The Washington Utilities and Transportation Commission filed a complaint against Puget Sound Energy. The utility faces up to $3.2 million in penalties.

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Puget Sound Energy faces millions in penalties after a state investigation of the March explosion in Seattle’s Greenwood neighborhood found unsafe practices by a former contractor that had already cost the utility $1.25 million in fines.

Investigators found that employees of Pilchuck Contractors, a Kirkland company hired by PSE for pipeline maintenance, did not properly cut and cap a natural-gas line in 2004, commission documents say. Instead, gas was still flowing in the pipe 12 years later when people using the narrow space between two buildings to store personal belongings broke the pipe at a threaded connection.

Gas escaped and accumulated inside or under a restaurant before it ignited, destroying two buildings, damaging several others and injuring nine firefighters, the report said.

The Washington State Utilities and Transportation Commission (UTC) filed a complaint against PSE alleging 17 violations of pipeline-safety regulations. If the violations are affirmed by the UTC’s three commissioners, the utility could face up to $3.2 million in penalties.

A statement released by PSE called the fines “disappointing and excessive” and reiterated that the pipe was damaged by people in a space where they were not supposed to be. The utility declined to provide additional comment.

The next step likely will be settlement negotiations.

Witnesses to the explosion in the early hours of March 9 told investigators they sometimes tripped on or bumped into the steel service line between Mr. Gyro’s and Neptune Coffee. Lab tests confirmed the line failed at the threaded connection due to applied external force, the UTC report says. A firefighter said that when he responded to the scene of the leak he saw gas “jetting” downward from the pipe’s threading.

State regulators do not conduct regular inspections of pipelines once they are decommissioned, a UTC spokeswoman confirmed. What, if any, steps PSE takes to inspect gas pipelines that have been deactivated is unclear.

According to a 2007 UTC investigation, Pilchuck was caught falsifying dozens of gas-leak inspection records.

The case centered on Pilchuck employee inspections of “phantom leaks,” in which someone complains about smelling natural gas but no leak is found.

Working off an anonymous tip, state regulators said they found reports signed with the names of inspectors who hadn’t written them, and others with falsified inspection dates. Investigators also charged PSE with failing to maintain permanent records of each leak investigation.

PSE admitted that the reports were intentionally falsified and agreed to pay $1.25 million as part of a 2008 settlement agreement, according to commission documents. The initial fine was $2 million, but PSE was able to shave $750,000 off that, in part by agreeing to pay for a $250,000 audit of all its gas-safety inspection records, and to retrain employees.

Although Pilchuck performed the inspections and kept the records, PSE was legally responsible, according to state regulators.

That was the largest pipeline-related fine paid to the UTC, which has sought financial penalties 14 times since 1992 statewide — collecting the full amount just twice. In that time, PSE has been the subject of 10 commission enforcement actions related to pipeline safety.

Pilchuck Contractors lost its contract with PSE in 2011, and that work accounted for up to 90 percent of Pilchuck’s business in some years, according to a statement made that year by the company’s president.

Wisconsin-based Michels Corporation acquired Pilchuck in 1999. Michels did not respond to a call seeking comment on the UTC investigation Tuesday.

In the six months since the explosion, local residents and retailers have worked to bring the neighborhood back to its previous vitality. Dozens of people marked its anniversary on one recent Friday with a block party celebrating the return of the businesses and restaurants closed by the blast.

Following the release of the state’s findings, Emilia Jones of the Phinney Neighborhood Association said she expects businesses to take some type of action. It’s unclear when or how that will take shape, she said.