Southern California Edison |
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General Management |
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Management Control Systems |
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Organizational Behavior |
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Intermediate |
10 |
Available.
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$9.00
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In September 2003, John Cogan, director of compensation and benefits
for Southern California Edison (SCE), reflected back on his company's
administration of its incentive plans during the California energy
crisis of 2000-01, which had brought SCE to the brink of bankruptcy.
It was a difficult period. Our traditional financial measures of
performance became meaningless. We were working the regulators, trying
to get relief, doing the best we could. But we were operating in an era
in which it was impossible to set goals, and we were losing money.
As a public utility, we live under constant and intense public
scrutiny. It is tough to pay bonuses in such a period. It's hard for
the public to understand, and some parties are quick to scream out in
protest. But we also had a need to retain our key people. Looking back,
I think we did the best we could. We were balancing a number of
considerations, and I think we did it quite well.
THE COMPANY
SCE, the major operating subsidiary of Edison International (NYSE:
EIX), was one of the largest investor-owned electric utilities in the
United States. Headquartered in Rosemead, California, the company
served a 50,000-square-mile area of central, coastal, and southern
California. Included in this area were approximately 800 cities and
communities and 12 million people. The company served 4.2 million
business and residential customers. At December 31, SCE had
consolidated assets of $18.2 billion and total shareholders equity of
$4.4 billion. Annual revenues were in excess of $8 billion (see Exhibit
1). SCE had over 12,000 employees. The company was organized into 20
major operating and staff units.
SCE's history can be traced to 1886, but the company was incorporated
with the SCE name in 1909 as a power generation and transmission
company. In the late 1990s SCE began to reduce its power generation
activities. It still owned and operated two nuclear power generation
units, 36 hydroelectric plants, two coal-fueled plants, and one
diesel-fueled plant, as well as minority interests in several other
power generation facilities. But as part of the restructuring of the
electric industry in California in the late 1990s, SCE sold 12 other
fossil fuel generating stations, and it was in the process of
decommissioning its nuclear power facilities. The company purchased
most of its power through the California Power Exchange and a variety
of other utilities and independent power producers. SCE's main roles
were becoming power transmission and distribution.
Between 1998 and 2003, SCE invested more than $3 billion in its
transmission and distribution system, and company management expected
to invest an additional $11 billion in electricity infrastructure
replacement and improvement in the next decade. This upgrading of
existing equipment was intended to accommodate the significant customer
growth expected.
Assignment
1. The SCE board and managers made a number of
special compensation-related decisions in response to the significant
set of uncontrollable factors—the California Energy Crisis—that the
company faced in 2000 and 2001.
a. Identify those decisions.
b. Evaluate those decisions. What were the SCE board
and managers trying to achieve with these special decisions? Were those
the right objectives? Were those the right decisions to achieve those
objectives?
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