California regulators last week ordered Pacific Gas and Electric (NYSE:PCG)
to hire an independent safety monitor (ISM) for five years, rejecting the utility’s request for a shorter period of oversight and insisting shareholders pay the $5 million annual bill.

The California Public Utilities Commission required the monitor as a condition for approving PG&E’s plan for exiting bankruptcy in May 2020.

The commission said its staff will hire the ISM based on responses to a request for proposals. The monitor will be responsible for ensuring that PG&E “prioritizes and implements the highest level of risk reduction across all levels of the company, from senior officials to field personnel,” the PUC said in an order Thursday. (Resolution M-4855)

The monitor will begin work before the term of the federal monitor, appointed in PG&E’s federal criminal probation proceeding, expires on Jan. 26, 2022. The federal monitor, law firm Kirkland and Ellis, was appointed following the utility’s 2017 criminal conviction for violating the U.S. Pipeline Safety Act and obstructing an agency proceeding in connection with the 2010 San Bruno gas pipeline explosion, which killed eight people and destroyed dozens of homes. The monitor’s work was expanded to include PG&E’s wildfire preparedness after the utility’s equipment was identified as the cause of catastrophic wildfires in 2017.

The CPUC said the ISM will be “functionally equivalent” to the federal monitor, with responsibility for both electric and gas safety, including wildfire mitigation plans, public safety power shutoffs and monitoring safety-related recordkeeping and record management.

“The ISM shall serve as the commission’s consultant, dispensing reports, materials, advice, opinions and recommendations to the commission,” the order said. “Consistent with the contours of the federal monitorship, the ISM’s work is directed by the commission and shall be performed for the commission’s benefit as well as PG&E’s.”

“In order to fulfill its role and effectively perform the areas within this scope of work, the ISM must be embedded within PG&E and have ongoing and regular access to PG&E’s non-privileged, every-day decision-making at all levels,” the order said. “The ISM must be able to raise safety concerns with PG&E and the commission immediately as they arise.”

The PUC said it would balance transparency with the need to protect from public disclosure utility confidential information and some communications, with the monitor required to produce a public report on its activities every six months.

“To the extent the ISM seeks access to materials that PG&E asserts are subject to attorney-client privilege or attorney work-product, PG&E shall use its best efforts to provide the ISM with comparable information without compromising the asserted privilege or protection,” the commission said.

The commission rejected conflict-of-interest provisions recommended by The Utility Reform Network (TURN), saying they were too broad and “could significantly reduce the pool of qualified vendors.” Instead, the commission’s Safety Policy Division will evaluate applicants’ potential conflicts and consult with its Legal Division to prevent conflicts that could jeopardize the monitor’s independence.

PG&E asked the commission to set an annual budget of $2 million to $5 million, arguing that setting a “static budget amount” would incentivize applicants to submit estimates that reach $5 million.

“But given the enormous task of effectively monitoring PG&E’s high-risk and expansive territory, we agree with TURN that ‘the distinctions among proposals will likely relate to the amount of work that can be performed within a $5 million budget — as well as the quality of the ISM team — and not on whether the work can be performed for less than $5 million,’” the commission said.

It also rejected PG&E’s request to hire the monitor for only two or three years, saying “five years is a reasonable amount of time considering the enormous task of developing a thorough understanding of PG&E’s lines of business and the numerous and complex safety risks associated with it.”

The utility also was rebuffed on its request to establish a “memorandum account” for ISM costs for potential cost recovery from ratepayers.

“These costs should be paid by PG&E shareholders and that PG&E may not seek cost recovery of ISM Plan costs in the future,” the commission said, noting its earlier description of PG&E’s safety performance “as ranging from ‘dismal to abysmal.’”