3. The Proposed Rework Project
SoCalGas proposes to rework the existing wells at its Aliso Canyon and La Goleta gas storage fields. The rework of the wells will result in additional deliverability from the existing wells, while allowing less cushion gas to be used to pressurize the fields. This rework project will free up 3 Bcf of cushion gas from Aliso Canyon, and 1 Bcf of cushion gas from La Goleta. SoCalGas proposes that the 4 Bcf of gas be reclassified as working gas, and that the gas in kind be transferred at book value to SoCalGas' CARE customers. According to the declaration of James Mansdorfer, SoCalGas' Storage Engineering Manager, which was attached to the application, the rework project is similar to the work that SoCalGas performs every year to offset the ongoing decline in deliverability that occurs with all storage wells over time.
Since the book value of the 4 Bcf of gas is approximately $1.5 million, and assuming a price during the winter of $12.50 per mcf1, the project would allow about $50 million in gas purchase costs to be avoided. The rework project costs are estimated at $14 to $19 million. The net benefit to CARE customers is that the 2005-2006 winter bills will be lower by about $48 million than they otherwise would be.
In order to maximize the benefits to CARE customers, SoCalGas proposes that the cost of the project be placed into rate base when the project is completed.2 SoCalGas intends to apply a depreciable life of approximately 33 years to the rework project costs. At a project cost of $14 million, the revenue requirement for the first year is approximately $2.6 million. If the project cost is $19 million, SoCalGas estimates the revenue requirement for the first year at approximately $3.5 million.
SoCalGas recommends that the revenue requirement associated with the rate basing of the project costs be allocated to only CARE customers. SoCalGas further states that the "Commission should reserve the option to reconsider allocation of these costs in the next BCAP and/or any other proceeding considering ratemaking for the unbundled storage program...." (Application, p. 9.)
SoCalGas proposes to reflect the anticipated benefits of the gas cost avoidance benefits into CARE rates over the December 2005 to March 2006 period so that CARE customers can receive the benefit of the lower rates at a time when gas consumption and prices are likely to be at their highest. SoCalGas states that it is reasonable to use the estimated cushion gas benefits to set rates during this four month period because the "operation of the Purchased Gas Account will ensure that over time SoCalGas recovers from gas procurement customers its actual cost of gas if the estimate of benefits turns out to be high or low." (SoCalGas Reply, p. 14.) By spreading the anticipated benefits over the four months to the CARE customers, together with the savings from the gas hedging authorized in D.05-10-043, SoCalGas hopes to keep CARE commodity rates from exceeding $8.00 per dth during the winter months.
As a result of the rework of the wells and the reclassification and withdrawal of the 4 Bcf of cushion gas, an additional 4 Bcf of gas storage capacity will be made available for sale. SoCalGas anticipates that this additional storage capacity will be marketed in time for the 2006 injection season. SoCalGas proposes that the issue of how the revenues from the sale of the additional storage capacity should be allocated be addressed at a later date in a proceeding of the Commission's choosing.
The proposed rework project is similar to the cushion gas project that SoCalGas proposed in 2001 in A.01-04-007, and which was approved by the Commission in D.01-06-086 and D.02-11-028. SoCalGas contends that under the precedent established in D.02-11-028, SoCalGas' shareholders should receive a portion of the value of the reclassified gas. However, due to the expected high cost of natural gas this winter, SoCalGas is proposing to forego its share of the value of the reclassified gas, and to give all of the benefit of the reclassified cushion gas to CARE customers. This rework project also differs from the project in A.01-04-007 in that SoCalGas is requesting that the cost of the project be put into rate base and recovered in the revenue requirement, rather than recovering the cost from selling the gas on the open market as was authorized for A.01-04-007 in D.02-11-028.
1 Once the cushion gas is reclassified as working gas, SoCalGas will remove from rate base the $1.5 million in cushion gas cost.
2 Since SoCalGas is not proposing that its shareholders receive any of the project benefits, SoCalGas should not be assigned any of the risks associated with the project. Thus, SoCalGas proposes that in the unlikely event the project does not result in net benefits to ratepayers, either as a result of a significant drop in natural gas prices or higher than expected project costs or a combination of the two, SoCalGas should still be allowed to recover its costs through rate base.
