SAN BRUNO -- Attorneys with the state regulatory agency that oversees PG&E asked to take a proposed $2.25 billion fine against the utility -- in the form of upgrades to its gas system -- off the table this week after an internal feud over what kind of penalty should be meted out, according to San Bruno officials.

On Monday, lawyers for the safety division of the California Public Utilities Commission filed a legal petition asking that the proposed fine be dropped while they "correct certain inaccuracies," drafting a new plan that they will submit by July 15, a city news release said.

The release states that the former recommendation "became mired in controversy after it was revealed to be 100 percent tax-deductible and littered with credits and perks to benefit PG&E, amounting in a net penalty of almost nothing for the utility."

"This is a step in the right direction for the people of San Bruno and for consumer safety advocates who, for almost three years, have waited for some measure of justice following this devastating and PG&E-made tragedy," San Bruno Mayor Jim Ruane said.

San Bruno has called for PG&E to be penalized $3.8 billion.

Mindy Spatt, spokeswoman for consumer advocacy group The Utility Reform Network, called the previous proposal "utterly outrageous."

"The PUC staff had correctly objected to the condition of using a PG&E wish list for penalties," she said. "This shows that staff objections have most certainly been heard. One way to look at it is the PUC staff wanted to do the right thing but apparently management had to be pulled along."

The CPUC could not be reached for comment Tuesday evening.

"We completely understand that the commission will levy a penalty or fine against us," said PG&E spokeswoman Brittany Chord, who added that the company considered the $2.25 billion fine excessive.

Chord said they believe that any fine should be paid "back into the safety of the system."

Last month, the CPUC reorganized its safety division after several key attorneys were removed from the PG&E case. The attorneys had said that penalizing PG&E by making it repair and upgrade its gas system was not strong enough, and wanted the utility to also face an additional fine.

Investigators concluded that the September 2010 natural gas explosion was the result of PG&E's flawed inspections, repairs and record-keeping. The blast killed eight people and destroyed 38 homes.

Contact Eric Kurhi at 408-920-5852. Follow him at Twitter.com/erickurhi.