Explosions are Bad for Business: PG&E's $1.6 Billion Fine

Back in 1956, the California utility company Pacific Gas & Electric laid a new gas pipeline, designated "132", to supply the growing needs of San Francisco and cities to its south along the peninsula.  The 30-inch-diameter pipeline's sections were welded together, and in one length near the town of San Bruno, a lengthwise seam was welded in one section.

For many years, the pipeline carried natural gas northward to San Francisco and surrounding communities, and as the population grew, PG&E increased the pressure the pipeline carried so as to keep up with growing demand.  In 1956, weld-inspection methods were fairly crude, and no one knew for sure how much pressure the pipeline could stand.

PG&E is regulated by the California Public Utility Commission (CPUC), so its profits and mode of operation are a creature of government as much as a product of private industry.  It is also a large publicly held corporation, ranking at 183 on the Fortune 500 list in 2014.  Under law, PG&E was obliged to take numerous safety measures to ensure that its aging pipelines were not a public hazard.  At one point, the firm got authorization to collect a special fee to be spent on safety improvements and upgrades.  Somewhere along the line, some of this safety-fee money was diverted instead to increases in executive salaries.  PG&E was also supposed to keep up-to-date GIS (geographic information system) records of the location and conditions of its pipelines, including seams such as the one in the section lying under San Bruno.  In many cases, it failed to do so, as PG&E staffer Bill Manegold found when he joined the company in 2005.  

In 2008, instead of performing a laborious pipeline-inspection procedure that would have involved shutting down the line, the firm intentionally "spiked" the pressure on Line 132, in a mistaken belief that if they failed to test it in this way, federal regulators would lower the maximum allowable pressure the line could carry.  According to state regulators, such spiking in turn required an inspection of the line for damage, an inspection that PG&E never performed.  In 2007 and again in 2010, PG&E asked the CPUC for permission to spend $5 million on upgrading sections of Line 132, but the work was not carried out.

Given this background, it may come as no surprise to you that on Sept. 9, 2010, residents of San Bruno heard a loud whooshing noise, followed by a tremendous explosion and fire.  The seam-welded portion of the line had ruptured.  In the ensuing holocaust in the middle of the residential neighborhood that had grown up around the pipeline, 38 homes were destroyed, dozens of people were injured, and eight persons died.  One of those killed, Jacqueline Greig, worked for the CPUC and had spent part of the summer investigating PG&E's plans to replace outdated pipelines.

Hundreds of lawsuits were filed against PG&E, and on April 9 of this year, the firm agreed not to contest a $1.6 billion fine levied against it by the CPUC.  (That amount is twice the company's total profits for 2014, incidentally.)  Reportedly, PG&E has in the meantime undertaken a massive effort to improve its safety and pipeline-inspection practices, but the CPUC is considering whether to break up the combined electric-gas utility into smaller pieces.

What went wrong here?  How could a large, supposedly competent organization of engineers and managers allow an old pipeline to be put at such risk that it explodes and destroys part of a neighborhood?  The National Transportation Safety Board, which investigated the accident, sums it up by saying it was an "organizational accident" that was the direct result of operational and managerial deficiencies. 

The CPUC is not innocent in this case either.  As the public entity charged with the responsibility of ensuring that private firms such as PG&E operate safely, it has come in for a lot of criticism as well.  Levying a fine that is twice a company's annual profits is something, but the real changes that have to happen are in the way PG&E operates.  And while fines are a form of punishment that companies understand, probably the most that fines can do is cause turnover in the executive suite, as disgruntled shareholders seek new leaders who won't let such a fiasco happen again.  There is no guarantee that the new managers will be any more competent than the previous set, except possibly in the matter of avoiding fines.

In all the words written about this disaster, I didn't see one that I think holds the key to avoiding such disasters in the future:  character.  You don't hear much discussion about character in the face of organizational failures, because we are trained to think of organizations like physicists think of air molecules:  as collections of particle-like people who will behave according to laws we can manipulate.  

There is something to the idea that even good people in a flawed organizational structure will end up doing bad things.  But even the best organizational structures cannot function well if the organization's people do not have strength of character, and a healthy respect, if not fear, of what can go wrong if their jobs are not done well.

The kind of fear that is needed was expressed well by a driver's ed instructor I had in high school, back in the days when high schools had driver's ed instructors.  She looked me straight in the eye and said, "You're about to sit behind the wheel of a machine that can kill people.  Every time you drive, you will be personally responsible for the safety of all the other drivers and pedestrians around you."  It put the fear of God in me with regard to how serious a matter driving was.  While I have not always lived up to that instructor's ideal, that fear I felt was a good thing in that it made me take driving seriously.

The ideal PG&E, and CPUC for that matter, would be composed of individuals whose memory of the San Bruno tragedy is never very far from their minds.  Not everyone working for those organizations is directly involved in safety matters.  But safety ought to be built into the consciousness of every employee to the extent that when those who are technically qualified to speak about safety say something's wrong and needs to be fixed, the entire organization should support all reasonable measures to ensure that those safety needs are addressed.  This includes things like replacing old lines when you get the money to do it, and spending ratepayer's money designated for safety on safety expenses, not extra pay for executives. 

It's a shame that eight people had to die to reveal the rottenness within the utility organizations responsible for the safety of California residents.  But sometimes, that's what it takes to bring strength of character back where it belongs.

Sources:  The AP article by Ellen Knickmeyer, "Utility won't appeal $1.6B penalty for blast" was carried by numerous outlets such as Yahoo News at http://news.yahoo.com/utility-wont-appeal-1-6-192700432.html;_ylt=A0LEV7sPUypVDxAAIZgnnIlQ.  I also referred to an article in the Los Angeles Times on the diversion of safety money to executive pay carried Mar. 25, 2015 at http://www.latimes.com/business/la-fi-puc-hearing-20150325-story.html, an article on the shoddy state of PG&E's GIS data carried on July 31, 2012 by www.sfgate.com at http://www.sfgate.com/news/article/PG-E-ignored-gaps-in-data-engineer-says-3752181.php, and the Wikipedia article "2010 San Bruno pipeline explosion".  PG&E's Fortune 500 ranking can be found at http://fortune.com/fortune500/pge-corporation-183/.