ALJ/RAB/avs H 7

Agenda ID #706

8/22/2002

Decision __________________

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Southern California Gas Company in Compliance with Resolution G-3304 and of Southern California Gas Company (U 904 G) and San Diego Gas & Electric Company (U 902 G) to Consolidate their Gas Supply Portfolios.

Application 01-01-021 (Filed January 11, 2001)

(Appearances are in Attachment A)

OPINION AUTHORIZING CONSOLIDATED GAS SUPPLY
PORTFOLIOS AND GAS ACQUISITION MANAGEMENT

TABLE OF CONTENTS

Title Page

OPINION AUTHORIZING CONSOLIDATED GAS SUPPLY PORTFOLIOS AND GAS ACQUISITION MANAGEMENT 1

Summary 2

Background 2

1. Consolidation of the SoCalGas and SDG&E Gas Acquisition Portfolios 5

2. Reversion of El Paso Capacity 11

3. Revised Rules for Core Transportation and Procurement Services 16

4. Core Subscription 21

5. Core Aggregation Transportation (CAT) 21

6. The Long Beach Agreement 22

7. Tolling Arrangements 23

8. Impact of D.01-12-018 (SoCalGas and SDG&E Gas Structure) 24

Findings of Fact 27

Conclusions of Law 30

ATTACHMENT A

OPINION AUTHORIZING CONSOLIDATED GAS SUPPLY
PORTFOLIOS AND GAS ACQUISITION MANAGEMENT

Summary

To promote efficiency and reduce costs, we authorize Southern California Gas Company (SoCalGas) and San Diego Gas & Electric Company (SDG&E) to:

1. consolidate their gas supply portfolios and related interstate pipeline and storage capacities, and to charge the same cost of gas to utility procurement customers in the SoCalGas and SDG&E service territories;

2. consolidate the management of their separate gas acquisition functions into a single management group;

3. implement revised uniform rules for their noncore customers wishing to obtain core service from them;

4. implement revised uniform rules for large core customers who wish to obtain utility procurement service;

5. allow non-affiliated wholesale customers to purchase gas from their combined portfolio;

6. provide that when brokering arrangements elapse for unassigned SoCalGas capacity on the El Paso Natural Gas Company's pipeline that capacity will be reallocated to the two utilities' consolidated gas supply portfolio; and

Background

On December 11, 2000, SoCalGas filed Advice Letters (AL) 2978 and 2979. At that time the market price of gas delivered at the California border had reached an unprecedentedly high level, both in absolute terms and relative to the market price of gas in producing basins plus the as-billed rate for firm interstate transportation. SoCalGas' average cost of gas had become very attractive compared to alternative supplies available in the marketplace.

In AL 2978, SoCalGas requested that the Commission apply a new formula for determining its monthly procurement rate for noncore customers selecting core subscription service beginning January 1, 2001. In AL 2979, SoCalGas requested that the same formula apply to its noncore customers who requested to transfer to bundled core service after December 1, 2000 (including gas procurement service).

In Resolution G-3304, issued December 21, 2000, the Commission found that if noncore (including wholesale) customers of SoCalGas were allowed to elect core subscription or traditional core service (including procurement service), it would substantially increase SoCalGas' cost of gas for its existing core and core subscription customers. Moreover, the Commission found that SoCalGas' proposal to create a class of procurement service that would be charged an incremental procurement cost was too complicated and speculative to adopt on an emergency basis. Instead, the Commission ordered SoCalGas to suspend transfers of noncore customers (including wholesale customers) to core subscription or traditional core service, except for customers whose gas supply provider was no longer offering service in California if SoCalGas was convinced that such customers would be left without service. Resolution G-3304 also required SoCalGas to file an application to address the issues contained in its advice letters.

On January 11, 2001, SoCalGas and SDG&E jointly filed this application. In addressing the issues required by Resolution G-3304, they propose new rules for eligibility and conditions for core service, the consolidation of the management of SoCalGas and SDG&E's currently separate gas acquisition departments, and the consolidation of the two utilities' gas supply portfolios, including associated storage and interstate capacity.

SoCalGas and SDG&E propose to:

1. Consolidate their gas supply portfolios and related interstate pipeline and storage capacities, and to charge the same cost of gas to utility procurement customers in the SoCalGas and SDG&E service territories.

2. Consolidate the management of their currently separate gas acquisition functions into a single management group, to lower total overhead expenses and promote more efficient gas purchasing.

3. Implement revised uniform rules for their noncore customers wishing to obtain gas supply (or procurement) service from them.

4. Implement revised uniform rules for large core customers who wish to obtain utility procurement service after having first elected transportation-only service.

5. Allow non-affiliated wholesale customers to purchase gas from the combined portfolio on terms that are reasonable for all affected core gas consumers.

6. Provide that when brokering arrangements elapse for unassigned SoCalGas capacity on the El Paso Natural Gas Company's pipeline (in excess of that which the Commission allocated to the SoCalGas core market in the last Biannual Cost Allocation Proceeding (BCAP)), that capacity should be allocated to the consolidated gas supply portfolio.

7. Allow employees in the consolidated gas procurement function to participate in the negotiation of any power contracts and associated gas supply arrangements by SDG&E that involve "tolling" provisions.

Public hearings were held June 25 and 26, 2001, before Administrative Law Judge (ALJ) Robert Barnett. The matter was submitted subject to the filing of briefs. Briefs were filed by applicants, Office of Ratepayer Advocates (ORA), The Utility Reform Network (TURN), Southern California Generation Coalition (SCGC), the city of Long Beach, El Segundo Power and Long Beach Generation (ES/LB), and the California Industrial Group and the California Manufacturers & Technology Association (CIG/CMTA).

1. Consolidation of the SoCalGas and
SDG&E Gas Acquisition Portfolios

SoCalGas and SDG&E propose to consolidate their gas commodity procurement and management functions into a combined gas portfolio which would be managed by a single organization. They request management discretion to determine whether the personnel would be employees of SoCalGas or SDG&E, or some combination thereof. The combined gas acquisition organization would remain separate from the utilities' gas operations organization, as required by SoCalGas/SDG&E merger conditions.¹ They propose that the cost of all gas supplies and associated storage and interstate capacity currently held by SoCalGas and SDG&E and all new supplies and assets be included in the combined portfolio. Currently unassigned El Paso capacity held by SoCalGas will be allocated to the consolidated portfolio to the extent that existing agreements for its brokering expire and is not otherwise committed.

Customers receiving procurement service from SoCalGas or SDG&E would pay the same rate for procurement service (including the cost of interstate capacity and storage). The allocation of the cost of intrastate transportation on the SoCalGas and SDG&E systems would not be affected by this proposal.

Applicants assert that consolidating their gas acquisition management functions and their gas portfolios will generate savings that will be passed through to their gas customers through organizational efficiency. Currently, SoCalGas and SDG&E combined have about 54 people dedicated to gas acquisition functions. They estimate that by consolidating management, approximately 7 to 9 positions can be eliminated. This would produce an overhead savings (salaries, benefits, and associated support costs) of about one million dollars per year. These savings will be reflected in annual performance-based ratemaking (PBR) earnings sharing calculations until the next PBR/Cost of Service proceeding, at which time they will be embedded in the authorized revenue requirement.

Applicants claim additional benefits from consolidation. They say a larger organization will allow for better back-up and training, and better management of turnover. It will allow for improved senior management focus on a single organization. It will reduce the cost, both to the utilities and to the Commission, to regulate two separate portfolios and gas cost recovery incentive mechanisms. They contend consolidation will produce gas cost savings, as well as overhead savings, compared to the combined gas costs of the two utilities operating gas acquisition on a stand-alone basis.

Applicants identified three principal ways in which consolidation will save gas costs:

First, the reliability margin of gas in storage (or equivalent assets) that a consolidated portfolio will need to maintain can be somewhat less than the sum that each utility has to maintain when operating on a stand-alone basis; Second,

consolidation will allow more economic use of the gas supplies, storage, and interstate capacity of the two utilities, especially of SDG&E's assets. Because of its size, existing trading organization, computer systems, and hub services organization, SoCalGas is better positioned than SDG&E to capitalize on core assets when they are not needed to serve procurement customers. Additional revenues are generated by physical gas transactions (off-system sales), capacity transactions, derivatives, and hub transactions. SDG&E contends that it is handicapped because its size does not support the systems needed to engage in those transactions; Third, increased load and supply diversity from consolidation will be beneficial. The access to Canadian supplies through the Pacific Gas and Electric Company system that SDG&E brings adds to the diversity of SoCalGas' core portfolio, which has no capacity on that route. Overall, SoCalGas and SDG&E estimate an annual savings of millions of dollars, depending on market conditions.

ORA supports applicants' consolidation proposal. ORA agrees that consolidation will produce 1) more efficient gas purchasing resulting in lower commodity costs because of the greater amount of natural gas being procured and greater diversity of demand being served, 2) more efficient use of storage and capacity assets, 3) greater efficiency in the cost of managing the utilities' gas procurement activities, and 4) regulatory efficiency. ORA also agrees that the combined purchasing power of the two utilities might be sufficient to counteract market power of suppliers, which would benefit California customers.

TURN supports consolidation provided that additional interstate capacity is reserved for the combined portfolio and that the revenue requirements for the two utilities be decreased on January 1, 2002. The city of Long Beach and El Segundo Power, LLC and Long Beach Generation, LLC support consolidation.

The only active party opposed to consolidation is SCGC.² It argues that the proposed merger of the core portfolios would improperly require SoCalGas' core ratepayers to subsidize SDG&E's core ratepayers; and insofar as the SoCalGas core has an independent need for reverting El Paso capacity, assigning the reverting El Paso capacity to the combined portfolio would fail to mitigate cross-subsidization of the SDG&E core by the SoCalGas core. SCGC contends that the SoCalGas core needs the reverting capacity for its own purposes, making the reverting capacity unavailable to offset the impact of combining the core portfolios; that combining the wholesale core loads with the SoCalGas core portfolio would require most of the reverting El Paso capacity that is independently needed by the SoCalGas core; that even if the reverting El Paso capacity were not needed independently by the SoCalGas core, the amount of reverting capacity would be insufficient to prevent the combining of the core portfolios from imposing a burden on the SoCalGas core; that the Sempra companies have proposed combining the core portfolios without analyzing the benefits and burdens on customers; that the Commission should not ignore market conditions and the impact on SoCalGas core ratepayers; and that the better course would be to avoid the benefit/detriment issues by having SDG&E maintain a competitive gas portfolio. Finally, SCGC asserts that assigning the reverting El Paso capacity to core customers without any offsetting benefit is unfair to noncore customers.

We will authorize consolidation of the gas acquisition portfolios of SoCalGas and SDG&E. ORA has succinctly described the benefits.

Consolidation provides more efficient gas purchasing, lower gas costs, more efficient management, more efficient use of storage and capacity, lower overheads, less regulatory complexity, and increased rate stability for core customers. On the issue of market power the combined portfolio purchasing power will make it easier to counteract the "charge whatever the market will bear" mentality of out-of-state gas suppliers and transporters.

The protest of SCGC is factitious. It professes concern for the SoCalGas core through the entirety of its testimony and briefs, but represents no core ratepayers.³ Those who do truly represent the core - ORA, TURN - and those who have core customers - SDG&E, SoCalGas, and Long Beach - support consolidation. SCGC's myriad objections can be winnowed down to two assertions: 1) that consolidation would constitute a subsidy by SoCalGas' core customers to SDG&E's core customers, and 2) that El Paso capacity that reverts to SoCalGas should continue to be brokered. Neither assertion is supported by the facts. We discuss the first assertion here and address reversion of El Paso capacity in the next section.

SCGC argues that SoCalGas' core ratepayers would subsidize SDG&E's core ratepayers because the portfolio merger would permit the SDG&E procurement customers to access pipeline capacity held by the SoCalGas core. Under current market conditions, sharing pipeline capacity with SDG&E customers would expose the SoCalGas core to an additional cost of border gas purchases which the SoCalGas core could otherwise avoid. SCGC says until recently the market value of the core reservation was significantly lower than the as-billed rate charged by the pipelines to SoCalGas for the capacity. The difference between the market value and the as-billed rate represented a stranded cost. The SoCalGas core bore substantial stranded costs as a result of holding a reservation of El Paso and Transwestern capacity.

In contrast, SCGC argues, SDG&E customers substantially avoided stranded interstate pipeline costs. SDG&E entered into pipeline contracts for only a small portion of its demand. SDG&E's core procurement load is approximately 125 MMcf/d during an average year. SDG&E has only 35 MMcf/d of pipeline capacity under contract to serve that load. As a result, prior to December 2000, SDG&E's core has avoided paying the full as-billed pipeline transportation rate for most of its requirements. However, market conditions changed in late 2000. Border prices increased substantially, and SDG&E was exposed to that price risk. As a result, SDG&E's procurement charges for core customers increased to a level almost twice that of SoCalGas. Therefore, in the opinion of SCGC, merging the SoCalGas and SDG&E portfolios would expose SoCalGas ratepayers to high border prices that they would otherwise avoid. SCGC concludes that after years of having the SDG&E core realize the benefits of purchasing a majority of its gas supplies at border prices and avoiding interstate pipeline stranded costs, it would be unfair to combine portfolios at precisely the time that interstate pipeline capacity has started to provide value to the SoCalGas core.

SCGC's argument is without merit. It is merely speculation on the future border price of gas. Historically, in the 33 out of the 42 months prior to November 2000, SDG&E's border price was less than SoCalGas'. If we consider the recent spike in rates as an anomaly SDG&E would be better off not consolidating. SoCalGas and SDG&E are proposing to consolidate their portfolios for the long run. They are not proposing any date at which the consolidation would end. Rather, the gas procurement customers of each utility would pay the same procurement rate. Noncore customers are large enough and sophisticated enough to be able to hedge against price spikes. Ordinary core gas customers do not have that ability and it is in their interest for the utility serving them to provide this assurance. Consolidation avoids speculation; it recognizes the preference for rate stability for core customers. Further, consolidation reduces overheard, provides more efficient use of assets, increases utility purchasing power and, over time, should produce a downward pressure on rates.