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PG&E Pipe Penalty Decision Expected 1Q2014

Noting that the company is operating in a politically charged environment, PG&E Corp. CEO Tony Earley predicted Wednesday that pending multi-billion-dollar natural gas pipeline fines and penalty cases should be decided by state regulators in the first quarter of 2014. If proposed penalties exceeding $2 billion are imposed, Pacific Gas and Electric Co. (PG&E) will appeal in either state or federal courts.

Earley made the projections during a 3Q2013 earnings conference call in which he reported decreased net income of $161 million (36 cents/share), compared with $361 million (84 cents) for the same period in 2012. During the latest quarter, PG&E increased its accrual for third-party liability claims by $110 million in wrapping up most litigation pending from the September 2010 gas transmission pipeline rupture and explosion in San Bruno, CA.

The utility also took a $196 million pre-tax charge against 3Q2013 earnings for disallowed capital expenditures related to its ongoing pipeline safety enhancement program (PSEP) that is an offshoot by the California Public Utilities Commission (CPUC) safety staff's proposed $2.25 billion penalties and fines (see Daily GPI, June 7). To date, PG&E said shareholders have covered the tab for more than $2.4 billion in pipeline safety-related work since San Bruno.

A proposed decision by a CPUC administrative law judge is expected by mid-December, PG&E executives confirmed during the earnings conference call.

Earley and other executives reiterated their claims that the level of proposed penalties in the San Bruno case is unprecedented. They contend that the near-$100 million in penalties in a decade-old El Paso Pipeline case stemming from a New Mexico gas explosion incident is the largest ever assessed. In that case, El Paso also was ordered to pay a $15.5 million civil penalty to resolve alleged violations (see Daily GPI, June 30, 2007).

"We do have options to appeal the [pending, proposed CPUC] penalty," Earley said. "There are provisions under California law that prohibit excessive fines and penalties, and we think we have some good arguments there if they get out of line with precedents across the country and what is reasonable.

"If you look at all the past cases, the numbers being talked about [for PG&E] is quarters of magnitude beyond anything that has ever been assessed. And when you think about it, assessing a penalty of that size doesn't accomplish anything; we've made major changes here and since San Bruno, we immediately started to work, doing the right thing."

PG&E officials have been arguing publicly that the true cost of the $2.25 billion proposal is more than $4 billion because the penalty does not take into account more than $2 billion already spent on enhanced pipe safety work over the past three years for which there has been no recovery in utility rates.

Analysts questioned PG&E’s poor record keeping for a 3.8 transmission pipeline that runs through San Carlos near San Francisco, which CPUC is scrutinizing (see Daily GPI, Oct. 29).

"Everyone needs to recognize that we are working in a very politically charged environment," said PG&E utility President Christopher Johns. "We pressure tested the lateral [Line 147] in 2011 and have done the work to convince us that it is a safe line, but [last year] during routine leak repair work we found some of our records were inaccurate, so we updated those and alerted the CPUC."

PG&E formally filed a notice of the record discrepancy with the CPUC, but once San Carlos local officials became aware of the situation, they declared an emergency and demanded that the pipe be shut down, which it was.

"This is what we want; as we are doing work, we want to constantly challenge and make sure our records are accurate," Johns said. "We're going to continue to look for those kinds of things."

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