Pacific Gas and Electric Co. suggested to managers before the San Bruno pipeline explosion that downgrading more than 2,300 natural-gas leaks - and potentially not fixing them - would save the company nearly $5 million, according to an internal document obtained by The Chronicle.

A March 2008 summary of potentially serious leaks in PG&E's distribution system in Northern and Central California, part of a leak database for engineers and managers of the company's regional divisions, detailed how costs could be avoided by downgrading leaks to a level where they only had to be monitored.

PG&E classifies pipeline leaks in three categories, with Grade 1 being the most serious and requiring immediate action, and Grade 3 needing only monitoring to ensure a problem does not worsen. The leaks dealt with in the monthly accounting were Grade 2 and Grade 2-plus, which are supposed to be repaired within three to 18 months, depending on their severity.

The 2008 document said downgrading 2,304 of PG&E's Grade 2 leaks to Grade 3 would save almost $4.9 million in repair costs, about $2,100 per leak. Nowhere does the document actually instruct managers to reclassify leaks, but it refers to the 2,304 total under the heading of "excessive leaks scheduled for repair."

Message clear, analyst says

The PG&E gas-system mapper whose protest led the company to rescind the tally of "potential avoided costs" wrote in April 2008 that such reports "had existed for years" and suggested that the message was clear: Downgrade leaks rather than fix them.

Combined with a bonus system for supervisors who kept their budgets in line, the policy was "a win/win for the managers but not for the actual leak survey process," wrote the gas-system mapper, Dave Newkirk.

The bonus system rewarded supervisors whose crews found fewer leaks and kept repair costs down, The Chronicle reported in December. PG&E scrapped it in 2008 after three company whistle-blowers complained to top utility officials and the board of directors that PG&E was encouraging supervisors to overlook possible safety threats.

A subsequent audit found that virtually all of PG&E's leak surveys were unreliable, and state regulators forced the company to bring in outside contractors to resurvey its entire system.

The company has said it did not intend to have executives automatically downgrade or disregard risks.

"There was never a directive to downgrade leaks, merely a request to observe the trends, percentages," said PG&E spokesman David Eisenhauer.

Nonetheless, he said, when "senior management became aware of this report," company officials suspended it "because of concern that local supervision might assume that it was appropriate to use the report to downgrade leaks without proper review and field investigation."

The distribution leaks classified as Grade 2 in the 2008 document were distributed across PG&E's geographic divisions, but it is impossible to tell exactly where they were located.

Leak-caused accidents

The transmission pipeline that exploded in September 2010 in San Bruno, killing eight people and destroying 38 homes, failed at a poorly constructed weld. Although there is no evidence there was a leak at the site of the blast, such problems have caused disastrous accidents elsewhere.

A shoddy repair of a leak in a distribution pipe led to a fatal explosion in 2008 at a home in Rancho Cordova (Sacramento County), and Grade 2 leaks were found months before the August 2011 rupture of a distribution line that blew up an unoccupied Cupertino condominium.

Newkirk sent his April 2008 protest about the estimated savings of downgrading leaks to internal auditors, and it was then forwarded to Bob Howard, a senior gas-system official no longer with the company. Howard did not return calls seeking comment.

Newkirk wrote that "this type of report and its perceived message that it is OK to downgrade leaks, bolstered by reduced maintenance budgets," has helped to "foster our current situation."

Newkirk, who still works for the company, declined to comment about his communication with managers or the memo.

Howard wrote in an e-mail reply to Newkirk and gas system officials that he and other managers were not aware of the monthly cost reduction tally. He told two underlings, gas integrity management officials Bob Fassett and Glen Carter, neither of whom still works at PG&E's gas division, that the report had started "some time ago" and must be halted immediately.

Thomas Robinson, a former PG&E senior gas engineer, said he devised the excess leak report in 2004. He relied on an "intuitive" formula that assumed a certain percentage of Grade 2 leaks were wrongly classified, he said.

Robinson, who left the company after 32 years in 2009, said his report "was not an edict to downgrade. It was along the lines of getting people to revisit their leak grading philosophy."

'It can be a real problem'

Before downgrading a leak, Robinson said, managers typically "would interview the leak graders or have them physically go out again and grade them again with a critical eye."

Some leaks were downgraded, Robinson said, but he doesn't know how many.

As for the potential cost savings calculated in the report, Robinson said, "money being saved is the bell ringer that gets people to pay attention."

Richard Kuprewicz, a pipeline safety consultant who is advising a ratepayer advocacy group, The Utility Reform Network, said the linkage of potential cost savings to downgrading of pipeline leaks was disturbing.

"It can become a real problem," Kuprewicz said. "The culture becomes focused just on cost savings without understanding the ramifications or how reckless this course can be."