Pacific Gas and Electric Co. (PG&E) faces longer-term costs in excess of $1 billion related to its fatal natural gas transmission pipeline rupture and explosion last year in San Bruno, CA, the combination utility’s new CEO Anthony Earley told reporters Monday.

With new pipeline safety regulations moving through Congress, two proceedings continuing at the California Public Utilities Commission (CPUC) and the San Francisco-based utility’s own proposed $2.2 billion pipeline enhancement program before the CPUC, Earley said it was impossible at this point to identify all the direct and indirect costs resulting from the Sept. 9, 2010 explosion, but PG&E at some point will have to sell added equity to pay for the more than $1 billion in charges that cannot covered by higher utility rates.

A former CEO at Detroit-based DTE Energy, Earley marked his first 90 days on the job at PG&E by holding a news briefing and conference call to provide his observations of where the giant combination utility stands and where it has to go to restore public trust. He admitted that the utility’s natural gas operations were “under-resourced” compared to the electric side of the business in the past and said that reestablishing the gas system is going to “come at a cost to our bottom line.”

Everyone agrees on one thing related to PG&E and that is it faces “a tremendous number of challenges,” said Earley, noting that he has spent a lot of his time the first three months at the utility talking with employees, regulators, customers, elected officials and community leaders. “Everyone understands that the confidence in the company is at an unacceptably low level,” he said.

“Traditionally when you combine gas and electric companies, the electric side dominates the business,” said Earley citing his 25-plus years in the industry, mostly with combination utilities. “Electric operations tend to be larger, with more resources and more visibility, and gas businesses get under-resourced, and anyone in this business will tell you that has been the experience. Based on the NTSB [National Transportation Safety Board] report [on San Bruno], it is absolutely clear that is what happened at this company.”

As a result, Earley repeatedly said PG&E is nowhere near where it needs to be, and the cost of getting much better is going to be high next year through 2013. He said that given the depth to which the utility has fallen, PG&E can’t just be average in the years ahead; it will need to be extraordinary.

Earley said PG&E supports the current proposed new pipeline safety bill being debated in Congress. New requirements such as automatic shutoff valves will be proposed for new retail rate support, but other upgrades tied to shortcomings from the past will not be covered in rates. So far, PG&E has identified nearly $1 billion in costs the company shareholders will pay for over the next couple of years.

He also expects to have adequate gas supplies this winter despite the transmission pipeline pressure reductions that have been in effect. PG&E has asked the CPUC to restore the pressures to their historic levels where the lines have been successfully hydrostatically tested, and Earley expressed confidence that the utility eventually will get the authorization it needs.

In terms of longer-term financial impacts, Earley said there will be “fines levied and they will be large fines,” but he has no idea now how large that will be. A San Francisco-based analyst for Standard & Poor’s Ratings Services, which lowered PG&E’s credit rating last Thursday, told NGI that a ballpark range the rating agency is using is $300-500 million in ultimate penalties. Those amounts may not be known until late next year or early in 2013, the analyst said.

“We also know that the CPUC realizes that the utility has to have sufficient financial resources in order to be able to invest in new infrastructure [to upgrade safety],” he said. “Obviously, a balance has to take place.”

In response to a question about any contingency funds the company has designated to pay the eventual fines, Earley said he doesn’t know the number, but he knows the utility will have to go raise it in the form of new shares sold by the company. “We are going to have to go to the marketplace [and] sell equity in order to raise money while maintaining the debt-equity ratios that California regulators require. There is no way to estimate what that number is right now.”

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