4. Discussion

4.1. Introduction

In deciding whether the PG&E and CPSD stipulation and the PG&E and TURN stipulation should be adopted, we are guided by Rule 12.1(d) of the Commission's Rules of Practice and Procedure. That subdivision states: "The Commission will not approve settlements, whether contested or uncontested, unless the settlement is reasonable in light of the whole record, consistent with laws, and in the public interest."19

4.2. OII Allegations and Stipulations

In determining whether the PG&E and CPSD stipulation and the PG&E and TURN stipulation are reasonable, consistent with the law, and in the public interest, we first examine the violations that have been alleged in this investigation, and the acknowledgements and admissions made by PG&E in its report, and in the PG&E and CPSD stipulation.

CPSD alleges five different instances involving violations of Pub. Util. Code §451 and seven sections of 49 CFR that have been incorporated into GO 112-E.20

These allegations of CPSD, which frame the issues in this OII, involve PG&E's non-compliance with various gas safety regulations, and failing to operate a safe and reliable gas system in violation of Pub. Util. Code §451.

The PG&E and CPSD stipulation contains admissions that PG&E violated the following seven CFR provisions cited in the OII.

o PG&E admits that the September 2006 pipe installation at 10708 Paiute Way was not authorized for gas service in violation of 49 CFR §§192.59(a)(1) and 192.13(c).

o PG&E admits that the pipe used at 10708 Paiute Way in September 2006 was not pressure tested in the manner required by law, prior to reinstating gas service, in violation of 49 CFR §192.503(a)(1).

o PG&E admits that the installation of gas pipe in Elk Grove in October 2006 had a wall thickness that was below specifications and in violation of 49 CFR §192.59(a)(1).

o PG&E admits that it failed to follow internal procedures with respect to its October 2006 discovery of the installation of gas pipe with wall thickness below specifications in Elk Grove, in violation of 49 CFR § 192.13(c).

o PG&E "admits that not administering drug and alcohol tests after the Rancho Cordova explosion to all employees" on December 24, 2008, "under the circumstances presented, could not be completely discounted as a contributing factor to the accident," and "was in violation of 49 [CFR §§] 199.105(b) and 199.225(a)."

PG&E also admits in the PG&E and CPSD stipulation that its response to the December 24, 2008 telephone call of an outdoor gas leak odor on Paiute Way "was unreasonably delayed and not effective."

We have historically favored settlements and stipulations that are reasonable in light of the record as a whole. In the PG&E and CPSD stipulation, PG&E has stipulated to many of the OII's allegations, but does not admit to any Pub. Util. Code violation. The PG&E and TURN stipulation would resolve the issues that TURN raised. Both the PG&E and CPSD stipulation, and the PG&E and TURN stipulation, avoid protracted litigation and reduces the parties' risk exposure in the event a different result is reached after litigating the issues. Thus, on balance, the resolutions of certain issues in the two stipulations are reasonable in this respect. In addition, the Commission has the authority under Pub. Util. Code §2104.5 to adopt a penalty that is less than what the Commission could have imposed.

However, the key in determining whether the PG&E and CPSD stipulation, and the PG&E and TURN stipulation, are reasonable, consistent with the law, and in the public interest, focuses on an analysis of the penalty amount agreed to in the PG&E and CPSD stipulation. We now turn to that analysis.

4.3. Penalty Amount

In analyzing the proposed penalty amount associated with both the PG&E and CPSD stipulation and the PG&E and TURN stipulation, we are guided by Pub. Util. Code §2104.5 and D.98-12-075.21 First, §2104.5 provides in part:

Any penalty for violation of any provision of this act, or of any rule, regulation, general order, or order of the commission, involving safety standards for pipeline facilities or the transportation of gas in the State of California may be compromised by the commission.22

Pub. Util. Code § 2104.5 further states in part:

In determining the amount of such penalty, or the amount agreed upon in compromise, the appropriateness of such penalty to the size of the business of the person charged, the gravity of the violation, and the good faith of the person charged in attempting to achieve compliance, after notification of a violation, shall be considered.

These considerations as to what the penalty amount should be, dovetail with the principles the Commission historically uses to set fines as set forth in D.98-12-075, namely, the financial resources of the utility, the severity of the offense, the conduct of the utility to prevent, detect, disclose and rectify the violation, and the totality of the circumstances. (See 84 CPUC2d at 182-184, 193-195.)

4.3.1. Severity or Gravity of the Violation

Safety and reliability of the natural gas system are of paramount importance to this Commission and to the public interest, i.e., the PG&E customers who rely on this system for heat, cooking, and for producing electricity. A basic principle of public utility service is for the public utility to provide safe and reliable service. (See D.11-03-005 at 22; D.09-03-025 at 18; D.04-12-015 at 45; D.01-12-021 at 10; Pub. Util. Code §§451, 761.) PG&E's underlying public utility service is to provide safe and reliable gas service, and the safety and reliability of its gas system must be PG&E's primary objective.

Based on PG&E's acknowledgement, its admissions, and the events that took place, PG&E failed to provide safe and reliable service at Rancho Cordova. PG&E acknowledges in its report that the Rancho Cordova explosion and fire "resulted from a series of failures by PG&E employees to follow prescribed procedures, failures for which PG&E takes full responsibility," and that "PG&E has learned from this accident and ... has made a number of improvements intended to enhance public safety and prevent this type of accident from occurring again." (Ex. 2 at 1.)23 PG&E also admits in the PG&E and CPSD stipulation to seven violations of various sections of 49 CFR, and also admits that its response on December 24, 2008 was unreasonably delayed and not effective.

This Commission has stated that violations which cause "actual physical harm to people or property are generally considered the most severe" type of offense. (84 CPUC2d at 188, 193.) As a result of PG&E's actions at Rancho Cordova, loss of life and physical injuries occurred, as well as property damage. The PG&E and CPSD stipulation that violations of 49 CFR occurred, as well as PG&E's acknowledgement in its report that there were errors or failures by its employees which caused the Rancho Cordova explosion and fire, demonstrate the severity and gravity of the offenses.

Shortcomings at PG&E also demonstrate the severity and gravity of the offenses.24 These shortcomings are demonstrated by the admissions in the PG&E and CPSD stipulation that:

o The pipe used in the September 2006 repair at 10708 Paiute Way was not authorized for use in providing gas service;

o PG&E did not pressure test the pipe used in the September 2006 repair at 10707 Paiute Way prior to reinstating gas service;

o The pipe used in the October 2006 installation in Elk Grove was below the specifications required by 49 CFR;

o PG&E internal procedures were not followed after discovering that pipe used at Elk Grove had wall thickness below specifications;

o PG&E's response to an outdoor gas leak odor on Paiute Way was unreasonably delayed and not effective; and

o PG&E failed to administer alcohol and drug tests to the employees associated with PG&E's response to Rancho Cordova on December 24, 2008.

These shortcomings illustrate deficiencies with PG&E's training, reinforcement of training, and a failure to emphasize to its employees that safety and reliability of its gas system must be of paramount importance.

4.3.2. PG&E's Conduct to Prevent, Detect, Disclose and to Rectify the Violation

As noted in section 3.3.2., PG&E states it took corrective action regarding its employees, procedures, and processes following the Rancho Cordova explosion and fire. Taking corrective action, i.e., a good faith attempt to prevent, detect, disclose, and to rectify a violation, is also one of the considerations in Pub. Util. Code §2104.5 and in D.98-12-075 for assessing the size of the penalty. The corrective action that PG&E took after the Rancho Cordova explosion reveals that PG&E had written procedures and processes in place to ensure safe and reliable service, but which its employees failed to follow. This demonstrates underlying problems with PG&E's training efforts, employee supervision, and promoting a corporate culture of employee awareness of their responsibility for ensuring that PG&E's facilities and operations are safe and reliable.

The October 2006 repair in Elk Grove make us question whether PG&E's efforts to make its gas system safer were done in good faith. For example, CPSD raised the issue that once PG&E learned of the out-of-specification pipe used in the October 2006 repair in Elk Grove, that this should have triggered a PG&E review of all of its repairs using polyethylene pipe, which should have led to the discovery that unauthorized pipe was used to make the September 2006 repair at 10708 Paiute Way. Instead, after learning that one of the pieces of pipe used in the October 2006 repair in Elk Grove did not meet required specifications, PG&E did not excavate the remaining pipe from the October 2006 repair at Elk Grove to measure the size of other pipes used in that repair. The discovery that other pipe used at Elk Grove did not meet specifications did not occur until 2009 when PG&E excavated other polyethylene pipe installations in response to the Rancho Cordova explosion. Whether or not PG&E should have reviewed all of its records and excavated all of its polyethylene pipe installations after learning that out-of-specification pipe had been used at Elk Grove is an issue that will be scrutinized if this proceeding is fully litigated.

4.3.3. Size and Financial Resources of PG&E

In deciding the size of a penalty, the size of the utility and its financial resources are also considered. (See Pub. Util. Code §2104.5 ; 84 CPUC2d at 184, 194-195.) We also compare the proposed penalty amount to PG&E's penalty exposure if the OII were fully litigated, and review past Commission decisions in which large penalties have been imposed on a public utility.

PG&E serves approximately 4.3 million natural gas customers and 5.2 million electric customers in a northern California service territory that covers 43% of the state. PG&E reported 2010 operating revenues of $13.841 billion.

In this OII, CPSD alleges five different instances involving violations of Pub. Util. Code §451 and seven sections of 49 CFR that have been incorporated into GO 112-E. (See OII at 9-10.) If these allegations are fully litigated, and assuming each CPSD allegation is proven and a continuing penalty amount of $20,000 per day is imposed for each violation of Pub. Util. Code §451 and GO 112-E, PG&E potentially faces $97 million or more in penalties.25

The potential penalty exposure of more than $97 million is moderate to large in comparison to the size of PG&E's operation of its public utility business, and would serve as a significant deterrent to ensure that similar incidents do not occur in the future. Comparing the potential penalty that PG&E could face, and the proposed penalty amount of $26 million in the PG&E and CPSD stipulation, provides the Commission with a range for deciding whether the proposed penalty is appropriate, reasonable, and in the public interest.

In comparison to other Commission decisions in which large penalties have been imposed on a public utility, the facts and circumstances of Rancho Cordova are distinguishable from those other decisions and justify a higher penalty. For example, (1) a $30 million penalty was imposed on Southern California Edison Company for false reporting of data in connection with its performance based ratemaking mechanism in D.08-09-038; (2) a penalty of $14.35 million imposed on San Diego Gas & Electric Company for wildfires resulting from failures in tree trimming and vegetation management in D.10-04-047; (3) a penalty of $27 million imposed on Pacific Bell Telephone Company and related companies for billing problems associated with broadband services in D.02-10-073; (4) a $20.34 million penalty imposed on Qwest Communications Corporation for slamming and unauthorized billings in D.02-10-059; and (5) a penalty of $12.14 million imposed on Cingular Wireless for collecting early termination fees in D.04-09-062.

None of these five decisions involved a loss of life, or the failure of the public utility to offer the underlying public utility service in a safe and reliable manner. In this proceeding, CPSD has alleged five instances of where Pub. Util. Code §451 have been violated, and that PG&E failed to follow GO 112-E.

When one considers the appropriate penalty, the gravity and severity of the offenses admitted to in the PG&E and CPSD stipulation, the statutory obligation of PG&E to provide safe and reliable gas service, PG&E's own acknowledgement of its employees' failures to follow procedures, the untimely response by PG&E, the resulting death, other injuries and property damage, and this Commission's and the public interest in ensuring safe and reliable natural gas service, the proposed penalty amount of $26 million agreed to in the PG&E and CPSD stipulation is too low. As a consequence, the PG&E and CPSD stipulation is unreasonable and not in the public interest.

As provided for in Rule 12.4, we propose that a penalty amount acceptable to the Commission for resolving and closing this OII is the amount of $38 million, plus payment of CPSD's investigation and proceeding costs. This proposed penalty amount is appropriate given the allegations in this investigation, PG&E's acknowledgement and admissions, and the gravity and severity of the facts and circumstances of the Rancho Cordova explosion and fire. The proposed penalty amount of $38 million will also avoid protracted litigation of the issues, and reduce PG&E's risk exposure in the event all of the allegations against PG&E are proven at hearing.

In addition, a proposed penalty amount of $38 million will send a clear message to PG&E that safety and reliability of its natural gas system must be its number one priority. Such a penalty amount will also serve as a financial deterrent to PG&E's lack of action and lack of initiative in ensuring that its natural gas system is safe and reliable. As the Commission stated previously in D.98-12-075:

The purpose of a fine is to go beyond restitution to the victim and to effectively deter further violations by this perpetrator or others...

Effective deterrence creates an incentive for public utilities to avoid violations. Deterrence is particularly important against violations which could result in public harm, and particularly against those where severe consequences could result. To capture these ideas, the two general factors used by the Commission in setting fines are: (1) severity of the offense and (2) conduct of the utility. These help guide the Commission in setting fines which are proportionate to the violation. (84 CPUC2d 155 at 182, 188.)

For all of the above reasons, the PG&E and CPSD stipulation, as proposed, is neither reasonable nor in the public interest. For the reasons discussed, the joint motion of PG&E and CPSD to adopt the PG&E and CPSD stipulation is denied, and the PG&E and CPSD stipulation is not adopted.

The PG&E and TURN stipulation is predicated on the approval of the PG&E and CPSD stipulation, and the agreed-upon penalty amount of $26 million. If we assume that the higher penalty amount of $38 million is agreeable to PG&E, CPSD and TURN, we would conclude that the PG&E and TURN stipulation is reasonable and in the public interest because that stipulation precludes PG&E from including in its next general rate case the other claims and related costs that have been resolved in connection with the December 24, 2008 Rancho Cordova explosion and fire, which PG&E admits and acknowledges that it caused. However, since the PG&E and TURN stipulation is based on the approval of the PG&E and CPSD stipulation without any changes, we do not adopt the PG&E and TURN stipulation.

PG&E, CPSD, and TURN shall have 30 days from the date this presiding officer's decision is served to accept the proposed penalty amount of $38 million. If this penalty amount is acceptable, a motion accepting the penalty amount of $38 million shall be filed with the Commission within the 30 days and served on the service list to this proceeding. Any party to this proceeding shall then have 15 days to file a response to such motion.

If such a motion accepting the $38 million penalty is filed, a proposed decision on the $38 million penalty amount will then be issued after the presiding officer's decision becomes final. Alternatively, a modified presiding officer's decision may be prepared, assuming an appeal or request for review of the presiding officer's decision is filed.

If no motion accepting the proposed penalty amount is filed, and once this presiding officer's decision becomes final, the assigned ALJ will issue a ruling scheduling evidentiary hearings on the underlying issues in this OII.

19 Both PG&E and CPSD, and PG&E and TURN, refer to their agreements as a "stipulation" instead of a "settlement." Although they use the term "stipulation," the rules pertaining to "settlements" that are set forth in Rules 12.1 to 12.7 of the Commission's Rules of Practice and Procedure, apply to both the PG&E and CPSD stipulation, and the PG&E and TURN stipulation. Rule 12.1 refers to a "settlement" as "the resolution of any material issue of law or fact or on a mutually agreeable outcome to the proceeding." Formerly, the Commission rules distinguished between a "settlement" and a "stipulation." However, that distinction was eliminated when former Rules 51 through 51.10 were eliminated in D.06-07-006, as initially proposed in the February 16, 2006 Order Instituting Rulemaking 06-02-011.

20 Pub. Util. Code §451 provides in part that: "Every public utility shall furnish and maintain such adequate, efficient, just, and reasonable service, instrumentalities, equipment, and facilities, ... as are necessary to promote the safety, health, comfort, and convenience of its patrons, employees, and the public." GO 112-E addresses the Commission's rules governing the design, construction, testing, operation, and maintenance of gas transmission and distribution pipe systems. GO 112-E also incorporates Parts 190, 191, 192, 193, and 199 of 49 CFR, which governs the design, construction, testing, operation, and maintenance of gas pipe systems.

21 D.98-12-075 (84 CPUC2d 155) addressed the principles that should be applied for imposing a fine for a violation of the affiliate transaction rules. As stated in 84 CPUC2d at 182, "these principles distill the essence of numerous Commission decisions concerning penalties in a wide range of cases...." The principles set forth in D.98-12-075 closely parallel the considerations set forth in Pub. Util. Code §2104.5. (See 84 CPUC2d 155 at 182-184, 188-190.)

22 The term "pipeline" as used in Pub. Util. Code §2104.5 is defined in Pub. Util. Code §227, which states: "Pipe line includes all real estate, fixtures, and personal property, owned, controlled, operated, or managed in connection with or to facilitate the transmission, storage, distribution, or delivery of crude oil or other fluid substances except water through pipe lines." In Rancho Cordova, the cause of the explosion was the separation of the polyethylene pipe from the Metfit coupling, which was used by PG&E to deliver natural gas to 10708 Paiute Way.

23 When the employees of a public utility are blamed for wrong doing, the Commission should "closely scrutinize any attempts" at placing blame, and "Managers will be considered, absent clear evidence to the contrary, to have condoned day-to-day actions by employees and agents under their supervision." (84 CPUC2d at 184, 189.) In addition, Pub. Util. Code §2109 provides in part that "the act, omission, or failure of any officer, agent, or employee of any public utility, acting within the scope of his official duties or employment, shall in every case be the act, omission, or failure of such public utility." That is, PG&E is ultimately responsible for the actions of its employees, and for any associated penalties.

24 We note that this decision is only addressing whether or not the two stipulations should be adopted or not. This decision does not prejudge the issues raised by the OII, should this OII be fully litigated. The conclusions that we draw in this decision are from PG&E's own admissions in the PG&E and CPSD stipulation, and from PG&E's acknowledgements in its own report in Exhibit 2.

25 The estimate of the $97 million in penalties is based on the following: violations of both Pub. Util. Code §451 and GO 112-E in each of the five instances set forth in the OII at 9-10; continuing violations from September 21, 2006 to December 24, 2008 for the use of the unmarked pipe in Rancho Cordova; continuing violations from November 9, 2006 to December 24, 2008 for failing to discover the defective Rancho Cordova repair as a result of being notified of the use of defective pipe used in Elk Grove; continuing violations from September 21, 2006 to December 24, 2008 for failing to develop and implement effective gas emergency plans; and $80,000 in penalties for failing to safeguard life and property and failing to administer drug and alcohol tests on December 24, 2008.

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