XV. PG&E Procurement Policy
and Core Procurement Services

A. Summary

PG&E contends that the basic structure and rules for core procurement under the Gas Accord structure have worked well for core customers. Under the structure, PG&E's Core Procurement Department contracts for PG&E pipeline and storage services, as well as for interstate pipeline service. The Core Procurement Department is managed independently of the gas transmission and distribution systems, and operates at arms-length from PG&E's pipeline operator, CGT.

PG&E's Core Procurement Department manages its gas supply and transportation portfolio under the Core Procurement Incentive Mechanism (CPIM). The CPIM provides a market-based measure of the performance of PG&E's Core Procurement Department, and a means for the Commission to ensure the reasonableness of costs incurred on behalf of core customers.

PG&E recommends that the current CPIM structure and services be continued, with a couple of changes. PG&E's proposed changes to the rules for core suppliers and for PG&E's Core Procurement Department are due primarily to reliability concerns. PG&E proposes changes in four areas.

1. Proposals

a. Winter Firm Capacity Requirement Proposal

PG&E's first proposal is to increase the core firm capacity arrangements for CPGs. This is needed to meet the proposed Winter Firm Capacity Requirement, and to match potential new upstream holdings with downstream Baja capacity. There are two parts to this proposal.

Under PG&E's proposed Winter Reliability Standard, the core Winter Firm Capacity Requirement for the 2004-2005 winter season is 2,425 MDth/d. In order to meet this requirement, the first part of PG&E's proposal is to increase the core assignment of firm storage withdrawal by an additional 75 MDth/d starting in the winter of 2004-2005. This would increase core's firm withdrawal rights to about 1150 MDth/d on January 15, which is the point in the withdrawal season that best determines the need for storage to support the requirement.

The second part of PG&E's proposal to meet the Winter Firm Capacity Requirement is, to the extent capacity is available, the core's holdings of annual and/or seasonal firm Baja be tailored to match the firm interstate capacity holdings at Topock. The amount of firm interstate capacity at Topock held by the core is to be decided in Phase II of the El Paso Capacity proceeding, R.02-06-041. The maximum amount of El Paso capacity that could be allocated to the core is 204 MDth/d.

b. CPIM Proposal

PG&E's second proposal pertains to the CPIM. PG&E's CPIM was developed as part of the Gas Accord. (See 73 CPUC2d at 832.) PG&E's Core Procurement Department operates within the unbundled Gas Accord structure like any other shipper on the system. Under the CPIM, PG&E is incented to purchase gas and maximize the value of the assets retained by the core in order to provide the lowest reasonable cost gas to core customers. The CPIM defines the benchmark against which actual purchase costs are compared, and establishes the rules around the sharing of costs and savings calculated relative to the benchmark. If the costs incurred are below or above a range around the benchmark, PG&E is either rewarded or penalized by the sharing mechanism.

The CPIM structure is, to a large extent, dependent on the underlying transport and storage capacities held by the core. Given the current uncertainties surrounding the final disposition of the newly acquired El Paso capacity and PG&E's existing Transwestern holdings, PG&E is not proposing a specific incentive structure in this proceeding. Rather, PG&E believes that such a structure will be developed as part of the Phase II portion of the El Paso Capacity proceeding and/or through a separate application.⁹⁵

PG&E proposes that the current CPIM be retained as a default structure in the event that anticipated modifications to the existing mechanism in the El Paso proceeding or a separate CPIM application are not approved by the Commission by the beginning of 2004. Any new structure that is developed in the other proceedings will become effective upon Commission approval. Also, the current CPIM or the new incentive structure should be amended to reflect the new core Winter Firm Capacity Requirement and the capacity additions that PG&E proposes.

c. Reliability Planning Proposal

PG&E's third proposal is to establish clear reliability planning standards. The proposal is designed to remove the ambiguity around Core Procurement's responsibilities in planning for peak-day events, and to eliminate the need for the alternate benchmark methodology in the current CPIM.⁹⁶ PG&E proposes that its Core Procurement Department be responsible for nominating supplies up to the pre-defined Winter Firm Capacity Requirement. If PG&E Core Procurement is unable to nominate supplies up to the Winter Firm Capacity Requirement and EFO noncompliance charges are incurred, charges arising from the difference between the predefined requirement and the amount of nominated supply will be considered a cost of gas with no offsetting adjustment to the standard CPIM benchmark. If core load exceeds the 1-in-10 level, Core Procurement will make every effort to acquire the needed additional supplies, but the costs of these incremental supplies will be matched by an equivalent but offsetting adjustment to the standard CPIM benchmark. If the core load exceeds the 1-in-10 level and EFO noncompliance charges are incurred, the charges will be matched by an equivalent but offsetting adjustment to the standard CPIM benchmark.

Under the Winter Firm Capacity Requirement, the core has to contract for sufficient assets to meet an approximate 1-in-10 year cold weather event demand level. PG&E proposes that CPGs meet a two-part requirement which recognizes the fact that after January 15, the low temperature expected to occur once every 10 years is a system average composite temperature of 38 degrees Fahrenheit, while the corresponding temperature during the December 1 through January 15 timeframe is 35 degrees. The core load associated with a 38 degrees composite temperature is approximately 200 MDth/d lower (2225 MDth/d) than the core load associated with a 35 degree composite temperature (2425 MDth/d). Using a two-part standard allows for a more efficient use of the assets held by CPGs. If a one-part standard is used for the whole winter, CPGs would be required to hold in reserve storage inventory to meet loads that in the latter part of the winter have a very low probability of occurrence.

d. Tariff Change Proposal

PG&E's fourth proposal is to implement the rate changes resulting from its proposals in conjunction with the monthly core procurement advice letter filing in the month that the 2004 gas structure rates become effective.

PG&E proposes to make the following revisions to PG&E's gas Preliminary Statement to implement its procurement proposals:

1. PG&E proposes to revise the core backbone, interstate and Canadian capacity reservations. Canadian capacity costs are currently recorded in the core subaccount of the Purchased Gas Account. PG&E proposes to record Canadian capacity costs in the core demand charge subaccount of the Core Pipeline Demand Charge along with other core pipeline demand charges, including additional capacity acquired to meet core needs. Since PG&E will retain the Gas Transmission-Northwest (GTN) capacity that is turned back by the gas ESPs, the tracking of the core transport portion of GTN capacity in the Core Transport Interstate Transition Subaccount of the CPDCA is no longer necessary.

2. In accordance with D.00-05-049, the core procurement portion of core storage costs is a component of the monthly core procurement price, effective October 1, 2000. The core transport portion of core storage costs is recovered through Schedule G-CFS. The core storage revenue requirement is recorded in the Core Firm Storage Account (CFSA). PG&E proposes to change the core storage reservation and to expand the applicability of Schedule G-CFS to include PG&E Core Procurement. The core procurement portion of storage costs will continue to be recovered in monthly core procurement rates. Minor changes to the CFSA will be made to implement the proposed changes.

3. PG&E proposes to revise Preliminary Statement Part C, Gas Accounting, Terms and Definitions, and the PGA, to reflect the revisions to the CPIM, including the proposal to remove the alternative benchmark and share the cost of EFO noncompliance charges.

2. Other Proposals

SPURR/ABAG propose that PG&E's Core Procurement Department be divested or spun off to a separate entity that is still owned by PG&E, and regulated by the Commission. SPURR/ABAG contend that such a proposal will reduce the cross-subsidies between core bundled sales customers and core transportation customer, eliminate the controversy over the proper level of PG&E's core brokerage fee, force the spun-off core procurement entity to deal with PG&E's distribution unit on an arm's length basis, and to make core customers aware that they have a choice between providers.

SPURR/ABAG also propose that PG&E's default core gas supplier be required to explain how it prices its gas sales to core customers.

B. Position of the Parties

1. SPURR/ABAG

PG&E states that it is the default provider of gas commodity service to core customers that do not elect core aggregation service. SPURR/ABAG acknowledges PG&E's role as the default supplier. However, SPURR/ABAG believes that there should be increased core customer awareness of the separation between PG&E's monopoly distribution function, on the one hand, and its non-monopoly procurement function on the other hand.

To ensure the separation between PG&E's monopoly function and PG&E's non-monopoly function, SPURR/ABAG propose that PG&E's core procurement group be divested or spun off to a separate entity that is still owned by PG&E and regulated by the Commission. This procurement entity would not share staff or administrative costs with PG&E's monopoly distribution company. The entity would be responsible for purchasing gas supply and reserving related transportation capacity and storage for bundled sales customers, and it would charge its gas sales customers the fixed and variable costs associated with its purchasing, selling, and billing functions. The fundamental purpose of SPURR/ABAG's proposal is to make core customers aware that they have a choice between default procurement service, and a competitive gas supply service provided by a third party supplier.

SPURR/ABAG contend that the establishment of a separate procurement entity would reduce the cross-subsidies between core bundled sales customers and core transportation customers, and would eliminate the controversy over the proper level of PG&E's core brokerage fee. Since the new entity would be responsible for all of the fixed and variable costs associated with the procurement function, the entity would assess an unbundled administrative fee that would presumably provide full recovery of all fixed costs associated with the procurement function.

Also, a separation of PG&E's monopoly and non-monopoly function would force the spun-off core procurement entity to deal with PG&E's monopoly distribution unit on an arm's length basis. The need for separation was highlighted by LGS and Wild Goose about the additional 75 MDth/d of firm storage withdrawal capacity and whether private storage providers should be able to provide this. The absence of arms-length dealings between PG&E's procurement department and its transportation department increases costs to bundled sales customers and makes it more difficult for third party suppliers to compete for sales to core customers.

One of PG&E's objections to the spin-off of its core procurement function is whether the spin-off would be consistent with § 328.2. SPURR/ABAG contend that the divestiture would be consistent with this code section because it would still be a gas corporation regulated by the Commission. This new gas corporation would perform part of the basic gas service referenced in § 328.2.

Another objection to the spin-off proposal is whether such a proposal should also apply to SoCalGas and SDG&E. SPURR/ABAG point out that such a proposal would make sense, but this proceeding is only addressing PG&E's market structure.

PG&E also questions whether the shareholders of the procurement entity should be placed at risk for recovering the fixed costs associated with maintaining a default core procurement service. SPURR/ABAG proposes that the procurement entity be at risk for the costs of procurement only if the Commission fails to provide recovery of these costs. SPURR/ABAG do not propose that the procurement entity should be denied recovery of any portion of its costs. Rather, the default supplier should be required to recover its fixed procurement costs (i.e., administrative costs) through a separate charge to be fixed by the Commission.

PG&E also questions whether bundled core sales customers will still have the right to receive bundled gas service from their gas utility under traditional terms and conditions. SPURR/ABAG's proposal is not intended to change the terms and conditions of default procurement service. Rather, the proposal will ensure that the entity that performs the default procurement function is not the same as the entity that performs the distribution function.

2. TURN

TURN questions whether PG&E's proposals regarding core procurement are properly within the scope of this proceeding. These proposals include the additional core storage withdrawal reservation and the proposal that the core's annual firm Baja capacity reservation be increased by as much as 200 MMcf/d to match any potential additional core holdings of upstream El Paso capacity. TURN contends that it is not clear that upstream pipeline capacity necessarily has to be matched with firm annual capacity without some offsetting reduction in seasonal reservation. TURN asserts that these are complex and important issues that should be examined in a proceeding in which the parties have some advance warning that the issues are going to be raised.

3. PG&E

PG&E contends that the basic structure and rules for procurement have worked well for core customers under Gas Accord I. The intervenors have raised three issues relating to the proposed changes to the rules for core suppliers and for PG&E's Core Procurement Department. These issues are: (1) the Winter Firm Capacity Requirement; (2) the proposal to match El Paso capacity allocated to the core with Baja capacity; and (3) SPURR/ABAG's proposal to spin-off PG&E's Core Procurement Department from the distribution utility.

PG&E states that the assignment of the 75 MDth/d of additional storage withdrawal simply formalizes PG&E Core Procurement Department's contractual arrangement since 1998. In order to meet the core Winter Firm Capacity Requirement, PG&E's Core Procurement Department proposes that it reconfigure its winter storage withdrawal profile to provide an additional 75 MDth/d of peak withdrawal capacity in December and January when temperatures are the coldest and demands are the highest. This early winter withdrawal capacity increase is merely an adjustment or exchange of existing withdrawal capacity. The additional withdrawal capacity in November, December and January is offset by reducing peak capacity available to core customers in late February and March, when the possibility of a cold weather event is much lower, and core's current withdrawal rights exceed forecasted needs. PG&E asserts that there is no change in net withdrawal capacity available to core customers during the winter season as a result of the exchange. Since the institution of the Gas Accord, this exchange has been accomplished by way of a peaking agreement on a year-to-year basis.

TURN argues that PG&E's proposal to match upstream capacity with downstream Baja capacity is outside the scope of this proceeding. PG&E contends that this issue falls squarely into the continuation of and possible adjustments to the CPIM and should be considered. PG&E asserts that the issue is one of determining the appropriate mix of firm capacity holdings that will ensure the highest value to the core during the periods when the actual physical utilization of capacity by the core will vary depending on the relative price relationships between the various sources of gas, as well as the overall level of core demand.

SPURR/ABAG proposes that PG&E place the core procurement function into a wholly-owned subsidiary of the utility. PG&E opposes SPURR's proposal because the current structure creates a fair and reliable competitive environment for all core customers. In addition, SPURR/ABAG has not presented a case that there is any discernable benefit to the majority of core customers. SPURR/ABAG's proposal may also violate Assembly Bill 1421 (Stats. 1999, ch. 909, § 4) and § 328.2, which require utility gas companies to provide basic gas service to all core customers in their service territory unless the customer chooses another provider. If the Commission decides to further examine this proposal, PG&E recommends that it be done in a separate proceeding.

PG&E strongly supports retaining the use of a gas procurement incentive structure in 2004, and believes that the concept of a procurement incentive mechanism should remain an integral part of the Gas Accord process. However, the CPIM structure is, to a large extent, dependent on the underlying transport and storage capacities held by the core. Due to current uncertainties surrounding the final disposition of the newly acquired El Paso capacity and PG&E's existing Transwestern holdings, PG&E cannot propose a specific incentive structure in this testimony. PG&E believes that a viable structure will be developed during 2003 as part of the Phase II of the El Paso Capacity proceeding, and/or through a separate application. PG&E proposes that this proceeding incorporate the revised mechanism subject to further amendments that result from changes that are specific to this proceeding.

C. Discussion

PG&E recommends that the current CPIM structure and services be continued, and that changes be made in four areas.

The current CPIM was originally approved as part of the Gas Accord settlement in D.97-08-055. (73 CPUC2d 770, 832.) In this proceeding, PG&E did not propose an updated CPIM because the outcome of Phase II of the El Paso proceeding is still not known. PG&E's testimony states that:

"PG&E believes that a viable structure will be developed during 2003 as part of the Phase II of the El Paso Capacity Proceeding and/or possibly through a separate application. PG&E proposes that Gas Accord II - 2004 will incorporate the revised mechanism subject to further amendments that result from changes that are specific to Gas Accord II - 2004." (Ex. 1, p. 16-11.)

Then at page 16-13 of Exhibit 1, PG&E states:

"The current CPIM will be retained as a default structure in the event that anticipated modifications to the existing mechanism, resulting from the outcome of Phase II and/or a separate CPIM application are not approved by the Commission by the beginning of the Gas Accord II - 2004 period. Any new structure developed as a result of the above mentioned proceedings will become effective upon Commission approval. Under Gas Accord II - 2004, the default mechanism or the newly modified incentive structure will be further amended to reflect the new Winter Firm Capacity Requirement and the above mentioned capacity additions."

The above testimony is important because it affects the changes that PG&E has proposed, as we discuss below.

The first proposal that PG&E requests is to increase the core's firm capacity holdings to meet the proposed Winter Firm Capacity Requirement. PG&E proposes that this be accomplished by increasing the amount of peak withdrawal capacity assigned to the core by 75 MDth/d starting in the winter of 2004-2005. The second increase would come from tailoring the core's holdings of annual and/or seasonal firm Baja transmission capacity to match the firm interstate capacity holdings at Topock.

As discussed earlier, we do not adopt PG&E's proposals for a Winter Reliability Standard and for a Winter Firm Capacity Requirement. Therefore, the proposed assignment of 75 MDth/d of storage withdrawal capacity to the core is not needed. Since the Winter Firm Capacity Requirement proposal is not adopted, the proposal to increase the core firm storage assignment through the 75 MDth/d of withdrawal capacity is not adopted.

PG&E acknowledges that the amount of firm interstate capacity at Topock will be decided in Phase II of the El Paso proceeding. Although PG&E has proposed in that proceeding that the interstate capacity be assigned to the core, we have not yet adopted a decision in that phase of the proceeding. Also, if additional capacity is assigned to the core, the above quotations contemplate that the CPIM be modified to include the additional capacity in the CPIM. Since neither the interstate capacity issue nor the modification of the CPIM has occurred, it appears that the shaping of any Baja capacity to match the interstate capacity is best left to either the El Paso proceeding, or a proceeding where modifications to the CPIM are being looked at. Accordingly, we decline to adopt PG&E's shaping proposal at this time.

PG&E's second proposal is to retain the current CPIM as the default structure in the event the anticipated modifications to the existing CPIM in the El Paso proceeding or a separate CPIM application are not approved by the Commission by the beginning of 2004. PG&E also proposes that if the current CPIM is retained as the default, that it be amended to reflect the core Winter Firm Capacity Requirement and the capacity additions that PG&E proposes.

As mentioned earlier, we have not taken any action yet on Phase II of the El Paso proceeding, and there is no separate application pending before the Commission to change the current CPIM. In addition, we do not adopt the Winter Firm Capacity Requirement, and we do not adopt the assignment of 75 Mdth/d of additional storage withdrawal capacity for the core. We will retain the current CPIM, as formulated in D.97-08-055, as the default incentive mechanism for PG&E's Core Procurement Department for 2004 and 2005, or until a revised CPIM is adopted by the Commission.

PG&E's third proposal is to clarify the Core Procurement Department's responsibilities regarding peak-day events. Specifically, PG&E proposes that the Core Procurement Department be responsible for nominating supplies up to the Winter Firm Capacity Requirement, and that the alternate benchmark methodology in the CPIM be eliminated. Since we do not adopt the Winter Firm Capacity Requirement, we do not adopt PG&E's proposal to clarify the reliability planning standards, and we do not adopt PG&E's proposal to eliminate the alternate benchmark in the CPIM.

PG&E's fourth proposal is for authorization to make a series of proposed tariff changes as listed earlier. Many of the proposed tariff changes which PG&E seeks are related to the Winter Reliability Standard, the Winter Firm Capacity Requirement, and the CPIM changes that PG&E requested. Since we do not adopt the Winter Reliability Standard, the Winter Firm Capacity Requirement, or the CPIM changes that PG&E requested, PG&E's proposed tariff changes are moot in some instances. In the event the other proposed tariff changes are consistent with the proposals or gas market structure that we adopt today, PG&E is authorized to make the necessary tariff changes.

SPURR/ABAG proposes that PG&E's Core Procurement Department be spun-off into a separate regulated entity. Although such a proposal sounds attractive for the competitive offering of core gas procurement, there are legal and structural hurdles to overcome. Section 328.2 states in part that "The commission shall require each gas corporation to provide bundled basic gas service to all core customers in its service territory unless the customer chooses or contracts to have natural gas purchased and supplied by another entity." This language suggests that PG&E's Core Procurement Department cannot be spun-off unless there is a structure that allows the gas corporation to continue providing bundled basic gas service. There are also some practical issues about how the spun-off utility will interact with other PG&E units, how it will be regulated, and what kind of regulations it should operate under. These issues are too complex to address in a proceeding with numerous other gas market structure issues. Accordingly, the proposal of SPURR/ABAG for PG&E to spin-off its Core Procurement Department is not adopted.

⁹⁵ In D.02-07-037, the Commission ordered PG&E and other California utilities to acquire El Paso pipeline capacity to ensure access to the Southwest supply basins. In response to the decision, PG&E contracted for 204 MDth/d of firm capacity. In Resolution G-3339, PG&E was found to have complied with D.02-07-037, and that it met the conditions for recovery of existing and acquired capacity costs, including Transwestern. The allocation of costs was left to Phase II of the El Paso Capacity proceeding. PG&E anticipates that a significant portion of the capacity will be dedicated to core use. PG&E states that the likely augmentation of the core's holdings of interstate capacity, and the change in status of PG&E's Transwestern contract, will result in significant modifications to the existing CPIM. ⁹⁶ According to PG&E, the alternate benchmark would be made obsolete by the adoption of the Winter Firm Capacity Requirement.

XV. PG&E Procurement Policy and Core Procurement Services