BILL ANALYSIS Ó 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE ALEX PADILLA, CHAIR SB 611 - Hill Hearing Date: April 30, 2013 S As Amended: April 15, 2013 FISCAL B 6 1 1 DESCRIPTION The California Constitution establishes the California Public Utilities Commission (CPUC) with five members appointed by the Governor and approved by the Senate for staggered six-year terms and grants the CPUC authority to regulate public utilities subject to control by the Legislature. (Cal. Const. Article II, Section 1) Current law requires the Governor to designate one of the commissioners as president who is authorized to direct and prescribe duties of an attorney (general counsel), executive director, and other staff and preside at CPUC meetings. (Public Utilities Code 305) This bill reduces the president's duties to presiding at CPUC meetings. Current law authorizes the CPUC to appoint a general counsel to represent the CPUC in all actions, to commence, prosecute or intervene in proceedings as directed by the president, and to advise the commission and each commissioner on all matters. (Public Utilities Code 307) This bill prohibits any CPUC employee or officer that is assigned to prosecution of an adjudication case from participating in, or advising the commission on, the decision of that case and makes the general counsel subject to laws and rules of professional conduct applicable to attorneys licensed to practice law in California. Current law establishes within the CPUC a Division of Ratepayer Advocates (DRA) to advocate on behalf of utility customers, with a director appointed by the Governor, a lead attorney designated by the director, and funding, attorneys and other staff provided by the CPUC. (Public Utilities Code 309.5) This bill changes DRA to the Office of Ratepayer Advocates (ORA) within the commission, provides ORA more autonomy in its budget and staff, including attorneys, and authorizes ORA to seek rehearing and judicial review of CPUC decisions the same as other parties to a CPUC proceeding. Current law requires the CPUC to annually submit to the Legislature financial reports, including any ratepayer costs, on specified nonprofit entities that were established as a result of CPUC decisions for various public benefit purposes. (Public Utilities Code 326.5) This bill prohibits the CPUC from establishing a "nonstate entity," defined to be any for profit or nonprofit company, corporation, partnership, or other entity or group of entities. Current law prohibits a public official or a body on which the official is a member from entering into a contract with an entity in which the official has a financial interest and deems such contract invalid. (Government Code 1090) This bill prohibits the CPUC from entering into a contract with a nonstate entity in which a commissioner is an owner, director, or officer and invalidates prior contracts with that entity if a commissioner ever becomes an owner, director or officer. The California Constitution provides that the Legislature may remove a commissioner for "incompetence, neglect of duty, or corruption," with two-thirds vote of each house concurring. (Cal. Const. Article XII, Section 1) This bill provides that a commissioner "is negligent of his or her duty" and may be removed pursuant to this constitutional provision if he or she acts as an owner, director, or officer of a nonstate entity established prior to January 1, 2014, by CPUC action in which the commissioner participated. Current law specifies various responsibilities of the CPUC's consumer protection and safety division. (e.g. Public Utilities Code 309.7) This bill changes these references to the safety and enforcement division. Current law requires the CPUC to provide the Legislature and the Governor an annual workplan, accounting of its transactions, and a report on the number of cases where resolution took longer than expected in scoping memos, and requires the CPUC president to annually report to the policy committees of the Legislature. (Public Utilities Code 321.6) This bill would require the report to include information on the disposition of applications for rehearing. This bill changes various statutory references to commission "regulations" to commission "rules." BACKGROUND CPUC Independent but Accountable to Legislature - The basic structure of the CPUC was established in the early 1900s by adding Article XII to the state constitution, which was one of Governor Hiram Johnson's reform efforts to curb undue influence of railroads in politics and government. Article XII grants the CPUC authority to regulate public utilities "subject to control of the Legislature" and grants the Legislature "plenary power" to confer authority and jurisdiction upon the CPUC, with the intent that the CPUC be accountable to the Legislature. The CPUC has historically been afforded much independence. Commissioners are appointed for staggered six-year terms to limit the potential for a single Governor to appoint a majority of commissioners within a four-year term. The Legislature, not the Governor, may remove a commissioner. The CPUC has been given broad latitude to set its own procedures, and any review of CPUC decisions has historically been limited to review only by courts of appeal and the Supreme Court, not trial courts. Current Commissioners - The current Governor has appointed four of the five current commissioners, a majority, as follows: Michael R. Peevey, President, originally appointed by Governor Davis in March 2002, appointed President by Governor Davis in December 2002, reappointed by Governor Schwarzenegger in December 2008, retained as President by Governor Brown, term expires in December 2014. Michael Florio, appointed by Governor Brown in January 2011. Catherine J.K. Sandoval, appointed by Governor Brown in January 2011. Commissioner Mark J. Ferron, appointed by Governor Brown in March 2011. Carla J. Peterman, appointed by Governor Brown in December 2012. CPUC Safety and Budget Problems - The CPUC has been under intense scrutiny the past year in connection with its oversight of utility infrastructure safety and, more recently, its internal budget operations. 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 70. Gas service was also disrupted for 300 customers. The National Transportation Safety Board (NTSB), which has primary jurisdiction for investigating pipeline failures, issued its Pipeline Accident Report on the San Bruno tragedy in August 2011 and concluded that, in addition to numerous PG&E violations, the CPUC's failure to detect the inadequacies of PG&E's pipeline integrity management program contributed to the accident. The CPUC initiated three separate proceedings to consider the alleged violations arising from the San Bruno tragedy. Evidentiary hearings were suspended in October 2012 but later resumed. On January 10, 2013, the Department of Finance (DOF) Office of State Audits and Evaluations (OSAE) released its performance audit of the CPUC budget process. The audit identified significant weaknesses with CPUC's budget operations that negatively affect the commission's ability to prepare and present reliable and accurate budget information. Specifically, the audit found that: The organizational structure of CPUC does not facilitate cohesive budgeting practices; The CPUC's budget forecasting methodologies produced results that differed significantly from actual results, with most of these differences unexplainable; Cases of fiscal mismanagement in which accounting records for certain funds were misrepresented and incorrect. For example, OSAE identified records that did not include certain fund transactions that ranged from roughly $40,000 to $275 million; and The CPUC's reconciliations of certain funds-where there were differences between DOF and State Controller's Office records-were inaccurate, requiring adjustments in the hundreds of millions of dollars. According to the audit, CPUC must implement and strengthen the fiscal controls over its budgeting practices and procedures in order to produce reliable and accurate budgetary information for the Governor, the Legislature, DOF, and other stakeholders. In the Fall of 2012, the CPUC engaged an independent consulting firm to facilitate its "Safety Culture Change" project. This project began with an initial discovery phase, which consisted of a document review, interviews and focus groups. The purpose of this phase was to uncover the existing culture, identify culture changes needed, and to develop a draft problem statement that would allow the CPUC to plan its culture change strategy. A consultant's summary of focus groups and interviews with employees was reported to the commission and included a few of the prevailing perceptions of the employees at the CPUC: "For the past ten years we have been mostly focused on climate change policies. Everything else takes a back seat. We have not been focused on creating the safety infrastructure." "There has been a lot of lip service to safety. I have not seen enough action yet to back up the talk." "When Commissioners vote, they don't support safety, so there's no incentive for the utilities to be safer. If they knew they were 100 percent liable for safety problems, they'd take it more seriously. If the commission lets them put the burden on ratepayers, rather than shareholders, there is no incentive for the utilities to change." Nonprofits Resulting from CPUC Decisions - In a variety of contexts over the years, CPUC decisions have ordered funding for nonprofit organizations that serve public benefits related to entities it regulates. For example, the Pacific Forest and Watershed Lands Stewardship Council was formed as a result of a December 2003 decision that ordered PG&E to provide $100 million over 10 years to be recovered in retail rates. In a bankruptcy settlement in 2003, PG&E was ordered to pay $30 million in shareholder funds over five years to a nonprofit the California Clean Energy Fund (CalCEF) to support clean technology development. In 2005, as a condition of approval of mergers of SBC and AT&T and Verizon and MCI, AT&T and Verizon were required to contribute a total of $60 million in shareholder funds over five years to a nonprofit the California Emerging Technology Fund (CETF) to promote broadband deployment and adoption to close the digital divide. The 2008 Budget Act enacted Section 326.5 of the Public Utilities Code, which requires the CPUC to annually submit to the Legislature financial reports, including any ratepayer costs, on these nonprofit entities that were established as a result of CPUC decisions. Changing Role of President - Legislation proposed over the years, and some enacted, has been aimed at improving CPUC accountability. Concurrent with 1996 electric restructuring, a series of procedural reforms were enacted to improve the accountability of individual commissioners to spend more time in hearings and to take ownership of draft decisions. SB 33 (Peace, 1999) attempted to address a perceived lack of accountability by commissioners by centralizing more authority with the president. Prior to that time, the CPUC president was elected by commissioners. The commissioners also appointed the general counsel and executive director, who performed at the direction of the commission. SB 33 put the executive director and general counsel directly under the control of the president and authorized the Governor to appoint the president. Since then, a series of bills have sought to limit the power of the CPUC president. AB 1157 (Ruskin, 2007) provided that commissioners elect a president rather than the Governor appoint one. AB 1973 (Ruskin, 2008) and AB 1315 (Ruskin, 2009) required Senate confirmation of a Governor-appointed president, and had the executive director and attorney take direction from the commission rather than the president. SB 1403 (Yee, 2012) also put the executive director and attorney under the direction of the commission and required that assignment of proceedings be by a majority vote of the full commission. None of these bills were chaptered. Public Meeting Required - The CPUC is subject to the Bagley-Keene Open Meeting Act, which requires a state body to take "action" (collective decision or an actual vote) only at a public meeting following the public posting of an agenda describing the item for proposed action at least 10 days prior to the meeting. Any private congregation of a majority of the members of a state body at the same time and place to hear, discuss, or deliberate upon any item that is within its jurisdiction is unlawful. Violations of the act can result in members of the state body facing misdemeanor penalties and action taken rendered invalid, with attorney's fees awarded to prevailing plaintiffs. Division of Ratepayer Advocates - The DRA is an independent division within the CPUC that advocates solely on behalf of residential and small commercial utility ratepayers. First established in 1984, DRA was later codified in SB 960 (Leonard, 1996), which also required that its director be appointed by the Governor subject to Senate confirmation. The statutory goal of DRA is "to obtain the lowest possible rate for service consistent with reliable and safe service levels." DRA advocates for consumers in industry-wide proceedings, individual rate cases, and before the Legislature. DRA has been without an official director for nearly three years. Dana Appling was DRA director from Aug 2004 through July 2010, and Joe Como has served as acting director since August 2010. DRA's staff consists of 137 technical, policy, and financial analysts with professional backgrounds as engineers, auditors, and economists with expertise in regulatory issues related to electricity, natural gas, telecommunications, and water industries in California. DRA has a separate budget account controlled by the director but subject to final approval of the commission. DRA has a lead attorney appointed by the director, with other staff attorneys assigned by the CPUC's general counsel from the CPUC's Legal Division. Currently, attorneys are assigned on a case-by-case basis, although prior practice included Legal Division attorneys assigned to DRA on long-term basis. According to DRA's 2012 annual report: "DRA participated in 176 CPUC proceedings and filed more than 600 pleadings to aid the CPUC in developing the record from which Commissioners formulated their final decisions. DRA lobbied decision-makers on behalf of ratepayers nearly 250 times in 2012 to ensure that the consumer perspective was heard. DRA's $27,535,000 budget represents a small fraction of ratepayer's investment compared with the nearly $4 billion in savings DRA's work was instrumental in achieving for Californians in the form of lower utility rates and avoided rate increases. For every dollar customers spent on DRA in 2012, they saved approximately $153 across their utility bills. Additionally, DRA influenced the outcome of numerous CPUC policies, decisions, and California legislation that will impact ratepayers." The DOF audit released in December identified CPUC noncompliance with statutory requirements specific to DRA's budget. The DOF report stated that, "with minimal input from DRA, the CPUC Budget Office prepares and communicates the budget to DRA and Finance. However, this process has lacked transparency and CPUC has not been able to explain or support to DRA's satisfaction how the various budgeted cost categories were determined. As a result, DRA is not able to adequately explain or defend its own budget."<1> COMMENTS 1. Author's Purpose . According to the author: "The CPUC has run amok, diverting the attention of top staff away from the CPUC's core responsibilities of ensuring safe delivery of energy and managing the public's money. The Department of Finance has found that the CPUC poorly managed its internal accounts, and the Legislative Analyst has questioned its ability to oversee the proper management of customer money in utility hands. Finally-and most importantly to the author-the 2010 explosion in San Bruno has shown the CPUC to have utterly failed to ensure the safety of utility infrastructure. Instead, the CPUC has focused in the last several years on discretionary -------------------------- <1> "California Public Utilities Commission Budget Process Performance Audit." Office of State Audits and Evaluations, Department of Finance, December 2012, p. 13. http://www.dof.ca.gov/osae/audit_reports/documents/FinalReport-Ca liforniaPublicUtilitiesCommissionPerformanceAuditWEB.pdf activities and commissioner pet projects, including multiple activities that Legislative Counsel has determined to be illegal or unconstitutional. This bill takes small but necessary steps to rehabilitate the CPUC." The author also states that a major impetus for this bill is objection to the general counsel's actions in October 2012 to suspend evidentiary hearings and cross-examination of PG&E regarding the utility's potential violations relating to the San Bruno explosion in order to facilitate a settlement of the proceeding. The suspension was later lifted and the hearings scheduled. 2. In Search of Institutional Reform or New Leadership ? In public statements and information provided to the committee, the author indicates that this bill stems, in large part, from his dissatisfaction with activities of the current president. The section of the bill identifying conduct that makes a commissioner subject to removal from office, according to the author's office, "only applies to one person." If enacted, this bill would take effect on January 1, 2014. The current president's term expires in December 2014. The challenge for the Legislature is to consider whether each reform proposed in this bill is beneficial to the institution for the long-term regardless of who the president and commissioners are. 3. Diminishing the Power of the President . This bill provides for the full commission, rather than just the president, to direct the general counsel, executive director and other staff in the performance of their duties and would reduce the president's authority to presiding at commission meetings. This would scale back the current authority of the president to what it was for decades prior to enactment of SB 33 in 1999. It would potentially enhance the role of the other four commissioners, both in directing routine day-to-day operations and more significant matters such as dismissing complaints or applications and intervening in legal actions. Increased participation by all commissioners also invokes the Bagley-Keene Act, which requires state bodies to take action only in a public meeting after the matter for action is on a meeting agenda made public at least 10 days before the meeting. Thus, to the extent commission direction of the attorney and executive director constitutes an "action" of the commission, the public meeting and agenda requirements would apply. According to the CPUC, this change would create operational delays, increase costs, and "directly interfere with the CPUC's ability to perform its duties in a timely manner or act in response to immediate demands." A structure that slows down decision-making could be especially problematic at this time when the CPUC faces intense pressure for a culture change and redirection of focus on public safety. The Utility Reform Network (TURN), on the other hand, states that this change of the president's powers would result in a more robust debate of issues and equalize the influence of all commissioners in setting the agency's priorities and its allocation of resources. Centralized power in the president creates the risk that other commissioners will be inhibited in their decision-making for fear of being marginalized by the president by limiting their access to CPUC legal, analytic, and other resources, states TURN. 4. Enhancing the Power of DRA . This bill enhances the independence and authority of DRA in three significant ways - allows DRA to submit its own budget directly to DOF rather than through the CPUC, allows DRA to employ its own staff including attorneys, and authorizes DRA to seek judicial review of CPUC decisions. DRA states that these changes will "better situate DRA to more effectively and efficiently utilize its resources to advocate for affordable, safe and reliable IOU services." TURN states that these changes will empower DRA to advocate for ratepayers "without fear of reprisal by a commission that currently has ultimate power to determine its budget and personnel." DRA's status as a division of the CPUC has been a barrier to appealing CPUC decisions in a court of law because that would essentially be suing itself. This bill puts DRA on the same footing as other parties to CPUC proceedings, thereby putting more teeth in its advocacy by having the threat to appeal. TURN states that this helps address "the tremendous disparity of resources between the regulated entities and the parties representing consumers and other public interest concerns." It is possible this change could raise questions about the need for ratepayer-funded intervenor compensation for groups like TURN if DRA also has use of ratepayer funds to represent ratepayers all the way through appeal. However, according to TURN, these groups' collective resources typically are only a fraction of that devoted to a case by regulated entities. Despite this bill's express grant of authority to the newly named ORA to seek judicial review of CPUC decisions, it retains the reference to the Office as "within the commission." This creates ambiguity as to whether ORA is sufficiently independent to have standing to seek judicial review. 5. Prohibiting Nonstate Entities . The author seeks to stop the CPUC from establishing nonprofit entities because, even if they deliver public benefits, the CPUC "can accomplish its mission either through convincing settling entities to contribute to state programs or by contracting with existing non-profits." CPUC decisions that establish nonstate entities move funds outside state oversight and circumvent government contract requirements, the author states. The author particularly objects to two nonprofits that were created as a result of CPUC decisions in which the current president was the assigned commissioner and that have governing boards of which the current president subsequently became chair - CalCEF and CETF. The author does not assert an improper financial interest, but describes the current president's activities as "unseemly" and "inviting the appearance of bias." The author states that the bill's provisions on nonstate entities "is to induce the commissioner to choose between his overlapping public and private interests." These provisions raise several issues the committee may wish to consider. First, "nonstate entity" is defined so broadly that the bill may prohibit more than intended, including, for example, a separate affiliate in a merger proceeding or a program administrator in the billion-dollar-per-year energy efficiency portfolios. Also, the CPUC did not necessarily "establish" the nonprofits to which the author objects but, rather, ordered regulated entities to fund them. Significantly, the bill makes no distinction between a nonstate entity for which the CPUC has ordered ongoing funding from ratepayer surcharges versus one-time shareholder contributions. For example, CalCEF and CETF both received sharedholder funding as a result of a CPUC decision, which is not funding that otherwise would have been available in the state budget for award of a state contract for the same public benefit purpose. Second, the bill prohibits the CPUC from entering into a contract with an entity where a sitting commissioner is an owner, director, or officer, even in the absence of any financial interest. This makes CPUC commissioners subject to more stringent requirements than any other state officials. Why are existing conflict of interest laws insufficient for CPUC commissioners? Third, the provision that makes acting as an owner, director or officer of a nonstate entity conduct sufficient to remove a commissioner from office raises concerns. The Constitution makes "neglect of duty" a basis for removal from office, and this bill deems the connection to a nonstate entity as being "negligent" of duty. But, even assuming this is a drafting error, the language could potentially be interpreted to make a commissioner subject to removal the moment this bill is effective for conduct prior to its effective date, raising due process concerns. In any event, this provision appears to be precedent-setting in that the committee could not identify any existing statute that specifies particular conduct as automatically constituting one of the grounds for commissioner removal from office under the Constitution. 6. Separation of Advisory and Prosecutorial Duties . This bill prohibits any CPUC employee who is involved in the prosecution of an adjudication case from participating in the decision of that case or advising a commissioner on how it should be decided. The state Administrative Procedures Act requires a state agency's adjudicative function to be separated from the investigative, prosecutorial, and advocacy functions (Sections 11425.10 and 11425.30 of the Government Code). But the CPUC has long been exempt from the APA. In fact, current law provides that the General Counsel's duties include prosecuting proceedings and advising the commission and each commissioner on all matters (PU Code Section 307). Current law establishing DRA, however, requires the commission to develop a code of conduct and procedures to ensure employees do not both advocate and advise decisionmakers in the same case (PU Code 309.5(d)). The CPUC provided the committee a copy of a 1997 memorandum on "Conflict of Roles: Guidelines & Procedures" that requires separation of functions for CPUC staff, but the memo emphasizes that these are only guidelines and gives the executive director and general counsel some authority to waive the guidelines. The CPUC nonetheless states that it complies with the California Supreme Court's 2009 decision in Morongo Band of Mission Indians v. State Water Resources Control Board, which requires separation of advocacy and advisory functions in state agency enforcement proceedings. This bill prohibits any employee who prosecutes a case, or "supervises" the prosecution of a case from advising the commission on that case. Assuming the general counsel supervises all attorneys in the Legal Division, including those assigned to prosecute cases, this provision potentially conflicts with the general counsel's statutory duty to advise each commissioner on any matter. 7. CPUC General Counsel Subject to State Bar . This bill provides that the CPUC's general counsel shall be subject to the State Bar Act and the Rules of Professional Conduct of the State Bar of California, which apply to any attorney licensed to practice law in California. This provision is redundant with current law that specifies that the general counsel be "an attorney at law of this state." 8. Report on Applications for Rehearing . Current law requires the CPUC to act within 60 days on an application for rehearing of a CPUC decision, which is a prerequisite to seeking judicial review. Parties complain that the CPUC rarely meets this timeframe and that extended delay effectively denies parties the right to seek judicial review. SB 1414 (Kehoe, 2010) sought to correct this problem by deeming an application as deemed denied after a certain date, but it was vetoed. This bill seeks to increase legislative oversight of the problem by adding to an existing CPUC report a requirement to report on disposition of applications for rehearing. 9. Changes in Name Only ? Sections 5, 8, and 15 of this bill change statutory references to the CPUC division responsible for "consumer protection and safety" to "safety and enforcement." The author states that this is to conform to the CPUC's action in January 2013 to rename the division. The CPUC, however, raises a question about the potential impact on its jurisdiction of removing the statutory reference to "consumer protection." Sections 9, 10, and 11 change references to commission "regulations" to "rules," which the author states is a clarification to conform to the constitutional provision authorizing the CPUC to establish "rules" for public utilities within its jurisdiction. POSITIONS Sponsor: Author Support: Division of Ratepayer Advocates The Utility Reform Network Oppose: California Public Utilities Commission Jacqueline Kinney SB 611 Analysis Hearing Date: April 30, 2013