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Safety violations would be 'material credit negative' for PG&E, Moody's says

Recent allegations that Pacific Gas and Electric Co. broke gas safety rules and falsified related records could reflect poorly on the utility's corporate governance and, consequently, drag on the utility and its parent company's credit ratings, according to Moody's.

"The alleged violations are a material credit negative for PG&E," the rating agency said in a Dec. 20 note. "The allegations, if found to be true, could be a sign of a systemic weakness at PG&E with respect to corporate governance and oversight policies."

The allegations are "all the more concerning," the note added, because Pacific Gas and Electric, or PG&E, in recent years was already found to be in violation of safety and record-keeping standards leading up to the 2010 San Bruno, Calif., pipeline explosion that killed eight people, injured numerous other people and destroyed a neighborhood.

The California Public Utilities Commission has alleged that the utility falsified tens of thousands of gas safety records over 2012 through 2017. A formal investigation is just beginning, but a CPUC staff inquiry already found that PG&E did not have adequate staff to keep up with excavator requests for information on where exactly the utility's gas lines were but pressured locators to alter their records to make it appear that the company had been responding to the requests on time. If there is a financial penalty associated with the investigation, "the size of the penalty could be substantial," Moody's noted.

The Pipeline Safety Trust, an advocacy group, shared many of Moody's concerns. The kind of pressuring and dishonesty the CPUC staff inquiry highlighted is out of keeping with PG&E's public portrayal of cultural and procedural changes since the San Bruno explosion, Pipeline Safety Trust spokesperson Rebecca Craven said recently. "They are claiming to have a 'speak up' culture at the same time that supervisors are apparently being pressured to falsify reports and in turn pressuring employees to falsify one-call response reporting," Craven said. "And the allegation is that this has gone on for many years, all while PG&E was telling the public about its new safety culture and having pursued and succeeded in getting its safety management system 'certified.'"

A safety management system, or SMS, involves a cyclical, holistic approach to understanding and mitigating risk. The American Petroleum Institute in 2015 issued a recommended practice laying out how pipeline operators could develop their own safety management systems on a voluntary basis.

Craven said PG&E has been a vocal proponent of safety management systems, but "if the staff findings are confirmed, the behavior of PG&E makes a mockery of SMS adoption and once again highlights the need for more prescriptive regulations."

"This investigation has implications not only for PG&E ... but in a larger sense, it also calls into question any hope that voluntary measures by pipeline operators claiming to have instituted safety management systems will dramatically improve pipeline safety," Craven said.

Moody's also noted that the utility is already facing potentially significant wildfire liabilities. Some of these liabilities may be alleviated by recent state legislation that would allow the CPUC to consider the company's financial stability when deciding how to allocate costs related to 2017 fire activity. However, liabilities associated with 2018's Camp Fire, which claimed 88 lives and burned more than 150,000 acres, may not receive the same legal treatment, Moody's said.

Adding to the PG&E Corp. subsidiary's challenges, the court that sentenced the utility on six felony criminal convictions related to the San Bruno explosion has asked the company to address whether its infrastructure's relationship to recent wildfires constitutes a violation of the company's five-year probation.