PG&E Should Pay $1.4 Billion for San Bruno Blast, Judges Say

Sep 02, 2014 4:36 pm ET

(Updates with comment from analyst in fourth paragraph.)

Sept. 2 (Bloomberg) -- PG&E Corp., owner of California’s largest utility, should pay $1.4 billion for a deadly 2010 natural gas pipeline explosion in San Bruno, in what may be the largest safety-related penalty ever levied by the state’s regulators.

The penalty consists of $950 million that would be paid to the state and $450 million in charges and remedies that shareholders would have to pay, according to the proposed decision from two state regulatory judges. The California Public Utilities Commission’s five commissioners must still approve the proposal and may offer alternatives, according to an e-mailed statement today.

San Bruno city officials and commission staff had pushed for a larger fine, while the company warned against penalties that might push it to the brink of bankruptcy. The total penalties would be $2.04 billion when added to a prior ruling that forced the company to swallow $635 million in pipeline modernization costs.

“It might be a little less than some investors had feared but it is obviously a very big number,” Kit Konolige, a New York-based analyst for BGC Partners LP, said today. “It looks like the market is marginally relieved that this doesn’t appear to be any worse than some of the things that have been proposed.”

PG&E rose 1.7 percent to $47.29 at the close in New York.

“We are accountable and fully accept that a penalty is appropriate,” PG&E said in an e-mailed statement from Greg Snapper, a spokesman. “We have respectfully asked that the commission ensure that the penalty is reasonable and proportionate.”

Staff Recommendation

The proposal is less than a staff recommendation that San Francisco-based PG&E pay $2.25 billion in penalties for violations that led to the explosion that killed eight people and destroyed 38 homes.

PG&E has called that amount “excessive” and Fitch Ratings Ltd. said a large penalty, on top of costs related to the incident that have already been absorbed by PG&E, would signal a “deterioration of the broader regulatory compact in California.”

Since the incident, the company replaced its CEO, froze its dividend and separated its gas business from electric utility operations.

The city of San Bruno had proposed a $2.45 billion penalty, without credit for money the company has spent upgrading its statement.

San Bruno City Manager Connie Jackson said the city is reviewing the penalty proposals.

“The decision doesn’t go nearly as far as the city advocated for safety improvements,” Jackson said today in a telephone interview.

Federal Charges

PG&E also faces as much as $1.13 billion in fines if the utility is convicted in a federal criminal case alleging 27 counts of violations of federal pipeline regulations and obstructing an investigation by the National Transportation Safety Board. PG&E pleaded not guilty to the federal charges and has said its employees didn’t intentionally violate the pipeline safety law.

Federal and state investigations determined PG&E installed faulty pipe, kept poor records and performed inadequate maintenance on the pipeline.

Today’s decision found that PG&E committed 3,798 violations of state and federal laws, rules, standards or regulations.

‘This has been a major milestone that investors have been waiting for,’’ Paul Patterson, a New York-based analyst for Glenrock Associates LLC, said in a phone interview before the decision was released. “It could serve as a signal as to what the commission might do, but there is no guarantee they won’t ultimately go in a different direction.”