SAN FRANCISCO -- State safety regulators socked PG&E Monday with an eye-popping $2.25 billion in proposed penalties for the 2010 San Bruno natural gas pipeline disaster.

The penalties are well deserved for the company's "failure to follow industry standards," the Consumer Protection and Safety Division of the California Public Utilities Commission said. It drew a direct line between those failures and the explosion, which killed eight, injured 58 and destroyed 38 homes.

But in the latest example of the controversy that has followed the aftermath of the explosion at almost every stage, even that huge figure stirred controversy because of the way the PUC structured it. The $2.25 billion represents money PG&E must spend to improve its pipelines. Some advocates had urged the PUC to fine the company, which is seen as a far more punitive measure and which would have meant the money would go to the state general fund.

"We disagree with the PUC staff that there should be no fine," said San Bruno City Manager Connie Jackson. "There needs to be a punitive component. Fines are a way of demanding accountability for the negligent operations that PG&E has perpetrated."

Jack Hagan, director of the PUC's Consumer Protection and Safety Division, defended the recommended penalties as a means of guaranteeing a safer gas pipeline system.

"I am recommending the highest penalty possible against PG&E, without compromising safety," he said. "I want every penny of it to go toward making PG&E's system safer."

If approved, the penalties would be by far the largest ever proposed by a state regulator, far exceeding the largest to date -- the $101.5 million levied for a gas pipeline explosion in New Mexico in 2000.

The recommendation drew a pained response from PG&E Chairman and CEO Tony Earley. Fresh from presiding over an annual shareholders meeting, he called the penalties "excessive" and warned that they would make it more costly to finance improvements to the system.

"I understand the desire to punish PG&E," Earley said, but added that the penalties "far exceed anything that I have seen in my 30 years in the industry."

All of the money would come from shareholders, not ratepayers, according to the long-awaited proposal.

PG&E can deduct from the penalties what it has already spent on safety improvements, which it estimates at about $1.4 billion in system upgrades and repairs. The PUC staff places that number closer to $1 billion and wants an audit to determine the precise amount of the expenditures.

The company has operating revenue of more than $15 billion and profit of nearly $1 billion a year, and should be able to handle the penalties, safety regulators said.

A decision by the PUC on the penalty recommendation is expected late this summer, after PG&E files a response and safety regulators and other interested parties reply.

The 70-page brief by the safety division harshly criticized PG&E for being responsible for an explosion that "was entirely preventable."

But fining the company for each of more than 100 violations, some extending for as long as 54 years, "would result in tens of billions of dollars in fines, which is more than PG&E's net worth," it concluded.

The report said the imposition of fines that would go to the state's general fund "does not make sense" because it would leave PG&E with less money to spend on a gas transmission system that "is broken due to decades of PG&E mismanagement." And then PG&E customers would have to make up the difference by paying higher rates, said the safety regulators.

The Utility Reform Network, a consumer advocacy group, suggested a $1.7 billion penalty but supported Monday's recommendations.

"PG&E played with the lives of the people of San Bruno by installing defective pipe under their homes, then compounded the danger by failing to properly test and inspect the pipe," TURN legal director Tom Long said. "The CPUC has an opportunity to send PG&E a strong message about safety."

San Bruno city officials Monday recommended that the PUC impose a $2.25 billion penalty on PG&E. That would be allocated as a $1.25 billion fine and $1 billion in remedies, including pipeline system improvements, an independent monitor on the upgrade process, and a pipeline safety trust fund.

Area legislators applauded the proposal.

"This is a wonderful decision," state Sen. Jerry Hill, who represents the San Bruno area, said in an interview with this newspaper. "With PG&E's profits, these payments will not bankrupt the company."

Rep Jackie Speier, D-Hillsborough, said the penalty "will set a national standard for the safe delivery of natural gas."

Contact Pete Carey at 408-920-5419.

Improvements to gas line
PG&E cited $1.4 billion in improvements to its natural gas pipeline system in response Monday to the proposed $2.5 billion in penalties recommended by safety regulators for the company's failings that led to the 2010 gas line explosion in San Bruno that claimed eight lives.
Among the improvements:
  • Replaced 45 miles of pipeline
  • Retrofitted 78 miles of pipeline to accommodate in-line inspections
  • Automated 67 valves
  • Converted more than 3.7 million paper records and added them to a new geographic information system
  • Improved leak response time
    Source: PG&E