Amended in Senate April 8, 2013

Senate Bill No. 48

Introduced by Senator Hill

December 19, 2012

An act to begin delete amend Section 854 of, and to add Sections 740.5 and 854.5 to, end delete begin insert add Section 740.5 to end insert the Public Utilities Code, relating to begin delete energy end delete begin insert public utilities end insert .

LEGISLATIVE COUNSEL’S DIGEST

SB 48, as amended, Hill. begin delete Energy-related research: mergers: entities formed to receive benefits on behalf of ratepayers. end delete begin insert Public utilities: research and development projects. end insert

Under existing law, the Public Utilities Commission begin delete (PUC) end delete has regulatory authority over public utilities, including electrical corporations begin delete and end delete begin insert , end insert gas corporations, begin insert heat corporations, and telephone corporations, end insert as defined. Existing law authorizes the begin delete PUC end delete begin insert commission end insert to fix the rates and charges for every public utility, and requires that those rates and charges be just and reasonable. Existing law authorizes begin delete certain public utilities, including end delete electrical corporations begin delete and end delete begin insert , end insert gas corporations, begin insert heat corporations, and telephone corporations end insert to voluntarily adopt certain research and development programs and authorizes the begin delete PUC end delete begin insert commission end insert to allow inclusion of expenses for research and development in rates. Existing law requires the begin delete PUC end delete begin insert commission end insert to consider specified guidelines in evaluating the research, development, and demonstration programs proposed by electrical corporations and gas corporations.

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This bill would require that any research and development or research, development, and demonstration project that is performed by a 3rd party, as defined, and is funded in whole or in part by the ratepayers of an electrical or gas corporation be subject to a merit review, as defined. The bill would require the State Energy Resources Conservation and Development Commission to select the persons to perform the merit review. The bill would require the PUC to prepare and submit to the policy and fiscal committees of the Legislature, by February 1 of each year, a written report listing all research and development, or research, development, and demonstration projects, including specified information, that were funded in whole or in part by the ratepayers of an electrical or gas corporation during the previous 5 years.

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The Public Utilities Act, prohibits any person or corporation from acquiring or controlling, directly or indirectly, any public utility organized and doing business in this state, without first securing authorization to do so from the PUC. The act requires the PUC, before authorizing the merger, acquisition, or change in control of an electric, gas, or telephone utility having revenues in excess of a specified amount, to consider, among other things, that the proposal provides short-term and long-term economic benefits to ratepayers, and equitably allocates the short-term and long-term forecasted economic benefits of the proposed merger, acquisition, or control, as determined by the PUC, between shareholders and ratepayers, where the PUC has ratemaking authority. Existing law requires that the ratepayers receive not less than 50% of the benefits.

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This bill would prohibit the PUC, when authorizing a merger, acquisition, or change in control, from establishing an entity to receive benefits on behalf of ratepayers without first obtaining statutory authorization from the Legislature. The bill would prohibit a commissioner of the PUC from being an officer or director of an entity formed to receive benefits of behalf of ratepayers resulting from approval of a merger, acquisition, or change in control of an electrical, gas, or telephone corporation.

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The bill would require the commission, by no later than January 1, 2016, to consolidate all review and approval of research and development projects into a single research investment planning proceeding that would be required to recur no more frequently than every 2 years. The bill would prohibit the commission from allowing cost recovery of expenses for funding any research and development project outside the consolidated proceeding, except for the excluded projects and programs, as defined, for which a public utility applied for research and development funding prior to January 1, 2013. The bill would require the commission, when reviewing any request for authorization of expenses for research and development projects where the expenses are to be recovered from ratepayers, to place a preference on projects if the application was solicited in a manner that provides for the maximum amount of competition, unless limited and unique circumstances exist where it is not possible or desirable to maximize competition, and the proposed project encourages the use and leveraging of matching funds where possible. The bill would require that certain research and development projects first undergo peer review, as defined, that considers specified matter. The bill would require the commission, before initiating a consolidated research planning proceeding, to prepare and submit a report to the relevant policy and fiscal committees of the Legislature listing all research and development projects where the expenses of the project were or are recovered from ratepayers during the previous 5 years.

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Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

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begin insert SECTION 1. end insert   

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begin insert Section 740.5 is added to the end insert begin insert Public Utilities
Code end insert begin insert , to read: end insert

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begin insert 740.5. end insert   

(a) For purposes of this section, the following terms
have the following meanings:

(1) “Excluded projects and programs” means research and
development or research, development, and demonstration projects
and programs that are the subject of Application 12-11-009,
Application 11-03-001, Application 11-03-002, Application
11-03-003, Application 12-07-001, Application 12-07-002,
Application 12-07-003, Application 12-07-004, Application
11-06-006, Application 11-06-029, and Application 11-07-001.

(2) “Peer review” means a thorough, consistent, and objective
examination based on preestablished criteria by persons who are
independent of persons submitting an application, or conducting
the research and development, and who are knowledgeable in the
field of endeavor to which the application or research and
development pertains. Peer reviewers shall be free of any financial
or other interest which could significantly impair the individual’s
objectivity or create and unfair competitive advantage for any
person or organization.

(3) “Research and development project” includes a research,
development, and demonstration project or program.

(b) No later than January 1, 2016, the commission shall
consolidate all review and approval of research and development
projects into a single research investment planning proceeding
that shall recur no more frequently than every two years.
Commencing January 1, 2014, the commission shall not allow cost
recovery of expenses for funding any research and development
project outside the consolidated proceeding, except for the
excluded projects and programs for which a public utility applied
for research and development funding prior to January 1, 2013.

(c) When reviewing any request for authorization of expenses
for research and development projects where the expenses are to
be recovered from ratepayers, the commission shall place a
preference on projects where both of the following are true:

(1) The application was solicited in a manner that provides for
the maximum amount of competition, unless limited and unique
circumstances exist where it is not possible or desirable to
maximize competition.

(2) The proposed project encourages the use and leveraging of
matching funds where possible.

(d) Unless the proposed research and development project has
been selected by the public utility through an open solicitation of
proposals, the commission shall not authorize expenses for a
project that will be recovered from ratepayers in an amount in
excess of one million five hundred thousand dollars ($1,500,000)
without the project first undergoing peer review. The peer review
shall consider all of the following:

(1) The extent to which the same or similar research,
development, and demonstration work could be performed by
entities that the public utility does not select.

(2) The appropriateness of the level of requested funding in
camparison to other projects by similarly experience individuals
using similar facilities performing in similar timeframes and
circumstances.

(3) The likelihood that the proposed work can be accomplished
within the proposed time and budget by the investigators or the
technical staff, given their experience and expertise and available
resources.

(e) (1) Notwithstanding Section 10231.5 of the Government
Code, before initiating a consolidated research planning
proceeding, the commission shall prepare and submit a report to
the relevant policy and fiscal committees of the Legislature listing
all research and development projects where the expenses of the
project were or are recovered from ratepayers during the previous
five years, including for each project the citations of all published
papers, all oral and poster presentations given at public meetings,
and all patents awarded for the funded research. For an electrical
corporation, the report may be included in the report made to the
Legislature pursuant to Section 910.

(2) A report to be submitted pursuant to paragraph (1) shall be
submitted in compliance with Section 9795 of the Government
Code.

(f) The requirements of this section do not apply to research
and development projects or programs managed by an independent
contractor pursuant to subdivision (b) of Section 2851, or to those
managed by the Energy Commission.

(g) Except for those research and development projects exempt
pursuant to subdivision (f), any research and development project
for which recovery of expenses is requested pursuant to Section
740, that furthers the goals of Section 740.1, or that advances the
public interest consistent with subdivision (c) of Section 399, is
subject to the requirements of subdivisions (b), (c), (d), and (e).

(h) Nothing in this section authorizes funding of research and
development projects through the rates of a gas corporation that
is not in compliance with subdivision (a) of Section 890.

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SECTION 1.  

Section 740.5 is added to the Public Utilities
Code, to read:

740.5.  

(a) For purposes of this section, the following terms
have the following meanings:

(1) “Merit review” means a thorough, consistent, and objective
examination based on preestablished criteria by persons who are
independent of persons submitting an application, or conducting
the research and development, and who are knowledgeable in the
field of endeavor to which the application or research and
development pertains.

(2) “State agency” includes every state office, officer,
department, division, bureau, board, and commission. “State
agency” does not include the University of California or California
State University.

(3) “Third party” means a person, corporation, or other entity
that is not a state agency or an electrical corporation or gas
corporation regulated by the commission.

(b) Any research and development or research, development,
and demonstration project that is performed by a third party and
is funded in whole or in part by the ratepayers of an electrical or
gas corporation shall be subject to a merit review. The Energy
Commission shall select the persons to perform the merit review.
The Energy Commission shall use the most recent Merit Review
Guide for Financial Assistance, or successor guide, issued by the
federal Department of Energy pursuant to Section 600.13 of
Subpart A of Part 600 of Chapter II of Title 10 of the Code of
Federal Regulations (10 CFR 600.13) as a guide for conducting
merit reviews.

(c) (1) Notwithstanding Section 10231.5 of the Government
Code, by February 1 of each year, the commission shall prepare
and submit to the policy and fiscal committees of the Legislature
a written report listing all research and development, or research,
development, and demonstration projects that were funded in whole
or in part by the ratepayers of an electrical or gas corporation
during the previous five years, including for each project the
citations of all published papers and all oral and poster
presentations given at public meetings. For an electrical
corporation, the report may be included in the report made to the
Legislature pursuant to Section 910.

(2) A report to be submitted pursuant paragraph (1) shall be
submitted in compliance with Section 9795 of the Government
Code.

SEC. 2.  

Section 854 of the Public Utilities Code is amended
to read:

854.  

(a) No person or corporation, whether or not organized
under the laws of this state, shall merge, acquire, or obtain control,
either directly or indirectly, of any public utility organized and
doing business in this state without first securing authorization to
do so from the commission. The commission may establish by
order or rule the definitions of what constitute merger, acquisition,
or control activities which are subject to this section. Any merger,
acquisition, or change in control without that prior authorization
shall be void and of no effect. No public utility organized and
doing business under the laws of this state, and no subsidiary or
affiliate of, or corporation holding a controlling interest in a public
utility, shall aid or abet any violation of this section.

(b) Before authorizing the merger, acquisition, or a change in
control of any electrical, gas, or telephone corporation organized
and doing business in this state, where any of the utilities that are
parties to the proposed transaction has gross annual California
revenues exceeding five hundred million dollars ($500,000,000),
the commission shall find that the proposal does all of the
following:

(1) Provides short-term and long-term economic benefits to
ratepayers.

(2) Equitably allocates, where the commission has ratemaking
authority, the total short-term and long-term forecasted economic
benefits, as determined by the commission, of the proposed merger,
acquisition, or control, between shareholders and ratepayers.
Ratepayers shall receive not less than 50 percent of those benefits.

(3) Not adversely affect competition. In making this finding,
the commission shall request an advisory opinion from the Attorney
General regarding whether competition will be adversely affected
and what mitigation measures could be adopted to avoid this result.

(c) Before authorizing the merger, acquisition, or a change in
control of any electrical, gas, or telephone corporation organized
and doing business in this state, where any of the entities that are
parties to the proposed transaction has gross annual California
revenues exceeding five hundred million dollars ($500,000,000),
the commission shall consider each of the criteria listed in
paragraphs (1) to (8), inclusive, and find, on balance, that the
merger, acquisition, or control proposal is in the public interest.

(1) Maintain or improve the financial condition of the resulting
public utility doing business in the state.

(2) Maintain or improve the quality of service to public utility
ratepayers in the state.

(3) Maintain or improve the quality of management of the
resulting public utility doing business in the state.

(4) Be fair and reasonable to affected public utility employees,
including both union and nonunion employees.

(5) Be fair and reasonable to the majority of all affected public
utility shareholders.

(6) Be beneficial on an overall basis to state and local
economies, and to the communities in the area served by the
resulting public utility.

(7) Preserve the jurisdiction of the commission and the capacity
of the commission to effectively regulate and audit public utility
operations in the state.

(8) Provide mitigation measures to prevent significant adverse
consequences which may result.

(d) When reviewing a merger, acquisition, or change in control
proposal, the commission shall consider reasonable options to the
proposal recommended by other parties, including no new merger,
acquisition, or control, to determine whether comparable short-term
and long-term economic savings can be achieved through other
means while avoiding the possible adverse consequences of the
proposal.

(e) The person or corporation seeking acquisition or control of
a public utility organized and doing business in this state shall
have, before the commission, the burden of proving by a
preponderance of the evidence that the requirements of subdivisions
(b) and (c) are met.

(f) In determining whether an acquiring utility has gross annual
revenues exceeding the amount specified in subdivisions (b) and
(c), the revenues of that utility’s affiliates shall not be considered
unless the affiliate was utilized for the purpose of effecting the
merger, acquisition, or control.

(g) Paragraphs (1) and (2) of subdivision (b) shall not apply to
the formation of a holding company.

(h) For purposes of paragraphs (1) and (2) of subdivision (b),
the legislature does not intend to include acquisitions or changes
in control that are mandated by either the commission or the
Legislature as a result of, or in response to any electric industry
restructuring. However, the value of an acquisition or change in
control may be used by the commission in determining the costs
or benefits attributable to any electrical industry restructuring and
for allocating those costs or benefits for collection in rates.

SEC. 3.  

Section 854.5 is added to the Public Utilities Code, to
read:

854.5.  

(a) When authorizing a merger, acquisition, or change
in control pursuant to this chapter, the commission shall not
establish an entity to receive benefits on behalf of ratepayers
without first obtaining statutory authorization from the Legislature.

(b) No commissioner shall be a director or officer of an entity
formed to receive benefits on behalf of ratepayers. The holding of
simultaneous positions as a commissioner and as a director or
officer of an entity formed to receive benefits of behalf of
ratepayers resulting from approval of a merger, acquisition, or
change in control pursuant to this chapter is the holding of public
offices that are incompatible pursuant to Section 1099 of the
Government Code.

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