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Pacific Gas & Electric Found Guilty of Five of Eleven Charges in Federal Criminal Case Related to 2010 San Bruno Gas Explosion

August 17, 2016

After deliberating for seven days, a federal jury convicted Pacific Gas & Electric Company (PG&E) of obstruction and five of 11 counts of pipeline-safety violations. The verdict included finding that PG&E had failed to gather information to evaluate potential gas line threats and deliberately had not classified a gas line as high risk. The verdicts were issued August 9, 2016.[1] The federal indictment leading to the convictions[2] was triggered by a gas leak, explosion, and fire in San Bruno, California in 2010 that resulted in eight deaths, dozens of injuries, and extensive property damage.[3]

In prior articles we have reported on the record $1.6 billion fine levied by the California Public Utilities Commission related to the San Bruno explosion and fire.[4] In addition to a $300 million fine paid directly to the state, the CPUC penalty required PG&E to refund $400 million to natural gas utility customers and pay for $850 million in pipeline upgrades. PG&E also settled claims totaling more than $500 million to the victims and of the incident and established a $50 million trust for the city of San Bruno for costs related to recovery from the explosion and fire. PGE also contributed $70 million to support city and community recovery efforts.[5]

Originally, the federal prosecutors sought criminal penalties of $562 million from PG&E related to federal pipeline safety and record-keeping violations. But after the case had been submitted to the jury, and based on a PG&E motion discussed below, the federal prosecutors sought leave of the Court to eliminate all but $6 million in fines from the case.[6]

The Verdict

In the Federal criminal trial, the jury found multiple violations of rules intended to administer 16 U.S.C. Section 60123(a) which establishes a criminal violation for knowingly and willfully violating section 60114(b), 60118(a), or 60128 of Title 16 or a regulation prescribed or order issued pursuant to Title 16. Presumably, given contentions in the indictments and evidence at trial, the jury found violations of 16 U.S.C. Section 60118 relating to compliance with safety regulations, inspection and record keeping requirements. 16 U.S.C. §60118 provides:

Compliance and waivers (a) GENERAL REQUIREMENTS.—A person owning or operating a pipeline facility shall— (1) comply with applicable safety standards prescribed under this chapter, except as provided in this section or in section 60126; (2) prepare and carry out a plan for inspection and maintenance required under section 60108(a) and (b) of this title; (3) allow access to or copying of records, make reports and provide information, and allow entry or inspection required under section 60117(a)–(d) of this title; and (4) conduct a risk analysis, and adopt and implement an integrity management program, for pipeline facilities as required under section 60109(c).

The jury found the utility guilty of:

a) “obstructing a National Transportation Safety Board proceeding;”

b) “knowingly and willfully violating 49 CFR 192.917(b)…in violation of 49 USC Section 60123(a)”;

c) “knowingly and willfully violating 49 CFR 192.917 (a) or DFM 1816-01 in violation of 29 USC Section 60123(a);”

d) “willfully and knowingly violating 49 CFR 192.919 in violation of 29 USC Section 60123(a)”;

e) “knowingly and willfully violating 49 CFR Section 192.917(e)(3)…in violation of 49 USC Section 60123(a)” and

f) “knowingly and willfully violating 49 CFR Section 192.917(e)(4)…in violation of 49 USC Section 60123(a).”

PG&E issued a press release[7], in response to the verdicts that states:

PG&E faced 11 charges of violating the U.S. Pipeline Safety Act and one charge of obstruction of an NTSB proceeding. No individuals were charged as a part of this proceeding and no charges related to the San Bruno explosion itself were ever filed.

The company has spent $2.7 billion in shareholder funds to enhance the integrity of its natural gas system. In addition, it has made significant progress in improving and modernizing natural gas system records and record-keeping practices. As a result of its efforts, PG&E was the first company in the U.S. to earn several highly regarded and internationally recognized safety certifications.

PG&E had sought throughout the trial to avoid all references to the San Bruno explosion in the criminal case. The Court ultimately permitted testimony on the pipeline regulation violations and the San Bruno explosion. “The court is pleased that PG&E finally agrees that the best course of action in this criminal trial is to mention the San Bruno explosion to the jury, but to mention it carefully,” Judge Henderson wrote in his ruling. PG&E had sought to remove from evidence a number of emails from before the explosion that placed the utility in a poor light. The Court denied PG&E’s motion.[8]

Alternative Fines Act

A great deal of controversy was reported in the press when the federal prosecutors removed from the case, potential criminal fines of $562 million. During the trial, the Federal prosecutors sought to fine PG&E based on the Alternative Fines Act (AFA) on the theory that PG&E had derived a gross gain of $281 million associated with its failure to make expenditures associated with pipeline safety and record-keeping.

18 U.S. Code § 3571 - Sentence of fine provides:

(d) Alternative Fine Based on Gain or Loss.—

If any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss, unless imposition of a fine under this subsection would unduly complicate or prolong the sentencing process.

Based on the asserted gain from failing to expend funds to maintain the pipeline and keep adequate records, the prosecutors sought $562 million (or double the gross gain asserted).

In September, 2015, PG&E moved to dismiss the AFA remedies from the case. The Court dismissed claims associated with asserted gross losses to the victims because they would unduly complicate the case, but deferred a definitive judgment on whether proof of PG&E gain from the asserted offenses would unduly complicate or prolong the sentencing phase of the case until after the trial phase.[9] At the close of the trial, PG&E moved to dismiss the “gross gain” fine from the case asserting in its motion that the government had failed to call a financial expert to support its claims for gross gain. In addition, PG&E asserted that the government’s intended AFA expert would have relied not upon a federal pipeline standard that existed at the time of the alleged violations, but rather a state PUC standard adopted in reaction to the incident.[10] Based on revisions to the government’s case, PG&E asserted that the maximum fine associated with Pipeline Safety Act violations, without the AFA counts, amounted to just $5.5 million.[11] As PG&E correctly pointed out in its motion, under standard utility ratemaking, a utility has every incentive to expend funds in support of capital investments. In effect, PG&E argued, in order to determine whether PG&E had gained, as a result of failure to make pipeline expenditures, the parties would have had to present, and the jury would have had to understand, a mock pipeline rate proceeding

By notice dated August 2, 2016, with leave of the Court, the Government dismissed the Alternative Fine Act proposed fines.[12]

State Prosecution

After public criticism that no PG&E officials were charged in the federal criminal proceeding, the San Mateo County, California District Attorney conducted its own investigation of the San Bruno incident. Ultimately, the District Attorney announced that he would not seek to prosecute individuals for the San Bruno explosion and the resulting deaths and injuries and property damage based on the fact that there was insufficient evidence to prosecute.[13]

For further information, contact Michael Dotten or one of the other attorneys in the firm’s Energy or Ratemaking and Power Sales practice groups.

* Of Counsel to Marten Law, LLP. Mr. Dotten served as General Counsel of PG&E Gas Pipeline, Northwest Corporation (“GTN”) in 1999-2000. GTN was then a subsidiary of PG&E Corporation, but it was a separate entity regulated by the Federal Energy Regulatory Commission (and not by the California Public Utilities Commission). PG&E Corporation maintained a strict information “firewall” between the federally regulated interstate natural gas pipeline (GTN) and the downstream, state-regulated gas distribution company (Pacific Gas & Electric Company). GTN is now owned by TransCanada Pipeline Corporation. Mr. Dotten writes this article based strictly on publicly available documents cited in this article. He otherwise has no knowledge of the underlying facts related to PG&E’s state-regulated natural gas distribution system at issue in in this article. Any opinions expressed in this article are the author’s alone.

[1] United States of America v. Pacific Gas and Electric Company, Case No. 14-cr-00175-TEH, USDC N. CA, Jury verdict form, Dkt 884.

[2] https://oag.ca.gov/system/files/attachments/press_releases/PGE%20Indictment_0.pdf

[3] The 2010 explosion and fire in San Bruno, California result in 8 deaths, dozens of injuries and extensive property damage. 

[4] California PUC Increases Fine to PG&E Resulting From the San Bruno Explosion to $1.6 Billion, June 3, 2015, and The Unprecedented $1.4 Billion Proposed Fine to PG&E Resulting From the San Bruno Explosion and Related Regulatory Issues, October 8, 2014.

[5] https://www.pge.com/en/about/newsroom/newsdetails/index.page?title=20150813_pge_pays_san_bruno_fine, retrieved August 16, 2016.

[6] Prosecutors in PG&E case abruptly reduce potential fines, SF Gate, August 2, 2016, retrieved August 16, 2016.

[7]https://www.pge.com/en/about/newsroom/newsdetails/index.page?title=20160809_pge_statement_on_trial_verdict, retrieved August 16, 2016.

[8] Jury can hear about San Bruno explosion in PG&E trial, Mercury News, July 12, 2016, retrieved August 16, 2016.

[9] Dkt. 275.

[10] Defendant’s Motion to Determine Whether Alternative Fines Act Case Should Proceed at 7.

[11] Id. at 8.

[12] https://ecf.cand.uscourts.gov/doc1/035114467783, Dkt. 871.

[13] DA: Not Enough Evidence to Prosecute PGE Execs in San Bruno Explosion, August 11, 2016; retrieved August 17, 2016.

 

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