III. Position of the Parties

A. Position of NCGC

NCGC seeks to modify the gas curtailment and diversion rules contained in the PG&E Gas Accord decision and resolution. Specifically, NCGC seeks to give gas-fired electric generation usage a higher priority than other noncore end users for the duration of the current electricity crisis. These curtailment and diversion rules are found in PG&E's Gas Rule 14. Instead of following the priorities established in PG&E's Gas Rule 14, NCGC requests that in the event of a curtailment, non-electric generation service be interrupted before service to electric generators is interrupted. In the event of a gas diversion, NCGC requests that gas transported for electric generation purposes be diverted only after non-electric generation noncore uses have been diverted.

NCGC contends that the Gas Accord and Resolution G-3288 permits PG&E to cut or reduce service to noncore customers in certain situations. NCGC believes that one such situation is found in Section II.E.11.a of the Gas Accord. That section provides for the curtailment of noncore customers in the event PG&E determines that curtailment is necessary due to a constraint on PG&E's local transmission or distribution systems. According to NCGC, the Gas Accord does not provide PG&E with the authority to discriminate among noncore customers on the basis of their end use.

NCGC contends that a second situation for cutting or reducing service may occur when a gas diversion is called pursuant to Section II.E.12.a of the Gas Accord if "operational conditions exist such that supply is insufficient to meet demand and delivery to end-users is threatened. . . ." Instead of providing PG&E with the authority to discriminate among noncore customers on the basis of end use, the Gas Accord established the following order for diverting gas supply on PG&E's transmission system:

"i. Noncore supply scheduled under As-available transportation is diverted in order of contract transmission price and on a pro rata basis for all volumes with the same price. However, scheduled deliveries from storage using As-available transmission will be treated as the highest priority noncore firm transmission.




"ii. Firm transportation to on-system noncore end-users." (73 CPUC2d at p. 811.)

NCGC contends that a higher priority for electricity generators is supported by the language contained in the Temporary Emergency Natural Gas Purchase and Sale Order, and Further Temporary Emergency Natural Gas Purchase and Sale Order that were issued by the Secretaries of the United States Department of Energy (DOE) on January 19, 2001 and January 23, 2001, respectively. In addition, NCGC asserts that the January 9, 2001 letter to Governor Gray Davis from Gordon R. Smith, the President and Chief Executive Officer of PG&E, indicated that diverting gas from electric generators would "decrease the level of electric generation in Pacific Gas and Electric Company's service territory and lead to worsening outages on the electric system." NCGC argues that even though it is obvious that there is a heightened need to avoid curtailments or interruptions of gas service to electric generators in the current crisis, PG&E's Gas Rule 14 fails to provide for any special consideration of electric generators.

In accordance with Rule 47(d) of the Commission's Rules,⁵ NCGC asserts that it did not file its petition within one year of the issuance date of D.97-08-055 because the conditions which resulted in the current electricity crisis did not exist at that time, and were never contemplated when the Gas Accord was negotiated and subsequently approved by the Commission.

B. Position of PG&E

PG&E contends that NCGC has not provided a sufficient policy justification or an adequate evidentiary basis to make a major change to the longstanding rules regarding service priority. NCGC has not provided any information about the impact that such a policy change would have on other noncore customers. PG&E recommends that the Commission deny the petition, or, in the alternative, schedule evidentiary hearings.

PG&E states that the Commission needs to remain cognizant of the "very important, practical differences between supply diversions, on the one hand, and customer curtailments, on the other hand."⁶ If the Commission decides to give electric generators a higher priority than other noncore customers, PG&E states that the higher priority can only be instituted for gas curtailments at the present time, and that a lead time of six months is needed if the higher priority is to apply to gas diversions.

PG&E points out that the current gas supply situation in Northern California is familiar to the Commission. PG&E states that an evidentiary hearing was held on February 16, 2001 in PG&E's application (A.01-01-024) requesting mutual assistance from Southern California Gas Company (SoCalGas). PG&E states that the evidentiary record developed in that proceeding provides valuable and timely information regarding the gas supply situation, and that the Commission should refer to and incorporate by reference the record developed in A.01-01-024.

PG&E maintains that prior to the Gas Accord and the deregulation of the electric industry, gas priorities were established based on the customer's end-use and the customer's ability to burn alternative fuels. In the early 1990s, PG&E's utility electric generation (UEG) facilities had the lowest priority. UEG and other noncore customers were required to maintain adequate backup fuel on site in the event of a curtailment.

In 1993, the Commission lifted the alternative fuel requirement in D.93-09-082. The UEG's priority was raised to the same level as other noncore industrial customers, excluding cogeneration.⁷ When the Gas Accord was adopted, UEGs were made equal in priority to all noncore uses, including cogeneration. Following the deregulation of the electric industry, most of PG&E's UEG plants were sold to other generating companies.

PG&E states that NCGC's petition does not explain whether the preference given to gas-fired electric generators would be equal to, or below, that of core customers.⁸ It appears, however, that NCGC intends that electric generators should constitute a new class of service for gas deliveries that is below the core, but higher than other noncore customers.

PG&E does not believe that the petition provides a sufficient basis to change the longstanding rules which govern service priority to noncore customers. NCGC's petition would essentially terminate gas service to other noncore customers before service to gas-fired electric generators would be affected. Although PG&E agrees that gas-fired generation is an essential component of a source of electric power for California, and that gas-fired generation is especially critical during the current electricity crisis, that does not mean the gas priority rules should now be changed to give electric generators a higher priority than other noncore customers. PG&E also contends that the DOE's orders do not make it "self-evident," as NCGC claims, that electric generation must be given a higher priority than other noncore uses.

PG&E believes that a more extensive record is needed to support a change in curtailment priorities. PG&E states that NCGC has failed to point out in its petition that gas-fired electric generation accounts for two-thirds of PG&E's noncore load on a typical winter day. PG&E contends that if electric generators are given a higher priority, so that other noncore customers are curtailed entirely, the impact on other noncore uses could be disastrous. PG&E states that before the Commission makes a change to the curtailment rules, the Commission should examine the impact on other customers, including the effects on hospitals, refineries, prisons, universities, and military bases.

PG&E also asserts that NCGC has not explained why electric generators have not obtained firm storage withdrawal rights in PG&E's service territory. PG&E points out that under the existing Gas Rule 14, gas withdrawn from storage has a higher priority than all other noncore gas flowing under firm transportation contracts. Thus, electric generators and other noncore customers can use firm storage service to protect their flowing supplies from diversions, and in some circumstances, from curtailments. Before making any changes to PG&E's Gas Rule 14, PG&E recommends that the Commission gather evidence about why the electric generators have not pursued this storage option.⁹

PG&E asserts that if electric generators are given a higher priority of service than other noncore customers during a supply diversion or a curtailment, then the Commission should also consider, once the Gas Accord expires at the end of 2002, how to restructure the rates the generators pay for gas service. PG&E contends that if electric generators receive a higher quality service than other noncore customers, then they should be required to pay a higher rate for this superior service.

If the Commission considers any changes to the gas curtailment rules, PG&E contends that the Commission should also adopt non-compliance penalties for entities that fail to obey a curtailment ordered under Rule 14. Although Rule 14 contains a $50 per decatherm penalty for failing to comply with a gas supply diversion, there is no penalty for a failure to comply with a curtailment order. PG&E recommends that if the priority order in Rule 14 is modified, the rule should be amended to include a $50 per decatherm penalty for a customer's failure to comply with a gas curtailment order.

If a higher priority is established for electric generators in the event of a gas diversion, PG&E states that it would need at least six months to make substantial modifications to PG&E's computer system in order to track and distinguish the gas supplies destined for electric generation from the gas supplies bound for other noncore uses. PG&E contends that such modifications are needed because gas supplies come from a variety of marketers and other sources, and gas supplies often trade hands several times before they reach the ultimate end-use customer. If electric generators are given a higher priority during a gas curtailment, PG&E states that this would not require extensive computer system modifications.

C. Position of CIG/CMTA

CIG/CMTA are opposed to NCGC's petition because it seeks to reverse the curtailment and diversion rules which have been in existence since 1991, and which were incorporated into the PG&E Gas Accord. By seeking to give electric generators a higher priority, CIG/CMTA contend that such a modification will disrupt natural gas service to all other large businesses in Northern California in the middle of the winter season in order to benefit the NCGC members.

CIG/CMTA point out that in D.91-11-025, the Commission eliminated the curtailment priority based upon end-use, and instead decided to allocate gas among noncore customers based on the customers' decision to purchase firm or interruptible service. Diversion of noncore customer gas was implemented on a pro rata basis. These same curtailment and diversion principles were continued in D.97-08-055, and then incorporated into the Gas Accord. CIG/CMTA contend that noncore customers have relied on the same curtailment and diversion rules for over 10 years to plan their operations, and to change the priorities at this juncture would be unfair and unjustified.

CIG/CMTA point out that electric generators make up approximately two-thirds of PG&E's noncore load. If electric generators are given a higher priority than other noncore customers, CIG/CMTA contend that the likely result is that gas service to all other noncore customers would stop, perhaps for an extended period of time. Without gas service, the non-electric generator customers' plant equipment could be damaged. In addition, they may be forced to lay off workers.

If these non-electric generator businesses are shut down, CIG/CMTA contend that the likely consequence is that there will be no demand for the electricity generated by the electric generators who will receive a higher priority. In addition, terminating gas service to one-third of the noncore load is unlikely to meaningfully increase gas deliveries to the remaining two-thirds of the noncore load represented by the electric generators.

CIG/CMTA contend that the gas curtailment rule was designed to provide noncore customers with options, and that noncore customers were expected to make their own contingency plans in the event of a gas curtailment. Noncore customers could choose to cease operations, rely on firm storage services, or acquire sufficient supplies of alternate fuels to use in the event of a curtailment. NCGC's request would essentially force other noncore customers to subsidize electric generators who have failed to acquire alternate fuels or to take advantage of firm storage service.

As for NCGC's reliance on the DOE orders, CIG/CMTA respond that those orders have expired, and that the orders never addressed the issue of whether electric generators should be given a higher priority over other noncore customers.

CIG/CMTA suggest that if the NCGC members want a higher curtailment priority, the NCGC members should seek out and negotiate mutually agreeable arrangements with individual noncore customers. CIG/CMTA state that these noncore customers may be willing to provide their remaining gas supplies after a pro rata curtailment to NCGC members has occurred.

If electric generators are given a higher priority over other firm noncore customers, CIG/CMTA recommend that the Commission require the electric generators to pay other noncore customers an involuntary diversion fee of $50 per decatherm.

CIG/CMTA also contend that NCGC has failed to demonstrate that an emergency exists, and thus, no basis exists for NCGC's emergency petition. CIG/CMTA assert that at the present time, PG&E has adequate gas supplies. In addition, the Commission recently authorized PG&E to pledge its accounts receivable as security for its gas purchases, which CIG/CMTA believe will improve PG&E's ability to procure gas.

D. Position of Sempra Utilities

The Sempra utilities take no position on NCGC's petition as it relates to PG&E's system. They do, however, emphasize that any modifications to PG&E's curtailment priority should be confined to PG&E, and should not result in any modifications to the curtailment priorities for the Sempra utilities.