There are three CPUC investigative enforcement proceedings pending against the Utility that relate to (1) the Utility's safety recordkeeping for its natural gas transmission system, (2) the Utility's operation of its natural gas transmission pipeline system in or near locations of higher population density, and (3) the Utility's pipeline installation, integrity management, recordkeeping and other operational practices, and other events or courses of conduct, that could have led to or contributed to the rupture of one of the Utility's gas transmission pipelines in San Bruno, California on September 9, 2010. The SED has recommended that the CPUC impose what the SED characterizes as a penalty of $2.25 billion on the Utility, allocated as follows: (1) $300 million as a fine to the State General Fund, (2) $435 million for a portion of costs related to the Utility's PSEP that were previously disallowed by the CPUC and funded by shareholders, and (3) $1.515 billion to perform PSEP work that was previously approved by the CPUC, implement operational remedies, and for future costs. Other parties, including the City of San Bruno, TURN, the CPUC's ORA, and the City and County of San Francisco, have recommended total penalties of at least $2.25 billion, including fines payable to the State General Fund of differing amounts.

The ALJs who are presiding over the investigations are expected to issue one or more presiding judges' decisions to address the violations that they have determined the Utility committed and to impose penalties. It is uncertain when the decisions will be issued. Based on the CPUC's rules, the presiding judges' decisions would become the final decisions of the CPUC 30 days after issuance unless the Utility or another party filed an appeal with the CPUC, or a CPUC commissioner requested that the CPUC review the decision, within such time. If an appeal or review request is filed, other parties would have 15 days to provide comments but the CPUC could act before considering any comments.

At March 31, 2014, the Condensed Consolidated Balance Sheets included an accrual of $200 million in other current liabilities for the minimum amount of fines deemed probable that the Utility will pay to the State General Fund. The Utility is unable to make a better estimate due to the many variables that could affect the final outcome, including: how the total number and duration of violations will be determined; how the various penalty recommendations made by the SED and other parties will be considered; how the financial and tax impact of unrecoverable costs the Utility has incurred, and will continue to incur, to improve the safety and reliability of its pipeline system, will be considered; whether the Utility's costs to perform any required remedial actions will be considered; and how the CPUC will respond to public pressure. Future changes in these estimates or the assumptions on which they are based could have a material impact on future financial condition, results of operations, and cash flows. The CPUC may impose fines on the Utility that are materially higher than the amount accrued and may disallow PSEP costs that were previously authorized for recovery or other future costs. Disallowed capital investments would be charged to net income in the period in which the CPUC orders such a disallowance. See “Disallowed Capital Costs” below. Future disallowed expense and capital costs would be charged to net income in the period incurred.

As previously disclosed, the U.S. Department of Justice has been conducting a criminal investigation related to the San Bruno accident. On April 1, 2014, the U.S. Attorney's Office for the Northern District of California filed a 12-count criminal indictment against the Utility in federal district court alleging that the Utility knowingly and willfully violated minimum safety standards under the Natural Gas Pipeline Safety Act relating to record keeping, pipeline integrity management, and identification of pipeline threats. The indictment seeks a fine of $500,000 for each of the 12 felony counts, plus a special assessment of $400 for each count, for total fines of $6 million. The U.S. Attorney could seek a superseding indictment to bring additional charges or fines against the Utility. On April 21, 2014, the Utility entered a plea of not guilty and the court set a status conference for June 2, 2014. The Utility believes that criminal charges are not merited and that it did not knowingly and willfully violate minimum safety standards under the Natural Gas Pipeline Safety Act as alleged.

Gas Safety Citation Program. The SED has authority to issue citations and impose fines on California gas corporations, such as the Utility, for violations of certain state and federal regulations that relate to the safety of natural gas facilities and operating practices. The California gas corporations are required to inform the SED of any self-identified or self-corrected violations of these regulations. The SED has discretion to impose fines or take other enforcement action to address a violation, based on the totality of the circumstances. The SED can consider various factors in determining whether to impose fines and the amount of fines, including the severity of the safety risk associated with each violation, the number and duration of the violations, whether the violation was self-reported, and whether corrective actions were taken. The SED has imposed fines ranging from $50,000 to $16.8 million in connection with several of the Utility's self-reports. The Utility has submitted about 60 self-reports (plus some follow-up reports) that the SED has not yet addressed. The Utility believes it is probable that the SED will impose fines or take other enforcement action with respect to some of these self-reports in the future. In addition, the SED has been conducting numerous compliance audits of the Utility's operating practices and has informed the Utility that the SED's audit findings include several allegations of noncompliant practices. It is reasonably possible that the SED will impose fines or take other enforcement action with respect to its audit findings. The Utility has been taking corrective actions in response to these matters.

Natural Gas Transmission Pipeline Rights-of-Way. In 2012, the Utility notified the CPUC and the SED that the Utility planned to complete a system-wide survey of its transmission pipelines in an effort to identify encroachments (such as building structures and vegetation overgrowth) on the Utility's pipeline rights-of-way. The Utility also submitted a proposed compliance plan that set forth the scope and timing of remedial work to remove identified encroachments over a multi-year period and to pay penalties if the proposed milestones were not met. In March 2014, the Utility informed the SED that the survey has been completed and that remediation work, including removal of the encroachments, is expected to continue for several years. The SED has not addressed the Utility's proposed compliance plan, and it is reasonably possible that the SED will impose fines on the Utility or take other enforcement action in the future based on the Utility's failure to continuously survey its system and remove encroachments.

Other Matters. On March 3, 2014, a vacant house in Carmel, California was severely damaged due to a natural gas explosion while the Utility's employees were performing work to upgrade the main natural gas distribution pipeline in the area. There were no injuries or fatalities. A third-party engineering firm hired by the Utility has completed an independent assessment and concluded, among other things, that after a welder tapped into the steel distribution pipeline that had previously been fitted with an inner plastic pipe, natural gas migrated from the space between the inserted plastic pipe and the steel pipe into the soil and, eventually, through an opening in a sewer service lateral into the vacant house. The ignition source was likely the stove pilot light. The consultant's report stated that the root cause of the incident was determined to be “inadequate verification of system status and configuration when performing work on a live line.” The Utility is implementing the recommendations made by the consultant. The CPUC, the U.S. Attorney's Office, and local fire and police officials are continuing to investigate the incident, and additional investigations or proceedings could be commenced. PG&E Corporation and the Utility believe it is reasonably possible that fines could be imposed on the Utility, or that other enforcement actions could be taken, in connection with this matter.

The CPUC has not yet acted on the Utility's PSEP update application (submitted in October 2013) that presented the results of its completed search and review of records relating to validation of operating pressure for the Utility's entire natural gas transmission pipeline system. The Utility requested that the CPUC approve changes to the scope and prioritization of PSEP work, including deferring some projects to after 2014 and accelerating other projects, and that the CPUC adjust authorized revenue requirements to reflect these changes. On April 25, 2014, the SED released the results of its safety review of the Utility's operating pressure validation work and the Utility's PSEP update application. Although the SED identified a number of exceptions, it did not identify any imminent safety concerns. The Utility is reviewing the SED's findings and recommendations. The SED has scheduled a workshop in early May to present its audit findings and the Utility will have an opportunity to respond to the SED's findings. It is uncertain when the CPUC will issue a decision on the PSEP update application.

The Utility has requested that the CPUC authorize capital costs of $766 million under the PSEP, reflecting the proposed changes in the PSEP update application. Of this amount, approximately $340 million is recorded in Property, Plant, and Equipment on the Condensed Consolidated Balance Sheets at March 31, 2014. At March 31, 2014 and December 31, 2013, the Utility has recorded cumulative charges of $549 million for PSEP capital costs that are expected to exceed the amount to be recovered. The Utility would record additional charges to the extent PSEP capital costs are higher than currently expected, or if additional capital costs are disallowed by the CPUC. The Utility's ability to recover PSEP capital costs also could be affected by the final decisions to be issued in the CPUC's pending investigations discussed above.

On August 23, 2012, a complaint was filed in the San Francisco Superior Court against PG&E Corporation and the Utility (and other unnamed defendants) by individuals who seek certification of a class consisting of all California residents who were customers of the Utility between 1997 and 2010, with certain exceptions. The plaintiffs allege that the Utility collected more than $100 million in customer rates from 1997 through 2010 for the purpose of various safety measures and operations projects but instead used the funds for general corporate purposes such as executive compensation and bonuses. The plaintiffs allege that PG&E Corporation and the Utility engaged in unfair business practices in violation of California state law. The plaintiffs seek restitution and disgorgement, as well as compensatory and punitive damages. PG&E Corporation and the Utility contest the plaintiffs' allegations. In May 2013, the court granted PG&E Corporation's and the Utility's request to dismiss the complaint on the grounds that the CPUC has exclusive jurisdiction to adjudicate the issues raised by the plaintiffs' allegations. The plaintiffs have appealed the court's ruling to the California Court of Appeal. PG&E Corporation and the Utility are unable to estimate the amount or range of reasonably possible losses, if any, that may be incurred in connection with this matter if the lower court's ruling is reversed.

Accruals for other legal and regulatory contingencies (excluding amounts related to natural gas matters above) totaled $43 million at March 31, 2014 and December 31, 2013. These amounts are included in other current liabilities in the Condensed Consolidated Balance Sheets. The resolution of these matters is not expected to have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, or cash flows.

At March 31, 2014, the Utility expected to recover $584 million of its environmental remediation liability through various ratemaking mechanisms authorized by the CPUC. One of these mechanisms allows the Utility rate recovery for 90% of its hazardous substance remediation costs for certain approved sites (including the Topock site) without a reasonableness review. The Utility may incur environmental remediation costs that it does not seek to recover in rates, such as the costs associated with the Hinkley site.

The Utility is legally responsible for remediating groundwater contamination caused by hexavalent chromium used in the past at the Utility's natural gas compressor stations. One of these stations is located near Hinkley, California and is referred to below as the “Hinkley site.” Another station, the Topock Natural Gas Compressor Station, is located near Needles, California and is referred to below as the “Topock site.” The Utility is also required to take measures to abate the effects of the contamination on the environment.

The Utility's remediation and abatement efforts at the Hinkley site are subject to the regulatory authority of the California Regional Water Quality Control Board, Lahontan Region. The Regional Board has certified a final environmental report evaluating the Utility's proposed remedial methods to contain and remediate the underground plume of hexavalent chromium and the potential environmental impacts. The Regional Board is expected to issue the final project permits and a final clean-up order in phases through 2014 and into 2015. As the permits and order are issued, the Utility expects to obtain additional clarity on the total costs associated with the final remedy and related activities. The Utility has implemented interim remediation measures to reduce the mass of the chromium plume, monitor and control movement of the plume, and provided replacement water to affected residents.

The Utility's environmental remediation liability at March 31, 2014 reflects the Utility's best estimate of probable future costs associated with its final remediation plan and interim remediation measures. The State of California has established a final drinking water standard for hexavalent chromium that is expected to become effective July 1, 2014. The Utility does not believe the new standard will have a material impact on its environmental remediation liability. Future costs will depend on many factors, including the levels of hexavalent chromium the Utility is required to use as the standard for remediation, the required time period by which those standards must be met, and the extent of the chromium plume boundary. Future changes in cost estimates and the assumptions on which they are based may have a material impact on future financial condition, results of operations, and cash flows.

The Utility's remediation and abatement efforts at the Topock site are subject to the regulatory authority of the California Department of Toxic Substances Control and the U.S. Department of the Interior. The California Department of Toxic Substances Control has approved the Utility's final remediation plan to contain and remediate the underground plume of hexavalent chromium, under which the Utility will implement an in-situ groundwater treatment system to convert hexavalent chromium into a non-toxic and non-soluble form of chromium. The Utility expects to submit its final remedial design plan in late 2014 for approval to begin construction of the groundwater treatment system. The Utility has implemented interim remediation measures, including a system of extraction wells and a treatment plant designed to prevent movement of the chromium plume toward the Colorado River. The Utility's environmental remediation liability at March 31, 2014 reflects its best estimate of probable future costs associated with its final remediation plan. Future costs will depend on many factors, including the extent of work to be performed to implement the final groundwater remedy and the Utility's required time frame for remediation. Future changes in cost estimates and the assumptions on which they are based may have a material impact on future financial condition, results of operations, and cash flows.

Although the Utility has provided for known environmental obligations that are probable and reasonably estimable, the Utility's undiscounted future costs could increase to as much as $1.7 billion (including amounts related to the Hinkley and Topock sites described above) if the extent of contamination or necessary remediation is greater than anticipated or if the other potentially responsible parties are not financially able to contribute to these costs. The Utility may incur actual costs in the future that are materially different than this estimate and such costs could have a material impact on results of operations during the period in which they are recorded.

In January 2014, PG&E Corporation received the IRS closing agreements for the 2008 and 2010 audit years, which remain subject to the approval by the Joint Committee on Taxation of the U.S. Congress. The IRS is currently reviewing several matters pertaining to the 2011 and 2012 tax returns. The most significant of these matters relates to the repairs accounting method changes.

The IRS has been working with the utility industry to provide guidance concerning the deductibility of repairs. PG&E Corporation and the Utility expect the IRS to issue guidance with respect to repairs made in the natural gas transmission and distribution businesses during 2014. PG&E Corporation's and the Utility's unrecognized tax benefits may change significantly within the next 12 months depending on the guidance to be issued by the IRS and the resolution of the IRS audits related to the 2011 and 2012 tax returns. As of March 31, 2014, PG&E Corporation and the Utility believe that it is reasonably possible that unrecognized tax benefits will decrease by approximately $360 million within the next 12 months.

The Utility is a member of NEIL, which is a mutual insurer owned by utilities with nuclear facilities. NEIL provides insurance coverage for property damages and business interruption losses incurred by the Utility if a nuclear event were to occur at the Utility's two nuclear generating units at Diablo Canyon and the retired Humboldt Bay Unit 3. NEIL provides property damage and business interruption coverage of up to $3.2 billion per nuclear incident and $2.5 billion per non-nuclear incident for Diablo Canyon. Humboldt Bay Unit 3 has up to $131 million of coverage for nuclear and non-nuclear property damages. NEIL also provides coverage for damages caused by acts of terrorism at nuclear power plants.

Under the Price-Anderson Act, public liability claims that arise from nuclear incidents that occur at Diablo Canyon, and that occur during the transportation of material to and from Diablo Canyon are limited to $13.6 billion. The Utility purchased the maximum available public liability insurance of $375 million for Diablo Canyon. The balance of the $13.6 billion of liability protection is provided under a loss-sharing program among utilities owning nuclear reactors. In addition, Congress could impose additional revenue-raising measures to pay claims. The Price-Anderson Act does not apply to claims that arise from nuclear incidents that occur during shipping of nuclear material from the nuclear fuel enricher to a fuel fabricator or that occur at the fuel fabricator's facility. The Utility has a separate policy that provides coverage for claims arising from some of these incidents up to a maximum of $375 million per incident. In addition, the Utility has $53 million of liability insurance for Humboldt Bay Unit 3 and has a $500 million indemnification from the NRC for public liability arising from nuclear incidents, covering liabilities in excess of the liability insurance. (See Note 14 of the Notes to the Consolidated Financial Statements of the 2013 Annual Report for additional information.)

In the ordinary course of business, the Utility enters into various agreements to purchase power and electric capacity; natural gas supply, transportation, and storage; nuclear fuel supply and services; and various other commitments. The Utility disclosed its commitments at December 31, 2013 in Note 14 of the Notes to the Consolidated Financial Statements in the 2013 Annual Report. During the three months ended March 31, 2014, the Utility entered into several renewable energy power purchase agreements, resulting in a total commitment of $300 million over the next 20 years. These agreements have been approved by the CPUC and have completed major milestones with respect to construction.