On September 2, 2014, the assigned CPUC ALJs issued their presiding officer decisions in the three investigative enforcement proceedings pending against the Utility. As previously disclosed in the 2013 Annual Report, these investigations relate to the Utility's natural gas transmission operations and practices and the San Bruno accident that occurred on September 9, 2010. The ALJs determined that the Utility committed approximately 3,700 violations of law, rules and regulations. The ALJs jointly issued a decision (the “Penalty Decision”) calling for total penalties of $1.4 billion on the Utility to address all violations, allocated as follows: (1) $950 million fine to be paid to the State General Fund, (2) $400 million refund to ratepayers of previously authorized revenues, and (3) remedial measures that the ALJs estimate will cost the Utility at least $50 million. The ALJs' decisions are not the final decisions of the CPUC. As described below, the Utility and other parties have appealed these decisions. In addition, three CPUC Commissioners have requested that the CPUC review the decisions. It is possible that one or more Commissioners will issue an alternate penalty decision for consideration by the CPUC. (Two of the five CPUC Commissioners have recused themselves from voting on the final outcome of the investigations.)

On October 2, 2014, the Utility and other parties, including TURN, ORA, and CCSF filed appeals with the CPUC of the presiding officer decisions. In its appeals, the Utility argues that the penalties imposed and the findings and conclusions on which they are based do not meet applicable legal standards, are based on the misapplication of California law and regulations, and are unconstitutional. The Utility has asked the CPUC to order the Utility to pay a significantly reduced penalty that is reasonable and proportionate in light of the nature of the violations and that takes into account the substantial unrecovered amounts the Utility has already spent and forecasts that it will spend on gas system safety. The Utility requests that it be allowed 180 days to raise the funds it may be ordered to pay to the State General Fund rather than the 40 days specified in the Penalty Decision. The Utility also argues that the entire penalty should go toward funding investments in the Utility's gas transmission system.

TURN, ORA, and CCSF jointly filed an appeal urging the CPUC to disallow the Utility's recovery of remaining PSEP costs of $877 million and to require the Utility to pay $473 million to the State General Fund. These parties also argue that the record in the investigative proceedings would support an even larger penalty than stated in the Penalty Decision. The City of San Bruno appealed the rejection of its proposals for the appointment of an independent monitor to oversee the Utility's natural gas operations and for the establishment of a pipeline safety trust. On October 27, 2014, the parties filed responses to the various appeals.

It is uncertain when the outcome of these investigations will be determined. There continues to be significant uncertainty regarding the ultimate form and amount of penalty while the various appeals and requests for review of the presiding officer's decisions are unresolved. The impact on PG&E Corporation's and the Utility's consolidated financial statements will vary depending on the forms and amounts of penalties that are ultimately adopted by the CPUC. Fines payable to the State General Fund or refunds of revenues previously authorized would be charged to net income when it is probable that such penalties will be imposed and the amounts can be reasonably estimated. A disallowance of previously authorized and incurred capital costs would be charged to net income when the disallowance is probable and the amount can be reasonably estimated. (See “Pipeline Safety Enhancement Plan” below.) Penalties in the form of future shareholder-funded pipeline work would be charged to net income in the period during which the actual costs are incurred.

At September 30, 2014, the Condensed Consolidated Balance Sheets included an accrual of $200 million in other current liabilities for the minimum amount of fines deemed probable. Although the CPUC may impose total penalties on the Utility of $1.4 billion or higher, consistent with the Penalty Decision, the Utility is unable to make a better estimate of probable fines or make a reasonable estimate of probable disallowances or other refunds due to the variety of potential outcomes that could result from the various appeals and Commissioners' requests for review. PG&E Corporation's and the Utility's estimates and the assumptions on which they are based are subject to change as developments in the appeal process occur or if alternate penalty decisions are issued for CPUC consideration. Future changes in estimates or assumptions could have a material impact on future financial condition, results of operations, and cash flows. PG&E Corporation and the Utility believe the final outcome of the investigations will have a material impact on their financial condition, results of operations, and cash flows.

On July 30, 2014, the U.S. Attorney's Office for the Northern District of California filed a 28-count superseding criminal indictment against the Utility in federal district court replacing the indictment that had been filed on April 1, 2014. The superseding indictment alleges 27 felony counts (increased from 12 counts alleged in the original indictment) charging 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 superseding indictment also includes one felony count charging that the Utility illegally obstructed the NTSB's investigation of the San Bruno accident. The maximum statutory fine for each felony count is $500,000, for total fines of $14 million. The superseding indictment also seeks an alternative fine under the Alternative Fines Act which states, in part: “If any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss.” Based on the superseding indictment's allegations that the Utility derived gross gains of approximately $281 million and that the victims suffered losses of approximately $565 million, the maximum alternate fine would be approximately $1.13 billion.

The Utility entered a plea of not guilty. The Utility continues to believe 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 or obstruct the NTSB's investigation, as alleged in the superseding indictment. A status conference is scheduled to be held in court on November 3, 2014. PG&E Corporation and the Utility have not accrued any charges for criminal fines in their condensed consolidated financial statements as such amounts are not considered to be probable.

PG&E Corporation's and the Utility's financial condition, results of operations, and cash flows also may be affected by the outcome of the following matters. They are unable to reasonably estimate the amount or range of future charges that could be incurred in connection with these matters given the wide discretion the CPUC and the SED have in determining whether to bring enforcement action and the number of factors that can be considered in determining the final penalties.

In September and October 2014, the Utility notified the CPUC that the Utility believes certain communications between the Utility and CPUC personnel violated the CPUC's rules regarding ex parte communications. Ex parte communications include any communications concerning substantive issues in a formal proceeding before the CPUC, between a decision maker and an interested person, that does not occur in an established public forum or on the record. Some of these communications relate to the 2015 GT&S rate case, in which the Utility has requested a $555 million increase in natural gas transmission and storage revenues effective January 1, 2015. On October 16, 2014, a CPUC ALJ issued a ruling, effective immediately, that bans the Utility from engaging in any oral or written ex parte communications, as well as procedural communications, with Commissioners or their advisors (other than during all-party meetings) regarding the GT&S rate case or any other rate-setting or adjudicatory proceeding before the CPUC, for a one-year period or until the resolution of the GT&S rate case, whichever is later. (The ALJ also issued a PD requesting the CPUC to affirm the ruling.) In addition, the CPUC Commissioner who is assigned to the GT&S rate case issued an alternate PD on October 16, 2014, that, among other provisions, would impose a $1.05 million fine and adopt a ratemaking disallowance of no more than half of the revenue increase, as authorized by a final CPUC decision in the 2015 GT&S rate case, that would have been amortized (collected from ratepayers) over the period between the original planned timing of a final decision (March 2015) and the modified schedule for a final decision. Comments by parties on the PD and alternate PD are due on November 5, 2014.

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. As of September 30, 2014, the Utility has submitted 70 self-reports (plus several follow-up reports) that the SED has not yet addressed. Among other reports, in July 2014, the Utility reported that it discovered that, contrary to its procedures, employees who perform work to fuse plastic pipes together had completed only part of their requisite re-qualification. The Utility believes that this issue does not constitute a safety concern as every plastic pipe installed in the field is tested on site and under pressure before being put into service. The Utility has notified the SED that employees who are performing this work have undergone the proper re-qualifications. The Utility believes it is probable that the SED will impose fines or take other enforcement action with respect to some of the Utility's 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 with respect to its audit findings. The Utility has been taking corrective actions in response to these 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 determined that the root cause of the incident was “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 U.S. Attorney's Office is investigating the Carmel incident and the Utility is cooperating with federal investigators. The CPUC and local Carmel officials are also continuing to investigate the incident. The City of Carmel has requested the CPUC to issue an order instituting a formal investigation into whether the Utility violated applicable laws and regulations. The Utility believes it is probable that enforcement actions will be taken in connection with this matter.

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.

On August 28, 2014, the CPUC issued an order instituting a formal investigation into a contract worker fatality that occurred in June 2012 during the dismantling of an unused fuel tank at the Utility's retired Kern power plant in Bakersfield, California. The SED conducted an investigation of the incident and has alleged that the Utility failed to adequately evaluate safety in contract bid proposals; did not provide adequate contractor project safety review and oversight; and neglected to evaluate safer alternatives. The SED also alleged that the Utility failed to conduct a prompt and thorough incident root cause analysis, as requested by the SED, in order to assist in identifying and implementing effective corrective actions to improve safety and reduce the likelihood of future incidents. The CPUC also noted that the SED's investigation into a 2013 incident at the Kern power plant is ongoing. In that incident, a bystander who was observing the demolition of the plant was severely injured by debris from the explosion.

The Utility and the SED are currently engaged in negotiations to reach a stipulated outcome of this proceeding. The CPUC ALJ has deferred adoption of a procedural schedule to enable the parties to continue to engage in negotiations. Any settlement agreement that may be reached would be submitted to the CPUC for its consideration. The Utility and the SED are scheduled to file a status report with the ALJ on November 3, 2014. It is reasonably possible that fines will be imposed on the Utility in connection with this matter. The CPUC also could order the Utility to comply with additional remedial measures, such as requiring the Utility to correct identified deficiencies and to further improve the safety of its operations.

On October 16, 2014, a PD was issued that would approve the settlement agreement (submitted in July 2014) among the Utility, the CPUC's ORA and TURN, to resolve the Utility's PSEP Update application (submitted in October 2013). The total PSEP-related revenue requirements (2012-2014) proposed in the settlement agreement reflect a proposed $23 million reduction to expense funding, as compared to the Utility's request. The Utility has recorded a charge against operating revenue to reflect the cumulative impact of this reduction. There would be no reductions to total PSEP capital costs of $766 million requested by the Utility in the PSEP Update application. The Utility previously has recorded cumulative charges of $549 million for PSEP-related capital costs that are expected to exceed the amount to be recovered. At September 30, 2014, approximately $540 million of PSEP-related capital costs is recorded in property, plant, and equipment on the Condensed Consolidated Balance Sheets. The Utility would be required to record charges in future periods to the extent PSEP-related capital costs are higher than currently expected and to the extent the CPUC authorizes total capital costs that are lower than $766 million in its final decision. Comments on the PD are due November 5, 2014. The CPUC will vote on the PD, at the earliest, on November 20, 2014. The Utility's ability to recover PSEP-related costs also could be affected by final decisions issued in the CPUC's pending investigations discussed above.

In August 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 alleged 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 alleged that PG&E Corporation and the Utility engaged in unfair business practices in violation of California state law. The plaintiffs sought restitution and disgorgement, as well as compensatory and punitive damages. 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. In October 2014, the Court of Appeals affirmed the court's ruling to dismiss the complaint. PG&E Corporation and the Utility believe it is remote that any material losses will be incurred in connection with this complaint.

Accruals for other legal and regulatory contingencies (excluding amounts related to the enforcement and litigation matters described above) totaled $35 million at September 30, 2014 and $43 million at 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 September 30, 2014 the Utility expected to recover $678 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 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. In 2013, the Regional Board 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 cleanup and abatement order in mid-2015. As final permits and orders 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 provide replacement water to affected residents under its whole house water replacement program (as described in the 2013 Annual Report). The Utility has discontinued its whole house water replacement program as a result of the State of California's new drinking water standard for hexavalent chromium that became effective on July 1, 2014.

The Utility's environmental remediation liability at September 30, 2014 reflects the Utility's best estimate of probable future costs associated with its final remediation plan and interim remediation measures. 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 nature and extent of the chromium contamination. 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. In September 2014, the Utility submitted its 90% remedial design plan to regulatory authorities and expects to submits its final remedial design plan in 2015, which would seek approval to begin construction of an in-situ groundwater treatment system that will convert hexavalent chromium into a non-toxic and non-soluble form of chromium. 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 September 30, 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 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 $1.8 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.

The 2014 GRC decision authorized flow-through ratemaking for temporary differences attributable to repair costs and certain other property-related costs for federal tax purposes. PG&E Corporation's and the Utility's financial results reflect a reduction in income tax expense associated with these temporary differences consistent with this ratemaking method. In addition, recent guidance from the IRS allows the Utility to deduct more repair costs than previously forecasted in the GRC. For the three months ended September 30, 2014, the Utility recognized a reduction in income tax expense consistent with GRC and IRS guidance for $175 million for the application of flow-through ratemaking effective as of January 1, 2014.

The IRS is currently reviewing several matters in the 2011, 2012, and 2013 tax returns. The most significant relates to a 2011 accounting method change to adopt guidance issued by the IRS in determining which repair costs are deductible for the electric distribution and transmission businesses. The IRS is expected to issue guidance by the end of 2014 that determines which repair costs are deductible for the natural gas transmission and distribution businesses. PG&E Corporation's and the Utility's unrecognized tax benefits may change significantly within the next 12 months depending on the IRS guidance that is issued and the resolution of the audits related to the 2011, 2012, and 2013 tax returns. As of September 30, 2014, it is reasonably possible that unrecognized tax benefits will decrease by approximately $380 million within the next 12 months, and most of this decrease would not impact net income.

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 nuclear generating facility located at Humboldt Bay. NEIL provides property damage and business interruption coverage of up to $3.2 billion per nuclear incident and $2.6 billion per non-nuclear incident for Diablo Canyon. NEIL provides coverage for nuclear and non-nuclear property damages of up to $131 million for the retired Humboldt Bay Facility. 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. 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 the retired Humboldt Bay facility and has a $500 million indemnification from the NRC for public liability claims 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 nine months ended September 30, 2014, several purchase power agreements the Utility entered into with renewable energy facilities were approved by the CPUC and completed major milestones with respect to construction, resulting in a total commitment amount of $2.2 billion over the next 25 years.