IV. Discussion

Our approach for resolving the First and Second Petitions is to examine the Supplement and the pleadings related to the Supplement, and to determine to what extent the First and Second Petitions have been resolved by the Supplement and the related pleadings.

TURN and PG&E have each proposed adding an additional paragraph to D.03-12-061. Instead of deleting the language about the Line 401 at-risk adjustment from D.03-12-061, as PG&E suggested in its Second Petition, PG&E is now willing to add an additional paragraph to D.03-12-061 which describes how the adjustment "suffers from several methodological flaws," creates a disincentive, and directs PG&E to propose a different formula in its next rate application. PG&E's proposed paragraph was presented in its reply to the Supplement as an alternative to TURN's proposed paragraph.

TURN maintains that the references to the Line 401 at-risk adjustment should not be stricken from D.03-12-061. TURN acknowledges in its response to the Supplement that the Line 401 at-risk adjustment may act as a disincentive, and that the adjustment should only be applied to the original Line 401 capacity. This acknowledgment is a retreat from TURN's response to the First Petition, wherein TURN supported applying the adjustment to the new Line 401 capacity that was added in 2002. In its response to the Supplement, TURN proposes adding a paragraph to D.03-12-061 which states that the Line 401 at-risk adjustment "may result in a disincentive for PG&E management to invest in backbone expansions in the absence of load growth increases...," and that the adjustment "may be modified after 2007 by applying it only to capacity prior to the Redwood Path capacity expansion of 2002." (TURN, Response to Supplement, p. 7, App. A.)

The respective paragraphs that PG&E and TURN seek to add to D.03-12-061 agree that the Line 401 at-risk adjustment can create a disincentive for future investment in the gas transmission infrastructure under certain circumstances. The proposed paragraphs differ though as to what circumstances can cause the disincentive to occur, and whether the Line 401 at-risk adjustment should be retained for setting future rates beginning for 2008.

The Supplement and the related pleadings address the impact of the proposed settlement in A.04-03-021, which would establish PG&E's gas transmission rates for 2005 through 2007. As a result of the proposed settlement and the setting of rates for the next three years, PG&E is willing to leave the Line 401 at-risk adjustment language intact, rather than seeking in its Second Petition to have it stricken. However, due to the disincentive that could result from the at-risk adjustment, PG&E and TURN propose to add their respective proposed paragraphs to D.03-12-061 to resolve the disincentive issue.

PG&E is willing to withdraw the First Petition or have it considered moot if the Second Petition is adopted. The issues raised by Mirant and NCGC about the First Petition would be resolved by PG&E's Second Petition since PG&E is no longer seeking an increase in gas transmission rates for 2004, and the rates for 2005 through the end of 2007 would be resolved by the adoption of the proposed settlement in A.04-03-021. TURN's response to the First Petition that the at-risk adjustment was correctly applied to the new Line 401 capacity would be resolved by TURN's proposal in its response to the Second Petition that the at-risk adjustment should only be applied to capacity built before the 2002 expansion.

The Second Petition and the pleadings filed in connection with the Supplement provide us with two possible avenues for resolving the two petitions to modify D.03-12-061. The first avenue is to either strike or retain the Line 401 at-risk adjustment language in D.03-12-061. The second avenue is to either add or decline to add the additional paragraph to D.03-12-061 that TURN and PG&E have proposed.

We see no need to strike the language in D.03-12-061 that refers to the Line 401 at-risk adjustment. PG&E is no longer seeking any change to the 2004 rates, and the rates for 2005 through 2007 are the subject of a proposed settlement in A.04-03-021. If that proposed settlement is adopted, the at-risk adjustment adopted in D.03-12-061 will not affect the 2005 through 2007 rates. Thus, from the perspective of PG&E and the others who responded to the First and Second Petitions, there is no longer a need to eliminate the Line 401 at-risk adjustment language from D.03-12-061. We believe that retaining, rather than deleting, the discussion in D.03-12-061 about the Line 401 at-risk adjustment helps to explain the development of how Line 401 has been treated for ratemaking purposes and how it applies to PG&E's rates.

As shown in the mathematical examples set forth in the Supplement, PG&E has raised a valid point about how the Line 401 at-risk adjustment could create a disincentive for PG&E to invest in the gas transmission infrastructure. PG&E correctly points out that the policy of this Commission is to ensure that we have the gas transmission, distribution and storage facilities needed to meet California's natural gas needs. Accordingly, adding an additional paragraph to D.03-12-061 to address the disincentive issue is warranted.

We believe that adding language similar to what PG&E and TURN have proposed about the disincentive issue will address the issues raised by PG&E in its First Petition, and in its Second Petition as changed by PG&E's reply to the Supplement. Although TURN and PG&E have proposed that their respective paragraphs be added to D.03-12-061, their proposed paragraphs reflect the bias of their positions. Instead of adopting their proposed paragraphs, we will adopt the paragraph which follows. This paragraph is a hybrid of what PG&E and TURN proposed in response to the Supplement, and which balances the competing interests. The following paragraph should be added before the last paragraph on page 292 of D.03-12-061 after the line "a reasonable opportunity to recover its revenue requirement":

"In a petition for modification of D.03-12-061, PG&E has raised the issue that the Line 401 at-risk adjustment that was adopted in this decision (D.03-12-061) for the purpose of setting PG&E's backbone transmission rates suffers from several methodological flaws, including creating a disincentive for PG&E to continue investing in the natural gas transmission infrastructure. We are cognizant of the disincentive that the Line 401 at-risk adjustment could create, and our policy of encouraging continuing investment in the gas transmission infrastructure so that consumers are protected from extreme price spikes, price volatility and service curtailments. Although we adopted the Line 401 at-risk adjustment for setting rates, and a proposed settlement in A.04-03-021 proposes to set rates for 2005 through 2007, PG&E is free to propose a different methodology for calculating its backbone rates when it files its next rate application for its gas transmission system."

The adoption of the above paragraph will resolve the concerns that PG&E raised in its First and Second Petitions and the Supplement to the Second Petition, and the concerns of the other parties. In addition, it leaves the door open for PG&E to propose how the rates for the Redwood Path should be calculated in PG&E's next rate application, while recognizing the need for continuing investment in the gas transmission infrastructure. Accordingly, PG&E's Second Petition, which has been changed as a result of PG&E's reply to the Supplement, should be granted by adding the above paragraph before the last paragraph on page 292 of D.03-12-061 after the line "a reasonable opportunity to recover its revenue requirement." All other relief that PG&E and the other parties seek with respect to the Second Petition and the Supplement should be denied.

PG&E's First Petition should be deemed moot since PG&E is no longer seeking to change its 2004 gas transmission rates.

This proceeding should remain open until the petition for modification of D.03-12-061 that was filed by Duke Energy North America and Duke Energy Trading and Marketing is resolved.