4. Procedures for Soliciting LNG Supply Contracts
We sought comment on what procedures the utilities should use to solicit LNG supply offers. The parties' comments are summarized as follows:
· The Sempra utilities recommend that the California utilities conduct RFPs beginning as soon as 2008, for total LNG supply for up to 25% of their forecasted core and utility electric generation (UEG) demand; the utilities propose to consult with Energy Division, DRA and TURN in the design of the RFP and the identification of preferred terms (e.g., firmness, relevant indices, gas quality, in-service date).
· PG&E believes that immediate active engagement with the major LNG players is necessary so that potential opportunities are not foreclosed, and proposes that utilities collaborate with Commission staff and stakeholder groups to identify contract terms that are most desirable to their customers and commercially feasible.
· For its part, Edison does not believe that it requires long-term gas contracts given its current estimates of its long-term gas needs.
· Clearwater Port urges the Commission to establish long term procurement policies now, given the long lead time for all long-term natural gas projects (production, LNG, pipeline or storage) and so that new supplies will be available when LNG and domestic prices converge.
· Woodside urges the Commission to establish long term contracting guidelines so that the utilities can have the opportunity to enter into long term contracts if and when they determine that they are in the best interests of their ratepayers.
· Coral emphasizes that, as a first order of business, the Commission needs to develop a procurement policy and procurement incentive structures that encourage a portfolio approach that encourages low prices, price stability and risk management. Coral maintains that California utilities need to incorporate price risk management into their gas supply portfolios through staggered terms, fixed prices, hedged and index-priced supplies.
· DRA maintains that, given current economic and market conditions, it is not worth undertaking the considerable effort necessary to develop procedures for soliciting LNG supplies.
· TURN recommends all-source solicitations only after the Commission examines the issue of long-term gas supply procurement in the context of its core supply procurement policies and incentives mechanisms.
As these comments highlight, under the status quo, we do not review the gas utilities' processes and procedures for soliciting gas supply or the reasonableness of their resulting arrangements. Rather, the gas utilities' recovery of costs of gas supply is subject to their procurement incentive mechanisms, which peg rewards and penalties to spot market prices. The gas utilities have the discretion to explore and enter into any supply options by whatever means they choose, with cost recovery subject to their procurement incentive mechanisms (or, in the case of the electric utilities, ERRA review). Having concluded, as discussed above, that LNG supply should compete head-to-head with other supply regardless of source, we find no basis to establish guidelines or procedures for cost recovery related to LNG supply contracts outside of the procurement incentive mechanisms.
Coral and TURN note that, by pegging rewards and penalties to spot market index prices, the procurement incentive mechanisms effectively discourage the gas utilities from entering into long-term fixed-price gas supply contracts. Coral and TURN recommend that we consider whether and how to incorporate price risk management in the utilities' gas supply portfolios through staggered terms, fixed prices, hedged and index-priced supplies, and that we do so in our now-open rulemaking to address the gas utilities' incentive mechanisms.4 This issue applies to all gas supply without regard to source. It is beyond the scope of this proceeding, whose focus is LNG supply only.
With respect to the Sempra utilities' specific proposal to develop and conduct an RFP by 2008 to solicit LNG supply to meet up to 25% of their core and utility electric generation natural gas demand, we reiterate that, while we invite them and the other California utilities to explore their various LNG supply options, we are not prepared on this record to condone any particular contract terms or supply portfolio composition. The utilities have the discretion, under current policy and procedures, to pursue their various natural gas supply options as they deem appropriate, with cost recovery subject to their procurement incentive mechanisms (or, in the case of the electric utilities, ERRA review). We have no basis on this record to dedicate a portion of the utilities' natural gas demand to LNG supply or exempt it from the cost recovery procedures that apply to their procurement of gas supply generally.
4 The Commission issued an Order Instituting Rulemaking to Address the Gas Utilities' Incentive Mechanisms and the Treatment of Hedging under those Incentive Mechanisms (R.08-06-025) on June 26, 2008.
