II. Background

On June 27, 2002, the California Public Utilities Commission (Commission) issued an Order Instituting Rulemaking (OIR), Rulemaking (R.) 02-06-041, to consider requiring California natural gas and electric utilities to preserve interstate pipeline capacity to California. The OIR was in response to the May 31, 2002, Federal Energy Regulatory Commission (FERC) order indicating marketers currently serving California may turn back up to 725 million cubic feet per day (MMcf/d) of firm capacity on El Paso interstate pipeline to El Paso's East of California (EOC) customers. See El Paso Natural Gas Company, et al., 99 FERC ¶ 61,244 (2002) (May 31 Order). As a result of the May 31 Order, unless California replacement shippers or California utilities acquire the turned back capacity, it could be permanently lost to California. To ensure that California retains sufficient interstate pipeline capacity to meet the needs of its natural gas and electric customers, and to avoid the substantial reduction of capacity and resulting high gas and electric prices that occurred in the winter of 2000/2001, R.02-06-041 proposed rules to require California utilities to acquire capacity and address cost recovery. The utilities were directed, and other interested parties were invited, to file comments to the proposed rules.

Under the FERC's May 31 Order, El Paso's EOC customers must decide by July 31, 2002, how much El Paso capacity rights they will need for their Contract Demand (CD). The May 31 Order also found that marketers currently serving California under CD contracts are willing to turn back up to 725 MMcf/d of firm capacity which may be subscribed to by EOC customers, even though the turned back capacity is a substantial part of the 3,290 MMcf/d of El Paso capacity certificated to meet California's natural gas needs.

We were concerned that if no California replacement shipper acquires this turned back capacity, up to 725 MMcf/d of firm capacity on the El Paso system could be permanently lost to serve California customers. If there is a confluence of events, such as those that occurred in winter 2000/2001, the loss of 725 MMcf/d could have devastating impacts on both the supply and cost of gas and electricity for California customers. The marketers turning back capacity and potential California replacement shippers are not subject to our jurisdiction, so we have no authority over those entities. Therefore, we proposed rules directing the California utilities subject to our regulation to sign up for as much of this turned back capacity as possible. Because we must issue a decision in advance of July 31, 2002, the time for comments and reply comments on the proposed rules was shortened. Comments were due July 8, and replies July 12, 2002.

Comments were filed by the following: California Manufacturers and Technology Association (CMTA); Kinder Morgan Interstate Gas Transmission LLC (KMIGT); Mirant Americas, Inc. (Mirant); The Office of Ratepayer Advocates (ORA); The Utility Reform Network (TURN); SDG&E and SoCalGas; the County of San Bernadino (San Bernadino); West Coast Power¹; Duke Energy North America, LLC and Duke Energy Trading and Marketing, LLC (Duke Energy); Kern River Gas Transmission Company and Questar-Southern Trails Pipeline Company (Kern River/Questar); Southern California Generation Coalition (SCGC); Calpine Corporation (Calpine); Edison; Southwest Gas; PG&E; Transwestern Pipeline Company (Transwestern); Watson Cogeneration Company (Watson); City of Long Beach (Long Beach); California Department of General Services (DGS); and Canadian Association of Petroleum Producers (CAPP).

Reply comments were filed by Energy, Minerals and Natural Resources Department of the State of New Mexico (New Mexico); El Paso; CAPP; TURN; Watson; PG&E; Kern River/Questar; Edison; SDG&E and SoCalGas; and Calpine.