PG&E Boosts Safety-Upgrade Plans

Who should pay for pipeline improvements?

PG&E Corp.’s new chief executive outlined a broad plan to bump up spending on the California utility’s gas-pipeline network, hoping to restore public confidence in its ability to deliver gas safely.

The company, which also reported a 22% drop in third-quarter profit Thursday, saw its reputation badly damaged by a major pipeline explosion in San Bruno, Calif., in September 2010, which killed eight people. The accident occurred in a defective pipe; the utility’s inability to quickly shut off gas resulted in the incineration of an entire neighborhood of homes. Subsequent investigations by state and federal investigators revealed substandard practices at PG&E.

The San Francisco-based utility is facing two years of disappointing earnings as it pursues costly upgrades needed to restore trust, said Anthony Earley Jr., who has been the company’s CEO for two months. Mr. Earley was previously chief of DTE Energy, based in Michigan.

PG&E’s reputation “was in tatters with regulators and the public,” he said in an interview. “The only way to fix things is to hunker down and produce really good service for customers.”

To get there, the company intends to spend an extra $200 million in 2012 and a similar amount in 2013 to accelerate pipeline-safety tests and other remedial pipeline work. Mr. Earley said PG&E doesn’t expect to get reimbursed by rate payers for that $400 million expense.

Separately, PG&E intends to spend $2.2 billion by 2014 on a program to further modernize its pipeline system and employ state-of-the-art technology, including better inspection tools. It is seeking authority to charge customers $1.7 billion of that expense, Mr. Early said, but expects shareholders to bear the remaining $500 million. The impact on rates isn’t clear.

Utility regulators may require PG&E to bear a larger share of upgrade costs, he said. The company is also facing a fine of unknown size related to the San Bruno explosion. On Thursday, the company increased its estimate of the cost of third-party claims from the San Bruno explosion to as much as $600 million, an increase of $200 million over earlier estimates.

To fund its immediate needs, PG&E will issue $1 billion worth of stock by the end of 2012 and freeze its dividend. On Thursday, it lowered its estimate of 2012 operating earnings by 30 cents a share to $3.10 to $3.30 a share.

Paul Patterson, president of research firm Glenrock Associates in New York, said Mr. Earley appeared to be “taking the bull by the horns” but added that it was too early to tell whether the program would work or whether state regulators would support it.

“The operative word is uncertainty,” Mr. Patterson said.

A consumer advocate said she applauds Mr. Earley’s action on safety issues. But Mindy Spatt, spokeswoman for the Utility Reform Network in San Francisco, warned that her group will fight the utility if it tries to charge customers for work that is needed now because “work was done poorly—or not at all—in the past.”

The National Transportation Safety Board concluded in August that welding defects in the manufactured pipe contributed to its failure. The board also blamed pervasive shortcomings in PG&E’s pipeline operations and spotty regulatory oversight.

For the quarter ended Sept. 30, PG&E reported net income of $203 million, or 50 cents a share, on revenue of $3.86 billion; results were reduced by $162 million in charges related to gas-pipeline operations. In the year-earlier period, it reported net of $261 million, or 66 cents, on revenue of $3.51 billion.

Earnings will be damped by pipeline spending for at least the next two years, Mr. Earley said, but he believes the utility can earn its authorized return of 11.35% in 2014. The profitability of regulated utilities is capped to prevent them from charging too much for services for which consumers have no alternate supplier.

Corrections & Amplifications
PG&E Corp. said it will cost more than $1 billion to upgrade the company’s natural-gas pipelines, but it doesn’t know the size of the fine it faces for a 2010 pipeline explosion that destroyed a neighborhood in San Bruno, Calif. A previous version of this article incorrectly said the fine could be as large as $1 billion, based on faulty information provided by the company.