2. The Record Supports the Commission's LNG Determination

RACE claims that there is no evidence to support the Phase I Decision's conclusion that there is "a looming threat to domestic supplies of natural gas and that LNG should be developed to provide a `supply diversity' hedge to declining domestic supplies." (RACE Application, p. 3.) RACE's arguments are erroneous. As noted in the Phase I Decision, we issued the Gas OIR "in response to new reports, recent 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 and/or infrastructure to meet the future requirements of all California residential and business consumers." (D.04-09-022, p. 5.) Under Article XII, section 6 of the California Constitution, and sections 451, 701, and 761, we have the power and the obligation to "actively supervise and regulate natural gas public utilities in California and to do all things which are necessary to ensure adequate and reliable public utility service to California ratepayers at just and reasonable rates." (R.04-01-025 [Gas OIR], p. 9.)

We relied on a body of evidence demonstrating that we needed to address California's long-term natural gas needs in issuing the Gas OIR. In its 2003 Integrated Energy Policy Report (IEPR), the California Energy Commission (CEC) found that California should "[e]ncourage the construction of liquefied natural gas facilities and infrastructure and coordinate permit review with all entities to facilitate their development on the West Coast." (CEC's IEPR, p. viii; see also p. 29; R.04-01-025, pp. 2, 5.)⁸ The CEC's IEPR projects that natural gas demand in California will increase over the next ten years, and that California's access to natural gas supplies is affected, to a large extent, by the robust growing in natural gas demand in Nevada, Arizona, and the Pacific Northwest. (CEC's IEPR, p. 24; see also R.04-01-025, p.5.)

We held a joint workshop with the CEC on December 9-10, 2003 entitled "Natural Gas Market Outlook 2006-20016" examining long-term natural gas supply issues. (D.04-09-022, p. 7; R.04-01-025, p. 2.) At this workshop, numerous parties testified and provided evidence supporting the fact that LNG is important to the California Market. (D.04-09-022, p. 7; R.04-01-025, p. 2.) Most speakers at the workshop confirmed that California needed to increase energy efficiency and natural gas infrastructure to meet its long-term natural gas needs. (D.04-09-022, p. 7; R.04-01-025, p. 2.)

We also found that there is an additional problem that production and proven reserves may be declining in most of the producing basins in the United States. (R.04-01-025, p. 7.) We took note of the fact that Canada's National Energy Board (NEB) and the United States Department of Energy's Energy Information Administration (EIA) had issued recent reports that "raise significant concerns about the sufficiency of long-term supplies of natural gas developed or produced in North America to meet long-term demand forecasts for North America." (R.04-01-025, p. 7.) Thus, both the NEB and the EIA have found that LNG will be necessary in order to have a reliable supply of gas in the future. (R.04-01-025, pp. 7-8.)

After carefully reviewing detailed evidence that the State's long-term natural gas supply may not be sufficient or reliable, and after holding a workshop jointly with the CEC in December, 2003 to discuss long-term natural gas needs in California, we decided, as a matter of policy, to pursue long-term strategies to upgrade and expand natural gas infrastructure and importation, including planning for importation of LNG. This determination is consistent with past Commission policy, and with our traditional practice of following the principal of supply and demand. We found that it is undisputable that the price of natural gas is going up, and reasoned that if California has a greater supply, then the price of natural gas will lower. We had ample evidence before we issued the Gas OIR to establish policies to ensure a long-term, reliable supply of gas to California. At the time we issued the Gas OIR, the need for new gas supplies in the State, and the ability of LNG to partially fill that need had already been established. (R.04-01-025, pp. 1-8.) Because the need for LNG had been well established, further hearings to determine need were not warranted.

⁸ The CEC's 2003 IEPR may be found at the following web address: http://www.energy.ca.gov/2003_energypolicy/index.html