Gas Prices

The gas prices used to calculate SCE's short-run avoided costs rely on published border prices at Topock.⁵ SDG&E's short-run avoided costs also rely on Topock indices. PG&E's short-run avoided costs are based on a 50/50 weighting of published border prices at Malin⁶ and Topock.

D.96-12-028, p. 15, provides that:

As the market continues to evolve, parties may wish to rely on new published indices. [Footnote omitted.] Parties may file petitions to modify this decision if they wish to change the indices adopted herein. Before making this request, parties should confer regarding the accuracy and robustness of such new indices. As a minimum, we require that there be four months of reliable information available.

According to its Petition, on July 18, 2000, SCE held a meet and confer session to discuss possible changes to gas price indices.⁷ SCE's Petition filed after that meeting did not propose replacement of gas price indices. In comments on the Petition, ORA proposed that the Commission consider replacing the Topock index because of concerns over market power abuse, and suggested that the Malin border price might serve as an appropriate replacement. ORA's comments argued that the Commission's Section 5 complaint at FERC (Docket No. RP00-241-000) "casts serious doubt on the continued legitimacy of the border indices in the SRAC formula." (ORA August 28, 2000 Comments, p. 8.) The ALJ provided parties an opportunity to comment on issues surrounding the border indices and propose alternative indices if so desired.

SCE states that it historically employed a portfolio approach to gas procurement. SCE argues that when the Commission adopted D.96-12-028, the Topock indices "represented a reasonable proxy for the commodity portion of SCE's avoided cost of gas" (SCE September 27, 2000 Comments, p. 16) because of their robustness and reflection of market dynamics. "Whether the Topock indices continue to represent a fair approximation of SCE's avoided cost of gas depends, therefore, on whether the `market determined prices' reflected in the Topock indices are the result of robust, competitive market dynamics." (SCE September 27, 2000 Comments, p. 17.) SCE argues that "the gas pricing components in the Transition Formula [are] no longer performing their intended function of representing a fair approximation of SCE's avoided fuel cost going forward." (SCE September 27, 2000 Comments, p. 5.) SCE presented an analysis to support its position that continued use of the Topock index price overstates its avoided costs.

SCE argues that Topock indices no longer meet the robustness criteria adopted in D.96-12-028 because of withholding of capacity on the El Paso pipeline. SCE alleges here, and this Commission has argued to FERC, that withholding of capacity on the El Paso pipeline has driven up the basis differential⁸ between the San Juan Basin (a producing basin) and the California/Arizona border. In addition, SCE argues that because many QF gas purchases are linked or tied to the Topock indices⁹ that many noncore gas users are now insensitive to the price of natural gas. (SCE September 27, 2000 Comments, p. 12.) SCE argues that this price inelasticity may be a contributing factor to the increase in Topock prices. (See SCE September 27, 2000, pp. 12-13.) In its December 15, 2000 Comments, SCE Declarant Eric Lavik states "It is my understanding from communications with representatives of these publications [list...] that fewer transaction have recently been reported at the Southern California border at Topock than has historically been the case." (SCE December 15, 2000 Comments, p. 26.)

QF Parties¹⁰ argue that basis differentials "between California border prices and producing region prices are influenced by many factors, including fundamental demand factors in California, supply disruptions such as the El Paso accident, and certain trading strategies of market participants." (QF Parties September 27, 2000 Comments, p. 2.)¹¹ QF Parties argue that high demand for natural gas in California, coupled with utilization of the pipeline system at close to capacity makes it unsurprising that prices at the border have risen. This price signal, QF Parties assert, serves the function of alerting the market that pipeline capacity should be expanded. (See QF Parties September 27, 2000 Comments, p. 12.) CAC argues that it is not the indices that are causing problems, but rather the market itself. (CAC September 13, 2000 Comments¹², p. 4.) QF Parties and CAC also point out that the Topock indices are used in performance based ratemaking mechanisms for Southern California Gas Company and PG&E and that ORA has not raised any issues about the continued use of the Topock index for that purpose.

SCE argues that market power abuse and QF pas procurement approaches render the Topock price no longer representative of SCE's gas purchases. Therefore, SCE argues that we must replace the Topock price in the Transition Formula with another index that has not been subject to market power abuse. In its September 27, 2000 Comments, SCE proposes two options to replace the Topock index, Malin or San Juan Basin plus $0.18/MMBtu. $0.18/MMBtu represents the average cost of interstate transportation between the San Juan Basin and Topock in 1997. SCE states that Malin has not been subject to the same market abuse that has occurred at Topock.

In its November 28, 2000 emergency motion, SCE withdrew its support for Malin to replace the Topock index. Instead, SCE now recommends replacing the simple average of the three published Topock border indices currently used in the SCE Transition Formula with an index consisting of (i) 10% of the simple average of three border indices at Topock (as published in Btu Daily Gas Wire, Natural Gas Intelligence, and Natural Gas Week) and (ii) 90% of Southern California Gas Company's ("SoCalGas") monthly published Schedule G-CS Cost of Gas. In a December 1, 2000 Ruling, comments were allowed on this new proposal and on two other options.

Most parties oppose use of any of the options identified by SCE or in the December 1, 2000 Ruling. Coral Energy Resources, L.P. and Engage Energy US, L.P. (jointly Coral) and QF Parties argue that SCE's avoided fuel costs should be based on a Southern California border receipt point, not a Northern California border receipt point. Therefore, although not supporting use of Malin in lieu of Topock, both Coral and QF Parties recommend that, if we adopt Malin as a replacement for Topock, we add intrastate transportation costs to bring it to Southern California. A review of PG&E's tariffs indicates that PG&E's G-AFTOFF or G-AAOFF from Malin to Off System on the Redwood Path would accomplish this proposed adjustment. QF Parties also identified other possible Southern California border indices, namely North Needles, Wheeler Ridge, and Kern River Station, that could replace Topock.

QF Parties argue that use of basin prices adjusted for interstate transportation is unlawful under § 390(b) because it does not rely on border prices as required by the statute. QF Parties also criticize SCE's proposal to adjust the San Juan basin price by the 1997 basis differential as violating the § 390(b) requirement to use current prices in comparing gas prices to the starting price of gas.

Discussion

FERC has the ultimate authority and responsibility to provide relief to California ratepayers should it concur with our complaint that market power abuse has artificially raised gas prices at the California border. We need not have a definitive ruling that market power abuse is occurring to find that the Topock border index no longer represents a robust market. The comments in numerous rounds of pleadings on this matter have convinced us that the Topock index is no longer sufficiently robust to be utilized in the Transition Formula. Numerous QF parties have submitted declarations regarding how the gas they purchase is tied or linked to Topock prices. Based on the declarations submitted, it is clear that almost none of the QFs that submitted declarations actually purchase gas at Topock, and thus, their purchases are not reflected in the Topock price reported in various publications. Although no specific evidence was adduced regarding the size of the market at Topock (either in terms of number of transactions or volume) at the time D.96-12-028 was adopted or today, it is clear that a significant volume of purchases are not reflected in reported border prices. This reduces the liquidity of the Topock market, making it more susceptible to price manipulation. It is just this sort of reduced liquidity asserted by SCE in the December 15, 2000 declaration of Eric Lavik, paragraph 5.

The possibility of market power abuse on the El Paso pipeline coupled with reduced liquidity in the Topock market convinces us that Topock no longer meets the requirement of reflecting a robust market required in D.96-12-028 and highlights the need for repeal of sec. 390. We will direct the Energy Division to conduct a workshop on the various gas cost options for the Edison SRAC -- Malin plus intrastate transport to Southern California, basin price plus tariffed interstate transport, continued use of indices at Topock, or some combination of these - and report to the commission within forty-five days. Pending the receipt of that report and action on it by the commission, we will adopt the CTP as the Transition Formula.

Next we must determine whether the replacement for Topock meets the requirement of PURPA that it represent the purchasing utility's avoided cost. In its November 28, 2000 Emergency Motion, SCE asserts that if it still owned gas fired generating facilities, it would not purchase gas solely at the border to meet its gas requirements and therefore a border price index cannot represent its avoided cost. We do not need to find that SCE would have purchased gas solely at the border to find that using Malin plus intrastate transportation is a reasonable proxy for SCE's avoided cost of gas and is consistent with PURPA. As SCE emphasizes in its September 29, 2000 Comments, in adopting the Topock indices, "the Commission clearly did not find that SCE had historically purchased natural gas at a price equal to the simple average of the Topock indices." (SCE September 27, 2000 Comments, p. 16, emphasis in original.) By making this statement, SCE acknowledges that in a given month its avoided cost of fuel will differ from the proxy relied on in the Transition Formula, but on average, the proxy will reasonably approximate its procurement costs. SCE itself argues that Malin indices have closely approximated what it believes the price of gas would be in an undistorted Topock market. (See SCE October 30, 2000 Comments, p. 12.) Over time, setting avoided cost based on a robust border price index can reasonably represent gas procurement costs under a portfolio procurement strategy and therefore will generally meet the requirements of PURPA.