IV. Discussion

In D.01-06-086, the Commission authorized SoCalGas to sell the 14 Bcf of reclassified cushion gas upon the terms and conditions specified in a future Commission decision. This same decision also authorized SocCalGas to recover the well work costs associated with reclassifying the cushion gas. D.01-06-086 invited the parties to submit additional comments as to whom the reclassified cushion gas should be sold to. The parties who commented have suggested two options. The first proposal is to allow SoCalGas to sell the 14 Bcf on the open market using a sealed bid procedure. The second proposal is to allocate 70% of the 14 Bcf to core customers at book value, and to sell the remaining 30% on the open market. The proceeds from the remaining 30% would be used to reimburse SoCalGas for the book cost of the cushion gas and for the cost of the well redesign work. Any remaining net proceeds would be divided between SoCalGas' shareholders and noncore customers. A third option, which none of the commenting parties support, is to give electric generators and qualifying facilities a preference over others to purchase the gas. A fourth option, which we adopt in this decision, is to allocate the entire 14 Bcf of reclassified cushion gas to the core at a minimum floor price of book value, subject to a possible upward adjustment in Phase 2 of this proceeding.

SoCalGas expressed the need for an evidentiary hearing regarding the disposition of the reclassified cushion gas if ORA's proposal was adopted in its entirety. No other parties who commented believe that evidentiary hearings are needed. As discussed below, since we are only adopting an interim floor price for the reclassified gas, which is subject to adjustment in Phase 2, and because we are not addressing how any remaining net proceeds or deficits should be allocated, no hearings are needed in this phase of the proceeding.

In order for the Commission to decide under what terms and conditions the reclassified cushion gas should be sold, each proposal's advantages and disadvantages should be considered. In addition, the Commission should consider which proposal is more appropriate in light of other policy concerns and current market conditions.

None of the commenting parties support the idea of giving electric generators and qualifying facilities a preference over others to purchase the 14 Bcf of gas. Both ORA and TURN argue that these types of gas purchasers should not be given a preference because of a fear that the generators and qualifying facilities will raise electricity rates to unreasonable levels at the expense of ratepayers. By selling the gas into the open market, Duke Energy believes that these generators will have a fair opportunity to bid on this gas, and that such bidding will reflect the economic value of the gas to the purchasers.

SoCalGas' proposal to sell the 14 Bcf in the open market through a sealed bid procedure has the advantage of maximizing the proceeds from the sale of the gas. Any creditworthy purchaser could bid on part or all of the supply. The bid prices for the 1 Bcf increments are likely to reflect the market demand and availability of gas during the winter. The sale of this gas is also likely to have a temporary effect of lowering gas prices.

The disadvantage of selling the gas in the open market is that core customers will have to compete with other prospective gas purchasers for this supply. Even though SoCalGas' core gas storage inventories are starting with the winter-opening storage target of 70 Bcf, additional gas supply will be needed by core customers during the winter season. Under ORA's proposal, 70% of the gas would be allocated to the core at book value. However, if core customers have to bid for this supply of gas, or have to purchase additional supplies elsewhere, the cost of the gas will be substantially higher.

The advantage of ORA's proposal is that core customers will be assured of an additional 9.8 Bcf of gas during the coming winter season at a low cost. This will help to lower the average cost of gas for core customers during the winter season.

The disadvantage of ORA's proposal is that the maximum value from the sale of the reclassified cushion gas will not be realized because the reclassified cushion gas would be transferred to the core at book value. Also, if ORA's proposed allocations are adopted, this will effectively determine the Phase 2 issues and eliminate the need for a second phase.

Other considerations the Commission needs to take into account are the impact of the well redesign, and whether noncore customers received any benefits from the core storing gas during the injection season.

The well redesign work will open up additional storage for core and noncore customers in the future. The well work will also free up 14 Bcf of gas which is already in storage and which can be used during the winter. The availability of this gas will also free up some of the system capacity of the gas pipelines during the winter season.⁵

As for core storage, noncore customers undoubtedly benefit from core storage because additional capacity is made available during the winter season. By putting gas into storage during the injection season, core customers are assured of gas supplies during the heavy demand for gas during the winter by noncore customers. Although this is a benefit to noncore customers, this is a natural result of the core storage program. If gas is not procured for the core during the injection season, this would cause problems for all gas consumers during the winter. Thus, this benefit alone should not be an overriding consideration.

There are also public policy reasons to consider. One such policy is to procure gas supplies for core customers at reasonable prices. In order to have adequate supplies on hand to meet the core's winter demand, SoCalGas had to purchase high priced gas at the beginning of the injection season for the 2001-2002 winter season. By injecting gas into storage for the core, this freed up pipeline capacity during the summer and for the winter for those customers who did not store any gas. Thus, by allocating some or all of the reclassified cushion gas to the core, this will help offset the high cost gas and result in a lower average cost of gas for the core.

Another policy reason to consider in deciding to whom the gas should be made available to is that SoCalGas has earned a rate of return on this cushion gas in the past, as noted in D.01-06-086.

The issue that confronts us in this proceeding is to determine how to make the best use of the 14 Bcf of gas. After weighing the advantages and disadvantages of each proposal, and the policy concerns, the best outcome is to authorize SoCalGas to transfer 100% of the reclassified cushion gas, 14 Bcf, to SoCalGas' core customers. The transfer price will be set at the floor price of 31 cents per Mcf, which represents the book value of the reclassified cushion gas. The final sales price that the core will pay for this gas may be adjusted upwards depending on the evidentiary record developed in Phase 2 of this proceeding. This arrangement will ensure that core customers have adequate gas supplies for the winter at a price to be decided in Phase 2, and will help offset the high priced gas that was purchased on behalf of the core at the beginning of the injection season. In addition, by making this gas available to core customers, this will free up additional system capacity during the winter season for SoCalGas' noncore customers.

In D.01-06-086, we authorized SoCalGas to recover the costs associated with the well redesign work and the book cost of the reclassified cushion gas from the sale proceeds of the gas. We also deferred to a second phase of this proceeding "all other ratemaking issues, including the allocation of the anticipated net gain on sale of the reclassified cushion gas, the anticipated reduction in prospective operating costs, and the allocation of benefits among customer classes...." (D.01-06-086, p. 32.)

Since we have previously decided that a second phase will be held to address the other ratemaking issues, the gas to be transferred to the core shall be set at a floor price of book value on an interim basis only. The final determination of the price to be paid by the core for the 14 Bcf of reclassified cushion gas, as well as what should be done with any remaining net proceeds, if any, will be decided in the second phase of this proceeding in conjunction with the other Phase 2 issues identified in D.01-06-086.

Accordingly, SoCalGas is directed to do the following:

1. SoCalGas shall transfer all of the 14 Bcf of the reclassified cushion gas to SoCalGas' core portfolio at an interim floor price of 31 cents per MCF, the book value of the reclassified cushion gas, subject to a possible later upward adjustment after an evidentiary record has been developed in Phase 2 of this proceeding.

2. SoCalGas shall track, in the previously authorized memorandum account, the difference between the floor price of 31 cents per Mcf and the final price of the gas that will be decided by the Commission in Phase 2 of this proceeding.

3. Within five days of the transfer of 100% of the reclassified cushion gas to the core portfolio, SoCalGas shall file and serve a notice describing the date upon which this took place.

Based on the comments, the Phase 2 issues will be considered in this proceeding rather than in SoCalGas' BCAP. The issues regarding the price of the gas sold to the core, the anticipated reduction in operating costs, and the allocation of benefits, are better suited for resolution in this proceeding than in the BCAP. A ruling with regard to the Phase 2 issues will be released after the reclassified cushion gas has been transferred in accordance with the above discussion.

⁵ In D.01-06-086, at pages 24 to 25, the Commission noted that the availability of the 14 Bcf of gas would "temporarily increase SoCalGas' capacity to deliver gas to its customers by about 90 MMcf per day without having to utilize the interstate pipelines."