California regulators imposed the largest penalty for a U.S. natural-gas utility, ordering PG&E Corp. to pay $1.6 billion for failures that led to a deadly 2010 natural gas pipeline explosion in a San Francisco suburb.

A faulty weld on the pipeline caused an explosion and fire rupture that killed eight people and destroyed 38 homes in San Bruno, California. PG&E, owner of the state’s largest utility, committed 2,425 violations of safety rules in the decades leading up to the incident. The company still faces as much as $1.13 billion in federal criminal fines for the blast and has committed to spend $2.8 billion to improve pipeline safety.

The California Public Utilities Commission voted 4-0 for the penalty at a meeting in San Francisco Thursday. The agency has been criticized by local officials for its response to the incident — two members recused themselves from voting on the fine after improper e-mails with PG&E executives were made public. The U.S. Attorney’s office in San Francisco and California’s attorney general are investigating communications between the company’s Pacific Gas & Electric utility and the commission.

“Although the decision is an important milestone, it sounds like the legacy of San Bruno will live on at PG&E and the PUC as the agency plans to continue to investigate the company’s operations for some time to come,” Paul Patterson, a New York-based utility analyst for Glenrock Associates LLC, said in a telephone interview.

The San Francisco-based company had warned that an earlier staff-proposed fine of $2.25 billion would push it to the edge of bankruptcy. Since the tragedy, PG&E has replaced its chief executive officer, frozen its dividend and separated its gas business from its power operations to improve safety.

“We are deeply sorry for this tragic event and we have dedicated ourselves to re-earning the trust of our customers and the communities we serve,” PG&E Chairman and CEO Tony Earley said in a statement. “While we obviously need to review the orders in their entirety before making a final decision, we do not expect to appeal today’s rulings.”
PG&E fell 1.6 percent to $52.78 at the close in New York.

Michael Picker, who took over as president of the commission this year, proposed the $1.6 billion penalty after an agency judge recommended $1.4 billion. Picker questioned whether the company was too big to make adequate changes, saying its response to the need for safety measures was uneven.

“Is the organization simply too large — spread across a sizable portion of a large state, and encompassing diverse functions such as both gas transmission and gas distribution, as well as electric service — to succeed at safety?” Picker said. He called for a probe into PG&E’s safety culture.

Under the order approved Thursday, PG&E will pay $300 million to the state, refund $400 million to its gas customers and spend $850 million on infrastructure improvements that can’t be recovered in rates. The $1.4 billion penalty recommendation from the administrative law judge included a $950 million state fine.

“Our decision to use a mix of penalties and remedies is based on our intention to penalize PG&E for its violations and to deter similar behavior and violations in the future,” Picker wrote in the order. A larger fine would result in higher costs for PG&E customers, he said.

Former President Michael Peevey and Commissioner Michael Florio recused themselves after e-mails surfaced last year that included PG&E requests to change judges for a rate proceeding. The city of San Bruno sued the agency to release correspondence between the utility and the commission. Victims of the blast included a member of the commission staff and her 13-year-old daughter.

The explosion was the result of “gross misconduct by PG&E and lax oversight by this commission,” San Bruno Mayor Jim Ruane told the commissioners before the vote.

“I blame PG&E for the deaths of my family,” Sue Bullis, a resident of San Bruno who lost her husband, her son and her mother-in-law in the blast, said at the meeting. “I have no confidence in the infrastructure underground, those who operate it and, I have to say, the CPUC which has acted with indifference over the past five years.”

Source: Bloomberg