BILL ANALYSIS Ó 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE ALEX PADILLA, CHAIR AB 56 - Hill Hearing Date: July 5, 2011 A As Amended: June 29, 2011 FISCAL B 5 6 DESCRIPTION Federal Law and general orders of the California Public Utilities Commission (CPUC) require the commission to regulate gas transmission, distribution and gathering pipeline facilities which include gas corporations, master-metered mobile home parks, and propane operators. This bill defines a commission-regulated gas pipeline facility to include intrastate transmission, distribution and gathering pipeline facilities which include gas corporations, master-metered mobile home parks, and propane operators. Federal Law and general orders of the CPUC set forth requirements for the design, construction, testing, maintenance and operation of gas gathering, transmission and distribution piping systems. This bill requires gas corporations to submit a plan to the CPUC for the testing or replacement of all transmission pipelines as soon as practicable along with interim safety enhancement measures that will enhance public safety during the implementation of the plan. This bill requires gas corporations to file semi-annual reports with the Consumer Protection Safety Division (CPSD) to track the testing, repair and maintenance of gas pipelines. Federal Law and general orders of the CPUC require that each gas pipeline owner and operator to have an emergency plan in place with specified components including written procedures to minimize hazards resulting from pipeline emergencies, methods of receiving notifications of emergencies, and communicating with emergency responders. Federal Law requires gas transmission pipeline owners and operators to provide geospatial data the Secretary of Transportation (Secretary) for its transmission pipelines and to update that data as required by the Secretary. The Secretary is also permitted to provide technical assistance to state and local officials to improve local response by adapting information available through the National Pipeline Mapping System to software used by emergency response personnel responding to pipeline emergencies. This bill requires the CPUC to establish emergency response standards, which include emergency response plans, to be followed by owners or operators of distribution and transmission pipelines, in consultation with the California Emergency Management Agency, and first responders including the California Fire Chiefs Association. This bill requires the emergency response plans to include a requirement that pipeline owners and operators provide the State Fire Marshal and fire chiefs in the pipeline operator's territory with instructions on how to access and utilize the National Pipeline Mapping System. Federal Law and general orders of the CPUC require that each transmission line have sectionalized block valves placed at specified intervals and in specified locations ranging from every 2 miles to every 10 miles and classifies pipelines based on the types of facilities that are within 220 yards of its location. Federal Law defines a High Consequence Area as an area including all class 3 and class 4 locations and some class 1 and class 2 locations with unique circumstances related to surrounding populated facilities. This bill requires the CPUC to develop, and gas corporations to meet, minimum criteria and standards for the installation of sectionalized block valves and automated and remote shutoff valves for all newly installed pipelines, pipelines that traverse an earthquake fault zone, and pipelines located in high consequence areas and class 3 and 4 locations. Current law grants the CPUC the power and obligation to determine not only that any rate or increase in a rate, is just and reasonable, but also the authority to supervise and regulate every public utility in the state. This bill requires a gas corporation to demonstrate in its rate cases that proposed rates will be sufficient to maintain safe and reliable service in a cost-effective manner, restricts a gas corporation from recovering any fine or penalty in rates, that the safety record of the gas corporation be considered in determining a reasonable rate of return and that a balancing account be used to track expenditures related to public safety. BACKGROUND San Bruno Tragedy - On the evening of September 9, 2010 a 30-inch natural gas transmission line ruptured in a residential neighborhood in the City of San Bruno. The rupture caused an explosion and fire which took the lives of eight people and injured dozens more; destroyed 37 homes and damaged dozens more. Gas service was also disrupted for 300 customers. The pipeline in question is owned and operated by Pacific Gas & Electric (PG&E) and originally built in 1948. In 1956 it was relocated and rebuilt to accommodate new housing development. The National Transportation Safety Board (NTSB), in conjunction with the CPUC was on scene within 24 hours to investigate the cause of the explosion. Although preliminary elements of the investigation have been detailed, a final report on causation is not expected until at least the fall. Regulatory Action - The NTSB has principal jurisdiction over the investigation into San Bruno and is expected to release its final report on causation later this summer. Preliminary findings have been released and the NTSB has "identified both the material and the fabrication welds of the section of pipeline that failed did not meet either: (1) the engineering consensus standards applicable to natural gas transmission pipelines at the time, or (2) the PG&E specifications in effect at the time of construction."<1> It has also been determined that PG&E has inadequate records and knowledge of its aging gas pipeline infrastructure to allow the utility or the CPUC to make informed and sound decisions on the steps necessary to operate a safe and reliable natural gas --------------------------- <1> Report of the Independent Review Panel (hereafter Report), Executive Summary, p. 5. system. Complacency appears to be a significant factor. PG&E records had incorrectly characterized fundamental aspects of the line that ruptured but piping engineers for the utility were aware that the segment was double-submerged arc welded rather than seamless. The inadequacy of records is also the result of a "grandfathering" or exemption under federal law from pressure test requirements for pipelines placed in service before 1970. Federal regulations allowed pipeline operators to operate a segment at the highest actual operating pressure of the segment during the five-year period between July 1, 1965 and June 30, 1970. As a consequence, the NTSB recommended that PG&E obtain "traceable, verifiable, and complete" records and, with reliably accurate data, calculate a dependable pressure level for pipe operation. PG&E has been unable to meet that recommendation for hundreds of miles of its transmission pipelines most of which were laid prior to 1970. Southern California Gas and San Diego Gas & Electric are under the same orders and have also been unable to produce records for a significant portion of its pipelines as well, especially for the older vintage pipelines. In response the CPUC has ordered all California gas transmission operators to develop and file for CPUC consideration a Natural Gas Transmission Pipeline Comprehensive Pressure Testing Implementation Plan to achieve the goal of orderly and cost effectively replacing or testing all natural gas transmission pipeline that have not been pressure tested. The CPUC has also started a penalty consideration phase into whether PG&E's gas transmission pipeline recordkeeping was unsafe, whether it violated the law, and if so whether deficient PG&E recordkeeping caused or contributed to the pipeline rupture in San Bruno. Independent Review Panel - On September 23, 2010, the CPUC created an Independent Review Panel of experts to conduct a comprehensive study and investigation of the September 9, 2010, explosion and fire. The CPUC directed the panel to make a technical assessment of the events, determine the root causes, and offer recommendations for action by the CPUC to best ensure such an accident is not repeated elsewhere. The CPUC encouraged the panel to make such recommendations as necessary. Such recommendations could include changes to design, construction, operation, maintenance, and replacement of natural gas facilities, management practices at PG&E in the areas of pipeline integrity and public safety, regulatory changes by the CPUC itself, and statutory changes to be recommended by the CPUC. The panel released its findings on June 9th and concluded that the pipeline rupture was "a consequence of multiple weaknesses in PG&E's management and oversight of the safety of its gas transmission system," and that the CPUC "did not have the resources to monitor PG&E's performance in pipeline integrity management adequately or the organizational focus that would have elevated concerns about PG&E's performance in a meaningful way." COMMENTS 1. Author's Purpose . According to the author, the purpose of this bill is to ensure that California develops new regulations and standards for the safe and reliable operation of natural gas pipelines in the state. The author represents the community of San Bruno and has witnessed first-hand the life-changing tragedy of the San Bruno explosion. He believes that the Legislature has the opportunity and the obligation to take every step possible to ensure that the lessons of this tragedy are well learned and that the circumstances are not repeated. He further reports that federal and state hearings and investigations have revealed serious flaws in existing regulations and in how the state oversees the owner and operators of natural gas pipelines in California. This bill seeks to address some of the deficiencies in the regulation of natural gas transmission pipelines that have been discovered in community meetings, and NTSB and CPUC investigations. The bill seeks to ensure that the CPUC is regulating the industry adequately; that utilities companies are operating safely and that there is increased accountability and transparency in how California manages its pipeline infrastructure. 2. Pipeline Testing . Records searches by the three major gas corporations to verify operating pressures and pipe configurations for more than 10,000 miles of transmission pipelines have resulted in critical data gaps particularly for older vintage pipelines which were exempted from pressure testing requirements. PG&E has stated that it is not able to provide specific records for critical components in its natural gas transmission pipelines. SoCalGas and SDG&E have stated that it is very difficult, if not infeasible, to locate records for all pipeline materials in the specified areas. This bill addresses those deficiencies by requiring that all natural gas transmission pipelines in service in California be brought into compliance with modern standards for safety and that every transmission pipeline that has not been pressure tested, or which lacks reliable records, be replaced or pressure tested. This bill tracks a June 9th decision by the CPUC. 3. Gas Safety Report . During informational hearings of this committee it became apparent that the rate cases of the gas corporations were based on compromise and settlements with very little regard to whether the budgets were based on safety. There appeared to be little or no question of the gas corporations as to whether the requested level of capital outlay funding was sufficient to ensure a safe and reliable transmission system. Whatever budget was put forth by the gas corporation was then subject to negotiation, primarily based on ratepayer impacts, and there was no review by or consultation with the CPUC's Consumer Protection Safety Division. As the utility changed priorities for pipeline maintenance and repair and shifted funds between projects, there was no again no oversight or review by the CPUC This issue was highlighted by the Independent Panel as well which found "PG&E did spend capital at or above the amounts it requested in its rate cases over the last several years, but we did not observe a coherent planning process to assure the system was being maintained and modernized with any urgency."<2> The CPUC has addressed this issue in PG&E's rate case (commonly referred to as Gas Accord V) for 2011 to 2014 by requiring the CPSD staff to track PG&E's capital expenditure projects for PG&E's gas transmission pipelines and gas storage services over the four year rate cycle period. This bill codifies that reporting requirement which will ensure its continued use and its applicability ------------------------- <2> Report at p. 10. to all rate cases and gas corporations. As to its efficacy, there was concern expressed by the Independent Review Panel as to whether the CPSD has adequate resources to analyze the new reports. The committee chair has been successful in working with the administration to add four positions to the division last winter and securing an additional 5.5 positions in the 2011 Budget Act. 4. Just and Reasonable Rates . As heard in testimony before the committee at last fall's informational hearing on the San Bruno tragedy, there is a clear disconnect between the ratemaking proceedings for gas corporations and the safety of the gas pipeline system. The Independent Review Panel echoed this sentiment in its report by noting that there has been "very little colloquy in the rate cases about safety. Hence, the rate case was not serving as an objective process by which PG&E's integrity management budgets were being scrutinized."<3> Additionally "?there was, in no case, a critical assessment of whether PG&E's efforts were calibrated to the actual risk to pipeline safety."<4> The author has addressed this issue in four ways. First he restricts a gas corporation from recovering any fines and penalties through rates, and second, gas corporations would be required to demonstrate that rates will be sufficient for safe and reliable services. These are generally not problematic. He has also however put forward similar but different requirements for a gas corporation to track "revenue requirements for public safety and actual expenditures made by the utility." This provision is somewhat similar to SB 879 and should be reconciled as indicated in the next comment # 5. Finally, the author has gone further to require the CPUC to consider a gas corporation's safety record in determining a reasonable rate of return. This provision blurs the distinction between the ratemaking process and the enforcement process by using rates, or suggesting that rate of return be restricted, if a gas corporation demonstrates a poor safety record. The author and committee should consider striking this provision. ------------------------- <3> Report at p. 23. <4> Report at p. 23. The CPUC has begun to address the relationship of safety and rates in a different manner but has demonstrated an awareness that these costs should not be solely born by ratepayers. In its pipeline record proceeding concerning the deficiencies of PG&E's pipeline records and the costs likely to be incurred to bring those records up to modern standards PG&E will be required to submit a plan to the CPUC which would share the costs of this work between ratepayers and shareholders. 5. Conflicts with Senate Bills . This bill proposes that the CPUC: (1) establish compatible emergency response standards that owners or operators of intrastate transmission and distribution would be required to follow (see also SB 44, Corbett); (2) establish a plan for the installation of automatic or remote shut-off valves (see also SB 216, Yee); and (3) require gas corporations to establish and maintain a balancing account for the recovery of expenses for inspection, maintenance, or repair of transmission pipelines (SB 879, Padilla). To ensure consistent committee actions and prevent conflicts between the bills the author and committee should consider conforming the provisions of those bills to AB 56 or striking the conflicting provisions from this bill entirely. 6. Ratepayer Impact . Aftermath of San Bruno will cost hundreds of millions. This bill is consistent with actions of the CPUC as it relates to the safety report and pipeline replacement and testing. 7. Related State Legislation . There are four other bills which have been introduced in response to the San Bruno tragedy: SB 44 (Corbett) requires gas corporations to establish emergency response plans for responding to pipeline disasters or malfunctions and to facilitate access to pipeline maps for emergency service personnel. Status: Pending hearing in the Assembly Appropriations Committee. SB 216 (Yee) requires the CPUC to determine and develop a plan for automatic shut off or remote controlled valves on certain natural gas facilities. Status: Pending hearing in the Assembly Appropriations Committee. SB 705 (Leno) requires gas corporations to develop a safety plan for develop a service and safety plan for the safe and reliable operation of gas pipeline facilities. Status: Pending hearing in the Assembly Appropriations Committee. SB 879 (Padilla) requires gas corporations to use a balancing account to track capital expenditures. Status: Set for hearing in Assembly Utilities & Commerce Committee July 5, 2011. ASSEMBLY VOTES Assembly Floor (54-21) Assembly Appropriations Committee (17-0) Assembly Utilities and Commerce Committee (9-0) POSITIONS Sponsor: Author Support: AARP San Mateo County Board of Supervisors Santa Clara County Board of Supervisors Oppose: Pacific Gas and Electric Company Sempra Energy utilities (unless amended) Southern California Edison (unless amended) Kellie Smith AB 56 Analysis Hearing Date: July 5, 2011