BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 1350 - Leno Hearing Date:
April 17, 2012 S
As Amended: April 10, 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 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.
BACKGROUND
The CPUC regulates utility service for approximately 10.7
million customers that receive natural gas from Pacific Gas and
Electric (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 the 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.
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 also 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 . This bill would authorize the CPUC to
order that all or a portion of a fine or penalty levied
against a gas corporation in relation to a safety standard
for pipeline facilities or the transportation of gas in the
state be held in a balancing account at the utility to
offset expenses that would otherwise be recovered from the
utility's customers to pay for gas safety measures. Any
moneys not used for this purpose would be returned to the
General Fund. The result would be that, in specified
circumstances, the penalties assessed on the gas
corporation could be used to prevent or reduce certain rate
increases that would otherwise be sought by utilities as a
result of necessary or mandatory spending on gas system
safety measures.
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. 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. 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 CPUC opines that the
allocation of fines to the General Fund benefits the state
through increased revenue. However 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. The CPUC
argues 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 "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 will have to make the same safety
upgrades but has no pending enforcement actions against it
which could offset ratepayer impact.
4. Sunset ? The circumstances that have led to the
introduction of this bill are hopefully unique in the
history of the CPUC and may warrant a one-time exception to
the policies surrounding the allocation of penalties to the
General Fund. This raises the question of whether the
mechanism created by the bill should be limited to the
current circumstances and pending penalty actions sunset at
some future point. This would ensure that the original
purpose of penalty allocation to the General Fund would be
maintained and that gas corporations, in the future, would
continue to be treated as all other utilities and business
entities regulated by the CPUC. The committee may wish to
consider sunsetting this mechanism on December 31, 2017 by
which time the penalty phases of current and future CPUC
proceedings against PG&E should be concluded.
POSITIONS
Sponsor:
The Utility Reform Network
Support:
California Public Utilities Commission
Division of Ratepayer Advocates
Oppose:
None on file
Kellie Smith
SB 1350 Analysis
Hearing Date: April 17, 2012