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Light penalties the norm for state utilities following fatal accidents [The Morning Call (Allentown, Pa.)](Morning Call (Allentown, PA) Via Acquire Media NewsEdge) Oct. 12--On Feb. 9, 2011, natural gas from a cracked cast-iron pipe fueled a massive explosion that lit up the sky in Allentown, killing five people and destroying eight row homes at 13th and Allen streets. The explosion echoed another -- just six months earlier in San Bruno, Calif. There, the blast was so strong it registered as a small earthquake. Eight people were killed, and dozens of homes were consumed by fire. In Allentown, blame was placed on a corroded distribution line belonging to natural gas utility UGI; in San Bruno, on a defective weld in the transmission system operated by Pacific Gas & Electric. Two administrative law judges, after working openly in public hearings, issued a ruling on the San Bruno case last month. They ordered PG&E to pay a record $1.4 billion fine. Combined with $635 million in pipeline upgrades ordered earlier, the company's total cost -- which will be borne by shareholders, not ratepayers, if upheld on appeal -- will top $2 billion. That's 4,000 times more than the $500,000 penalty that UGI agreed to pay in a settlement approved last year by the Pennsylvania Public Utility Commission. Unlike in the San Bruno case, in Pennsylvania, the PUC negotiated its settlement with UGI behind closed doors, without public presentation of evidence or witness testimony. The PUC, which is marking its centennial this year, hasn't fully litigated a case involving an alleged safety violation by a gas or electric utility in recent memory. Neither PUC staff nor outside observers interviewed by The Morning Call, including some with decades of experience in utility regulation, could recall such a case. Instead, the PUC disposes of safety violations through negotiated settlements. After the Allentown explosion, for example, the PUC's Bureau of Investigation and Enforcement met with UGI's lawyers in private. There, the two sides reached the following agreement: UGI, a division of Valley Forge-based UGI Corp., a Fortune 500 company with $6.5 billion in revenue that year, would pay a fine of $386,000 -- a figure later increased to $500,000. The company would also expedite its pipeline replacement schedule and forgo reimbursement for $25 million in replacement costs over the next two years, though it could later recoup that money from customers through a rate hike. Pennsylvania is not alone in negotiating major settlements involving public safety behind closed doors. No one keeps track nationally or statewide of how many utility safety cases are settled in this way, but numerous sources said fully litigated cases are rare. "It raises a question," said Scott Hempling, former executive director of the National Regulatory Research Institute in Silver Spring, Md. "The process by which potential wrongdoers are being held accountable -- does that process have enough rigor, transparency and weight to produce a result in the public interest?" James H. Cawley, the PUC's longest-serving commissioner, said in this state it does. Settling cases, he said, is preferable to litigating them because it saves money and time, and yields concessions from utilities that promote safety. And the results, unlike a penalty ordered by an administrative law judge, cannot be overturned on appeal, he noted. "You are trying to protect the public here. You are not trying to get money for the commonwealth," he said. "I'd rather see a settlement that shows me some creativity ... than a knock-down, drag-out [court] case." So far this year, 14 people have been killed in 88 "significant incidents" involving the distribution and onshore transmission of natural gas nationwide, according to the federal Pipeline and Hazardous Materials Safety Administration. Over the past two decades, such accidents have accounted for an average of 13 fatalities a year. The California Public Utilities Commission is the exception among state utility commissions: It at least occasionally, if not frequently, resolves such cases through litigation. The CPUC does so, in part, because the rules are different in California. There, third parties, including watchdog groups, have legal standing as "interveners." Not only may they take a seat at the negotiating table, but they may also recoup legal costs from utilities they successfully challenge. After the San Bruno explosion, the CPUC and PG&E tried to enter into mediated settlement discussions. Interveners, however, objected, and the case ended up being litigated. Jason Zeller, a recently retired CPUC lawyer who also served as president of the National Conference of Regulatory Attorneys, said litigation motivates investigators to dig deeper and look harder for evidence -- "to go out there and open file cabinets." Only after the CPUC began preparing for litigation did investigators discover through an audit that PG&E had diverted to shareholders $50 million that was supposed to have gone toward natural gas pipeline safety improvements. "We need to find out what happened," Zeller said. "The only way to do that is to litigate a case." Gerry Norlander, executive director of the Public Utility Law Project, a watchdog group in Albany, N.Y., said, "If you never play the card," referring to litigation, "if your opponent knows you are bluffing, they can say this is their last offer [and] ... they're more likely to get an agreement friendlier to them." He said regulators cannot know what constitutes a good settlement if they have no record of litigation for a basis of comparison. "You're settling cases in the dark," he said. Rooted in history The idea for public utility commissions originated more than a century ago with electric companies -- one of the businesses the commissions regulate today. Specifically, utility commissions were the brainchild of Thomas Edison's one-time personal secretary, Samuel Insull. A major figure in his own right, Insull was co-founder of General Electric and creator of a vast business empire of utilities and railroads. He was the Bill Gates of his day. Though in Insull's case, fame turned into infamy. After emigrating from England in 1881 and working for Edison in New Jersey for the remainder of the decade, Insull set off for Chicago. There, he gained control of a small electric generation station and built it into a major utility holding company. Utility owners, however, faced a mounting threat by the end of the century as households and businesses learned through experience that electricity was very different from other commodities. Even then, generating and delivering the seemingly magical source of light was such a capital-intensive enterprise that only one electric company in a given area could do it and hope to turn a profit. Two or more companies would result in a surfeit of wires and poles -- and insolvency for all. When it came to electricity, competition -- that most American of concepts -- was ruinous. Insull was among the first in his nascent industry to comprehend fully that electricity lent itself to what 19th-century British philosopher John Stuart Mill described as a "natural monopoly." The challenge, then, was to somehow make such a monopoly acceptable to voters, many of whom were already agitating for a solution of their own: municipal-owned electric companies, or "munis." Munis were anathema to utility owners. Public ownership of generation plants and power lines would have put an end to the private profits that had made them rich. In an address at the annual convention of the National Electric Association in 1898, Insull put forth an alternative: the state utility regulatory commission. Utilities would operate under the oversight of government. True, utilities would lose control over their rates; but they would remain privately owned under a structure that would virtually guarantee steady, if not exorbitant, profits. To Insull's fellow utility owners at the convention, his proposal seemed heresy. Eventually, though, as the call for munis grew louder, they began to see things differently. It would take another decade before the creation of the first regulatory commission, in Wisconsin, but others would soon follow in New York, Massachusetts and elsewhere. Much later, after Insull's business empire had collapsed during the Great Depression, he was accused of bilking investors. He fled the country to Europe but was arrested and extradited. A trial in which he was found not guilty did little to restore his reputation. His legacy, nonetheless, was secure. Long before his death in 1938, regulatory commissions had been established in every state. The Pennsylvania Public Utility Commission -- then called the Public Service Commission -- became operational in 1914 and underwent major reforms in 1937 and 1976. Today, it consists of five governor-appointed commissioners supported by a staff of nearly 500. Meeting weekly in sparsely attended public meetings at the state Capitol, the commissioners oversee 8,000 entities, including natural gas, electric, telecommunications, water/wastewater and transportation utilities. The chairman of the commission is Robert F. Powelson, who was nominated to the PUC in 2008 by Democratic Gov. Ed Rendell and appointed chairman by Republican Gov. Tom Corbett in 2011. Before joining the PUC, he was president of the Chester County Chamber of Business & Industry. According to Powelson, the PUC's Bureau of Investigation and Enforcement, with its large expert staff, is the envy of other states, and the settlements the bureau negotiates serve the public well. "Pennsylvanians should have the peace of mind that the PUC is out there in the field holding utilities accountable," he said. "Our record speaks for itself in getting outcomes for consumers and, more importantly, driving safety." Few would argue the electric and natural gas industries have not thrived under the stability provided by the social contract envisioned by Insull more than a century ago. Stockholders have reaped dividends while customers have gained widespread access to service at predictable and reasonable rates. Even so, some experts, such as former Ohio State University professor Bob Burns, believe the relationship between utilities and regulators has become too cozy. Burns is afraid he may have inadvertently contributed to the problem with an influential white paper titled "Administrative Procedures for Proactive Regulation." Published in 1988 when Burns was a researcher for the National Regulatory Research Institute, the paper argues for more negotiated settlements. Burns explained his focus at the time was rate-making cases, not the safety violation cases to which utility commissions nationwide have since applied his ideas. Now, more than 25 years later, he fears an over-reliance on negotiated settlements has allowed utilities to run roughshod over the laws that are supposed to protect their customers. "If a safety violation is egregious enough, then litigation is the way to do it," he said. Two PPL cases The Pennsylvania Public Utility Commission's reluctance to litigate safety cases is not limited to natural gas accidents. In 2008, Lancaster resident Cynthia Glassman was killed in a house fire the day after Allentown-based PPL Electric Utilities cut off her power. Glassman, who was 64, had been paying off delinquent bills through an agreement with PPL, but the utility terminated service after she missed a $7.23 late fee. The subsequent PUC investigation determined PPL did not have adequate grounds to turn off Glassman's power because she had recently made a payment of $204 as requested by a PPL customer service representative, and it was the customer service representative who failed to apply that payment to the late fee. Though the cause of the fire was never determined, the utility agreed in a settlement with the PUC to pay a $471,000 penalty. Some of the regulations PPL allegedly violated in its handling of the Glassman case would be cited by the PUC in another complaint against PPL three years later. Richard Eberly, 45, of Lititz, Lancaster County, died of natural causes Aug. 2, 2011, according to an obituary. Two months earlier, PPL had terminated electricity service to his trailer for nonpayment of $5,325. The PUC's investigation concluded PPL had violated state utility regulations by cutting Eberly's power prematurely. Despite Eberly's protests, investigators noted, PPL failed to place his account "into dispute," which would have allowed his power to stay on. Eberly notified PPL six times that he had a medical condition, though he did not provide a doctor's note, according to the PUC. Last year, the PUC voted 5-0 for a $45,000 settlement in the case with PPL. Asked about the repeat offenses, PPL spokesman Bryan Hay said, "All customer cases are unique and involve different aspects of the PUC's regulations." Also common to both the Eberly and Glassman settlements -- and virtually all of the PUC's safety violation settlements -- was a clause in which the utility asserted it was not admitting to any of the allegations. Such legal language can provide utilities a measure of protection against criminal charges and civil lawsuits from injured parties, including family members of victims. "It's not a sticking point for us whether or not [utilities] admit any guilt or wrongdoing," PUC spokeswoman Jen Kocher explained. "As long as we get the remedial action, and if we can get a civil penalty as well, then we are happy." PUC investigations into such matters are conducted by its Bureau of Investigation and Enforcement, comprising engineers with technical expertise and lawyers steeped in utility law. Typically, if a utility is suspected of violating safety rules, the bureau dispatches investigators to interview witnesses and gather other evidence. Once the investigators submit a formal complaint, settlement negotiations begin. "What we're seeking is to address the safety concerns, to make sure it doesn't happen again," bureau Director Johnnie E. Simms said. To that end, settlements often include, in addition to fines, non-financial concessions. In the Glassman case, for example, PPL agreed to revise its termination procedures and retrain its customer service representatives. Utilities, of course, have their own legal defense teams, and the back-and-forth over proposed remedies often drags on for weeks or months through face-to-face meetings, telephone calls and email exchanges -- all in private. The lack of transparency is a point of concern for Hempling, the former director of the National Regulatory Research Institute, who also advises regulators internationally and teaches utility law at Georgetown University. "[If] there's not a public accounting, I don't know how you ensure that the public is being protected," he said, noting that his comments weren't directed at any particular case or state's utility commission. "It's not a matter of right or wrong; it's a matter of 'how do we know?' " "The public simply does not need to know everything," Commissioner Cawley countered, dismissing what he characterized as "sunshine arguments" hashed over for years. "The public, frankly, has just got to trust that the people on the public payroll have utmost on their minds the public interest." Simms said negotiations can be "long and intense" as his staff works to achieve its objective. "We are trying to change behavior," he said. After the Bureau of Investigation and Enforcement and a utility draft a settlement, their proposal must pass muster with an administrative law judge. But even then, it's not a done deal. First, the five commissioners must approve it. And, in theory, they could vote it down, sending the case back to the bureau for full litigation. In litigation, the bureau would have to argue its case and the utility would make its defense before a judge in a public courtroom -- a potentially time-consuming and costly proposition. "The negotiation and PUC approval processes ensure that settlements are in the public interest and bring matters to a close faster and more efficiently," PPL's Hay said. "It's not a very efficient process for any parties involved to litigate if you can reach a settlement." Cast-iron pipes The Pennsylvania PUC had been grappling with natural gas disasters long before the 2011 explosion in Allentown. In 1990, Allentown firefighters were checking on a report of a gas leak at 423 N. Fifth St. when an explosion destroyed three homes, killing Diane Lazer and hurling her housemate across the street. The National Transportation Safety Board, which handled the case because the PUC's Bureau of Investigation and Enforcement had not yet been formed, determined a deteriorating water line had caused an 87-year-old cast-iron gas pipe to weaken and crack. Escaping gas seeped into Lazer's home. The NTSB found that the gas pipe's failure was "inevitable," even without the leaking water main, because the old cast-iron pipe was corroded. The NTSB blamed UGI for the explosions, saying it failed to monitor its system and replace the pipe. A corroded cast-iron pipe would also cause destruction and grief two decades later at 13th and Allen streets. In the years between 1990 and 2011, there were at least seven gas explosions in the Lehigh Valley, including two with fatalities. Eight months after Allentown's 2011 explosion, a third-party contractor digging at a Millersville, Lancaster County, intersection ruptured a gas main, leading to an explosion that damaged a home and business. The subsequent investigation found that UGI failed to properly mark its underground facilities and didn't have appropriate measures in place to prevent damage or to shut down the gas line in a timely manner. Last year, the PUC approved a $200,000 settlement with UGI in the case. Similarly, work by a third-party contractor ended in an explosion on the other side of the state, in Allegheny County, three years earlier. In that case, three homes were destroyed, a man was killed and his granddaughter was seriously injured. Though it was the contractor who damaged a gas distribution line, the PUC found Peoples Natural Gas utility at fault for failing to inspect the work site. "Had these procedures been followed ... the damaged [pipe] would likely have been detected and corrected," PUC investigators wrote in their complaint. Under the subsequent settlement, Peoples Natural Gas paid an $80,000 fine. Mark McDonald, a gas explosion investigator for Boston-based NatGas Consulting, believes the penalties that come out of negotiated settlements are too small. "In the industry, it's called 'the cost of doing business,' " he said. "It shows the lack of fear." Explosions will continue "until someone starts truly paying -- other than the victims," he said. "The utilities are rational as corporations," added Burns, who recently retired from Ohio State. "They keep in mind what things are costing them. ... You have to make sure the penalties are great enough that they will pay attention." Killed in Allentown in 2011 were William Hall, 79, and his wife, Beatrice, 74; and Ofelia A. Ben, 69, her granddaughter, Katherine Cruz, 16, and Katherine's 4-month-old son, Matthew Vega. PUC investigators were on the scene before the smoke had cleared, and they were a constant presence for the next three weeks. Their investigation continued for 16 months. In June 2012, the Bureau of Investigations and Enforcement filed a complaint pointing to a gas leak emanating from a crack in a cast-iron gas distribution line buried beneath Allen Street. UGI was accused of failing to ensure adequate levels of an odorant added to natural gas to help customers smell leaks; failing to adequately survey its gas lines and react to signs that the aging pipes in the area needed repair; and for deficiencies in its emergency response. In a strongly worded response the following month, UGI disputed nearly every count. The two sides began talking almost immediately. "I can tell you this, they were intense negotiations," Simms recalled. "There were several mini-drafts of a proposed settlement." Paul Metro, who heads the bureau's natural gas investigations, said the size of the fine was a major point of contention. In the end, UGI agreed to pay $386,000 which, according to Metro, was the maximum permissible penalty when each of the alleged violations was assessed individually. "Our primary goal is not collecting revenue for the state fund," he said. It "is changing the corporate culture, or changing behavior." UGI also promised to install new odorant equipment and replace all its aging, cast-iron pipes by 2027 -- a job previously expected to take until 2051. "The terms of this settlement come at a significant cost ... quite substantial and sufficient to deter [UGI] from committing any violations in the future," PUC investigators wrote when the settlement was announced in October 2012. The five PUC commissioners eventually voted in favor of the settlement, though not before reassessing the fine at $500,000 -- the maximum at the time for a single event. Since then, the maximum has been raised to $2 million. "Those fine limits are dictated by the law," PUC Chairman Powelson said. "We are hamstrung in many cases by statutory requirements." In contrast, California has no maximum, and its fines mount daily and indefinitely. In the San Bruno case, for example, regulators arrived at a $1.4 billion fine after determining PG&E had committed 3,800 infractions over a period of decades. Surviving victims of the Allentown blast, including relatives of those killed, sued UGI separately. It is unclear how much those cases cost the company. All were settled out of court under sealed terms. UGI declined to comment for this article. Settlement culture In the classes Hempling teaches on utility law, he warns of what he calls "regulation by settlement." "A settlement culture can induce regulatory passivity," he wrote in the textbook "Preside or Lead? The Attributes and Actions of Effective Regulators." "There is risk of atrophy," the passage continues. "Muscles unused become muscles less able. This spiral points downward: As the commission becomes less engaged and less alert, it becomes less respected and less relied upon, leading to more settlements and more atrophy." In Pennsylvania, more settlements are not possible. Even so, Commissioner Cawley said Hempling's diagnosis doesn't apply to the state's PUC. "He's describing a very passive settlement culture, as opposed to [the PUC's] diligent settlement culture," he said. "Unfortunately, the vast majority of the states do not have the resources we have and are forced into a passible culture. ... But we have the resources. "Very often, you settle a case to get more," he said. " ... In my experience, we get a better result by settling." [email protected] 610-820-6130 ___ (c)2014 The Morning Call (Allentown, Pa.) Visit The Morning Call (Allentown, Pa.) at www.mcall.com Distributed by MCT Information Services |