United States: California Public Utilities Commission Opens Two New Investigations

Tara S. Kaushik is a Partner and Kevin John Ashe is an Associate in our San Francisco office.

Introduction

On June 27, 2019 the California Public Utilities Commission (CPUC or the Commission) filed two Orders Instituting Investigations (OII) to investigate (i) the safety culture of Southern California Gas Company (SoCalGas) and its parent company Sempra Energy, and (ii) SoCalGas' role in the Aliso Canyon natural gas leak. Market participants and stakeholders should play close attention to these investigatory proceedings, as they show a pattern where the Commission is closely evaluating utility companies' organizational structure and "safety culture."

SoCalGas Safety Culture Investigation

Prompted by the Aliso Canyon gas leak and 2017 rupture of Line 235-2 in San Bernardino County, this investigation covers the overall safety culture and governance of Sempra Energy and its subsidiary, SoCalGas. The investigation seeks to determine whether leadership at Sempra Energy and SoCalGas prioritize safety and accountability. The Commission's Safety and Enforcement Division (SED) — which is charged with assessing the "culture, governance, policies, practices, and accountability metrics" relating to SoCalGas's operations — has been charged with assessing whether the companies' policies and governance promote "a clearly articulated set of principles and values with a clear expectation of full compliance at each level of the organization." The Commission has specifically tasked SED with evaluating whether SoCalGas effectively communicates its safety principles internally, and whether employees operate uniformly in full compliance with those principles.

Particularly, the Commission states a concern that SoCalGas has not implemented established industry practices for well management, and has failed to perform well failure investigations and risk assessments. The investigation will review SoCalGas's operation details for the past few years including revenue goals, budgets, staffing and spending to assess compliance with regulations. Also, the proceeding will review board and executive leadership's safety experience and commitment to safety culture as well as how executive compensation promotes safety.

The Commission has stated that it will explore "linking return on equity to safety performance and periodic review of SoCalGas' certificate to provide utility services." With this emphasis on safety culture, and consistent with the Commission's treatment of Pacific Gas and Electric (PG&E), it is likely that the Commission will order SoCalGas and Sempra Energy to implement safety recommendations made by SED in its consultant's report.

The Order adds to the recent saga of CPUC efforts to investigate utility safety culture. The first such investigation reviewed the safety culture of PG&E after the explosion at its San Bruno pipeline in 2010. Northstar, a consulting group responsible for the PG&E audit, concluded that a responsive utility's safety culture requires: comprehensive training of personnel, a sense of urgency in speed of change, company-wide communications, continuous evaluation of the effectiveness of policies and consistency between corporate and field practices. Following issuance of Northstar's report, PG&E was ordered to develop a comprehensive safety strategy that included specific timelines, resources to be allocated, personnel requirements and clear action plans and metrics. PG&E's safety culture proceeding remains active today. Most recently, the Commission ordered the utility to submit safety qualifications and expertise of the newly appointed Board members, and the assigned Administrative Law Judge requested comments on a number of threatening proposals ranging from periodic review of PG&E's certificate of public convenience and necessity to breaking up the utility's corporate structure.

While the consequences of PG&E's and now SoCalGas' safety culture proceedings remain to be seen, one thing is certain: the Commission is now taking safety culture seriously, and is augmenting its traditional oversight controls to ensure an organization's culture fosters safe service.

Aliso Canyon Investigation

On June 27, 2019, the CPUC filed a second OII to determine whether SoCalGas violated the Commission's decisions, General Orders and/or other applicable rules and requirements in connection with the uncontrolled release of natural gas from Oct. 23, 2015 to Feb. 11, 2016 (111 days).

The Commission stated it had sufficient evidence to commence a formal investigation based on the findings of a report of an independent consulting company retained by SoCalGas, who conducted an investigation into the cause of the accident. According to the OII, that report found that the leak was primarily caused by microbial corrosion.

The Order invites comments as to whether SoCalGas should be required to reimburse the state for the costs of this investigation. SoCalGas filed a timely response questioning the Commission's authority to require reimbursement of the costs before any determination of fault. SoCalGas argues that such a request is premature and inconsistent with due process.

SoCalGas is required to submit its response within 30 days (i.e., by July 27, 2019). The utility must specify any objections it has to the scope of issues, and whether a hearing is necessary. A prehearing conference will also be scheduled between Aug. 11, 2019 and Aug. 26, 2020. The Commission also anticipates the need for evidentiary hearings resulting from expected disputed issues of material facts.

The Order represents just one of many ongoing investigations facing California's investor-owned utilities. On the same day that the Commission filed the Order, the Commission initiated an investigation against PG&E for its role in the 2017 Northern California Siege fires. As this has the potential to impact how closely the Commission will regulate utility corporate structures and operations in the near future, interested parties and stakeholders should monitor these proceedings closely.

Deborah Bundy | Peter Holl assisted with this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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