BILL ANALYSIS �
AB 1456
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Date of Hearing: April 9, 2012
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Steven Bradford, Chair
AB 1456 (Hill) - As Introduced: January 9, 2012
SUBJECT : Gas Corporations: rate of return: safety.
SUMMARY : This bill would require the commission to consider
the safety performance of a gas corporation in determining what
constitutes a just and reasonable rate of return.
EXISTING LAW :
1)States that the California Public Utilities Commission (PUC)
has regulatory authority over public utilities, including gas
corporations, authorizes the commission to fix the rates and
charges for every public utility, and requires that those
rates and charges be just and reasonable.
2)States the Natural Gas Pipeline Safety Act of 2011, among
other things, prohibits a gas corporation from recovering any
fine or penalty in any rate approved by the commission.
FISCAL EFFECT : Unknown.
COMMENTS : According to the author, "this bill would require
the PUC to consider the safety performance of a gas utility in
determining what constitutes a just and reasonable profit. By
tying safety performance to utility profit, the bill would
ensure that safety is a top focus of management."
1)Background : The impetus of this bill stems from the September
9, 2010 explosion and fire that occurred in the City of San
Bruno. A 30-inch natural gas transmission pipeline, owned and
operated by Pacific Gas and Electric Company (PG&E), ruptured
and caused an explosion and fire which claimed the lives of
eight people and injured dozens more; destroyed 37 homes and
damaged dozens more. Natural gas pipeline accidents in
California, particularly the explosion in the City of San
Bruno, have called for a re-evaluation of pipeline safety in
the legislature and regulatory enforcement agencies.
The National Transportation and Safety Board (NTSB) had
principal jurisdiction over the investigation into the San
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Bruno explosion and released its final report on the causation
last year. The NTSB determined that the probable cause of the
accident was the Pacific Gas and Electric Company'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.
The report notes that contributing to the accident were the
California Public Utilities Commission'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 PUC's
failure to detect the inadequacies of PG&E's pipeline
integrity management program.
Furthermore, 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.
2)The PUC formed its own review panel based on authority it
cited in its resolution to"do all things, whether specifically
designated in ... �the Public Utilities Code] or in addition
thereto, which are necessary and convenient" to our regulation
of public utilities, including, though not limited to,
adopting necessary rules and requirements in furtherance of
our constitutional and statutory duties to regulate and
oversee public utilities operating in California."
3)In September 2010, the PUC's Independent Review Panel (IRP)
was formed to examine contributing factors to the San Bruno
disaster. The PUC directed the panel to make a technical
assessment of the events, determine the root causes, and offer
recommendations for action by the PUC to best ensure such an
accident is not repeated elsewhere.
4)The IRP released its findings on June 9, 2011. Important
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findings related to this bill are:
a) A recommendation that "Upon thorough analysis of
benchmark data, adopt performance standards for pipeline
safety and reliability for PG&E, including the possibility
of rate incentives and penalties based on achievement of
specified levels of performance."
b) A finding that "the CPUC did not have the resources to
monitor PG&E's performance in pipeline integrity management
adequately or the organizational focus that would have
elevated concerns about PG&E's performance in a meaningful
way."
1)The IRP did not recommend that safety performance be a
consideration in the PUC's rate of return assessment.
2)It is unclear that, since June 2011, the PUC has had
sufficient time to reorganize itself in a manner that will
ensure that pipeline integrity management is adequately
monitored. The PUC is currently soliciting bids to analyze and
evaluate the Gas Safety and Reliability Branch of the PUC in
the context of their effectiveness in adhering to existing
federal safety regulations and provide CPUC with new ideas and
insight as to how the program could evolve into one that is
more proactive in addressing future gas safety issues. The PUC
is not expected to award this contract until May 2012.
3)Safety performance does not fit neatly into a triennial rate
of return assessment. While the intent of the bill may seem an
appropriate reaction to an event such as San Bruno, safety
performance, as has also been learned from San Bruno is
something that extends well before and well after the PUC's
triennial review of rates of return. If the safety performance
of regulated utility were taken into consideration prior to
San Bruno the PUC might have concluded that, for example, PG&E
should receive a bonus for its safety performance. Likewise,
after San Bruno, the PUC might conclude that PG&E should be
penalized for its safety performance. Correcting for this
deficiency in this bill would be arbitrary - one could propose
looking back over the last 10 years, last 20 years, last 50
years and in each increment, could conclude that over X period
of time, a regulated entity was safe and should receive a
normal rate of return. However, add just one tragic incident,
like San Bruno, and the decision could be significantly
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different.
4)Lack of a safety standard. Without an established safety
performance standard the PUC would be left to arbitrarily
determining whether or not any particular utility met,
exceeded, or fell short on its safety performance.
5)Rate cases might be more appropriate for a safety incentive or
penalty. Performance bonuses and penalties could be addressed
in the Rate Cases, where the PUC can better assess progress
and deficiencies. This could be done once the benchmarking
study is complete and performance standards are established.
6)Until the benchmarking analysis is complete, this bill is
premature. The author may wish to consider amending the bill
to require a benchmarking study and for the PUC to evaluate
rate incentive and penalties every three years after the
benchmarking study is complete.
Suggested amendments:
On page 2, beginning at line 9: (d) The panel suggested that
upon thorough analysis of benchmark dat a rate incentives and
penalties be applied to gas corporations based on the
achievement of specified levels of performance.
SEC. 2. Section 960 is added to the Public Utilities Code, to
read:
960. The commission shall consider the safety performance of a
gas corporation in determining what constitutes a just and
reasonable rate of return .
(a) The commission shall perform an analysis of benchmark data
and adopt performance standards for pipeline safety and
reliability.
(b)The commission shall evaluate rate incentives and penalties
every three years after the benchmarking study is complete.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
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Pacific Gas and Electric Company (PG&E)
San Diego Gas & Electric Company (SDG&E)
Sempra Energy utilities (SEu)
Southern California Gas Company
Analysis Prepared by : DaVina Flemings / U. & C. / (916)
319-2083