BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 861|
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THIRD READING
Bill No: AB 861
Author: Hill (D)
Amended: 8/24/12 in Senate
Vote: 21
SENATE ENERGY, UTIL. & COMMUNIC. COMM. : 7-4, 6/25/12
AYES: Padilla, Corbett, De Le�n, DeSaulnier, Kehoe,
Pavley, Simitian
NOES: Fuller, Berryhill, Emmerson, Wright
NO VOTE RECORDED: Rubio, Strickland
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : Not relevant
SUBJECT : Public Utilities Act: remedies for violation
SOURCE : Author
DIGEST : This bill directs the Public Utilities
Commission (PUC) to determine whether earnings-based
incentives paid to executives should be paid for through
rates or by shareholders.
Senate Floor Amendments of 8/24/12 delete the provision
that prohibits rate recovery by an electrical or gas
corporation that is a public utility for earnings or
stock-based price-based incentive pay for its employees or
directors.
CONTINUED
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ANALYSIS :
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. Authorizes the PUC to exercise limited jurisdiction over
the holding company of a utility in order to protect the
public interest and ensure that the utility subsidiary
is providing adequate service at just and reasonable
rates.
3. Defines a public utility as common carrier, toll bridge
corporation, pipeline corporation, gas corporation,
electrical corporation, telephone corporation, telegraph
corporation, water corporation, sewer system
corporation, and heat corporation, where the service is
performed for, or the commodity is delivered to, the
public.
4. Authorizes the PUC to impose a fine ranging from $500 to
$20,000 per offense, against any person or entity, other
than a public utility, that fails to comply with a
utility law or commission requirement, or who aids or
abets a public utility in the violation of the same.
5. Establishes a misdemeanor penalty for public utilities
and their officers, agents and employees if they violate
any utility law or commission requirement, or aid or
abet a public utility in the violation of the same. The
penalty is up to one year in jail and/or a $1,000 fine.
This bill:
1. Requires the PUC to determine the appropriate ratemaking
treatment for incentive compensation paid to officers or
employees of an electrical corporation or gas
corporation for incentive compensation that is linked to
the stock price or financial performance of the
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electrical corporation or gas corporation.
2. Increases the maximum fine per offense to $50,000,
against any person or entity, other than a public
utility, that fails to comply with a utility law or
commission requirement, or who aids or abets a public
utility in the violation of the same.
3. Increases the potential fine to $5,000, for public
utilities and their officers, agents and employees if
they violate any utility law or commission requirement,
or aid or abet a public utility in the violation of the
same.
Background
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: (a)
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 (b)
inadequate pipeline integrity management program, which
failed to detect and repair or remove the defective pipe
section;
2. Contributing to the accident were the PUC's and the U.S.
Department of Transportation's exemptions of existing
pipelines from the regulatory requirement for pressure
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testing, which likely would have detected the
installation defects. Also contributing to the accident
was the PUC'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.
This is one of a series of bills, beginning in 2011,
stemming from the tragedy of San Bruno. Several bills have
been passed intended to ensure a safe gas distribution and
transmission system for the State of California. Fines
against public utilities have been increased, new safety
standards established, and emergency response systems have
been improved.
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
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.
Comments
According to the author's office, PUC-regulated utilities,
reward executives with incentive payments for the company's
financial performance. Public utilities however, are not
like normal corporations. They cannot increase their
profit by increasing market share or selling more product.
They cannot raise their revenue at all since the total
amount they are able to recover in rates is set by the PUC.
The only way a public utility can increase its profit is
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by cutting its operations and maintenance costs, as has
been demonstrated by PG&E. The year of the San Bruno
explosion, the company cut costs by laying-off engineers,
putting off safety assessments, using cheaper safety
assessments, and reducing its leak surveys. Compensating
executives based on earnings or stock price creates a
perverse incentive and is bad policy.
Under existing law, it is up to shareholders to determine
whether or not they want to pay for this policy. This
bill, however, will make sure that ratepayers do not
participate in it. Better aligning the incentives of
utility executives with those of customers and shareholders
will help further the interests of all stakeholders and
enhance the long-term health of California's utilities.
Executives can beef up their quarterly numbers while
steering the company aground, then parachute away without
consequence. Modeled on Section 954 of the 2010 Dodd-Frank
Wall Street Reform and Consumer Protection Act, this bill
will require utilities and their holding companies to
reassess executive performance bonuses retroactively. If
the PUC fines the company for a violation that occurred in
the previous five years, and if a top executive received a
performance bonus based on corporate earnings during that
time period, the company must reassess what incentive the
executive would have gotten had the fine been levied at the
time of the violation. The executive (or former executive)
must return the difference to the company's shareholders.
This only applies to utility and holding company directors
and executive officers.
Right now, the penalty limit for executive violations is
$20,000, a small number to executives making a million
dollars a year in base pay and millions more in stock and
incentive payments. Raising the penalty limit to $50,000
per violation will help keep executives on the straight and
narrow.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/27/12)
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Black Economic Council
Division of Ratepayer Advocates
Latino Business Chamber of Greater Los Angeles
National Asian American Coalition
Public Utilities Commission
The Utility Reform Network
RM:m 8/27/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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