San Mateo County Superior Court Judge Steven Dylina rejected the argument from Pacific Gas and Electric Co. that it was clear there was no malicious intent on their part and any award should be limited to actual damages.
Trial is scheduled to begin in January in the lawsuit, which was filed by homeowners affected by the explosion of a gas pipeline in San Bruno. The huge blast killed eight people and destroyed 38 homes.
One of the lead attorneys for the plaintiffs, Frank Pitre, contended in a two-day hearing PG&E had used "scrap pipe from an unknown source" and the utility had massaged the pressure so it would hold its capacity, the San Francisco Chronicle said.
PG&E countered by saying the mistakes were made years ago and there had been no malicious intent.
Dylina's ruling did not weigh in on whether PG&E should be on the hook for punitive damages, but it did not bar the plaintiffs from asking the jury to award potentially millions of dollars in additional damages.
The Chronicle said Tuesday's ruling could have an impact on pre-trial settlement talks. PG&E has already settled with more than 70 of the 431 original plaintiffs.