PG&E Ordered to Pay Record $1.6 Billion for Deadly Gas Blast

By Mark Chediak, Bloomberg

10 April 15

alifornia regulators imposed the largest penalty for a U.S. natural-gas utility, ordering PG&E Corp. to pay $1.6 billion for failures that led to a deadly 2010 natural gas pipeline explosion in a San Francisco suburb.

A faulty weld on the pipeline caused an explosion and fire rupture that killed eight people and destroyed 38 homes in San Bruno, California. PG&E, owner of the state�s largest utility, committed 2,425 violations of safety rules in the decades leading up to the incident. The company still faces as much as $1.13 billion in federal criminal fines for the blast and has committed to spend $2.8 billion to improve pipeline safety.

The California Public Utilities Commission voted 4-0 for the penalty at a meeting in San Francisco Thursday. The agency has been criticized by local officials for its response to the incident -- two members recused themselves from voting on the fine after improper e-mails with PG&E executives were made public. The U.S. Attorney�s office in San Francisco and California�s attorney general are investigating communications between the company�s Pacific Gas & Electric utility and the commission.

�Although the decision is an important milestone, it sounds like the legacy of San Bruno will live on at PG&E and the PUC as the agency plans to continue to investigate the company�s operations for some time to come,� Paul Patterson, a New York-based utility analyst for Glenrock Associates LLC, said in a telephone interview.

The San Francisco-based company had warned that an earlier staff-proposed fine of $2.25 billion would push it to the edge of bankruptcy. Since the tragedy, PG&E has replaced its chief executive officer, frozen its dividend and separated its gas business from its power operations to improve safety.

Too Big?

�We are deeply sorry for this tragic event and we have dedicated ourselves to re-earning the trust of our customers and the communities we serve,� PG&E Chairman and CEO Tony Earley said in a statement. �While we obviously need to review the orders in their entirety before making a final decision, we do not expect to appeal today�s rulings.�

PG&E fell 1.6 percent to $52.78 at the close in New York.

Michael Picker, who took over as president of the commission this year, proposed the $1.6 billion penalty after an agency judge recommended $1.4 billion. Picker questioned whether the company was too big to make adequate changes, saying its response to the need for safety measures was uneven.

�Is the organization simply too large -- spread across a sizable portion of a large state, and encompassing diverse functions such as both gas transmission and gas distribution, as well as electric service -- to succeed at safety?� Picker said. He called for a probe into PG&E�s safety culture.

Commissioner Recusals

Under the order approved Thursday, PG&E will pay $300 million to the state, refund $400 million to its gas customers and spend $850 million on infrastructure improvements that can�t be recovered in rates. The $1.4 billion penalty recommendation from the administrative law judge included a $950 million state fine.

�Our decision to use a mix of penalties and remedies is based on our intention to penalize PG&E for its violations and to deter similar behavior and violations in the future,� Picker wrote in the order. A larger fine would result in higher costs for PG&E customers, he said.

Former President Michael Peevey and Commissioner Michael Florio recused themselves after e-mails surfaced last year that included PG&E requests to change judges for a rate proceeding. The city of San Bruno sued the agency to release correspondence between the utility and the commission. Victims of the blast included a member of the commission staff and her 13-year-old daughter.

�Gross Misconduct�

The explosion was the result of �gross misconduct by PG&E and lax oversight by this commission,� San Bruno Mayor Jim Ruane told the commissioners before the vote.

�I blame PG&E for the deaths of my family,� Sue Bullis, a resident of San Bruno who lost her husband, her son and her mother-in-law in the blast, said at the meeting. �I have no confidence in the infrastructure underground, those who operate it and, I have to say, the CPUC which has acted with indifference over the past five years.�