OREANDA-NEWS. While this week brought notable developments in the ongoing criminal indictment against Pacific Gas and Electric (PG&E), Fitch Ratings expects other key events to have a more significant influence on PG&E's creditworthiness. PG&E is a wholly-owned subsidiary of PG&E Corporation.

This week the U. S. District Court for the Northern District of California issued an order granting a motion by the U. S. government to dismiss sentencing under the Alternative Fines Act in PG&E's criminal trial. As a result, the maximum potential PG&E fine in the event of a guilty verdict in the criminal case is $6 million. That amount is significantly lower than the potential $562 million penalty under the Alternative Fines Act previously sought by the federal government.

The criminal indictment is in connection with the San Bruno pipeline explosion in 2010, and the U. S. government is now seeking a penalty of $500,000 per felony count. On that basis, PG&E's incremental exposure to the 12-count criminal indictment would total $6 million. Under the Alternative Fines Act, the penalty could have been twice the alleged gross gain of $281 million or $562 million. As of this writing, the jury in the criminal trial is deliberating.

While the criminal indictment continues to be a source of some uncertainty for PG&E, Fitch expects other key events may have a greater impact on the company's creditworthiness. The most notable anticipated event, in Fitch's view, will be the final Phase 2 decision in PG&E's pending 2015 gas transmission and storage (GT&S) rate case. The California Public Utilities Commission (CPUC) in June 2016 approved a revised alternative proposed decision authorizing a second proceeding. The phase 2 proceeding will finalize disallowed gas safety spending projects required in the penalty phase of the commission's San Bruno investigation.

The GT&S decision authorized a $193 million 2015 test year rate increase including a $138 million placeholder ex parte communications penalty. The rate increase is consistent with Fitch's estimates and will be impacted by the phase 2 decision (as will the ultimate ex parte penalty), which will consider what projects will be tallied in the $850 million San Bruno penalty and what proportion of the penalty will be allocated to capital and expense.

Separately, PG&E announced Aug. 3, 2016 that it reached a settlement agreement in the utility's 2017 general rate case (GRC), The settlement, if approved by the CPUC, would increase test year rates $88 million effective Jan. 1, 2017. That compares to the $319 million test year rate increase supported by the company. However, considering attrition year rate increases in 2018 and 2019, the aggregate 2017 - 2019 rate increase as proposed in the settlement represents approximately 77% of the PG&E's latest updated revenue increase request. In addition, the settlement filed with the commission includes a non-unanimous proposal for a third post-test year attrition rate increase of $361 million in 2020.

Signatories to the settlement agreement include the Office of Ratepayers Advocate and The Utility Reform Network and 12 addition parties to the proceeding. This is a constructive development, in Fitch's opinion, which should facilitate a quicker path to a final CPUC decision. Fitch believes an administrative law judge (ALJ) proposed decision and a final CPUC decision could be issued in the first half of next year. The CPUC is not bound by the settlement agreement.