III. Position of the Parties

A. SoCalGas

SoCalGas proposes that the 14 Bcf of reclassified cushion gas be sold in a one-round sealed bid process, with all bids made in increments of 1 Bcf. A bidder would be allowed to submit up to 14 bids of 1 Bcf increments, and could bid different prices for different 1 Bcf increments. SoCalGas proposes to award the 14 Bcf to the highest 14 increments bid, and each of 14 increments sold would be at the price bid for the individual increment. SoCalGas does not propose to put any limit on the amount of the 14 Bcf that could be won by a single bidder. At the time SoCalGas submitted its application, SoCalGas proposed that the gas become the property of the winning bidders as of November 1, 2001, and that the new owners would be required to withdraw the gas from storage within five months, i.e., by March 31, 2002, unless the winning bidder(s) obtained rights to store the gas beyond that date.²

SoCalGas proposes to allow any creditworthy person or entity to submit a bid to purchase gas. In order to submit a bid, SoCalGas would require prospective bidders to pre-qualify their creditworthiness for an amount at least as great as the amount (price times volume) for which they submit a bid. SoCalGas would allow its Gas Acquisition department to participate in the bidding process, and states that the Gas Acquisition department will not be involved in the administration of the sale, or be privy to any information relevant to the sale that has not been made available to other bidders.

SoCalGas states that the only restriction that should be imposed on the sale of the reclassified cushion gas is to set the minimum quantity bid low enough so that it would be feasible and potentially economical for a large number of entities to bid for the reclassified cushion gas. SoCalGas believes that the 1 Bcf minimum quantity bid satisfies this goal since the noncore throughput on its system exceeds 600 Bcf.

SoCalGas states that it does not believe that the sale of the gas will create the potential for an increase in market power by any one person. The 14 Bcf represents less than 1.5% of the total SoCalGas system demand of approximately 1 Tcf per year. SoCalGas states that "[n]o matter how this gas is sold, it cannot reduce competition in the current market and is virtually certain to increase competition." (SoCalGas Opening Comments, p. 3.)

SoCalGas recommends that the Phase 2 issues remain in this proceeding, and that the Phase 2 issues should not be considered in SoCalGas' BCAP. SoCalGas contends that consolidating the Phase 2 issues into the BCAP will unnecessarily delay consideration of how to allocate the net proceeds because the BCAP will probably not be decided by the Commission until late 2002.³ By resolving the Phase 2 issues in this proceeding, SoCalGas states that ratepayers' rates will be reduced sooner.

In addition, SoCalGas does not believe that there is a sufficient overlap of issues pertaining to the allocation of the benefits of the reclassified cushion gas with the issues to be addressed in the BCAP. The Phase 2 allocation issues revolve around an assessment of past risks and rewards arising out of SoCalGas' ownership of the cushion gas before its sale, rather than the BCAP issues of forward-looking allocations of costs between customer classes.

SoCalGas notes that it is within the Commission's discretion to decide whether consolidation of the Phase 2 issues with the BCAP is appropriate, and that SoCalGas does not believe that such a consolidation would prejudice its rights or those of any other party. SoCalGas states that it will cooperate regardless of whether the Phase 2 issues are handled in this proceeding or in the BCAP.

SoCalGas is opposed to ORA's proposal that 70% of the reclassified cushion gas (9.8 Bcf) be allocated to core customers at book cost, and that the remaining 4.2 Bcf be sold by SoCalGas pursuant to a competitive bidding process. From the sale proceeds, ORA proposes that SoCalGas recover the book value of the gas and the cost of the well work. Under ORA's proposal, any proceeds in excess of this amount would be allocated between SoCalGas' shareholders and noncore customers.

SoCalGas contends that ORA's proposal is an improper attempt to determine the allocation of the gain on sale prior to the Phase 2 issues being heard. SoCalGas states that D.01-06-086 specifically set aside a second phase to consider these kinds of issues. Specifying the transfer price of 70% of the 14 Bcf of reclassified cushion gas at book cost, and recovery of the well redesign costs from the sale proceeds of the 4.2 Bcf, would clearly prejudge the ratemaking treatment in advance of any Phase 2 proceeding.

SoCalGas acknowledges in its reply comments that the Commission could order some or all of the 14 Bcf transferred to the core portfolio, instead of selling the gas on the open market, and that the Commission could determine in Phase 2 the price the core should pay for the gas, and how the book cost of the gas and the cost of the well work should be allocated. However, SoCalGas contends that such an approach has no value over the sale of the reclassified cushion gas on the open market.

SoCalGas contends that its Gas Acquisition department "has already made excellent progress to date toward achieving its November 1 winter-opening target storage inventory level." (SoCalGas Reply Comments, p. 5.) Thus, there is no basis for the Commission to conclude that SoCalGas will not achieve its storage target if it is not allocated some of the 14 Bcf of gas. In addition, if the Commission does not issue a decision until the end of September 2001, the Gas Acquisition department must continue to plan and inject gas for the benefit of the core portfolio under the assumption that the reclassified cushion gas will not be designated for the core. By the end of September, the start of the winter season will be only one month away, and core storage will be very close to its winter-beginning target. SoCalGas contends that this gas is likely to be of more value to other market participants who have not been as diligent in storing gas.

SoCalGas contends that selling the gas on the open market will provide reliability benefits to the system as a whole if the buyer(s) take title to the gas on November 1, 2001, the start of the high-demand winter season. Since the gas is already in storage, the gas can be delivered without the need to move the gas through the interstate or backbone intrastate pipelines. In addition, under SoCalGas' proposal, its Gas Acquisition department could also bid for some or all of the 14 Bcf of gas. By allowing the gas to be sold on the open market, SoCalGas believes that those who value the gas more, will pay a higher value for the gas. The end result is that there will be a greater amount to be allocated in Phase 2.

SoCalGas also points out that ORA has neither alleged nor shown that core customers will receive a greater net economic benefit from transferring the gas to the core versus a sale of the gas on the open market.

SoCalGas states in its reply comments that no evidentiary hearings are needed at this time because the allocation on the gain on sale and other economic benefits of the project are to be considered in Phase 2. If the Commission were to consider ORA's allocation proposals, then SoCalGas states that evidentiary hearings would be required before any decision was issued.

B. ORA

ORA proposes that 70% of the reclassified cushion gas (9.8 Bcf) be allocated at book cost to core customers, and that the remaining balance of 4.2 Bcf be sold into the market using a competitive sealed bid procedure.

ORA states that allocating the 9.8 Bcf to core ratepayers over the five month period from November 2001 through March 2002 at 1.96 Bcf per month will contribute to the core storage target of 70 Bcf of inventory. The 70% allocation to the core, or 9.8 Bcf, is analogous to the historical cost allocation to core customers of the revenue requirement associated with gas storage facilities. ORA contends that such an allocation will reduce the overall core gas costs for this coming winter, and reduce the amount of expensive gas that must be purchased at the California border during the balance of the injection season and this coming winter. By allocating this gas to core customers at book value, core customers will get a significant amount of gas supply at a low cost, and avoid the loss in value if the gas was sold into the market and the after-tax proceeds were then passed on to core customers. ORA asserts that the after-tax proceeds would only allow core customers to purchase a fraction of the 9.8 Bcf of gas.

ORA also contends that its proposal for core customers will help mitigate the high cost of gas that was injected into storage by SoCalGas during the early months of the current injection season when California border prices were high. ORA asserts that noncore customers benefited from the early season core storage injections by enabling noncore customers to have sufficient gas delivered to meet their peak summer demand.

As for the remaining 4.2 Bcf of gas, ORA states that SoCalGas should be allowed to recover from the sale proceeds the book cost of the cushion gas plus the capital cost of the improvements before the net proceeds are allocated between SoCalGas and noncore customers. ORA estimates that the gross proceeds from the sale of the 4.2 Bcf of gas could range between $17 million (assuming a $4.00 per Mcf border price) and $42 million (assuming a $10 per Mcf border price). If the gas sale proceeds are not enough to cover the cost of the capital improvements, which is estimated to be about $16 million, ORA states that the balance should then be recovered from core ratepayers.

ORA states that its approach is reasonable because both SoCalGas and noncore customers will benefit. SoCalGas will benefit from any incremental noncore throughput that is associated with the sale of the 4.2 Bcf of gas. SoCalGas will also have additional storage inventory, injection capacity, and withdrawal capacity to market. In addition, according to SoCalGas' testimony in its application, operating costs will be lower, which should improve SoCalGas' net earnings. ORA asserts that noncore customers will benefit by having access to this incremental gas supply, and by having incremental storage capacity available in future years.

ORA also notes that the introduction of the reclassified cushion gas into the market will serve as an additional source of flowing supply, help alleviate any potential gas curtailment, enhance system integrity, increase storage inventory on the system, and moderate gas prices at the California border.

ORA acknowledges that under its proposal, one could argue that SoCalGas will unfairly forego huge profits, and that core customers will derive the bulk of the benefits. ORA points out, however, that SoCalGas will not realize any loss on its original investment because core customers have contributed a return on SoCalGas' investment in cushion gas since 1943 for La Goleta, and since 1972 for Aliso Canyon. ORA also states that the benefits to affected parties will be fairly balanced because the average cost of gas stored for core customers will be reduced, while shareholders and noncore customers will share in the sale proceeds, along with new storage services.

ORA is opposed to the idea of giving generators or qualifying facilities a priority for the reclassified cushion gas unless a commitment is made that the gas will be used to generate electricity that will be sold to California ratepayers at reasonable prices. ORA notes that the generators and qualifying facilities have already benefited by the early injection of core gas, which provided a more flexible and reliable system during the peak summer months of electric generation demand.

ORA states that if its proposal is adopted, there is no need for a second phase of this proceeding to address the ratemaking and allocation issues. Under ORA's proposal, a majority of the reclassified cushion gas would be allocated to core customers at cost, and the gain from the sale of the remaining gas would be shared between non-core customers and SoCalGas' shareholders.

C. SCGC

SCGC supports the proposal of SoCalGas to sell the reclassified cushion gas at market prices without any restrictions, and to address the ratemaking issues in a second phase of this proceeding. SCGC states that such a sale will presumably maximize the gross proceeds and the net gain on sale.

SCGC states that if the proposal of ORA and TURN to assign a portion of the reclassified cushion gas to the core at book cost is adopted, this will substantially reduce the net proceeds that SoCalGas proposes to allocate among customers in Phase 2 of the proceeding. The proposal of ORA and TURN would also eliminate the need for a second phase of this proceeding since core customers would receive a substantial portion of the economic benefit. SCGC states that the Commission should reject this attempt by ORA and TURN.

SCGC believes that the allocation of the net benefits derived from the sale of the reclassified cushion gas should be consolidated and considered in SoCalGas' BCAP, rather than having Phase 2 considered in this proceeding.

D. Duke Energy

In the absence of a shortage of natural gas,⁴ Duke Energy believes that the best use of the reclassified cushion gas is to sell it to the highest bidder to maximize the revenues from the sale of the gas. Thus, no preference should be given to electric generators and qualifying facilities, nor should the Commission reserve this reclassified cushion gas for the use of core customers, or to sell it to the core at book value. Duke Energy asserts that selling the gas on the open market will provide the Commission with maximum flexibility to exercise its judgment on how the revenues received for the gas should be allocated.

By selling the gas into the market, SoCalGas claims that this will increase the supply of gas in the intrastate Southern California market. Duke Energy contends that this will help ensure that the gas supply remains adequate, and it will put downward pressure on gas prices when prices tend to be at their highest. Duke Energy also points out that selling the gas to the highest bidder should mean that the gas will be put to its most valuable use, which should increase overall economic efficiency.

Duke Energy does not believe that evidentiary hearings are necessary because any restrictions about the sale of the reclassified cushion gas raises policy issues that can be argued in comments and supplemental briefs.

Duke Energy believes that the issues about the allocation of the proceeds from the sale of the reclassified cushion gas should be addressed as part of SoCalGas' next BCAP proceeding, when the Commission considers the other issues and concerns that affect the allocation of utility revenues. Duke Energy contends that a separate phase in this proceeding to consider the allocation of the sale proceeds would consume time and resources, and would overlap with the schedule for the BCAP.

E. TURN

TURN supports ORA's position that 70% of the reclassified cushion gas be allocated to core customers at book value. TURN agrees with ORA that core customers have paid additional costs to inject gas since March of 2001, and that such storage injections benefit all customers since they free up flowing supplies for the coming winter.

TURN notes that SoCalGas and SDG&E have proposed to consolidate their core procurement portfolios which would result in additional interstate pipeline capacity for this combined portfolio. If this proposal is adopted by the Commission, an additional 90 MMcfd of flowing gas for core customers would be made available, and would help ensure that additional costs are not imposed on core ratepayers. Although TURN and ORA support this proposal, it is still unknown whether such a proposal will be adopted.

If the Commission does not adopt ORA's proposal, TURN does not oppose SoCalGas' recommendation to sell the reclassified cushion gas through a sealed bid process for 14 one-Bcf increments with no limit on the purchase amount. TURN is opposed to giving any priority to generators of qualifying facilities because such a priority would enrich the generators.

TURN states that if the Commission does not adopt ORA's proposal, the cost allocation and ratemaking issues should be addressed in Phase 2 of this proceeding, rather than in SoCalGas' BCAP. TURN contends that past Commission proceedings, judicial economy, and timeliness all support resolving the Phase 2 issues in this proceeding. In addition, the profits from the sale of the reclassified gas are unrelated to the methodologies used in the BCAP to functionalize and allocate costs between system components and customer classes.

² In the report dated December 3, 2001, SoCalGas states that if the Commission authorizes the sale of the gas at the December 11, 2001 meeting, SoCalGas expects that it will be able to sell the gas for withdrawal beginning January 1, 2002, and that the gas withdrawal would have to be completed by May 31, 2002. If the Commission does not approve the sale of the gas until after December 11, 2001, SoCalGas expects to ask the Commission to allow a withdrawal period of longer than five months.

³ SoCalGas' BCAP application proposes that a Commission decision be adopted on October 21, 2002.

⁴ Duke Energy states that SoCalGas does not expect any curtailments this winter due to a shortage of natural gas, and that San Diego Gas & Electric Company has also stated that it does not expect that a shortage of natural gas will create any curtailments on its system this winter.