5. Pre-Approval of LNG Supply Contracts

We sought comment on what procedures should be used to pre-approve LNG supply contracts. We identified, as one option, the procedure that we adopted for interstate pipeline contracts whereby utilities present proposed contracts within pre-approved capacity amounts and term ranges to Energy Division for informal review and approval. For proposed contracts that fall outside of the pre-approved ranges, the utilities are to confidentially consult with DRA, TURN and Energy Division about their plans and efforts in advance of entering into a contract; if those parties do not reach agreement, the utility may seek pre-approval by advice letter. (See D.04-09-022.) Another option is to require utilities to file advice letters for pre-approval of all LNG supply contracts.

There is no dispute or proposal to deviate from the requirement, under D.06-12-029, that the utilities obtain pre-approval for any affiliate transaction for the procurement of LNG supply, pursuant to D.06-12-029.

The range of comments on the pre-approval procedures for LNG supply contracts generally reflects the parties' respective views on the appropriate procedure for their solicitation:

· The Sempra utilities propose to consult with Energy Division, DRA and TURN in the design and issuance of the RFP and in the awarding of any LNG supply contracts, and to submit the contracts for pre-approval by advice letter filing.

· PG&E similarly proposes to confidentially discuss any proposed LNG contract with Energy Division, DRA and TURN prior to its execution, and recommends pre-approval by advice letter for simple contracts, e.g., price tied to a regional price index, and by application for more complex or very long-term contracts.

· Edison supports applying the interstate pipeline contract pre-approval procedures to LNG supply contracts, but suggests that subjecting contracts of five years or longer to the application process may be too unwieldy for LNG supply contracts.

· Clearwater Port supports applying the interstate pipeline pre-approval procedures to LNG supply contracts, but suggests that an application, rather than advice letter, be required (1) where a contract involves an affiliate, and (2) where the contract deviates from the Commission's gas supply procurement policies (once established).

· Coral opposes a pre-approval process as it presupposes that the costs of any long-term supply contract will be accounted for outside of the utilities' procurement incentive mechanisms. Coral submits that the Commission should modify the incentive mechanisms to include the costs of all long-term and short term contracts within it. Coral recommends pre-approval only in the case of affiliate contracts.

· The Indicated Producers and GTN question the appropriateness of applying the interstate pipeline contract pre-approval procedures to LNG supply contracts.

· TURN proposes that the issue of possible pre-approval of supply contracts be addressed in the upcoming rulemaking addressing procurement incentive mechanisms. In the meantime, utilities should submit formal applications for pre-approval of any LNG supply contract.

· DRA supports allowing the utilities to file advice letters for pre-approval of LNG supply contracts with the provision, as adopted in D.04-09-022, that DRA reserves the right to have the requesting utility file a formal application in lieu of advice letter. DRA shares the Indicated Producers' and GTN's view that the expedited pre-approval process for interstate pipeline capacity contracts is inappropriate for LNG supply contracts.

Having concluded that LNG should compete head-to-head with other sources of natural gas, and without prejudice to the utilities' ability to apply for pre-approval of particular LNG supply contracts in the future, we find no basis to establish a special procedure for the approval of LNG supply contracts or associated cost-recovery outside of the procurement incentive mechanisms. This does not excuse LNG supply contracts from D.06-12-029, which requires pre-approval for any affiliate transaction for utility resource procurement. However, such review and pre-approval is for the limited purpose of ensuring that the transaction complies with the Affiliate Rules.

The utilities have the discretion to seek pre-approval of LNG supply contracts by application, just as they may do for any other relief. We expect such application to show good cause why we should approve the contract and associated cost recovery outside of the procurement incentive mechanism.

We do not authorize the utilities to seek pre-approval of LNG supply contracts by advice letter. The considerations that led us to authorize advice letters for the approval of long-term interstate capacity contracts do not apply here. In particular, D.04-09-022 authorized advice letters for pre-approval of capacity contracts under circumstances of an imminent opportunity to terminate or negotiate reduced amounts of capacity in certain expiring existing capacity contracts, and limited the advice letter process to proposed contracts that were within an established capacity range based on core capacity holding requirements. We do not face an imminent fleeting opportunity for the California utilities to enter into LNG supply contracts, and we do not have a basis to require the California utilities to procure a particular volume range of, or particular terms for, LNG supply. In addition, as the comments highlight, pre-approval of particular gas supply contracts outside of the procurement incentive mechanism implicates a number of significant issues regarding the procurement incentive mechanism. The advice letter process is not adequate to address these issues.