I. INTRODUCTION

On December 11, 2000, during a period of unprecedented price spikes for natural gas at the California border, Southern California Gas Company ("SoCalGas") filed Advice Letters ("AL") 2978 and 2979. 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 as of January 1, 2001. In AL 2979, SoCalGas requested that the same formula apply to its noncore customers who requested a transfer to bundled core service after December 1, 2000.

In Resolution G-3304, issued December 21, 2000, the Commission ordered SoCalGas to suspend transfers of noncore customers, including wholesale customers, to core subscription or traditional core service, except for those customers whose gas supply provider was no longer offering service in California. The Commission found that if noncore customers of SoCalGas could elect core subscription (gas procurement service only) or traditional core service (either bundled procurement and transportation, or transportation only, referred to as "core service"), the cost of gas for existing core and core subscription customers would dramatically increase. The Commission rejected SoCalGas' proposal to create an incremental class of procurement service through the advice letter process. SoCalGas was directed to file an application to address these matters.

On January 11, 2001, SoCalGas and San Diego Gas and Electric Company ("SDG&E") jointly filed an application, A.01-01-021, to propose new rules for eligibility and conditions for core service, and to request consolidation of the two utilities' gas supply portfolios and the management of SoCalGas' and SDG&E's separate gas acquisition departments. A major feature of the proposal was, after consolidation of the gas supply portfolios of SoCalGas and SDG&E, that both SoCalGas and SDG&E would charge the same cost of gas to utility procurement customers in SoCalGas and SDG&E service territories. Applicants supported their proposal by noting cost savings and efficiency gains associated with consolidation of gas portfolios and gas acquisition management functions, as well as potentially reduced costs to the Commission for regulation. In addition to applicants, the Office of Ratepayer Advocates ("ORA"), The Utility Reform Network ("TURN"), the City of Long Beach and Segundo Power, LLC and Long Beach Generation, LLC supported consolidation.

SCGC opposed consolidation, arguing in part that SoCalGas' core ratepayers would subsidize SDG&E core ratepayers, and that the proposal did not analyze the benefits and burdens on all affected customers.

SoCalGas and SDG&E also proposed that electric generation ("EG"), refinery, and enhanced oil recovery ("EOR") customers of either utility, which consume more than 250,000 therms per year, not be able to choose either bundled core transportation and utility procurement service or core transportation service alone. Other noncore customers, at the expiration of any firm contracts they already had with their utility, could switch to core transportation or bundled core transportation and utility procurement service. Customers electing core transportation service would have to commit to a five-year term, rather than one-year as then required, with the utilities proposing that if intrastate capacity is insufficient to serve such a customer, such an election could be rejected. For noncore customers using over 250,000 therms per year electing core transportation, other than EG, refinery, and EOR customers barred from such an election, the five-year commitment includes an 80% use-or-pay requirement for the core transportation rate should the customer fuel switch or bypass utility service. Customers electing bundled core transportation and utility procurement services would pay a "cross-over" procurement rate for twelve months.

SCGC opposed this provision, although not explicitly in its briefs or testimony. In a separate filing ordered by Administrative Law Judge Barnett after briefs were filed regarding the impact of D.01-12-018 on this application, SCGC argued that D.01-12-018, which lifted a temporary ban on all noncore customers from choosing core service or core subscription service, meant that no bans on any noncore customers were henceforth permissible. SoCalGas and SDG&E argued that while D.01-12-018, which also confirmed the end of core subscription service while still allowing for core service, signaled the Commission's intent to again provide core service options for noncore customers, it "did not address any terms and conditions on such transfers." Thus, SoCalGas and SDG&E asserted that the Commission in the current proceeding is free to consider any reasonable conditions on such transfers, including the proposal that EG, refinery, and EOR customers be totally barred from electing core service. Moreover, prior to the temporary ban on all noncore customers electing core service all SoCalGas EG customers using over 250,000 therms per year were themselves already banned from electing core service. Thus, SoCalGas and SDG&E argued that lifting of the temporary ban in D.01-12-018 should not necessarily affect EG customers, who had not been eligible for core service prior to the temporary ban applicable to all noncore customers.

In D.02-08-065, the Commission issued an Initial Opinion that deferred approval of the joint proposal to consolidate gas supply portfolios and the management of the separate gas acquisition departments, concluding that the benefits of the proposal were "primarily theoretical." (D.02-08-065, p. 10). The Commission also determined that potential anti-competitive downsides to the proposal were not fully appreciated, such as the lack of a highly competitive electric generation market that would be essential to mitigating any vertical market power gained by the parent company, Sempra. The decision noted that the potential anti-competitive impact of the removal of SDG&E as a separate trading entity, whose purchasing activities together with SoCalGas' and Pacific Gas and Electric Company's ("PG&E") contribute to a significant trading hub at the California border, was not addressed in the application. The Commission also noted that the then pending investigation established in D.02-06-023 regarding California 2000/2001 border gas price spikes will clarify some of the issues affecting consolidation. For the above reasons, the Commission deferred rendering a final determination on the joint proposal for consolidation, pending a decision in the investigation ordered in

D.02-06-023.

With respect to the joint proposal to alter core transportation and procurement services, the Commission noted that "[t]here appears to be relatively little opposition to SoCalGas' and SDG&E's proposals in these areas." (D.02-08-065, p. 18). The Decision accepted the main feature of the joint proposal, concluding that the five-year commitment for core transportation service, and the twelve-month cross-over rate for bundled utility procurement and core transportation service, "will be sufficient to prevent price arbitrage and protect existing customers." In Ordering Paragraph 3, the Decision ordered that "Electric generation, refinery, and enhanced oil recovery (EOR) customers of either utility, any of whom consume over 250,000 therms per year, may not choose core transportation service or bundled core transportation and utility procurement service." (D.02-08-065, p. 29).

SCGC filed a timely Application for Rehearing of D.02-08-065. SCGC seeks rehearing of Ordering Paragraph 3 on two grounds: (1) the decision "is unduly discriminatory to prohibit EG, refinery, and EOR customers that consume over 250,000 therms per year from electing Core Service while permitting other customers that consume over 250,000 therms per year to elect such service" in violation of Section 453 of the Public Utilities Code; and (2) the "prohibition on EG, refinery, and EOR customers electing core service is arbitrary and capricious and is not based on substantial evidence." (SCGC's Application for Rehearing, p. 1). In support of their undue discrimination argument, SCGC asserts that the bar on allowing EG, refinery, and EOR customers to elect core service cannot be justified on the basis of size, load factor, the presence or absence of alternative fuel capability, electric market impact, or end-use. With respect to load factor, SCGC argues that most refinery and EOR customers operate at extremely high load factors, and "some" EG customers at high load factors, while others operate at medium or low load factors. SCGC argues that other customers with high load factors, such as cogeneration units, are eligible to elect core service. SCGC notes that "[e]ven though a noncore customer operates its EG, refinery, or EOR facility at a very high load factor, the rule adopted in D.02-08-065 would prohibit that noncore customer from electing core service." (SCGC's Application for Rehearing, p. 5). In support of its argument that the decision is not supported by substantial evidence, SCGC notes that no finding or fact or conclusion of law supports Ordering Paragraph 3, and argues that this paragraph is not supported by substantial evidence in light of the whole record.

SoCalGas, SDG&E, and ORA filed a joint Response to SCGC's Application for Rehearing, opposing it on the grounds that substantial record evidence exists to support Ordering Paragraph 3, and that this evidence provides a fully adequate basis for the distinction between EG, refinery, and EOR customers using over 250,000 therms per year and other customers. The joint Response cites uncontradicted evidence offered by SoCalGas/SDG&E witness Van Lierop (Ex. 7, pp. 12-13) and ORA witness Pocta (Ex. 12, pp. 10-12) in support of the proposal, evidence not mentioned either by the text of the decision or by SCGC in its Application for Rehearing. The SoCalGas/SDG&E testimony notes that EG, refinery, and EOR "customers have a very different load profile than the general commercial and industrial customers in that their loads exhibit large fluctuations daily and monthly" and "have alternate fuel capability to varying degrees," while noting that some EG units are barred from fuel switching to due local air quality rules. (SoCalGas/SDG&E/ORA Response, p. 3, citing Ex. 7, pp. 12-13). Such usage characteristics result in very difficult forecasting of the gas needs of such customers, and accompanying balancing issues associated with inaccurate projections. ORA testimony further notes that EG, refinery, and EOR customers are sophisticated entities capable of procuring their own interstate pipeline capacity and gas supplies, and often part of integrated energy corporations with access to gas supply and firm interstate pipeline capacity. (Ex. 12, p. 10). Finally, the joint Response notes that under previous tariffs, EG customers in SoCalGas' service territory with usage over 250,000 therms per year were similarly barred from electing core service, and that all of SCGC's clients with issues in this proceeding are EG customers in SoCalGas' service territory. Thus, the ban adopted by D.02-08-065 maintained Commission policy with respect to barring EG customers from electing core service. The joint response asserts, "[a] decision that makes no change in existing tariffs when no party has recommended any change cannot be unlawful for lack of record evidence or undue discrimination in violation of Section 453." (SoCalGas/SDG&E/ORA Response, p. 7) The joint response concedes that there are no findings of fact or conclusions of law directed solely to the provisions, and supports the Commission modifying the decision to add any new findings or conclusions to support Ordering Paragraph 3.

We have carefully reviewed each and every argument raised by the application for rehearing and are of the opinion that good cause for rehearing has not been demonstrated. Accordingly we deny these applications for rehearing. However, as we explain below, we modify D.02-08-065 in several respects to clarify our reasoning and correct typographical errors.