BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  AB 1456|
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                                 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  :    

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          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 

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          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 

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          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 

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          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."


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           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 

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          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.  

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          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 

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          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, 

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            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

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