BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 861| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 861 Author: Hill (D) Amended: 8/24/12 in Senate Vote: 21 SENATE ENERGY, UTIL. & COMMUNIC. COMM. : 7-4, 6/25/12 AYES: Padilla, Corbett, De León, DeSaulnier, Kehoe, Pavley, Simitian NOES: Fuller, Berryhill, Emmerson, Wright NO VOTE RECORDED: Rubio, Strickland SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 ASSEMBLY FLOOR : Not relevant SUBJECT : Public Utilities Act: remedies for violation SOURCE : Author DIGEST : This bill directs the Public Utilities Commission (PUC) to determine whether earnings-based incentives paid to executives should be paid for through rates or by shareholders. Senate Floor Amendments of 8/24/12 delete the provision that prohibits rate recovery by an electrical or gas corporation that is a public utility for earnings or stock-based price-based incentive pay for its employees or directors. CONTINUED AB 861 Page 2 ANALYSIS : Existing law: 1. Vests with the PUC the authority to fix just and reasonable rates and charges for public utilities and requires that expenses for bonuses paid to an executive officer, when a utility has stopped paying its debts, are borne by shareholders and cannot be recovered in rates. 2. Authorizes the PUC to exercise limited jurisdiction over the holding company of a utility in order to protect the public interest and ensure that the utility subsidiary is providing adequate service at just and reasonable rates. 3. Defines a public utility as common carrier, toll bridge corporation, pipeline corporation, gas corporation, electrical corporation, telephone corporation, telegraph corporation, water corporation, sewer system corporation, and heat corporation, where the service is performed for, or the commodity is delivered to, the public. 4. Authorizes the PUC to impose a fine ranging from $500 to $20,000 per offense, against any person or entity, other than a public utility, that fails to comply with a utility law or commission requirement, or who aids or abets a public utility in the violation of the same. 5. Establishes a misdemeanor penalty for public utilities and their officers, agents and employees if they violate any utility law or commission requirement, or aid or abet a public utility in the violation of the same. The penalty is up to one year in jail and/or a $1,000 fine. This bill: 1. Requires the PUC to determine the appropriate ratemaking treatment for incentive compensation paid to officers or employees of an electrical corporation or gas corporation for incentive compensation that is linked to the stock price or financial performance of the AB 861 Page 3 electrical corporation or gas corporation. 2. Increases the maximum fine per offense to $50,000, against any person or entity, other than a public utility, that fails to comply with a utility law or commission requirement, or who aids or abets a public utility in the violation of the same. 3. Increases the potential fine to $5,000, for public utilities and their officers, agents and employees if they violate any utility law or commission requirement, or aid or abet a public utility in the violation of the same. 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 70. Gas service was also disrupted for 300 customers. The National Transportation Safety Board (NTSB), which has primary jurisdiction for investigating pipeline failures, issued its Pipeline Accident Report on the San Bruno tragedy in August 2011, and determined that: 1. The probable cause of the accident was PG&E's: (a) inadequate quality assurance and quality control in 1956 during its Line 132 relocation project, which allowed the installation of a substandard and poorly welded pipe section with a visible seam weld flaw that, over time grew to a critical size, causing the pipeline to rupture during a pressure increase stemming from poorly planned electrical work at the Milpitas Terminal; and (b) inadequate pipeline integrity management program, which failed to detect and repair or remove the defective pipe section; 2. Contributing to the accident were the PUC's and the U.S. Department of Transportation's exemptions of existing pipelines from the regulatory requirement for pressure AB 861 Page 4 testing, which likely would have detected the installation defects. Also contributing to the accident was the PUC's failure to detect the inadequacies of PG&E's pipeline integrity management program; and 3. Contributing to the severity of the accident were the lack of either automatic shutoff valves or remote control valves on the line and PG&E's flawed emergency response procedures and delay in isolating the rupture to stop the flow of gas. This is one of a series of bills, beginning in 2011, stemming from the tragedy of San Bruno. Several bills have been passed intended to ensure a safe gas distribution and transmission system for the State of California. Fines against public utilities have been increased, new safety standards established, and emergency response systems have been improved. Utility Rates . The PUC is required to ensure that a public utility's rates are just and reasonable. Rates are to be set in an amount that will cover the utility's costs of providing service and maintaining facilities and provide the utility a profit, or rate of return. This rate of return is considered to be the compensation paid to investors for the capital they have provided for public utility service. The general standard is that a utility's rate of return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economic management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. Comments According to the author's office, PUC-regulated utilities, reward executives with incentive payments for the company's financial performance. Public utilities however, are not like normal corporations. They cannot increase their profit by increasing market share or selling more product. They cannot raise their revenue at all since the total amount they are able to recover in rates is set by the PUC. The only way a public utility can increase its profit is AB 861 Page 5 by cutting its operations and maintenance costs, as has been demonstrated by PG&E. The year of the San Bruno explosion, the company cut costs by laying-off engineers, putting off safety assessments, using cheaper safety assessments, and reducing its leak surveys. Compensating executives based on earnings or stock price creates a perverse incentive and is bad policy. Under existing law, it is up to shareholders to determine whether or not they want to pay for this policy. This bill, however, will make sure that ratepayers do not participate in it. Better aligning the incentives of utility executives with those of customers and shareholders will help further the interests of all stakeholders and enhance the long-term health of California's utilities. Executives can beef up their quarterly numbers while steering the company aground, then parachute away without consequence. Modeled on Section 954 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, this bill will require utilities and their holding companies to reassess executive performance bonuses retroactively. If the PUC fines the company for a violation that occurred in the previous five years, and if a top executive received a performance bonus based on corporate earnings during that time period, the company must reassess what incentive the executive would have gotten had the fine been levied at the time of the violation. The executive (or former executive) must return the difference to the company's shareholders. This only applies to utility and holding company directors and executive officers. Right now, the penalty limit for executive violations is $20,000, a small number to executives making a million dollars a year in base pay and millions more in stock and incentive payments. Raising the penalty limit to $50,000 per violation will help keep executives on the straight and narrow. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 8/27/12) AB 861 Page 6 Black Economic Council Division of Ratepayer Advocates Latino Business Chamber of Greater Los Angeles National Asian American Coalition Public Utilities Commission The Utility Reform Network RM:m 8/27/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****