San Bruno city officials today called for a $3.85 billion penalty to be levied against PG&E for a deadly 2010 pipeline blast and called a lower penalty proposed by state regulators “half-baked.”

In a legal argument filed with the California Public Utilities Commission today, attorneys for the city argue that a proposed $2.25 billion penalty is well below what PG&E can afford and would not provide a sufficient deterrent.

The proposed penalty would allow PG&E to count money already being spent on capital improvements to the gas pipeline system and receive a more than $900 million tax benefit for the work, San Bruno officials argued.

Jack Hagan, the Director of the CPUC’s Safety and Enforcement Division, said Wednesday that the proposed penalty would “not only sanction PG&E for past misconduct and neglect, but also advance public safety by requiring shareholder-funded investments in safety improvements…”

By contrast, San Bruno’s proposal would include a $900 million non-tax deductible fine in addition to pipeline safety improvements, install an independent monitor to make sure all necessary pipeline improvements are made and require PG&E to finance the establishment of a California Pipeline Safety Trust.

The after-tax impact on PG&E of San Bruno’s proposal would amount to $2.45 billion.

The Sept. 10, 2010, pipeline blast killed eight people in San Bruno and destroyed dozens of homes, leveling much of the Crestmoor Canyon neighborhood. Investigators have attributed the blast to flaws in the section of pipe that failed.

City officials have expressed a lack of confidence this week in the CPUC proceedings, which have been marred by allegations that four members of the legal team working on the case abruptly quit the project last week. Some reports have suggested team members may have refused to sign off on the CPUC’s proposed penalty.

After San Bruno city officials called for an investigation earlier this week, CPUC spokeswoman Terrie Prosper said the lawyers simply asked for reassignments, which were granted.

“We challenge the CPUC to not let PG&E off the hook for this devastating and entirely avoidable man-made disaster,” San Bruno Mayor Jim Ruane said in a statement today. “The state and the nation are watching whether the CPUC, the agency tasked with protecting public safety, is capable of carrying out its duty.”

PG&E argued in a brief filed earlier this month that the $2.25 billion fine proposed by CPUC staff is unjustifiably high, and has denied that it could have or should have known of the defective pipeline section, which was installed in 1956.

In addition, PG&E officials argued that shareholders have already paid around $900 million for gas transmission safety work since the San Bruno blast and made extensive changes to the management and structure of the company.

San Bruno officials remain unsatisfied.

“I can tell you that the City of San Bruno is not going to rest,” City Manager Connie Jackson said today.

“This is too important, not only to the victims and to this community as a whole, but to utility customers everywhere,” Jackson said.

All briefs including those filed today will be submitted to two assigned administrative law judges, who are expected to reach a decision in late summer, according to the CPUC.

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