Background

NARCO is a gas customer of PG&E. In 1988, pursuant to decisions and orders of the Commission, PG&E unbundled natural gas service to its largest natural gas users, known as non-core customers for the purpose of this decision. Unbundling refers to the separation of the transportation of the gas from the sale of the commodity itself. Non-core customers could purchase bundled service from PG&E, which included the gas and transportation to their premises, or they could purchase only transportation from PG&E and arrange to have their own gas delivered into the PG&E distribution system. From 1988 to 1991, all non-core transportation-only customers paid rates that included demand charges based on their average annual and peak month demands.

In September 1990, the Commission adopted Decision (D.) 90-09-089, which further unbundled PG&E services allowing customers to use PG&E's firm transportation rights on interstate pipelines to gain access to gas sources. D.90-09-089 also changed the rate structure such that non-core customers transporting their own gas would pay a flat charge based on the therms delivered, a "volumetric" rate, instead of paying demand charges that were based on average and peak month demand on the system. Volumetric rates are preferred by most natural gas customers because they more closely reflect the actual gas used in a month, compared to demand charges that are based on average usage over a period of time.

D.90-09-089 also added a use-or-pay provision to the transportation rates to replace the demand charge:

Our adopted rules on forgiveness of use-or-pay transportation obligations differ somewhat from those proposed by the Settlement. The Settlement's provisions would relieve customers from use-or-pay obligations for what appears to be any circumstance, except fuel switching, which would reduce demand. It is not reasonable to impose on the general body of ratepayers this much risk for demand reductions in transportation services. The utilities are obligated to pay certain demand charges for interstate pipeline transportation. It is therefore reasonable to require individual customers to share some of the risk associated with their demand variations.

The use-or-pay provision was therefore added to protect ratepayers from revenue shortfalls that could occur if the forecasted throughput was not met. Customers who chose to retain the option to use alternative fuels were required to commit to using at least 75% of the Annual Contract Quantity (ACQ). If a customer failed to use 75% of its ACQ in a contract year, the customer would be charged a use-or-pay charge for all deficient quantities.

The gas rate design adopted by D.90-09-089 also created several different service levels which allowed customers to choose the level of curtailment priority they required. The lower the service level, the earlier the customer's load would be curtailed. Core customers were designated service level (SL) 1 and non-core customers could choose SL 2 to SL 5. In order to choose SL 2 or SL 3, the customer had to make an annual commitment in its contract to use a specified quantity of natural gas. In addition, customers choosing SL 2 or SL3 could also choose to be full requirements customers or non-full requirements customers. Full requirements customers had to commit to burning natural gas for 100% of their total fuel needs during the contract term. In return for this commitment, full requirements customers were not subject to use-or-pay charges. Non-full requirements customers retained the option to burn alternate fuels, and had corresponding use-or-pay obligations.

SL 2 was a firm transportation service. Under SL 2, customers could either buy gas from PG&E (as a bundled service), or participate in PG&E's Customer Identified Gas (CIG) program. The CIG program allowed customers access to a portion of PG&E's firm transportation rights on either the El Paso Natural Gas or Pacific Gas Transmission interstate pipelines to obtain their gas supply.

Gas under the CIG program could be requested from four supply basins - Canada, San Juan, Permian, and Anadarko. A set amount of PG&E's capacity was set aside from each basin for the CIG program. Beginning April 15, 1991, PG&E held an "open season" allowing customers to request gas from the four basins.

Under the CIG program, requests for allocations of gas had to be combined with firm transportation contracts. Volumes were allocated on a first-come, first-served basis, with all requests for a particular basin received the same day treated as having been received simultaneously. At the time of this program, gas from the San Juan Basin was in high demand, primarily due to its low cost. The San Juan Basin capacity was sold out on the first day of the open season.

To inform its customers about the gas rate design changes, PG&E held informational meetings in March 1991 with interested customers and marketers and sent an information package detailing options on or about April 1, 1991. The new gas rate design took effect in August 1991.

NARCO's Complaint

NARCO states that, on April 15, 1991, in response to PG&E's open season under the CIG program, it submitted a request for gas volumes equal to the total amount of its fuel requirements for its Calcine One plant in Ione, California, 508,000 decatherms (Dth) per year, for a two-year period, to be considered for sourcing out of the San Juan Basin. PG&E prepared a gas transportation service contract in support of NARCO's request and the agreement was signed by David Elliott, at that time the plant manager at the Ione plant, on April 15, 1991. Subsequent to the allocation of 195,126 Dth of San Juan Basin gas to NARCO, the agreement was modified to reflect that only 195,000 Dth of the 508,000 ACQ would come from the San Juan Basin and the balance would come from Canadian sources. The modified Agreement was signed by Richard Zaro, Elliott's successor as plant manager of the Ione plant, on August 5, 1991.¹ The Agreement was later amended on July 22, 1992, increasing the ACQ to 513,895 Dth for the August 1, 1992 to July 31, 1993 contract period.

Under PG&E's Tariff Schedule G-FT, NARCO's Ione plant was obligated to use a minimum of 75% of the contracted 508,000 and 513,895 Dth quantities for 1991-1992 and 1992-1993, respectively, to meet its use-or-pay obligations under the tariff. The Ione plant did not meet the obligation, thus resulting in the use-or-pay charge.

NARCO presented two witnesses, David Elliott and Joseph Hughes, Purchasing Manager for NARCO in Cleveland, Ohio. NARCO stated that its corporate purchasing department in Cleveland, along with NARCO's agent Access Energy Corporation (Access), and PG&E began negotiating a natural gas transportation program commencing in March 1991.

NARCO argues that the contract and amendment were both executed by Zaro in violation of NARCO's corporate purchasing policies. While in prior years the Ione plant manager had general authority to execute gas service contracts on behalf of NARCO, that authority was rescinded in 1991, and all new gas contracting was to be coordinated by NARCO's corporate purchasing department in Cleveland. This policy change was memorialized in both NARCO's internal purchasing guidelines dated October 1, 1990, and in a March 5, 1991 memorandum from Hughes to several NARCO employees.

NARCO also claims that the minimum annual transportation obligations identified in the contract were mistakes and that its expectation was that if it didn't receive the entire amount of its request from the San Juan Basin, the contract would be revised downward to reflect an amount identical to its allocation of San Juan Basin gas.

NARCO's only need for firm gas was to meet the needs of its spray dryer process, which had annual requirements of approximately 230,000 Dth. In the past, NARCO had contracted on a firm basis for only a portion of its gas, meeting all of its other fuel requirements with either fuel oil or gas purchased on an interruptible basis. NARCO declares that its intent during the contract period was to meet the plant's remaining energy requirements with fuel oil.

NARCO claims that PG&E misrepresented to NARCO the basis for entering into the 1991-1992 contract and the 1992-1993 contract amendment as follows: that the amounts contracted for would come out of the San Juan Basin and not from any other source; that the contract could be amended based upon the allocations; and that NARCO should contract for as much as possible so as to get the maximum San Juan Basin gas when allocations were made.

NARCO claims that since natural gas usage at the Ione plant in 1990 was only 340,104 Dth, PG&E knew or should have known that the amounts contracted for were well in excess of historical usage and that the basis for contracting for such high amounts was strictly to maximize NARCO's allocation out of the San Juan Basin. NARCO presented a proposal from Access dated April 9, 1991, as evidence of its strategy to maximize its allocation from the San Juan Basin.

NARCO maintains that PG&E failed to notify NARCO of the eventual San Juan Basin allocation and thereby denied NARCO the opportunity to amend the contract. NARCO acknowledges that the April 15, 1991 contract was eventually revised to provide for deliveries of gas from Canada in order to cover the difference between the contract minimum and the San Juan Basin allocation, but argues that this was a mistake.

NARCO states that although a memorandum from Zaro to PG&E implies that the corporate purchasing department approved the revisions to the April 15, 1991 contract, no such approval had been given. According to NARCO, since Hughes was not made aware of the August 5, 1991 contract until August 1992, Zaro was not authorized to sign it.

NARCO also states that Zaro continued to act without authority when he executed the July 22, 1992 amendment, that the amendment was also not submitted to NARCO's purchasing department for review, and that Hughes did not become aware of it until after it had been signed. NARCO maintains that even though NARCO received and paid PG&E's billings for gas services during the contract period, its doing so did not amount to ratification of Zaro's agency because NARCO did not have actual knowledge of the underlying contract provisions.

Finally, NARCO contends that by virtue of a letter dated September 15, 1992, PG&E was put on notice of the mistake and PG&E should have taken steps to renegotiate the contract and/or mitigate any damages.

PG&E's Response

PG&E states that effective August 1, 1991, NARCO entered into a Natural Gas Service Agreement with PG&E and that the Agreement was executed on or about August 5, 1991 by NARCO's representative Zaro, the Ione plant manager. PG&E states that all negotiations related to the Agreement were conducted through the Ione plant representatives, and that NARCO corporate purchasing was never involved in either contract negotiations or in the Agreement's 508,000 Dth designation. PG&E also states that there was never any indication by NARCO that its Ione plant personnel did not have the authority to contractually bind NARCO. Furthermore, PG&E states that NARCO and PG&E had entered into other gas service agreements in prior years, including natural gas supply agreements, general service agreements, and sale of equipment agreements, and the signatory on behalf of NARCO had always been the plant manager for the Ione plant. PG&E states that NARCO had treated all such previous agreements as valid and enforceable, and that NARCO had never previously suggested that its plant managers did not have authority to contractually bind NARCO.

Janet Blume, PG&E's Major Account Representative responsible for NARCO's Ione facility, testified that she did not question the plant manager's authority to sign the contract because Elliott had conveyed to her, to previous PG&E account representatives, and to PG&E corporate representatives that NARCO's plant manager had the authority to execute all agreements for the Ione plant. Blume testified that since PG&E had not experienced any problems with signature authority on any of the previous gas service agreements, she did not question the plant manager's continuing authority to sign on behalf of NARCO. Blume noted that Russell Esposito, NARCO's Operations Manager in Pleasanton, California, participated in the negotiations on the gas service agreement for the Ione facility, and that after the negotiations were complete, Esposito informed her that Elliott would be signing the agreement as the local plant manager was fully responsible for the execution of all agreements.

In addition, Blume testified that when Elliott informed her of his pending retirement, he indicated that Zaro would be replacing him and would take over all of his responsibilities, including any details to be finalized on the gas service agreement to become effective August 1, 1991. PG&E notes that NARCO did not present any evidence to contradict this testimony.

Blume testified that she did not question NARCO's designation of 508,000 Dth ACQ because it was her understanding that the Ione plant had the capability to burn at least six million therms annually, based on information conveyed to her by Elliott. In addition, PG&E notes that NARCO's metered gas usage in 1989 was 4,934,227 therms, therefore a volume of 5,080,000 therms only represented a 3% increase over 1989 usage. In addition, PG&E notes that the use-or-pay obligation only mandated that the customer use 75% of the ACQ in order to avoid penalties, and that 75% of 508,000 Dth, or 381,000 Dth, was consistent with NARCO's historical usage.

PG&E points out that despite NARCO's claim that its contractual commitment of 508,000 Dth was only for sourcing out of San Juan Basin, its request for rate schedule dated April 12, 1991 (Exhibit G) clearly identifies Canadian Hunter Marketing and Canadian Hunter Exploration Ltd. as among its suppliers, thereby indicating that at least some portion of the natural gas would come from Canada.

PG&E states that NARCO had two opportunities to reduce the contract quantity. First, subsequent to the conclusion of the open season, PG&E notified NARCO by letter from Catherine Paulsen dated May 8, 1991 that NARCO's allocation out of the San Juan Basin was 195,126 Dth. The letter indicated that NARCO could either accept that allocation, or reject the allocation and submit a new application. PG&E notes that NARCO responded to the letter via a facsimile dated June 5, 1991, from Zaro to Blume, stating, ". . . this is how our Purchasing Dept. & Access Energy Corp. have edited the contract for the 24 mo[nth] term," and providing revised contract pages. PG&E further notes that NARCO requested and received transportation for supplies from Canada in order to complete the revised contract. Blume stated that she discussed the revisions to the contract with Zaro and that Zaro confirmed the amounts.

PG&E stated that it did not allow customers to reduce the contract amount to only the San Juan Basin allocation to prevent customers from unfairly gaming the system by requesting more gas than they needed simply to get a higher pro rata share, accepting that pro rata share, and then lowering their contract quantity to the detriment of other customers who were more honest about their actual needs.

PG&E Corporate Account Manager Karl Aube testified that he attended several of the negotiations at the Ione facility along with Blume and Donald Cooper to assist in explaining the new CIG program and the change from service levels to a new firm transportation rate. Aube testified that he informed each and every natural gas customer he dealt with that, because of the high demand, customers nominating for gas from the San Juan Basin should expect allocations from that basin to be less than the amounts nominated. Aube claimed he explained to NARCO its obligation to use PG&E's firm transportation rights to make up with CIG from other interstate supply sources any shortfall between its San Juan Basin nomination and its actual San Juan Basin allocation. Aube also testified that he stressed the use-or-pay provisions multiple times prior to the Agreement being signed, and noted that if NARCO wanted firm transportation from PG&E, such high priority gas use would have a use-or-pay provision if NARCO wanted to retain the ability to burn oil.

Aube's understanding was that if NARCO had difficulty meeting use-or-pay obligations, the company would displace oil burning to meet those obligations and avoid penalties. Aube and Blume both testified that they never advised NARCO, or any other customer, that it could change the ACQ to fit actual requirements after allocations had been established.

The second opportunity to change the contract quantity was prior to the second year. Because these were two-year agreements, the contract provided for the customer to request that the contract quantity be changed at least 30 days prior to the beginning of the second contract year. PG&E notes that NARCO took advantage of this option and increased the contract quantity from 508,000 to 513,895 Dth.

Blume also states that she communicated with Zaro many times about the fact the plant was not using the minimum amount. She also pointed out that NARCO received information regarding its underutilization of contracted amounts not only through the detailed bills, but also through the activities of its broker Access, which was responsible for trading excess gas on the secondary market.

PG&E states that its actions are consistent with the Commission's order in D.90-09-089 that only force majeure could relieve a customer from the use-or-pay obligation.

Finally, PG&E states that its investigation, billing and collection procedures in connection with matters involved in the complaint have been in accordance with all relevant provisions of the Public Utilities Code and other applicable law, with the decisions of the Commission, and with all applicable rules and tariffs.