7. Other Issues
7.1. Does § 785 Give Priority to Natural Gas Production Over Storage?
Armstrong's protests contend that § 785 requires the Commission, as a first priority, to encourage increased gas production, and that the Proposed Project will frustrate this policy.51 Although Armstrong withdrew its protests to the Applications, the Commission will still consider the legal issue of whether § 785 requires the Commission to give priority to production of natural gas from the Gas Field over the use of the Gas Field for gas storage to ensure that our decision is consistent with § 785. We conclude that § 785 does not require the Commission to give priority to production of natural gas from the Gas Field over the use of the Gas Field for gas storage services, and, therefore, approval of the Proposed Project will not contravene § 785.
The Legislature established the Gas Policy Act when it enacted Assembly Bill (AB) 2117 to add § 785 to the Public Utilities Code in 1983.52 Section 785(a) states in part that,
"the commission shall... encourage, as a first priority, the increased production of gas in this state, including gas produced from that area of the Pacific Ocean along the coast of California commonly known as the outer continental shelf, and shall require, after a hearing, every gas corporation to purchase that gas which is compatible with the corporation's gas plant and which is produced in this state having an actual delivered cost, measured in equivalent heat units, equal to or less than other available gas, unless this requirement will result in higher overall costs of gas or other consequences adverse to the interests of gas customers. (Emphasis added.)
In establishing the Gas Policy Act, the Legislature declared that California gas production is an important part of the state's gas supply, that the actual delivered cost of California produced gas is presently lower than the cost of alternative out-of-state and Canadian gas supplies.53 Section 2(d) of the Gas Policy Act explicitly states that the Legislature's intention in enacting the Gas Policy Act is to require the state's public utility gas corporations to purchase all available supplies of low-cost California gas first, provided that such purchases do not result in higher overall costs of gas or other consequences adverse to the interests of gas customers.
The Legislature's declaration makes clear that the intent of § 785 is to give priority to purchasing low-cost natural gas produced in California over the purchase of higher-cost out-of-state and Canadian gas supplies. This interpretation is supported by the legislative bill analysis for AB 1906.
AB 1906 was initially introduced to amend § 785 but was ultimately enrolled as § 785.1, as the Gas Policy Act Amendments of 1993. According to the bill analysis, AB 1906 was authored to ensure that California gas producers are not placed at an unfair economic disadvantage relative to out-of-state shippers. The bill analysis states, in part,
"... The price paid to California producers is substantially below the cost of out-of-state gas, in part reflecting the fact that buyers do not incur charges for long distance transportation over interstate pipelines. In part the lower price reflects the historical fact that Pacific Gas & Electric (PG&E), incase [sic] of Northern California gas production, has exercised its monopoly control over intrastate gas transmission service and its monopoly power as the sole buyer of gas to suppress prices for California gas. The result has been a decline in the level of exploration and development for California gas and the diminution of investment, employment and taxes paid by this local California business. Loss of market share by California gas production has been accompanied by a gain in market share for out-of-state producers. The Legislature has acted on this issue a number of times in the past 10 years, most notably in the California Gas Policy Act (Moore, 1983 and 1985). This bill addresses problems which have gone unresolved by the CPUC for a number of years, in which the Assembly Utilities and Commerce Committee heard at its informational hearing earlier in the session."
This analysis is consistent with the stated intent of § 785 to give priority to purchasing natural gas produced in California over natural gas produced out-of-state. Like § 785, the intent of § 785.1 is for the Commission to give priority to California-produced gas over out-of-state gas.
There is nothing to suggest that the Legislature intended for the Commission to prioritize natural gas production over storage. In establishing the Gas Policy Act Amendments of 1993, the Legislature states, among other things, that the state's regulatory agencies "should ensure that natural gas produced in this state is not placed at an unfair economic disadvantage relative to gas from sources outside of the state as the result of any transportation tariffs or conditions of service."54
Related statutes support the conclusion that § 785 does not require the Commission to give natural gas production priority over the storage of natural gas. For example, § 785.2 requires the Commission "to investigate, as part of the rate proceeding for any gas corporation, impediments to the in-state production and storage of natural gas. The commission may adopt a tariff that encourages in-state production or storage of natural gas, including, but not limited to, reducing local transmission rates applicable to in-state gas blends, unless the commission finds that adopting the tariff will likely result in consequences adverse to the interests of gas customers.55
Section 785.2 requires the Commission to investigate impediments to both the in-state production and the in-state storage of natural gas, and does not prioritize one over the other. Section 785.2 also permits the Commission to adopt a tariff that encourages in-state production or storage of natural gas but does require that the Commission prioritize production over storage.
Section 785.5(b) permits the Commission to establish and revise guidelines for priorities among suppliers and sources of supply of gas to gas corporations, taking into consideration the requirements of § 785, and § 785.7 prohibits gas corporations from charging a higher rate for the transportation of gas produced in this state than for the transportation of gas from any other source.56
Thus, the intent of §§ 785, et seq. is to ensure that natural gas produced in this state is not placed at an unfair economic disadvantage relative to gas from sources outside of the state but § 785 does not require the Commission to prioritize the production of natural gas over gas storage services. Because § 785 does not require the Commission prioritize natural gas production over gas storage services, it is not necessary to determine if the Starkey Formations that the Proposed Project intends to use as storage reservoirs are depleted of all economically recoverable gas.
As discussed above, Armstrong, through negotiations with GRS and PG&E, reached agreement on the issues raised in its protests, and has withdrawn its protests to the GRS and PG&E Applications. Although Will Gill & Sons continues to disagree with GRS and PG&E and has not settled with GRS and PG&E with regard to the approximately 1,000 unleased acres, Will Gill & Sons withdrew its protest to the PG&E Application.
Because Armstrong and Will Gill & Sons no longer object to GRS and PG&E using the Gas Field for gas storage services, it is not necessary to determine if the Proposed Project can coexist with continued natural gas production from the other formations in the Gas Field, or to consider what, if anything, should be required to minimize or eliminate conflicts between gas production and storage operations. It is also not necessary to determine whether any grant of authority to GRS or PG&E in this proceeding should be limited to the Starkey Formations so as not to unreasonably interfere with ongoing natural gas production from other formations within the Gas Field.
7.2. Liability Insurance and Similar Indemnifications
The OA (Operator Agreement) provides that the Operator shall maintain policies of insurance at all times commensurate with the risk, and having such deductibles and retentions as would be placed by a reasonably prudent natural gas storage and pipeline business operator during the development and permitting, construction and operation phase(s) for a project of similar scope and nature.57 Exhibit F to the OA requires the Proposed Project operator to obtain and maintain a general liability insurance policy with coverage of at least a $50 million minimum per occurrence and $50 million annual aggregate.
As discussed above, the Settlement Agreement that we approve and the terms of which we incorporate in this Decision require Applicants to promptly report and submit to the Commission and the parties to this proceeding copies of any revisions or amendments to the OA. Thus, the Commission will be made aware of any changes to the OA that would modify the insurance requirements, and, if necessary, the Commission will have an opportunity at that time to address any concerns. Therefore, we will not impose on Applicants any additional insurance requirements for the Proposed Project.
7.3. Interconnection With PG&E
Applicants state that the details regarding the terms and conditions of the interconnection with PG&E Line 401 will be addressed in an Agreement for Installation or Allocation of Special Facilities (Special Facilities Agreement), and that Applicants and PG&E are working to finalize the Special Facilities Agreement using the form of agreement on file with the Commission.58
Applicants state that detailed design engineering work for the interconnection must be completed and costs of interconnection facilities identified before the Special Facilities Agreement can be finalized. Applicants state that this effort is underway but may not be completed until late in the third or early in the fourth quarter of 2009. Applicants agree to submit to the Energy Division a copy of the Special Facilities Agreement as soon as possible after it is executed.
Applicants assert that the interconnection arrangements between Applicants and PG&E will be similar to those established in previous agreements between PG&E and other independent storage providers, and will comply with the Gas Storage Rules and PG&E Rule 2. Applicants further state that the agreement must also be consistent with the Settlement Agreement.
As stated above, the Settlement Agreement, among other things, prohibits PG&E and any entity related to PG&E from providing any undue preference to GRS as compared to any other independent storage providers in terms of interconnection, classification of interconnection costs, construction and pricing of interconnection and other facilities.59
The Settlement Agreement also requires PG&E, pursuant to a standing request or an agreement-specific request of any party to this proceeding, to provide copies of, among other things, interconnection agreements and other agreements pertinent to the construction and operation of the interconnection between PG&E and GRS. To the extent that there are any differences in treatment provided by PG&E to GRS as compared to other independent storage providers, the Settlement Agreement requires PG&E to provide other independent storage providers with the opportunity to receive comparable treatment.
The Gas Storage Decision provides that utilities should interconnect with independent storage providers as if the latter were consumers of gas. The Gas Storage Decision determined that standard interconnection costs will be recovered on a rolled-in basis, that special facilities costs will be charged to the storage provider, and that PG&E's Rule 2 is a reasonable model for determining of what are standard facilities costs and what are special facilities costs.
The agreement form that will be used to establish interconnection arrangements (PG&E Form 79-255) contains the terms and conditions (excluding costs) for installation of special facilities, and is analogous in scope and depth (although not in content) to the interconnection agreements between PG&E and other independent storage providers. The Special Facilities Agreement that will be established between Applicants and PG&E complies with the Gas Storage Rules60 and should be approved.
Submitting the executed agreement to the Energy Division after a decision is issued approving the application is consistent with the practice in prior independent gas storage proceedings. In D.97-06-091 and D.00-05-038, the Commission required the applicants to provide the Energy Division the final total cost of interconnection, including the share of the cost paid by each entity, because this information was not set forth in the interconnection agreements.
Similarly, we will require Applicants to provide the Energy Division with a supplemental filing similar to those we required in D.97-06-091 and D.00-05-038. Before commencing its operations, Applicants shall provide the Commission, in a supplemental filing to the Energy Division, a copy of the executed Special Facilities Agreement containing the final total cost of the interconnection including the cost paid by each entity.61
7.4. GRS' Request for Approval of Market-Based Rates
GRS requests authority to charge market-based rates for the storage services it provides using its 75 percent interest in the Proposed Project. The Gas Storage Decision adopted market-based rates for non-core storage including incremental rates for service derived from new or expanded facilities, and, since that decision, the Commission has approved market-based rates for other independent gas storage providers.
The Commission evaluates the following factors in its market power analysis:62
1. Whether the applicant is a new entrant to California;
2. Whether the proposed project creates risks for core ratepayers;
3. Whether the applicant or any of its affiliates owns or controls gas transportation; and
4. Whether the applicant or any of its affiliates controls other natural gas facilities.
Applying these criteria to GRS leads us to conclude that GRS does not have market power and should be authorized to charge market-based rates for the storage services.
First, GRS is a new entrant to the California gas storage market, and has no customers. GRS will become the third independent storage provider to enter California's gas storage market and will compete with other independent gas storage service providers. As a new entrant, it is highly unlikely that competition from GRS could drive the incumbent investor-owned utility from the gas storage market.
Each of the existing independent gas storage service providers has nearly twice the working gas capacity of GRS, representing significantly larger potential gas storage market shares than GRS. As a result of the approval of this Application, PG&E will also increase its own market share of storage capacity through its ownership interest in the Proposed Project, and will compete with GRS.
GRS' entry into the gas storage market will increase competition among the current non-core storage providers, and, as a result, reduce market concentration in California. In addition, there are alternatives to gas storage services, including pipeline transportation capacity and utility gas balancing services.
As discussed above, the Settlement Agreement also contains provisions that prohibit Applicants from changing the 75/25% ownership ratio between GRS and PG&E or expanding the storage capacity of the Proposed Project beyond the capacity approved by the Commission in this proceeding without first seeking and receiving from this Commission any authority that may be required, and to provide prior notice to the Commission and all parties to this proceeding of any proposed expansion that Applicants contend does not require Commission authorization.63
Second, GRS' interest in the Proposed Project does not place core ratepayers at risk. GRS' shareholders bear the risks resulting from unused or discounted capacity in GRS' share of the Proposed Project. GRS does not have core ratepayers and will not be subsidized by the core ratepayers of its parent, NW Natural or by PG&E's core ratepayers. Therefore, there is no risk that core ratepayers will cross-subsidize GRS' interest in the Proposed Project or be at risk for that investment.
Finally, GRS does not own or control gas transportation infrastructure or contracts for capacity on major gas pipelines or own or control any other natural gas industry facilities, including the transportation infrastructure necessary to deliver gas stored in the Proposed Project to the market. GRS' parent, NW Natural, owns pipeline and distribution facilities in Oregon and Washington, which it uses to serve core customers. It also holds contracts for transportation capacity on two major natural gas pipelines in the Pacific Northwest in order to transport gas to its Oregon and Washington facilities.
However, NW Natural does not provide any services in California, and does not own or control transportation infrastructure in California or directly connected to California. We conclude that GRS does not have market power as a result of its or NW Natural's ownership of other natural gas infrastructure and interests in capacity contracts. Therefore, GRS should be authorized to provide the proposed storage services at market-based rates because GRS is a new market entrant with no customers, GRS' interest in the Proposed Project presents no risk to core ratepayers, and neither GRS nor its affiliates own or control gas transportation or other natural gas facilities in California.
As we have done in our prior decisions concerning competitive gas storage applications,64 we will permit GRS to charge market-based rates within a rate zone and to file tariffs with a rate window to allow for fluctuations in the market. GRS need not file any cost justification with its tariffs.
7.5. Requests for Waiver of Cost Showing
CPCN applicants are required to submit a statement of the estimated cost of the proposed construction and the estimated fixed and operating annual costs.65 However, the Commission has not previously required applicants seeking to provide competitive gas storage services to provide a cost showing relating to development and construction of their gas storage facilities.66
GRS is seeking market-based rate authority for the gas storage services it will provide in connection with the Proposed Project, and PG&E proposes to charge its tariffed market storage rates for the gas storage services it will provide in connection with the Proposed Project. Because GRS' and PG&E's shareholders will be at risk for the financial success of the Proposed Project, GRS and PG&E should be treated the same as other competitive storage providers with regard to providing a cost showing.
Except to the extent that PG&E obtains incremental core storage capacity under Commission authorized procedures, the Proposed Project will not serve core ratepayers, and core customers will not bear project costs because PG&E is not seeking to apply new rates to the Proposed Project at this time. As a result, there is no need to assess costs to determine whether the Proposed Project is cost-effective for ratepayers, and a cost showing at this time is not necessary. Therefore, GRS' and PG&E's requests to waive the need for a cost showing in the Applications are granted.
7.6. Requests for Waiver of the Cost Cap Requirement
Section 1005.5 requires the Commission to specify a maximum cost deemed to be reasonable and prudent for projects whose estimated costs are over $50 million (cost cap). The purpose of § 1005.5 is to limit cost recovery from ratepayers under a more traditional cost-of-service rate-of-return ratemaking scheme. GRS and PG&E estimate that the Proposed Project will cost will be in the range of $200 to $225 million.
The Commission has not previously applied the cost cap requirement in connection with independent gas storage facilities. For example, D.00-05-048 waived the cost cap requirement because LGS' rates were to be market-based and because ratepayers would not be financing the LGS project. D.02-07-036 also waived the cost cap requirement because WGS did not have captive customers who would finance the expansion project. Because GRS' rates will be market-based, ratepayers are not financing the Proposed Project and we do not have concerns regarding cross-subsidization by ratepayers.
Similarly, PG&E is seeking to provide natural gas storage services using its existing market storage tariff rates and does not seek to allocate any of its share of the costs to core customers. We do not have concerns regarding cross-subsidization by ratepayers because PG&E's captive ratepayers will not be funding its interest in the Proposed Project. Therefore, we waive the cost cap requirement of § 1005.5 for GRS and for PG&E.
7.7. GRS' Request for Exemptions From the Requirements of § 818 and § 851 and the Commission's Competitive Bidding Rule
GRS requests that the Commission determine that the competitive bidding rule does not apply to GRS, or that GRS' project-related financing arrangements are exempt from the policy. GRS asserts that this will provide GRS with the flexibility to negotiate advantageous financing where the financing structure for independent gas storage is uncommon, and in cases like this where GRS has no bond rating.
The Scoping Memo asked if GRS' request for exemptions from the requirements of § 818 and § 851 and the Commission's Competitive Bidding Rule in connection with its financing of the development of the Proposed Project is in the public interest, and if any exemptions that may be granted to GRS should be limited to the initial financing of the Proposed Project or extended to include to subsequent transactions.
DRA states that it does not oppose GRS' requests for exemptions in connection with the financing of the Proposed Project, but that GRS should not be exempt from the requirements of § 851 beyond its activities in connection with the financing of the Proposed Project.
In response to concerns expressed by DRA and LGS, GRS clarified that it seeks an exemption from the requirements of § 818 and § 851 only for the initial construction financing and permanent debt financing in connection with development of its 75 percent share in the Proposed Project and is not seeking a general exemption from those requirements. This clarification is recited in the Settlement Agreement and is no longer an issue with the Settling Parties.
We grant GRS' requests for exemption from the requirements of § 818 and § 851 for the initial construction financing and permanent debt financing in connection with development of its 75 percent share in the Proposed Project. GRS will not have captive customers to finance the Proposed Project and, therefore, GRS shareholders will bear the financial risk of the Proposed Project. Market competition will serve to constrain the costs that GRS can incur for capital and still compete effectively, and, therefore, the Commission's supervision of GRS' financing arrangements is not necessary to protect GRS customers or the public interest.
There is no need to grant GRS an exemption from the Competitive Bidding Rule for the Proposed Project because the Competitive Bidding Rule does not apply to GRS. The Competitive Bidding Rule,67 among other things, provides that the competitive bidding requirement is applicable only to utilities with bond ratings of "A" or higher. The Competitive Bidding Rule does not apply to GRS because GRS does not have a bond rating.
7.8. PG&E's Requests for a PTC
The PG&E Application satisfies the requirements for a PTC, including a description of the proposed facilities and related costs, a map, reasons the route was selected, positions of the government agencies having undertaken review of the Proposed Project, a PEA (Proponent's Environmental Assessment), and compliance with the provisions of CEQA.68 No party opposes PG&E's request and the PTC is granted.
51 Armstrong withdrew its protests to the Applications on May 18, 2009, after resolving the issues raised in its protests through negotiations with GRS and PG&E.
52 Stats 1983 Chapter 1287.
53 Chapter 1287, AB 2117, Sections 2(a) and 2(b).
54 AB 1906, Chapter 732, Chaptered October 4, 1993. Emphasis added.
55 § 785.2. Emphasis added.
56 § 785.7(a).
57 Exhibit F.
58 Applicants' June 30, 2009 response to the June 18, 2009 ALJ ruling directing Applicants to submit additional information.
59 Condition 2(a).
60 D.93-02-013, Appendix B.
61 The Special Facilities Agreement should not be filed with the Commission's Docket Office.
62 See D.00-05-048 and D.02-07-036.
63 Conditions 1(b) and 1(c).
64 See D.97-06-091, as modified by D.98-06-083, and D.00-05-048.
65 Rule 3.1(f).
66 See D.98-06-083, re: WGS and D.00-05-048 re: LGS.
67 See Resolution F-616, adopted October 1, 1986.
68 On July 21, 2009, PG&E submitted to the ALJ and served parties a copy of its Field Management Plan describing the measures PG&E will take to reduce the potential for exposure to EMFs generated by the Proposed Project.
