An auditing firm retained by the California Public Utility Commission (CPUC) said it discovered “serious deficiencies” in Pacific Gas and Electric Co.’s (PG&E) natural gas distribution system in 2007 and 2008 that were “pervasive across technical functions and geographic locations.”

In its 367-page report, Kansas-based Overland Consulting said, “Resource constraints [by senior management] were a root cause of the deficiencies.”

The independent audit was prompted by similar reviews of PG&E’s gas distribution system following the September 2010 pipeline explosion in San Bruno, CA, and it is to be included in the combination utility’s ongoing general rate case. The report also is to be part of a CPUC workshop June 12.

PG&E is seeking a $1.25 billion general rate increase effective Jan. 1 and another rate increase of $500 million in 2015 for its natural gas and electricity utility systems. In May 2012, the CPUC’s Safety and Enforcement Division (SED) retained Overland, which had audited PG&E transmission system operations, to review the distribution pipeline system.

Overland’s key findings describe a scenario of under funding and under staffing at PG&E’s gas distribution operations from the 1990s through 2007, when the utility began corrective actions. However, the auditors concluded that those actions brought “mixed” results, per the utility’s own internal reviews.

The audit claims that PG&E operating/maintenance (O&M) expenses from 1999-2007 were actually 13% lower than monies authorized for gas distribution O&M in utility rates. “The underspending averaged $18 million annually during that period,” the report said.

Spending was reversed in 2008 through 2010, which resulted in spending 25% more than ratemaking authorized levels. However, capital expenditures during from 1999 through 2010 were $168 million lower than had been authorized in rates collectively for the period. “Safety related capital expenditures were 13.3% lower than adopted [amounts],” the audit determined.

At the same time, PG&E’s profits during the 2003-2010 period were higher overall than the authorized levels. PG&E earned a return on equity (ROE) of 12.7% annually, compared with a CPUC-authorized ROE of 11.3% for that period, Overland noted.

“The pervasiveness of the deficiencies demonstrates that their ultimate root cause was ineffective or unresponsive executive management,” Overland’s report concluded. “The executives in charge of PG&E’s gas distribution operations placed excessive emphasis on cost containment and inadequate emphasis on work quality and public safety prior to 2008.”

Overland auditors took a swipe at PG&E’s top gas executive, Executive Vice President Nick Stavropoulos, who was hired in 2011, for “management deficiencies.” Stavropoulos helmed a turnaround plan for the gas operations beginning in October 2011. According to Overland, Stavropoulos divided PG&E’s operations into 20 processes, deeming half of them “inadequate,” and nine of the remaining 10 as “threshold,” which the auditors noted was the next designation after “inadequate.’ “The plan concluded that PG&E needed to make ‘wholesale changes’ in its gas operations.”

A PG&E spokesperson said the utility takes the allegations seriously and plans to respond in the upcoming CPUC proceedings, but “disagreements over the company’s past record are no reason to underfund gas safety investments for our customers in the future. The claims made by the new Overland report on PG&E’s past spending on gas distribution — which we dispute — do not bear on our current rate case request” because of three things.

“We have for the past seven years spent more than authorized in our rate cases for gas distribution — in some cases at shareholder expense — making up for claimed under-spending in the more distant past.” Also, since San Bruno, “we’ve taken sweeping action to put public and workforce safety first — including recruitment of a new CEO and other key officers, a top-to-bottom reorganization…” and “have already begun, and will continue, transparently reporting details of our spending in annual budget reports to the CPUC, and in biannual reports on gas safety spending and progress.”

©Copyright 2013Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.