If it wins final approval, the eye-popping $2.25 billion penalty that the California Public Utility Commission's Safety and Enforcement Division has recommended against Pacific Gas and Electric Co. will be the largest ever imposed against a utility in the United States.
PG&E officials predictably complained that it is excessive. The penalty is very large, but given the egregious violations alleged and depending on how it is finally structured, it is not excessive.
The penalty is meant to punish the utility for safety violations that resulted in a 2010 gas pipeline explosion in the city of San Bruno. The explosion and fire incinerated eight people and destroyed 37 homes.
The commission's safety division investigators concluded that the accident was entirely "foreseeable and preventable," especially after a similar explosion in Rancho Cordova two years earlier killed a man and destroyed five homes. PG&E's failure to detect and prevent the San Bruno explosion, investigators rightly said, was "morally and ethically reprehensible."
And, as large as it is, the recommended penalty is only a fraction of the tens of billions of dollars that legally could be assessed against the utility for hundreds of serious safety violations, some of which lasted more than five decades.
Brig. Gen. Jack Hagan, chief of the CPUC's safety division, said a penalty that large would have been more than the utility's net worth and would have deprived PG&E of the funds required to make urgently needed safety improvements. The $2.25 billion recommended penalty has been carefully calculated to keep PG&E in business while sending a message to the utility's executives and to other regulated entities that cutting costs by neglecting safety will not pay.
PG&E officials disagree. They say the size of the recommended fine, 22 times larger than any fine ever imposed against a utility in the country, potentially puts PG&E's credit rating at risk. That will make it more expensive to finance needed capital investments, higher costs that would eventually be passed on to ratepayers.
But that won't happen if PG&E is given credit for approximately $1 billion in safety fixes it already has made at shareholder expense and if all of the money assessed is used to pay for additional pipeline replacement and upgrades.
A complicated recommendation by ratepayer advocates that would require PG&E to pay a portion of the fine into the state's general fund makes little sense. A payment to the state would be intended to offset any tax benefit PG&E would receive for writing off its safety investments as a business expense. But safety investments are a legitimate business expense.
Moreover, while PG&E is most responsible for the San Bruno tragedy, the California Public Utility Commission is hardly blameless. PG&E neglected the safety of its pipelines for decades, but do-nothing regulators at the CPUC let it happen. The utility faces a record fine, but who holds regulators accountable? The state doesn't deserve a tax windfall for its inaction.
The five CPUC commissioners are expected to make a final decision on PG&E's penalty late this summer. They would be wise to carefully consider the counsel of their revamped and re-energized safety division.