San Bruno penalty

News today is that the California Public Utilities Commission are recommending PG&E be fined an eye-watering US$2.25 billion for its failings leading to the San Bruno disaster.  My initial reaction was to wonder how taking such a huge sum out of a corporation can improve safety, but it is not a fine in the sense of a penalty paid to the state.  Rather, the CPUC is proposing to mandate that PG&E spend the US$2.5 billion explicitly on improving pipeline safety, and that the money come out of corporate funds rather than being raised by increasing tariffs.

That strikes me as a very sensible approach to regulation and punishment that is perhaps also quite novel; at least, I doubt if such a strategy has ever been adopted in Australia and suspect that our legal system might not make provision for it.  The beauty is that it penalises the company (shareholders and presumably senior executives who would be on some sort of performance incentive) while simultaneously making a huge and direct contribution to lifting their safety performance.  And the company can’t cheat because part of the proposed penalty package is an audit program to verify that the specified funds are spent as intended and not obtained by cutbacks elsewhere.

(PG&E have already spent about US$1 billion on safety improvements since the San Bruno failure and that amount is included in the total penalty so they are required to spend only an additional US$1.25 billion; still a lot of money.)

The CPUC document making the recommendations is 76 pages long and I have briefly scanned only the first few pages.  They are interesting reading.  The CPUC approach is quite confrontational, perhaps to be expected in what I think is an adversarial system (my knowledge of the US/Californian legal system relevant to all this is precisely zero).  Later there is a mass of detail on the shortcomings of which PG&E is accused, and also some moving transcripts from survivors of the impacts on their lives.

Just a couple of quotes that outline the basis for the approach taken by the CPUC:

“CPSD recognizes that there is a limit on how much PG&E can afford to pay, because PG&E needs to retain its creditworthiness in order to be able to pay for its improvements in the safety of its facilities, as well as to procure natural gas and electric power.”

“The present case is an extraordinary one where the usual remedy of imposing penalties, which would go to the General Fund, does not make sense. PG&E’s gas transmission system is broken due to decades of PG&E mismanagement, and it will take billions of dollars and years to bring it up to acceptable safety standards. Because PG&E only has a finite amount of money, which it can afford to pay for penalties, and its ratepayers would have to pay the remaining amount of dollars required to repair PG&E’s natural gas transmission system, the Commission should use its equitable powers to order PG&E to pay for remedies that will ensure that its system will be safe without putting the entire burden on ratepayers.”

Quite enlightened I think.  However I get the impression that this is only the first salvo in a legal battle so whether the proposed penalties will actually be implemented is yet to be seen.

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3 Responses to San Bruno penalty

  1. Ross Calvert says:

    I agree that the remedy has considerable merit. I assume that the implementation will enable PG&E to continue in business albeit less profitably but it will be more sustainable in the long term as it evolves into a safer network.

  2. Eric Yin says:

    If properly applied the “fine” won’t come from the customer, but that’s not the problem anyway. PG&E had already raised their rates – specifically to maintain their pipelines, and they did nothing. They just put that rate increase in the bank…. How would this be any different?

  3. petertuft says:

    As mentioned, part of the penalty package is an audit program to make sure they do in fact spend the money where intended. Sounds good in principle, how it will work in practice is yet to be seen.

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