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PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION RESOLUTION G-3407

RESOLUTION

Resolution G-3407: In compliance with Decision 06-04-033 and Decision 06-12-031, Southern California Gas Company and San Diego Gas & Electric Company submit their proposed tariffs to implement system integration, firm access rights, and off-system deliveries on the transmission systems of the two utilities. The advice letters are approved with modifications.

By Southern California Gas Company Advice Letter 3706 and San Diego Gas & Electric Company Advice Letter 1668-G filed on January 29, 2007.

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SUMMARY

As required by Decision (D.) 06-04-033 and 06-12-031, Southern California Gas Company (SoCalGas) and San Diego Gas & Electric Company (SDG&E) (the utilities) filed Advice Letters 3706 and 1668-G respectively to make revisions to their tariffs and forms to implement system integration, the firm access rights (FAR) system, and off system deliveries on their transmission systems. This resolution approves Advice Letters (ALs) 3706 and 1668-G with modification. This resolution requires the utilities to file supplemental advice letters which incorporate the modifications to their tariffs required herein.

Thirteen parties filed protests in response to AL 3706 and AL 1668-G. The protests are granted in part and denied in part.

BACKGROUND

SoCalGas AL 3706 and SDG&E AL 1668-G were submitted in compliance with D.06-04-033 and D.06-12-031 to implement system integration, firm access rights, and off-system deliveries to PG&E on the utilities' gas transmission systems.

On January 29, 2007, SoCalGas filed compliance AL 3706 and SDG&E filed AL 1668-G. These filings were submitted in response to Ordering Paragraph (OP) 1.b. of D.06-04-033 and OP 3 of D.06-12-031 which state:

WORKSHOP

The Energy Division facilitated a workshop on February 22, 2007 held in the Commission's Training Room in San Francisco. The purpose of the workshop was to give intervenors to the System Integration Proceeding in A.04-12-004 an opportunity to ask questions of SoCalGas/SDG&E regarding the tariff filings attached to AL 3706 and 1668-G prior to filing their protests. The utilities gave a detailed presentation of the tariff revisions contained in the AL's.

NOTICE

Notice of AL 3706 and AL 1668-G was made by publication in the Commission's Daily Calendar. SoCalGas and SDG&E state that a copy of the Advice Letter was mailed and distributed in accordance with Section III-G of General Order 96-A.

PROTESTS

A ten-day extension of the normal protest period of 20 days for AL 3706 and 1668-G was granted by former Commission Executive Director Stephen Larson. Protests were due no later than March 2, 2007. SoCalGas AL 3706 and SDG&E AL1668-G were timely protested by the following parties: Division of Ratepayer Advocates (DRA); Clearwater Port LLC (Clearwater); Southern California Edison Company (SCE); BHP Billiton LNG International, Inc.(BHP Billiton); Aera Energy LLC (Aera) and Midway Sunset Cogeneration Company (MSCC); Indicated Producers (IP); SES Terminal, LLC (SES); California Cogeneration Council (CC), the California Manufacturers and Technology Association (CMTA), and Watson Cogeneration Company (Watson); Sempra Energy LNG (SE LNG); Coral Energy Resources, L.P. (Coral); Woodside Natural Gas, Inc. (Woodside); the Department of General Services (DGS); and Southern California Generation Coalition (SCGC).

The following is a summary of each protest:

DRA

1. DRA argues that Special Condition 22 under Schedule No. G-RPA should be revised to limit "set-asides" in Step 1 of the open season to contracts in effect as of the date the Commission adopted D.06-12-031. The proposed Special Condition 22 states that set aside options shall be granted to end-use customers under Commission-approved long-term firm transportation contracts in effect at the time of implementation of the FAR system. DRA argues that this provision could "open the door to an unknown number of long-term firm transportation contracts with set-aside options in Step 1", thus reducing available capacity in Steps 2 and 3 of the open season. DRA justifies its position by stating that in D.06-12-031, the Commission rejected some proposals for set asides because of its concern that too many set asides in Step 1 would reduce the amount of capacity available to end-users and other market participants in Steps 2 and 3 of the proposed open season.

2. Proposed Rule 39 B.2 addresses a situation where a party has requested a gas transmission capacity upgrade through executing a Collectible System Upgrade Agreement (CSUA), but is not making sufficient progress on its own LNG or pipeline project. It allows the utility to provide written notice, fifteen days prior to effectiveness, that the party has lost its first come, first-served (FCFS) priority. Proposed Rule 39.B. states that the party may raise any dispute with the Energy Division. DRA argues that Rule 39 B.2 should be modified to require an Advice Letter filing in the event the utilities wish to revoke FCFS party status to any party that is deemed to have lost it because of unsatisfactory progress in constructing the supply project or funding necessary and to post information related to project milestones on the utilities' websites.

Clearwater

1. Clearwater protests revisions to Rule 39.B.2. proposed and distributed by SoCalGas at the February 22, 2007 workshop. (A) Clearwater proposes that to ensure clarity, the term "predecessor agreement" be changed to "Collectible Work Authorization" (CWA) since the only agreement identified as a predecessor to the CSUA is the CWA. (B) Furthermore, Clearwater proposes that it be made explicit that the 15-day notice of cancellation and the 30-day notice to cure run sequentially, not concurrently. It also recommends that the party be given the notice and opportunity to cure the lack of satisfactory progress before the utility determines that the party has lost its status in the FCFS queue. (C) Clearwater opposes the proposed language which allows the party deemed to be not making satisfactory progress to raise any dispute with the Energy Division as the Energy Division does not have any policies, procedures or personnel in place for the adjudication of disputes that may arise under a Utility's tariff. Clearwater proposes that the Commission's existing adjudicatory procedure, namely the Complaint Procedure, be used for the adjudication of a dispute.

2. Clearwater opposes current tariff provisions which provide that the terms of the CSUA and related interconnection agreements are kept confidential. Clearwater supports greater transparency regarding the "LNG queue" that will be created at each receipt point. It believes that transparency will allow LNG suppliers and customers better access to information to make their resource procurement and investment decisions and increase the Commission's ability to ensure that there is no undue discrimination in the assignment or management of such rights. Clearwater proposes a tariff provision that would require the utility to post specific information regarding the "LNG queue" at each receipt point on its Electronic Bulletin Board. The Utility should be required to post: (a) the identity of the party that executed the CSUA or CWA; (b) the date of execution that establishes that party's position in the queue; (c) the amount of firm capacity that is reserved to that position in the queue and whether it is displacement or expansion capacity; (d) the date that the interconnection is scheduled to be completed; and (e) any notices of termination issued pursuant to Rule 39, Section B.2.

SCE

1. SCE protests proposed Schedule G-RPA, Special Condition 12 which provides that customers who hold firm receipt point rights may release their rights in the secondary market at a rate up to 125% of the G-RPA-1 rate, or if applicable, 125% of the G-RPA 1 rate (FAR reservation rate) plus the customer's G-RPA 2 rate (charge for expansion capacity). SCE argues that D.06-12-031 treats the reservation charge as a separate charge from the expansion charge, but that SoCalGas has erroneously combined the two charges as the basis for the secondary market rate cap. SCE argues that the Decision's reference to 6.25 cents per MMcfd is consistent with 125% of the G-RPA1 rate of 5 cents per Mmcfd.1

2. SCE protests proposed Special Condition 27 of G-RPA which states that if the total amount of set-asides exceed the available capacity at a particular receipt point or the available capacity of the Transmission Zone, set asides for core customers including the set asides for core loads of wholesale customers will be provided first. All other set-asides are subject to being pro-rated. SCE argues that all customers should be prorated equally, because in D.06-12-031 the Commission never indicated that noncore customers would be prorated before core during the Step 1 pre-open season.

BHP Billiton

1. BHP Billiton states the pro forma contracts submitted with the advice filing ( Master Services Contract, Schedule K, Pooling Service Agreement; Schedule L, Receipt Point Access Contract; Schedule M; Receipt Point Master Agreement; Schedule N , Off-System Service Contract; Request for Pooling Service Contract; Electronic Bulletin Board (EBB) Agreement Form; were not discussed in any detail at the workshop, nor were they addressed within the proceedings at the Commission leading up to the approval of a FAR/off-system framework. BHP Billiton strongly recommends that the text and details of the proposed pro forma contracts be set for a workshop process similar to that used for the interconnection and operator balancing agreements, with a time limit established no longer than 90 days before a report would be due to the Commission by the utilities detailing both the level of agreement and specifying any disagreement within the proposed drafts. In the event this process is not adopted, BHP Billiton protests the draft contracts and requests that they be listed as matters to be set for hearing by the Commission.

2. BHP Billiton proposes with regard to Rule 39, First-Come-First-Served (FCFS) Access to Expansion Capacity, that at a minimum the FCFS queue for capacity should be made available on the SoCalGas EBB. Secondly, it states that the queue must also recognize that an early signing entity may be either less likely to be constructed than a competitor for various reasons or far behind in the permitting process. BHP Billiton purports that the 15-day notice and 30-day cure period are woefully insufficient for a project of the magnitude anticipated and significantly less than standard terms in construction agreements. BHP Billiton proposes revised tariff language which requires that the utility provide both a 180 day notice of cancellation and a 90 day period to cure.

3. BHP Billiton suggests that a limited number of additional matters need to be clarified or revised within the tariff filing. These include:

RESPONSES to PROTESTS

The utilities responded to the protests of DRA; Coral; BHP Billiton; SES; Aera and MSCC; IP; SE LNG; SCE; DGS; Woodside; CCC, CMTA, and Watson; SCGC; and Clearwater on March 9, 2007. The utilities addressed the protests by issue as follows:

1. Balancing of Reservation Charge Revenues

Several parties (Coral, IP, SES, CCC/CMTA/Watson, DGS) protested the allocation of over- or under-collections in the ITBA to end-use customer transportation rates, claiming that any such over-or under-collection should instead be allocated to the FAR reservation charge. The utilities argue that this approach is inconsistent with D.06-12-031.They refer to Conclusion of Law No. 9 which states that "SDG&E and SoCalGas should be authorized to establish a balancing account so that they are not at risk for any under-recovery of the unbundled FAR reservation charge revenues, and any over-recovery is refunded to ratepayers.5 The utilities argue that throughout D.06-12-031, the term "ratepayers" is used to mean end-use customers, not FAR holders. The utilities cite as an example of a similar unbundling approach, the Noncore Storage Balancing Account sharing mechanism, where 50 per cent of revenues in excess of the authorized at-risk costs for unbundled storage service are credited to end-users, not noncore storage customers.

2. Set-Asides for Customers Holding Commission-Approved Long-Term Contracts

Coral, SCGC, IP, DRA, and DGS protested that the proposed tariff language should be modified so that Commission-approved long-term contracts that would qualify for Step 1 set-asides should be limited to those contracts in effect as of the date of the Decision. The utilities refer to D.06-12-031 where it is stated that "for a customer who has a Commission-approved long-term firm transportation contract for firm deliveries at a particular receipt point, which contract is in effect at the time the FAR system is implemented, that customer will have the option to receive a FAR set-aside at the specified receipt point."6 They point to the Decision's use of the word "currently" when it says that "there are currently four contracts that meet these criteria." They interpret it to mean that there can be no doubt that the Decision intended to allow for the possibility that, prior to FAR implementation, the Commission might approve additional long-term contracts that would qualify for set-asides.

3. Treatment of Core Set-Asides, Schedule No. G-RPA, Schedule No. 27

The utilities assert that their proposed language ensures that core set-asides are not pro-rated if total set-asides exceed the capacity at a given receipt point. The utilities' response to the protests of Coral, SCGC, and SCE on this issue is that while the Commission did not specifically address this issue in the Decision, the Commission has long recognized that core customer contracts on upstream pipelines must be given full force and effect, thus distinguishing the core set-asides from other set-asides. SoCalGas points to D.04-09-022 which specifically recognized a need to ensure upstream core commitments on El Paso Natural Gas Company and Transwestern Pipeline Company and retained a preference for deliveries from them.7 SoCalGas refers also to D.04-09-022 wherein the Commission established a policy requiring the gas utilities to hold certain amounts of upstream pipeline capacity on behalf of core customers.8 The utilities argue that by such specific approval, the Commission is strongly expressing its support for these contracts. They state that core set-asides are clearly different than other set-asides from the Commission's perspective and should not be reduced to the extent that the total set-asides exceed the capacity at a particular receipt point. The utilities state that SCGC's argument that there is no need for this provision ignores the possibility that additional long-term contracts and set-asides may be approved by the Commission prior to implementation of FAR, and the possibility that in future open seasons, set-asides may be in excess of the capacity at a particular receipt point. Moreover, they state that core set-asides will be established based upon the core's upstream pipeline commitments immediately prior to the open season and there is the possibility that new contracts on upstream pipelines will be executed prior to FAR implementation that could increase the core set-asides at particular receipt points from what the set-aside would be under existing contracts.

4. Rule 39 Issues

The utilities state that much of the discussion in the protests of BHP, Woodside, DRA and Clearwater on the proposed changes to Rule 39 was constructive in identifying the consequences of establishing FCFS priority for determining utility facility costs necessary to receive gas from multiple new suppliers. The utilities agree with protestants that posting the queue for FCFS priority on the utility electronic bulletin board (EBB) will provide transparency. They propose to post "Collectible System Upgrade Agreements" (CSUA's) on the EBB so that all parties can see the queue and the project milestones that must be met to keep priority. The utilities have proposed a revised Rule 39 with their Reply to Protests.

5. Direct Deliveries Off-System

The utilities have no objection to the recommendation of Coral, SCGC and BHP Billiton that shippers be able to nominate directly from a receipt point access contract to an off-system delivery contract, without the need to first nominate to a citygate pooling contract as long as the shipper would still be required to pay both the FAR reservation charge and the off-system charge.

6. Contingent Liability of Releasing Shippers

In response to the protests of Coral and SCGC regarding the requirement that a Releasing Shipper remain contingently liable in the event of default by a Replacement Shipper, the utilities state they do not object to relieving the Releasing Shipper from liability if the Acquiring Shipper acquires the capacity for the entire remaining term of the agreement, pays the maximum tariff rate for the capacity, and pays all applicable surcharges.

7. All-or-Nothing Set-Asides

In response to the protests of Coral, SCGC, and BHP Billiton to the requirement that new set-asides authorized by the Decision (PG&E long-term contracts and capacity created by "Funding Parties") must elect all of their set-aside amounts if they select any set-aside, the utilities state that although the decision did not specifically address this matter, these set-asides are analogous to other set-asides that have a similar "all-or-nothing" feature. Both core set-asides, which will be based upon upstream matching contracts, and long-term contract set-asides must be elected on an all-or-nothing basis. California producers are the only parties who can receive reduced set-asides because they are based on peak monthly production, not matching upstream commitments that are usually closer to annual average levels. According to the utilities, this same rationale does not apply to other set-asides. They state that if the Commission should decide that parties obtaining set-asides because of long-term contracts or because they funded new capacity should be allowed to elect a portion of their eligible set-aside quantity rather than the entire amount, it must apply this principle consistently to all set-asides, including the gas acquisition groups at SDG&E and SoCalGas on behalf of core customers.

8. Reduction of FAR Associated with Displacement Capacity

(a) In response to the protests of Coral, SCGC, SES and BHP Billiton regarding the treatment of FAR associated with "Displacement Capacity", the utilities agree that a statement is needed to clarify that a reduction occurs only within the same transmission zone in which the FAR holder is located and not system-wide.

(b) In response to BHP Billiton's concern that Special Condition No. 24 of Schedule No. G-RPA can be interpreted to mean that a new supply developer must choose entirely between "displacement" and "expansion" capacity, the utilities state that they do not believe that the language was so intended and propose to clarify it.

(c) In response to BHP Billiton's claim that it is not clear under the tariffs that a reduction in "expansion" capacity could occur only for circumstances of force majeure or system maintenance, the utilities state that it would be inappropriate to limit the situations in which reductions may occur because it is also possible that reductions could occur at times of extremely low demand on the system, depending upon the volume of new supplies entering the system and other factors such as storage injection capacity and off-system delivery capacity and nominations.

(d) In response to the protests of SCGC and Coral that argue it would be inappropriate to reduce nominations first to funders of "Displacement Capacity" at Otay Mesa when zonal capacity is less than the stated capacity as would be done at other receipt points, the utilities state that there is absolutely no language in D.06-12-031 that even attempts to explain why the Otay Mesa receipt point would receive such preferential treatment over other receipt points on the system.

9. Terms of Contract Forms

In response to the request of BHP Billiton that the Commission convene a workshop with respect to the terms of the contract forms submitted with the AL's, the utilities state that BHP's protests are general and it has not provided any indication of specific concern. They believe the forms are "straightforward" and there is no need for the time and effort associated with an additional workshop in this regard.

10. Secondary Market Cap

SCE proposes that the cap in the secondary market be 125% of just the G-RPA1 rate, while BHP Billiton contends that it should be set at 125% of the combined G-RPA1 and G-RPA2 reservation charges. The utilities support SCE on this point, because they state that the Decision specifically refers to 6.25¢/dth as the price cap.

11. PG&E Interconnection Point

In response to BHP Billiton's suggestion that the tariff language be changed to exclude specific reference to deliveries to PG&E at Kern River Station in the event that an additional interconnection is established, the utilities believe that a better approach is simply to add interconnection points with PG&E as they might be established in the future.

12. Gas Quality and Rule 30

IP protests the inclusion of certain language in Rule No. 30 relating to natural gas quality on the basis that the issue is being addressed in connection with implementation of D.06-09-039 in R.04-01-025 (AL 3675). The utilities have no objection to removing this language from the tariffs in connection with the instant proceeding and maintaining the existing Rule 30 language, recognizing that the issue will be addressed in connection with AL 3675.

13. Long-Term Contract Rates

14. Bids in Step 3A and 3B

In response to SCGC's protest that longer-term bids should not be given priority over shorter-term bids in Step 3A of the open season, the utilities state that although the Commission did not specifically address this in the Decision, their proposal in the proceeding was to provide priority to longer-term bids in Step 3. This rewards customers willing to make longer-term commitments to the utility system. In response to SCGC's argument that Step 3B should only include new capacity and not remaining existing capacity, the utilities say theirs is the proper interpretation of the Decision. They argue that this will permit new suppliers to utilize existing "displacement" capacity without requiring them to construct only on an "expansion" basis. To adopt SCGC's approach would discourage new supplies to California because the cost of "expansion" capacity could be significantly higher.

15. Credits Exceeding Customer Bills

In response to SCGC's protest that the utility should make a direct payment to the Releasing Shipper should the revenues received from the Acquiring Shipper exceed the amount due from a Releasing Shipper for any month, the utilities state that many customers prefer a bill credit, rather than a direct payment. They propose new tariff language for Special Condition No. 12, Schedule No. G-RPA, which gives the Releasing Shipper the option to request either a credit or return of excess revenues.

16. ITBA

SCGC argues that the ITBA should reflect the difference between actual revenues received and the utility revenue requirement. SDG&E and SoCalGas believe that the existing language accomplishes this objective; however, they do not object to the specific revision proposed by SCGC. SCGC further argues that off-system revenues should be credited to the System Integration sub-account of the ITBA. The utilities state that this is unnecessary if the Commission finds that D. 06-12-031 intended any under- or over-collection of FAR reservation charges to be allocated to end-use customer transportation rates. However, if the Commission finds that any under- or over-collection in FAR reservation charges should be amortized only over future FAR reservation charges, SCGC's point is valid and should be reflected in the tariffs.

17. Fixing the G-RPA1 Rates Indefinitely

In its protest, Coral argues that a party that signs a contract for more than three years should be able to fix the G-RPA1 rate, thereby preventing the rate from increasing even if the Commission should increase the rate for future open seasons. The utilities oppose this suggestion as inconsistent with Coral's belief that over- or under-collections in the ITBA should be allocated to the FAR reservation charge, thereby causing the charge to increase or decrease as the ITBA balance is amortized. The utilities state that it was clear in the exemplary tariffs and contracts that the G-RPA1 rate would be the rate the Commission established from time to time and was not a "set" rate that could never vary. They suggest that if a new supplier receiving a set-aside believes that the G-RPA1 reservation charge has increased too much, it can forego its set-aside rights in a future open season while retaining the option to reinstate the set-aside if it finds the G-RPA1 rate more palatable at that time.

18. Establishment of Future Pool-to-Pool Transfer Charges

In response to the protests of Coral and DRA opposing the tariff language that would reserve the right to seek Commission approval of a pool-to-pool transfer fee, the utilities state that the language was part of the exemplary tariffs submitted in the proceeding and therefore part of their "proposal" approved by the Commission.

19. Definition of "Off System Customer"

The utilities agree with BHP Billiton's suggestion that the definition of "off-system customer" be updated to include deliveries from points other than storage. Accordingly, they propose to revise the definition as follows: "Off-System Customer": Marketer, broker, supplier or other entity contracting for off-system delivery services or bidding for storage service on their own behalf for ultimate consumption outside the utility's service territory."

20. Producer Set-Asides

In response to IP's proposal regarding producer set-asides, the utilities have no objection to IP's approach and suggest the following revised language to clarify the calculation of peak month daily average production:

21. Limit on Capacity Available in Steps 1 and 2

In response to DGS' argument that the Commission should not use the five-year time period adopted in the Decision to establish the limit of capacity in Steps 1 and 2, the utilities state that the argument is inappropriate for a protest in connection with the compliance AL filings and should be rejected.

22. G-Pool Tolerance

In response to DGS' protest that the Commission should establish a 10% tolerance on pooling transactions, the utilities state that pooling transactions must balance on a daily basis, just as they do on the interstate pipelines and this was reflected in the exemplary tariffs. However, end-use customers like DGS will continue to receive their 10% monthly balancing tolerance. Therefore, there is no need to include a tolerance with respect to pooling transactions in order to address DGS' concern.

23. Subsequent Set-asides for Long-Term Contracts

The utilities agree with SE LNG and Coral that the proposed tariffs do not make clear that a party funding "displacement" or "expansion" capacity under a long-term agreement would be able to obtain a set-aside in open seasons after the initial open season. The utilities believe SE LNG's proposed tariff language resolves this problem and addresses Coral's concern in this regard.

24. Adding New Receipt Points

The utilities agree with Coral and SCGC that the tariffs should specifically include both the Otay Mesa and North Baja receipt points which are expected to be in service prior to the FAR open season.

On March 8, 2007, Clearwater submitted a Reply to two points in the Protests of BHP Billiton, Woodside, and Coral to AL 3706.

1. Rule 39 - Clearwater objects to the protests of Woodside and BHP Billiton which propose that SoCalGas delete from its tariff the language in Rule 39, Section B.2 that gives priority to previously executed CSUA's. Both Woodside and BHP Billiton were signatories to the Joint Proposal. Decision 06-12-031 adopted the Joint Proposal Funding Options, one of which is the execution of a Collectible System Upgrade Agreement, as well as the first-in-time principles. Clearwater states that both Woodside and BHP Billiton now urge the Commission to adopt entirely new criteria for determining who is first-in-time.

2. Rule 30 Clearwater states that Coral, through an incorrect reading of the Decision, attempts to convert inexpensive "displacement" capacity at Otay Mesa into "expansion" capacity. In the event of insufficient receipt point capacity due to force majeure or maintenance, Coral argues that its displacement capacity at Otay Mesa should not be reduced before other firm receipt point nominations are reduced. Coral argues that all nominations in the Southern Zone, including displacement capacity at Otay Mesa should be reduced only on a pro rata basis. Clearwater argues that the Decision clearly states that new displacement capacity will be reduced first, should capacity shortfalls occur and requests that the Commission reject Coral's objection.

On March 9, 2007 Coral submitted a reply to a portion of SCE's March 2, 2007 protest to AL 3706.

SCE's protest addresses the secondary market cap that should apply to releases of firm receipt point capacity at expansion receipt points. Coral states that if a customer holding firm access rights at an expansion receipt point pays both the G-RPA1 firm reservation charge and the G-RPA 2 incremental reservation rate, the customer should be allowed to recover the full amount of both reservation charges upon its release of the firm receipt point capacity. Coral states that SoCalGas' proposed tariff Schedule G-RPA, Schedule 12 should be adopted and SCE's protest on this issue should be denied.

On March 15, 2007, SES submitted a Reply to SoCalGas and SDG&E Response to Protests on AL 3706.

1. SES states that in their response, the utilities have presented a new proposal and tariff language for establishing and maintaining priority for determining utility facility costs necessary to receive gas from multiple new suppliers. SoCalGas has proposed tariff language that says that priority for purposes of determining facility costs will be established on the basis of the date a party executes a CSUA. SES requests that the language be modified to state that priority is based on the date a party executes a CSUA or its predecessor agreement. SES states that this is consistent with the intent of the Joint Proposal.

2. SES objects to the utilities' proposal to post all CSUA's with a completed Appendix B on its EBB by date of original execution, as well as the companion provision that "parties to a CSUA will be deemed to have waived any objection to such posting." SES states that as contemplated by SoCalGas, the Appendix B will contain specific milestones and associated dates and financial commitments. SES states that although DRA, BHP Billiton, and Clearwater requested more transparency regarding the project queue to be established based on the first-come, first-serve policy, they did not propose that each project's CSUA and Appendix B be posted on the EBB. SES supports BHP Billiton's proposal which would require a posting of only the queue for future expansions at each receipt point.

On March 16, 2007, IP, Watson, CMTA, BHP Billiton, CCC, and SES (Intervenors) jointly filed a reply to the response of the utilities to AL 3706.

The utilities response asserts that amortizing any over- or under-collection of FAR revenues in end-use customers' transportation rates, rather than in FAR rates, would be consistent with D.06-12-031. Should the Commission require actual unbundling and balancing of the FAR revenues against future FAR reservation rates, the utilities made a new proposal concerning the ratemaking methodology for FAR. According to the Intervenors, the proposal would unbundle more costs than contemplated by any party in the hearing process and would guarantee a significant undercollection in FAR revenues in the first year. The result, in following years, would be to increase the FAR rate more than 50% over the Commission's adopted 5 cent rate.

The Intervenors state that the utilities argue in their Response that the use of an adopted throughput to determine the dollar amount to be unbundled from end-use customer rates would understate FAR revenues. As a result, the utilities allege that end-use customers would subsidize FAR holders. Instead of using adopted throughput, the utilities want the calculation of the FAR revenue requirement to be based on the assumption that they will be able to sell 100% of their receipt point capacity 100% of the time. The Intervenors state that this assumption is wildly unreasonable because analysis of SoCalGas' daily average throughput, based on the last BCAP and on 2005 recorded gas deliveries, shows system use significantly less (64 to 69%) than full capacity. The Intervenors state that even looking at future demand growth in the 2006 California Gas Report - for year 2025 - the throughput will still be far less than the 3,875 MMcf/d that the utilities propose to use for unbundling.

Furthermore, the Intervenors assert, the proposal to base unbundled FAR revenues on full system capacity deviates from the position the utilities took during the proceeding. Based on the utilities own data, reasonable values for throughput are in the range of 55 to 75% of its system capacity, not 100%. The result would be that the remaining 25% revenue shortfall will be rolled into the same high revenue requirement for year 2 of the FAR program, which could cause the FAR rate to increase to about 9.4 cents for year 2 of the program. The Intervenors state that this would be inconsistent with the decision's intent to set a lower reservation charge in order to encourage participation in the holding of FAR. They reason that by unbundling an unrealistically large portion of transmission revenues to be balanced by FAR holders, FAR holders will subsidize end-user rates. Because the Decision rejected the utilities proposed credit-back mechanism which had the same effect, the Intervenors state that this new proposal is inconsistent with the Decision. The Intervenors refer to the fact that PG&E does not assume that it will sell all available firm access rights.

The Intervenors state that the proposal of the utilities during the proceeding to approximate FAR revenues based on 2005 recorded gas deliveries or the 1999 BCAP adopted throughput may, in fact, underestimate FAR revenues. They propose as an alternative, that to implement a 5 cent unbundled rate, the portion to be unbundled should be based on the results from the open season.

On March 21, 2007, Woodside submitted a Reply to the Responses to Protests filed by the utilities and Clearwater to AL 3706.

Tariff Rule 39. Woodside finds the comments in the utilities' response to protests on the subject of the "first in time" provision of Rule 39 to be useful, although not sufficiently detailed or clear to permit it to properly execute its responsibilities under the Rule. The utilities would require parties that have executed a CSUA to develop the Appendix B milestones within a specific time period in order to preserve their priority. The utilities assert that this would retain the existing queue; however, Woodside says this would throw out the queue and initially and properly establish the queue based upon a fully executed CSUA including Appendix B. Woodside finds the comments of Clearwater to be entirely unfounded and unreasonable. Woodside states that Clearwater "would have the Commission approve tariff language that would permit anyone to wander in off the street, sign a CSUA without any specification of the project timelines, facilities and/or costs, without making any payment or even arranging for a schedule of payment, hand it to SoCalGas, and without even obtaining SoCalGas' countersignature, obtain priority for purposes of determining the facilities and costs of facilities required for new receipt points on the SoCalGas system." Woodside states that the Commission decision tells parties to use a "first in time" approach, but provides no specification as to how that is to be accomplished. Woodside urges the Energy Division to convene a meeting or workshop of the parties in an effort to develop wording for Rule 39 that has consensus support.

DISCUSSION

The Commission has reviewed the Advice Letters, the Protests, the Responses to the Protests, and the Replies to the Responses to the Protests and reached the following conclusions.

1. Balancing of FAR Reservation Revenues

We agree with Intervenors Coral, IP, SES, CCC/CMTA/Watson, and DGS that any under- or over-collection of FAR revenues in the ITBA should be allocated to the FAR reservation charge, and not to all end-use customers' rates. The Commission rejected SoCalGas' proposed credit-back ratemaking mechanism and ordered the unbundling of the 5 cents per Dth reservation charge. SoCalGas' proposal for a balancing account mechanism in AL 3706 operates in essentially the same way as the rejected credit back mechanism. Any over- or under-recovery of FAR revenues must be balanced separately and amortized in the following year's FAR rates.

2. Set-Asides for Customers Holding Commission-Approved Long-Term Contracts

For several reasons, we find merit in the protests of Coral, SCGC, IP, DRA, and DGS stating that it was the intent of the Decision to limit set-asides to long term contracts in place as of the date of the Decision: (a) In the section of the Decision disallowing set-asides for noncore customers who have long-term contract commitments on the upstream pipelines, the Commission states that "(s)uch a set-aside is likely to reduce the amount of capacity available to end-users at the most popular receipts points, and little, if any, capacity would be available to end-users and other market participants in Steps 2 and 3.10 (b) Prior to the end of hearings in Phase 2 of the FAR proceeding A.04-12-004, SoCalGas was asked by the presiding ALJ to furnish a list of long-term contracts with set-asides. The presumption of parties was that the list included all existing contracts which would be allowed set-asides. SoCalGas furnished a list which did not include its contract with U.S. Gypsum. Although the contract with U.S. Gypsum was entered into on November 3, 2006, six weeks prior to the Commission's approval of the FAR decision on December 14, 2006, SoCalGas did not disclose the contract's existence to the Commission until December 20, 2006, when it filed A.06-12-023. (c) Lastly, D.06-12-031 specifically names each long-term contract which is allowed a set-aside and is silent on set-asides for contracts not specifically named. Again, the presumption of many parties is that set-asides were to be limited to those named in the Decision.

3. Treatment of Core Set-Asides, Schedule No. G-RPA, Special Condition 27

We agree with the proposal of SoCalGas that core set-asides will not be subject to proration if total set-asides exceed the capacity at a given receipt point. In D.04-09-022, the Commission established a policy requiring the gas utilities to hold a certain amount of upstream pipeline capacity on behalf of core customers. It stands to reason that the core's firm access receipt points rights should be available to receive gas available from its upstream contracts.

4. Rule 39 Issues

the priority on the queue, it must seek prior Commission approval by filing an Advice Letter subject to the normal protest period.

5. Direct Deliveries Off-System

Shippers shall be able to nominate directly from a receipt point access contract to an off-system delivery contract without the need to first nominate to a citygate pooling contract. The shipper would still be required to pay both the FAR reservation charge and the off-system charge. The utilities have indicated that they are agreeable to this change in the nomination procedure requested by Coral, SCGC, and BHP.

6. Contingent Liability of Releasing Shippers

The utilities have agreed to modify the proposed tariff language which requires a Releasing Shipper to remain contingently liable in the event of default by a Replacement Shipper in the situation where the Releasing Shipper releases capacity at the full rate and for the remaining duration of the contract. Upon the objections of Coral and SCGC on this issue, the utilities will relieve the Releasing Shipper from liability if the Acquiring Shipper (AS) meets the utilities' creditworthiness requirements, the AS acquires the capacity for the entire remaining term of the agreement, the AS pays the maximum tariff rate for the capacity, and the AS pays all applicable surcharges.

7. All-Or-Nothing Set-Asides - GRPA, Special Condition 21

We see no reason to obligate parties with set-asides under long-term contracts to take the entire amount, if they do not want the full amount. Parties obtaining set-aside rights because of long-term contracts or because they funded new capacity shall be allowed to elect a portion of their eligible set-aside quantity, rather than the entire amount if they so desire. This reduced elected amount will be set for the entire period of their bid in the open season. Parties will be eligible to revise their set-aside amount in the next open season. The only exception to election of partial set-asides will apply to the gas acquisition groups of SoCalGas and SDG&E who will be required to obtain the full amount of the set-asides on behalf of core customers.

8. Reduction of FAR Associated with Displacement Capacity

To accommodate the concerns of SES and BHP, the utilities have agreed to clarify the tariff language to indicate that a reduction of displacement capacity only occurs within the same transmission zone in which the FAR holder is located. The utilities also agree to add a statement to Special Condition No. 24 of Schedule No. G-RPA to clarify that a new supply developer may specify a combination of displacement and expansion receipt point capacity and is not limited to one or the other.

9. Terms of Contract Forms

The Energy Division will not hold a workshop on the terms of the contract forms submitted by the utilities. The only party requesting such a workshop is BHP Billiton. We direct the utilities to work with BHP Billiton to clarify contract forms.

10. Secondary Market Cap

We agree with SCE that the cap in the secondary market is 125% of the G-RPA1 rate and not 125% of the combined G-RPA1 and G-RPA2 rates. As Edison notes, although D.06-12-031 did not specify an amount of the secondary market cap, the Commission did adopt a cap of 125% of the FAR reservation charge in the context of discussing Edison's proposal, and Edison had referred to a maximum secondary market price of 6.25 cents/Dth.

11. PG&E Interconnection Point

We direct the utilities to add reference to additional interconnection points with PG&E to tariffs as they are placed in service. SoCalGas and SDG&E state in their Reply to Protests that they are willing to add new interconnection points as they come into service, and this seems reasonable.

12. Gas Quality and Rule 30

The utilities have agreed to remove the language in Rule No. 30 relating to natural gas quality as protested by IP. The gas quality issue was addressed in SoCalGas AL 3675 and SDG&E AL 1652-G, which the Commission adopted with modifications in Resolution G-3397 on June 7, 2007.

13. Long-Term Contract Rates

We have previously concluded that the balance in the ITBA should be allocated only to FAR holders, rather than end-use transportation customers. We agree with Aera and MSCC that D.06-12-031 specifically provides for their contracted rates to be reduced by the 5 cent unbundled reservation charge in the same manner as these charges are unbundled from the rates of other customers.12

14. Bidding Rights Under Step 1 and Step 2

15. Bids in Steps 3A and 3B

SCGC argues against proposed Special Condition 46 of Schedule G-RPA, which gives preference to longer term contracts over shorter term contracts in Step 3A. Although D.06-12-031 allows contracts from 3 to 20 years, it contains no language requiring the utilities to give preference to longer-term contracts over shorter-term contracts.13 Accordingly, we order the utilities to remove the proposed language in their tariffs which gives preference to longer-term contracts in Step 3A. This will allow parties who choose to get some experience with how the FAR process works before they make a longer commitment, to be on an equal footing with those choosing longer-term contracts.

16. Credits Exceeding Customer Bills

We believe that the utilities' proposed new language in their Reply to Protests which allows the Releasing Shipper to designate either to have any excess amount credited to its account or to have it returned will be acceptable to SCGC and any other concerned parties.

17. ITBA

The utilities state that it was always their intent that the ITBA reflect the difference between actual revenues received and the utility revenue requirement. They have agreed to SCGC's revision to the proposed tariff language to clarify this issue.

18. Fixed G-RPA1 Rate

Although Coral argues that the G-RPA1 rate should be fixed for the duration of the contract, even if that contract is for 10 or 20 years, we do not believe this is practical or economical, and is certainly not conducive to approaching a cost-based rate. Fixing the rate would give customers entering into longer term contracts an economic advantage over those signing shorter-term contracts. Certainly costs will change over time and the utilities will have the opportunity to request that the Commission evaluate proposals to adjust the rate to a more appropriate level. Parties will have the opportunity to evaluate the proposals and comment at that time. There was much discussion during the proceeding with regard to adoption of a cost- based methodology to determine the FAR rate. While the Commission did not adopt a cost-based methodology for determining the FAR rate, there was a lack of testimony on what the actual cost should be. A cost-based FAR rate may be a methodology to work toward. Fixing the FAR rate for some holders of FAR for the duration of long-term contracts would work in opposition to this approach.

19. Pool-to-Pool Transfer Charge

Although D.06-12-031 approved the utilities' request for a pooling service, the Decision did not approve the exemplary tariffs filed with the Application. Tariffs are submitted with AL's and evaluated for concurrence with the appropriate Decision after its approval by the Commission. D.06-12-031 allowed the utilities to track and recover the reasonable costs of implementing the pooling service, limited to a maximum of $500,000 recoverable from all ratepayers.16 However, we agree with Coral that the tariff language is premature, even if the rate is set at zero. We order the utilities to remove the language from their proposed tariff. If at some time in the future the utilities believe that it is necessary to implement a Pool-to-Pool Transfer Charge, they may file an application or an advice letter requesting approval to do so.

20. Definition of "Off-System Customer"

21. Producer Set-Asides

22. Limit on Capacity Available in Steps 1 and 2

COMMENTS

Public Utilities Code section 311(g) (1) provides that this resolution must be served on all parties and subject to at least 30 days public review and comment prior to a vote of the Commission. Section 311(g) (2) provides that this 30-day period may be reduced or waived upon the stipulation of all parties in the proceeding.

The 30-day comment period for the draft of this resolution was neither waived nor reduced. Accordingly, this draft resolution was mailed to parties for comments on August 3, 2007.

Comments on draft Resolution G-3407 were received on August 23, 2007 from SoCalGas/SDG&E, Coral, TURN, Clearwater, SCE, IP, SCGC, and CMTA/U.S. Gypsum.

Reply comments were received on August 28, 2007 from SoCalGas/SDG&E, Coral, and IP.

The comments and reply comments to the draft resolution have been considered, and minor changes have been made to this resolution. The changes appear in Footnote number 1, and in the Discussion Section in number 7 and number 15.

FINDINGS

1. Commission Decision 06-12-031, Ordering Paragraph 3 directed the utilities to file appropriate advice letters to implement the FAR system, the gas pooling service, and off-system delivery service to PG&E within 45 days of its effective date.

2. Commission Decision 06-04-033, Ordering Paragraph 1.b. directed the utilities to establish the Integrated Transmission Balancing Account (ITBA). Ordering Paragraph 6 of D.06-12-031 authorized SDG&E and SoCalGas to establish a balancing account to track and recover the difference for any under- or over-recovery on unbundled FAR reservation charges.

3. SoCalGas timely filed Advice Letter 3706 and SDG&E timely filed Advice Letter 1668-G on January 29, 2007, in compliance with D.06-04-033 and D.06-12-031.

4. A ten-day extension of the normal protest period of 20 days was granted for AL 3706 and AL 1668-G by former CPUC Executive Director Stephen Larson.

5. Protests were due no later than March 2, 2007.

6. The Energy Division facilitated a tariff workshop on February 22, 2007 on the tariff filings submitted with these AL's.

7. SoCalGas AL 3706 and SDG&E AL 1668-G were timely protested by: DRA; Clearwater; SCE; BHP Billiton; Aera and MSCC; IP; SES; CCC, CMTA, and Watson; SE LNG; Coral; Woodside; DGS; and SCGC.

8. The utilities timely submitted a Response to the protests on March 9, 3007.

9. On March 8, 2007, Clearwater submitted a reply to the Protests of BHP Billiton, Woodside, and Coral.

10. On March 9, 2007, Coral submitted a reply to SCE's Protest.

11. On March 15, 2007, SES submitted a Reply to the utilities' Response.

12. On March 16, 2007, IP, Watson, CMTA, BHP Billiton, CCC, and SES jointly submitted a Reply to the utilities' Response.

13. On March 21, 2007, Woodside submitted a Reply to the utilities' Response and to Clearwater's Reply to the Protests of BHP Billiton, Woodside, and Coral.

14. The Commission rejected SoCalGas' proposed credit-back ratemaking mechanism and ordered the unbundling of the 5 cents per Dth reservation charge in D.06-12-031. Any over-or under-recovery in FAR revenues must be amortized in the following year's FAR rates. The utilities will base the amount of revenue requirements to be unbundled from end-user rates on the throughput results from the open season. Should the throughput results from the open season be less than SoCalGas' latest forecast of cold-year throughput, SoCalGas shall use the forecast of cold-year throughput of 2821 MMcfd in order to calculate estimated FAR revenues.

15. Set-asides are limited to those long-term contracts in effect on the date the Commission approved D.06-12-031 and which are still in effect at the time the FAR system is implemented.

16. Core set-asides will not be subject to proration if total set-asides exceed the capacity at a given receipt point.

17. Parties that have executed a CSUA that does not contain specific milestones or stages with associated dates and financial commitments in its Appendix "B" are required to do so within 90 days of the Commission's approval of the FAR tariffs in order to be included in the queue.

18. At the completion of the 90-day negotiation period, the queue for FCFS priority shall be posted on the utility EBB to provide transparency.

19. Project milestones and completion dates shall be posted for each party. Financial commitments associated with these events shall be deemed to be confidential and shall not be posted.

20. Should the date for performance for any party on the FCFS queue expire without its performance commitment being met, the utility must provide a 30-day notice of cancellation and a subsequent 60-day period to cure.

21. Prior to the utility reordering priority of the FCFS queue, it must seek prior Commission approval by filing an Advice Letter subject to the normal protest period.

22. Shippers shall be able to nominate directly from a receipt point access contract to an off-system delivery contract without the need to first nominate to a citygate pooling contract.

23. A Releasing Shipper will be relieved from liability for payment of FAR firm reservation charges to the utility if the Acquiring Shipper (AS) meets the utilities' creditworthiness requirements, the AS acquires the capacity for the entire remaining term of the agreement, the AS pays the maximum tariff rate for the capacity, and the AS pays all applicable surcharges to the utility.

24. Parties with set-asides under long-term contracts are not obligated to take the entire amount of capacity under their contract if they do not want to bid for the full amount.

25. The exception to election of partial set-asides will apply to the gas acquisition groups of SoCalGas and SDG&E. The SoCalGas and SDG&E core gas acquisition groups are required to obtain the full amount of the set-asides based on their upstream interstate pipeline capacity commitments on behalf of core customers in Step One.

26. A pro rata reduction of displacement capacity nominations occurs within the same transmission zone in which the FAR holder of displacement receipt point capacity is located.

27. Special Condition No. 24 of Schedule No. G-RPA shall indicate that a new supply developer may specify that receipt point expansion capacity is a combination of displacement and expansion capacity, and is not limited to one or the other.

28. The Otay Mesa receipt point is not exempt from the requirement that reductions of nominations at a receipt point are applied first to funders of Displacement Capacity when nominated zonal capacity is less than the stated firm capacity.

29. The utilities shall work with BHP Billiton and other parties to clarify contract forms. The Energy Division is not required to hold a workshop on this issue.

30. The cap of the reservation charge in the secondary market is 125% of the G-RPA1 rate and not 125% of the combined G-RPA1 and G-RPA2 rates.

31. The utilities shall add reference to additional interconnections points with PG&E in Schedule G-OSI to tariffs as they are placed in service.

32. Proposed language in Rule No. 30 relating to natural gas quality shall be removed from the tariff. The gas quality issue was addressed in Resolution G-3397.

33. Tariff language in Rule 30.D.3 shall restore the provision guaranteeing that SoCalGas will accept scheduled volumes from each receipt point up to the maximum operating capacity of that point.

34. As provided in D.06-12-031, Aera and MSCC contracted rates shall be reduced by the 5 cent unbundled reservation charge in the same manner as these charges are unbundled from the rates of other customers.

35. The bidding rights afforded to Aera and MSCC under its existing long-term bundled contract must be kept distinct from the set-asides that Aera will receive as a California producer.

36. No preference shall be given to longer-term contracts over shorter-term contracts in Step 3A. This will allow parties who choose to get some experience with how the FAR process works before they make a longer commitment to be on an equal footing with those choosing longer-term contracts.

37. Existing capacity may be included for bidding in Step 3B of the open season, if it is still available.

38. A Releasing Shipper may designate whether to have any excess revenues, obtained by the utility from an Acquiring Shipper (beyond the amount due from the Releasing Shipper) for any month, credited to the account of the Releasing Shipper or to have the amount returned directly.

39. The ITBA will reflect the difference between actual FAR revenues received and the utility FAR revenue requirement.

40. The G-RPA1 rate shall not be fixed for the duration of a FAR contract.

41. D.06-12-031 allowed the utilities to track and recover the reasonable costs of implementing the pooling services, limited to a maximum of $500,000 recoverable from all ratepayers. However, the reference to a Pool-to Pool Transfer Charge shall be removed from the tariffs, even if it is set at zero.

42. The definition of "Off-System Customer" shall be revised to: "a marketer, broker, supplier, or other entity contracting for off-system delivery services within California or bidding for storage service on their own behalf for ultimate consumption outside the utilities' service territory within California."

43. The tariff language relating to California Producer Set-Asides which clarifies the calculation of peak month daily average production shall be revised as stated in the Discussion, Section #21 of this Resolution.

44. The utilities shall include their observations about the selling or trading of set-aside capacity when the FAR system comes up for review.

45. In D.07-06-003, the Commission eliminated the five-year monthly average called for in D.06-12-031 to be used to determine how much pipeline capacity will be made available for end-user bids in Step 2 of the open season process.

46. Pooling transactions must balance on a daily basis. End-use customers are already allowed a 10% monthly balancing tolerance.

47. Tariff language shall be clarified to indicate that a party funding "displacement" or "expansion" capacity under a long-term agreement will be able to obtain a set-aside in open seasons after the initial open season.

48. The receipt points of Otay Mesa and North Baja shall be included in the tariffs.

THEREFORE IT IS ORDERED THAT:

1. The request of SoCalGas and SDG&E for approval of tariffs as presented in AL 3706 and AL1668-G, respectively, is approved with modifications.

2. SoCalGas and SDG&E shall file supplemental advice letters within 10 days to make the required modifications to tariff language as ordered in this Resolution.

3. The supplemental advice letters shall be served on all parties to this proceeding.

4. The supplemental advice letters shall be subject to the full protest period and review of the Energy Division.

This Resolution is effective today.

I certify that the foregoing resolution was duly introduced, passed and adopted at a conference of the Public Utilities Commission of the State of California held on September 6, 2007 the following Commissioners voting favorably thereon:

1 Although both D.06-12-031 and the Edison protest of March 2, 2007 used MMcfd as the unit of measure, the correct unit of measure is cents per Dth/day.

2 D.06-09-039, pp. 76-80, 168-169, 174, FOF 38-39, 41. D.06-12-031, pp. 70-72.

3 D.06-12-031, P. 74.

4 Although SCGC cites D.06-09-021, the decision where this provision is outlined is D.04-09-022.

5 D.06-12-031, Conclusion of Law No. 9, p. 139.

6 D.06-12-031, page 15.

7 D.04-09-022, P. 71.

8 D.04-09-022, p.23-31.

9 Evidentiary Hearing Transcript in A.04-12-004, pages 1207-1208, Cross Examination of Allison Smith.

10 D.06-12-031, p. 95.

11 After the Commission approved FAR in D.06-12-031, at the Workshop, SoCalGas indicated its intention to actively market long-term contracts with set-asides up to the date of implementation of the FAR.

12 D.06-12-031, p.101-102.

13 D.06-12-031, p. 105.

14 Ibid.

15 D.07-06-003, p.5.

16 D.06-12-031, OP 5.a.

17 D.06-12-031, p.81.

18 D.06-12-031, Footnote 58, Page 99.

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