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PG&E Should Pay $2.25 Billion for California Blast, Agency Says

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May 6 (Bloomberg) -- PG&E Corp. should pay $2.25 billion for violating safety laws prior to a 2010 natural gas pipeline explosion in California that killed eight people, the staff of the California Public Utilities Commission said.

The penalty would include money already spent on safety work upgrades as well as additional investments and should be paid for by shareholders, the CPUC’s Safety and Enforcement Decision said today in a statement. It would be the largest assessed by a state regulatory agency, according to the CPUC. The staff did not recommend that PG&E pay a fine to the state.

“This is a very long and reprehensible violation,” Brigadier General Jack Hagan, director of the CPUC’s safety division, said in a telephone interview. “I talked to legislators and the public and determined that this money was better spent by using it on safety instead of the state’s general fund,” Hagan said.

Parties are submitting their recommendations today for fines in a state regulatory probe into a PG&E gas line blast that destroyed 38 homes in San Bruno, a suburb of San Francisco. The commission probably will assess a final penalty later this year, PG&E Chairman and Chief Executive Officer Anthony Earley said during an earnings conference call last week.

The city of San Bruno recommended to the CPUC that PG&E pay the state a $1.25 billion cash fine, San Bruno officials said in a statement today. PG&E and its shareholders also should have to pay another $1 billion in planned pipeline safety work and not be allowed to collect reimbursement for those costs from customers, the city said.

‘Gross Negligence’

“We call on the CPUC to demonstrate that it is a tough regulator by imposing fines and penalties that will send a message that safety is a top priority and that gross negligence and recklessness will not be tolerated,” San Bruno Mayor Jim Ruane said today at a press conference.

Earley called the penalty recommendations “excessive” in an e-mail statement. “I understand the desire to punish PG&E,” Earley said. “However, the penalties proposed by the Commission staff and others 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.”

PG&E, based in San Francisco, fell 1.6 percent to $46.50 at the close in New York.

Enhancing Safety

“PG&E has taken accountability and we fully expect a penalty from the CPUC,” Brittany Chord, a PG&E spokeswoman, said in a telephone interview. “The amount of that penalty is still an open question, but we believe every dollar of any penalty should be directed into work that enhances the safety of the system and benefits PG&E customers.”

PG&E has already spent $1 billion in shareholder funds for pipeline safety work, an amount that will be considered part of the $2.25 billion recommended penalty, Hagan of the safety division said.

PG&E’s shareholders also would have to cover the costs of projects ordered by the CPUC in December before collecting money from customers.

The recommendation is the maximum financial penalty that can be imposed on PG&E shareholders without compromising safety, Hagan said.

Separately, the Utility Reform Network, a consumer advocacy group, is recommending that PG&E pay $1 billion to fix neglected pipelines and $720 million in fines and other penalties, according to an e-mailed statement.

The CPUC’s Division of Ratepayer Advocates said PG&E should pay a $2.5 billion penalty including a $550 million fine and shareholders bearing the costs of required pipeline work, according to a regulatory filing.

Blast Cost

The blast has cost PG&E’s shareholders $1.4 billion in mandated safety work and other expenses, the company said on May 2. It precipitated the retirement of former Chairman and CEO Peter Darbee and forced the state’s largest utility owner to freeze its dividend. PG&E has set aside at least $200 million for fines, according to a May 2 regulatory filing.

An administrative law judge still must rule on the recommended fines and make a proposed decision for penalties. The five-member commission, which may amend that proposal, will then have to vote on the final penalty.

Analysts have estimated the fine will be $477 million, according to a January Wells Fargo & Co. report produced on behalf of PG&E.

To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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