2. Summary of A.07-12-021

In Application 07-12-021 (A.07-12-021 or application), PG&E requests Commission approval of long-term natural gas transportation arrangements on a proposed interstate pipeline known as the Ruby Pipeline Project (Ruby Pipeline). If built, the Ruby Pipeline will extend from Opal, Wyoming to an interconnection with PG&E's gas transmission system at Malin, Oregon, on the California-Oregon border, a distance of approximately 670 miles. The Ruby Pipeline will have a firm delivery capacity of between 1.3 billion cubic feet per day (Bcf/d) and 1.5 Bcf/d at Malin, depending on final contracts with shippers.

The Ruby Pipeline will be an interstate pipeline regulated by the Federal Energy Regulatory Commission (FERC) and must receive a certificate of public convenience and necessity from FERC authorizing its construction and operation. In addition, Ruby's rates, terms, and conditions of service will be subject to ongoing regulation by FERC.

The Ruby Pipeline will be owned and operated by Ruby Pipeline, LLC (Ruby LLC) which, in turn, will be owned 100% by El Paso Corporation (El Paso). El Paso is the largest operator of interstate pipelines in the United States.

PG&E's contract with Ruby LLC is contained in the Precedent Agreement that was executed on December 20, 2007, a copy of which is attached to PG&E's application. The Precedent Agreement includes two sets of transportation arrangements, one for PG&E's Core Gas Supply Department (Core Gas Supply), and the other for PG&E's Electric Fuels Department (Electric Fuels).

In the case of Core Gas Supply, PG&E seeks to acquire 250 MDth/d of firm capacity for the 15-year period of November 1, 2011 through October 31, 2026. The actual start date will depend on when the Ruby Pipeline goes into service. Core Gas Supply will reduce its current holding of 610 MDth/d on the Gas Transmission Northwest Corporation (GTN) pipeline by 250 MDth/d, to 360 MDth/d. As a result, there will be no increase in Core Gas Supply's interstate pipeline capacity holdings. Core Gas Supply already holds firm downstream capacity on PG&E's Redwood Path, and PG&E does not propose any changes to Core Gas Supply's Redwood Path arrangements.

In the case of Electric Fuels, PG&E seeks to acquire 250 MDth/d of firm capacity on Ruby for a four-month period beginning July 1, 2011, and 125 MDth/d for the 15-year period of November 1, 2011 through October 31, 2026. PG&E also seeks to acquire matching downstream capacity on the Redwood Path (i.e., 250 MDth/d for an initial 4-month period followed by 125 MDth/d for a 15-year period). Electric Fuels does not currently hold capacity on the Redwood Path.

Core Gas Supply and Electric Fuels will together hold 375 MDth/d of firm capacity on the Ruby Pipeline (250 MDth/d + 125 MDth/d) for a 15-year period. PG&E will pay a fixed reservation charge equal to the lower of $0.68 per dekatherm (Dth) or 95% of the Initial Recourse Rate (IRR).¹ PG&E will also pay a fuel charge equal to approximately 1.1% of the volume of gas shipped. In addition, PG&E has negotiated a most-favored-nation clause that guarantees PG&E will receive any lower rate offered to another similarly situated shipper during the 15-year period. This rate protection applies to the reservation charge but not the fuel charge.

Starting on the 11th anniversary (November 1, 2022) and each anniversary thereafter, Core Gas Supply and Electric Fuels will each have the option to reduce its capacity as follows: Down to 80% of contracted capacity on the 11th anniversary; down to 60% on the 12th anniversary; down to 40% on the 13th anniversary; down to 20% on the 14th anniversary; and down to 0% on the 15th anniversary. At the end of the initial 15-year term, Core Gas Supply and Electric Fuels will each have an evergreen right to renew its gas arrangements for a one-year term. The evergreen renewal will be exercisable until October 31, 2035 (i.e., 10 years after the expiration of the initial 15-year term). The rate for evergreen extension periods will be the effective rate at the end of the initial 15-term or at the end of any subsequent evergreen extension term.

The annual fixed cost for Core Gas Supply's and Electric Fuels' proposed capacity on the Ruby Pipeline is $93.1 million based on a rate of $0.68/Dth. The annual fixed cost for Electric Fuels' proposed capacity on the Redwood Path is $13.4 million based on PG&E's current tariffed rate of $8.9095/Dth per month. The combined annual fixed cost is $106.5 million. PG&E will have to pay additional, FERC-approved, volume-based charges for (1) pipeline compressor fuel, and (2) lost and unaccounted for gas (L&U gas). All these costs would be offset, in part, by the savings that PG&E obtains from de-contracting 250 MDth/d of capacity on the GTN pipeline. PG&E also forecasts that the savings it achieves by purchasing gas in the Rocky Mountains will more than offset the costs of the proposed gas transportation arrangements.

PG&E requests that the Commission (1) approve the proposed transportation arrangements on the Ruby Pipeline and Redwood Path, and (2) authorize PG&E to recover the costs for these arrangements in PG&E's retail gas and electric rates. PG&E also requests Commission authorization to make conforming changes to its Core Procurement Incentive Mechanism.

At the time PG&E filed A.07-12-021, PG&E's parent company - PG&E Corporation - held an option to purchase a 25.5% equity interest in the Ruby Pipeline. Because it was possible that an affiliate relationship could ensue during the pendency of the application, PG&E requested that the Commission either (1) find that no affiliate transaction approval is required, as the Precedent Agreement was negotiated and executed prior to the existence of any affiliate relationship between PG&E and Ruby LLC, or (2) authorize PG&E's proposed transportation arrangements with Ruby LLC as an approved affiliate transaction pursuant to D.06-12-026, Appendix A-3, Affiliate Rule III.B.1.

On May 6, 2008, PG&E Corporation terminated its option to acquire an equity interest in the Ruby Pipeline, and PG&E withdrew the request in its application for the previously described approvals and waivers related to PG&E Corporation's acquisition of an equity interest in the Ruby Pipeline.

¹ The IRR is the tariffed rate for firm service for a term of between one and 15 years.