II. Background
Since the early 1980s, North America has benefited from surplus natural gas supplies. From the early 1990s until the Summer of 2000, California also enjoyed the benefits of a significant amount of excess interstate natural gas pipeline capacity. Many of the Commission's policies involving natural gas during the past two decades (e.g., "let the market decide" expansion policies, limits to the natural gas utilities' public service obligation to procure natural gas for their noncore customers) reflected these conditions. In these surplus situations, competition has worked very well. As a result of the competition among marketers of natural gas, there were relatively low natural gas prices at the California border until the Summer of 2000.
From the Summer of 2000 through the Spring of 2001, California suffered from an energy crisis, which included exorbitant natural gas prices. The significant increase in the natural gas prices resulted from an increase in demand and the manipulation in the supply of natural gas for California. This, in turn, was part of the cause of exorbitant prices in the wholesale electric market to California, which also was victimized by price and supply manipulation by certain generators and marketers of electricity. California's experience in the energy crisis revealed how a shortage of natural gas and/or electricity, whether real or contrived, can be devastating to the people, businesses and the economy of the State of California. Even a shortage in just a couple of months could cause billions of dollars of additional costs, which would not be incurred if there were a balance in the supply and demand. Moreover, the direct connection between natural gas supply and prices and the price of electricity was clearly established during the energy crisis. While steps have been taken by the State of California and the FERC to try to prevent future manipulation in the energy markets, it is critical that California not face a shortage between its natural gas demand and supply in the future regardless of the cause of such a shortage.
In the CEC's IEPR at 24, the CEC projects natural gas demand in California to increase over the next 10 years, particularly as a result of the growing use of natural gas for electric generation. The CEC further found that California's access to natural gas supplies is greatly affected by the strong growth in natural gas demand in Nevada, Arizona and the Pacific Northwest. Id., at 26.
Notwithstanding the projected increase in natural gas demand in California, recent developments seriously threaten California's supply of natural gas in the long-term, although there is no immediate threat of a natural gas shortage during this year. One such threat is the loss of interstate pipeline capacity to California, which is critical because California's in-state production of natural gas can only meet (at most) 15% of the demand for natural gas in California.
For example, El Paso Natural Gas Company (El Paso) is the largest interstate pipeline serving California with certificated capacity to California of 3,290 MMcf/d (million cubic feet per day). In El Paso Natural Gas Company, et al., 99 FERC ¶ 61,244 (2002), when the FERC required El Paso's East of California (EOC) customers to decide how much El Paso capacity rights they will need in Contract Demand (CD) contracts in the near future, the FERC found that marketers serving California were willing to turn back to El Paso's EOC customers up to 725 MMcf/d of their firm capacity rights on El Paso to California. Of course, while this would benefit El Paso's EOC customers, it would be at the expense of the California consumers who would lose this access to natural gas supplies. Faced with a substantial loss of interstate pipeline capacity to California, in D.02-07-037 we required California utilities to sign up for a significant amount of the firm capacity, which marketers had offered to turn back to El Paso's EOC customers.2 Although the California utilities signed up for more than 400 MMcf/d of this capacity, California ultimately lost 533 MMcf/d of El Paso capacity to the EOC customers as a result of terminated contracts and some of the capacity offered by the marketers in that FERC proceeding. In addition, California has lost even more El Paso firm capacity rights and other interstate pipeline firm capacity rights due to long-term capacity releases of firm capacity by entities previously serving California.
Certain interstate pipeline transportation contracts between California natural gas utilities and El Paso, Transwestern Pipeline Company (Transwestern) or Gas Transmission Northwest Corporation (GTN) will expire in 2005 or 2006 and require notices of termination or the exercise of the right of first refusal in 2004 or early 2005.3 Similarly, contracts for interstate pipeline transportation service (to California delivery points) between certain marketers and these interstate pipelines may terminate in 2005 or 2006, and it is unclear whether or not they will be renewed or subscribed to by entities serving California. Consequently, there is uncertainty over whether California will have enough interstate pipeline capacity rights secured by firm transportation contracts in the future to meet California's long-term needs.
A separate problem, in addition to the uncertainty over interstate pipeline capacity to California, involves new data concerning natural gas production and reserves in North America. With the exception of the natural gas producing basins in the Rocky Mountains, there are indications of decreasing production and declining proven reserves in most of the producing basins in the United States. Although it was previously assumed that there were ample proven natural gas reserves in Canada, which would be adequate to meet demand forecasts in Canada and for export to meet a substantial portion of the demand forecast in the United States, this assumption has been thrown into doubt by the most updated analysis of Canadian production of natural gas. Recent reports by Canada's National Energy Board (NEB) and the United States Department of Energy's Energy Information Administration (EIA) raise significant concerns about the sufficiency of long-term supplies of natural gas developed or produced in North America to meet long-term demand forecasts for North America. In the NEB's report entitled "Short-term Natural Gas Deliverability from the Western Canada Sedimentary Basin 2003-2005" (December 2003) at V, the NEB states that the Western Canada Sedimentary Basin (WCSB) serves practically all of Canada's domestic natural gas requirements and provides exports "that amount to approximately 15% of total market consumption in United States." Production of natural gas in the WCSB was at an all-time high of 16.7 Bcf/d (billion cubic feet per day) in 2001, but has decreased slightly thereafter. The NEB projects deliverability from the WCSB to further decrease to 15.8 Bcf/d by the end of 2005. Id., at VI.
The new data has even more serious ramifications over the long-term. In the EIA's December 16, 2003 report entitled "Annual Energy Outlook 2004" (AEO2004) at 8, the EIA states: "Canadian imports are also projected to be sharply lower in AEO2004 than in AEO2003. Net imports of natural gas from Canada are projected to remain at about the 2002 level of 3.6 trillion cubic feet through 2010 and then decline to 2.6 trillion cubic feet in 2025 (compared with the AEO2003 projection of 4.8 trillion cubic feet in 2025). The lower forecast in AEO2004 reflects revised expectations about Canadian natural gas production... based on data and projections from the Canadian NEB and other sources." We are particularly concerned about these forecasts, because Canada supplies over 25% of California's gas requirements.
There is clearly a need for planning and actions to prevent a natural gas shortage in the future, which could otherwise cause a new energy crisis for California. The CEC has concluded that California must increase its energy efficiency programs to help moderate demand and must actively encourage infrastructure enhancements, such as additional interstate pipeline capacity, more operational flexibility in storage, and access to LNG facilities. See IEPR (December 2003) at VI, VIII, 26 and 29. At the Commission's and CEC's two-day joint workshop entitled "Natural Gas Market Outlook 2006-2016" on December 9-10, 2003, most speakers confirmed the need for increased energy efficiency and additional natural gas infrastructure to meet California's long-term natural gas needs.4
The Commission has the power and the obligation under Article XII, Section 6 of the California Constitution and Sections 451, 701 and 761 of the California Public Utilities Code to actively supervise and regulate natural gas public utilities in California and to do all things which are necessary to ensure adequate and reliable public utility service to California ratepayers at just and reasonable rates. See Camp Meeker Water System, Inc. v. Public Utilities Com. (1990) 51 Cal. 3d 850, 861-862; Sale v. Railroad Commission (1940) 15 Cal.2d 607, 617. Pursuant to this authority, the Commission is instituting this rulemaking proceeding to ensure that California does not face a natural gas shortage in the future. We therefore require the California natural gas public utilities to answer certain data requests and to submit proposals in the two phases of this proceeding, and we invite all interested parties to respond to the utilities' proposals and/or otherwise participate in this proceeding.
