III. Data Requests And Proposals To Address California's Long-Term Need For Natural Gas
In order to make informed decisions addressing the steps necessary to provide California with sufficient natural gas over the long-term, the Commission must call upon the expertise of the California natural gas public utilities, the natural gas industry, consumer groups and other interested parties who participate in Commission proceedings, as well as the Commission's staff. We are therefore requiring the California natural gas public utilities to answer data requests and submit proposals focused on the issues, which the Commission will specify below. All interested parties are invited to respond to the utilities' proposals, including offering modifications or alternatives to the proposals. Due to some deadlines facing the natural gas public utilities and market participants, we will have two phases in this proceeding: Phase I, an expedited hearing which will lead to the Commission's decision by the Summer of 2004; and Phase II, the more comprehensive phase which will lead to the Commission's adoption of new rules and policies in a decision planned for the end of 2004.
A. Data Requests
Pursuant to Sections 581, 584 and 701 of the California Public Utilities Code, the Commission requires the Respondent California natural gas public utilities to provide in a public filing in this proceeding information responsive to the Commission's data requests concerning the utilities' demand forecasts for their service territories (under various specified scenarios), the intrastate and interstate infrastructure (e.g., pipelines and storage facilities) necessary to meet the demand forecasts, the natural gas supply necessary to meet the demand forecasts, and the deadlines facing the utilities and market participants which could require Commission decisions or guidance in 2004. The Commission's specific data requests are attached to this OIR as Appendix A. Respondents should file and serve their data responses as attachments to their proposals addressing the issues for Phase I in this proceeding. The schedule for the filings in this rulemaking is listed below.
In these data requests, the phrase "California Natural Gas Public Utilities" refers to PG&E, SDG&E, SoCalGas and Southwest Gas collectively. The phrase "Your Utility" refers to the specific utility (e.g., PG&E) individually responding to the data requests. Forecasts and other quantities requested should be stated on an MMcf/d basis. The phrase "core customers" includes former noncore customers and core subscription customers, which have elected to become core customers. The phrase "noncore customers" excludes the former noncore customers, which have subsequently elected to become core customers.
B. Phase I Proposals
Phase I is on an expedited track, so that the Commission can issue a decision to provide guidance to the California natural gas public utilities by the Summer of 2004. At a minimum, Phase I will address the following matters that we believe have deadlines necessitating a Commission decision by the Summer: (1) the California public utilities' decisions concerning their existing interstate pipeline firm transportation contracts and subscription to new interstate pipeline capacity; (2) access on the intrastate pipelines to LNG supply in the future; and (3) additional access to or expansion of interconnecting facilities with interstate pipelines to increase California's access to natural gas supplies. In their Phase I filings, the utilities and the responding parties may recommend additional matters for the Commission to rule upon by the Summer to the extent they provide sufficient justification for an expedited ruling on these other matters.
The California natural gas public utilities, identified herein as Respondents, are required to file proposals addressing the following Phase I issues:
1. Sufficient Interstate Pipeline Capacity to
Meet Core Procurement Supply Obligations
Each Respondent should propose the aggregate amount (on an MMcf/d basis) of firm transportation rights on interstate pipelines, which it believes it should hold in 2006 under long-term contracts with interstate pipelines in order to serve its core procurement supply obligations.5 Each Respondent should also propose the aggregate amount of out-of-state supply (whether it transports the natural gas pursuant to firm contracts with interstate pipelines or purchases the natural gas at interconnecting facilities that access LNG supplies), which it believes it will need in 2016 in order to serve its core procurement supply obligations. In each proposal, the Respondent should also generally address guidelines for: how it proposes to contract for sufficient interstate pipeline capacity to meet these supply obligations without risking a supply shortage to its customers in the near future or the long-term; how it will provide supply diversity with such contracts; and what process for Commission review should take place (after the Commission's decision in the Summer of 2004) for the Respondent to receive pre-approval of its specific contracts with each pipeline, including the potential reduction of contract demand capacity rights under existing contracts with interstate pipelines.6 The Commission recognizes that the utilities will have to be in negotiations with the pipeline companies, whether it involves the existing contracts or new contracts, and the utilities may need some flexibility in deciding how much interstate pipeline capacity to sign up for on the various pipelines. While the Commission does not intend to put the utilities in a disadvantageous situation for these negotiations, there must be some type of process in order for the Commission to review and pre-approve new contracts before they are executed. Therefore, each Respondent should specify in its proposal the process it recommends for such pre-approval.
2. Access on Intrastate Pipelines to LNG Supply
Although proposed LNG supplies on the West Coast may not be available until 2006 or later, there are a number of matters that must be resolved in the short-term for these LNG facilities to benefit California. One such matter involves the access issues on the intrastate pipelines in California. Each of the Respondents, except for Southwest Gas, should submit a proposal concerning guidelines for how natural gas supplies from LNG facilities can access each of their intrastate pipelines and distribution facilities to the extent that LNG terminals are constructed on the West Coast.7
Some of the proposed projects would be located in Baja California, Mexico and would need access for their natural gas supplies to be transported through Otay Mesa for the shortest transportation route to Southern California. There is currently an open season deadline of September 1, 2004 for use of pipelines in Mexico and the United States for this natural gas to be transported to Arizona and other East of California locations. We are concerned that LNG shippers may not have direct access from Baja California to the southern California market, and that we have not provided clear guidelines to SDG&E and SoCalGas for providing access to their transmission systems for such shippers. Therefore, so that this LNG supply may also be directly accessible to California, the Commission should issue a decision by the Summer of 2004 concerning general guidelines for access for such natural gas supplies to enter Southern California through Otay Mesa. Accordingly, SoCalGas and SDG&E must address in their proposal the following issues concerning access through Otay Mesa: the reasonable amount of expansion capacity (which shippers may be interested in utilizing) and the costs for such capacity expansion for interconnecting facilities and intrastate pipelines to facilitate this natural gas supply being available to California; the costs and terms for users of these interconnecting facilities; whether there would be double receipt points (i.e., SDG&E and SoCalGas) or one integrated path for such supplies; and whether any other issues (e.g., bypass or peaking rate issues) exist and how they should be resolved if an entity supplies natural gas through this route or a shipper receives natural gas through this route.
For any LNG project, which is proposed to be built in or near the public utilities' service territory (i.e., onshore or offshore California), each Respondent (except Southwest Gas) should also submit in a proposal the extent to which it would have to interconnect with or expand its intrastate pipelines to make the natural gas accessible; the costs and terms for users of these interconnecting facilities; and whether any other issues (e.g., bypass or peaking rate issues) exist and how they should be resolved if a shipper receives natural gas from the LNG facility.
3. Access on Interconnecting Facilities with Interstate Pipelines
In the case of Kern River's recent expansion, which is already in operation, there is currently a dispute as to the accessibility of additional Rocky Mountain supply of natural gas to Southern California. In light of California's future need for natural gas supplies from the Rocky Mountains and other supply sources, the Commission should issue guidelines involving interconnecting facilities, which may include, if warranted, modifications to Commission decisions. Therefore, SoCalGas is directed to file as part of its Phase I filing, a proposal for providing additional access for Rocky Mountain supplies to reach California through SoCalGas' interconnecting facilities.
In conjunction with the California natural gas public utilities' new or renewed contracts, which they intend to enter into with interstate pipelines, there may also be issues relating to interconnecting facilities with the pipelines. To the extent that any Respondent is aware of such an interconnection facility issue and believes that it is urgent for the Commission to decide this issue by the Summer of 2004, the Respondent should include in its Phase I filing a proposal concerning the interconnecting facility.
C. Phase II Proposals
As discussed above, California's energy crisis was caused, in part, by the manipulation in the supply and price of natural gas, and this resulted in billions of dollars of additional costs in natural gas and electric prices ultimately borne by California consumers. What is striking is that this occurred during the time when there were abundant natural gas supplies in North America and close to one Bcf/d of excess interstate pipeline capacity under firm interstate pipeline contracts to California primary delivery points. We now face in a few years insufficient natural gas supplies in North America for all of the forecast potential demand, as well as less interstate pipeline capacity under firm contracts to California, than during the energy crisis. We are uncertain about whether interstate pipeline capacity, which physically connects to California intrastate pipelines, has sufficient available upstream capacity to meet California's natural gas requirements. Unless the interstate pipeline capacity is under a contract for firm service to California primary delivery points and the contracting shipper intends to use the capacity to transport natural gas to California, there is no assurance that the pipeline capacity will be available to meet California's needs.8
These developing conditions present a serious risk of higher natural gas prices or a future natural gas shortage for California, which could be comparable to or even worse than what occurred during the energy crisis, unless the Commission takes new steps and adopts policies and rules to attempt to prevent such a shortage. Accordingly, unless the California natural gas public utilities can demonstrate that they can already fully protect California from a short-term or long-term natural gas shortage caused by interruptions in natural gas supply, we must adopt new policies and rules to be prepared to address these natural gas shortage issues. Accordingly, we are requiring in addition to the Phase I proposals, the following Phase II proposals.9
1. Natural Gas Utilities' System Reserves for Emergencies
In addition to procurement obligations for core customers, the California natural gas public utilities have public service obligations to all of their core and noncore customers in terms of how the utilities operate their systems. All four California natural gas public utilities are obligated to operate their natural gas distribution systems to meet the transportation needs of all of their core and noncore customers. In addition, PG&E and SoCalGas have storage facilities available to meet core and noncore needs, and both utilities also operate extensive intrastate pipelines, which provide access for core and noncore customers to supplies of natural gas from interstate pipelines, from in-state production of natural gas, to and from the utilities' own storage facilities, and, in the case of PG&E, to and from independent storage facilities.
In view of the future risk of California facing a natural gas shortage and much higher prices, the Commission proposes that the public service obligations of California natural gas public utilities, in their role as system operators, be expanded to include a requirement for maintaining "emergency reserves," which consist of: (1) slack capacity on the intrastate pipelines for maximum flexibility of access to storage and interconnecting pipeline facilities; (2) an emergency supply of natural gas in storage in California; and (3) a limited amount of additional interstate pipeline capacity subscribed to by the California utilities solely for the emergency needs of the utilities. In essence, we need insurance in the form of physical supplies that can be accessible to California in the event of an emergency. Even if utilities or some noncore customers enter into financial instruments that can hedge prices, the financial instruments provide inadequate protection to California, as a whole, if there is a physical limitation or supply interruption causing a shortage of natural gas supply for a short or long period of time. Natural gas is essential to provide heat and hot water in homes and businesses, for cooking food and drying clothes, and for fuel for many industries and electric generators. We therefore need access to and a supply of natural gas as a physical hedge to protect California in an emergency situation.
PG&E, SDG&E and SoCalGas, as system operators, are directed to file Phase II proposals to provide an emergency reserve for their systems consisting of excess intrastate pipeline and interstate pipeline capacity, as well as an additional reserve of natural gas in storage. These proposals should specify: how much slack capacity should be available on their intrastate pipelines for emergencies; the amount of additional firm interstate pipeline capacity rights that the utilities believe would be a sufficient amount for them to subscribe to as emergency reserves; how much natural gas emergency reserves they should retain in their storage facilities, or in the case of PG&E, possibly by way of contract with independent storage operators; whether or not PG&E's or SoCalGas' storage facilities should be expanded to help meet future California demand for natural gas; whether existing or new independent storage facilities should be expanded or constructed; and/or the extent to which expansion of intrastate pipelines may be necessary to enhance access to and flexibility in storage operations.10
The emergency reserves of natural gas and capacity rights, which we are considering, should not be considered as dedicated to particular core customers or noncore customers nor assumed to be available in any particular customer's future plans. The emergency reserves should be dedicated to California's needs in the future in the event of a shortage. Each of the Respondents should propose a process under which the Respondents would promptly inform the Commission of an imminent threat of a shortage and of their proposed use of the emergency reserves to protect the customers in their service territories. These proposals should also include a provision as to how the utilities should recover their costs associated with the emergency reserves in a systemwide charge to all customers (e.g., an equal cents per therm volumetric charge), and, to the extent that certain core or noncore customers are allocated a portion of the natural gas reserves in storage during the emergency, a provision as to how that group of customers should be charged for replenishing the supply in storage.
The utilities' proposals for these emergency reserves should address each of the above-mentioned concerns. These proposals should also address how to provide for the emergency reserves in the most cost-effective manner, bearing in mind that the utilities' public service obligations will encompass this responsibility to protect California natural gas consumers from a natural gas shortage.
2. The Utilities' Potential Backstop Function
In addition to and totally separate from the emergency reserves requirement, the Commission is considering the necessity of the natural gas utilities operating as a backstop if the noncore market participants do not ensure sufficient interstate pipeline capacity to meet the noncore customers' needs in the future. It is premature to assume that the noncore market participants (e.g., generators, industrial customers, large commercial customers, and marketers serving these end-users) will not provide for the necessary infrastructure, including contracts for firm interstate pipeline capacity to California, to meet their needs. It is our hope that the noncore customers will take care of themselves.
Nevertheless, we are very concerned about the uncertainty as to whether or not sufficient firm interstate pipeline capacity to California delivery points will be under contracts in the future to meet all of the noncore customers' natural gas needs. As discussed above, numerous marketers offered to turn back El Paso interstate pipeline capacity, and a substantial amount of this capacity was lost to California. In addition, entities are entering into or have entered into long-term capacity releases, which have redirected interstate pipeline capacity away from California delivery points. Many contracts (with California delivery points) between marketers and interstate pipelines will be expiring in the next few years. Many of the large industrial customers and large commercial customers of the California utilities have historically resisted entering into long-term contracts for interstate pipeline capacity.
Consequently, the Commission intends to monitor this situation further, and we instruct the Respondents to propose in their Phase II filings a process by which they will gather information and keep the Commission regularly informed about the infrastructure and services provided to their noncore customers, including the amount of firm interstate pipeline capacity in contracts between interstate pipelines and California noncore customers and/or marketers serving California noncore customers. This information should also include updates as to how much interstate pipeline capacity, which has previously been utilized to serve California, is serving markets outside of California.
In the event that it turns out that there is insufficient interstate pipeline capacity under contracts to serve the noncore market in California, then we will have to consider whether or not the utilities should subscribe to a certain amount of interstate pipeline capacity to serve the noncore customers in their service territory. This "backstop function" would only pertain to ensuring the additional necessary infrastructure to meet noncore customers' needs, but would not pertain to purchasing natural gas for noncore customers, which do not choose to become bundled "core" customers. Moreover, we are requiring the utilities to monitor and inform us of the situation, and, therefore the backstop function of the utilities is merely a potential function at this time.
We do not want to discourage any California noncore customers (i.e., end-users or marketers serving them) from arranging for their own secure supply of natural gas by entering into firm transportation contracts with interstate pipelines with California primary delivery points. Therefore, we are calling this a potential function of the utilities, which could be prevented by the noncore customers signing up for sufficient firm interstate pipeline capacity rights. In addition, we require the Respondents to propose a crediting mechanism as part of their Phase II proposal, which would provide a full or partial credit to a noncore customer from a backstop recovery charge, if any is ultimately adopted, such that the noncore customer would not pay twice for reservation charges with the interstate pipelines.11 Such a crediting mechanism is hypothetical at this time, because the backstop function of the utilities and any specific charges for the backstop function are hypothetical at this time. Regardless of the hypothetical nature of the crediting mechanism, it is important that the Respondents include a crediting mechanism in their Phase II proposals concerning their potential backstop function, so that the market participants have notice of the crediting mechanism when they make their decisions about signing up for firm interstate pipeline capacity rights in the near future.
Consequently, Respondents' Phase II proposals for the potential backstop function should include a process for keeping the Commission informed of the developments discussed above, and a crediting mechanism in the event we subsequently require the utilities to perform a backstop function and adopt associated charges.
3. New Ratemaking Policies Consistent with the Goal of Ensuring Adequate and Reliable Long-Term Natural Gas Supplies
Our current ratemaking policies are aimed at providing the California natural gas public utilities with incentives to keep their costs as low as possible and operate as efficiently as possible. For example, the utilities have "at risk" conditions for recovering some of their costs based upon the noncore throughput on their systems. In light of our examination of new policies to guard against a future natural gas shortage, which could otherwise ultimately impose extremely high costs on California ratepayers, we need to examine our current ratemaking policies so that our public service obligation policies and ratemaking policies are consistent with each other.
It may be that there are some conflicting interests in this regard, and that we need to change certain of our current ratemaking policies. Specifically, "at risk" type of conditions may create incentives to the utilities to focus too much upon short-term gains or potential losses rather than long-term results. Yet, it is the long-term supply situation, where we risk potentially serious consequences.
Secondly, these ratemaking policies may create incentives to the utilities not to have slack capacity, in order to protect their shareholders from any risks. This could undermine the utilities' cooperation with new suppliers of natural gas or independent storage operators. Yet, we need slack capacity and flexibility to enhance California's access to sufficient supplies of natural gas at various times of the year and to make sure that competition at the California border is viable.
Thirdly, specific risk factors affecting potential profits or losses for the utilities could potentially dominate the utilities' perspective away from ensuring adequate and reliable service to all of their customers. Yet, first and foremost, the focus of the utilities should be upon providing adequate and reliable service at reasonable rates to all of their ratepayers in their service territories.
In light of the above, we provide notice herein that we are reexamining these ratemaking policies, and we could potentially modify decisions prospectively, which rely upon these ratemaking policies. We therefore require the Respondents in their Phase II filings to identify and propose changes to current "at risk" conditions they face in their rates, which they believe create incentives that conflict with the Commission's policies in favor of energy demand reduction efforts (e.g., energy efficiency programs) and the Commission's proposals for additional slack capacity, additional interstate pipeline reservation charges and emergency reserves of natural gas.
Accordingly, in their Phase II filings, Respondents should submit proposals as to how to change current ratemaking policies to conform to the new policies of this Commission requiring them to promote energy efficiency programs and maintain and preserve enhanced infrastructure to meet California's demand for natural gas in the long-term.
