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DAN REYNOLDS, managing editor of Risk & Insurance®

When it comes to paying for capital improvements to safety and operations, utilities routinely lobby regulators for rate increases to cover costs. The same goes for liabilities and insured losses incurred for damages from allegations that a utility didn't maintain its equipment properly.

In the aftermath of the judgment against the utility, insurance capacity shrank by 66 percent and rates spiked. The utility petitioned the California Public Utilities Commission for rate increases to cover what it termed "unaffordable" levels of insurance pricing.

The utility is now seeking to raise revenue through rate hikes that would fund a "wildfire expense balancing account." That effort is being opposed in the courts by some rate payers.

Fellow California-based utility Pacific Gas & Electric is now facing allegations that it didn't install or maintain its natural gas pipelines properly in a case with even more grievous attending circumstances. In 2010, one of the company's natural gas pipelines exploded in San Bruno, which is located in San Mateo County just south of San Francisco and near San Francisco International Airport.

Eight people were killed and 58 injured in the explosion which destroyed most of a neighborhood. The utility announced recently that it would spend $1.7 billion over the next year to test and improve its system. But the company's Directors' and Officers' insurers and its general liability insurers are bracing for an onslaught of legal actions that have yet to play out.

According to its 2011 annual report filed with the U.S. Securities and Exchange Commission, PG&E faces more than 100 lawsuits involving third-party claims for personal injury and property damage in connection with the San Bruno explosion. Those lawsuits involve two class actions that involve approximately 370 plaintiffs, according to the company's filing.

In addition, a lawsuit has been filed alleging breach of fiduciary duty by the company's officers and directors. So that the cases involving death or serious injury to a household may proceed first, a San Mateo County Superior Court judge has ordered that the D&O case be put on hold until a further order of the court.

On January 12, the California Public Utilities Commission issued a finding that the accident was caused by the company's failure to follow industry practices when installing the pipeline, its poor record-keeping practices and, among other allegations, a "corporate culture that emphasized profits over safety."

The CPUC also commissioned a report that found that the utility spent less on gas pipeline safety investments than it recovered in rates between 2006 and 2010.

Brian Hertzog, a spokesman for PG&E described the audit's methodology as "fundamentally flawed."

The audit alleged that the company expended $95 million less in capital improvements and $39 million less in operations and maintenance expenditures between 1996 and 2010 that it would have been allocated in general rate case settlements with the commission over that time period. But Hertzog said the case settlements allocated a mass figure for expenditures and didn't provide line items for capital improvements or operations and maintenance. Thus, no failure to expend the appropriate amount in either category can be alleged, he said.

Hearings to determine whether the utility's ratepayers or shareholders or both should pay for subsequent and current improvements are scheduled to begin on Sept. 17, 2012.

February 27, 2012

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