Position of the Parties

A. SoCalGas

The Year Eight GCIM application of SoCalGas reports on the reasonableness of its gas supply and storage operations for the period April 1, 2001 through March 31, 2002. In accordance with D.94-03-076, D.97-06-061, D.98-12-057 and D.02-06-023, SoCalGas requests that the Commission approve a shareholder award of $17.4 million.

SoCalGas' Annual Report for Year Eight, which was attached to SoCalGas' application, notes that "SoCalGas' core customers have realized the benefit of gas purchases below the GCIM Benchmark in seven of the past eight years." (A.02-06-035 Application, Attachment A, p. 2.) SoCalGas' Annual Report also states:

"In summary, the GCIM provides an incentive for SoCalGas to efficiently use the retail core's interstate pipeline and storage rights to deliver reliable, low-cost supplies. Reliability is achieved by constructing a portfolio of natural gas supplies that is diversified by contract type, geographic region, and supplier. SoCalGas uses tools available to a typical trading organization, including purchases, sales, loans, parks, wheels, derivatives, exchanges, and transportation contracts. These tools enhance reliability and allow SoCalGas to make economic use of assets, when not directly needed for reliability, to lower overall gas costs to its core customers." (A.02-06-035 Application, Attachment A, pp. 4-5.)

B. SCE

SCE contends that the original intent of the GCIM was to provide a procurement incentive so that SoCalGas has an incentive to purchase gas supplies at or below prevailing market prices. SCE asserts that over time, the GCIM has been modified to include incentives that are not related to gas procurement, but rather are incentives relating to SoCalGas' use of transportation assets and financial instruments. SCE contends that by including the profits from the use of transportation assets and financial instruments as part of the GCIM formula, the GCIM "creates perverse incentives, harms noncore customers, and has a detrimental impact on California energy markets." (SCE Protest, p. 3.) SCE also argues that the GCIM, "in its current form, encourages and approves of actions by SoCalGas that raise natural gas prices to benefit company shareholders at the expense of core and noncore gas and electric customers." (Id.)

SCE points out in Year Eight, SoCalGas beat the benchmark by $190 million, a savings that is close to the amount reported for Year Seven. Although this amount will be reduced due to the settlement adopted in D.02-06-023, SCE asserts that until the perverse incentives are eliminated from the GCIM, the GCIM continues to be flawed.

SCE also contends that:

In many ways, the GCIM formula puts SoCalGas in the combined position of an interstate pipeline and a market affiliate, i.e., one that can use transportation assets along with its dominant position in commodity markets at the California border to benefit its shareholders through the GCIM mechanism. In fact, the GCIM is worse because it not only permits, it encourages SoCalGas to utilize its transportation assets to maximize "benefits" to core ratepayers. Indeed, the anticompetitive effects caused by this very dangerous combination is the very reason FERC's regulations continue to carefully separate transportation services from sales of natural gas and to evaluate all new regulations to ensure that they continue to treat interstate transportation and natural gas marketing as distinct economic and commercial services. (SCE Protest, p. 4, footnotes omitted.)

SCE believes that hearings are necessary so that the Commission and the parties can examine the activities of SoCalGas during Year Eight "to determine whether the requested award was the result of the exercise of market power or other anticompetitive behavior by SoCalGas." (SCE Protest, p. 6.)

C. ORA

At the time ORA filed its response to SoCalGas' Year Eight application, ORA was planning to submit its Monitoring and Evaluation Report for Year Eight on October 31, 2002. ORA agrees that hearings may not be necessary for this proceeding, and notes that ORA's report will include an audit of SoCalGas' Purchased Gas Account costs, an analysis and verification of the GCIM calculations, and an evaluation of how the GCIM is operating.

ORA's Monitoring and Evaluation Report for Year Eight was served on December 20, 2002. This report states that ORA "conducted a comprehensive audit of the GCIM Year Eight results submitted by SoCalGas in its Application." (ORA Monitoring and Evaluation Report, Dec. 20, 2002, p. 1-3.) The report also states that the cost savings below the GCIM benchmark were confirmed, and that the shareholder award amount of $17.4 million was verified. Based on the results of ORA's audit, ORA recommends that SoCalGas be authorized to recover a shareholder award of $17.4 million.