Our View: PG&E’s fines were justified; rate increases were not

09/03/2014 6:28 PM

09/03/2014 6:28 PM

The judges appointed by the California Public Utilities Commission ruled that PG&E must pay a record $1.4 billion in fines for the horrific natural gas explosion that killed eight people and destroyed a San Bruno neighborhood four years ago.

Combined with the $635 million PG&E already has paid, the overall amount approaches the $2.25 billion the city of San Bruno and other harsh critics of PG&E had sought. For a company that made $814 million in profit on revenues of $15.6 billion last year, the fines are painful but certainly not excessive.

Still, it’s not nearly as bad as it sounds for the company. Just three weeks ago, the CPUC approved rate increases totaling $460 million this year. Over three years, it will receive $2.37 billion in rate increases. Ratepayers will see their bills go up roughly $7.50 per month, and they could go higher if a separate rate increase for natural gas is also approved.

Two years ago, perhaps anticipating that its culpability would result in these record-setting fines, PG&E requested rate increases totaling $4.8 billion over three years, starting in 2015. Those increases were to cover such things as improved pipeline safety, but also additional money for retiring executives, a short-term incentive program for employees and a rewards and recognition program. We find spending any additional money on bonuses for PG&E executives repugnant. It was, after all, PG&E’s executives who allowed the pipelines to fall into disrepair and who left the company open to pending federal criminal charges.

Anyone who had responsibility for making executive-level decisions in the time frame leading up to San Bruno disaster in 2010 should not be eligible for any incentives or retirement bonuses.

While the fines are larger than many anticipated, the reaction from Wall Street was more telling. PG&E’s stock price rose after the decision was issued Tuesday, an indication that bankers and stock traders feared the fines might have been worse. Perhaps they should have been.

The decision is actually four separate decisions running 239 pages, 283 pages, 51 pages and 167 pages, plus attachments, produced by administrative law judges Mark S. Wetzell and Amy Yip-Kikugawa. They focus on PG&E failures to maintain records, properly classify the magnitude of danger related to pipelines and the explosion itself. The fourth decision sets forth the justification for the fines.

“This amount serves to put all gas pipeline operators on notice that there is an absolute need to maintain and operate their pipeline systems in compliance with all federal and state safety requirements, and that failure to do so will result in a fine that is not simply a “cost of doing business,” the decision says.

The judges detailed shameful business decisions leading up to the explosion, including one in 2005 in which the company’s top executives presented the notion of “transformation,” intended in part to reduce operating costs. Safety suffered.

The company decreased investments in gas transmission infrastructure from $250 million 2009 to $200 million in 2010.

The company also issued annual dividends to shareholders of between $476 million and $624 million from 2005 to 2009, and paid bonuses to employees of $56 million in 2010.

The San Bruno explosion destroyed 38 homes and carved a 72-foot crater in the Crestmoor neighborhood.

“The Crestmoor neighborhood was effectively wiped off the map,” one of the judges wrote.

PG&E committed 3,708 separate violations. Many of them went on for as long as 50 years.

Pacific Gas and Electric Co. must pay $950 million in a fine to the state of California’s general fund and $400 million for pipeline improvements, plus $50 million in other payments. PG&E also must pay the litigation costs of the city of San Bruno and consumer advocates who intervened, which will run into the millions.

Even this long after the 2010 explosion, the proceeding is not over. Public Utilities Commission members will review the decision and affirm or alter it. But the outline is in place. The blame and burden are squarely on PG&E, rightly so.

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