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The Unprecedented $1.4 Billion Proposed Fine to PG&E Resulting From the San Bruno Explosion and Related Regulatory Issues

October 8, 2014

After nearly four years of investigation and hearings, Administrative Law Judges for the California Public Utilities Commission (CPUC) have recommended that PG&E be fined $1.4 billion for a series of violations of State and Federal law related to a gas leak, explosion and fire in San Bruno, California in 2010 that result in 8 deaths, dozens of injuries and extensive property damage. The CPUC also proposed fines associated with PG&E’s alleged failure adequately to maintain its gas facilities and to maintain records over several decades.

 In four separate opinions, the ALJs found that PG&E committed 3,708 violations of various provisions of Part 192 of Title 49 of the Code of Federal Regulations, Pub. Util. Code § 451, the 1955 American Society of Mechanical Engineers Standard B.31.8 (and its subsequent revisions), General Order 112 (and its subsequent revisions), and Rule 1.1 of the Commission’s Rules of Practice and Procedure.[1]  According to the ALJs’ orders, many of these violations occurred over a number of years, for a total of 18,447,805 days in violation.[2]  The $1.4 billion penalty, plus other amounts that the CPUC previously ruled must come from PG&E shareholders for expenditures to improve the safe operation of natural gas pipelines (R.11-02-019), brings the total of fines and required expenditures to more than $2 billion.[3] In an SEC 8-K filing, PG&E has disclosed that the pre-tax impact of the fine on the Company, with related costs would be $4.75 billion.[4]

In addition to the civil penalties that have been proposed, PG&E has been accused in Federal indictments[5] of criminal violations that would potentially expose the company to an additional $1.13 billion in fines if the company is convicted.[6] The Company has pled not guilty to the criminal charges.[7] A federal judge rejected PG&E’s motion  to remove reference to the San Bruno explosion from the criminal indictment against the company, ruling that the incident is a permissible count in  the government’s case.[8]

Unless one of the parties to the underlying administrative proceedings appealed  the orders to the CPUC, or a CPUC Commissioner requested review of the ALJs’ orders, the Orders would have been final in 30 days of the ALJ’s Orders.[9]  By the appeal deadline, PG&E, the city of San Bruno, two consumer groups sought rehearing and 3 CPUC Commissioners announced their intention to take up the matter before the CPUC Commissioners themselves.[10] The City of San Bruno, one of the parties in the CPUC cases, had publicly criticized the ALJs order on the grounds that $950 million of the fine would go the State of California general fund. The advocacy group TURN has also criticized the orders.[11] Both parties believe that the bulk of the remedies should be used to improve pipeline safety rather than go to the California general fund in the form of a fine.[12]

The National Transportation Safety Board (NTSB) issued a Pipeline Accident Report following the tragedy finding:

the probable cause of the accident was the Pacific Gas and Electric Company's (PG&E) (1) inadequate quality assurance and quality control in 1956 during its Line 132 relocation project, which allowed the installation of a substandard and poorly welded pipe section with a visible seam weld flaw that, over time grew to a critical size, causing the pipeline to rupture during a pressure increase stemming from poorly planned electrical work at the Milpitas Terminal; and (2) inadequate pipeline integrity management program, which failed to detect and repair or remove the defective pipe section.

Contributing to the accident were the California Public Utilities Commission's (CPUC) and the U.S. Department of Transportation's exemptions of existing pipelines from the regulatory requirement for pressure testing, which likely would have detected the installation defects. Also contributing to the accident was the CPUC's failure to detect the inadequacies of PG&E's pipeline integrity management program.[13]

Traditionally, administratively-imposed penalties (the regulatory equivalent of punitive damages) are designed to be at a level where a fine would be significant to the fined party and where it would both punish the act and deter future acts or oversights.[14] In the case of PG&E the $950 million proposed to be paid to California’s general fund resembles punitive damages collected in civil actions where the state often is paid a large share of the damages. In these administrative penalty and punitive damages cases, the objective is to avoid creating a windfall for a plaintiff—but to assure that the total award against the defendant is sufficient to deter bad conduct in the future. Punitive damages or administrative fines are premised on the view that society is injured by the wrongful acts. The ALJ’s penalty order found a staggering range for potential fines under California’s statutes:

[T]he range of potential fines that could be imposed in light of the violations is from $9.2 billion to $254.3 billion. Nonetheless, we realize that the amount of the penalty to be imposed must be significantly decreased in consideration of PG&E’s financial resources.[15]

The ALJs’ fines and remedies order found that the CPUC is required by California law to remit any penalty portion of its order to the General Fund.[16] PG&E argued that such a result is only necessary resulting from a civil action in state Court.[17]

Constitutional Standards for Administrative Fines and Penalties

While we generally think of the “cruel and unusual” punishment clause of the U.S. Constitution to apply only to criminal sentencing, the Eighth Amendment actually provides “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” Article 1, § 17 of the California Constitution also prohibits “cruel or unusual punishment” and “excessive fines.” What constitutes an “excessive” fine has been articulated by the U.S. Supreme Court as a proportionality test: “a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant's offense.”[18] The Supreme Court has found that the forfeiture of the entire amount of unreported currency leaving the country on an international flight is not proportionate.[19] But in providing that result the Court identified two principles that apply:

“ (first) is that judgments about the appropriate punishment belong in the first instance to the legislature…. The second is that any judicial determination regarding the gravity of a particular criminal offense will be inherently imprecise. Both of these principles counsel against requiring strict proportionality between the amount of a punitive forfeiture and the gravity of a criminal offense, and we therefore adopt the standard of gross disproportionality.”[20]

In other words, Courts should not overturn a fine as excessive under the Eighth Amendment unless the amount of the fine levied is grossly disproportionate to the gravity of the offense. On the other hand, as PG&E argued in its brief before the CPUC on fines and remedies, the Courts sometimes measure “excessiveness” in penalties by reference to fines levied in other, like circumstances.

Other Recent Examples of Administrative Penalties in the Energy Field

U.S. District Court Judge Carl Barbier recently found that BP Exploration & Production Inc. is “subject to enhanced penalties under the Clean Water Act” because the 2010 Gulf of Mexico explosion and oil spill was the result of its gross negligence and willful misconduct. As a consequence, BP’s potential liability may be as much as $14 billion more than if the judge hadn’t found gross negligence and willful misconduct.  BP said it “strongly disagrees” with the decision and will appeal to the Circuit Court of Appeals.[21] The BP explosion killed 11 workers and the resulting spill touched beaches in 5 states. Like the PG&E pipeline explosion, the blast also lead to individual tort actions and criminal allegations. In terms of scale, the BP blast and spill affected a much broader geographic area than the San Bruno explosion and fire.

In contrast to the PG&E fines, the Federal Pipeline and Hazardous Materials Safety Administration (FPHMSA) proposed $9.78 million in civil penalties against pipeline operators for alleged violations of federal law in all of 2013.[22] The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 authorized PHMSA to double its maximum civil penalty for violations of federal safety statutes. In 2013 the Administration issued a final rule increasing the maximum civil penalty pipeline operators from $100,000 to $200,000 for a single violation and from $1 million to $2 million for a series of related violations.[23] The penalty portion that the ALJ Order proposes to go to the State of California is nearly 100 times larger than the total of the proposed fines against all pipelines by the FPHMSA) for all of 2013.

In its briefs, in response to a proposed fine and regulatory disallowances of $2.25 billion advocated  by the CPUC’s Consumer Protection and Safety Division (“CPSD”) and intervenors,[24]  PG&E argued that the CPUC’s penalty should be proportionate to other fines under similar circumstances. PG&E argued the two most comparable fatal natural gas pipeline accidents are 1) the natural gas pipeline rupture near Carlsbad, New Mexico in August 2000 and 2) the gas line rupture and explosion in Allentown, Pennsylvania in February 2011.[25] In those cases, the affected pipelines/utilities paid, respectively: 1) $101.5 million – consisting of a $15.5 million civil penalty and $86 million to implement program improvements (in a consent decree) and 2) a $500,000 civil penalty  and $24.75 million in unrecoverable remedial measures.[26]

In rejecting PG&E’s comparability analysis, the ALJs concluded that in the Recordkeeping Violations and Class Location decisions that PG&E committed “numerous violations of pipeline safety regulations … which were very lengthy in time and endangered many other high consequence areas in PG&E’s service territory.”[27] The ALJs rejected the argument that other states’ statutory caps on fines for related violations should be instructive, holding that the California legislature had given the CPUC broad authority to determine the level of fines rather than to establish a maximum fine amount.[28] The ALJs rejected the argument that other states’ fines control the analysis under the Federal and State excessive fines constitutional clauses.

Ultimately, the ALJs also put great weight on PG&E’s ability to pay the fines and regulatory disallowances imposed. In finding that the level of fines proposed by the CPSD and intervenors was not excessive, the ALJs found :

even if one were to only consider PG&E’s gas transmission and distribution business on a standalone basis, it would have an aggregate value of approximately $6.4 billion, and an equity value of approximately $4.3 billion.[29]

Regulatory Issues of First Impression

The size of the proposed fines and regulatory disallowances raise many issues of first impression that the CPUC Commissioners themselves (and perhaps appellate courts) will likely face:

  1.  Are fines and disallowances of $1.4 billion disproportionate based on:
    1. California’s own precedent?
    2. Precedent relating to similar incidents involving other states or federal regulation?
  2. If they are disproportionate, do the circumstances involving gas pipeline maintenance and record-keeping over the years and the damage from a major incident involving the loss of life and large property damage, justify multiples of prior fines?
  3. Will the unprecedented level of fines and regulatory disallowance discourage equity investments in PG&E, or will the utility’s borrowing costs increase significantly, either of which could adversely affect PG&E’s ratepayers in the long term? In other words, must the long-standing “capital attraction test”, in circumstances such as the San Bruno explosion and fire, yield to efforts to penalize a utility for bad behavior?
  4. Should the regulators consider whether a fine and regulatory disallowances totaling over $2 billion could cripple efforts to restore a gas distribution system with total equity of $4.3 billion?
  5. Should the CPUC adjust the fines and regulatory disallowances it imposes in circumstances where the NTSB found that state and federal exemptions of existing pipelines from the regulatory requirement for pressure testing, prevented detection of the installation defects that led to the tragedy?
  6. In light of the circumstances, should the State’s general fund receive the bulk of the fines, or should the fines be used exclusively to upgrade PG&E’s gas pipelines?

The author raises these questions, not to suggest an answer, but rather to identify the fine balancing-act that regulators must engage in when attempting to remedy acts of regulated utilities over which they have ongoing regulatory responsibilities. Future articles will report on regulatory and appellate consideration of the CPUC ALJs’orders.

For more information, please contact any member of Marten Law’s Energy practice.

[1] On September 9, 2010, a 30-inch diameter segment of a natural gas transmission pipeline owned and operated by Pacific Gas and Electric Company (PG&E) ruptured in a residential area in San Bruno, California. The pipeline was originally installed in 1956. The resulting explosion and fire killed 8 people, injured dozens and destroyed 38 homes. Tragically and ironically, one of those killed in the explosion (Jacqueline Greig) worked for the California Public Utilities Commission reviewing PG&E's investment plans to upgrade its natural gas lines, including another section of the same pipeline within miles of her home. Ms. Greig’s 13-year-old daughter Janessa also died in the explosion. http://www.foxnews.com/us/2010/09/11/apnewsbreak-calif-federal-regulators-say-gas-pipeline-deadly-blast-ranked-high/ Reported September 11, 2010, retrieved September 3, 2014.

[2] http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M103/K390/103390911.PDF and http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M105/K451/105451860.PDF

[3] Id.

[4] http://pge.q4cdn.com/e6f72e4c-74f9-416a-8be1-a39a84b39d31.pdf?noexit=true, dated September 2, 2014, retrieved September 4, 2014.

[5] http://www.justice.gov/usao/can/news/2014/docs/PG&E%20-%20Superseding%20Indictment.pdf,   Superseding indictment issued July 30, 2014, retrieved September 4, 2014.

[6] PG&E Pleads Not Guilty in San Bruno Blast Case. http://www.sfgate.com/crime/article/PG-amp-E-pleads-not-guilty-in-San-Bruno-blast-case-5695990.php, Reported August 19, 2014, retrieved September 4, 2014.

[7] Id.

[8]PG&E loses bid to strip San Bruno reference from indictment, SF Gate October 1, 20014, retrieved October 2, 2014.  http://www.sfgate.com/bayarea/article/PG-E-loses-bid-to-strip-San-Bruno-reference-from-5794570.php

[9] Rule 14.4 CPUC Rules of Practice and Procedure

[10] Review PG&E San Bruno blast penalty, 3 CPUC members urge, October 3, 2014 SF Gate, retrieved October 3, 2014, http://www.sfgate.com/bayarea/article/CPUC-to-rule-on-1-4B-blast-penalty-against-San-5797716.php

[11] http://abc7news.com/news/cpuc-fines-pg-e-$14-billion-in-san-bruno-pipeline-disaster/291624/

[12] Id.

[13] Pacific Gas and Electric Company Natural Gas Transmission Pipeline Rupture and Fire, San Bruno, California
September 9, 2010 NTSB Number: PAR-11-01 NTIS Number: PB2011-916501 Adopted: August 30, 2011 https://www.ntsb.gov/investigations/summary/PAR1101.html, retrieved September 9, 2014.

[14] PG&E's San Bruno fine: huge, but will it stick?  Christian Science Monitor, http://www.csmonitor.com/Environment/Energy-Voices/2014/0906/PG-E-s-San-Bruno-fine-huge-but-will-it-stick

September 6, 2014, retrieved September 8, 2014.


[16] CPUC ALJ Fines and Remedies Order at 27.

[17] Id. at 26.

[18] United States v. Bajakajian (1998) 524 U.S. 321, 334.

[19] Id.

[20] Id. Citations omitted.

[21] 'Worst Case' BP Ruling on Gulf Spill Means Billions More in Penalties, Bloomberg, September 4, 2014, http://www.bloomberg.com/news/2014-09-04/bp-found-grossly-negligent-in-2010-gulf-of-mexico-spill.html, retrieved September 8, 2014.

[22] Pipeline Violation Penalties Breaks Record in 2013, Bloomberg BNA, April 8, 2014, http://www.bloomberg.com/news/2014-04-08/pipeline-violation-penalties-breaks-record-in-2013-.html

Retrieved September 8, 2014.

[23] Id.

[24]Fines and Remedies Order  at 31.

[25]Id.  at 34.

[26] Id. at 35.

[27] Id. at 36-37.

[28] Id. at 38.

[29] Id. at 64.


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