Senate Energy, Utilities and Communications Committee

SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE

ALEX PADILLA, CHAIR

Bill No: SB 705 - Author:LenoHearing Date: April 28, 2011 S

As Amended: April 13, 2011FISCAL B

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DESCRIPTION

Current Federal law and general orders of the California Public Utilities Commission (CPUC) require the commission to regulate gas transmission, distribution and gathering pipeline facilities which include investor-owned utilities, master-metered mobile home parks, storage facilities, and propane operators.

Current Federal law and general orders of the CPUC establish safety requirements pertaining to the design, construction, testing, operation, and maintenance of utility gas gathering, transmission, and distribution piping systems, and for the safe operation of such lines and equipment.

Current lawvests regulatory authority over gas corporations to the CPUC and authorizes it to fix the rates and charges for service as well as standards and practices for services to be furnished.

This bill requires gas corporations to develop, adopt and implement a service and safety plan, including specified elements, that places safety of the public and gas corporation employees as the top priority which would be reviewed, modified and updated by the CPUC on a regular basis.

Current law authorizes the CPUC to enforce federal pipeline safety standards, as well as state pipeline safety requirements, through penalties of up to $20,000 per day, per violation, and/or injunctive relief.

This bill restricts the CPUC from allowing a gas corporation to recover costs from ratepayers which are incurred as a result of inadequate historical compliance with standards and practices related to record-keeping,inspections, retrofitting or testing caused by unreasonable faulty reliance or inadequate data, or maintenance work caused by deferred maintenance.

Current law directs the CPUC to determinethe reasonableness ofoperational costs, cost allocation among customerclasses, and rate design for natural gasutilities.

This bill requires that authorized cost recovery for pipeline reliability, including the installation of transmission pipeline valves and the replacement of transmission pipes be supported by a cost/benefit analysis including alternatives, that the CPUC account for any prior failure of the gas corporation to carry out its obligation to safely construct, operate, and maintain its gas plant, and that all revenues received by the IOUs are expended only for purposes authorized by the CPUC.

BACKGROUND

Natural Gas Regulation – The CPUC regulates natural gas utility service for approximately 10.7 million customers that receive natural gas from Pacific Gas and Electric (PG&E), Southern California Gas, San Diego Gas & Electric, Southwest Gas, and several smaller natural gas utilities. The CPUC also regulates independent storage operators Lodi Gas Storage and Wild Goose Storage.

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 CPUC regulates the California utilities' natural gas rates and natural gas services, including in-state transportation over the utilities' transmission and distribution pipeline systems, storage, procurement, metering and billing.

Most of the natural gas used in California comes from out-of-state natural gas basins. In 2008, California customers received 46% of their natural gas supply from basins located in the Southwest, 19% from Canada, 22% from the Rocky Mountains, and 13% from basins located within California. Natural gas from out-of-state production basins is delivered into California via the interstate natural gas pipeline system

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 dozens more. Gas service was also disrupted for 300 customers.

The pipeline in question is owned and operated by PG&E and originally built in 1948. In 1956 it was relocated and rebuilt to accommodate new housing development. The National Transportation Safety Board (NTSB), in conjunction with the CPUC was on scene within 24 hours to investigate the cause of the explosion. Although preliminary elements of the investigation have been detailed, a final report on causation is not expected until at least the fall.

The NTSB’s examination of the ruptured pipe segment and review of PG&E records revealed that although those records marked the pipe as seamless the pipeline in the area of the rupture was constructed with longitudinal seam-welded pipe and was constructed of five sections of pipe, some of which were short pieces measuring about 4 feet long. These short pieces of pipe contained different seam welds of various types, including single- and double-sided welds that may not have been as strong as the seamless pipe listed in PG&E’s records. The NTSB has not concluded that the faulty records or welds were the proximate cause of the rupture.

However, the NTSB is concerned that there are other discrepancies between installed pipe and as-built drawings in PG&E’s gas transmission system. It is critical to know all the characteristics of a pipeline in order to establish a valid operating pressure below which the pipeline can be safely operated. The NTSB is concerned that these inaccurate records may lead to incorrect operating pressures.

Pipeline Assessment & Investment – Since San Bruno PG&E, both on its own and under orders of the CPUC and NTSB, has undertaken extensive work to improve the operations and safety of its natural gas system. This work includes validation and assessment of its record-keeping practices, inspection and field testing of its pipelines, including hydrostatically testing or replacing approximately 150 miles of pipeline segments in high consequence areas this year. Additional mandates from regulators are likely to include installation of remote or automatic valves and new and additional testing standards. PG&E reports that it will expand its field action and inspection program to certain other pipelinesegments. Tests will include in-line inspections with “smart pigs” and newcamera inspection technologies, as well as pressure testing. When indicated by field testing orengineering analysis, PG&E will excavate, further inspect and/or replace pipelines.

The cost of this work is expected to at least be in the hundreds of millions of dollars.

CPUC Fine Authority & Actions – In February the CPUC opened two proceedings which could result in fines against the utility related to San Bruno. The first proceeding concerns whetherdeficient PG&E recordkeeping caused or contributed to the pipeline rupture in San Bruno. The second case concerns PG&E records on pipeline pressures. The utility could be subject to fines in both proceedings. These two proceedings are separate from their liability from the San Bruno explosion. After the conclusion of the NTSB’s investigation into the cause of the San Bruno rupture, the CPUC will open an open an additional proceeding to consider fines and penalties for the utility’s failures identified by the NTSB.

COMMENTS

1. Author’s Purpose. After the explosion at San Bruno and the ongoing episodes of gas explosions around the country it is now generally recognized that system safety has been a lower priority in operating and maintaining the system for transporting, delivering and using natural gas. As a result the public is at great risk of accidents and explosions. The CPUC has undertaken several initiatives to improve system safety and thus the quality of gas service offered to the public, and has recently demonstrated a greater sense of urgency in addressing systemic safety concerns. This sense of urgency has been stimulated by legislative hearings such as those we held in October and the introduction of AB 56 (Hill) in the Assembly and this bill in the Senate.

Enactment of this bill in its amended version accomplishes the necessary first steps: the creation of a permanent state policy placing safety first: a legislative directive to implement the policy through a thorough-going change in the culture of the industry and the utilities that places safety first in operation and maintenance procedures and programs for both workers and management; the creation of safety plan process for each utility overseen by and subject to the approval of the CPUC; and specific assurances to the public that the money it will take to implement safety programs will not be diverted to the utilities’ bottom line. This bill provides the Legislature’s policy direction and outlines a process that assures continuous attention to safety in the gas industry.

1. Legislative Ratemaking? This bill has two provisions which mandate the CPUC to follow specific guidelines in ratemaking proceedings for gas pipelines. The CPUC has a duty to assure that adequate and reliable utility services are available at just and reasonable rates and has great latitude in making those determinations through ratemaking proceedings. The Legislature also has a duty to see that the CPUC’s duty is carried out in a fair and responsible manner. There have been times when the Legislature has directed the CPUC to take specified actions relative to rates and the ratemaking process the most notable of which is the rate freeze on baseline rates instituted during the electricity crisis in 2001. However, prescriptive legislation which mandates what costs can and should be recovered by a utility can interfere with the ratemaking process.

1. Cost Recovery or Penalty? Section five of this bill would prohibit the CPUC from granting cost recovery to utilities such as PG&E that have been negligent in maintaining records or accomplishing pipeline safety work necessary to keep pipelines up to proper safety standards. Prohibited cost recovery includesdirect and indirect expenses for data gathering and pipeline testing, maintenance and replacement and would also include any return on investment or profit to the utility.

The extent of work anticipated to address pipeline safety in the PG&E service territory is currently unknown but the utility has embarked on an extensive pipeline assessment and upgrade program. This bill would prohibit the CPUC from authorizing PG&E to recover the costs of that work from ratepayer funds which would include such basic expenditures as payroll. By doing so it transforms its assessment and upgrade program into a penalty program. The CPUC has clear authority to assess direct financial penalties against PG&E and its shareholders for its failures to prevent the San Bruno tragedy. Those penalties are as high as $20,000 per day, per violation. The committee has received no information indicating that the CPUC’s fining authority is inadequate to properly penalize the utility for its failures.

However, utilities are routinely granted a “rate of return” on work done to maintain and repair infrastructure which is in essence a profit to shareholders. There is a significant issue raised by the San Bruno tragedy – should a utility be permitted to profit from the ordered records searches and pipeline assessments, testing, and upgrades which may have caused significant harm to the public?

1. Ongoing Maintenance and Repairs. For routine maintenance, repairs and replacement necessary for the safe operation of a gas corporation’s infrastructure, section five of this bill also requires a cost-benefit analysis before work is done and for the CPUC to consider alternatives to that work. The CPUC would also be required to “fairly account for any prior failure” of the utility to maintain a safe plant and further require that all revenues received by the utility be expended only for the purposes authorized by the CPUC.

After San Bruno, questions were raised as to whether PG&E had been redirecting funds authorized for pipeline maintenance and repair to non-safety uses or company profits. Investigation showed that as part of the PG&E’s spending authorization they submit a list of potential safety work to be done and related locations to the CPUC. There was no evidence that PG&E redirected the funds from pipeline safety as approved by the CPUC but some of those funds were used for other repairs for other pipeline segments that at the time were deemed more critical and because the conditions upon which the previously reported repair list was based had changed.

Through the ratemaking process a gas corporation’s budget (commonly referred to as a general rate case or gas accord) for a specified period (usually three or four years) is submitted, subject to public hearings, modified, and approved. That budget includes funding for maintenance and repair but the gas corporations have always had the latitude to use the funding for the repairs deemed most necessary during the funding cycle and have not been required to justify the change in spending or needed repairs to the CPUC.

The CPUC’s Consumer Product Safety Division is responsible for oversight and investigations concerning pipeline safety. Last fall this committee held aninformational hearing the committee concerning the CPUC’s regulation of gas pipelines and discovered that the CPSD has no involvement, review, or knowledge of the funding side of a gas corporation’s budget for pipeline maintenance and repair. A budget review for funding for these critical needs has been basically left to negotiation between stakeholders. The gas corporation submits the budget to the CPUC and then the gas corporation, ratepayer advocates, and other intervenors negotiate a funding level or settlement which is routinely less than what was submitted to the CPUC and is routinely approved by the CPUC. This process does not require much of the utility in the way of justifying the need for funding maintenance nor has it concerned whether the requested funding level is adequate. The process does call out for the budget process to be focused on safety rather than negotiating costs, as well as including the CPSD to ensure that the funding dedicated to pipeline maintenance and repairs matches what the CPSD sees in its review and audits of the system’s integrity.

However, this bill does not address those issues. Instead it raises questions as to whether the processes would operate as hurdles to funding maintenance and repair projects. For example, if a utility submits as part of its funding that ten miles of pipeline needs to be replaced, this bill requires a cost/benefit analysis to justify that replacement.

1. CPUC Action. The CPUC has begun to address the issue of pipeline safety in the ratemaking process in the recent approval of PG&E’s Gas Accord V (aka general rate case) for 2011 to 2014. The utility will now be required to provide semi-annual reports to the CPUC that detail maintenance and repair activities and costs and progress on projects previously identified as high risk. It is not clear whether this is enough or what more should be required at this point. Legislative guidance may be appropriate but the prescriptive elements proposed in Section 5 of this bill may go too far and create unintended consequences making repair and maintenance more difficult. To avoid this impact the author and committee should consider striking section five from this bill.

1. Technical Amendments. This committee has adopted two other bills which require increased regulation by the CPUC to address pipeline safety. As a result of committee action, in an effort to clarify the authority of the CPUC over gas pipelines and to establish one clear body of law on gas safety and service, SB 44 (Corbett) and SB 216 (Yee) were amended into a newly established division (Chapter 4.5 (commending with Section 950). The author and committee should consider similar conforming amendments to this bill.

1. Related Measures. The following measures have been introduced in this session in response to the San Bruno tragedy:

• SB 44 (Corbett)requires the CPUC to commence a proceeding to establish emergency response standards, which include emergency response plans, to be followed by owners or operators of commission-regulated gas pipeline facilities. Status: Pending hearing in Senate Appropriations Committee.
• SB 216(Yee) requires gas requires the CPUC to adopt standards that require the installation of automatic shut-off or remote controlled sectionalized block valves on all commission-regulated pipelines that are located in a high consequence area or that traverse an active seismic earthquake fault unless the commission determines it is prohibited under federal law. Status: Pending hearing in the Senate Appropriations Committee.
• SB 879(Padilla)would require that in any ratemaking proceeding in whichthe commission authorizes a gas corporation to recover expenses forthe inspection, maintenance, or repair of transmission pipelines, thatthe commission require the gas corporation to establish and maintain aone-way balancing account for the recovery of those expenses. Status: Set for hearing in Senate Energy, Utilities & Communications Committee May 3, 2011.
• AB 56 (Hill) implements a number of public safety measures with regard to natural gas pipeline facilities, including requiring the owner or operator of a gas pipeline to develop a public safety program and a facilities modernization program, and requiring the CPUC to track proposed repairs to gas facilities to determine if the repairs were made. Status: Pending hearing in the Assembly Appropriations Committee.

POSITIONS