BILL ANALYSIS                                                                                                                                                                                                    Ó          1





                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                                 ALEX PADILLA, CHAIR
          

          AB 1456 -  Hill                                   Hearing Date:  
          July 3, 2012               A
          As Amended:         May 25, 2012             FISCAL       B

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                                      DESCRIPTION
           
           Current law  vests with the California Public Utilities 
          Commission (CPUC) 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.

           Current law  requires the CPUC to ensure that laws, rules and 
          orders are enforced and obeyed by the public utilities of the 
          state, including gas corporations, and that violations are 
          promptly prosecuted.  

           Current law  permits the CPUC to levy penalties of $500 to 
          $50,000 per day against any public utility that fails or 
          neglects to comply with an order, decision, decree, rule, 
          direction, demand, or requirement of the commission including 
          violations of safety standards for pipeline facilities. All 
          proceeds are deposited to the State's General Fund.

           This bill  requires the CPUC to perform an analysis of benchmark 
          data and adopt safety performance standards for pipeline safety 
          and reliability.  

           This bill  permits the CPUC to implement a rate incentive program 
          related to safety that contains penalties based on safety 
          performance.

                                      BACKGROUND
           











          Gas Pipeline Regulation - The CPUC regulates utility service for 
          approximately 10.7 million customers that receive natural gas 
          from PG&E, Southern California Gas (SoCalGas), San Diego Gas & 
          Electric (SDG&E), Southwest Gas, and several smaller natural gas 
          utilities.  The vast majority of California's natural gas 
          customers are residential and small commercial customers, 
          referred to as "core" customers, who accounted for approximately 
          40% of the natural gas delivered by California utilities in 
          2008.  Large consumers, like electric generators and industrial 
          customers, referred to as "noncore" customers, accounted for 
          approximately 60% of the natural gas delivered by California 
          utilities in 2008. 

          The U.S. Department of Transportation's Pipeline and Hazardous 
          Material Safety Administration (PHMSA), acting through the 
          Office of Pipeline Safety (OPS), administers the national 
          regulatory program to assure safe transportation of natural gas, 
          petroleum, and other hazardous materials by pipeline.  The 
          statutes under which OPS operates provide for state assumption 
          of all or part of the intrastate regulatory and enforcement 
          responsibility through annual certifications and agreements.  
          This cooperative, collaborative relationship between the federal 
          and state government - the Federal/State Partnership - forms the 
          cornerstone of the pipeline safety program for which the CPUC 
          has assumed most of the responsibility.  The CPUC does not 
          exercise jurisdiction over municipal operators which are under 
          the direct authority of the OPS.  State pipeline safety programs 
          adopt the federal regulations and may issue more stringent 
          regulations for intrastate pipeline operators under state law.  

          Legislative/Regulatory Action Since San Bruno - This is one of a 
          series of bills, beginning in 2011, stemming from the tragedy of 
          San Bruno where 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.

          Several bills have passed intended to ensure a safe gas 
          distribution and transmission system for the State of 
          California.  Maximum fine levels against public utilities have 
          been increased, new safety standards established, and improved 
          emergency response systems mandated.  Following is a summary of 
          the most significant actions:











                 AB 56 (Hill, 2011) - Implements numerous safety-related 
               measures regarding the operation of natural gas pipeline 
               facilities regulated by the CPUC. Status: chaptered.
                 AB 478 (Hill, 2012) - Requires the CPUC to direct 
               penalties assessed against PG&E in any one of three 
               investigations to a separate account of the offending 
               utility to offset the investments made by PG&E for pipeline 
               replacement that would otherwise be recovered from 
               ratepayers.  Status: Senate Appropriations Committee.
                 AB 578 (Hill, 2012) - Requires the CPUC to formally 
               respond to certain safety recommendations concerning gas 
               pipeline safety made by the federal National Transportation 
               Safety Board and federal Pipeline and Hazardous Materials 
               Safety Administration.
                 AB 861 (Hill, 2012) - Requires the CPUC to direct 
               penalties assessed against PG&E in any one of three 
               investigations to a separate account of the offending 
               utility to offset the investments made by PG&E for pipeline 
               replacement that would otherwise be recovered from 
               ratepayers.  Status: Senate Appropriations Committee.
                 SB 44 (Corbett, 2011) - 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: 
               chaptered.
                 SB 216 (Yee, 2011) - Requires the CPUC to determine and 
               develop a plan for automatic shut off or remote controlled 
               valves on certain natural gas facilities.  Status: 
               chaptered.
                 SB 705 (Leno, 2011) - 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: chaptered.
                 SB 879 (Padilla, 2011) - Requires gas corporations to 
               use a balancing account to track capital expenditures and 
               also increased fines on public utilities from a maximum of 
               $20,000 to $50,000 per offense.  Status: chaptered.
                 SB 1350 (Leno) - Allows the CPUC to use fines or 
               penalties levied against a gas corporation to offset the 
               cost of gas safety investments and expenses instead of 
               depositing the fines in the General Fund as required by 
               existing law. Status: Held in Senate Appropriations 
               Committee.











          What Are They Doing? - In addition to three proceedings 
          investigating PG&Es failures in its natural gas system, the CPUC 
          is conducting a public review of various approaches to improve 
          its ratemaking process for gas corporations to prioritize safety 
          initiatives.  To address the broader issues and the necessity of 
          rules for the safe and reliable operation of natural gas 
          pipelines, the CPUC opened a proceeding last year to:

                 Provide the public with a means to make their views 
               known to the CPUC;
                 Provide the public with the Independent Review Panel's 
               expert recommendations;
                 Develop and adopt safety related changes to the CPUC's 
               regulation of natural gas transmission pipelines, including 
               requirements for construction, especially shut-off valves, 
               maintenance, inspections, operation, record retention, 
               ratemaking, and the application of penalties;
                 Consider ways that the CPUC can undertake a 
               comprehensive risk assessment for all natural gas pipelines 
               regulated by the CPUC, and possibly for other industries 
               that the CPUC regulates;
                 Consider available options for the CPUC to better align 
               ratemaking policies, practices, and incentives to elevate 
               safety considerations, and maintain utility management 
               focus on the "nuts and bolts" details of prudent utility 
               operations;
                 Consider the appropriate balance between the CPUC's 
               obligation to conduct its proceedings in a manner open to 
               the public with the legitimate public safety concerns that 
               arise from unlimited availability of certain utility 
               information;
                 Consider if further rules or other protection is needed 
               for whistleblowers to inform the CPUC of safety hazards; 
               and
                 Expand emergency and disaster planning coordination with 
               local officials.

          Utility Rates - The CPUC 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.  

          Independent Review Panel - In the aftermath of the explosion of 
          a natural gas transmission pipeline in San Bruno the CPUC 
          created an Independent Review Panel (IRP) 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 IRP released its findings on June 8, 2011 and 
          recommended to the CPUC that:

               Upon thorough analysis of benchmark data, adopt 
               performance standards for pipeline safety and 
               reliability for PG&E, including the possibility of rate 
               incentives and penalties based on achievement of 
               specified levels of performance.

          NTSB Recommendation - The National Transportation Safety Board, 
          which has primary jurisdiction for investigating pipeline 
          failures, issued its Pipeline Accident Report on the San Bruno 
          tragedy in August, 2011 and found that:

               Because PG&E, as the operator of its pipeline system, 
               and the CPUC, as the pipeline safety regulator within 
               the state of California, have not incorporated the use 
               of effective and meaningful metrics as part of their 
               performance-based pipeline safety management programs, 
               neither PG&E nor the CPUC is able to effectively 
               evaluate or assess the integrity of PG&E's pipeline 
               system.











                                       COMMENTS
           
              1.   Author's Purpose  .  The author reports that the 2010 
               natural gas transmission pipeline explosion in San Bruno 
               has demonstrated that, in the absence of an understanding 
               of the relative safety of the regulated utilities' pipeline 
               systems, the CPUC cannot assure us that the state's natural 
               gas corporations are making safety a priority.  The CPUC 
               has created incentive programs for energy efficiency, 
               system electric reliability, customer service, and worker 
               safety, and utilities have met the performance standards 
               associated with those incentives.  Requiring the CPUC to 
               add a public safety component to this host of priorities 
               will ensure that safety remains a focus in the future.

               The regulations for pipeline safety, set at the federal 
               level, have performance-based components, and the CPUC's 
               reliance on penalties has meant that only the 
               compliance-based components of the regulations have been 
               enforced.  PG&E and the CPUC have been heavily criticized 
               by both the NTSB and the CPUC's IRP for their satisfaction 
               with "check-the-box compliance."  NTSB Chairwoman Deborah 
               Hersman described their report as the story of "a company 
               that exploited weaknesses in a lax system of oversight and 
               government agencies that placed a blind trust in operators 
               to the detriment of public safety."   The IRP has stated 
               that, to ensure safe operations, "the CPUC's role in the 
               auditing of Ýpipeline safety] must shift culturally, beyond 
               compliance driven."   Both groups are clear that 
               compliance-based penalties are insufficient to enforce 
               performance-based regulations.

               AB 1456 would require the CPUC to adopt performance 
               standards for pipeline safety and evaluate the state's gas 
               utilities against those standards.  The CPUC may levy 
               penalties on the utility for poor performance.  The CPUC 
               has done this in areas of energy efficiency, system 
               electric reliability, customer service, and worker safety, 
               and the result has been improvement in each area.

               The NTSB has already proposed possible performance 
               measures, and the IRP has suggested that the Commission 
               adopt "rate incentives and penalties based on specified 
               levels of performance."  AB 1456 will ensure that we will 










               know whether or utilities are operating in a safe manner.

              2.   What are Performance Measures  ?  The author intends that 
               the CPUC adopt performance measures for gas corporations 
               such as those referenced by the NTSB in its report on the 
               San Bruno explosion.  Examples provided by the NTSB 
               include:

                           Number of incidents per mile or per 1,000 
                    customers;
                           Number of missing, incomplete, or erroneous 
                    data fields corrected in an operator's database; 
                           Response time in minutes for leaks, ruptures, 
                    or other incidents; and
                           Number of public responses received per 
                    thousands of postcards/surveys mailed.

               The author also reports that the New York State Department 
               of Public Service has created incentive programs for all 
               gas distribution companies in its jurisdiction, programs 
               which have improved leak response, damage prevention, and 
               leak management.  The following incentive program was 
               created for National Fuel Gas Distribution Corporation, 
               worth about 30 basis points of their return on equity:

                           80 miles of leak-prone main pipe replacement 
                    ($256K)
                           4,000 mils of service pipe replacement ($256K)
                           Hazardous leak backlog reduction to 75 ($512K)
                           75% of service calls responded to in 30 min 
                    ($64K)
                           90% of service calls responded to in 45 min 
                    ($64K)
                           95% of service calls responded to in 60 min 
                    ($64K)
                           Damages per 1000 mark and locate requests: 4.2 
                    ($256K)
                           Damages due to mismarking per 1000 mark and 
                    locate requests: 0.9 ($192K)
                           Company Damages per 1000 mark and locate 
                    requests: 0.2 ($256K)

              1.   Pay for Performance  ?  The fundamental question presented 
               by this bill is whether a utility's profits should be tied 










               to safety performance measures.  The author opines that 
               strictly relying on penalties for non-compliance with 
               safety standards undermines the CPUC's commitment to never 
               let a similar accident happen again and would invite 
               another pipeline disaster."  

               The CPUC is fundamentally opposed to the concept of linking 
               safety performance to rate incentives arguing that "safety 
               is not optional or discretionary."  They further opine that 
               safety performance is a basic obligation of service for a 
               utility and that one of the fundamental CPUC obligations 
               gas corporations face is the obligation to provide safe and 
               reliable service.  However, the CPUC opines that "where 
               rate incentives have been instituted, the utilities have in 
               several situations manipulated or withheld safety or 
               performance data in order to avoid any potential negative 
               revenue impacts."



                                    ASSEMBLY VOTES
          
          Assembly Floor                     (78-0)
          Assembly Appropriations Committee  (17-0)
          Assembly Utilities and Commerce Committee                      
          (15-0)

                                       POSITIONS
           
           Sponsor:
           
          Author

           Support:
           
          None on file

           Oppose:
           
          California Public Utilities Commission



          































          Kellie Smith 
          AB 1456 Analysis
          Hearing Date:  July 3, 2012