County's Motion to Strike Portions of Southwest's Reply Brief or to Set Aside Submission for Taking Additional Evidence (Motion)
On March 18, 2002, the County filed a motion to strike a portion of Southwest's reply brief based on "untested new evidence that Southwest has submitted as an attachment to its reply brief."71 In the alternative, the County request that the Commission "set aside submission and reopen the record for the purpose of taking additional evidence relevant to the Commission's evaluation of the new evidence that Southwest has presented."72 The County argues that it is "fundamentally unfair, and a violation of the due process rights of other parties, for Southwest to be able to introduce new factual evidence in its reply brief . . ."73 The County charges that the evidence concerning futures prices for gas provided by Southwest is based only one date, April 27, which the County believes is not typical. Nevertheless, "the County emphasizes that it does not view the outcome of this analysis as a major issue in this case."74 The County concludes its Motion with the specific request that the Commission strike Section I, on pages 31-34, and Appendix I to Southwest's reply brief or set aside submission to reopen the record to take evidence on futures prices on April 24, 25, 26, and 28. On April 2, ORA filed a response recommending the reopening of the record.
On March 29, 2002, Southwest filed a response to the Motion. Southwest supports the option of taking additional evidence, and states that it has no objection to accepting the new evidence offered by itself and the County. Southwest, however, notes that it does not take issue with the County's view that the outcome of this analysis is not a major issue in this proceeding. Finally, Southwest notes that:
"The County's objection to, and its Motion to Strike, Appendix 1 only applies to two sentences of Section III.I of Southwest's Reply Brief (pages 32-34): (1) On page 33, the last sentence of the second full paragraph (beginning "For illustrative purposes..." and (2) on page 34, the last sentence of the first full paragraph (beginning "If, for example, one examines..."). The remainder of Section III.I does not rely on Appendix 1 and is therefore not properly the subject of the County's Motion to Strike."75
We grant the County's motion. First, we agree that introducing this evidence during the reply brief fails to provide the County and ORA an opportunity to either respond or test the reliability or validity of this evidence. Thus, it would be inherently unfair to accept this additional evidence without reopening the record. Second, we also agree that this information does not address any major issue in this proceeding. In particular, we found that although Southwest's decision to inject gas on any given day may make narrow economic sense, it was imprudent to let the injection season end without filling at a significant portion of its contracted storage or securing futures contracts covering that amount of gas. The exact levels of the futures price in April of gas for delivery in December and January 2000-01 and the cost of gas procurement, injection, and storage on any given day is not central to our determination of the reasonableness of Southwest's managerial actions or to our determination of an appropriate disallowance. For this reason, we determine that it is both fair and efficient to strike the portions of Southwest's reply brief that introduce new evidence.
Comments on Proposed Draft Decision
The Commission mailed the alternate draft decision of Commissioner Wood in this matter to the parties in accordance with § 311(g)(1) and Rule 77.7 of the Rules of Practice and Procedure. Comments were filed by Southwest Gas Co. and Office of Ratepayer Advocates and reply comments were filed by County of San Bernardino, Southwest Gas Company and Office of Ratepayer Advocates.
1. From December 1997 to December 2000, Southwest's gas procurement rate for its Southern Division was $2.21 per Dth.
2. On December 1, 2000, Southwest increased its rate for procured gas to $8.62 per Dth.
3. In January, February, and March 2001, Southwest increased its rate for procured gas to $12.96 per Dth, $15.76 per Dth, and $15.76 per Dth, respectively.
4. The Commission opened this investigation into the natural gas procurement practices of Southwest on June 28, 2001 in order to examine the reasonableness of managerial actions concerning gas procured in the period from June 1, 1999 through May 31, 2001.
5. There is no dispute among the parties to this proceeding concerning the applicable precedents for determining the standard of review in an investigation into the reasonableness of a utility's actions.
6. The historic range for gas prices in California was from $2.00 to $5.00 per MMBtu.
7. During the summer of 2000, gas prices reached a high of $7.00 per MMBtu.
8. Southwest holds rights to store up to 1.5 Bcf of natural gas.
9. In the summer of 2000, Southwest stored .17 Bcf, or 11% of its contracted storage capacity.
10. Southwest stored 1.4 Bcf of gas in 1999 (93% of capacity), 1.4 Bcf in 1998 (93% of capacity), 1.1 Bcf in 1997 (73%), and .75 Bcf in 1996 (50%).
11. Southwest's storage of only .17 Bcf of natural gas in the summer of 2000 left it largely dependent on monthly and daily spot market prices for flowing gas in the winter of 2000-2001.
12. Southwest did not use financial instruments such as futures contracts to hedge the price of winter gas during the summer of 2000.
13. Currently, Southwest secures all of its gas from California gas markets.
14. The Commission sets gas storage targets for SoCalGas, SDG&E, and PG&E.
15. Southwest's tariffed gas costs were lower than SDG&E's in 17 of the 24 months of the period under review.
16. SoCalGas's tariffed gas costs were almost 50% lower than Southwest's tariffed costs during the energy crisis months December 2000 through May 2001.
17. Commission policy places the highest priority on low cost gas and makes price stability a secondary goal.
18. Southwest's gas procurement strategy in 2000-2001 failed to achieve the goal of providing low cost gas.
19. Southwest's gas procurement strategy in 2000-2001 failed to provide stable customer prices.
20. Unlike Southwest, wholesale customers including SDG&E, the City of Long Beach, and the City of Palo Alto made extensive use of gas storage in the summer of 2000.
21. Southwest failed to show by a clear and convincing evidence that its gas procurement actions in the summer of 2000 were reasonable.
22. The decision of Southwest not to deploy a strategy for using a significant amount of its its contracted storage or to secure futures contracts covering an equivalent amount of gas constitutes imprudent managerial action.
23. ORA's methodology reasonably shows the gas costs that Southwest could have avoided by increasing its storage of gas in the summer of 2000.
24. Using ORA's methodology, we calculate that if Southwest had filled its storage to the five-year average level of 82%of its contracted storage capacity, Southwest could have avoided $5,799,067 in gas procurement costs during the winter of 2000-2001.
25. The methodology proposed by the County for calculating disallowances makes operating assumptions that managers could follow only in an approximate way.
26. The index methodology proposed by the County for calculating the cost that Southwest could have saved through the use of storage overstates the potential savings because the methodology fails to reflect Southwest's demonstrated ability to purchase gas at prices below the index.
27. The methodology proposed by Southwest to calculate disallowances rests on unrealistic assumptions concerning the timing of gas purchases and gas use that understate the savings that stored gas can produce.
28. Southwest introduced new evidentiary material in its reply brief that it should have offered earlier in the proceeding.
29. Acceptance of the evidentiary material introduced by Southwest in its reply brief would be unfair to other parties to this proceeding.
1. Utilities are held to a standard of reasonableness based upon the facts that are known or should be known at the time of decision.
2. As the Commission has previously concluded, a utility must demonstrate that its actions are reasonable through clear and convincing evidence.
3. As the Commission has previously concluded, the term "reasonable and prudent" means that at a particular time any of the practices, methods and acts engaged in by a utility follows the exercise of reasonable judgment in light of facts known or which should have been known at the time the decision was made.
4. As the Commission has previously concluded, a decision may be found to be reasonable and prudent if the utility shows that its decisionmaking process was sound, that its managers considered a range of possible options in light of information that was or should have been available to them, and that its managers decided on a course of action that fell within the bounds of reasonableness, even if it turns out not to have led to the best possible outcome.
5. Southwest was imprudent when it failed to deploy a strategy for using a significant amount of its contracted storage in the summer of 2000 or, in the alternative, to secure an equivalent supply of gas through futures contracts.
6. The Commission should disallow the recovery of $5,799,067 in gas procurement costs of Southwest because of imprudent managerial actions during the review period of June 1, 1999 through May 31, 2001.
7. Southwest should rebate $5,799,067 to its customers based on their consumption during the period November 2000 through March 2001.
8. The Commission should grant the County's Motion to Strike in part by striking Appendix 1 of Southwest's reply brief and the related sentences on pages 33 and 34 identified herein.
9. This proceeding should be closed.
IT IS ORDERED that:
1. Southwest Gas (Southwest) shall reduce its Purchased Gas Account by $5,799,067 to reflect our disallowance of unreasonable gas procurement costs.
2. Southwest shall rebate $5,799,067 plus interest at the prevailing rate in Southwest's Purchased Gas Account to its core customers as a bill credit based on each customer's usage over the year from November 2000 through March 2001.
3. Southwest shall file an advice letter no later than 15 days following the effective date of this decision to provide a refund plan to implement this bill credit.
4. The County's motion to strike portions of Southwest's reply brief is granted to the extent described herein.
5. This proceeding is closed.
This order is effective today.
Dated , at San Francisco, California.
71 County, Motion, page 1. 72 County, Motion, pp. 1-2. 73 County, Motion, p. 3. 74 County, Motion, p. 5. 75 Southwest, Response to Motion to Strike, March 29, 2002, p. 2.
