongdoers responsible for their

wrongs.

vi. Respect for the regulatory process, including its key features of
transparency, reliance on facts and logic, and law.

vii. A clear commitment to transparency and honesty.

viii. A clear commitment to the state's clean energy goals.

ix. A minimum number of years of experience or demonstrated capability of

providing the utility services at issue.

x. The financial capability to execute the purchase (both paying the

shareholders and taking on the debt).

xi. A capital structure sufficient to finance, or get financing for, the likely
stream of necessary investments.

xii. An internal compensation system, from executives to line-workers, that

aligns compensation fully and exclusively with performance for the
customer, where there is no conflict between pursuing shareholder interests
and customer interests.

17
 xiii. At all levels of the company, diversity reflecting the diversity of the
population's service territory.
b) Must-not-haves
i. A record of felonies or justice-obstruction. 34

ii. A record of violating regulatory rules; or labor, safety, or environmental

laws. 35

iii. A record of poor performance in other jurisdictions. 36

34
See, e.g., EU Directive 2014-23 at ¶ 69:
Concessions should not be awarded to economic operators that have participated in a
criminal organization or have been found guilty of corruption, fraud to the detriment
of the Union's financial interests, terrorist offences, money laundering, terrorist
financing or trafficking in human beings.
35
See, e.g., EU Directive 2014-23 at ¶ 70:
Furthermore, contracting authorities and contracting entities should be given the
possibility to exclude economic operators which have proven unreliable, for instance
because of serious or repeated violations of environmental or social obligations,
including rules on accessibility for disabled persons or other forms of grave
professional misconduct, such as violations of competition rules or of intellectual
property rights. It should be clarified that grave professional misconduct can render
an economic operator's integrity questionable and thus render the economic operator
unsuitable to receive the award of a concession contract irrespective of whether the
economic operator would otherwise have the technical and economical capacity to
perform the contract.
36
See, e.g., id: . . .Contracting authorities and contracting entities should also be able to exclude
candidates or tenderers whose performance in earlier concessions or other contracts with contracting
authorities or contracting entities has shown major deficiencies with regard to substantive requirements,
for instance failure to deliver or perform, significant shortcomings of the product or service delivered,
making it unusable for the intended purpose, or misbehavior that casts serious doubts as to the reliability
of the economic operator. National law should provide for a maximum duration for such exclusions.
It is possible for a company with a past record of violations to prove that that prior history is sufficiently
remote, the people responsible appropriately separated, and the organization fully reformed, such that its
past should not disqualify it automatically. See, e.g., EU Directive 2014-23 at ¶ 71:
Allowance should, however, be made for the possibility that economic operators can
adopt compliance measures aimed at remedying the consequences of any criminal
offences or misconduct and at effectively preventing further occurrences of the
misbehavior. Those measures might consist in particular of personnel and
organizational measures such as the severance of all links with persons or
organizations involved in the misbehavior, appropriate staff reorganization measures,
the implementation of reporting and control systems, the creation of an internal audit
structure to monitor compliance and the adoption of internal liability and
compensation rules.

18
 iv. Affiliation with a holding company system that is overly complex, overly
leveraged, or overly invested in businesses whose risks or strategies
conflict with the utility's obligation to serve.

v. A record of anticompetitive practices, or opposition to allowing qualified,

cost-effective companies opportunities to compete for services performed
by the applicant.

vi. Control of facilities that would give the applicant horizontal or vertical
market power in any service, where the risk of that market power is not
fully eliminated.

c) Discretionary Items
Once competitors pass the must-have and must-not-have screens, the Commission
can judge them based on other criteria, including the following: Culture of
experimentation and innovation; active, educated board members who are not over-
compensated relative to their value; compensation systems for executives and employees
that reward good work appropriately, including a non-excessive ratio of CEO
compensation to line-worker compensation; financial strength; type of ownership (e.g.,
government vs. private shareholder, private equity vs. publicly traded); and adherence to
fair trade and diverse procurement practice principles.

3. Step 3: Conduct The Competition

A competition to choose CPCN holders could follow the five steps summarized
here.

(a) Issue An Order Starting The Process

This Order would announce that the Commission will hold a competitive process
for choosing one or more candidates (including PG&E) to provide one more services
within PG&E's territory along with steps and the schedule. The Order would describe the
end goal: to have PG&E’s current customers served by the most cost-effective, customer-
responsive, safe, innovative, and reliable providers that can meet the State’s
environmental objectives. It would pose a series of questions to invite creative ideas
from stakeholders and prospective bidders. This process should be flexible and the

19
Commission should use a variety of tools, formal and informal to stimulate interest,
identify new candidates, identify questions or concerns that might discourage
competitors, and gathering useful ideas about evaluative criteria and other features of the
process.
Some prospective competitors might want to buy the entire company, others only
some of the assets; some might want to serve the entire service territory; others only
parts. Some might want to provide only monopoly services; others might want to provide
both monopoly and competitive services. People will have ideas about what services
should be treated as monopoly services and which should be subjected to competition.

(b) Hold Technical Workshops

Using ideas submitted by stakeholders, 37 the Commission staff would host one or
more technical workshops to discuss details. Stakeholders could discuss the services they
would like to see provided and the types of companies they would like to see as
providers. Prospective competitors could describe any clarifications of regulatory policy
that they would need before deciding whether to compete. Workshop participants could
ask questions of each other, of PG&E, and of Commission staff. The Commission would
notice this workshop process appropriately so that decisionmakers could attend and
participate.

(c) Issue Formal Requests For Proposals

The Commission would then design a formal Request For Proposals (RFP) for the
particular services that CPCN holders would provide, in identified territories. The RFP
would contain the selection criteria—the must-haves, the must-not-haves, and the
discretionary items—described above.
The Commission could precede this formal RFP with a request for non-binding
expressions of interest which are used in some industries as an efficient way to test the
market while screening out ineligible competitors.

37
Financial stakeholders and potential stakeholders such as shareholders, institutional investors, bond
holders, and others should be encouraged to participate.

20
 (d) Choose The CPCN Holder(s)
Applying its evaluative criteria, the Commission would choose the winning
companies. Besides the evaluative criteria discussed above, the Commission might also
consider factors like creativity in developing resource plans, likely rate path, and price
offered.

4. The Commission Should Coordinate Its PG&E

Review With The Bankruptcy Proceeding
A reconsideration of PG&E's CPCN was a necessity before the bankruptcy.
Establishing clear criteria and procedures will remain a necessity after the bankruptcy.
While nothing about the bankruptcy proceeding precludes the Commission from
continuing its current inquiry, the Commission should consider how the two efforts
should interrelate. To that end, the Commission should organize its work in three phases.
These phases need not happen sequentially; work can occur on all three simultaneously.
Phase 1 would define the functions the utility would fulfill (the job), the
responsibilities, the rights, and the selection criteria. At this point the job would be
defined generically, with more specificity to come when Phase 3 is completed. Phase 1
would also establish (a) the minimum characteristics for any post-bankruptcy CPCN
holders, including PG&E; (b) the performance metrics they would have to satisfy; and (c)
the consequences for failing to meet those requirements, ranging from fines and penalties
to loss of the CPCN.
Phase 2 would establish the steps for running a competition to replace a CPCN
holder for one or more services.
Phase 3 would examine the range of activities currently carried out by PG&E, and
the geographic territory covered by PG&E, asking this question: What is the most cost-
effective, reliable, and safe mix of services, in what size and location of territory, for one
or more utilities to provide? The answers to this question can be fed back into Phase 2,
so that if the Commission holds a competition to replace a CPCN holder, it has defined
with specificity the services and territory for which the competitors will be competing.

21
 5. The Commission Should Reject Attempts To Avoid CPCN
Accountability
a) Infrastructure Investment
Some might argue that the possibility of a utility losing its CPCN would
discourage that utility from making necessary investments. This argument fundamentally
misunderstands the obligation to serve. As long as a utility has a CPCN, it has an
obligation to serve. 38 That obligation to serve includes the obligation to make necessary
investments. A utility has no discretion to avoid its investment obligations because it
fears it will lose its CPCN and not recover its investment. As identified in Part II.B.1.d,
if a transfer occurs, the departing entity will receive its unrecovered investment.

b) Stock Price
Stock price drops are the natural consequence of poor performance. A
commission has no legal obligation to protect a utility from that natural consequence. 39
A commission's legal obligation to shareholders involves the utility's prudent investment
in assets used and useful for providing service; that legal obligation does not extend to

38
“Every three years, PG&E presents to the Commission how much revenue it needs to provide safe and
reliable utility service, which includes how much it will likely receive in revenue from its assets such as
gas storage. The Commission adopts an expected revenue figure based on full information provided by
the utility. If PG&E collects more than adopted, it can retain the money. If it receives less, PG&E is
nevertheless obligated under Section 451 of the California Public Utilities Code to provide safe and
reliable service. PG&E can use various ratemaking processes to return to the Commission and request
additional funding.” 2012 Cal. PUC LEXIS 39.
Contrary to PG&E's argument, the safety obligation established by Section 451 is not a residual, variable
byproduct of a particular rate level set by the Commission. To be clear, public utilities are not permitted
to adopt anything other than safe operations and practices, even if they believe that rates approved by
the Commission are inadequate.
D.15-04-023 [I.12-01-007], Modified Presiding Officer's Decision Regarding Alleged Violations by
Pacific Gas and Electric Company in Connection with the San Bruno Explosion and Fire, mimeo at 26-27
(emphasis added).
2015 Cal. PUC LEXIS 539 *
39
See Market Street Ry. Co. v. Railroad Comm'n of Cal., 324 U.S. 548 (1945) ("The due process
clause has been applied to prevent governmental destruction of existing economic values. It has
not and cannot be applied to insure values or restore values that have been lost by the operation of
economic forces.").

22
the bets shareholders make in the stock market. 40 In any event, PG&E’s stock price may
drop, but the stock price of the company replacing PG&E will rise. Caring more about
PG&E than its potential replacement contributes to the very entitlement culture the
Commission now seeks to fix.
Those who choose to be equity investors do so by choice; the Commission must
create an environment that welcomes, not discourages, investors. But to favor one set of
equity investors over another, on grounds of incumbency alone, is illogical. If the
Commission finds that establishing clear procedures and process for CPCN transfers due
to utility underperformance or management failure is causing more uncertainty in the
financial markets than is comfortable, the procedures can be phased in so that the market
has a chance to adjust. Allowing any utility's discomfort with accountability to weaken
accountability leads to three negative outcomes.

i. Economic waste
When a state tolerates CPCN holders who perform sub optimally, it wastes
resources every hour, day, week, month, and year. That waste affects everyone, from the
largest manufacturer to the smallest renter.

ii. Unearned advantage

Artificial protection of a CPCN holder, whether based on too-big-to-fail
assumptions or the absence of clear CPCN transfer procedures, gives an incumbent utility
a cost-of-capital advantage over prospective competitors. Prospective investors in
potentially competing companies then will invest elsewhere, depriving the Commission
of options and making too-big-to-fail a self-fulfilling prophecy. 41 Those who say more
"supportive" regulation will lower the cost of capital miss this point completely. Giving

40
We do not hereby suggest that stock price is irrelevant to Commission decision making.
41
For a rough analogy, see Paul Krugman, "Obama's Other Success: Dodd-Frank Financial Reform Is
Working," The New York Times (Aug. 3, 2014) ("[R]escues in times of crisis can give large financial
players an unfair advantage: They can borrow cheaply in normal times, because everyone knows that
they are 'too big to fail' and will be bailed out if things go wrong.").

23
artificial support to an inefficient incumbent raises costs, because it deprives us of
efficiencies available from others.

iii. Loss of trust in government

No one would expect a state government to hand a government-protected CPCN
worth billions to one or more private companies without transparency or competition. Yet
with PG&E, Californians live with that very result every day. It is time to win back
consumers' trust.

6. Conclusion On Periodic CPCN Review:

The June 2019 Ruling accurately captures the “sense of entitlement” that
contributes to PG&E’s safety culture failings, but a periodic review of PG&E’s CPCN
appears insufficient to address that culture of entitlement without a demonstration that
there are willing investors who may be interested in stepping into PG&E’s shoes do a
better job. Whether a service is more efficiently provided by a monopoly utility or by a
competitive market, and by a single CPCN holder or multiple ones, requires fact-
gathering and analysis. The Commission should identify the necessary studies and assign
responsibility for them. The Commission should start an inquiry that will culminate in
clear metrics for each dimension of the obligation to serve.

D. The CPCN Process Described In Part C Will Ensure The

Commission Is Aware Of Potential Competitors And Has
A List Readily Available
As described above in response to Question 2.2.C, the CPCN review process,
including the expressions of interest, can be used ensure the Commission knows exactly
who is interested in providing the safest, most reliable, and most cost-effective service in
Northern California. Only then can the Commission act from a position of strength.
Alternately, the Commission can utilize the probationary process identified in section
IIC(1)(c) above until a successor candidate is identified and available.

24
 E. The CPCN Review Process Costs Are Outweighed By The
Benefits Associated With The Review
To the Public Advocates Office’s knowledge, the cost of proceedings is not
considered by the Commission when it sets the periodicity of its proceedings. The costs
associated with the CPCN review process should be no different, and any costs would be
outweighed by the benefits in ensuring safe, reliable, and cost-effective service.

IV. AT A MINIMUM, PG&E CORP.'S HOLDING COMPANY

STRUCTURE MUST BE LIMITED TO THE PUBLIC UTILITY
ACTIVITIES AUTHORIZED BY THE COMMISSION

A. Should PG&E Have A Holding Company?

If the Commission allows PG&E to retain both its gas and electric businesses, the
Commission should explore requiring PG&E to establish those businesses as separate
affiliates. That way, each business has its own executives, its own sources of debt
financing, and its own bond ratings. Each should have a distinct board reflecting the
expertise requirements unique to each business. If there are two separate affiliates, a
holding company is unavoidable—some entity has to own the stock of each business. If
the Commission decides that PG&E should have either an electricity business or a gas
business but not both, then no holding company is necessary.
If PG&E Corporation remains as a holding company, non-utility businesses run
the risk of cross subsidies, unearned advantage in the non-utility markets, use of
government protection to enter new markets, risks of management distraction, and all the
other problems the Commission has mentioned in its many prior proceedings on utility
holding companies. Being a government-protected utility is privilege enough.

V. THE COMMISSION SHOULD NOT LINK PG&E’S RATE OF

RETURN ON EQUITY TO SAFETY PERFORMANCE METRICS
It is unlikely that appropriate safety performance metrics can be crafted that are
not either subject to manipulation by the utility or at a level sufficient to trigger the

25
desired response. 42 As previously experienced in California, past performance-based
ratemaking has been subject to manipulation and submittal of false data. For example, in
2008, Southern California Edison Company was “ordered to refund to its ratepayers all
$28 million in PBR customer satisfaction rewards it has received and forgo an additional
$20 million in rewards it has requested.” 43 The Commission should avoid creating
similar circumstances that encourages utility management to manipulate and submit false
data in order to increase profits. Instead, the Commission should insist on the utility
meeting its obligations to provide safe and reliable service.

VI. THE COMMISSION CAN TAKE ADDITIONAL ACTIONS TO

ADDRESS THE CULTURE OF ENTITLEMENT
CPCN transfer aside, the Commission can take at least seven additional measures
to help send clear signals to PG&E's executives, boards, and shareholders that the
Commission's patience has reached its limit.

A. Use An Expressions-Of-Interest Process To Build A List

Of Potential CPCN Holders.
By attracting and pre-qualifying candidates, the Commission would have a set of
companies ready, willing, and able to replace the incumbent. Then when performance
shortcomings justified probation or CPCN transfer, the Commission would have real
options. “Too big to fail” would cease to be an effective argument against replacing a
poorly performing incumbent. This readiness to act will, by itself, inject accountability
into a system of fines and penalties that is not succeeding.

B. Design, And Require Incumbent Utilities To Execute, A

“Living Will” Providing For A Smooth CPCN Transfer.
Regulators need contingency plans. Consider a rough analog: the Dodd-Frank
Act's requirement of a "living will." Banks whose failure could pose "systemic risk"

42
PG&E has already proposed a Safety Related Earnings Adjustment Mechanism in its Test Year 2020
General Rate Case in Application (A.) 18-12-009. The Public Advocates Office provided testimony in
June 2019 opposing this mechanism for a variety of reasons including a lack of external verification and a
lack of Commission measured metrics. See, Exh. CalAdvocates-03 in A.18-12-009.
43
D.08-09-038, p. 2.

26
must file "resolution plans" that provide for the "rapid and orderly" liquidation or
restructuring of the company, "so as to "mitigate[] serious adverse effects on U.S.
financial stability." The plans must "[f]ocus on identifying core business lines and
critical operations and mapping to legal entities"; and must identify "funding, liquidity
needs, interconnections and interdependencies, and management information systems." 44
The Commission can do something similar—create the legal documentation necessary to
transfer CPCNs smoothly.

C. Eliminate company-ratepayer conflict.

If executives at the U.S. Postal Service had personal incentives to raise the price of
a first-class stamp, there would be outrage. The same goes for utility executives. The
Commission should require the utility to present for Commission approval evidence that
its compensation plans, at all company levels, create no personal incentives at odds with
safe, reliable, and cost-effective service for the customers. This should occur even in
cases where ratepayers do not pay the executives’ salaries.

D. Ensure internal compliance.

The Commission should require the utility to develop a list, for each executive and
manager, of the types of misbehaviors—actions, inactions, and omissions—that have a
reasonable probability of raising the cost or lowering the quality of service or adversely
impacting safety. Accompanying the list should be the range of consequences that would
apply, including salary cuts, demotions, and terminations. And when a substantial error
occurs, the Commission should require the utility to identify with precision the
individuals responsible and the consequences of the error(s). If the utility cannot trace a
problem to particular individuals, that is a larger problem, evident of the need to consider
a CPCN transfer.

44
Federal Deposit Insurance Corp., "Living Wills Overview" (Jan. 25, 2012), available at
https://www.fdic.gov/about/srac/2012/2012-01-25_living-wills.pdf.

27
 E. Issue A Periodic Scorecard On The Utility's Performance,
With Consequences For The Utility’s Bottom Line.
Instead of waiting for isolated adverse events and then imposing fines, the
Commission should create an atmosphere of continuous oversight and evaluation, an
expectation of continuous and rapid improvement, and a system of penalties for failing to
make the required improvement. This oversight can overlap with the probation concept
discussed next. The oversight can be reduced in frequency once the company has proven
its ability to improve on its own or increased if the company fails to improve on its own.

F. Create a probationary status, and apply it to PG&E.

Probation would signal that the incumbent’s performance is headed toward, or has
fallen below, the level required to retain a CPCN, but that the Commission has not yet
decided to transfer the CPCN. The status means that at any time the Commission could
require a transfer. Once the Commission has established this concept, it should hold a
proceeding to determine whether probation should apply to PG&E.

G. Eliminate The Practice Of Weakening Penalties And

Fines Due To Their Effects On The Utility's Finances.
Once the Commission has established a process for CPCN transfer and obtained
expressions of interest from viable companies, there no longer is a need for ratepayers,
taxpayers, and others to subsidize the utility's errors by lowering penalties below the level
commensurate with a violation.

VII. CONCLUSION
PG&E’s pattern of safety failures and rule violations are reason enough to justify
revocation of PG&E’s CPCN. That the Commission’s traditional penalty tools have
proven insufficient to change PG&E’s behavior demonstrates the entrenched culture of
entitlement within the utility. The Commission must act decisively to remove this culture
from PG&E and take the steps necessary to prevent further fatalities associated with
PG&E’s failures. The Commission must no longer tolerate the culture of safety failure
and complacency. The Commission should therefore adopt the Public Advocates Office’s
recommendations and institute the necessary steps to allow for CPCN revocation if

28
PG&E does not prove that it is the best entity to provide safe, reliable, and cost effective
electricity and natural gas service in its CPCN territory.

Respectfully submitted,

/s/ NOEL OBIORA

NOEL OBIORA
Attorney

Public Advocates Office

California Public Utilities Commission
505 Van Ness
San Francisco, CA 94102
Tel: (415)-703-5987
July 19, 2019 Email: noel.obiora@cpuc.ca.gov

29