San Bruno Controversy Roils California PUC

PUCOn September 15th the California Public Utilities Commission issued an opaque press release refereing “inappropriate email exchanges” between PG&E and a PUC official.    It states that CPUC President Michael Peevey is going to recuse himself from the PG&E proceeding and that he asked his Chief of Staff to resign.    But there is far more to this press release than what is apparent.   To the knowledgeable insider, it reveals the very tangled web woven by utilities and regulators.   It should also serve as a cautionary tale to all persons involved in the regulatory arena.  Ultimately, these revelations may lead to some much needed improvements in PUC leadership and ethics within the agency.

This isn’t an entirely disturbing tale.  There are some heroes.   But first, the context of this CPUC press release is important. San Bruno was the site of a 2010 gas pipeline explosion caused by PG&E’s inadequate maintenance.  A report by the National Transportation Safety Board said the pipeline break was caused by PG&E’s use of substandard and poorly welded pipe not meant for operational use. It faulted PG&E for taking 95 minutes to shut off the gas in the pipeline, insufficient emergency response, inaccurate pipeline records, poor maintenance and inadequate risk management procedures.  PG&E was indicted by a Grand Jury in April 2014 for its poor record keeping and “integrity management” practices.  A subsequent indictment was handed down three months later charging the company with obstruction of justice for lying to the NTSB regarding its pipeline testing policy, bringing the total number of counts in the indictment to 28.    A few months later, the state PUC staff proposed a $1.4 billion penalty to punish PG&E for its role in the fatal natural gas explosion in San Bruno, which was well below the $2.25 billion recommended by its staff and other consumer groups.   But behind that recommendation, was an unprecedented rebellion by the CPUC’s own staff.   One year earlier,  a number of highly regarded and experience attorneys within the CPUC were taken off the PG&E case because they objected to a penalty proposal offered by the Commission’s general counsel.   Cagen was reportedly fired.  I know both Bob Cagen and Harvey Morris — they are among the best attorneys at the CPUC.  That reassignment says a lot about the political battle raging within the CPUC about how to handle PG&E’s transgressions.   And their refusal to take “orders” and other staff members support of them says a lot about the integrity of many PUC attorneys.  

One of the little reported problems was with the CPUC’s (Michael Peevey’s) decision to hire Frank Lindh as chief counsel of the CPUC in 2008. Lindh had previously worked for 15 years as an attorney for PG&E.   He failed to earn the respect or support of many CPUC attorneys and other staffers. Notwithstanding the significant public interest conflict of having a former utility counsel making important legal decisions for the agency,  Peevey strongly supported Lindh.   This, among other decisions, sowed the seeds of was to happen a few years later when San Bruno exploded.

But then, things got uglier.  In late July 2014,  The CPUC released email correspondence between PG&E executives and the PUC officials.   The emails showed an uncomfortably close relationship between PG&E and CPUC President Michael Peevey.   One need only read a 2011 Bay Guardian article to see that Peevey was/is the consummate insider who prides himself on cutting deals and making things happen.   Some in the industry are impressed with Peevey’s abilities and his understanding of how utilities think.  Others, like this commentator, found his tactics to border on being illegal and his demeanor undignified. His chief of staff, Carol Brown, was an experienced CPUC advisor and former administrative judge who was known to share Peevey’s interest in cutting deals and bypassing procedural hurdles.   She is not a “corrupt” person in any sense of the word and is largely a scapegoat in this story.   But hers is an example of how easily “co-option” by regulated interests can occur over time.   The emails between herself and PG&E executives are revealing:

  –  An April 2, 2014 email message from Peevey to Brian Cherry, PG&E’s vice president of regulatory relations. In it, Peevey appears to offer public relations advice to PG&E as federal indictments loomed over the company for actions leading to the fatal pipeline rupture.  After reviewing a PG&E statement issued before the federal charges were made public, Peevey wrote: “One comment: PG&E’s decision to issue a press release last week anticipating all this only meant that the public got to read two big stories rather than one. I think this was inept.”

   –  An April 25, 2013 email from PG&E executive Laura Doll to Peevey’s chief of staff, Carol Brown. It similarly reveals Peevey’s office providing advice, this time about a pipeline safety seminar that was postponed because it would bring together PG&E officials and two PUC commissioners involved in the San Bruno case. Brown suggested, “1. Send back a sweet note saying the issue is moot since seminar not going forward…and then wait for them to throw a fit. 2. Answer any simple question you can, and then object to the others as being outside the scope of the 3 [San Bruno investigations]—but offering to meet and confer on the issue—and schedule a date out a little…” Doll’s response: “Love you. Thanks.”

    –  A series of emails from PG&E’s Cherry to Peevey that include Wall Street analyst opinions and stories about how the CPUC’s San Bruno case is affecting the utility’s financial strength. For example, a Feb. 21, 2013 email from Cherry to Peevey notes “Bad day for us today,” and includes a Dow Jones earnings story that discusses PG&E’s loss “amid rising costs from the San Bruno pipeline explosion.”

   –   A Dec. 8, 2011 email from PG&E’s Doll to Paul Clanon, the CPUC’s executive director, complaining about the breadth of a records request from the CPUC’s legal division. In it, Doll says to Clanon, “I doubt you have time to look at these things, but I can’t get over the unchecked appetite for global data request from legal. It’s unmanageable…seriously, is there any procedural opportunity to have other eyes on the scope and nature of these requests? These do nothing to improve safety, and we have already conceded that our records suck. I’m being naïve again, right? But thanks for listening. Laura.”

–   A new set of emails were released in mid-September.   The most damning of them was one from PG&E’s lobbyist to Peevey’s Chief of Staff:  “I’m not sure we could get someone worse” when he learned of one judge’s possible appointment to the case. He told Brown another judge candidate “screwed us royally” in an earlier case. “Let’s just say she has a history of being very hard on us.” “I can see if anything can be done,” Brown responded in an email: “Take a deep breath — I am working on it,”   The irony is that PG&E wanted ALJ John Wong, who is one of the better judges at the CPUC , assigned to the case.   He would not be a toady to the PG&E position, despite the utility’s expectations.   Subsequently, another judge was added to the case as well.

The most troubling part of this sordid story is that PG&E may have got  away with avoiding more substantial penalties than should have been imposed.   In early September,  the two CPUC judges issued four decisions.  Three of the decisions established the number of violations in connection with eachinvestigation. In the fourth decision, the Administrative LawJudges imposed a penalty based on the total number of violations. The Administrative Law Judges found that in total, PG&E committed 3,798 violations of state and federal laws, rules,standards, or regulations in connection with the operations and practices of its gas transmission system pipeline.  The $1.4 billion penalty, when combined with the amount that the PUC previously ruled must come from shareholders for expenditures to improve the safe operation of natural gas pipelines (R.11-02-019), exceeds $2 billion. The penalty consists of $950 million to be paid to California’s General Fund, $400 million in pipeline improvements that cannot be recovered from customers (called a disallowance), and approximately $50 million to be used to implement more than 75 remedies to enhance pipeline safety, including $30 million for the CPUC’s Safety and Enforcement Division to hire independent auditors to audit PG&E’s compliance.

These penalties must be paid by PG&E’s shareholders and are not recoverable from PG&E’s customers. Within 60 days PG&E must submit a report to the CPUC providing the status of the progress and the timeframe for completion of each remedy ordered in the decisions.   The  ALJ’s decisions will take effect unless a party to the proceeding files an appeal or a Commissioner requests a review. Should a party file an appeal of the decisions or a Commissioner requests review, the Administrative Law Judges will review the appeal and either make changes to their decisions or keep them the same. The decisions would then come before the Commissioners to consider at a Voting Meeting — the meeting that Peevey has now agreed to skip.   Hopefully, a party will appeal and the remaining four Commissioners will be obligated to look deeply into whether the penalties should be more substantial.

In mid-September, the CPUC opened an inquiry into PG&E’s apparently violation of CPUC Rule 8.3(f) which states, “Ex parte communications regarding the assignment of a proceeding to a particular Administrative Law Judge, or reassignment of a proceeding to another Administrative Law Judge, are prohibited.”  ALJ Hallie Yacknin has ordered lPG&E officials to appear before her on October 7 to consider contempt of commission rules barring that kind of communication between the utility and the commission that regulates it.   Sanctions may include monetary penalties, restrictions on future ex parte communications, and other appropriate sanctions as may be identified at the hearing.

In the meantime, the CPUC has suffered a major black eye to its credibility and the degree of utility influence over CPUC decisions has been exposed. The PG&E executives were clearly wrong, but their behavior was not at all beyond the pale of how utility executives frequently interact with Commissioners and their advisors.   Their mistake was that they were caught. And while Peevey and his staff may be legitimately chastised for their coziness with the utilities,  many CPUC staffers performed exactly as the public would hope — with integrity and clear purpose.  Perhaps this is a good story, after all.  At a minimum, it should lead to improvements in how the agency is run.

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