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California Energy Markets / Bottom Lines

[July 5, 2019 / No. 1546]

The Long, Winding Road of PG&E's $108M San Bruno Ex Parte Penalty

A new settlement adds to the $97.5 million assessed to Pacific Gas & Electric in April 2018 for ex parte communications regarding the explosion and fire in the San Bruno residential neighborhood that killed eight people. PG&E's total penalty for the ex parte communications is now set at $107.5 million.

"PG&E's employees and agents engaged in communications with decision-makers at the commission, as well as related conduct that was harmful to the regulatory process," the June 28 motion for the California Public Utilities Commission to approve the settlement says [I15-11-015].

The CPUC will now review the settlement, although previous members of the agency itself were involved with the inappropriate dealings. The story of the back-channel San Bruno deal-making is long and winding and provides a rare view into how such communications play out in California when big money and insider connections are involved.

Back in 2013, PG&E was under investigation by the CPUC over the San Bruno event that had occurred a few years earlier, but its executives had a plan.

Working behind the scenes with a former member of the CPUC, Susan Kennedy, the utility lobbied inside the commission.

But the new settlement proves that the effort got very messy and didn't end well after it was exposed.

The $10-million settlement presented to the CPUC June 28 includes $2 million to the state's general fund and $1 million each to the cities of San Bruno and San Carlos. Additionally, PG&E would forgo collection of $5 million in revenue requirements during the term of its 2019 gas transmission and storage rate case and would forgo $1 million in its 2020 general rate case.

Susan Kennedy
Susan Kennedy. Photo: CMS

Parties to the new settlement include the cities of San Bruno and San Carlos, the CPUC's Safety and Enforcement Division, the Public Advocates Office and The Utility Reform Network.

Jack Hagan.
Jack Hagan. Photo: California National Guard

The current phase of the CPUC's investigation represents Phase 2 of a proceeding that has been ongoing since 2015. The CPUC established Phase 2 in order to determine which of the newly revealed communications were ex parte and what the penalties would be.

PG&E began submitting the latest batch of emails to the CPUC in late 2017, just as the agency was approving the $97.5-million settlement over the previous ex parte talks.

The newer emails, which drew outrage from San Bruno officials when made public, showed how Kennedy lobbied as a consultant on PG&E's behalf in the San Bruno investigation, discussing it with former CPUC President Michael Peevey and Brigadier General Jack Hagan, then director of SED, whom she called "the General."

In a January 2013 email to then-PG&E Vice President of Regulatory Relations Brian Cherry, Kennedy discusses having lunch with Peevey and then her "second date with the General." She said she would be taking Hagan to see former Gov. Arnold Schwarzenegger's latest movie, which had just come out.

Kennedy, a highly connected Democrat who nonetheless had also been Schwarzenegger's chief of staff, is a prominent political figure in California, having joined Schwarzenegger's staff after serving as chief of staff to Democratic Gov. Gray Davis. In her email to Cherry, Kennedy said Peevey "hopes the General can bring something home—but that the crazies are so far out there that it might not be possible."

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In May 2013, Hagan issued SED's proposal: PG&E would be penalized $2.2 billion, but most of that amount would go into system improvements. Hagan's plan was highly unusual in that several CPUC attorneys who had worked for years on the case refused to participate, and then got into a public dispute with Hagan that played out in the press.

The CPUC in April 2015 ended up penalizing PG&E $1.6 billion for the San Bruno explosion.

Hagan resigned in January 2014, and Peevey departed the CPUC under the shadow of a highly public investigation into back-room deal-making regarding the closure of the San Onofre Nuclear Generating Station. Both Peevey's and Cherry's homes were raided by state investigators in that case, and Cherry resigned from PG&E. But the investigation into the SONGS case by the office of then-California Attorney General Kamala Harris never led to any charges.

According to the new settlement, Kennedy was also representing another party—Bottle Rock Power—that was negotiating with PG&E for contract approval by the commission.

Kennedy is also founder and CEO of prominent San Francisco-based company Advanced Microgrid Solutions, now called AMS, in which Schwarzenegger has been an early and ongoing investor.

The penalties "are substantial, reflecting the seriousness of the conduct," the June 28 motion to file the settlement says. "These remedies also reflect the fact that PG&E has already paid substantial amounts for ex parte violations in the 2010-2014 time period involving many of the same PG&E employees trying to influence outcomes in many of the same commission proceedings as are at issue in the joint evidentiary record."

Under the settlement, PG&E must treat and satisfy the claims as general unsecured claims in accordance with the terms of a confirmed Chapter 11 reorganization plan. If neither the confirmed plan nor the commission specifies a time by which PG&E shall satisfy the claims, the payments are due on the confirmed plan's effective date.

In the years since San Bruno, PG&E's safety culture has been the subject of intense scrutiny by the public, especially as the utility is deemed responsible for large wildfires.

But the latest ex parte penalties will do little to quell the cynicism among Californians who perceive that the San Bruno explosion led to little change, and that the CPUC has historically been unduly influenced by utilities pulling the levers of power. The impacts of this legacy have been profound. –Jason Fordney

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