ALJ/TJS/tcg Mailed 8/29/2002

Decision 02-08-064 August 22 2002

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Investigation into the Natural Gas Procurement Practices of the Southwest Gas Company.

Investigation 01-06-047 (Filed June 28, 2001)

Andrew Wilson Bettwy and Bridget A. Branigan, Attorneys at Law; Leboeuf Lamb Greene & MacCrae, by Christopher Hilen, Attorney at Law, for Southwest Gas Corp., respondents.

Charles Scolastico, Attorney at Law, Kresse Armour, Lori D. Panzino, interested parties.

Marion Peleo, for Legal Division, Jacqueline Greig, for Office of Ratepayer Advocates, and Marshall Riley, for Assembly Phil Wyman.

TABLE OF CONTENTS

Title Page

DECISION FINDING SOUTHWEST GAS'S PROCUREMENT PRACTICES
FROM JUNE 1, 1999 TO MAY 31, 2001 UNREASONABLE 2

Summary 2

Background 2

Procedural Background 4

The Standard for Prudent Managerial Action 5

Issue 1: Were the Actions of Southwest Prudent? 8

Southwest: Gas Procurement was Reasonable 8

ORA: Southwest's Failure to Store Gas was Imprudent 12

County: Failure to Store Gas was Imprudent and Risky 14

Discussion - Flaws in Southwest's Gas Purchasing Policy Constitute
Imprudent Action 19

Issue 2: What is the Appropriate Level of Disallowance that Should
Result from Southwest's Actions? 25

ORA 25

County 26

Southwest 27

Discussion: Disallowance Should Be $2.691 Million; Rebates Due to
Customers Based on Consumption in Winter 2000-01. 28

Other Issues Raised in the Proceeding 30

Did Southwest Take Adequate Steps to Aid its Customers During
the Crisis Period? 30

Should the Commission Order a Core Procurement Incentive
Mechanism for Southwest? 32

What other Steps Should Southwest Take Concerning the Procurement
of Gas and the Use of Storage? 32

Steps Proposed by the County 32

Steps Proposed by ORA 34

County's Motion to Strike Portions of Southwest's Reply Brief or to
Set Aside Submission for Taking Additional Evidence 36

Comments on Proposed Decision 38

Findings of Fact 41

Conclusions of Law 43

ORDER 44

DECISION FINDING SOUTHWEST GAS'S PROCUREMENT PRACTICES
FROM JUNE 1, 1999 TO MAY 31, 2001 UNREASONABLE

Summary

We determine that the failure of Southwest Gas (Southwest) to either use its gas storage or to secure contracts for winter delivery of gas at rates equivalent to the cost of gas that could have been stored during the Summer of 2000 constitutes an imprudent managerial action. This makes a portion of Southwest's costs incurred in acquiring gas unreasonable.

We find that the failure of Southwest to fill its storage to at least 50 percent of its capacity departed from the standard practices of California gas companies and left Southwest exposed to the volatility of 2000-2001 winter gas markets. This led to higher gas costs over this period than are reasonable. We therefore disallow the recovery of $2,691,675 in gas acquisition costs that Southwest should refund to their customers in proportion to their use of gas during the October-March 2000-2001 heating season.