V. Phase II Issues

One of the most contentious issues identified in the comments revolves around allocation of turned back capacity costs between core and noncore customers of the utilities. Extensive comments on the allocation issues were filed. Whereas ORA and TURN argue that core ratepayers of the natural gas utilities should not pay for any of the turned back capacity costs, Duke Energy, West Coast Power, CMTA, Mirant, and SCGC argue that only core ratepayers should pay for the turned back capacity costs. In its comments, PG&E states that it needs to sign up for some capacity to meet its core customers needs but does not believe it should sign up for capacity for its noncore customers. As stated above, the Commission expects the utilities to sign up for capacity, to meet core and noncore customer needs, and we therefore require California natural gas utilities and California electric utilities to sign up for turned back capacity. We also made clear in our OIR that how costs will be allocated among a particular utility's customers would have to be decided in Phase II, in light of the limited time we have to issue the proposed rules under the FERC's timetable. We therefore will not rule on specific allocation issues at this time and will fully address all of the parties' concerns during Phase II in this proceeding. We do clarify here that each utility's costs associated with acquiring turned back capacity will be recovered in its own customers' rates and the allocation between core and noncore customers, and gas and electric operations, may differ by utility depending on the utility's specific situation.

Numerous parties also raised concerns about market signals being sent by adoption of these rules and about the need to diversify supply among various interstate pipelines to California. Not surprisingly, this was the focus of the comments of Kern River/Questar, Transwestern, KMIGT, and New Mexico. This concern about future policies was also expressed in the comments by PG&E, SoCalGas and SDG&E, Calpine, ORA, CMTA, and Watson. We could consider these matters in Phase II of the proceeding or in subsequent Commission proceedings. We are adopting these rules in an emergency context, where we are attempting to preserve as much as possible of the existing infrastructure that has historically served California. This decision is not intended to send long-term market signals and is without prejudice to future decisions about diversification, utility responsibility for noncore customers, and other issues that have been raised by the parties in comments. Simply because we are dealing with an emergency now, does not mean there cannot be future adjustments to the capacity signed up for by the California utilities. In the future, we expect to reconsider long-term capacity releases by the California utilities, and the FERC's May 31 Order itself contemplates future opportunities for the turnback of capacity to meet the growing EOC customers' needs. Thus, the Commission can authorize the California utilities to adjust their interstate pipeline capacity holding as we explore these further policies in Phase II and/or subsequent Commission proceedings. Moreover, in the future when there are growing needs by the California natural gas consumers, there will undoubtedly be more opportunities for the diversification of supplies.

In their comments, PG&E and Edison asked for the Commission to rule at this time on capacity release issues and preapprove or presume reasonable all conduct involving capacity releases of the interstate pipeline capacity. Except for our requirements that the utilities no longer enter into long-term capacity releases at this time and that they engage in short-term capacity releases for capacity which they cannot utilize, we cannot address other capacity release issues in the short time frame we have to issue these rules. Therefore, we will not preapprove or presume reasonable all conduct involving capacity releases, and we will review any other pertinent capacity release issues in Phase II in this proceeding, as necessary.

In its comments, PG&E also recognizes that the details of adjustments of its core procurement incentive mechanism should be addressed in Phase II. Any necessary adjustments to gas cost incentive mechanisms or other rates to address the details of the turnback capacity cost recovery, as well as the existing interstate pipeline capacity cost recovery, will be dealt with in Phase II of this proceeding.

There may be additional issues that parties will want to raise in Phase II, so the Commission is not limiting Phase II issues to only the above-mentioned issues.