BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1456| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 1456 Author: Hill (D) Amended: 8/21/12 in Senate Vote: 21 SENATE ENERGY, UTIL. & COMMUNIC. COMM. : 9-0, 7/3/12 AYES: Padilla, Fuller, Corbett, De León, DeSaulnier, Kehoe, Pavley, Rubio, Strickland NO VOTE RECORDED: Berryhill, Emmerson, Simitian, Wright SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/16/12 AYES: Kehoe, Walters, Alquist, Dutton, Lieu, Price, Steinberg ASSEMBLY FLOOR : 78-0, 5/30/12 - See last page for vote SUBJECT : Gas corporations: safety performance standards: rate incentive program SOURCE : Author DIGEST : This bill requires the Public Utilities Commission (PUC) to perform an analysis of benchmark data and adopt safety performance metrics for pipeline safety. This bill permits the PUC to implement a rate incentive program related to safety that contains penalties using safety performance metrics. ANALYSIS : CONTINUED AB 1456 Page 2 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. Requires the PUC 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. 3. Permits the PUC 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 PUC to consider the following principles when adopting safety performance metrics: 1. Each safety performance metric shall be designed to be an indicator of safety performance. 2. Each safety performance metric shall be designed so that it may be reevaluated within a useful timeframe. 3. Each safety performance metric shall be designed so that the data inputs to the metric are verifiable. 4. The adopted set of safety performance metrics shall be robust enough to serve as a useful indicator of pipeline safety. Background Gas pipeline regulation . The PUC regulates utility service for approximately 10.7 million customers that receive natural gas from Pacific Gas and Electric Company (PG&E), Southern California Gas (SoCalGas), San Diego Gas and Electric (SDG&E), Southwest Gas, and several smaller CONTINUED AB 1456 Page 3 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 United States Department of Transportation's Pipeline and Hazardous Material Safety Administration, 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 PUC has assumed most of the responsibility. The PUC 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. In addition to three proceedings investigating PG&Es failures in its natural gas system, the PUC 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 PUC opened a proceeding last CONTINUED AB 1456 Page 4 year to: 1. Provide the public with a means to make their views known to the PUC; 2. Provide the public with the Independent Review Panel's (IRP) expert recommendations; 3. Develop and adopt safety related changes to the PUC'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; 4. Consider ways that the PUC can undertake a comprehensive risk assessment for all natural gas pipelines regulated by the PUC, and possibly for other industries that the PUC regulates; 5. Consider available options for the PUC 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; 6. Consider the appropriate balance between the PUC'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; 7. Consider if further rules or other protection is needed for whistleblowers to inform the PUC of safety hazards; and 8. Expand emergency and disaster planning coordination with local officials. 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 CONTINUED AB 1456 Page 5 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. IRP . In the aftermath of the explosion of a natural gas transmission pipeline in San Bruno the PUC created IRP of experts to conduct a comprehensive study and investigation of the September 9, 2010, explosion and fire. The PUC directed the panel to make a technical assessment of the events, determine the root causes, and offer recommendations for action by the PUC to best ensure such an accident is not repeated elsewhere. The PUC 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 PUC itself, and statutory changes to be recommended by the PUC. The IRP released its findings on June 8, 2011 and recommended to the PUC 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." The National Transportation Safety Board (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." CONTINUED AB 1456 Page 6 Prior/Related Legislation 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), Chapter 519, Statutes of 2011, implemented numerous safety-related measures regarding the operation of natural gas pipeline facilities regulated by the PUC. AB 478 (Hill, 2012) requires the PUC 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. AB 578 (Hill, 2012) requires the PUC 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 PUC 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. SB 44 (Corbett), Chapter 520, Statutes of 2011, required 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. SB 216 (Yee), Chapter 521, Statutes of 2011, required the PUC to determine and develop a plan for automatic shut off or remote controlled valves on certain natural gas facilities. SB 705 (Leno), Chapter 522, Statutes of 2011, required gas corporations to develop a safety plan for develop a service CONTINUED AB 1456 Page 7 and safety plan for the safe and reliable operation of gas pipeline facilities. SB 879 (Padilla), Chapter 523, Statutes of 2011, required 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. SB 1350 (Leno, 2012) allows the PUC 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. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee, up to $418,000 in 2013-14 from the Public Utilities Reimbursement Account for a rulemaking to revise the utilities' rate case plan. Up to $267,000 annually from the Public Utilities Reimbursement Account to conduct an initial analysis and then subsequent updating of benchmark data, define performance metrics and performance standards, and develop rates based on safety. OPPOSITION : (Verified 8/21/12) Public Utilities Commission ARGUMENTS IN SUPPORT : The author's office 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 PUC cannot assure us that the state's natural gas corporations are making safety a priority. The PUC 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. CONTINUED AB 1456 Page 8 Requiring the PUC 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 PUC's reliance on penalties has meant that only the compliance-based components of the regulations have been enforced. PG&E and the PUC have been heavily criticized by both the NTSB and the PUC'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. This bill requires the PUC to adopt performance standards for pipeline safety and evaluate the state's gas utilities against those standards. The PUC may levy penalties on the utility for poor performance. The PUC 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 PUC adopt "rate incentives and penalties based on specified levels of performance." ARGUMENTS IN OPPOSITION : PUC writes in opposition, this bill is unnecessary because the PUC currently has sufficient power to perform benchmarking analyses, develop safety performance standards and compare the utilities' performance to any identified standards absent any legislative changes. Further, the PUC Staff does not support the concept of linking safety performance to rate incentives. The PUC and its staff argue that safety is not optional, or discretionary. Safety performance is a basic obligation of service for a utility. One of the CONTINUED AB 1456 Page 9 fundamental Public Utilities Code Section obligations gas corporations face is their obligation under Section 451 of the Code which provides that "every public utility shall furnish and maintain such adequate, efficient, just and reasonable service,? to promote the safety, health, comfort, and convenience of its patrons, employees, and the public." Further support for the PUC's existing authority to take the actions contemplated by the proposed legislation is found in Public Utilities Code Section 761 which provides that "if, after a hearing, the Commission finds that service is unsafe or unreasonable, that the Commission shall determine and fix the rules." While benchmarking can be useful in comparing different aspects of pipeline operations over time among companies to identify potential areas for improvement, each operator is differently situated (with varying miles of urban and rural pipe, different geologic conditions, etc.) and faces different operating conditions. The pipeline infrastructure and the threats to which it is subjected vary significantly from operator to operator and from state to state. The variability includes operator size, competence, pipeline age, operating conditions, pipeline material, and environmental conditions. As such, benchmarking efforts are more effective as a tool for the identification of risks based on historical performance and for identifying opportunities for improvement, than they are for an evaluation of operator performance. ASSEMBLY FLOOR : 78-0, 5/30/12 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, Donnelly, Eng, Feuer, Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Gorell, Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, CONTINUED AB 1456 Page 10 Portantino, Silva, Skinner, Smyth, Solorio, Swanson, Torres, Wagner, Wieckowski, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Fletcher, Valadao RM:k 8/21/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED