2. Background and Procedural History

Catalina, located 22 miles from the mainland, is a leading resort for the Los Angeles area. The island is 21 miles long and 8 miles wide, with Avalon the principal town. Tourism is the main industry, and the island attracts tens of thousands of visitors annually.

SCE provides all of the gas, water and electric service in Catalina and has done so since 1962.¹ Previous general rate increases for gas distribution costs were granted in 1980 and 1987.² In the 1980 general rate case, SCE was authorized to establish a Gas Cost Adjustment Clause (GCAC) that permits SCE to pass through to customers its wholesale cost of gas purchased for Catalina. Authorized distribution costs, however, have not changed since the 1987 general rate case.

SCE serves 1,300 commercial and residential gas customers in Avalon (as contrasted with 2,400 electricity customers and 1,900 water customers), delivering gas through 6.5 miles of underground distribution pipes. The gas production facilities are located at the Pebbly Beach Gas Plant in Avalon. Liquefied petroleum gas (LPG) is delivered to Catalina by barge and transported by tanker truck to five storage tanks. The LPG is heated and vaporized to change it from liquid to gas, then mixed with air and inserted into the underground distribution system supplying customers in Avalon and Pebbly Beach Village. Driving much of the increase in SCE's gas costs is the pending $1.3 million replacement of the 30-year-old gas vaporization plant.

SCE filed this general rate case on January 23, 2004. On February 26, 2004, the Commission's Office of Ratepayer Advocates (ORA) protested the request for increased rates. A Prehearing Conference was conducted on April 9, 2004, and Assigned Commissioner Loretta M. Lynch issued a Scoping Memo on April 21, 2004, in which she concluded that a hearing was required.

Two public participation hearings attended by about 40 persons were conducted in Avalon on June 7, 2004. The Commission heard from 14 ratepayers, including Avalon Mayor Ralph Morrow and City Councilman Dan O'Connor. Most of the speakers were owners of restaurants and other small businesses in Avalon. While high in their praise for SCE's utility service on the island, they objected to a substantial increase in gas rates that will have to be borne by only 1,335 ratepayers.³ One speaker, Cliff Keene, said that the estimated 74% increase in gas bills resulting from SCE's proposal would be devastating for restaurants because they must use gas to cook and can't raise meal prices by an equivalent amount. Another speaker, Debbie Avellana, described the already high costs of living for many Avalon residents who are service people earning $7 to $10 an hour. A number of speakers noted that SCE's electric rates in Avalon are normalized with mainland rates and asked why gas rates could not be similarly normalized. (Both SCE and ORA responded that Catalina is the only location in which SCE provides gas service and there are no mainland gas rates with which the island's rates can be normalized.)

An evidentiary hearing was conducted in Avalon on June 8, 2004. The Commission heard from four witnesses and received the testimony of four other witnesses by stipulation. Final briefs were filed on July 19, 2004, and reply briefs were filed on August 2, 2004, when the case was deemed submitted for Commission decision.