II. Procedural History

A. The Responses to the Application

The 30-day protest period for the application expired on August 25, 2005. No protests were filed, but three responsive pleadings were submitted on the due date. The first was a petition to intervene filed by Wild Goose Storage, Inc. (Wild Goose). After pointing out the Commission decisions that had authorized Wild Goose to build its own gas storage facilities,¹ Wild Goose noted that it, along with LGS and PG&E, are competitors for natural gas storage in Northern California, and that LGS's "plan to increase its storage capabilities will as a matter of course impact the competitive natural gas storage market in the region."

The second responsive pleading was filed by Duke Energy North America, LLC and Duke Energy Marketing America, LLC (collectively, Duke) in support of the application. Duke's response noted that "as one of the largest consumers and transporters of natural gas in California," it recognized the value of gas storage for balancing and cost control purposes. Pointing out that "the Commission has encouraged electric generators to use storage to ensure that gas is available during times of peak electric demand," Duke asserted that the expansion of LGS facilities represented by the Kirby Hills Facility would be "consistent with this goal."

The third pleading consisted of a response and comments filed by PG&E. In its response, PG&E requested that a hearing be held on the application in the event LGS and PG&E could not resolve their differences over PG&E's position that issuance of a CPCN for Kirby Hills should be conditioned upon (1) making LGS responsible for all costs of interconnecting the Kirby Hills Facility with PG&E's Line 400, and (2) limiting the Kirby Hills Facility to only one point of interconnection with PG&E's facilities so as to eliminate any risk of bypass. PG&E's response also noted that it was conducting "good faith negotiations" with LGS over these issues, and that "although PG&E is requesting an evidentiary hearing on these issues in this docket, PG&E proposes that the Commission hold the evidentiary hearing in abeyance pending the outcome of these settlement negotiations." (PG&E Comments, p. 7.)

B. The Adequacy of the Proponent's Environmental Assessment

Under Rule 17.1(d) of the Commission's Rules of Practice and Procedure, an applicant proposing to construct a project such as the Kirby Hills Facility is required to submit, as a separate exhibit to the application, a Proponent's Environmental Assessment (PEA). Moreover, as the agency responsible for certification of the Kirby Hills Facility, the Commission is required under § 15100 of CEQA to assess the completeness of the application, including the PEA.

In its PEA, LGS asserted that the Kirby Hills Facility would either have no significant effect upon the environment, or that any effects it might have could be reduced to insignificant levels through the implementation of certain mitigation measures known as Applicant Proposed Measures, or APMs.

After an initial review of the application including the PEA, the Commission`s Energy Division sent LGS a letter in mid-August 2005 stating that necessary information was missing, and that the application could not, therefore, be deemed complete. LGS responded to the deficiency letter in early September, but on September 23, 2005, the Energy Division sent LGS a second deficiency letter outlining additional information that would be needed before the application could be deemed complete. LGS responded to this letter on October 7, 2005. On October 21, 2005, the Energy Division sent LGS a letter noting LGS's "comprehensive response" to the second deficiency letter, and concluding that, as supplemented, the application could now be considered complete.

Pursuant to CEQA, the Energy Division then commenced its initial study of the project to determine whether an MND could be issued, or whether a full Environmental Impact Report (EIR) would be required. On January 17, 2006, the Energy Division issued for 30 days of public review and comment a Draft IS/MND. The Draft IS/MND concluded that through implementation of the APMs proposed by LGS, along with other mitigation measures set forth in the Draft IS/MND, the Kirby Hills Facility's effects upon the environment could be reduced to less-than-significant levels.

The comments received in response to the Draft IS/MND are discussed in Section V.C of this decision. The Final IS/MND for the Facility issued on February 24, 2006.

C. LGS's Settlement with PG&E

As noted above, while PG&E requested hearings on the application, its request was conditional, with PG&E stating that hearings were unlikely to be necessary if its settlement negotiations with LGS proved successful.

On September 30, 2005, PG&E filed a Further Response in this docket, which stated that PG&E's differences with LGS had been resolved and that PG&E was therefore withdrawing its request for hearings and for imposing the two conditions described above on the CPCN for Kirby Hills.

At the request of the assigned Administrative Law Judge (ALJ), LGS filed, on October 5, 2005, a settlement agreement reflecting its negotiations with PG&E. The settlement agreement has three principal sections. The first governs interconnection costs and provides:

"LGS agrees to pay PG&E in full as Special Facilities per PG&E's Rule 2 all documented costs of designing, engineering, installing, and commissioning metering facilities, necessary appurtenant control valves, communication equipment, permits and fees, and associated costs of a hot tap interconnection of the Kirby Hills facility with Line 400, and a temporary interconnection to Line 182, plus the applicable tax gross-up."

The second provision requires LGS to pay PG&E the full "documented costs of adjusting its computer system and modeling program to take into account the addition of the Kirby Hills facility, up to $200,000."

The third provision deals with the question of whether the Kirby Hills Facility should be limited to one point of interconnection with PG&E's Line 400 and states in full:

"PG&E and LGS agree that the addition of the Kirby Hills facility will neither expand nor contract LGS's current or future ability to directly interconnect with storage customers. Any resolution of interconnection issues emanating from [Rulemaking] 04-01-025 or any other proceeding will apply equally to LGS's existing storage facilities and the Kirby Hills facility. In the event that no resolution of these issues is arrived at in that docket, the parties reserve their rights to advocate their respective positions in any appropriate forum or proceeding."

¹ Wild Goose was originally granted a CPCN in D.97-06-091, and was later authorized to expand the capacity of its storage facilities in D.02-07-036.