BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   AB 861|
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                                 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





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           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 







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             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 







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             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 







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          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)








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          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  ****