BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 1456 - Hill Hearing Date:
July 3, 2012 A
As Amended: May 25, 2012 FISCAL B
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DESCRIPTION
Current law vests with the California Public Utilities
Commission (CPUC) 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.
Current law requires the 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 perform an analysis of benchmark
data and adopt safety performance standards for pipeline safety
and reliability.
This bill permits the CPUC to implement a rate incentive program
related to safety that contains penalties based on safety
performance.
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.
Legislative/Regulatory Action Since San Bruno - This is one of a
series of bills, beginning in 2011, stemming from the tragedy of
San Bruno where 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.
Several bills have passed intended to ensure a safe gas
distribution and transmission system for the State of
California. Maximum fine levels against public utilities have
been increased, new safety standards established, and improved
emergency response systems mandated. Following is a summary of
the most significant actions:
AB 56 (Hill, 2011) - Implements numerous safety-related
measures regarding the operation of natural gas pipeline
facilities regulated by the CPUC. Status: chaptered.
AB 478 (Hill, 2012) - Requires the CPUC to direct
penalties assessed against 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. Status: Senate Appropriations Committee.
AB 578 (Hill, 2012) - Requires the CPUC to formally
respond to certain safety recommendations concerning gas
pipeline safety made by the federal National Transportation
Safety Board and federal Pipeline and Hazardous Materials
Safety Administration.
AB 861 (Hill, 2012) - Requires the CPUC to direct
penalties assessed against 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. Status: Senate Appropriations Committee.
SB 44 (Corbett, 2011) - Requires gas corporations to
establish emergency response plans for responding to
pipeline disasters or malfunctions and to facilitate access
to pipeline maps for emergency service personnel. Status:
chaptered.
SB 216 (Yee, 2011) - Requires the CPUC to determine and
develop a plan for automatic shut off or remote controlled
valves on certain natural gas facilities. Status:
chaptered.
SB 705 (Leno, 2011) - Requires gas corporations to
develop a safety plan for develop a service and safety plan
for the safe and reliable operation of gas pipeline
facilities. Status: chaptered.
SB 879 (Padilla, 2011) - Requires gas corporations to
use a balancing account to track capital expenditures and
also increased fines on public utilities from a maximum of
$20,000 to $50,000 per offense. Status: chaptered.
SB 1350 (Leno) - Allows the CPUC to use fines or
penalties levied against a gas corporation to offset the
cost of gas safety investments and expenses instead of
depositing the fines in the General Fund as required by
existing law. Status: Held in Senate Appropriations
Committee.
What Are They Doing? - In addition to three proceedings
investigating PG&Es failures in its natural gas system, the CPUC
is conducting a public review of various approaches to improve
its ratemaking process for gas corporations to prioritize safety
initiatives. To address the broader issues and the necessity of
rules for the safe and reliable operation of natural gas
pipelines, the CPUC opened a proceeding last year to:
Provide the public with a means to make their views
known to the CPUC;
Provide the public with the Independent Review Panel's
expert recommendations;
Develop and adopt safety related changes to the CPUC's
regulation of natural gas transmission pipelines, including
requirements for construction, especially shut-off valves,
maintenance, inspections, operation, record retention,
ratemaking, and the application of penalties;
Consider ways that the CPUC can undertake a
comprehensive risk assessment for all natural gas pipelines
regulated by the CPUC, and possibly for other industries
that the CPUC regulates;
Consider available options for the CPUC to better align
ratemaking policies, practices, and incentives to elevate
safety considerations, and maintain utility management
focus on the "nuts and bolts" details of prudent utility
operations;
Consider the appropriate balance between the CPUC's
obligation to conduct its proceedings in a manner open to
the public with the legitimate public safety concerns that
arise from unlimited availability of certain utility
information;
Consider if further rules or other protection is needed
for whistleblowers to inform the CPUC of safety hazards;
and
Expand emergency and disaster planning coordination with
local officials.
Utility Rates - The CPUC 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.
Independent Review Panel - In the aftermath of the explosion of
a natural gas transmission pipeline in San Bruno the CPUC
created an Independent Review Panel (IRP) of experts to conduct
a comprehensive study and investigation of the September 9,
2010, explosion and fire. The CPUC directed the panel to make a
technical assessment of the events, determine the root causes,
and offer recommendations for action by the CPUC to best ensure
such an accident is not repeated elsewhere. The CPUC encouraged
the panel to make such recommendations as necessary. Such
recommendations could include changes to design, construction,
operation, maintenance, and replacement of natural gas
facilities, management practices at PG&E in the areas of
pipeline integrity and public safety, regulatory changes by the
CPUC itself, and statutory changes to be recommended by the
CPUC. The IRP released its findings on June 8, 2011 and
recommended to the CPUC 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.
NTSB Recommendation - The National Transportation Safety Board,
which has primary jurisdiction for investigating pipeline
failures, issued its Pipeline Accident Report on the San Bruno
tragedy in August, 2011 and found that:
Because PG&E, as the operator of its pipeline system,
and the CPUC, as the pipeline safety regulator within
the state of California, have not incorporated the use
of effective and meaningful metrics as part of their
performance-based pipeline safety management programs,
neither PG&E nor the CPUC is able to effectively
evaluate or assess the integrity of PG&E's pipeline
system.
COMMENTS
1. Author's Purpose . The author reports that the 2010
natural gas transmission pipeline explosion in San Bruno
has demonstrated that, in the absence of an understanding
of the relative safety of the regulated utilities' pipeline
systems, the CPUC cannot assure us that the state's natural
gas corporations are making safety a priority. The CPUC
has created incentive programs for energy efficiency,
system electric reliability, customer service, and worker
safety, and utilities have met the performance standards
associated with those incentives. Requiring the CPUC to
add a public safety component to this host of priorities
will ensure that safety remains a focus in the future.
The regulations for pipeline safety, set at the federal
level, have performance-based components, and the CPUC's
reliance on penalties has meant that only the
compliance-based components of the regulations have been
enforced. PG&E and the CPUC have been heavily criticized
by both the NTSB and the CPUC's IRP for their satisfaction
with "check-the-box compliance." NTSB Chairwoman Deborah
Hersman described their report as the story of "a company
that exploited weaknesses in a lax system of oversight and
government agencies that placed a blind trust in operators
to the detriment of public safety." The IRP has stated
that, to ensure safe operations, "the CPUC's role in the
auditing of �pipeline safety] must shift culturally, beyond
compliance driven." Both groups are clear that
compliance-based penalties are insufficient to enforce
performance-based regulations.
AB 1456 would require the CPUC to adopt performance
standards for pipeline safety and evaluate the state's gas
utilities against those standards. The CPUC may levy
penalties on the utility for poor performance. The CPUC
has done this in areas of energy efficiency, system
electric reliability, customer service, and worker safety,
and the result has been improvement in each area.
The NTSB has already proposed possible performance
measures, and the IRP has suggested that the Commission
adopt "rate incentives and penalties based on specified
levels of performance." AB 1456 will ensure that we will
know whether or utilities are operating in a safe manner.
2. What are Performance Measures ? The author intends that
the CPUC adopt performance measures for gas corporations
such as those referenced by the NTSB in its report on the
San Bruno explosion. Examples provided by the NTSB
include:
Number of incidents per mile or per 1,000
customers;
Number of missing, incomplete, or erroneous
data fields corrected in an operator's database;
Response time in minutes for leaks, ruptures,
or other incidents; and
Number of public responses received per
thousands of postcards/surveys mailed.
The author also reports that the New York State Department
of Public Service has created incentive programs for all
gas distribution companies in its jurisdiction, programs
which have improved leak response, damage prevention, and
leak management. The following incentive program was
created for National Fuel Gas Distribution Corporation,
worth about 30 basis points of their return on equity:
80 miles of leak-prone main pipe replacement
($256K)
4,000 mils of service pipe replacement ($256K)
Hazardous leak backlog reduction to 75 ($512K)
75% of service calls responded to in 30 min
($64K)
90% of service calls responded to in 45 min
($64K)
95% of service calls responded to in 60 min
($64K)
Damages per 1000 mark and locate requests: 4.2
($256K)
Damages due to mismarking per 1000 mark and
locate requests: 0.9 ($192K)
Company Damages per 1000 mark and locate
requests: 0.2 ($256K)
1. Pay for Performance ? The fundamental question presented
by this bill is whether a utility's profits should be tied
to safety performance measures. The author opines that
strictly relying on penalties for non-compliance with
safety standards undermines the CPUC's commitment to never
let a similar accident happen again and would invite
another pipeline disaster."
The CPUC is fundamentally opposed to the concept of linking
safety performance to rate incentives arguing that "safety
is not optional or discretionary." They further opine that
safety performance is a basic obligation of service for a
utility and that one of the fundamental CPUC obligations
gas corporations face is the obligation to provide safe and
reliable service. However, the CPUC opines that "where
rate incentives have been instituted, the utilities have in
several situations manipulated or withheld safety or
performance data in order to avoid any potential negative
revenue impacts."
ASSEMBLY VOTES
Assembly Floor (78-0)
Assembly Appropriations Committee (17-0)
Assembly Utilities and Commerce Committee
(15-0)
POSITIONS
Sponsor:
Author
Support:
None on file
Oppose:
California Public Utilities Commission
Kellie Smith
AB 1456 Analysis
Hearing Date: July 3, 2012