Will San Bruno Be a “Game-Changer”?

Energy professionals and the general population are both acutely aware of the explosion of a Pacific Gas & Electric Co. (PG&E) natural gas pipeline in San Bruno, Calif., that led to the death of eight people and the total destruction of 38 homes in September 2010. The tragic accident garnered immediate national attention, thrusting the natural gas industry into the spotlight. The California Public Utilities Commission’s (CPUC) Independent Review Panel neatly encapsulated the sentiment surrounding the event: “The fact that a large segment of pipe literally blew out of the ground in an urban neighborhood and the residents were generally unaware of the proximity of a high-pressure natural gas transmission system to their homes—raises significant public safety concerns.”

In the aftermath of the explosion, the National Transportation Safety Board (NTSB) and the CPUC each launched an independent investigation to gather facts and make recommendations for the improvement of the safe management of PG&E’s natural gas lines. Each investigation took nearly an entire year to conduct, and the resulting reports were widely expected to make recommendations and findings that would have a nationwide impact on the conduct and future of the entire natural gas industry.

In communications with the media, many regulators have routinely identified San Bruno as a “game-changer.” In addition, CPUC Executive Director Paul Clanon has been quoted as saying that the CPUC “has not rested one day in improving what we do” since the San Bruno explosion. Regulators for other public utility commissions have made similar commitments of renewed commitment to safety. Has San Bruno been the “game-changer” promised? Have regulators improved their oversight?

Testing Is Long Overdue

Hydrostatic pressure testing of a natural gas pipeline involves shutting down a pipeline for approximately 8 hours, removing any natural gas, and then filling the line with water at much higher pressures than the pressure at which the natural gas pipeline will be operated. If this costly test does not highlight any weaknesses in the pipeline, the pipeline is deemed safe and restored to service.

Mandatory hydrostatic pressure testing of all pipelines by itself is a “game-changer.” In some cases, as with the San Bruno pipeline, pipelines have been installed without any prior hydrostatic pressure testing and have never been subject to testing in the field. Moreover, before San Bruno, exemptions at both the state and federal level had allowed some older natural gas pipelines to continue operations, despite never having been pressure-tested in the field.

The NTSB identified the “exemptions of existing pipelines (historically granted by the CPUC and U.S. Department of Transportation) from the regulatory requirement for pressure testing, which likely would have detected the installation defects” as a major contributing factor to the San Bruno explosion.

In the immediate aftermath of the San Bruno incident, California regulators and those at the national level moved swiftly to repeal these exemptions and thus require hydrostatic pressure testing for all pipelines. In addition, the CPUC required all California natural gas utilities to submit a comprehensive pressure-testing implementation plan by August 2011, setting the stage for hydrostatic pressure testing to become a “game-changer.”

Who Pays for Testing?

PG&E’s implementation plan includes not only pipeline pressure testing but also for pipeline replacement, inspections, a valve automation program, and a pipeline records integration program. PG&E’s cost estimate for just Phase 1 of its overall implementation plan is approximately $2 billion. Without offering a value judgment on the merits of PG&E’s specific implementation plan, the utility’s proposal shows that the necessary increase in safety of the nation’s natural gas pipeline system will require a significant investment of ratepayer money.

The CPUC’s response to PG&E’s request for substantial rate increases to enhance natural gas pipeline safety will provide an initial barometer of whether regulators are prepared to use San Bruno as a “regulatory” game-changer. Substantially granting PG&E’s request, or at least acknowledging that increasing safety will lead to increased rates, would demonstrate that the CPUC has learned the lessons offered by San Bruno and is prepared to respond to any criticism from those consumer groups and politicians whose natural instincts are to oppose any rate increase.

Such positive action by the CPUC will likely spur other regulators around the country to authorize similarly targeted investment in infrastructure and processes designed to enhance safety, despite the likely associated increase in rates. One can only hope that we will then see the beginning of a long-overdue era of significant investment in safety and infrastructure improvement around the country.

All too often in utility rate applications, the opportunity to reduce the amount of the requested increase by deferring maintenance has been the easy option for regulators. However, as San Bruno sadly demonstrates, deferring maintenance and cutting costs by foregoing investment in safety and infrastructure improvements is ultimately much costlier. The San Bruno tragedy demands that all market participants—utilities, regulatory commissions, and consumer groups—change the game they each play in regulatory proceedings when it comes to safety.

— Vidhya Prabhakaran ([email protected]) is an associate in Davis Wright Tremaine’s Energy Practice Group.