BILL ANALYSIS Ó 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 705 - Leno Hearing Date: April 28, 2011
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As Amended: April 13, 2011 FISCAL B
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DESCRIPTION
Current Federal law and general orders of the California Public
Utilities Commission (CPUC) require the commission to regulate
gas transmission, distribution and gathering pipeline facilities
which include investor-owned utilities, master-metered mobile
home parks, storage facilities, and propane operators.
Current Federal law and general orders of the CPUC establish
safety requirements pertaining to the design, construction,
testing, operation, and maintenance of utility gas gathering,
transmission, and distribution piping systems, and for the safe
operation of such lines and equipment.
Current law vests regulatory authority over gas corporations to
the CPUC and authorizes it to fix the rates and charges for
service as well as standards and practices for services to be
furnished.
This bill requires gas corporations to develop, adopt and
implement a service and safety plan, including specified
elements, that places safety of the public and gas corporation
employees as the top priority which would be reviewed, modified
and updated by the CPUC on a regular basis.
Current law authorizes the CPUC to enforce federal pipeline
safety standards, as well as state pipeline safety requirements,
through penalties of up to $20,000 per day, per violation, and/or
injunctive relief.
This bil l restricts the CPUC from allowing a gas corporation to
recover costs from ratepayers which are incurred as a result of
inadequate historical compliance with standards and practices
related to record-keeping, inspections, retrofitting or testing
caused by unreasonable faulty reliance or inadequate data, or
maintenance work caused by deferred maintenance.
Current law directs the CPUC to determine the reasonableness of
operational costs, cost allocation among customer classes, and
rate design for natural gas utilities.
This bill requires that authorized cost recovery for pipeline
reliability, including the installation of transmission pipeline
valves and the replacement of transmission pipes be supported by
a cost/benefit analysis including alternatives, that the CPUC
account for any prior failure of the gas corporation to carry out
its obligation to safely construct, operate, and maintain its gas
plant, and that all revenues received by the IOUs are expended
only for purposes authorized by the CPUC.
BACKGROUND
Natural Gas Regulation - The CPUC regulates natural gas utility
service for approximately 10.7 million customers that receive
natural gas from Pacific Gas and Electric (PG&E), Southern
California Gas, San Diego Gas & Electric, Southwest Gas, and
several smaller natural gas utilities. The CPUC also regulates
independent storage operators Lodi Gas Storage and Wild Goose
Storage.
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 CPUC regulates the California utilities' natural gas rates
and natural gas services, including in-state transportation over
the utilities' transmission and distribution pipeline systems,
storage, procurement, metering and billing.
Most of the natural gas used in California comes from
out-of-state natural gas basins. In 2008, California customers
received 46% of their natural gas supply from basins located in
the Southwest, 19% from Canada, 22% from the Rocky Mountains, and
13% from basins located within California. Natural gas from
out-of-state production basins is delivered into California via
the interstate natural gas pipeline system
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 dozens more.
Gas service was also disrupted for 300 customers.
The pipeline in question is owned and operated by PG&E and
originally built in 1948. In 1956 it was relocated and rebuilt
to accommodate new housing development. The National
Transportation Safety Board (NTSB), in conjunction with the CPUC
was on scene within 24 hours to investigate the cause of the
explosion. Although preliminary elements of the investigation
have been detailed, a final report on causation is not expected
until at least the fall.
The NTSB's examination of the ruptured pipe segment and review of
PG&E records revealed that although those records marked the pipe
as seamless the pipeline in the area of the rupture was
constructed with longitudinal seam-welded pipe and was
constructed of five sections of pipe, some of which were short
pieces measuring about 4 feet long. These short pieces of pipe
contained different seam welds of various types, including
single- and double-sided welds that may not have been as strong
as the seamless pipe listed in PG&E's records. The NTSB has not
concluded that the faulty records or welds were the proximate
cause of the rupture.
However, the NTSB is concerned that there are other discrepancies
between installed pipe and as-built drawings in PG&E's gas
transmission system. It is critical to know all the
characteristics of a pipeline in order to establish a valid
operating pressure below which the pipeline can be safely
operated. The NTSB is concerned that these inaccurate records may
lead to incorrect operating pressures.
Pipeline Assessment & Investment - Since San Bruno PG&E, both on
its own and under orders of the CPUC and NTSB, has undertaken
extensive work to improve the operations and safety of its
natural gas system. This work includes validation and assessment
of its record-keeping practices, inspection and field testing of
its pipelines, including hydrostatically testing or replacing
approximately 150 miles of pipeline segments in high consequence
areas this year. Additional mandates from regulators are likely
to include installation of remote or automatic valves and new and
additional testing standards. PG&E reports that it will expand
its field action and inspection program to certain other pipeline
segments. Tests will include in-line inspections with "smart
pigs" and new camera inspection technologies, as well as pressure
testing. When indicated by field testing or engineering analysis,
PG&E will excavate, further inspect and/or replace pipelines.
The cost of this work is expected to at least be in the hundreds
of millions of dollars.
CPUC Fine Authority & Actions - In February the CPUC opened two
proceedings which could result in fines against the utility
related to San Bruno. The first proceeding concerns whether
deficient PG&E recordkeeping caused or contributed to the
pipeline rupture in San Bruno. The second case concerns PG&E
records on pipeline pressures. The utility could be subject to
fines in both proceedings. These two proceedings are separate
from their liability from the San Bruno explosion. After the
conclusion of the NTSB's investigation into the cause of the San
Bruno rupture, the CPUC will open an open an additional
proceeding to consider fines and penalties for the utility's
failures identified by the NTSB.
COMMENTS
1. Author's Purpose . After the explosion at San Bruno and
the ongoing episodes of gas explosions around the country it
is now generally recognized that system safety has been a
lower priority in operating and maintaining the system for
transporting, delivering and using natural gas. As a result
the public is at great risk of accidents and explosions.
The CPUC has undertaken several initiatives to improve
system safety and thus the quality of gas service offered to
the public, and has recently demonstrated a greater sense of
urgency in addressing systemic safety concerns. This sense
of urgency has been stimulated by legislative hearings such
as those we held in October and the introduction of AB 56
(Hill) in the Assembly and this bill in the Senate.
Enactment of this bill in its amended version accomplishes
the necessary first steps: the creation of a permanent
state policy placing safety first: a legislative directive
to implement the policy through a thorough-going change in
the culture of the industry and the utilities that places
safety first in operation and maintenance procedures and
programs for both workers and management; the creation of
safety plan process for each utility overseen by and subject
to the approval of the CPUC; and specific assurances to the
public that the money it will take to implement safety
programs will not be diverted to the utilities' bottom line.
This bill provides the Legislature's policy direction and
outlines a process that assures continuous attention to
safety in the gas industry.
2. Legislative Ratemaking ? This bill has two provisions
which mandate the CPUC to follow specific guidelines in
ratemaking proceedings for gas pipelines. The CPUC has a
duty to assure that adequate and reliable utility services
are available at just and reasonable rates and has great
latitude in making those determinations through ratemaking
proceedings. The Legislature also has a duty to see that
the CPUC's duty is carried out in a fair and responsible
manner. There have been times when the Legislature has
directed the CPUC to take specified actions relative to
rates and the ratemaking process the most notable of which
is the rate freeze on baseline rates instituted during the
electricity crisis in 2001. However, prescriptive
legislation which mandates what costs can and should be
recovered by a utility can interfere with the ratemaking
process.
3. Cost Recovery or Penalty ? Section five of this bill
would prohibit the CPUC from granting cost recovery to
utilities such as PG&E that have been negligent in
maintaining records or accomplishing pipeline safety work
necessary to keep pipelines up to proper safety standards.
Prohibited cost recovery includes direct and indirect
expenses for data gathering and pipeline testing,
maintenance and replacement and would also include any
return on investment or profit to the utility.
The extent of work anticipated to address pipeline safety in
the PG&E service territory is currently unknown but the
utility has embarked on an extensive pipeline assessment and
upgrade program. This bill would prohibit the CPUC from
authorizing PG&E to recover the costs of that work from
ratepayer funds which would include such basic expenditures
as payroll. By doing so it transforms its assessment and
upgrade program into a penalty program. The CPUC has clear
authority to assess direct financial penalties against PG&E
and its shareholders for its failures to prevent the San
Bruno tragedy. Those penalties are as high as $20,000 per
day, per violation. The committee has received no
information indicating that the CPUC's fining authority is
inadequate to properly penalize the utility for its
failures.
However, utilities are routinely granted a "rate of return"
on work done to maintain and repair infrastructure which is
in essence a profit to shareholders. There is a significant
issue raised by the San Bruno tragedy - should a utility be
permitted to profit from the ordered records searches and
pipeline assessments, testing, and upgrades which may have
caused significant harm to the public?
4. Ongoing Maintenance and Repairs . For routine
maintenance, repairs and replacement necessary for the safe
operation of a gas corporation's infrastructure, section
five of this bill also requires a cost-benefit analysis
before work is done and for the CPUC to consider
alternatives to that work. The CPUC would also be required
to "fairly account for any prior failure" of the utility to
maintain a safe plant and further require that all revenues
received by the utility be expended only for the purposes
authorized by the CPUC.
After San Bruno, questions were raised as to whether PG&E
had been redirecting funds authorized for pipeline
maintenance and repair to non-safety uses or company
profits. Investigation showed that as part of the PG&E's
spending authorization they submit a list of potential
safety work to be done and related locations to the CPUC.
There was no evidence that PG&E redirected the funds from
pipeline safety as approved by the CPUC but some of those
funds were used for other repairs for other pipeline
segments that at the time were deemed more critical and
because the conditions upon which the previously reported
repair list was based had changed.
Through the ratemaking process a gas corporation's budget
(commonly referred to as a general rate case or gas accord)
for a specified period (usually three or four years) is
submitted, subject to public hearings, modified, and
approved. That budget includes funding for maintenance and
repair but the gas corporations have always had the latitude
to use the funding for the repairs deemed most necessary
during the funding cycle and have not been required to
justify the change in spending or needed repairs to the
CPUC.
The CPUC's Consumer Product Safety Division is responsible
for oversight and investigations concerning pipeline safety.
Last fall this committee held an informational hearing the
committee concerning the CPUC's regulation of gas pipelines
and discovered that the CPSD has no involvement, review, or
knowledge of the funding side of a gas corporation's budget
for pipeline maintenance and repair. A budget review for
funding for these critical needs has been basically left to
negotiation between stakeholders. The gas corporation
submits the budget to the CPUC and then the gas corporation,
ratepayer advocates, and other intervenors negotiate a
funding level or settlement which is routinely less than
what was submitted to the CPUC and is routinely approved by
the CPUC. This process does not require much of the utility
in the way of justifying the need for funding maintenance
nor has it concerned whether the requested funding level is
adequate. The process does call out for the budget process
to be focused on safety rather than negotiating costs, as
well as including the CPSD to ensure that the funding
dedicated to pipeline maintenance and repairs matches what
the CPSD sees in its review and audits of the system's
integrity.
However, this bill does not address those issues. Instead it
raises questions as to whether the processes would operate
as hurdles to funding maintenance and repair projects. For
example, if a utility submits as part of its funding that
ten miles of pipeline needs to be replaced, this bill
requires a cost/benefit analysis to justify that
replacement.
5. CPUC Action . The CPUC has begun to address the issue of
pipeline safety in the ratemaking process in the recent
approval of PG&E's Gas Accord V (aka general rate case) for
2011 to 2014. The utility will now be required to provide
semi-annual reports to the CPUC that detail maintenance and
repair activities and costs and progress on projects
previously identified as high risk. It is not clear whether
this is enough or what more should be required at this
point. Legislative guidance may be appropriate but the
prescriptive elements proposed in Section 5 of this bill may
go too far and create unintended consequences making repair
and maintenance more difficult. To avoid this impact the
author and committee should consider striking section five
from this bill.
6. Technical Amendments . This committee has adopted two
other bills which require increased regulation by the CPUC
to address pipeline safety. As a result of committee
action, in an effort to clarify the authority of the CPUC
over gas pipelines and to establish one clear body of law on
gas safety and service, SB 44 (Corbett) and SB 216 (Yee)
were amended into a newly established division (Chapter 4.5
(commending with Section 950). The author and committee
should consider similar conforming amendments to this bill.
7. Related Measures . The following measures have been
introduced in this session in response to the San Bruno
tragedy:
SB 44 (Corbett) requires the CPUC to commence a
proceeding to establish emergency response standards,
which include emergency response plans, to be followed by
owners or operators of commission-regulated gas pipeline
facilities. Status: Pending hearing in Senate
Appropriations Committee.
SB 216 (Yee) requires gas requires the CPUC to adopt
standards that require the installation of automatic
shut-off or remote controlled sectionalized block valves
on all commission-regulated pipelines that are located in
a high consequence area or that traverse an active seismic
earthquake fault unless the commission determines it is
prohibited under federal law. Status: Pending hearing in
the Senate Appropriations Committee.
SB 879 (Padilla) would require that in any ratemaking
proceeding in which the commission authorizes a gas
corporation to recover expenses for the inspection,
maintenance, or repair of transmission pipelines, that the
commission require the gas corporation to establish and
maintain a one-way balancing account for the recovery of
those expenses. Status: Set for hearing in Senate
Energy, Utilities & Communications Committee May 3, 2011.
AB 56 (Hill) implements a number of public safety
measures with regard to natural gas pipeline facilities,
including requiring the owner or operator of a gas
pipeline to develop a public safety program and a
facilities modernization program, and requiring the CPUC
to track proposed repairs to gas facilities to determine
if the repairs were made. Status: Pending hearing in the
Assembly Appropriations Committee.
POSITIONS
Sponsor:
The Utility Reform Network
Utility Workers Union of America
Support:
California Labor Federation
Coalition of California Utility Employees
International Brotherhood of Electrical Workers
San Diego Gas & Electric Company (if amended)
Sempra Energy (if amended)
Southern California Gas Company (if amended)
Oppose:
None on file
Kellie Smith
SB 705 Analysis
Hearing Date: April 28, 2011