STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

December 4, 2003 Agenda ID #3052

Ratesetting

TO: PARTIES OF RECORD IN APPLICATION 01-10-011

RE: NOTICE OF AVAILABILITY OF PROPOSED DECISION REGARDING THE
GAS STRUCTURE AND RATES FOR PACIFIC GAS AND ELECTRIC COMPANY FOR 2004

Consistent with Rule 2.3(b) of the Commission's Rules of Practice and Procedure, I am issuing this Notice of Availability of the above-referenced proposed decision. The proposed alternate decision was issued by President Michael R. Peevey on December 4, 2003. An Internet link to this document was sent via e-mail to all the parties on the service list who provided an e-mail address to the Commission. An electronic copy of this document can be viewed and downloaded at the Commission's Website ( www.cpuc.ca.gov). A hard copy of this document can be obtained by contacting the Commission's Central Files Office [(415) 703-2045].

This is a proposed alternate decision to Administrative Law Judge (ALJ) Wong previously served to you. It will be on the Commission's agenda on December 18, 2003, along with the proposed decision of ALJ Wong. The Commission may act then, or it may postpone action until later.

When the Commission acts on the proposed decisions, it may adopt all or part of them as written, amend or modify them, or set them aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

As set forth in Rule 77.6, parties to the proceeding may file comments on the enclosed alternate order no later than 5pm on December 11, 2003. An original and four copies of the comments with a certificate of service shall be filed with the Commission's Docket Office and copies shall be served on all parties on the same day of filing. Anyone filing comments shall electronically serve those on the service list who have provided electronic addresses. Parties shall also ensure that they electronically serve their comments on President Peevey's energy advisor, Roosevelt Grant, at rg1@cpuc.ca.gov and assigned ALJ Wong, at jsw@cpuc.ca.gov. For those who have not provided electronic addresses, printed copies of the comments shall be served by first class mail or another expeditious mode of delivery. No reply comments will be accepted.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:acb

COM/MP1/rg1/acb DRAFT Alternate Agenda ID #3052

Ratesetting

Decision PROPOSED ALTERNATE DECISION OF PRESIDENT PEEVEY

(Mailed 12/4/2003)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Pacific Gas and Electric Company Proposing a Market Structure and Rules for the Northern California Natural Gas Industry for the Period Beginning January 1, 2003 as Required by Commission Decision 01-09-016. (U 39 G)

Application 01-10-011

(Filed October 8, 2001)

OPINION REGARDING THE GAS STRUCTURE AND RATES
FOR PACIFIC GAS AND ELECTRIC COMPANY FOR 2004

TABLE OF CONTENTS

Title Page

I. Summary 2 2

II. Background 3 3

III. 2004 Gas Structure and Beyond 6 6

A. Summary of the Proposals 6 6

B. Continuation of the Gas Accord Structure 8 8

1. Introduction 8 8

2. Positions of the Parties 10 10

a. PG&E's Position 10 10

b. California Cogeneration Council and Calpine Corporation 14 14

c. California Manufacturers and Technology Association 16 16

d. Canadian Association of Petroleum Producers 18 18

e. City of Palo Alto 18 18

f. Department of General Services 19 19

g. Duke 20 20

h. Indicated Producers 20 20

i. Lodi Gas Storage, L.L.C. 20 20

j. Mirant 21 21

k. Northern California Generation Coalition 21 21

l. Office or Ratepayer Advocates 22 22

m. The Utility Reform Network 24 24

C. Discussion 28 28

IV. Winter Reliability Standard and Winter Firm Capacity Requirement 35 35

A. Introduction 35 35

1. Winter Reliability Standard Proposal 36 36

2. Facility Requirements to Support the Winter Reliability Standard 37 37

a. Central Backbone Improvements 37 37

b. Local Transmission Improvements 37 37

c. Backbone Transmission 38 38

d. PG&E Storage 39 39

3. Core Winter Firm Capacity Requirement 39 39

B. Other Proposals 41 41

C. Positions of Parties 41 41

1. Lodi Gas Storage 41 41

V. Transmission Services 56 56

A. Background 56 56

1. Current Structure for Local Transmission Services 57 57

2. Current Structure for Backbone Transmission Services 58 58

a. Paths 58 58

b. Firm and as Available Rights 58 58

c. Delivery Points 59 59

d. Standard Service 60 60

e. Negotiated Service 60 60

f. Discounting 61 61

3. Proposals 62 62

a. Basic Backbone Transmission Services Structure 62 62

b. Basic Local Transmission Services Structure 62 62

c. Long-Term Firm Backbone Contracts 63 63

d. Commensurate Discount Rule 63 63

e. Scheduling Non-Performance 65 65

f. Bypass Transportation Charge Proposal 66 66

(1) Introduction 66 66

(2) Potential Bypass of Local Transmission Charge 67 67

(3) Potential Bypass of Backbone Transmission Charge 68 68

(4) Bypass Charge Proposal 68 68

4. Other Proposals Affecting Transmission 70 70

B. Positions of the Parties 70 70

1. CCC/Calpine 70 70

a. Bypass Proposal 70 70

b. Long-Term Contracts 72 72

2. CMTA 73 73

3. California Natural Gas Producers Association 73 73

(1) Bypass Proposal 78 78

(2) Long-term Contracts 81 81

(3) Other Issues 83 83

C. Discussion 83 83

1. Basic Backbone Transmission Services 83 83

2. Basic Local Transmission Services 84 84

3. Long-Term Firm Backbone Contracts 84 84

4. Commensurate Discount Rule 86 86

5. Scheduling Non-Performance 87 87

6. Bypass Transportation Charge Proposal 88 88

VI. Storage Services 89 89

A. Introduction 89 89

B. Proposals 91 91

1. Assignments of Firm Storage Rights 91 91

2. Core Firm Storage Service 92 92

a. Basic Storage Services 92 92

b. Injection and Withdrawal Profiles for CFS 93 93

c. Firm Counter-Cyclical Storage Rights for CFS 94 94

3. Standard Firm Storage Service 94 94

a. Basic Storage Services 94 94

b. Injection and Withdrawal Profiles for SFS 97 97

4. Long-term Firm Storage Contracts 99 99

5. Negotiated Firm and As-Available Services 99 99

6. Hub Services 100 100

7. Storage Shrinkage 100 100

C. Position of the Parties 100 100

D. Discussion 107 107

1. Assignments of Firm Storage Rights 107 107

2. Core Firm Storage Service 109 109

a. Basic Storage Services 109 109

(1) Firm Storage Injection, Inventory, and Withdrawal Profiles for Core Firm Storage 110 110

(2) Firm Counter-Cyclical Storage Rights for Core Firm Storage 111 111

3. Standard Firm Storage Service 111 111

a. Basic Storage Services, Non-Cycle Working Gas, and Compression 111 111

(1) Firm Storage Injection, Inventory and Withdrawal Profiles for Standard Firm Storage 114 114

(2) Firm Counter-Cyclical Storage Rights for Standard Firm Storage Service 115 115

4. Long-Term Firm Storage Contracts 116 116

5. Storage Shrinkage 117 117

VII. Contract Extension and Open Season 117 117

A. Background 117 117

1. Summary of Proposed Contract Extension Process 118 118

2. Summary of Proposed Open Season Process 119 119

3. Participation of PG&E Department in the Open Season 120 120

4. Other Proposals 121 121

B. Position of the Parties 122 122

1. CCC/Calpine 122 122

2. DGS 123 123

3. NCGC 124 124

4. PG&E 126 126

C. Discussion 128 128

VIII. Operations and Balancing 131 131

A. Background 131 131

1. Operational Overview 131 131

2. Operations and Balancing Under the Gas Accord 133 133

3. Balancing Services Proposals 134 134

a. Background 134 134

b. Additional Storage Capacity 134 134

c. Daily Imbalance Limit 135 135

d. Monthly Excess Imbalance Charge 136 136

e. California Gas Production 136 136

f. Measuring OFO and EFO Compliance by Core Procurement Groups 137 137

4. Nomination Scheduling Process Proposal 139 139

5. Supply Shortfall Proposals 140 140

a. Curtailment Process Proposal 140 140

b. Local Curtailment Noncompliance Charge 143 143

6. Shrinkage Proposals 144 144

a. Adjustment of Shrinkage Proposal 144 144

b. Storage Shrinkage Proposal 145 145

7. Noncompliance Charge Proposal 146 146

8. Anonymous Trading Platform Proposal 147 147

B. Positions of the Parties 148 148

1. CCC/Calpine 148 148

a. Curtailment Proposal 148 148

b. Daily Imbalance Proposal 149 149

2. CMTA 150 150

3. California Natural Gas Producers Association 153 153

4. Coalinga 156 156

5. DGS 156 156

6. Duke 156 156

7. Indicated Producers 158 158

8. LGS 161 161

9. NCGC 167 167

(1) Daily Imbalance Limit 169 169

(2) Imbalance Charge 170 170

(3) Curtailment Process 173 173

10. ORA 173 173

11. Palo Alto 174 174

12. SPURR/ABAG 175 175

13. Wild Goose 175 175

14. PG&E 177 177

C. Discussion 186 186

1. Balancing Service Proposals 186 186

a. Additional Storage Capacity 186 186

b. Daily Imbalance Limit For the Monthly Balancing Option 189 189

c. Disposition of Monthly Imbalances 189 189

d. OFO Obligations for California Gas Production 191 191

e. Measuring Core Procurement Groups' Compliance 194 194

2. Bumping Proposal 195 195

3. Supply Shortfalls and Capacity Constraints Proposals 195 195

a. Diversion or Curtailment 195 195

b. Local Curtailments 196 196

4. Shrinkage Proposals 198 198

5. Noncompliance Charges Proposal 199 199

6. Anonymous Trading Platform Proposal 200 200

IX. Operating and Maintenance Exenses 200 200

A. Summary of O&M Expenses 200 200

B. Positions of the Parties 202 202

C. Discussion 207 207

X. Capital Expenditures 210 210

A. Summary of Capital Expenditures 210 210

B. Positions of the Parties 213 213

1. CCC/Calpine 213 213

C. Discussion 218 218

1. Introduction 218 218

2. Non-Cycle Working Gas 219 219

3. Pipeline Safety Act 220 220

4. Winter Reliability Standard 220 220

5. Reduction In Metering Costs and Power Plant Connections Costs 221 221

6. Gerber Compressor Station 222 222

7. Conclusion 223 223

XI. Cost of Service 223 223

A. Summary of Cost of Service 223 223

B. Discussion 226 226

XII. Demand Forecast 227 227

A. Summary of Demand Forecast 227 227

B. Position of the Parties 230 230

1. CCC/Calpine 230 230

C. Discussion 239 239

XIII. Cost Allocation and Rate Design 242 242

A. Summary 242 242

1. Backbone Transmission Cost Allocation and Rate Design 243 243

a. Gas Accord Period 243 243

(1) Cost of Service and Cost Allocation 243 243

(2) Rate Design 244 244

b. 2004 Cost Allocation and Rate Design Proposal 245 245

2. Storage Cost Allocation and Rate Design 247 247

a. Gas Accord Period 247 247

b. 2004 Proposals 249 249

(1) Introduction 249 249

(2) Core Firm Storage Service 249 249

(3) Standard Firm Storage and Market Storage Services 250 250

(4) Load Balancing and Self-Balancing Services 250 250

3. Local Transmission Cost Allocation and Rate Design 251 251

a. Gas Accord Period 251 251

b. 2004 Proposals 252 252

(1) Core and Core Wholesale 252 252

(2) Noncore 252 252

4. Other End User Rate Components 254 254

a. Customer Access Charge 254 254

(1) Gas Accord Period 254 254

(2) 2004 Proposal 255 255

b. Customer Class Charge 255 255

c. Transmission-level Eligibility Criteria 256 256

d. Distribution Rates 258 258

(1) Allocation of Distribution-level Costs 258 258

(2) Balancing Account Protection 259 259

5. Single Electric Generation Class 259 259

a. Gas Accord Period 259 259

b. 2004 Proposal 261 261

6. Other Proposals 264 264

B. Backbone Transmission Cost Allocation and Rate Design 264 264

1. Roll-In Of Noncore Redwood Path Costs 264 264

a. Position of the Parties 264 264

(1) CCC/Calpine 264 264

b. Discussion 279 279

2. Load Factor and Design Capacity 287 287

a. Position of the Parties 287 287

(1) CCC/Calpine 287 287

b. Discussion 300 300

C. Storage Cost Allocation and Rate Design 310 310

1. Discussion 310 310

D. Local Transmission 312 312

1. Four-Tier Noncore Proposal and Backbone level Rate Structure 312 312

a. Position Of The Parties 312 312

(1) CCC/Calpine 312 312

2. Coalinga 324 324

3. Duke 326 326

a. Backbone level Rate Structure 326 326

(1) Four-Tier Rate Proposal 338 338

(6) Palo Alto 345 345

(7) Sacramento Municipal Utility District 349 349

(8) Backbone level Rate Structure 353 353

(9) Four-Tier Rate Proposal 355 355

(10) PG&E 359 359

4. Discussion 365 365

E. Other End-User Rate Components 371 371

1. Customer Access Charge 371 371

a. Position of the Parties 371 371

(1) Department of General Services 371 371

(2) Mirant 372 372

(3) NCGC 373 373

(4) PG&E 374 374

b. Discussion 375 375

2. Customer Class Charge 377 377

a. Position of the Parties 377 377

(1) TURN 377 377

b. Discussion 378 378

3. Transmission - Level Eligibility Criteria 379 379

a. Discussion 379 379

4. Balancing Account Protection Proposal 380 380

a. Position of the Parties 380 380

(1) Duke 380 380

5. Discussion 380 380

F. Single Electric Generation Class 381 381

a. Position of the Parties 381 381

(1) CCC/Calpine 381 381

(2) DGS 386 386

(3) NCGC 386 386

(4) RealEnergy 388 388

(5) PG&E 389 389

b. Discussion 389 389

XIV. Contingency Rate Adjustments 394 394

A. Summary of Proposals 394 394

B. Position of the Parties 396 396

1. NCGC 396 396

2. ORA 398 398

3. PG&E 398 398

C. Discussion 399 399

XV. PG&E Procurement Policy and Core Procurement Services 400 400

A. Summary 400 400

1. Proposals 401 401

a. Winter Firm Capacity Requirement Proposal 401 401

b. CPIM Proposal 402 402

c. Reliability Planning Proposal 403 403

d. Tariff Change Proposal 405 405

2. Other Proposals 406 406

B. Position of the Parties 406 406

1. SPURR/ABAG 406 406

2. TURN 408 408

3. PG&E 409 409

C. Discussion 411 411

XVI. Core Aggregation Transportation Service 415 415

A. Summary 415 415

1. Winter Firm Capacity Requirement Proposal 416 416

2. Transportation Capacity Proposal 417 417

3. Core Firm Storage Proposal 418 418

4. Core Aggregation Growth Proposal 419 419

5. Information Proposal 419 419

B. Position of the Parties 420 420

1. SPURR/ABAG 420 420

2. TURN 426 426

3. PG&E 427 427

C. Discussion 429 429

1. Winter Firm Capacity Requirement Proposal 429 429

2. Transportation Capacity Proposal 429 429

3. Core Firm Storage Proposal 432 432

4. Core Aggregation Growth Proposal 433 433

5. Information Proposal 433 433

XVII. Interconnection Services 434 434

A. Proposals 434 434

1. Gas Rule 27 Proposal 434 434

2. Off-System Direct Connect Proposal 436 436

B. Position of the Parties 437 437

1. CCC/Calpine 437 437

C. Discussion 448 448

1. Gas Rule 27 Proposal 448 448

2. Off-System Direct Connect Proposal 449 449

XVIII. California Gas Transmission Risk Management Program 452 452

A. Summary 452 452

B. Discussion 454 454

XIX. Future Gas Market Structure and Rate Filings 456 456

XX. Conclusion 457 457

XXI. Comments on Proposed Alternate Decision 458 458

XXII. Assignment of Proceeding 458 458

Findings of Fact 458 458

Conclusions of Law 471 471

ORDER 480 480

Attachment A

Attachment B

OPINION REGARDING THE GAS STRUCTURE AND RATES FOR
PACIFIC GAS AND ELECTRIC COMPANY FOR 2004

I. Summary

Pacific Gas and Electric Company (PG&E) filed the above-captioned application on October 8, 2001. PG&E's application requested that the Gas Accord¹ structure and rates for its gas transmission and storage system be extended for two more years (through the end of 2004) pending the resolution of PG&E's bankruptcy filing.

In Decision (D.) 02-08-070, we approved a settlement by the parties which extended the Commission-approved market structure, rates, tariffs, and terms and conditions of service for PG&E's transmission and storage system by one year. Under the settlement, the market structure for PG&E's gas transmission service was extended for the period from January 1, 2003 to December 31, 2003, and PG&E's gas storage service was extended for the period from April 1, 2003 to March 31, 2004. Due to the adoption of the settlement, the issues regarding the gas structure and rates for the period beginning January 1, 2004 were unresolved.

Today's decision resolves the gas market structure, rates, and terms and conditions of service for PG&E's natural gas transmission and storage system for 2004. PG&E and the other parties proposed for resolution a number of structural and policy issues, as well as cost and rate design issues. Appendix B of the decision lists a matrix of the issues addressed in today's decision.

PG&E proposed a $453,736,000 revenue requirement for 2004 for its gas transmission and storage systems.² PG&E's proposed revenue requirement represents an increase of 7% over the Gas Accord revenue requirement for 2003 of $423,923,000 million. Today's decision adopts a revenue requirement for 2004 of $437,564,000.³ The adopted revenue requirement represents an increase of 3.22% over 2003 gas transmission and storage rates of $423,923,000.

Today's decision also addresses the various cost allocation and rate design proposals of PG&E and the other parties. Since this decision adopts a cost allocation and rate design methodology that is very similar to what was contained in the Gas Accord, we expect that the gas transmission and storage rates and charges will rise slightly, reflecting the 3.22% increase in the revenue requirement.

¹ The Gas Accord market structure and rates for PG&E were originally approved in the Gas Accord Settlement Agreement that was adopted in D.97-08-055 [73 CPUC2d 754]. That settlement, and the time period covered by the settlement (through December 31, 2002), is commonly referred to as the "Gas Accord." In addition to the market structure and rates, the settlement addressed PG&E's role in gas procurement for core customers, as well as a number of issues concerning the Line 401 project. Certain provisions of the Gas Accord were modified by D.00-02-050 and D.00-05-049. ² PG&E had originally requested $478,759,000 as its revenue requirement for 2004. This request was based in part on a higher rate of return that PG&E was seeking to litigate in this proceeding. The February 14, 2003 ALJ ruling granted a motion to strike PG&E's cost of capital testimony from being litigated in this proceeding, and stated that "the parties can use the cost of capital established in D.02-11-027 as a placeholder until a decision on the cost of capital for test year 2004 is rendered. ³ The adjustments to PG&E's revenue requirement request, to arrive at the adopted revenue requirement, are shown in Appendix A of this decision.