PG&E Corp. CEO Anthony Earley in a Wall Street interview Wednesday held out the possibility of a Chapter 11 bankruptcy by the company's giant San Francisco-based combination utility, Pacific Gas and Electric Co. (PG&E), if a proposed $2.25 billion penalty by state regulatory safety staff is upheld by the five-member California Public Utilities Commission (CPUC).

PG&E is in the cross hairs of the CPUC safety staff, consumers and the city of San Bruno, where almost three years ago a 30-inch diameter PG&E gas transmission pipeline ruptured with a resulting explosion that killed eight people, injured scores more and devastated a neighborhood about 10 miles south of San Francisco (see Daily GPISept. 13, 2010).

Earley told Bloomberg News that how the CPUC ultimately handles the penalty "will determine whether the company will continue to make the progress we made or will end up being a company that is just struggling along because we are financially hobbled."

City officials in San Bruno immediately accused Earley of being misleading about the degree of the potential impact from the proposed penalty. "Mr. Earley's comments are inconsistent with the company's own sworn testimony made before the CPUC on March 5 this year," said San Bruno Mayor Jim Ruane, a vocal critic of the utility (see Daily GPIJune 7).

After months of machinations and public harangues on all sides, a CPUC administrative law judge is now assessing the combined three penalty proceedings involving PG&E and the explosion. Although the state public figure is $2.25 billion, PG&E has argued that it is facing more than $4 billion in penalties because most of the more than $2 billion it has spent for upgrading its pipeline system the past three years is also being disallowed for coverage in retail utility rates.

In addition, the continuing drama has included an internal dispute among CPUC lawyers that recently became public regarding the proposed $2.25 billion penalty (see Daily GPIJune 28). Then, more recently, the CPUC's Consumer Safety and Enforcement Division amended its proposal to include a $300 million payment by PG&E to the state's General Fund (see Daily GPIJuly 18July 17).

In the midst of this saga, two of the major credit rating agencies, Moody's Investors Services and Standard and Poor's Ratings Services (S&P), said they would have to review the California regulatory system and PG&E ratings if the full penalty is assessed, while the CPUC has faced increased scrutiny on its response to stepping up natural gas pipeline safety oversight by the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (see Daily GPIJuly 26).

Separately on Wednesday, two CPUC regulatory judges -- Karen Clopton, the chief judge; and Maribeth Bushey -- ordered PG&E to show cause why it should not be sanctioned for a July regulatory filing they allege appears to cover up or minimize some serious errors of facts related to the safety level of its pipeline system. A show-cause hearing is set for Sept. 6.

The dispute involves authorized maximum allowable operating pressures (MAOP) for some of PG&E transmission pipeline segments, but overall the CPUC determined those lines did not present a public safety problem as long as they are operated at a lower MAOP. If PG&E is unable to satisfy the judges' concerns, the utility faces an additional $50,000 fine for each alleged violation.

A PG&E spokesperson said the issues raised by the CPUC judges are procedural and do not relate to safety. Closer to the show-cause hearing date next month, the utility will give a more detailed defense of its filings to the regulatory body.

Following the bankruptcy report, a CPUC spokesperson told local news media on Wednesday that the matter is now in the hands of the regulatory judge to make a recommendation to the five commission members, and that action is expected before the end of the year.

If PG&E eventually filed for Chapter 11 bankruptcy protection, it would be the second time in 12 years it has done so (see Daily GPIApril 9, 2001). In the midst of California 2000-2001 wholesale energy market meltdown, the combination utility filed in early 2001 and emerged reorganized three years later.

 In the meantime, on the San Bruno city website on Wednesday a notice was posted for a "Three-Year Remembrance Event" in the neighborhood that was ripped apart by the pipeline blast. It is billed as a "remembrance and a celebration for the families who have completed reconstruction and are returning home."