III. PROPOSED RULES REQUIRING SUBSCRIPTION TO TURNED BACK CAPACITY

Under the FERC's May 31 Order, the turn back of up to 725 MMcf/d of capacity will occur as early as July 31, 2002, and, therefore, time is of the essence. If we require California utilities to sign up as replacement shippers, they must be able to do so by July 31, 2002 or risk forever losing a significant portion of El Paso's capacity to California, with adverse consequences to California natural gas consumers, both in terms of extremely high prices and shortages of natural gas. Moreover, because natural gas-fired powered plants provide a substantial amount of electricity in California, the potential loss of access to natural gas could cause significant adverse impacts to the California electric consumers both in terms of extremely high prices and potential blackouts due to lack of fuel. In light of the deadlines imposed by the FERC in its May 31 Order, the Commission must pursue expeditious comments on proposed rules in order to prevent potentially dire consequences to California natural gas and electric consumers.

In light of the need for timely action, we limit our initial request for comments to the following two issues. All comments by respondents and other interested parties should be limited to these two fundamental issues.² The first proposed rule is that California's natural gas utilities, SoCalGas, PG&E, SDG&E, Southwest Gas, and California's largest electric utilities, Edison, PG&E, and SDG&E, each be required to sign up for a proportionate amount of the turned back capacity not subscribed to by replacement shippers serving California. The second proposed rule is that the Commission find just and reasonable and pre-approve the California utilities subscription to the turned back capacity. The second rule would guarantee that utility compliance with the Commission's requirement cannot be the basis for a finding of unreasonableness in signing up for the turned back El Paso capacity. All other related issues, such as the allocation among the California utilities' customers for the recovery of these costs or any reasonable or necessary adjustments to a utility company's core procurement incentive mechanism, will be addressed in a later phase in this case. We further describe the two proposed rules, and the issues to be considered, below.

The first proposal, for which the Commission seeks comments, is the requirement that California utilities sign up for as much turned back capacity as possible (that other California replacement shippers do not sign up for and California would otherwise risk losing on the El Paso system). The Commission cannot at this time identify a definitive amount that each California utility should sign up for because the FERC order only indicates a willingness on the part of the marketers to turn back up to 725 MMcf/d of firm capacity on El Paso to California. California marketers may ultimately decide to turn back much less of this capacity. Therefore, we are dealing with a moving target and cannot know at this time the exact amount of capacity that marketers will ultimately choose to turn back or the amount of turned back capacity at particular delivery points on El Paso.³ Likewise, we do not know at this time whether other California replacement shippers (i.e., marketers or end-users in California) intend to sign up for any of the turned back capacity. For example, the City of Long Beach, California or an industrial customer in California may choose to sign up for El Paso capacity rights and purchase natural gas in the Southwest producing basins rather than at the California border.

By proposing that each large California utility subscribe to a proportionate amount of the turned back El Paso capacity, it will spread the El Paso reservation charges (associated with this turned back capacity) over a larger base of ratepayers so that the burden will not fall on any one set of ratepayers and will be minimal to any particular ratepayer. In return, California will have sufficient interstate pipeline capacity in the near future, to help prevent natural gas shortages, electric power shortages and unreasonably high natural gas and electric prices resulting therefrom.

For example, the Commission contemplates that some of the California natural gas utilities, who currently do not have capacity rights on El Paso, may use the newly acquired El Paso capacity to meet their core customer needs. Undoubtedly, it is also necessary to preserve capacity to meet the noncore customers' needs in California, including the needs of electric generation power plants or Qualifying Facilities. Therefore, the California natural gas utilities, including SoCalGas, and the California electric utilities should also sign up for additional El Paso capacity turned back by the marketers, in order to preserve additional capacity for noncore gas customers' needs. To the extent that they do not need the capacity for their own needs, the California utilities can recover the cost of this capacity by short-term capacity releases in the secondary market and through a surcharge on their intrastate rates to make up the difference between costs and revenues for this capacity.

In proposing this rule, the Commission contemplates that the California utilities will negotiate directly with marketers wishing to turn back capacity (i.e., obtain a permanent or long-term capacity release from the marketer at or below the maximum transportation rate) or as part of the formal "capacity rationalization process" contemplated by the FERC's May 31 Order. The Commission does not intend to limit in any way the El Paso EOC customers' growth and legitimate needs for capacity in their own right. We expect El Paso will expand its system sufficiently to meet all of its customers' needs, rather than pit one class of customers against another class of customers as it has done in the past.

The second proposal is to pre-approve and find just and reasonable the practice and costs of each of the California utilities in signing up for a proportionate amount of the El Paso turned back California capacity. In light of previous Commission decisions during very different market conditions (i.e., significant excess pipeline capacity to California), California utilities may be reluctant to sign up for turned back capacity on the El Paso system. As discussed, there is much less excess pipeline capacity to California than there previously had been, and our experience during winter 2000/2001, when California was deprived of substantial amount of interstate pipeline capacity, has demonstrated the severe adverse effects that can occur when there is insufficient interstate pipeline capacity to meet California's needs. Thus, the Commission proposes finding that it is just and reasonable for the California utilities to sign up for the turned back capacity without risking that their subscription to this turned back capacity would ever be used as a ground for disallowing any portion of these costs in rates.

To ensure that shippers serving California have sufficient capacity to meet California's needs during peak times (i.e., winter and summer months), the Commission proposes requiring the California utilities to sign up for the El Paso system turned back capacity not subscribed to by other shippers serving California. California's natural gas utilities, SoCalGas, PG&E, SDG&E, and Southwest Gas, as well as California's largest electric utilities, Edison, PG&E, and SDG&E would be subject to this requirement.

California utilities identified herein are named respondents in this proceeding and are required to file comments on these proposals. All other interested parties may file comments.