II. BACKGROUND

For most of the past decade, California has enjoyed the benefits of excess interstate natural gas pipeline capacity and relatively low natural gas prices at the California border, which resulted from competition among marketers of natural gas. More recently, natural gas demand in California and other states has increased and less excess interstate pipeline capacity to California has been available.

On April 4, 2000, the Commission filed a complaint with the FERC in Public Utilities Commission of the State of California v. El Paso Natural Gas Company, et al., FERC Docket No. RP00-241-000, where we challenged anticompetitive contracts between El Paso, the largest interstate pipeline serving California, and its marketing affiliate, El Paso Merchant Energy, L.P. (Hereinafter, this will be referred to as the CPUC v. El Paso complaint proceeding.) In the CPUC v. El Paso complaint proceeding, the Commission presented evidence that El Paso and its affiliate withheld substantial amounts of interstate pipeline capacity to California, causing $3.2 billion of excessive natural gas costs to California consumers during the 15-month term of the contracts. The issues in the CPUC v. El Paso complaint proceeding are being litigated before the FERC and will not be repeated here. It is undisputed in the CPUC v. El Paso complaint proceeding that during winter 2000/2001, El Paso only made available to California shippers approximately 2,600 MMcf/d of interstate pipeline capacity, almost 700 MMcf/d less than El Paso's certificate obligation to California of 3,290 MMcf/d. It is also undisputed that during winter 2000/2001, natural gas prices at the California border were at least two to three times higher than natural gas prices anywhere else in the nation.

One of the factors contributing to the loss of interstate pipeline capacity to California during winter 2000/2001, was the substantial growth in demand of El Paso's EOC customers and El Paso's failure to expand its system to meet all of its customers' needs. In FERC Docket No. RP00-336-002, et al., the Commission, along with numerous other parties, challenged El Paso's practice of allowing certain of its EOC customers to usurp California shippers' capacity, and sought a reasonable limit on El Paso's EOC customers' capacity rights along with a requirement that El Paso expand its system. On May 31, 2002, the FERC issued its "Order on Capacity Allocation and Complaints" (May 31 Order) and required El Paso's EOC customers to convert their capacity rights from unlimited "full requirements" to a limited Contract Demand (CD) amount of firm capacity. See El Paso Natural Gas Company, et al., 99 FERC ¶ 61,244 (2002).

FERC's May 31 Order requires El Paso's EOC customers to decide by July 31, 2002 how much El Paso capacity rights they will need in CD contracts in the near future. The FERC also found that marketers currently serving California under CD contracts are willing to turn back between 592 MMcf/d and 725 MMcf/d of firm capacity to EOC customers to meet new EOC CD demands (in addition to EOC customer's use of El Paso's expansion of its facilities). Although the Commission filed comments in the FERC proceeding arguing that any turned back capacity by marketers currently serving California should first be offered to willing replacement shippers serving California, the FERC's May 31 Order does not address the Commission's proposal. Whether the FERC subsequently clarifies that the turned back capacity should first be offered to California replacement shippers, or the issue is resolved in negotiations with marketers or settlement meetings contemplated in a "capacity rationalization process" provided for in the FERC May 31 Order, if no California replacement shipper comes forward to acqire the turned back capacity, California could permanently lose up to 725 MMcf/d of firm capacity on the El Paso system. As California experienced during the winter of 2000/2001, the loss of this significant amount of El Paso capacity could have devastating rate impacts on California consumers. It is therefore imperative that California replacement shippers subscribe to this capacity and that EOC customers' needs be met by El Paso system expansions rather than by transferring turned back California capacity to the EOC customers.

Marketers who plan to turn back California capacity on the El Paso system have no public service obligation to meet the needs of California consumers. Their willingness to turn back California capacity on the El Paso system is instead driven by profits and losses, including any potential short term financial losses without regard to potential long term profits. On the other hand, our Commission and the California utilities are responsible for ensuring that California consumers' natural gas and electric needs are met without risk of the substantial spike in natural gas prices and electric prices that occurred during winter 2000/2001.¹ Consequently, we must ensure that California preserves as much as possible of the 3,290 MMcf/d of certificated firm capacity on El Paso to California.