PG&E diverted safety money for profit, bonuses Reports: Utility diverted safety funds into profit

Fire crews search through the rubble of homes in San Bruno, Calif. on Friday, Sept. 10, 2010 that were destroyed by a massive natural gas pipeline explosion Thursday night. Fire crews search through the rubble of homes in San Bruno, Calif. on Friday, Sept. 10, 2010 that were destroyed by a massive natural gas pipeline explosion Thursday night. Photo: Paul Chinn, The Chronicle Photo: Paul Chinn, The Chronicle Image 1 of / 3 Caption Close PG&E diverted safety money for profit, bonuses 1 / 3 Back to Gallery

Pacific Gas and Electric Co. diverted more than $100 million in gas safety and operations money collected from customers over a 15-year period and spent it for other purposes, including profit for stockholders and bonuses for executives, according to a pair of state-ordered reports released Thursday.

An independent audit and a staff report issued by the California Public Utilities Commission depicted a poorly led company well-heeled in its gas operations and more concerned with profit than safety.

The documents link a deficient PG&E safety culture - with its "focus on financial performance" - to the pipeline explosion in San Bruno on Sept. 9, 2010, that killed eight people and destroyed 38 homes.

The "low priority" the company gave to pipeline safety during the three years leading up to the San Bruno blast was "well outside industry practice - even during times of corporate austerity programs," said the audit by Overland Consulting of Leawood, Kan.

Making money

But PG&E wasn't hurting for cash, according to the audit. From 1999 to 2010, the company collected $430 million more from its gas-transmission and -storage operations than the revenue authorized by the California Public Utilities Commission, which sets the rates the company can charge its customers.

"PG&E chose to use the surplus revenues for general corporate purposes" rather than improved gas safety, the Overland audit said.

The audit was unable to trace exactly how PG&E spent the diverted money. But in a separate report on the San Bruno explosion released Thursday, the utilities commission staff noted that in the three years leading up to the San Bruno explosion, the company spent $56 million annually on an incentive plan for executives and "non-employee directors," including stock awards, performance shares and deferred compensation.

"A cursory review reveals that a significant portion, in the millions, has been awarded to the CEO," the commission staff report said in a reference to former PG&E head Peter Darbee, who retired last year.

Cutting corners

By cutting back on pipeline-replacement projects and maintenance, laying off workers, using cheaper but less effective inspection techniques and trimming other pipeline costs, PG&E saved upward of 6 percent of the money designated for pipeline safety, maintenance and operations programs, the Overland audit said.

Meanwhile, on the revenue side, transmission pipeline operations were "very profitable" for PG&E since March 1998, the audit said.

Assemblyman Jerry Hill, D-San Mateo, whose district includes San Bruno, called the company's diversion of customers' money "criminal behavior."

"When you divert funds intended for maintenance and safety to profits, there is nothing clearer," Hill said. "It is criminal."

Hill noted that the San Mateo County district attorney, the state attorney general and the U.S. attorney's office are conducting a joint investigation of the San Bruno disaster. He said he would talk to them about incorporating the Overland audit in their probe.

However, it is unclear whether PG&E broke any criminal statutes governing its behavior at the time, unless there was fraud.

The utilities commission staff report said that under state law and agency regulations, PG&E could spend less than what it was authorized to spend "because the commission is generally precluded from asking for the money back if the company overestimated its revenue requirement."

The Legislature passed a law last year, sponsored by Hill and others, that requires a utility to account for any under-spending and explain where every dollar went.

'Truly unconscionable'

"It is truly unconscionable that PG&E was allowed by the CPUC to steal ratepayer monies that should have been spent on safety and, instead, was put in the pockets of PG&E shareholders," said Rep. Jackie Speier, D-Hillsborough, who represents the devastated San Bruno neighborhood. "All these monies identified in the audit should be returned to ratepayers, presumably as a credit against the work that PG&E should have done, but didn't."

PG&E officials declined to comment on specifics of the two reports.

"Our No. 1 priority is to make our system the safest in the nation," said PG&E President Chris Johns.

No new money

The utilities commission issued the documents as part of a process that could lead to millions of dollars in fines. In addition, the commission recommended changes in how PG&E spends money on gas-system maintenance and pipeline replacement.

Before PG&E "seeks additional ratepayer funds," the commission said, it should:

-- Allocate $95.4 million that the company under-spent on capital expenditures since 1997 - including pipeline replacement - for those purposes.

-- Use the $430 million in additional revenue it collected since 1999 "to fund future transmission and storage operations."

-- Use $39.3 million that it collected but failed to spend for pipeline-transmission operations and maintenance since 1997 for those purposes.

Those recommendations put the commission and PG&E on a collision course.

In August, PG&E outlined a plan to modernize its gas-transmission lines in response to the San Bruno disaster. Included was money to replace 185 miles of pipe segments in PG&E's 5,700-mile gas-transmission system and to upgrade 200 miles of other segments unable to accommodate a modern inspection tool known as a "smart pig."

The company pegged the price at $2.2 billion and said 90 percent of that would be paid by gas customers through rate increases, with the rest covered by company investors.

Meeting new rules?

On Wednesday, PG&E issued a statement promising that it won't dun customers for any expense required to upgrade its gas system to meet existing federal and state standards.

"That said, let's be just as clear about what PG&E is proposing," the company added. "The vast majority of the pipeline safety work going forward is not about correcting issues from the past. It's about meeting entirely new standards being established by the California Public Utilities Commission."

PG&E estimated that the average residential customer will pay $1.93 per month more through 2014 to finance the work.

A Chronicle investigation published in March revealed that in 2000, PG&E sharply curtailed a program started in the mid-1980s to replace hundreds of miles of aging gas-transmission pipe. Records obtained by The Chronicle showed the decision was made by PG&E and approved by the utilities commission's safety chief.

The Overland audit noted that PG&E's replacement of transmission pipelines for safety purposes all but ceased in 2000.

Complete coverage

To see Chronicle reports on pipeline safety since the 2010 explosion in San Bruno, video of the disaster and government investigative documents, go to www.sfgate.com/san-bruno-fire.