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 1 4 5 6 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