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Southern California Edison
Author(s):
Merchant, Kenneth A.
Van der Stede, Wim A.
Functional Area(s):
   General Management
   Management Control Systems
   Organizational Behavior
Setting(s):
   For Profit
Difficulty Level: Intermediate
Pages: 10
Teaching Note: Available. 
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First Page and the Assignment Questions:
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?