9. Cost Allocation, Rate Design, and Cost Recovery
This proceeding considers whether the Applicants' FAR cost allocation, rate design, and cost recovery proposals are reasonable. This includes the reasonableness of the proposal to fully unbundle backbone transmission costs from rates, the reasonableness of the proposed separation of costs between local and backbone transmission, the reasonableness of the proposal to collect an in-kind fuel charge, and the reasonableness of other proposals set forth in the Application.
Unlike the operational issues in this proceeding, parties did not reach agreement on all cost allocation, revenue requirement, and rate-related issues. However, several parties reached agreement on these issues and presented a joint recommendation on rate issues (referred to as the "JRR").21 Some of the recommendations in the JRR are opposed by CCC, IP and Watson.
We adopt the recommendations presented in the JRR for the reasons discussed below.
9.1. Separation of Costs between Local and
Backbone Transmission
For the period from October 1, 2011, until the effective date of rates established in the 2011 SDG&E/SoCalGas Triennial Cost Allocation Proceeding (TCAP) (i.e., January 1, 2013), the backbone transmission revenue requirement of $135.0 million must be recovered through BTS rates.22 The adopted revenue requirement requires $87.2 million to be unbundled from the SDG&E/SoCalGas transmission system in addition to the $44.8 million revenue requirement that was previously unbundled. The $87.2 million increase in the BTS revenue requirement is off-set by reductions in other end-use transportation rates.
In addition, SDG&E/SoCalGas must prepare a new backbone embedded cost and functionalization study to be filed with their 2011 TCAP application, and SDG&E/SoCalGas must confer with interested parties in advance to discuss study data, scope, and methodology prior to preparing the cost/functionalization study. The unbundled BTS revenue requirement is included in the scope of the 2011 TCAP.23
The recommendations to establish a backbone transmission system revenue requirement of $135 million for the 15-month period until new TCAP rates become effective, for SDG&E/SoCalGas to prepare a new backbone embedded cost/functionalization study after consultation with the parties, and to include the unbundled BTS revenue requirement in the scope of the 2011 TCAP reasonably resolve this issue in light of the record.
D.06-12-031 determined that a cost-based FAR reservation charge reflecting the cost of the backbone transmission system was desirable, and stated the Commission's intention to establish a cost-based FAR charge for the second three-year Open Season of FAR. D.06-12-031 directed SDG&E/SoCalGas to submit a cost study of the backbone transmission system in their next Biennial Cost Allocation Proceeding (BCAP), and adopted an interim reservation charge of five cents/Dth/day. In 2007, SDG&E/SoCalGas prepared an embedded cost study of the transmission system as part of their 2009 BCAP showing.
D.09-11-006 approved a settlement agreement resolving issues in Phase II of the SDG&E/SoCalGas 2009 BCAP, including adopting the combined SDG&E/SoCalGas embedded cost transmission revenue requirement of
$201.2 million ($163.2 million for SoCalGas and $38.0 million for SDG&E).24 As the basis for allocating transmission system costs, and to determine updated backbone transportation rates, SDG&E/SoCalGas used the embedded cost transmission revenue requirement and throughput developed in SDG&E/SoCalGas' 2009 BCAP, escalated to 2010 base margin. When escalated to 2010 base margin, the total transmission system revenue requirement is
$210.1 million ($170.6 million for SoCalGas and $39.5 million for SDG&E).
No party opposes unbundling backbone costs from the transmission system. However, parties agree that the 2007 cost study does not accurately reflect unbundled backbone transmission costs because backbone facilities also serve a local transmission or redelivery function but the 2007 cost study treats each transmission pipeline as if it were purely backbone or purely local transmission.25 As such, most parties agree that SDG&E's/SoCalGas' 2007 embedded cost allocation study contains local transmission costs that should not be included in an unbundled backbone transmission revenue requirement. However, parties disagree on what adjustments to the cost study most accurately delineate the unbundled backbone transmission revenue requirement.
SDG&E/SoCalGas calculate the portion of SoCalGas' $170.6 million transmission revenue requirement attributable to backbone transmission
($118.1 million) by applying the weighted average of capital-related costs (depreciation expenses and the portion of rate base associated with backbone transmission assets), and the combined operating and maintenance (O&M) and administrative/general expenses related to backbone transmission mains and compressor stations. This produces a combined revenue requirement of
$157.523 million attributable to backbone transmission for SDG&E and SoCalGas ($118.057 million for SoCalGas and $39.466 million for SDG&E).
SDG&E/SoCalGas then allocate a portion of the backbone transmission costs to local transmission to account for the portion of the backbone transmission system used to perform a local transmission function.26 The result of this calculation assigns 24 percent of total backbone costs of $157.5 million to the local transmission function (i.e., $37.7 million) and the remaining $119.8 million to the backbone transmission revenue requirement to be recovered through rates.
It is not possible to verify SDG&E's/SoCalGas' assumption that customers served directly from the backbone comprise the same percentage of system demand under both average and cold year peak day demand conditions. However, that this assumption cannot be verified does not justify allocating zero transmission system costs to local transmission. To do so will continue to include local transmission costs that should not be included in the backbone transmission revenue requirement.
At the same time, because a portion of the SDG&E system currently serves as backbone transmission for gas received into the SDG&E system at Otay Mesa, it is reasonable that some portion of the SDG&E transmission system costs be assigned to the backbone transmission revenue requirement.27 However, based on the record before us, it is not possible to directly determine the precise portion of the SDG&E transmission system costs that should be assigned to the backbone transmission system revenue requirement.28
Although the JRR's recommended backbone transmission revenue requirement of $135.0 million is a compromise, it falls within the range of proposals put forth in this proceeding.29 The parties recommending the backbone transmission revenue requirement of $135.0 million include the parties that initially recommended the highest revenue requirement (DRA/TURN) and the parties that initially recommended the lowest revenue requirement (RES/SCGC). The backbone transmission revenue requirement of $135.0 million is reasonable and should be adopted for the period from October 1, 2011, until the effective date of rates established in the 2011 SDG&E/SoCalGas TCAP (i.e., January 1, 2013).
The parties acknowledge that, because a significant amount of customer load is served directly from the backbone system, SDG&E's/SoCalGas' 2007 embedded cost allocation study contains local transmission costs that should not be included in an unbundled backbone transmission revenue requirement. To address this concern, SDG&E/SoCalGas must prepare a new backbone embedded cost and functionalization study that must be filed with their 2011 TCAP application.
The new backbone embedded cost and functionalization study must be a "bottoms up" study where SoCalGas/SDG&E perform a pipeline-by-pipeline cost separation analysis that uses the pipeline specific costing information presented in the workpapers to SoCalGas' embedded cost of service study and pipeline-by-pipeline engineering design/flow model information to assess the accurate share of backbone and local transmission functions. Prior to the study, SDG&E/SoCalGas must hold a conference with interested parties to discuss study data, scope, and methodology.
9.2. Rate Design and Cost Recovery
Currently, customers may choose between firm and interruptible receipt point access service. The rate for firm service is a one-part fixed reservation charge, and the rate for interruptible service is a one-part volumetric rate equal to the firm service reservation rate stated on a "100-percent load factor" per-Dth-per-day basis.
SDG&E/SoCalGas initially proposed to continue the existing rate structure by offering shippers a choice between firm and interruptible access to receipt points, with a BTS capacity reservation charge for firm service and a volumetric for interruptible service. In addition, SDG&E/SoCalGas propose establishing an in-kind fuel charge to recover the cost of compression fuel used to move gas from receipt points to market centers.
We first address the rate structure for firm and interruptible service.
SDG&E/SoCalGas must offer a firm BTS rate option under a one-part straight fixed-variable (SFV) rate, billed as a reservation charge under
Schedule G-BTS, and calculated to recover the unbundled backbone revenue requirement and to amortize balances accumulated in the BTBA.30 The adopted one-part SFV rate is similar to the current one-part G-RPA1 rate for firm receipt point access rights, and similar to that initially proposed by SDG&E/SoCalGas.31
It is reasonable to continue providing customers with the firm BTS rate option that is currently offered and billed as a reservation charge.
During the three-month period from October 1, 2011 to January 1, 2012, the SFV rate must amortize the balance in the BTBA as of July 31, 2011.32 It is reasonable that, during the three-month period from October 1, 2011 to
January 1, 2012, the SFV rate amortize the balance in the BTBA as of July 31, 2011.
During the 15-month period from October 1, 2011 until January 1, 2013, the SFV firm reservation rate must use a billing determinant33 that is based on an assumed capacity of 3100 Mdth/day.34 Although no party opposes the recommendation that the SFV rate amortize the balance in the BTBA as of July 31, 2011 during the 15-month period from October 1, 2011 until January 1, 2012, CCC, IP, and Watson argue that the recommended billing determinant is too low.
The assumed capacity of 3100 Mdth/day is lower than the actual volume of firm and interruptible sales for the year ending September 30, 2010. According to CCC, IP, and Watson, basing the SFV firm reservation rate on the actual capacity of firm and interruptible sales (i.e., 3539 Mdth/day35) will better ensure that the firm reservation rate is not set too high and result in over-collecting the revenue requirement.
There is no evidence in the record on how much demand for capacity may decrease in response to rate increases that will result from this decision (i.e., the demand elasticity for firm capacity).36 However, it is not reasonable to assume that demand will remain unchanged in response to a substantial rate increase for BTS customers.
Rather, it is reasonable to expect that the amount of capacity that will be sold to BTS customers during the 15-month period from October 1, 2011 to January 1, 2013 will decrease in response to the higher BTS rates resulting from this decision.37 Basing the SFV firm reservation rate on actual firm and interruptible sales for the period ending
June 30, 2011 will likely under-collect the authorized revenue requirement during the 15-month period from October 1, 2011 to January 1, 2013.
An SFV firm reservation rate based on lower demand is more reasonable than a rate that assumes no change in demand in response to a price increase.38 The assumed capacity of 3100 Mdth/day is reasonable and should be used as the billing determinant when calculating the SFV firm reservation rate that will be in effect during the 15-month period from October 1, 2011 to January 1, 2013.
SDG&E/SoCalGas must offer a two-part firm BTS MFV rate option consisting of a fixed reservation charge and a usage charge billed on a volumetric basis.39 A two-part firm BTS MFV rate option consisting of a fixed reservation charge and a usage charge billed on a volumetric basis is reasonable because an MFV rate option will help lower-load-factor customers manage their capacity costs and aid shippers that are not able to fully use their backbone capacity.
The JRR recommends that the two-part MFV rate be designed to recover the unbundled backbone revenue requirement, with 80 percent recovered through the reservation charge and 20 percent recovered through the usage charge.40 Although no party opposes the recommendation that SDG&E/SoCalGas offer a two-part firm BTS MFV rate option, parties disagree on the billing determinant that should be used to calculate the MFV rate. Parties also disagree on the proportion of costs that should be recovered in the fixed and variable components of the MFV rate.
During the three-month period from October 1, 2011 to January 1, 2012, the MFV rate must amortize the balance in the BTBA as of July 31, 2011.41 It is reasonable for the MFV rate to amortize the balance in the BTBA as of July 31, 2011, during the three-month period from October 1, 2011 to January 1, 2012.
During the period from October 1, 2011 to January 1, 2013 (the effective date of revised rates to be established in the 2011 SDG&E/SoCalGas TCAP), the reservation (fixed) rate component of the MFV charge must be based on an assumed throughput of 3100 Mdth/day and the usage component of the MFV charge must be based on an assumed throughput of 2634 Mdth/day.42
No party opposes the JRR recommendation to base the usage component of the MFV charge on an assumed throughput of 2634 Mdth/day. The assumed capacity of 2634 Mdth/day is reasonable and should be used as the billing determinant when calculating the usage (volumetric) component of the MFV charge that will be in effect during the 15-month period from October 1, 2011 to January 1, 2013.
CCC, IP and Watson oppose the JRR's assumed throughput of
3100 Mdth/day for use as the billing determinant for the reservation (fixed) rate component of the MFV charge for the same reasons discussed above in connection with the JRR's recommended SFV rate option. It is reasonable to expect that the amount of capacity that will be sold during the 15-month period from October 1, 2011 to January 1, 2013 will decrease in response to the higher rates resulting from this decision.
For the same reasons discussed above in connection with the SFV rate option, the assumed capacity of 3100 Mdth/day is reasonable and should be used as the billing determinant when calculating the reservation (fixed) rate component of the MFV charge that will be in effect during the 15-month period from October 1, 2011 to January 1, 2013.
Eighty (80) percent of the backbone revenue requirement must be recovered through the fixed portion of the MFV rate (i.e., the reservation charge) and 20 percent of the revenue requirement must be recovered through the variable portion of the MFV rate (i.e., the volumetric charge).43 Recovering
80 percent of the backbone revenue requirement through the fixed component of the MFV rate and 20 percent through the volumetric component is within the range of proposals offered by the parties, and is reasonable.44
SDG&E/SoCalGas must offer a one-part volumetric interruptible rate that is equal to the daily SFV rate on a 100-percent load factor basis.45 The adopted interruptible rate is designed the same way as the interruptible rate currently contained in the SoCalGas FAR service tariff, and, as discussed below, will be adjusted annually.
CCC, IP and Watson oppose the JRR's recommendation that the billing determinant used to develop the interruptible rate be based on an assumed throughput of 3100 Mdth/day. CCC, IP, and Watson recommend that a lower billing determinant (based on the average year throughput of 2634 Mdth/day) be used to derive the interruptible rate.46 The CCC/IP/Watson recommended methodology results in an interruptible rate that is 34 percent higher than the firm SFV rate at 100-percent load factor to encourage customers to use firm service.
According to CCC, IP, and Watson, using average year throughput as the billing determinant for the interruptible rate will recover the backbone revenue requirement if all customers used interruptible service. However, during the period from October 2008 through December 2009, only three percent of scheduled nominations were interruptible nominations.
It is not reasonable to price the lower priority "interruptible" service higher than "firm" service. Given that 97 percent of scheduled nominations were firm nominations during the period from October 2008 through December 2009, little increase in firm service would be achieved by pricing interruptible service higher than firm service as a way to further discourage use of interruptible service, even if the Commission determined that such a policy was appropriate (which it has not).
The assumed capacity of 3100 Mdth/day is reasonable and should be used as the billing determinant when calculating the interruptible rate that will be in effect during the 15-month period from October 1, 2011 to January 1, 2013.
SDG&E/SoCalGas must establish an in-kind fuel factor, initially set at
0.22 percent of the total volume of natural gas to be delivered at the receipt point and updated quarterly based on the fuel factor determined from the prior quarter data.47 Any applicable volumetric charges must be charged only on scheduled volumes net of shrinkage. The in-kind fuel factor must take effect on October 1, 2011.
SDG&E/SoCalGas initially proposed an in-kind fuel charge of
0.22 percent, updated quarterly, on volumes received at receipt points to recover the cost of compression fuel used to move gas from receipt points to market centers. IP/Watson and SCGC recommended that the proposed in-kind fuel charge be assessed only on delivered volumes (i.e., net of shrinkage) because, according to these parties, customers should not have to pay transportation charges on gas that is provided to SDG&E/SoCalGas as an in-kind fuel charge payment and consumed as compressor fuel.
Establishing an in-kind fuel charge, assessed only on delivered volumes, to recover the cost of compression fuel used to move gas from receipt points to market centers is reasonable and consistent with the Commission's desire to establish cost-based FAR charges. Adoption of an in-kind fuel charge means that SDG&E/SoCalGas will no longer collect the cost of compressor fuel in end-use customer rates, thereby removing $11.3 million from the current end-use rates.
SDG&E/SoCalGas must revise BTS rates on January 1, 2012 through the SDG&E/SoCalGas Annual Regulatory Update to amortize the 2011 year-end balance in the BTBA.48 Beginning January 1, 2013 and each January 1 thereafter, SDG&E/SoCalGas must revise BTS rates through the SDG&E/SoCalGas Annual Regulatory Update to amortize balances accumulated in the BTBA during the previous year, and 2) to adjust the SFV and MFV reservation charges using the actual firm contracted capacity and interruptible sales experienced during the preceding October 1 through September 30 period.
All parties support the recommendation to annually update the firm reservation rate using actual firm contracted capacity plus interruptible volumes during the preceding year. Except for the in-kind fuel factor that should be adjusted quarterly based on the fuel factor from the prior quarter, it is reasonable to annually adjust BTS rates because this will avoid large over-collection or under-collection of revenues. However, adjustments should not be made to BTS rates on January 1, 2012, because three months is not enough time to reflect seasonal revenue variations.
9.3. Adopted Rates
The revenue requirement and rate design that we adopt result in the following illustrative BTS rates49:
Rate Element |
Adopted Rate |
SFV Reservation Charge ($/dth/day) |
$0.11269 |
MFV Reservation Charge ($/dth/day) |
$0.09015 |
MFV Volumetric Charge ($/dth) |
$0.02653 |
Interruptible Volumetric Charge ($/dth) |
$0.11269 |
These rates will be in effect until new rates in the SG&E/SoCalGas 2011 TCAP are adopted and implemented (i.e. January 1, 2013).
The adopted SFV Reservation Charge of $0.11269 represents a 163% increase over the current reservation charge.50 The increases in BTS rates are accompanied by reductions in other end-use transportation rates from which backbone transmission system costs were removed.
Attachment 3 to this decision displays the effect of this decision on SoCalGas rates, and Attachment 4 displays the effect of this decision on SDG&E gas rates.
21 The JRR is Exhibit JRR-1, and is sponsored by SDG&E/SoCalGas, CMTA, DRA, RES, SCGC, and TURN.
22 This adopts Recommendation No. 1 of Exhibit No. JRR-1.
23 These are Recommendations Nos. 4 and 4.a of Exhibit No. JRR-1.
24 D.09-11-006, Appendix A (BCAP Phase II Settlement Agreement), Section II.B.2.C.
25 Some customers are served directly from the backbone transmission system without using local transmission lines.
26 SDG&E/SoCalGas determine the portion of the backbone transmission costs that should be assigned to local transmission using "cold year annual average throughput" (2,651 MMcfd) and the percentage of the utilities' 1-in-10 year peak day end-use demand served directly from the backbone transmission system without using local transmission lines (35 percent).
27 D.04-09-022 authorized SDG&E and SoCalGas to establish Otay Mesa as a joint receipt point into their systems. D.06-04-033 determined that the function of the SDG&E transmission system and the Rainbow Corridor would change from a local transmission function to backbone transmission function when SDG&E/SoCalGas began transporting regasified liquefied natural gas from the Otay Mesa receipt point into SDG&E/SoCalGas service territory. No party disputes that gas has been received into the SDG&E/SoCalGas system at the Otay Mesa receipt point, but some argue that not enough gas has been received to justify treating any portion of the SDG&E transmission system as "backbone."
28 It is unreasonable to reclassify a pipeline based on the volume of gas received at a receipt point because a pipeline would constantly change classification with the daily ebbs and flows of gas through a receipt point, and such an ongoing reclassification of pipelines would make it impossible to determine the cost of the backbone transmission system.
29 SDG&E/SoCalGas initially recommended a backbone transmission system revenue requirement of $119.8 million, DRA and TURN initially recommended a revenue requirement of $157.5 million, and SCGC initially recommended a revenue requirement of $80.0 million. CCC, IP, and Watson recommend a revenue requirement of
$94.6 million.
30 This adopts Recommendation No. 2.a of Exhibit No. JRR-1.
31 SDG&E/SoCalGas calculate the reservation charge for firm backbone capacity by using the average daily firm contract demand quantity (CDQ) during the 15-month period. SDG&E/SoCalGas convert this volume to Dth by applying a British Thermal Unit conversion factor (i.e., multiplying the CDQ by 1.0302), multiplying the result by 365 days to derive the annual capacity in "thousands of dekatherms" (MDth), and dividing this result by 1000 to derive the annual capacity in Dths (i.e., Dth/year). SDG&E/SoCalGas then divide the annual backbone transmission revenue requirement by the derived Dth/year to determine the backbone transportation rate per Dth.
32 This adopts Recommendation No. 2.a.i of Exhibit No. JRR-1.
33 "Billing determinant" refers to the denominator by which costs are divided to determine a rate.
34 Exhibit No. JRR-1, Recommendation No. 2.a.ii.
35 See Exhibit SD/SCG-8 (Average Daily Total of the Firm Contracted Capacity and Interruptible Utilization of Access Rights 10/1/09 - 9/30/10).
36 Elasticity of demand (demand elasticity) quantifies the extent to which demand for a product will decline in response to a price increase, and rise in response to a price decrease (i.e., it is the percentage change in quantity demanded in response to a one percent change in price). Demand elasticity is usually quantified by dividing the percentage change in the quantity of the product purchased by the percentage change in the price of the product.
37 SDG&E/SoCalGas initially proposed to base their proposed reservation charge on firm contract demand volumes, excluding average interruptible usage volumes, because SDG&E/SoCalGas assumed that usage would decrease as a result of increased rates. See Exhibit SD/SCG-3 at 4:7 - 10. No party raised concerns about this approach to accounting for demand elasticity, and some parties' proposals implicitly make the same assumption. See SCGC-1 at 17:15 - 22 and Table 4 at 18. See also TR 173:21 - 174:2.
38 The JRR's assumed capacity of 3,100 Mdth/day is approximately eleven percent lower than the actual contracted firm capacity of 3,489 Mdth/day for the period ending September 30, 2010, reported in Exhibit SD/SCG-8.
39 This adopts Recommendation No. 2.b of Exhibit No. JRR-1.
40 The variable/usage component of the MFV rate includes variable O&M costs, rate of return, and taxes related to the backbone transmission system.
41 This adopts Recommendation No. 2.b.i of Exhibit No. JRR-1.
42 Exhibit No. JRR-1, Recommendations Nos. 2.b.ii and 2.b.iii (Note: Recommendation No. 2.b.iii is mislabeled as "2.b.ii").
43 This adopts Recommendation No. 2.b of Exhibit No. JRR-1.
44 CCC, IP, and Watson oppose this recommendation. CCC and Watson recommend a 78/22 percent split. IP recommends an 81/19 percent split, if its proposed revenue requirement is adopted. Alternatively, IP recommends an 65/35 percent split, if the Commission adopts a revenue requirement that is higher than that proposed by IP.
45 This adopts Recommendation No. 2.c of Exhibit No. JRR-1.
46 IP and Watson state that the amount of FAR capacity sold substantially exceeds the amount of capacity actually scheduled and used. They argue that using the amount of capacity sold to compute the interruptible rate will result in a rate that is too low to recover the revenue requirement if all shippers take interruptible service.
47 This adopts Recommendation No. 14 of Exhibit No. JRO-1. In connection with this recommendation, as discussed elsewhere in this decision, JRO Recommendation
No. 13.d recommends approval of the proposal to modify the Integrated Transmission Balancing Accounting (ITBA) account so as not to record transmission fuel costs.
48 This adopts Recommendation No. 3 of Exhibit No. JRR-1.
49 The actual rates charged beginning October 1, 2011 will reflect the balance in the BTBA as of July 31, 2011. As a result, the actual rates will differ from those listed here.
50 The interim rate adopted by D.06-03-021 was not cost-based but was initially set at $0.05/dth until a cost study identifying backbone transmission costs was completed.
