Consumer Federation of California

Pacific Gas and Electric Co. customers will pay nearly two-thirds of the $1.8 billion it will cost to upgrade the company’s natural-gas pipelines, which were exposed as potentially unsafe by the 2010 explosion in San Bruno, the California Public Utilities Commission decided Thursday.

In dividing up the costs of overhauling PG&E’s 1,100-mile urban gas transmission system, the commission also abandoned a proposal that would have slashed the profit that the company could make on the project.

PG&E originally wanted its customers to pay almost all the cost of its three-year effort to inspect and replace pipelines, the safety of which was cast into doubt when a major transmission line ruptured and exploded in San Bruno, killing eight people.

Instead, customers will pay about 65 percent of the $1.8 billion the company was authorized to spend, while PG&E will pay 35 percent. The utilities commission followed the recommendation of an administrative law judge, who said PG&E should pay a greater share than it proposed because its mismanagement had allowed its natural-gas pipeline system to deteriorate.

The commission also told PG&E it would have to absorb any cost overruns.

Cost to customers

On average, PG&E residential customers will be billed 88 cents more a month next year for the upgrade and $1.36 more a month in 2014, the utility says. Bills will rise further after that, but those costs have not been determined.

The money will help PG&E to test 783 miles of pipeline using high-pressure water and replace another 186 miles. The company will also install 228 automated shutoff valves on gas lines and modify 199 miles of pipe so they can be inspected by in-line tools that can detect the type of flaws that led to the San Bruno disaster.

Although it saddled PG&E with a greater share of the cost than the company wanted, the utilities commission also rejected what would have been a significant penalty – a five-year profit sanction for pipeline safety breakdowns leading up to the San Bruno disaster.

The sanction had been proposed by administrative law Judge Maribeth Bushey, who said the state commission should cut PG&E’s legally guaranteed rate of return on what it spends on the overhaul from the current 11.35 percent to 6.05 percent. That profit comes from the amount PG&E is allowed to bill its customers.

$130 million ‘Christmas gift’

Bushey said PG&E deserved less profit because of its "long-standing avoidance of sound, safety engineering-based decision-making in favor of financially motivated, nominal regulatory compliance."

The utilities commission, however, voted against that cut at its meeting in San Francisco. Members agreed with the utility’s arguments that suffering a profit loss would jeopardize its financial position as it attempts to pay for major upgrades to its system.

San Bruno officials denounced the decision as a $130 million "Christmas gift," but Commissioner Mike Florio said cutting the profit would "send the wrong signal that somehow investing in safety is less important than investments in other aspects of the utility’s business."

Cutting rate of return

The commission did vote separately to cut the 2013 rate of return for all capital spending by major utilities – including PG&E – to a little more than 10 percent, not to punish the companies but to reflect reduced financing costs. That will cost PG&E almost twice as much as the $130 million profit loss proposed by Bushey, Florio said.

Florio and other commissioners also stressed that PG&E has yet to pay fines for safety violations stemming from the San Bruno blast. Those fines are expected to run into the hundreds of millions of dollars.

Mayor upset

San Bruno Mayor Jim Ruane criticized the decision, however, saying it gutted a key sanction against PG&E for failing to operate its system safely.

"We are here today because PG&E blew up our town, killed eight individuals in our city, our friends, and they should be punished for it," Ruane said. "What happened today is PG&E is making profit on those lives. It’s disgusting, and it’s not right."

PG&E said the commission-approved plan put it on the "right path forward" to improve its system. "Today’s decision affirms PG&E’s blueprint for continued progress on behalf of our customers," the company said in a statement.

But PG&E also expressed disappointment that the commission had allocated an increased share of the costs to the company.