State: Fining PG&E 'does not make sense' State PUC recommends money go into safer pipes, not general fund

San Bruno Mayor Jim Ruane, standing with Vice Mayor Irene O'Connell, believes PG&E should be fined $1.25 billion for the 2010 explosion on top of spending $1 billion to improve its system. San Bruno Mayor Jim Ruane, standing with Vice Mayor Irene O'Connell, believes PG&E should be fined $1.25 billion for the 2010 explosion on top of spending $1 billion to improve its system. Photo: Liz Hafalia, The Chronicle Photo: Liz Hafalia, The Chronicle Image 1 of / 75 Caption Close State: Fining PG&E 'does not make sense' 1 / 75 Back to Gallery

Pacific Gas and Electric Co. shareholders should have to spend $2.25 billion to fix the company's gas pipelines in the wake of the 2010 explosion in San Bruno, but levying a fine against the utility for the dozens of regulatory violations it allegedly committed over decades "does not make sense," a state regulatory agency said Monday.

Any money PG&E spends should go toward making its pipes safer and not be directed into the state's general fund, which is where fines against utilities end up, said Jack Hagan, head of the consumer protection and safety division of the California Public Utilities Commission.

"I am recommending the highest penalty possible against PG&E without compromising safety, and I want every penny of it to go toward making PG&E's system safer," Hagan said.

He said the $2.25 billion - a sum an independent consultant told regulators that PG&E could safely absorb and remain viable - should come from company shareholders, not its customers.

Hagan made his recommendation to two administrative law judges considering how PG&E should be penalized for its actions connected to the September 2010 natural-gas pipeline explosion in San Bruno that killed eight people and destroyed 38 homes.

In a legal filing, Hagan said, "The present case is an extraordinary one where the usual remedy of imposing penalties, which would go to the general fund, does not make sense. PG&E's gas transmission system is broken due to decades of PG&E mismanagement, and it will take billions of dollars and years to bring it up to acceptable safety standards."

The utility has only so much money, and fining it could leave PG&E with nowhere to turn to pay for system improvements but its customers, Hagan said.

The utilities commission staff has alleged that PG&E maintained an unsafe pipeline system, kept incomplete records and mounted an inept emergency response the night of the explosion.

PG&E reacts

In a statement, PG&E's chief executive officer, Tony Earley, said, "I understand the desire to punish PG&E." But he added that the remedies proposed by Hagan and other parties in the case "far exceed anything that I have seen in my 30 years in the industry and fail to appropriately account for the actions taken by the company."

He called for a "more balanced approach."

In contrast to Hagan's suggestion, San Bruno officials asked Monday that PG&E be fined $1.25 billion on top of $1 billion to improve its system. Mayor Jim Ruane said such a fine would show that the utilities commission can be a "tough regulator" and hold PG&E accountable for "gross mismanagement."

The Utility Reform Network, a ratepayer advocacy group, proposed fining PG&E $720 million. The group wants PG&E pay an additional $1 billion for safety fixes, including testing and inspecting pipelines, on top of $500 million that it says the company has already agreed to take from shareholders.

No timetable

The two administrative law judges hearing the case against PG&E will issue their own recommendations on how much the company should be penalized, and the five-member utilities commission will make the final decision. No timetable has been set.

Earley told reporters after a shareholders meeting in San Francisco that a large fine would be "unrealistic," given that it has already spent $1.5 billion of shareholders' money on repairs, victims compensation, legal bills and other costs from the disaster.

"I think the company has already paid a very heavy price," Earley said.

A steep fine, Earley said, would hurt PG&E's ability to raise the funds needed for pipeline work.

The company would pay higher interest rates to borrow money, he said, and would have a harder time attracting investors when it issues stock. PG&E plans to issue up to $1.2 billion in stock this year to help pay for pipeline repairs.

Money not in bank

"I don't have that money sitting in the bank," Earley said. "I've got to go out and raise that money from shareholders who are willing to invest in the company in the future. I don't write them a letter and say, 'Please, shareholders, send me a thousand dollars each.' "

The fines proposed by San Bruno and The Utility Reform Network would not threaten PG&E's stability, Earley said. But by increasing the cost and difficulty of raising capital, it could slow the speed of pipeline repairs and upgrades, he said.

In this year alone, the company plans to replace about 60 miles of pipeline, perform high-pressure water testing on another 200 miles and install 50 automated valves.

"I don't know the number you'd have to get to where the company would be threatened," Earley said. "The thing that would be threatened is, the company could not keep spending the money on safety that we need to spend."