Bloomberg News

PG&E CEO Says Big Blast Fine Would Threaten Financial Viability

February 24, 2012

PG&E Corp. (PCG), owner of California’s largest utility, has told state regulators that a substantial fine for a 2010 gas pipeline blast in San Bruno, California, could threaten the financial viability of the company.

“The company does need to be financially viable after we are finished with all the issues related to San Bruno,” PG&E Chairman and Chief Executive Officer Anthony Earley said yesterday during an interview at the San Francisco bureau of Bloomberg News. Regulators “have acknowledged this,” Earley said.

The California Public Utilities Commission is considering fining PG&E after the commission said in a report last month that the utility broke state and federal laws before the explosion. Federal and state investigators have said that PG&E’s poor management and safety practices led to the blast, which killed eight people and destroyed 38 homes.

PG&E, which is based in San Francisco, has set aside $200 million for potential fines, which is the minimum amount it expects, Earley said. A penalty of $1 billion would be a “challenge” to the utility and “totally out of proportion to any fine that has ever been given for airplane crashes or any disaster,” Earley said. The company would have to sell additional stock to pay for a fine of that sum, he said.

“I understand it is a tragedy, but right now the size of the fine isn’t going to change how we are reacting,” Earley said. “We know we need to change the business and we are doing everything humanly possible to change the business,” he said.

Protecting the Public

The top priority of the state’s utilities regulators is to protect the public, said Terrie Prosper, spokeswoman for the commission, in an e-mailed message.

“Commissioners determine fine amounts in cases before them after careful consideration of the facts of a case,” Prosper said. “They don’t determine fine amounts based on what a utility wants to pay.”

“A fine should be based upon what PG&E did or didn’t do, not on what they say they can afford or not,” Mark Toney, executive director of the Utility Reform Network, said in a telephone interview. “For a fine to have meaning, it would have to be large enough that is not simply written off as a one-time incident.”

PG&E plans to spend about $1 billion in gas system upgrades and safety tests that won’t be recovered in customer bills, Earley said. The company has also separated its gas business from its electricity business and brought in new management to run its gas unit to improve service, he said.

Explosion’s Impact

PG&E could see total costs related to the explosion, including fines, of as much as $1.7 billion through 2013, Chief Financial Officer Kent Harvey said on Feb. 16 during an earnings conference call with investors.

That amount is “basically the whole net worth of our gas transmission and storage business,” Earley said.

“I know politically there has to be a large fine, but at some point, people need to step back and say, it doesn’t serve any purpose,” he said, adding that the company will need to also pay for massive infrastructure investments.

“I’ve got to go out and sell new stock after this is over,” Earley said. “And if this company isn’t considered a good investment in a good regulatory environment, that is going to be very, very challenging,” he said.

PG&E filed for bankruptcy in 2001 after soaring energy prices and deregulation of the state’s power market forced it to reorganize. It emerged from bankruptcy in 2004.

Dividend Frozen

PG&E has frozen its dividend for the second consecutive year as a result of increasing costs from pipeline safety work. The company last week raised the 2012 cost estimate for improvements to its gas pipeline system by 36 percent to a range of $450 million to $550 million pretax.

Regulators also have to decide this year how much PG&E can collect from customers to help pay for a proposed $2.2 billion gas pipeline improvement plan.

PG&E has proposed that shareholders will absorb $535 million for the project, with rate increases covering the remainder. Consumer advocacy groups including the San Francisco- based Utility Reform Network and state lawmakers have said that regulators should reject the proposal.

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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