2. Background

The Commission and the California Energy Commission's (CEC) Energy Action Plan I (EAP I), adopted in 2003, stated our goal to "[e]nsure adequate, reliable, and reasonably priced electrical power and natural gas supplies, including prudent reserves, are achieved and provided through policies, strategies, and actions that are cost-effective and environmentally sound for California's consumers and taxpayers." (EAP I at p. 2.) The Commission's and CEC's Energy Action Plan II (EAP II), issued in October 2005, found that "California must also promote infrastructure enhancements, such as pipeline and storage capacity, and diversify supply sources to include liquefied natural gas (LNG)." (EAP II at pp. 12-13.)

The Commission opened Rulemaking (R.) 04-01-025 to adopt policies in furtherance of this goal. In so doing, we noted that forecasts indicated decreasing production and declining proven reserves in most of the producing basins in the United States, along with decreasing deliverability from Canada. Responding to the need for additional natural gas infrastructure, Decision (D.) 04-09-022, issued in Phase I of that rulemaking, adopted procedures for the utilities to seek pre-approval of contracts for interstate pipeline capacity, and ordered the California natural gas utilities to provide non-discriminatory open access to all new supplies of natural gas, including LNG.

The Commission opened the current rulemaking in order to address supply procurement issues related to LNG. In so doing, we noted our heightened concerns about the adequacy of future natural gas supplies based upon the Energy Information Administration's (EIA) "Annual Energy Outlook 2007" issued in February 2007 and the CEC's "North American Natural Gas Review" presented at the California Natural Gas Stakeholders Working Group Meeting at the CEC on September 6, 2007. Both of these reports forecast an increase in North American natural gas demand, decreasing North American production available to the United States, and our increasing need to rely on LNG to help meet our demand. With these concerns in mind, we undertook to address the process for pre-approving the natural gas utilities' procurement contracts with LNG suppliers in order to help ensure that there will be adequate supplies of natural gas at reasonable prices to meet California's long-term needs.

We received opening comments on January 24, 2008, from the following parties:

· San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas) (collectively, the Sempra utilities), whose affiliated company, Sempra LNG, is developing the Energia Costa Azul LNG receiving terminal in Baja California and whose other affiliates operate the pipelines that would market natural gas from that terminal.

· Pacific Gas and Electric Company (PG&E), whose affiliate has an equity agreement in a proposed interstate pipeline which would transport LNG-supplied natural gas from a proposed LNG import terminal in Coos Bay, Oregon, to Northern California.

· Southern California Edison Company (Edison).

· Clearwater Port LLC (Clearwater Port), which plans to construct and operate the Clearwater Port project, an offshore LNG receiving terminal with an average natural gas production capacity of 1.2 billion cubic feet/day,¹ for delivery into the SoCalGas pipeline system.

· Woodside Natural Gas, Inc. (Woodside), which plans to construct and operate the OceanWay Secure Energy project, an offshore underwater buoy receiving station, for delivery of up to 800 million cubic feet/day (MMcf/d) of re-gasified LNG into the SoCalGas pipeline system.

· Coral Energy Resources, L.P. (Coral), a seller of natural gas to wholesale and retail customers throughout North America; Coral purchases gas supplies in all of the producing basins that currently serve California and plans to market re-gasified LNG from the Energia Costa Azul LNG receiving terminal that is being developed by Sempra Energy LNG.

· The Indicated Producers, an ad hoc coalition that includes BP Energy Company, BP America Inc., ConocoPhillip Company, Chevron U.S.A. Inc., and Occidental of Elk Hills, Inc.

· Gas Transmission Northwest Corporation (GTN), a wholly-owned, indirect subsidiary of TransCanada Pipelines Limited.

· El Paso Corporation (El Paso), the owner and operator of natural gas transmission pipelines; El Paso is also involved in several LNG projects, including an LNG terminal and pipeline in Sonora, Mexico, that is proposed to interconnect with the El Paso system at the Arizona border and could deliver to California and other markets.

· Community Environmental Council (CE Council), a non-profit environmental organization that promotes renewable energy and energy efficiency.

· Ratepayers for Affordable Clean Energy (RACE), a corporation organized for the purpose of advocacy and education regarding energy-related matters.

· South Coast Air Quality Management District (SCAQMD), the public agency responsible for comprehensive air pollution regulation and planning in Southern California.

· The Greenlining Institute (Greenlining), representing the interests of low-income communities, minorities, and residential ratepayers.

· The Utility Reform Network (TURN), a non-profit consumer advocacy organization representing the interest of residential and small commercial customers.

· The Commission's Division of Ratepayer Advocates (DRA).

We received reply comments on March 20, 2008, from the Sempra Utilities, PG&E, Edison, Clearwater Port, Woodside, Coral, the Indicated Producers, the CE Council, RACE, TURN, and also from the following parties:

· Sempra LNG, an affiliate of the Sempra utilities who, as identified above, is developing the Energia Costa Azul LNG receiving terminal in Baja California.

· Sound Energy Solutions (SES), who proposed building an LNG import terminal in the Port of Long Beach, with an average natural gas send-out capacity of 800 MMcf/d, which will connect with SoCalGas's pipeline system.

¹ Source: http://www.energy.ca.gov/lng/documents/3_WEST_COAST_LNG_PROJECTS_PROPOSALS.PDF, updated March 2008.