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California PUC Increases Fine to PG&E Resulting From the San Bruno Explosion to $1.6 Billion

June 3, 2015

In September, 2014, after nearly four years of investigation and hearings, Administrative Law Judges for the California Public Utilities Commission (CPUC) recommended fines against Pacific Gas & Electric Company (PG&E) totaling $1.4 billion[1] for a gas leak, explosion, and fire in San Bruno, California in 2010 that resulted in eight deaths, dozens of injuries, and extensive property damage.[2] Now, upon review of the draft Orders the CPUC increased the fine to an unprecedented $1.6 billion.[3] In addition to increasing the overall penalty, the Commission revised where PG&E’s fines will be directed. Instead of $950 million going into California’s general fund, the state coffers will receive $300 million. PG&E will refund $400 million to its customers in the form of a credit on their monthly gas bill, with the rest of the money going toward pipeline safety upgrades at the company. The CEO of PG&E’s corporate parent said that he did not expect PG&E to appeal the final CPUC order.[4]

In rendering its unanimous opinion, the Commission Chair highlighted the failings of both PG&E and the Commission over the years:

PG&E failed to uphold the public’s trust. The CPUC failed to keep vigilant. Lives were lost. Numerous people were injured. Homes were destroyed. We must do everything we can to ensure that nothing like this happens again. Our decision commits a significant portion of the shareholder-funded penalty – one of the biggest utility sanctions in U.S. history – to making PG&E’s gas transmission system as safe as possible for the public, consumers, utility workers, and the environment.”[5]

In the CPUC’s Order it found that PG&E committed 2,425 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. Many of these violations occurred over a number of decades, for a total of 18,447,803 days in violation.[6]

CPUC Rejection of PG&E Defenses

The Commission rejected PG&E’s argument that the fine should be mitigated because violations that did not result in physical harm should be considered less severe:

We do not agree with PG&E’s arguments that violations that did not cause or result in physical harm should be considered less severe. In D.98-12-075, we noted that both economic harm and failure to comply with statutes or Commission directives were also considered when determining the severity of a violation. With respect to economic harm, we noted: The fact that the economic harm may be difficult to quantify does not diminish severity or the need for sanctions.[7]

PG&E was accused of seeking to hide record-keeping violations and impeding the staff investigation. The Commission found that those were “severe offenses.”[8]

The Commission also rejected PG&E’s view (corroborated by the NTSB investigation referred to below) that audits by the PUC’s Consumer Protection and Safety Division had contributed to the many violations by failing to catch, and bring to PG&E’s attention, the multiple violations the Commission ultimately found and that record-keeping violations were common among pipeline operators. In rejecting those arguments the CPUC found:

CPSD’s audits are not comprehensive. More importantly, as the pipeline operator, the onus to ensure that its gas transmission pipeline system is operated safely is on PG&E, not CPSD.[9]

* * *

Although PG&E recognizes its duty to maintain design, installation, testing, operating and maintenance records for all segments of its transmission pipeline system, it admits that it had lost or inadvertently destroyed records over the years. Despite knowing that it was missing records and the associated data that it was required to maintain, PG&E took no action to correct these violations.[10]

Standard Applied to Commission Fines

In setting the fines, the Commission articulated the standard it would apply:

[T]he Commission needs to balance the need for deterrence with the constitutional limitations on excessive fines. Consequently, the Commission must adjust fine levels to achieve the objective of deterrence, without becoming excessive, based on each utility’s financial resources.[11]

Nonetheless, the Commission concluded it:

is not guided by whether the adopted penalty imposes a hardship upon the company and its shareholders, but rather, whether the adopted penalty has a deterrent effect without adversely impacting ratepayers.[12]

In the end the Commission found that PG&E could bear the penalties imposed:

We find that PG&E has the financial resources to pay the penalty proposed by CPSD. Furthermore, PG&E should be able to pay a penalty of that magnitude without harming ratepayers or its ability raise the equity needed for revenue?producing investments required to provide adequate and safe service.[13]

Controversial Ex-Parte Communications

During the proceedings leading up to the fines, the parties sought thousands of e-mails that they alleged had been exchanged between the CPUC and its staff and PG&E that constituted inappropriate ex parte contact between the regulator and PG&E designed to influence the outcome of the proceeding and a related pipeline rate case. Ultimately, the Commission ordered the release of 65,000 emails, including some that suggested that the Commission Chair, had, at the behest of PG&E’s Vice President for Government Relations, sought to remove an Administrative Law Judge perceived as unfriendly to PG&E.

In the end, the PG&E Vice President was removed from his position and Michael Peevey, the Chair of the CPUC resigned at the end of his term, prior to the Commission’s final order on the San Bruno dockets. Ultimately, based on a search warrant, in February 2015, state investigators seized computers and other items from the homes of former Commission Chair Peevey and the former PG&E officer. The agents seized computers, smartphones and a thumb drive, a small data-storage device, according to the records filed with the Court based on the search warrant.[14]

Impact of Commission Orders on PG&E

In addition to amounts previously reserved to absorb the impact of the Commission’s actions, for the three months ended March 31, 2015 the Utility incurred costs of $553 million, pre-tax, associated with fines and penalties imposed.[15] When added to the disallowances already adopted in a prior CPUC Decision, the penalties and remedies exceed $2.2 billion.[16]

Federal Investigation

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.[17]

In addition to the civil penalties that have been levied, PG&E has been accused in Federal indictments[18] of criminal violations that would potentially expose the company to an additional $1.13 billion in fines if the company is convicted for allegedly violating the U.S. Pipeline Safety Act and obstructing the government’s investigation into the fatal blast.[19] The Company has pled not guilty to the criminal charges.[20] 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.[21] Also, in separate legal actions, PG&E has already paid out millions of dollars to the City of San Bruno and accident victims.[22]

At the end of the day, the PG&E fines will reduce the Company’s (and its parent Company’s) earnings. Based on already-announced disallowance of a return on the company’s investment in pipeline upgrades, the case raises issues about the wisdom of deferring investment in utility infrastructure and the administrative costs associated with maintaining adequate utility records.

[1] 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. This article follows a report on the CPUC Administrative Law Judges’ proposed fines that appeared earlier in this Newsletter. The Unprecedented $1.4 Billion Proposed Fine to PG&E Resulting From the San Bruno Explosion and Related Regulatory Issues, October 8, 2014 http://www.martenlaw.com/newsletter/20141008-pge-fine-san-bruno-explosion

[2] 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.

[3] DECISION DIFFERENT OF PRESIDENT PICKER ON FINES AND REMEDIES TO BE IMPOSED ON PACIFIC GAS AND ELECTRIC COMPANY FOR SPECIFIC VIOLATIONS IN CONNECTION WITH THE OPERATION AND PRACTICES OF ITS NATURAL GAS TRANSMISSION SYSTEM PIPELINES,
http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M150/K539/150539121.PDF, April 9, 2015, retrieved April 10, 2015.

[4] PG&E Says Lessons of Tragic San Bruno Explosion Will Not Be Forgotten. PG&E Corporation press release dated April 9, 2015.
http://www.pge.com/en/about/newsroom/newsdetails/index.page?title=20150409_pge_says_lessons_of_tragic_san_bruno_explosion_will_not_be_forgotten retrieved April 22, 2015.

[5] CPUC Press Release, April 9, 2015 at 2.

[6] CPUC Order at 2 and 76.

[7] Id. at 43.

[8] Id. at 47.

[9] Id at 52.

[10] Id. at 53.

[11] Id at 56.

[12] Id. at 68.

[13] Id. at 69.

[14] Agents search Michael Peevey’s home in PG&E judge-shopping case
http://www.sfgate.com/news/article/Agents-search-Michael-Peevey-s-home-in-PG-E-6047151.php
Updated 9:45 pm, Wednesday, January 28, 2015; Retrieved February 23, 2015.

[15] PG&E Corporation Press Release, April 29, 2015,
http://www.pgecorp.com/news/press_releases/Release_Archive2015/150429press_release.shtml

[16] CPUC Order. http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M151/K034/151034091.PDF.

[17] 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. - See more at: http://www.martenlaw.com/newsletter/20141008-pge-fine-san-bruno-explosion

[18] 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 - See more at: http://www.martenlaw.com/newsletter/20141008-pge-fine-san-bruno-explosion

[19] 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. - See more at: http://www.martenlaw.com/newsletter/20141008-pge-fine-san-bruno-explosion

[20] Id.

[21] 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 - See more at: http://www.martenlaw.com/newsletter/20141008-pge-fine-san-bruno-explosion

[22] http://www.wsj.com/articles/california-fines-pg-e-1-6-billion-for-deadly-gas-explosion-1428604317, April 9, 2015. Wall Street Journal, April 9, 2015, retrieved April 9, 2015 http://www.wsj.com/articles/california-fines-pg-e-1-6-billion-for-deadly-gas-explosion-1428604317.

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