2. Reversion of El Paso Capacity

SoCalGas proposes to allocate to the consolidated portfolio all available unassigned El Paso capacity held by SoCalGas. SoCalGas currently holds 300 MMcfd of firm capacity on Transwestern Pipeline and 1150 MMcfd of firm capacity on El Paso Natural Gas' pipeline, for a total of 1450 MMcfd. In the last SoCalGas BCAP, the Commission allocated 1044 MMcfd of that capacity (all 300 MMcfd on Transwestern, and 744 MMcfd on El Paso) to core service. The remaining amount, just under 400 MMcfd (all on El Paso) was unassigned. SoCalGas brokers this capacity, and any shortfall in the brokering revenues from the rate SoCalGas must pay El Paso is recovered by SoCalGas through the Interstate Transition Cost Surcharge (ITCS). As the various contracts for brokering expire, SoCalGas and SDG&E propose that all available unassigned capacity on El Paso be allocated to the consolidated core portfolio. This would take place whenever various contracts for brokering expire, until the end of the term of the underlying SoCalGas contract with El Paso on August 31, 2006.

Some of the unassigned capacity is already brokered for the full remaining term of SoCalGas' El Paso contract. The following amounts of unassigned capacity will be available to SoCalGas upon expiration of contracts already signed: On November 1, 2001, SoCalGas will recover 160 MMcfd of capacity; on January 1, 2002, it will recover an additional 50 MMcfd; on March 1, 2003, to comply with existing contracts SoCalGas will transfer to third parties 100 MMcfd; on January 1, 2005, SoCalGas will recover 30 MMcfd of capacity. The amount of capacity that reverts to SoCalGas between November 1, 2001 and August 31, 2006 when the SoCalGas - El Paso contracts expire is never more than 210 MMcfd and after March 1, 2003, significantly less.

SoCalGas' current 1044 MMcfd core allocation is roughly equal to SoCalGas' average daily core load under average weather conditions. SDG&E will be adding about 125 MMcfd of core load to the consolidated portfolio, and will contribute about 25 MMcfd of firm interstate capacity from Canada and 10 MMcfd of firm capacity on El Paso (plus 3.6MMcfd capacity recently obtained in an El Paso open season). SDG&E's interstate capacity rights are just under 90 MMcfd less than its annual average core demand. The core loads of Long Beach and Southwest Gas are less than 20 MMcfd combined. The applicants assert that the addition to the consolidated portfolio of unassigned El Paso capacity that becomes available will ensure no dilution in the relative percentage of SoCalGas customer core load served by interstate capacity.

SoCalGas and SDG&E recommend that their core customers be committed to the allocation of all unassigned El Paso capacity at the as-billed rate, even if it later turns out that this capacity has a market value below the as-billed rate, and that the consolidated utility portfolio could have purchased supply more cheaply at the California border. The utilities do not believe that noncore customers have first claim on the unassigned El Paso capacity when it returns from being brokered. Applicants acknowledge that noncore customers have paid ITCS for the shortfall between the as-billed rate for interstate capacity and the amount for which SoCalGas could broker this capacity when the market value of the capacity was less than the as-billed rate. However, applicants maintain that ITCS has been allocated to and paid by wholesale customers and core customers, not just noncore retail customers. SDG&E customers in total have paid about 14.5% of total SoCalGas ITCS, while SoCalGas' other wholesale customers have paid 2.1%, and retail SoCalGas core customers have paid 12.6%.

SCGC argues that any capacity reverting to SoCalGas should continue to be brokered as in the past, with all revenue flowing to offset ITCS charges. It believes the noncore, having paid ITCS, should now get the benefit of capacity brokered above as-billed rates.

SCGC's argument has no merit. First, and again, it is mere speculation. There is no assurance that brokered capacity will cost more than the as-billed rate, just as there is no evidence that today brokered capacity costs more than as-billed; second, by assigning more capacity to the core at the as-billed rate, the noncore is protected from fluctuations in capacity charges and additional ITCS; third, ITCS costs exist because noncore customers are not required to pay the full as-billed rate for the unallocated 400 MMcf/d in capacity held by SoCalGas in excess of the core reservation. Calling it a burden ignores the fact that the noncore have paid less than the as-billed rate for this capacity. Meanwhile, core customers have paid as-billed rates for almost all their transportation needs plus ITCS, so that "when the difference between the as-billed rate and the market value of capacity reserved for the core is considered, it can be argued that core customers have actually paid more in stranded costs that the noncore." (D.99-11-021, mimeo., at 38.) Fourth, and most important, we are required to assure reasonable rates and adequate service. Our concern is for the future. (D.01-03-082 at p. 51: "The Commission's first duty is to assure that customers of California public utilities receive reliable, safe service at reasonable rates.") To provide reasonable rates for the core requires additional capacity at a price that enhances rate stability: the as-billed rate. We emphasize that this result is based on the evidence in this record. In future proceedings if we find changed conditions, changed demand, changed capacity, our conclusions will differ.

ORA proposes that the returning capacity of 50 MMcfd, which is to be delivered at El Paso-Topock on January 1, 2002, be optimized such that the portion of capacity available for delivery at SoCalGas-Topock would be allocated to the core portfolio in exchange for non-SoCalGas delivery point capacity. According to ORA's estimate the 50 MMcfd was allocated as follows: 20 MMcfd at the SoCalGas delivery point; 16 MMcfd at the PG&E delivery point and 13MMcfd at the Mojave delivery point. Under ORA's recommendation, the core would obtain an additional allocation about 21 MMcfd at the SoCalGas delivery

point in exchange for a similar amount at the PG&E and/or Mojave - Topock

delivery point(s).⁴

ORA contends that the El Paso capacity associated with SoCalGas delivery points is more valuable to the core than non-SoCalGas delivery point capacity because it can be delivered directly to end-use customers and does not have to be rerouted. When SoCalGas uses the non-SoCalGas delivery point capacity to flow gas into the SoCalGas system, there is an extra transportation cost on Mojave and PG&E to get the gas to the SoCalGas Wheeler Ridge delivery point.

SoCalGas and SDG&E agree that this approach would probably be more favorable for the core customers served out of the consolidated portfolio than the portfolio simply keeping all the additional 50 MMcfd for as long as it is available. However, SoCalGas and SDG&E do not believe ORA's proposal is fair to noncore customers, as it can be expected to increase their ITCS burden. SoCalGas and SDG&E believe that it is appropriate to allocate currently unassigned El Paso capacity to the consolidated utility portfolio at the as-billed rate, but ORA's proposal is excessive. SoCalGas and SDG&E maintain that to get the benefit of allocation of reverting capacity in excess of the currently-allocated 1044 MMcfd, the core should take the risk and reward of holding all of that capacity at the as-billed rate for the remainder of the term of the underlying SoCalGas-El Paso contract (i.e., through August, 2006).

We believe the record is inadequate to support finding regarding delivery points at this time, an issue that was not raised during the hearings, especially when SoCalGas must transfer 100 MMcfd to third parties 14 months after receiving 50 MMcfd on January 1, 2002. It is more appropriate to wait for SoCalGas' next proceeding which considers capacity for the core.