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

PG&E is in the cross hairs of the CPUC safety staff, consumers and the city of San Bruno, CA, where almost three years ago a 30-inch diameter pipeline ruptured, killing eight people, injuring scores more (see NGI, Sept. 20, 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 have 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 NGI, June 10).

After months of machinations and public harangues on all sides, a CPUC administrative law judge is now assessing the combined three penalty proceedings. 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 system the past three years is disallowed for coverage in retail utility rates. In addition, the continuing drama has included an internal dispute among CPUC lawyers (see NGI, July 1). The CPUC’s Consumer Safety and Enforcement Division also amended its proposal to include a $300 million payment to the state’s General Fund (see NGI, July 22).

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 NGI, July 29).

Separately last Wednesday CPUC chief regulatory judge Karen Clopton and Judge 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. If PG&E eventually filed for Chapter 11 bankruptcy protection, it would be the second time in 12 years it has done so. In the midst of California 2000-2001 wholesale energy market meltdown, the combination utility filed in early 2001 and emerged reorganized three years later.