5. Evidence at Hearing

At hearing, SoCalGas presented the testimony of three of its employees and a consultant. ORA and TURN each presented one witness to testify in support of the proposed settlement. Edison presented the testimony of a consultant, as did SCGC, to testify in opposition to the settlement. The Commission received 24 exhibits into evidence. Nine of the exhibits were received under seal to conform to a nondisclosure agreement negotiated between SoCalGas and Edison.

Johannes Van Lierop, SoCalGas Director of Regulatory and Business Analysis, credited the GCIM with giving core customers the advantages of a highly motivated procurement agent and continued regulatory oversight from the Commission, the ORA and the Energy Division. Van Lierop testified that the proposed settlement would provide further benefits to consumers by increasing their share of gas cost savings. Opposition to the settlement, he said, comes from noncore customers who believe that efforts on behalf of core customers contributed to the high cost of gas for noncore businesses in the winter of 2000/2001. He denied that SoCalGas was responsible for the high costs and attributed much of the problems of noncore customers to their failure to use available storage capacity as a hedge against later spot prices for gas.

James P. Harrigan, Director of Gas Acquisition for SoCalGas, testified that the GCIM has benefited the utility's five million core customers by aligning core ratepayer and shareholder interests and encouraging the utility to focus on lowering gas costs. Harrigan said that over the first seven years of the program, savings of $299 million below the GCIM benchmark have been realized and, if the settlement is adopted, residential and small business customers will have realized $235 million of those savings. He presented an analysis showing that during the high-price period of November 2000 through March 2001, SoCalGas customers paid an average cost of gas of 65 cents per therm, compared to a PG&E average of $1.02 and an SDG&E average of $1.07. (Customers are billed on a per-therm basis, with a therm representing an amount of energy equal to 100 standard cubic feet of natural gas.)

On cross-examination, Harrigan acknowledged that the total of gas loans and repayments that SoCalGas negotiates with noncore and other customers is known only to SoCalGas, but he denied that this permits manipulation of the market because the volume of such transactions is minimal. He also acknowledged that individual members of the Gas Acquisition Department are paid bonuses based on the department's overall savings, but he defended this as an important incentive in reducing gas costs.

TURN's testimony was received by stipulation. In it, Senior Attorney Michel Peter Florio said that TURN supports the settlement agreement because it increases Year Seven benefits for core customers, establishes winter storage targets to enhance system reliability, and balances ratepayer and shareholder interests during normal and volatile years. Florio stated:

"TURN is no fan of deregulation of vital utility services. Nevertheless...[w]here reliable benchmarks exist to allow the measurement of utility performance compared to other market participants, a mechanism such as the GCIM allows the best of both worlds. The utilities are motivated to compete against other market participants, but at the same time ratepayers are assured of long-term protection through regulation and the ability to modify the mechanism as needed." (Exhibit 18, at 7.)

ORA project manager R. Mark Pocta testified that ORA supports the proposed settlement because, among other things, it assures that the utility will remain an aggressive buyer of natural gas for core customers with the incentive to minimize core procurements costs. Pocta said that the GCIM is superior to hindsight reasonableness reviews, which he described as a "heads you win, tails I lose" process for the utility.

On cross-examination, Pocta acknowledged that the current GCIM might permit excessive shareholder awards during a period like Year Seven when gas prices are unexpectedly high. He said that ORA in all likelihood would have opposed a GCIM award to shareholders of $106 million in Year Seven, but that the settlement resolves that question by imposing a cap on shareholder awards and reducing the Year Seven shareholder award to $30.8 million.

Consultant Catherine E. Yap testified in opposition to the settlement proposal on behalf of California generators represented by SCGC. She said that the GCIM should be modified to encourage SoCalGas to purchase gas at or below prevailing market prices, rather than relying on hub services and financial trades to reduce overall cost of gas. She also criticized the lack of a sunset provision for the GCIM, noting that the Commission had previously denied a recommendation to continue the procedure indefinitely.

Similarly, economist Paul R. Carpenter, testifying on behalf of Edison, faulted the GCIM for relying on wholesale physical and financial transactions with noncore customers rather than encouraging the utility to acquire gas at the lowest possible cost on behalf of core customers. Carpenter stated that the GCIM, both in its current form and in settlement form, encourages perverse incentives and market manipulation through the utility's monopoly position in its storage services, intrastate transmission, and core procurement. Moreover, he said, since noncore customers are on the other side of swaps or other ancillary transactions that benefit core customers, consumers ultimately pay for this benefit when electric generators and others pass on the costs to consumers through increased prices.

SoCalGas sought to rebut the testimony of Yap and Carpenter through the testimony of Van Lierop and economist Jeffrey J. Leitzinger. They testified that the high price of gas in winter 2000/2001 was caused by factors beyond the control of SoCalGas, in particular, unusually cold weather, reduced supplies of hydroelectric power, increased electric generation gas load, the rupture and shutdown of an El Paso pipeline, and inefficient use of gas storage by generators. As to market influence, they testified that SoCalGas represents only 3% to 4% of the total volumes on which the benchmark indices are based. They testified that Carpenter had provided no analysis or data to support a claim that SoCalGas has market power or a monopoly position that it can exercise to enhance GCIM recoveries.