PG&E's San Bruno fine: huge, but will it stick?

Pacific Gas and Electric got hit with a record $1.4 billion fine from the California Public Utilities Commission. But Wall Street thinks the final penalty will be smaller.

An administrative court this week dealt a big blow to Pacific Gas and Electric (PG&E), recommending that the utility pay $1.4 billion in fines, on top of earlier state and federal assessments, for a 2010 natural gas pipeline explosion in San Bruno, Calif.

If it holds, the $1.4 billion sum would be staggering. It's:

• not only a record fine for the California Public Utilities Commission but also nearly 40 times the CPUC's previous record in a safety-related case;
• more than all that PG&E earned last year, even before accounting for charges stemming from the explosion;
• intended, in the words of one administrative law judge who ruled in the case, to “send a strong message” to pipeline operators everywhere to comply with state and federal pipeline safety rules “or face severe consequences.”

Nevertheless, after the proposed fine was announced Sept. 2, PG&E's stock went up. Can civil fines against energy companies – even large fines – really make them operate more safely? Or are fines considered part of the cost of doing business?

"The fine is huge; it is not the 'cost of doing business,' " says Bob Bellemare, chief operating officer of chief consulting firm Mykrobel in New Mexico, who is not involved in the case. But "the stock market is waiting to see the outcome of an appeal and the market thinks this won't stick. [The fine] is meant to force a settlement. It is hard to believe that a $1.4 billion fine will make it through the legal process."

PG&E filed paperwork on Sept. 2 with the Securities and Exchange Commission to appeal the fine to the full public utility commission within 30 days. The CPUC is set to rule in early October. In that document, the utility said that its total out-of-pocket expense would be $4.75 billion, which includes not only the fines but also all the money it has spent and plans to spend upgrading its pipeline network.

Although the utility is pushing to reduce the fine, it concedes it's at fault. The pipeline explosion and subsequent fire caused eight fatalities and destroyed 38 homes. The National Transportation Safety Board assigned much of the blame for that blast to PG&E. It had said that the utility had no methods in place to detect structural weaknesses in its pipeline as well as the fact that it had no shut-off valves that would have limited the explosion’s severity.

The San Francisco-based utility has been cited for nearly 3,800 violations of state and federal natural gas pipeline laws. Separately this spring, federal prosecutors indicted PG&E on 27 criminal violations of the Natural Gas Pipeline Safety Act and one count of obstructing justice. Of the $1.4 million in fines, $400 million must be allocated to better pipeline safeguards and can't be passed through to consumers through rate hikes.

“There is no question that this is an extraordinarily large fine,” says Jane Barrett, professor of law and director of the Environmental Law Clinic at the University of Maryland law school, in an interview. “The judges clearly believed that the fine was not extreme given PG&E’s conduct.”

Fines are typically assessed in the context of one’s ability to pay, explains Ms. Barrett, who has no personal involvement with the PG&E case. The objective is to bring it to a level where it would be significant and where it would both punish the act and it would deter future ones.

Courts and agencies consider mitigating factors, Barrett adds. Companies, for instance, can have gold-plated compliance programs that still run afoul of the law. In the case of natural gas pipelines, authorities are tasked with determining whether the company genuinely tried to follow industry standards or whether they neglected their duties.

“You want regulators or law enforcement to segregate those who walk the walk from those who just give lip service,” says Barrett. “Based on the judge’s decision, I would infer that there was significant noncompliance and violations by PG&E that were egregious.”

PG&E has been at the forefront of “greening” its operations – a move that has created goodwill in the communities where it operates. It says that the emissions rate associated with the electricity that it delivers to its customers is 60 percent less the average utility in the country. To that end, it is involved in not just wind and solar power but also tidal and geothermal energy.

Barrett, who says that charging a “faceless corporation” is much less effective than “charging high-level employees,” goes on to say that criminal penalties have a more profound affect than mere civil fines. When faced with a barrage of both civil and criminal complaints, it is best to “work out a global settlement, although if not successful, PG&E will have to address each matter on its own.”