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
                                                                        
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                                      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