Other Issues Raised in the Proceeding

In addition to the central issues concerning the reasonableness of Southwest's actions, this proceeding also addressed a variety of related issues, including Southwest's actions in dealing with customers as the crisis developed and potential steps or policy guidance to prevent this situation from arising again. We address these issues in turn.

Did Southwest Take Adequate Steps to Aid its Customers During the Crisis Period?

As part of this investigation, the Assigned Commission and ALJ posed a variety of questions concerning what steps Southwest took to aid its customers as the billing crisis developed. Southwest testified to the following steps:

1. Southwest changed its disconnection policy, by instructing its customer service staff that disconnection should be considered a last resort. Southwest replaced its policy of mandatory disconnection upon a $25 arrearage with one that disconnected only after $100 in arrearage. In addition, Southwest declined to strictly enforce this policy.

2. Southwest implemented a community-wide public service campaign to educate customers in obtaining financial assistance through the CARE program. This included coordinating with the Placer County Human Services Agency and the San Bernardino County Department of the Aging, as well as 25 community service agencies.

3. Southwest expanded efforts to sign up customers for the equal payment and deferred payment plans.

4. Southwest shareholders contributed $45,000 to the Salvation Army's emergency assistance program and $20,000 to the Energy Share program.

5. On January 14, 2002, Southwest filed an advice letter to lower current winter bills.

6. Southwest obtained approval from the Commission to increase the income eligibility level for the CARE program, thereby making CARE available to more of its customers.

In addition, Southwest testified to efforts that it was undertaking to clarify its billing procedures and to make its actions more understandable to its customers.

In response, the County charges that Southwest's customer outreach efforts were inadequate and misdirected. The County states that Southwest's outreach focused on the High Desert communities, rather than Big Bear Valley where difficulties were most acute. In addition, the County asserts that Southwest could have done better. Finally, the County discounts Southwest's recent decrease in gas rates, since this action does not save the customers any money, but simply defers collection to a two-year period commencing April 1, 2002.

We determine that Southwest's outreach efforts to customers were reasonable. Southwest implemented a number of different measures to aid customers in the crisis. Southwest's efforts to reach community groups did reach more groups in the High Desert, but that was in part due to the fact that few community service groups are based in Big Bear Valley, and several of those that serve Big Bear Valley are based in the High Desert. In addition, Southwest's decision to change its policies concerning the disconnection of service was a reasonable response to the emerging crisis.

Should the Commission Order a Core Procurement Incentive Mechanism (CPIM) for Southwest?

The County recommends that the Commission develop a CPIM for Southwest "modeled on the PG&E CPIM that has been in place since 1998."⁶¹ The County states that such a regulatory regime would encourage the utility "both (1) to purchase a balanced, diversified portfolio of natural gas supplies and (2) to operate its storage capacity in a way that is most beneficial to its core ratepayers."⁶²

We will not adopt a CPIM for Southwest at this time. Our experience with the development of CPIM programs for PG&E, SDG&E, and SoCalGas indicates that such a regulatory regime requires an extensive record and thorough documentation of how the CPIM will operate. We have an insufficient record in this proceeding to propose and adopt such a program.

What other Steps Should Southwest Take Concerning the Procurement of Gas and the Use of Storage?

The County and ORA also made a variety of proposals that seek to improve the operation of Southwest's gas procurement and storage system.

Steps Proposed by the County

The County recommends "Southwest develop alternative sources of supply for its Southern California Division, such as gas purchases off the PG&E or Kern River pipelines."⁶³ The County states that the "major barrier to such supply diversification is Southwest's current wholesale transportation contract with SoCalGas, which commits Southwest to being a full requirements transportation customer of SoCalGas."⁶⁴ In addition, the County also shows that all of the other gas utilities have made reservations of firm interstate gas transportation capacity, which they use to make basin purchases. The County states that these basin purchases "have provided a hedge against price volatility in California border markets."⁶⁵ The County, however, recommends no disallowance based on savings that Southwest could have achieved by purchasing gas in basin markets.

In response to the County's discussion, Southwest points out that the contract with SoCalGas has proved a source of savings over the years. Southwest notes further that there is no policy either requiring or prohibiting full reliance on the California border market. Southwest argues "the record demonstrates overwhelmingly that, for several years prior to Winter 2000/2001, Southwest's customers benefited from Southwest's decisions to procure low cost supplies in the mature and robust California border market."⁶⁶ Finally, Southwest cites D.93-06-092, in which the Commission states that SDG&E should analyze "all kinds of gas purchase opportunities"⁶⁷ and "procure a mix of gas supplies that offers the best expected value when all outcomes are considered."⁶⁸

We will not direct Southwest to alter its contract with SoCalGas because Southwest demonstrates that its contract with SoCalGas has proved a source of savings to Southwest and its customers. Moreover, there is no evidence that this contract has constrained Southwest's purchases of gas in any way.

Similarly, there is no need to alter Commission policy to encourage basin purchases, for current policy supports the purchase of natural gas from diversified sources. We will not order that Southwest make purchases of gas from out-of-state basins nor make any disallowance based on Southwest's decision to purchase all its gas supplies in California border markets. We note, however, that the record in this proceeding demonstrated that California markets experienced volatility last winter related both to the cost of gas and to the cost of gas transmission capacity. Based on last year's experience, it would seem clear that any future review of the reasonableness of gas procurement decisions would need to examine any decision to purchase gas entirely from border markets.

Steps Proposed by ORA

ORA makes a series of recommendations for the Commission to consider in addressing Southwest's gas procurement costs in the future:

"1. Continue its efforts to secure interstate capacity;

"2. Develop specific storage guidelines and targets to ensure prudent use of its contractual storage capacity;

"3. Develop a gas procurement strategy that includes risk management tools other than relying primarily on fixed-price contracts, such as acquiring long-term transportation capacity, filling storage resources and potentially using financial instruments;

"4. Consider procuring its core gas supply requirements, or a portion thereof, directly from SoCalGas if the Commission approves the gas portfolio consolidation of SoCalGas and SDG&E (Application (A.) 01-01-021);

"5. Continue to offer customer assistance programs such as the Equal Payment Program and the Deferred Payment Plan."⁶⁹

We find the recommendations offered by ORA sensible - Southwest should continue its efforts to secure interstate capacity that will allow it to make basin purchases of gas. Similarly, Southwest should develop a gas procurement strategy that uses risk management tools such as long-term transportation capacity, filling storage, and potentially using financial instruments such as short-term futures contracts. We also endorse Southwest's efforts to market its Equal Payment Program and the Deferred Payment Plan.

We find that Southwest should modify its current storage program to ensure that it enters the winter heating season with storage at least half full. We do not require that Southwest automatically completely fill its storage on a timetable that ignores prices in gas markets. Although company generated storage targets may make some sense, they should not be considered externally imposed regulations that Southwest should follow independent of market conditions.

We reach no conclusion concerning ORA's recommendation that Southwest consider procuring some of its core gas supplies from SoCalGas. The evidence presented in this proceeding shows that except for the managerial error that led Southwest to fill only 11% of its contracted storage, Southwest has operated in an effective manner, systematically beating many market indices. Thus, we do not join ORA in urging Southwest to relinquish its role in procuring gas for its customers.