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June 22, 2013
Editorial: PG&E shareholders need to pay fair share of gas safety upgrades

San_Bruno_Pipeline_Explosion.jpg

(June 22 -- By the Editorial Board)

PG&E's role in the San Bruno gas pipeline explosion deserves the strongest possible penalty. Eight people died in the 2010 explosion and fire; 58 people were injured and 38 homes were destroyed.

Subsequent investigations have found that the utility failed to spend ratepayer funds on tests and replacement of pipelines that put the public at risk. All the time, corporate shareholders - including PG&E executives - profited from the company's failure to invest in pipeline safety.

Although PG&E says it accepts responsibility for the blast, it has refused to acknowledge that the explosion resulted from any violation on its part.

And though company executives say a penalty from the California Public Utilities Commission is appropriate, they are protesting the $2.25 billion penalty the PUC staff has proposed.

Last month, The Bee's editorial board endorsed that proposed penalty, calling it large "but not excessive." Since then, we've talked with leading stakeholders on the issue, including PG&E President Christopher Johns, San Bruno Mayor Jim Ruane and Jack Hagan, the director of the PUC's Consumer Protection and Safety Division.

On reflection, we no longer support the penalty that Hagan and his PUC staff have proposed. We think it should be stronger, and should ensure that shareholders - not ratepayers - pay a steep price for the safety upgrades the company should have invested in previously.

One big problem is that the PUC's proposed penalty is tax-deductible. That means the real after-tax impact to PG&E would be $1.3 billion, and even that is misleading.

The PUC proposal allows PG&E to get credit for safety improvements since 2010, even though some of those upgrades were ordered by the National Transportation Safety Board and other regulators. That could further reduce the PUC's penalty by as much as $1 billion.

Earlier this month, an internal furor about the PUC penalty broke into the open. Four commission lawyers who had been working on the penalty case switched to other duties because of how the case was being handled.

One of these was Robert Cagen, who issued this statement to KQED: "I personally could not continue working on the San Bruno penalty briefs because I concluded that the (recommendations) were unlawful and contrary to what our team had worked to accomplish in the last two-and-a-half years."

As this proposed penalty is being debated, PG&E is seeking a rate increase that would boost an average household's bill by $12 per month. PG&E says the rate increase would finance a number of upgrades, including "increasing by a factor of six the miles of gas pipe that have traditionally been replaced annually in order to improve system safety."

The net effect of the rate increase and PUC penalty? The company's shareholders will mostly escape liability, shifting costs for safety upgrades to ratepayers.

No one wants to see PG&E penalized so severely that it is forced back into bankruptcy. Yet this company is hardly in dire straits - quite the opposite. The utility in 2012 had operating revenue of more than $15 billion and earnings of $1.3 billion. Unlike other companies facing liabilities over disasters - such as BP following the Gulf of Mexico oil spill - PG&E's stock price has barely dropped since 2010, falling from roughly $48 to $44 per share.

When it makes a final decision later this summer, the PUC should consider imposing a fine on PG&E on top of its proposed penalty, and limiting the credit the utility could receive for safety upgrades since 2010.

That combination would ensure that shareholders share in the costs of making California safer. It also would send a strong message to utilities and other industries that reckless disregard for public safety will result in punitive action from the state of California.

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