COM/LYN/TAH/epg Mailed 8/29/2002
Decision 02-08-065 August 22, 2002
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Application of Southern California Gas Company in Compliance with Resolution G-3304 and of Southern California Gas Company (U 904 G) and San Diego Gas & Electric Company (U 902 G) to Consolidate their Gas Supply Portfolios. |
Application 01-01-021 (Filed January 11, 2001) |
(Appearances are in Attachment A)
INTERIM OPINION AUTHORIZING NEW RULES FOR ELIGIBILITY
AND CONDITIONS OF CORE AND WHOLESALE SERVICE, AND
DEFERRING APPLICANTS' REQUEST TO CONSOLIDATE GAS SUPPLY PORTFOLIOS AND GAS ACQUISITION MANAGEMENT
TABLE OF CONTENTS
INTERIM OPINION AUTHORIZING NEW RULES FOR ELIGIBILITY AND CONDITIONS OF CORE AND WHOLESALE SERVICE, AND DEFERRING APPLICANTS' REQUEST TO CONSOLIDATE GAS SUPPLY PORTFOLIOS AND GAS ACQUISITION MANAGEMENT 33
1. Consolidation of the SoCalGas and SDG&E Gas Acquisition Portfolios 66
2. Reversion of El Paso Capacity 1616
3. Revised Rules for Core Transportation and Procurement Services 1818
5. Core Aggregation Transportation (CAT) 2323
6. The Long Beach Agreement 2424
9. Comments on Draft Decision 2626
ATTACHMENT A
INTERIM OPINION AUTHORIZING NEW RULES FOR ELIGIBILITY
AND CONDITIONS OF CORE AND WHOLESALE SERVICE, AND
DEFERRING APPLICANTS' REQUEST TO CONSOLIDATE GAS SUPPLY PORTFOLIOS AND GAS ACQUISITION MANAGEMENT
This decision authorizes Southern California Gas Company (SoCalGas) and San Diego Gas & Electric Company (SDG&E) to:
· implement revised uniform rules for their noncore customers wishing to obtain core service from them; and
· implement revised uniform rules for large core customers who wish to obtain utility procurement service.
This decision finds that a five-year customer commitment to procurement service is an adequate period to prevent customer switching and to facilitate utility asset planning.
Pending the outcome of the investigation set forth in Decision 02-06-063, we will at this time defer consideration of applicants' request to:
· consolidate their gas supply portfolios and related interstate pipeline and storage capacities, and to charge the same cost of gas to utility procurement customers in the SoCalGas and SDG&E service territories; and
· consolidate the management of their separate gas acquisition functions into a single management group.
In an appropriate phase of a separate Rulemaking R.02-06-041 addressing interstate pipeline capacity to California, the Commission will consider applicants' request to provide brokering arrangements for unassigned SoCalGas capacity on the El Paso Natural Gas Company's pipeline and the allocation of that capacity.
On December 11, 2000, SoCalGas filed Advice Letters (AL) 2978 and 2979. At that time the market price of gas delivered at the California border had reached an unprecedentedly high level, both in absolute terms and relative to the market price of gas in producing basins plus the as-billed rate for firm interstate transportation. SoCalGas' average cost of gas had become very attractive compared to alternative supplies available in the marketplace.
In AL 2978, SoCalGas requested that the Commission apply a new formula for determining its monthly procurement rate for noncore customers selecting core subscription service beginning January 1, 2001. In AL 2979, SoCalGas requested that the same formula apply to its noncore customers who requested to transfer to bundled core service after December 1, 2000 (including gas procurement service).
In Resolution G-3304, issued December 21, 2000, the Commission found that if noncore (including wholesale) customers of SoCalGas were allowed to elect core subscription or traditional core service (including procurement service), it would substantially increase SoCalGas' cost of gas for its existing core and core subscription customers. Moreover, the Commission found that SoCalGas' proposal to create a class of procurement service that would be charged an incremental procurement cost was too complicated and speculative to adopt on an emergency basis. Instead, the Commission ordered SoCalGas to suspend transfers of noncore customers (including wholesale customers) to core subscription or traditional core service, except for customers whose gas supply provider was no longer offering service in California if SoCalGas was convinced that such customers would be left without service. Resolution G-3304 also required SoCalGas to file an application to address the issues contained in its advice letters.
On January 11, 2001, SoCalGas and SDG&E jointly filed this application. In addressing the issues required by Resolution G-3304, they propose new rules for eligibility and conditions for core service, the consolidation of the management of SoCalGas and SDG&E's currently separate gas acquisition departments, and the consolidation of the two utilities' gas supply portfolios, including associated storage and interstate capacity.
SoCalGas and SDG&E propose to:
1. Consolidate their gas supply portfolios and related interstate pipeline and storage capacities, and to charge the same cost of gas to utility procurement customers in the SoCalGas and SDG&E service territories.
2. Consolidate the management of their currently separate gas acquisition functions into a single management group, to lower total overhead expenses and promote more efficient gas purchasing.
3. Implement revised uniform rules for their noncore customers wishing to obtain gas supply (or procurement) service from them.
4. Implement revised uniform rules for large core customers who wish to obtain utility procurement service after having first elected transportation-only service.
5. Allow non-affiliated wholesale customers to purchase gas from the combined portfolio on terms that are reasonable for all affected core gas consumers.
6. Provide that when brokering arrangements elapse for unassigned SoCalGas capacity on the El Paso Natural Gas Company's pipeline (in excess of that which the Commission allocated to the SoCalGas core market in the last Biannual Cost Allocation Proceeding (BCAP)), that capacity should be allocated to the consolidated gas supply portfolio.
7. Allow employees in the consolidated gas procurement function to participate in the negotiation of any power contracts and associated gas supply arrangements by SDG&E that involve "tolling" provisions.
Public hearings were held June 25 and 26, 2001, before Administrative Law Judge (ALJ) Robert Barnett. The matter was submitted subject to the filing of briefs. Briefs were filed by applicants, Office of Ratepayer Advocates (ORA), The Utility Reform Network (TURN), Southern California Generation Coalition (SCGC), the city of Long Beach, El Segundo Power and Long Beach Generation (ES/LB), and the California Industrial Group and the California Manufacturers & Technology Association (CIG/CMTA).
1. Consolidation of the SoCalGas and
SDG&E Gas Acquisition Portfolios
SoCalGas and SDG&E propose to consolidate their gas commodity procurement and management functions into a combined gas portfolio which would be managed by a single organization. They request management discretion to determine whether the personnel would be employees of SoCalGas or SDG&E, or some combination thereof. The combined gas acquisition organization would remain separate from the utilities' gas operations organization, as required by SoCalGas/SDG&E merger conditions.1 They propose that the cost of all gas supplies and associated storage and interstate capacity currently held by SoCalGas and SDG&E and all new supplies and assets be included in the combined portfolio. Currently unassigned El Paso capacity held by SoCalGas would be allocated to the consolidated portfolio to the extent that existing agreements for its brokering expire and is not otherwise committed.
Customers receiving procurement service from SoCalGas or SDG&E would pay the same rate for procurement service (including the cost of interstate capacity and storage). The allocation of the cost of intrastate transportation on the SoCalGas and SDG&E systems would not be affected by this proposal.
Applicants assert that consolidating their gas acquisition management functions and their gas portfolios will generate savings that will be passed through to their gas customers through organizational efficiency. Currently, SoCalGas and SDG&E combined have about 54 people dedicated to gas acquisition functions. They estimate that by consolidating management, approximately 7 to 9 positions can be eliminated. This would produce an overhead savings (salaries, benefits, and associated support costs) of about one million dollars per year. These savings will be reflected in annual performance-based ratemaking (PBR) earnings sharing calculations until the next PBR/Cost of Service proceeding, at which time they will be embedded in the authorized revenue requirement.
Applicants claim additional benefits from consolidation. They say a larger organization would allow for better back-up and training, and better management of turnover. It would allow for improved senior management focus on a single organization. It would reduce the cost, both to the utilities and to the Commission, to regulate two separate portfolios and gas cost recovery incentive mechanisms. They contend consolidation would produce gas cost savings, as well as overhead savings, compared to the combined gas costs of the two utilities operating gas acquisition on a stand-alone basis.
Applicants identified three principal ways in which consolidation will save gas costs:
First, applicants state that the reliability margin of gas in storage (or equivalent assets) that a consolidated portfolio will need to maintain can be somewhat less than the sum that each utility has to maintain when operating on a stand-alone basis. Second, consolidation will allow more economic use of the gas supplies, storage, and interstate capacity of the two utilities, especially of SDG&E's assets. Because of its size, existing trading organization, computer systems, and hub services organization, applicants argue that SoCalGas is better positioned than SDG&E to capitalize on core assets when they are not needed to serve procurement customers. Additional revenues are generated by physical gas transactions (off-system sales), capacity transactions, derivatives, and hub transactions. SDG&E contends that it is handicapped because its size does not support the systems needed to engage in those transactions. Third, increased load and supply diversity from consolidation will be beneficial. The access to Canadian supplies through the Pacific Gas and Electric Company system that SDG&E brings adds to the diversity of SoCalGas' core portfolio, which has no capacity on that route. Overall, SoCalGas and SDG&E estimate an annual savings of millions of dollars, depending on market conditions.
ORA supports applicants' consolidation proposal. ORA agrees that consolidation will produce 1) more efficient gas purchasing resulting in lower commodity costs because of the greater amount of natural gas being procured and greater diversity of demand being served, 2) more efficient use of storage and capacity assets, 3) greater efficiency in the cost of managing the utilities' gas procurement activities, and 4) regulatory efficiency. ORA also agrees that the combined purchasing power of the two utilities might be sufficient to counteract market power of suppliers, which would benefit California customers.
TURN supports consolidation provided that additional interstate capacity is reserved for the combined portfolio and that the revenue requirements for the two utilities be decreased on January 1, 2002. The city of Long Beach and El Segundo Power, LLC and Long Beach Generation, LLC support consolidation.
SCGC opposes consolidation.2 It argues that the proposed merger of the core portfolios would improperly require SoCalGas' core ratepayers to subsidize SDG&E's core ratepayers; and insofar as the SoCalGas core has an independent need for reverting El Paso capacity, assigning the reverting El Paso capacity to the combined portfolio would fail to mitigate cross-subsidization of the SDG&E core by the SoCalGas core. SCGC contends that the SoCalGas core needs the reverting capacity for its own purposes, making the reverting capacity unavailable to offset the impact of combining the core portfolios; that combining the wholesale core loads with the SoCalGas core portfolio would require most of the reverting El Paso capacity that is independently needed by the SoCalGas core; that even if the reverting El Paso capacity were not needed independently by the SoCalGas core, the amount of reverting capacity would be insufficient to prevent the combining of the core portfolios from imposing a burden on the SoCalGas core; that the Sempra companies have proposed combining the core portfolios without analyzing the benefits and burdens on customers; that the Commission should not ignore market conditions and the impact on SoCalGas core ratepayers; and that the better course would be to avoid the benefit/detriment issues by having SDG&E maintain a competitive gas portfolio. Finally, SCGC asserts that assigning the reverting El Paso capacity to core customers without any offsetting benefit is unfair to noncore customers.
Discussion
We are concerned that the benefits of this proposal are primarily theoretical and do not offset the potential downsides as presented on this record to consolidating two of the largest supply and capacity portfolios in the state. The proposal also raises additional questions about the future needs of each utility's customers that the record does not allow us to address. The investigation into the California border price spike during 2000-2001 that we contemplated in D.02-06-023 could help to clarify these issues for possible further consideration.
SDG&E holds interstate pipeline contracts for a small portion of its demand. SDG&E's core procurement load is approximately 125 MMcf/d during an average year, and the utility has 35 MMcf/d of pipeline capacity under contract to serve that load. SDG&E buys much of its customers' remaining requirements at the California border, which historically has been priced lower than the basin price plus the full as-billed interstate transportation rate to get it to the California border. As a result, prior to December 2000 when applicants filed this application, SDG&E's core procurement customers avoided paying the full-as-billed pipeline transportation rate for most of their requirements. SoCalGas, on the other hand, owns interstate capacity rights of 1044 for core that generally match its average daily load, which allows it to buy most of its gas in the production basins. Historically, therefore, in the 33 out of the 42 months prior to November 2000, SDG&E's prices were less than SoCalGas'. At the time this application was filed, however, California border prices were many times the basin-plus-full-transportation rate (and indeed, several times higher than citygate prices nationwide). SDG&E paid significantly more for gas between late 2000 and the early months of 2001. If we consider the historical data, SDG&E would be better off not consolidating.
In D.98-03-073, we approved the merger of SoCalGas' and SDG&E's parent companies. A central focus of that decision was the question of whether the merger at the parent company level would result in market power for either utility company. We agreed with ORA that the advent of a competitive electric market increases the conflicts of interest and potential for market abuses by creating an additional vertical market relationship. We ordered the divestiture of all SDG&E's gas-fired generation facilities in order to mitigate the merged entity's market power and assuage other competitive concerns.
Divestiture of SDG&E's generation facilities notwithstanding, the market power concerns raised by ORA, Imperial Irrigation District and others in the context of the merger proceeding remain relevant today. Indeed, they are even more relevant today. At the time, the companies specifically withdrew from the scope of the merger request the proposal to consolidate their gas procurement operations, so this issue did not factor into our market power analysis then. Furthermore, at the time, many of the arguments supporting the conclusion that the merged parent companies would not have vertical market power, were premised on the assumption that the bulk power market in which the generators served by SoCalGas operate would be highly competitive. Therefore, the argument followed, even if SoCalGas could manipulate gas prices, competition from generators not served by SoCalGas would substantially undercut efforts by SoCalGas to raise (then) PX prices. The experience in the electric wholesale market of the last two years indicates that the competition from other generators element of this assumption, at least, was incorrect.
We further note that the applicants in this case have proposed that the management of their combined gas acquisition department be allowed to assist SDG&E with respect to "tolling"3 arrangements for wholesale power purchases to serve SDG&E's electric customers. We are concerned that this proposal effectively re-introduces - albeit in a different form -- the electricity generation element that we ordered removed in D.98-03-073 with SDG&E's generation divestiture. It is therefore critical that we consider the market power arguments in this context.
The application goes beyond simply increasing the SoCalGas portfolio by the approximately twelve percent that SDG&E's portfolio would add. It also includes access to information about the electric wholesale market and the natural gas requirements of generators in SDG&E's service territory through the tolling agreement proposal. We understand applicants' clarification that they are not proposing any consolidation of tolling gas for SDG&E's electric transactions with the gas supplies and assets in their proposed consolidated gas portfolio to serve their gas procurement customers, and that tolling purchases would not rely upon core assets. Use of core assets to support tolling agreements for electricity generation contracts, however, is a separate issue from the wholesale electricity market knowledge to be gained if the combined utility procurement staff assist in negotiating and managing gas tolling agreements that support electricity contracts.
Furthermore, Applicants and Long Beach have jointly presented a proposal for giving wholesale customers of SoCalGas an option to purchase gas from the consolidated SoCalGas/SDG&E gas portfolio. This proposal provides wholesale customers with treatment comparable to that which SDG&E would receive; that is, it treats core and noncore customers of the wholesale customers as if they were core and noncore customers, respectively, of the consolidated procurement operations.
Taken together, the various proposals contained in this application -- addition of SDG&E's procurement to SoCalGas', the consolidated portfolio's involvement in tolling agreements, and opportunity to add additional wholesale load to the consolidated portfolio - add up to a potentially significant increase in both scale and scope of SoCalGas' existing procurement operations. When considered in context of SoCalGas' unique position as a monopoly provider of gas transportation and storage services, and its access to and control of system information, we are troubled at the prospect of significantly increasing the scale and scope of what is already one of the largest local distribution company procurement operations in the country.
Currently, the separate purchasing activities of SoCalGas and SDG&E contribute, along with PG&E's separate core procurement department, to a significant trading hub at the border where Southwest basin gas enters California. This proposal would effectively remove a significant participant from that market. The applicants have not addressed the impact, if any, of that result; however, we do not see how removing a market participant increases market transparency.
We turn next to the benefits of consolidation claimed by the applicants and ORA. They can be summarized as 1) producing gas cost savings; 2) better back-up, training and management; 3) reducing the cost of regulating two separate portfolios, and 4) saving approximately $1 million annually in gas procurement overhead (staffing). We address these points in order below.
First, applicants claim that the reliability margin of gas in storage (or equivalent assets) that a consolidated portfolio will need to maintain can be somewhat less than the sum that each utility has to maintain when operating on a stand-alone basis. Given the key role of stored gas in meeting the peak core demand on SoCalGas' system, and in putting downward pressure on prices overall, it is unlikely that we would view a reduced reliability margin of gas in storage as a benefit.
The applicants further maintain that consolidation will allow more economic use of the gas supplies, storage, and interstate capacity of the two utilities, allowing the consolidated portfolio to capitalize on core assets when they are not needed to serve procurement customers. Certainly, consolidating portfolios expands the assets available for SoCalGas to use in generating additional revenues by physical gas transactions (off-system sales), capacity transactions, derivatives, and hub transactions. The transactions enabled by the use of SDG&E's assets would generate additional revenue to offset the cost of procured gas. However, the record does not establish that use of these assets contributes to a lower cost of actually procuring the gas itself. At its best, this benefit is speculative. At worst, the combination of 1) these additional SDG&E assets with 2) SoCalGas' existing control over interstate, intrastate and storage capacity serving Southern California, and 3) SoCalGas' incentives under its Gas Cost Incentive Mechanism to offset core procurement costs with revenues earned selling gas and capacity to the noncore, could result in higher overall border gas prices - to the detriment of all California gas consumers.
Finally, applicants state that increased load and supply diversity from consolidation will provide gas cost savings. The benefit of supply diversity, however, is something that either utility could acquire absent consolidation of their core procurement departments. Similarly, each utility separately already has at its disposal the tools to ensure reliable service to its respective procurement customers at reasonable and stable prices. Over the long term, SoCalGas and SDG&E could diversify their respective portfolios by acquiring capacity access to Canadian gas (in the case of SoCalGas) or U.S. Southwest-produced gas (in the case of SDG&E). It is not necessary to consolidate the procurement departments to do either.
Second, applicants argue that consolidating the companies' procurement functions will allow for better management, training and back-up. This benefit is theoretical. Applicants have not quantified these benefits, or specified how better training and back-up will occur.
Third, applicants and ORA state that consolidating the core procurement departments will lead to greater regulatory efficiency. The gas procurement activities of SoCalGas and SDG&E are already governed by benchmark incentive mechanisms that are relatively streamlined compared with the prior practice of reasonableness reviews. The "benefit" of conducting one annual incentive mechanism instead of two is unclear, and could actually lead to decreased oversight of the combined utilities' portfolios.
Finally, the approximately $1 million in annual gas procurement overhead savings that the applicants believe they will save is negligible when considered in the context of the utilities' overall portfolios.
These concerns do not allow us to make a final determination on the consolidation at this time. The investigation that we contemplate in D.02-06-063 regarding the California 2000/2001 border price spikes may clarify the issues. We will defer further discussion and final decision on the consolidation to a future date to be determined pending a decision in that investigation.
1 SoCalGas and SDG&E are affiliated companies, both being subsidiaries of Sempra Energy. Their respective parent companies, Pacific Enterprises and Enova, were authorized to merge in Decision (D.) 98-03-073, subject to a variety of conditions imposed to mitigate market power concerns. 2 CIG/CMTA filed a Reply Brief in which it is "adopting various arguments advanced by the SCGC." (Reply Brief p. 1.) 3 "Tolling" in the context of power purchase contracts refers to arrangements in which the purchaser of power from a generator provides the gas needed to generate the power, or makes other arrangements such that the generator is not at risk for variation in the price of gas consumed to produce the power. Tolling arrangements have the potential to provide benefits to electric consumers through reduced electric price volatility and ensuring plants are available to meet peak demands.
