BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 478 - Hill Hearing Date: June 19, 2012
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As Amended: May 30, 2012 FISCAL B
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DESCRIPTION
Current law requires the California Public Utilities Commission
(CPUC) 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.
Current law permits the CPUC 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 CPUC to direct penalties assessed against
Pacific Gas & Electric (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.
BACKGROUND
Gas Pipeline Regulation - The CPUC regulates utility service for
approximately 10.7 million customers that receive natural gas
from PG&E, Southern California Gas (SoCalGas), San Diego Gas &
Electric (SDG&E), Southwest Gas, and several smaller 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 U.S. Department of Transportation's Pipeline and Hazardous
Material Safety Administration (PHMSA), 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 CPUC
has assumed most of the responsibility. The CPUC 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.
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 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 determined that:
1) The probable cause of the accident was PG&E's: (1)
inadequate quality assurance and quality control in 1956
during its Line 132 relocation project, which allowed the
installation of a substandard and poorly welded pipe
section with a visible seam weld flaw that, over time grew
to a critical size, causing the pipeline to rupture during
a pressure increase stemming from poorly planned electrical
work at the Milpitas Terminal; and (2) inadequate pipeline
integrity management program, which failed to detect and
repair or remove the defective pipe section;
2) Contributing to the accident were the CPUC's and the
U.S. Department of Transportation's exemptions of existing
pipelines from the regulatory requirement for pressure
testing, which likely would have detected the installation
defects. Also contributing to the accident was the CPUC's
failure to detect the inadequacies of PG&E's pipeline
integrity management program; and
3) Contributing to the severity of the accident were the
lack of either automatic shutoff valves or remote control
valves on the line and PG&E's flawed emergency response
procedures and delay in isolating the rupture to stop the
flow of gas.
CPUC Investigation - As a part of its regulatory
responsibilities, the CPUC reviews and investigates complaints
and allegations of wrongdoing to ensure that the entities it
regulates are operating safely and legally. When such a review
or investigation determines that an entity has failed to comply
with laws or has engaged in inappropriate practices, the CPUC
may impose a fine payable to the state and/or order the entity
to repay consumers in the form of restitution. Typically, a CPUC
administrative law judge hears and reviews the case before
presenting it to the CPUC commissioners for a decision.
The CPUC has initiated three proceedings to consider penalties
against PG&E arising from the San Bruno tragedy:
1) Violations of Laws and Regulations - Whether PG&E
violated state law and various federal and state pipeline
safety regulations and accepted industry standards, leading
to the September 9, 2010, pipeline rupture;
2) PG&E Gas Pipeline Recordkeeping - Whether PG&E's gas
transmission pipeline recordkeeping was unsafe, whether it
violated the law, and if so whether deficient PG&E
recordkeeping caused or contributed to the pipeline rupture
in San Bruno on Sept. 9, 2010; and
3) Pipeline Classification - Whether PG&E failed to
properly and timely classify pipelines. PG&E operates
approximately 6,438 miles of high-pressure natural gas
transmission pipeline, which includes approximately 1,060
miles of pipelines in High Consequence Areas (class 1
locations are generally 10 or fewer buildings intended for
human occupancy; class 2 locations are generally more than
10 but fewer than 46 buildings intended for human
occupancy; class 3 locations are generally 46 or more
buildings intended for human occupancy; and class 4
locations are generally where buildings with four or more
stories above ground are prevalent).
The penalties associated with these investigations could easily
result in fines of hundreds of millions of dollars against PG&E.
Pipeline Upgrades - The NTSB also reported that pipeline safety
requirements at the federal and state levels are inadequate. As
a consequence, new safety measures have been adopted by the CPUC
which has ordered all pipelines that were not required to be
pressure-tested under federal rules (referred to as
grandfathered pipes which were constructed before 1970 and
included San Bruno) to be pressure tested or replaced. All
transmission pipes that haven't been tested before are being
tested or replaced, and for all pipes that have been tested,
California's gas corporations are re-verifying operating
pressures based on complete, traceable, and verifiable records.
The CPUC has a pending rulemaking in which it is investigating
additional safety standards to ensure the safe and reliable
operation of natural gas pipelines in California. Under
consideration are requirements for automatic or remotely
operable valves, emergency response, and public information.
The testing and replacement of grandfathered pipeline and the
new safety standards under consideration by the CPUC are
expected to cost gas corporation ratepayers billions of dollars
in the coming years.
COMMENTS
1. Author's Purpose . According to the author, AB 478
authorizes the CPUC to order a utility, that may be
assessed penalties any or all of three specific
investigations, to place fine money into an account for the
purpose of expending that money on pipe replacement in
Phase 1 of its pipeline safety enhancement program, a plan
required by CPUC Decision 11-06-017. In essence, the bill
allows fine money in these investigations to be placed
toward safety improvements instead of in the state's
General Fund. This bill decreases the cost to ratepayers
in the PG&E natural gas service territory. For every $1 of
pipe replacement costs avoided, ratepayers save more than
$3 in principle, debt interest, shareholder return, and
taxes on shareholder return. For the minimum fine amount
that PG&E expects to pay--$200 million -ratepayers would
save roughly $660 million. Should the fine reach $500
million, the savings would be over $1.6 billion. The fine
would need to exceed $834 million for PG&E to run out of
pipe replacement to offset in Phase 1.
2. Pipeline Safety Improvements . The costs of enhanced
safety measures for gas distribution and transmission
pipeline infrastructure are expected to be in the billions
of dollars and will largely fall on the backs of ratepayers
in all gas corporation territories. Although some of the
work ordered for customers of PG&E will be the
responsibility of its shareholders, much of the new program
requirements will be covered by its ratepayers because the
work being mandated is in response to new safety standards
for all gas corporations above those required under federal
law. As an example, an initial filing by SoCalGas for the
first phase of safety improvements in its territory and
that of SDG&E proposed that the utility pressure test
approximately 360 miles of transmission pipelines and
replace approximately 294 miles to comply with the new CPUC
standards. The total cost estimate for this work was $3.1
billion. This is just phase 1. Phase 2 costs are likely
to be much greater and include the installation of remote
or automatic shut-off valves in high density areas.
Similar costs are expected for the ratepayers in PG&E
service territory.
3. Allocation of Penalties . The historical purpose of the
allocation of penalties to the General Fund is thought to
be an effort to eliminate any bias in the assessment of the
penalties by the agency and in the positions of
stakeholders who appear before the agency. Allocation of
penalties to the General Fund is thought to eliminate any
conscious or unconscious effort to enhance utility programs
as a result of penalty actions. In a bill very similar to
AB 478 (SB 1350, Leno) which was heard by the committee
this spring, the CPUC argued that allocating the penalties
to the General Fund "reduces the CPUC's ability to direct
penalty funds in a manner that provides the greatest
economic and safety benefit to ratepayers" and that this
bill (SB 1350, Leno) "gives the CPUC the "flexibility to
use the money from safety fines/penalties to offset
expenses for gas safety measures that would otherwise be
recovered from the utility's customers."
Given the gravity of PG&E's actions regarding pipeline
safety, the tremendous penalties anticipated, and the
extensive upgrades necessary for gas pipelines in
California, the use of PG&E's penalties in this instance
may be warranted. However, it appears that this bill will
only mitigate the fiscal impacts of safety upgrades for
PG&E customers. SoCalGas and SDG&E will have to make the
same safety upgrades but have no pending enforcement
actions for which the penalties could offset the ratepayer
impact of upgrades.
4. Findings . The findings in this measure assume actions
proposed by third parties but not yet taken by the CPUC.
The inclusion of this information could be misleading,
consequently, the committee may wish to consider striking
the findings at page 4, lines 7 through 16.
5. Redundancy . The author's intent is that fines and
penalties assessed against PG&E in any one of three
investigations be applied to the costs of any needed
pipeline replacement over the next five years. However,
the author has restated that requirement in two different
places which are internally inconsistent. One section
references pipeline replacement and one generally
references "offsetting investments." To ensure that the
author's intent is achieved, the committee may wish
consider to striking lines 28 through 37 on page 7.
6. Related Legislation . SB 1350 (Leno) permits the CPUC to
direct penalties assessed against a gas corporation to a
separate account of the offending utility corporation to
offset the expenses of gas safety measures that would
otherwise be recovered from ratepayers. Status: held in
Senate Appropriations Committee.
ASSEMBLY VOTES *
Senate Appropriations Committee (9-0)
Senate Education Committee (9-0)
Assembly Floor (77-0)
Assembly Appropriations Committee (17-0)
Assembly Higher Education Committee
(9-0)
* Prior votes not relevant.
POSITIONS
Sponsor:
Author
Support:
None on file
Oppose:
None on file
Kellie Smith
AB 478 Analysis
Hearing Date: June 19, 2012