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PG&E Faces $1.4B Fine Over San Bruno Pipeline Explosion

Zacks Equity Research

PG&E Corporation's (PCG) main subsidiary and California’s largest regulated electric and gas utility – Pacific Gas and Electric Company (Pacific Gas) – is charged with $1.4 billion in fines and penalties associated with the fatal 2010 San Bruno natural-gas pipeline explosion.

After nearly four years of the incident that killed eight people, injured dozens of others, and damaged over 100 houses, this proposal of the California Public Utilities Commission (:CPUC) is believed to be the largest safety-related penalty in the history of the agency. A five-member CPUC is yet to approve the proposal from the two judges.

Pacific Gas has been fined $950 million for violating federal and state pipeline safety rules before the 2010 pipeline explosion. The remaining $450 million has been charged for upgrading the gas distribution network.

The charge comprises 3,798 violations of state and federal laws, rules, standards or regulations for the manner the company operated its gas pipeline network. PG&E and other associated parties in the case have 30 days to lodge an appeal, if any.

However, the proposed penalties have raised controversies. Although the Utility Reform Network that represents ratepayers at the San Francisco-based commission described the total fine amount as a considerable one, the mayor of San Bruno has criticized the judge's imposition to a consumer advocacy group. The fine ordained by the judges is lower than the $2.25 billion proposed by the CPUC staff, even when combined with the $635 million PG&E used for post-explosion safety expenses.

Apart from the fines, Pacific Gas was charged recently with obstruction of the National Transportation Safety Board (:NTSB) investigation in connection with the San Bruno explosion. A federal grand jury charged Pacific Gas of lying to the federal body about the deadly pipeline explosion. Pacific Gas was charged of “knowingly and willfully” violating 27 counts of the Natural Gas Pipeline Safety Act in a revised indictment.

The San Bruno accident continues to cast a shadow on the company’s financial results. PG&E said that penalties as well as upgrades may cost shareholders about $4.75 billion. This includes $2.7 billion PG&E had already committed for safety-related work following the San Bruno incident over the next several years.

PG&E’s operating earnings in the second quarter of 2014 lagged the Street expectation by 8% and the reported figure also trailed the year-ago number by 12.7%. The uninspiring earnings reflect the negative impact of unrecovered costs in the Natural Gas business.

Currently, PG&E carries a Zacks Rank #3 (Hold). Other better-ranked players in the sector include Huaneng Power International, Inc. (HNP), CMS Energy Corp. (CMS) and ALLETE, Inc. (ALE). Huaneng Power International holds a Zacks Rank #1 (Strong Buy), while CMS Energy and ALLETE carry a Zacks Rank #2 (Buy).

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