II. BACKGROUND

On January 22, 2004, we issued Order Instituting Rulemaking (OIR), Rulemaking (R.) 04-01-025 (Gas OIR) to establish policies and rules to ensure reliable, long-term supplies of natural gas to California. We issued the Gas OIR in response to new reports, recent Federal Energy Regulatory Commission (FERC) orders, and ongoing changes in the natural gas market, which indicate that in the long-term there may not be sufficient natural gas supplies or infrastructure to meet California's needs. We realized that in order to ensure that California does not face a natural gas shortage in the future, we must make certain decisions now regarding California natural gas public utilities, which we regulate. We required California natural gas public utilities to respond to data requests and to submit proposals to us to address how California's long-term natural gas needs should be met with interstate and intrastate pipeline expansions, more flexible storage operations, and access to proposed liquified natural gas (LNG) facilities. We also established two phases in this Gas OIR. The Scoping Memo determined what policy issues should be addressed immediately in Phase I, and what other issues may require a separate proceeding or be handled at a later date in Phase II.

On February 20, 2000, RACE filed a motion to intervene in this proceeding, which we granted. RACE filed a subsequent motion on March 9, 2004 to modify the schedule in this proceeding. RACE requested that we extend the deadline for interested parties to submit their comments by at least one month, that evidentiary hearing should be scheduled, and that the rulemaking should be modified by reversing Phase I and Phase II. We denied RACE's motion to modify the schedule on March 18, 2004. We noted that "RACE and other parties had sufficient opportunity in January and February to seek an extension of the comment period." (Administrative Law Judge (ALJ) Ruling Regarding Various Motions, March 18, 2004, p. 3.) Because of the untimeliness of RACE's request, and because Rules 14.1 and 14.2 of the Commission's Rules of Practice and Procedure give the Commission the authority to determine whether evidentiary hearings are needed in a rulemaking, the ALJ ruled that we had the discretion to find that evidentiary hearings were not needed in Phase I. (ALJ Ruling Regarding Various Motions, March 18, 2004, p. 3.)

On June 28, 2004, RACE filed an appeal challenging the categorization of Phase I of this proceeding as quasi-legislative rather than ratesetting. We denied RACE's appeal, finding that "[s]ince the Phase I decision will only address policy issues, and is not establishing rates for a specific company, the categorization of Phase I of this proceeding a quasi-legislative proceeding . . . is affirmed." (D.04-07-030 (Decision Denying Appeal of Categorization), p. 4 (slip op.).)

We issued D.04-09-022 (Phase I Decision) on September 10, 2004, adopting policies concerning the Phase I proposals of Southern California Gas Company (SoCalGas), San Diego Gas & Electric Company (SDG&E), Pacific Gas & Electric Company (PG&E), and Southwest Gas Company (Southwest). The policies adopted in the Phase I Decision are part of the California's overall effort to implement and fulfill the Energy Action Plan's (EAP) goal.

TURN and RACE timely filed a joint application for rehearing of the Phase I Decision (Joint Application) on October 12, 2004. TURN and RACE make the following arguments in their joint application for rehearing: (1) the Commission committed legal error pursuant to Public Utilities Code section 454(a) ¹ by setting rates without an evidentiary hearing; (2) the Commission acted in contravention to section 728 by setting rates without an evidentiary hearing; (3) the Phase I Decision violates section 1701.1, which prohibits establishing new rates in a quasi-legislative proceeding; (4) the Phase I Decision contravenes section 1708 by failing to provide adequate notice and opportunity to be heard; and (5) the Phase I Decision violates section 311(e) by making a substantive revision to a proposed decision without subjecting it to public review and comment.

RACE filed a separate application for rehearing on October 12, 2004 (RACE Application). RACE claims that the Commission made the following factual findings and legal conclusions that are not supported by the record: (1) there is an imminent shortage of natural gas; (2) LNG will promote a diverse supply portfolio; (3) LNG has price benefits; (4) the supply of LNG is flexible; (5) LNG will not lead to market-power abuse; (6) LNG will not result in affiliate transaction abuse; (7) the supply of LNG is reliable; (8) LNG has low safety risks and will not result in environmental damage; and (9) this is a quasi-legislative proceeding. RACE also argues that Sempra Energy's (Sempra) eleventh hour lobbying against evidentiary hearings and for favorable treatment at Otay Mesa was improper.

Sempra Energy LNG, BHP Billiton LNG International Inc. (BHP Billiton), Sound Energy Solutions (SES), Coral Energy Resources, L.P. (Coral), SDG&E, SoCalGas, and Gas Transmission Northwest Corporation (Northwest) all filed responses to the applications for rehearing, which have been considered.

We have reviewed each and every issue raised in the applications for rehearing. For the reasons discussed below, we are of the opinion that D.04-09-022 should be modified, and that rehearing of D.04-09-022, as modified, should be denied.

¹ Hereinafter, all references are to the Public Utilities Code, unless otherwise noted.