IV. Other Parties' Positions

The California Industrial Group and the California Manufacturers & Technology Association (CIG/CMTA) oppose the petition and request that the Commission deny the petition in its entirety.⁶

CIG/CMTA contends that its members are strongly opposed to any diversion of their gas supplies to serve core customers. However, if such a diversion occurs, then noncore customers should be compensated at the tariffed diversion charge of $50 per decatherm (Dth). They contend that many noncore customers were forced to close their businesses in November and December 2000 because of extremely high natural gas prices, and that the loss of production during that period has already threatened the viability of many of those businesses. CIG/CMTA contends that the petition:

"would further threaten these businesses by confiscating their natural gas supplies and compensating them only for the cost of the gas. The $50/Dth diversion charge at least would allow these customers to recoup some of their production losses resulting from confiscation of their gas supplies. CIG/CMTA submit that there is no basis whatsoever for any change in the charge associated with confiscation of noncore gas supplies." ⁷

CIG/CMTA also argue that PG&E's deteriorating financial condition is consistent with the position that ORA/TURN took in the rate stabilization proceedings,⁸ that there should not be any rate increases for the utilities.

CIG/CMTA asserts that PG&E will not be able to continue to procure gas for its customers unless some action is taken by the Commission and the state to either guarantee PG&E's payment obligations under its gas supply contracts, or to insert some other creditworthy entity into PG&E's gas procurement function. They also warn that the diversion of noncore gas supplies will force gas-fired electric generators and qualifying facilities to curtail their operations, which will further exacerbate the current electrical shortage.

CIG/CMTA contend that if the compensation for confiscation of noncore gas is reduced from $50 per Dth to a market rate, that the most likely consequence is that the noncore customers and their marketers will simply sell their gas elsewhere, rather than incur the costs to transport the gas within California.

Calpine Corporation (Calpine) is opposed to the petition and urges that it be denied in its entirety. Calpine contends that ORA/TURN's proposal will simply accelerate and exacerbate the current energy crisis. Calpine agrees with CIG/CMTA that if noncore gas is diverted, electric generation facilities which use natural gas will not be able to generate electricity, which will increase the likelihood of blackouts in PG&E's service territory. The diversion of noncore customer gas supplies may also result in gas suppliers refusing to sell gas to noncore customers in PG&E's service territory. In addition to noncore customers having to shut down their businesses, there might be no noncore gas to divert for the benefit of core customers.

Before adopting the proposal of ORA/TURN, Calpine states that the Commission should evaluate alternative solutions proposed by PG&E such as ordering Southern California Gas Company (SoCalGas) to provide assistance, or to use the existing core aggregation service so that core customers can purchase gas supply from parties other than PG&E.

Calpine states that if PG&E is permitted to divert natural gas supplies, and ORA/TURN's proposals are adopted, the Commission should modify the proposal so as to eliminate the cap on the diversion credit. That is, it should be based on the actual market price of natural gas, whether above or below $50 per Dth. Calpine states that in the preceding months, gas prices at the California border have at times exceeded $60 per Dth. In addition, PG&E should also be required to reimburse firm transmission noncore customers for the demand charge component of the customers' gas transmission charges. Calpine believes this is appropriate because the diversion of gas supply transforms firm transmission service into interruptible service. Calpine also states that the Commission should limit any waiver of non-compliance penalties to those due solely as a result of PG&E's financial inability to procure adequate core gas supplies, and not to penalties assessed during periods of operational constraints.

The City and County of San Francisco (CCSF) believes that the Commission should act quickly to avoid the severe consequences identified by ORA/TURN in its petition, and by PG&E in its emergency application in A.01-01-024. CCSF contends that if PG&E cannot provide reliable gas service due to its financial viability, then the Commission must ensure that service can be provided in another way. CCSF states that customers should not have to face the threat of gas curtailments when there are sufficient gas supplies available in the market and when PG&E is collecting sufficient revenues to purchase those supplies.

CCSF supports the modifications proposed by ORA/TURN, and suggest that three additional modifications be adopted. First, that the Commission should suspend the imbalance penalties of $10 per therm for use which exceeds the specified curtailment if curtailment or diversion is necessary due to PG&E's current inability to obtain supplies. CCSF contends that PG&E's Gas Rule 14 was intended to be used for physical shortages of gas supply due to uncontrollable forces. The penalties which accrue under this rule when the specified curtailment is not reached are inappropriate when the situation is created by PG&E's financial condition.

The second modification that CCSF proposes to be adopted is to exempt certain facilities from curtailments to minimize the impacts on the public of noncore gas curtailments and diversions. CCSF states that it has 14 noncore accounts which consist of museums, hospitals, jails, and other municipal and educational facilities. Some of these facilities have backup facilities to provide heat if gas is curtailed, but backup facilities are not available for cooking and water heating.

The third modification that CCSF proposes is that customers with multiple accounts should be permitted to meet curtailment orders by aggregating all accounts. CCSF states that it and other public entities should be entitled to choose which facilities to curtail in order to meet curtailment orders.

Coral Energy Resources, L.P. (Coral) opposes the petition, and recommends that interested parties be provided an opportunity to provide their input on the issues raised by the petition. Coral recommends that workshops be held to explore the implications of the proposals of ORA/TURN, and that the proposals and alternatives be thoroughly examined before the Commission reaches a decision.

Coral contends that if the proposals of ORA/TURN are approved, they would provide little incentive for PG&E's core procurement department to comply with EFO orders. That is, since there would be no OFO or EFO penalties, and the involuntary diversion charge would be less, PG&E would have no incentive to avoid the diversion of noncore gas.

Also, Coral contends that frequent and continuing EFOs will harm core and noncore transport-only customers and their suppliers because it may result in substantial overdeliveries that result in imbalances which must be traded at

the end of the month.⁹ Transport-only customers and their suppliers will suffer substantial financial harm if the price of gas changes from the time it was delivered until the monthly imbalances can be traded.

Coral states that it would not object to a limited reduction in the level of OFO and EFO penalties for all customers during PG&E's gas supply crisis. However, if such a reduction is adopted, Coral asserts that the Commission should also waive any monthly imbalance charges.

Coral also contends that the proposal to reduce the involuntary diversion charge from $50 per Dth to the lower of the actual market price¹⁰ or $50 per Dth, provides no compensation to noncore customers for the business interruptions that would inevitably result from a supply diversion. Coral contends that the proposed change to the diversion penalty would barely cover the noncore customers' purchased gas cost, and would not cover the cost of a customer's alternate fuel. In addition, the diversion charge would not compensate a gas supplier whose gas has been diverted to PG&E. ORA/TURN's diversion proposal penalizes noncore customers and their suppliers, and not PG&E, who created the need for the involuntary supply diversion. Coral asserts that the involuntary diversion charge is essentially a liquidated damages provision that a noncore customer should be entitled to in the event its gas is diverted.

Coral also asserts that the proposed reduction of the diversion charge is not likely to compensate the noncore customer for the cost of the gas that has been diverted. If the diversion penalty is reduced to the actual market price, as ORA/TURN propose, the published gas prices may not fully cover either the supplier's cost of the gas or the price agreed upon in the contract between the supplier and the customer. Coral also points out that there is no provision for interest on the cost of the gas, or an added premium that should be associated with PG&E's poor credit as a gas purchaser. Coral also argues that a reduction in the supply diversion penalty would amount to a taking of the noncore customer's gas without just compensation and would be confiscatory.

Coral also argues that the proposals of ORA/TURN discriminate against core aggregation customers and their suppliers because the waiver of the OFO and EFO penalties, and the reduced involuntary diversion charge do not apply to core aggregators and their customers. Thus, the proposals benefit PG&E and its core sale customers, and provide them with a competitive advantage as compared to other gas suppliers.

Coral contends that the proposals of ORA/TURN do not solve the fundamental problem of PG&E's lack of credit to purchase sufficient core gas supplies for its customers. Coral recommends that the Commission take steps to ensure that PG&E "stream" the revenues from PG&E's core gas sales to PG&E's gas suppliers. This will assure gas suppliers of full and timely payment for the gas sold to PG&E. By doing so, Coral contends this should mitigate the concerns of ORA/TURN since gas supplies will continue to flow, and there will be no need for diversions.

Duke Energy North America (DENA) agrees with ORA/TURN that PG&E's Gas Rule 14 is not designed to address the current circumstances facing PG&E. DENA asserts that the provisions of Rule 14 were designed only to apply to short-term supply-demand imbalances resulting from an event such as unseasonably cold weather. Diversions under Rule 14 were not contemplated as a result of PG&E's financial condition, nor was it contemplated that gas diversions might reduce deliveries to gas-fired generation plants during electricity shortage warnings by the Independent System Operator (ISO). If diversions occur, DENA states that PG&E should not be permitted to apply Rule 14 to divert gas from gas-fired electric generation facilities, whose output is needed to avoid electricity blackouts. DENA recommends that the Commission order PG&E to modify Rule 14, or to administer the rule, in a way which exempts gas-fired electric generators from gas diversions during periods when the ISO has declared a Stage 1, 2 or 3 emergency.¹¹

DENA notes that several recent developments have occurred which may allow PG&E to avoid diversions, or to at least delay them for several weeks. The Commission should consider the petition in light of these developments. DENA first points to the finding of a natural gas supply emergency made by President Clinton on January 19, 2001, and the Secretary of Energy's order that gas suppliers continue to provide gas. Second, on January 22, 2001, PG&E filed an expedited petition for modification of D.00-12-064, seeking authority to give natural gas suppliers a security interest in PG&E's accounts receivable, which may provide suppliers with a measure of financial reassurance. The third development is that the state is involved in negotiations and legislative efforts to solve the problems in the electricity market. These efforts may improve PG&E's financial position.

Enron North America Corp. and Enron Energy Services, Inc. (collectively "Enron") are opposed to the petition on two grounds. Enron's first objection is that it is unwise to make changes to tariffs that were carefully designed to accommodate system supply shortages and related emergency situations without considering the impact on all customer classes. When the rule was first being considered, Enron contends that all customer classes and all segments of the industry provided input. To make substantial modifications to the rule without allowing parties a fair opportunity to address the consequences of such changes would be unwise. Enron contends that ORA/TURN are simply seeking to minimize the financial consequences of diversions on core customers, and shifting more of the costs and consequences of diversion to noncore customers. Instead of rushing to change the rule, Enron asserts that the existing tariffs should be used to divert gas.

Enron's second objection is that a reduction in the diversion penalties could leave noncore shippers at risk for substantial out-of-pocket costs caused by the diversion, while providing the utility with a perverse incentive to divert more gas. Under ORA/TURN's proposal, they seek to reduce the $50/Dth diversion charge that core customers pay when noncore gas is diverted to core use. ORA/TURN propose that the charge be reduced to the current market price of gas up to a cap of $50/Dth. Enron contends that such a change could impose substantial losses on noncore customers because the noncore customer is likely to have paid interstate transmission rates to move gas to the California border, and possibly other costs, such as storage withdrawal charges. Also, if the diversion caused the non-core customer's operations to be curtailed or shut down, the customer also incurred substantial consequential damages. Compensating the noncore customer only for the commodity price of the gas does not begin to cover the noncore customer's costs.

Enron also asserts that by reducing the diversion credit, this might cause PG&E's core procurement department to rely more heavily on diversions as opposed to finding other means to improve PG&E's ability to purchase gas on its own account. Enron contends that the Commission should not provide an incentive for PG&E to rely on the noncore customers' ability to purchase gas and to have that gas diverted for core customers.

Nabisco Brands, Inc. (Nabisco) filed a protest to ORA/TURN's petition. Nabisco first questions whether PG&E is even permitted under PG&E's Rule 14 to divert gas. Nabisco contends that gas suppliers are refusing to sell gas to PG&E because of its current credit rating. Nabisco asserts that Rule 14 only refers to operational conditions and events of force majeure, two conditions that do not include PG&E's credit rating. Nabisco suggests that the Commission dismiss the petition for lack of ripeness since the diversions should not occur. Nabisco also recommends that the Commission make clear that PG&E can only divert gas in accordance with Rule 14, that is, when operational conditions such as unusually high gas demand, or force majeure, warrant the diversions.

Nabisco objects to ORA/TURN's proposal because it unfairly burdens large customers by substantially increasing their penalty exposure under Rule 14. Their proposal calls for the waiver of core customer EFO and OFO penalties, and reducing or limiting the diversion charges applicable to core customers. These penalties and compliance charges are used to fund the compensation that is owed to noncore customers whose gas is diverted.

Nabisco also states that if PG&E is allowed to divert gas under Rule 14 to address PG&E's lack of credit, it is likely that diversions will occur with more frequency. This may put noncore customers in the position of not being able to stop or reduce gas usage in the amount requested by PG&E, which will force noncore customers to incur significant noncompliance penalties.¹²

Nabisco asserts that ORA/TURN's proposal will result in a windfall to core customers. By eliminating the EFO penalties and reducing the diversion charge, core customers will reap the benefits of using the gas while paying an unrealistically low price for it.

Nabisco also contends that ORA/TURN's proposal ignores the fact that if gas is diverted, PG&E must still pay for the gas that it sells to end users, regardless of whether it is obtained through normal supply channels or diversions.

Nabisco states that the Commission should consider solutions that do not penalize whole classes of customers and which ignore marketplace realities. Nabisco recommends that the Commission require PG&E to segregate its gas revenues from other PG&E revenues, and use the gas revenues to pay for gas procurement and related expenses. Thus, there may be no need for diversions to solve a credit-related supply issue.

The Northern California Generation Coalition (NCGC) oppose the proposals of ORA/TURN and recommend that the proposals be rejected, or at a minimum, deferred.

NCGC contends that if noncore customers were asked to continue to procure gas, only to have the gas diverted by PG&E with no compensation beyond the market price, noncore customers would quickly cease nominating gas supplies. NCDC asserts that noncore customers would have no other alternative because if they continued to nominate gas, they would have to pay their suppliers for the gas and expose themselves to the risk that PG&E, as a potential bankrupt company, would be unwilling or unable to reimburse them for the gas in a timely manner. Also, these noncore customers would have to bear carrying costs between the date they paid their suppliers and the date they received compensation from PG&E.

NCGC contends that, contrary to ORA/TURN's position that the penalties serve no purpose other than to unnecessarily increase the cost of natural gas to core customer, the EFO penalties and the current diversion charge provide some incentive to noncore customers to bear the risk and carrying costs they would incur if they continue to nominate gas in spite of the diversions. Even at inflated January 2001 gas prices, diversion compensation of $50 per Dth provides an incentive that is likely sufficient to encourage noncore customers that are subject to diversion charges to continue nominating gas during the diversions. Also, some customers may view the prospect of receiving a portion of the EFO penalty dollars as compensation for being curtailed.

Another benefit of retaining the EFO penalties and diversion charges is that it sends a price signal to core customers to reduce their demand for gas.¹³ Any elimination or reduction in the EFO penalties and diversion charges would only subsidize core customers and encourage gas consumption to go unabated.

NCGC contends that ORA/TURN's proposal would impair electricity generation because gas that is nominated by electric generators would be subject to diversion without any payment of EFO penalties and diversion charges. Electricity generators would then be forced to curtail their generation of electricity, which would only exacerbate the electricity crisis. NCGC argues that electricity generation should be assigned a higher priority than other noncore uses for the duration of the current crisis.¹⁴

NCGC also asserts that various phrases in ORA/TURN's proposal are so vague, that the proposals could not be administered. One example is that ORA/TURN has not defined what constitutes "the actual market price of gas."

NCGC agrees with ORA/TURN that PG&E should be directed to immediately inform the Commission, and provide reports for the duration of the crisis, of the current storage and supply situation, and how PG&E intends to ensure that the demand of core gas customers are met.

PG&E supports the proposal of ORA/TURN that core procurement customers should be excused from having to pay OFO and EFO noncompliance charges in the event of a diversion of noncore gas during the current gas supply emergency.¹⁵ PG&E contends that no legitimate purpose would be served by imposing these noncompliance charges on PG&E's core ratepayers.

PG&E believes that the proposed modification to the diversion payments to noncore customers is not well-advised. PG&E believes that CIG/CMTA have persuasively argued that reducing the level of the diversion payment to the noncore suppliers, whose gas is diverted to meet core needs, would not be fair to the noncore suppliers and the noncore customers. PG&E agrees with CIG/CMTA that the diversion payment should be kept at $50/Dth. PG&E contends that reducing the level of the payment to noncore suppliers increases the risk that these suppliers will simply stop sending gas to California, which will only worsen the supply crisis. PG&E also agrees with ORA/TURN that it would be unfair to impose the full burden of these diversion payments on PG&E's core ratepayers.

PG&E proposes that if diversion payments are made to noncore customers pursuant to Gas Rule 14 during the current gas supply emergency, that the payments be recouped as follows:

"First, PG&E core customers should pay the market price for the gas that is diverted (up to $50/Dth), which shall be based on a daily border gas price index. Therefore, this market price should be booked to the Purchased Gas Account. Second, the difference between the market price for the gas and the $50/Dth paid to the noncore supplier then should be booked to a balancing account, and recovered from PG&E's on-system backbone transmission customers, via a special surcharge, on an equal-cents-per-therm basis. This will spread the cost of the above-market portion of any diversion charges as widely as possible across the entire market, rather than imposing this cost solely on PG&E's core or noncore ratepayers." (PG&E Response, p. 8, footnote omitted.)

PG&E also notes that it has two related emergency requests pending before the Commission. The first is PG&E's January 22, 2001 petition to modify D.00-12-029 in A.00-10-029, which seeks authority for PG&E to use its accounts receivable and customer accounts to provide a security interest for purposes of securing gas purchases on behalf of core customers. The second is PG&E's January 18, 2001 application seeking an order directing SoCalGas to provide emergency assistance to PG&E during the current gas supply emergency. PG&E urges prompt action on both to avert a serious gas shortage that would require diversions of noncore supplies during February.

The City of Palo Alto (Palo Alto) operates a municipal gas utility which supplies 27,000 core customers. Palo Alto opposes the request of ORA/TURN to modify the involuntary diversion usage charge. Palo Alto states that the $50/Dth charge is not a penalty, but rather is an essential means of compensating noncore customers for the cost of the diverted supplies as well as an incentive to ensure that suppliers continue flowing gas to PG&E's service area during a diversion. Palo Alto agrees with the response of CIG/CMTA that lowering the diversion usage charge will increase the likelihood that noncore customers and their suppliers will sell the gas elsewhere rather than to transport it to California.

Palo Alto supports the proposal of ORA/TURN to modify the EFO penalty for core customers during a diversion. Palo Alto states that this modification should apply to all core customers in PG&E's service area, including wholesale core customers and retail customers supplied by core aggregators. Although Palo Alto has contracted for firm gas deliveries from its supplier, Palo Alto is not certain if the gas will actually be delivered to Palo Alto in the event of a gas supply emergency. Palo Alto states that no one knows how PG&E will implement the diversion provisions of PG&E's Rule 14 if a gas supply emergency were to occur. Palo Alto contends that if less than 100% of the gas were delivered by PG&E to Palo Alto, and Palo Alto could not expeditiously reduce its usage, or if there were a lag in determining the amount of supplies available to its customers, Palo Alto could be charged the $50/Dth EFO penalty despite its best efforts to flow gas equal to or greater than its load. Such a penalty would unfairly penalize Palo Alto for PG&E's failure to obtain sufficient gas supplies for its core portfolio customers.

Palo Alto believes that a more appropriate EFO penalty should not exceed $5 per Dth. Such a penalty would provide an incentive for customers to comply with an EFO, and would not unduly burden customers for problems outside their control.

PanCanadian Energy Services Inc. (PCES) urges the Commission to reject ORA/TURN's petition on the following grounds: (1) that the relief is inappropriate, temporary in nature, and ineffective in dealing with the underlying problem; (2) that the proposed action would actually increase the problems of gas supply reliability in PG&E's service territory, and that it has the potential for creating longer-term negative consequences; and (3) that there are other remedies that are more lasting, effective and appropriate.

PCES states that the fundamental issue is a lack of creditworthiness. PG&E is now in the position of not being able to provide gas suppliers with any confidence that the suppliers will be paid for gas sold to PG&E, even if PG&E can recover its gas costs from ratepayers. That is because the gas revenues may be claimed by companies which sold electricity to PG&E. Due to a lack of segregation of electric and gas revenues, PG&E is unable to provide gas suppliers with assurances that they will be paid.

PCES states that gas is available at the market price, so PG&E's problem is not a gas supply issue. Although the cost of gas is higher than it was in the past, it is available to anyone who can pay for it. PCES also points out that this is not a transportation capacity issue, for which the OFO and EFO penalty provisions were adopted. PCES asserts that there is enough intrastate pipeline transmission capacity to deliver gas to both the core and noncore under current gas demand conditions. PCES contends it is therefore inappropriate to attempt to deal with a creditworthiness issue by reallocating the supply that is still entering the market, or to waive the penalties.

PCES contends that ORA/TURN's proposal would offer no lasting relief because all flows of noncore gas would probably stop. Instead of continuing to flow gas, PCES asserts that noncore customers will not risk their good credit to replace PG&E's bad credit to buy gas for core customers. PCES contends that the diversion of noncore gas supplies will cause noncore customers to cease operations. PCES contends that the $50 per Dth diversion payment is, in most cases, too small to reimburse noncore customers for lost production and profits, and other operating costs.

PCES states that the Department of Energy's emergency gas order has increased the financial exposure of the gas suppliers by effectively forcing the suppliers to continue sales to a virtually bankrupt customer. PCES states that this has long term detrimental implications for California because suppliers must consider the regulatory risks in deciding whether they should sell gas in California.

PCES also contends that there are serious legal issues with the proposal of ORA/TURN. These include taking, discriminatory treatment, due process, and notice issues.

PCES contends that ORA/TURN have also failed to explore more promising solutions. One solution, is PG&E's second expedited petition to modify D.00-12-064 and to obtain authorization under Pub. Util. Code § 851 to securitize its gas revenues, which will allow gas suppliers to have access to gas revenues. Another solution is to have the state buy gas for the core at market prices and then sell that gas to PG&E. This setup would be similar to the role that the state has assumed on the electric side. A third alternative is to organize through the state a core gas purchasing agency, which would sell commodity gas directly to core customers, and collect the payment from core gas ratepayers. A fourth alternative is for the Commission to order an immediate spin-off of PG&E's gas department from the electric department. This would create a creditworthy entity on the gas side. If the federal government offers assistance, PCES proposes possible exchanges of gas to be delivered to PG&E at the Calfornia border in exchange for federal royalty gas that is delivered elsewhere. PCES contends that all of its proposed alternatives directly address the problem of PG&E's creditworthiness, rather than creating new problems.

PCES does agree with ORA/TURN that everyone should have better information about PG&E's storage situation.

The School Project for Utility Rate Reduction (SPURR) opposes the petition on the grounds that the relief requested by ORA/TURN will not solve PG&E's credit issue. SPURR also objects to the proposal to waive the penalties associated with EFO and OFO conditions. If these penalties are waived, SPURR asserts that PG&E's core procurement department will not be encouraged to purchase enough gas supplies on a daily basis to remove an EFO or OFO condition.

SPURR does not object to a significant reduction in the level of EFO and OFO penalties, but believes that the Commission should not eliminate the penalties for EFO or OFO noncompliance. If the penalties are reduced, SPURR recommends that the reduction in penalties be made applicable to both the core procurement department and to all core aggregators. This will ensure that core aggregation customers are not disadvantaged because of their decision to purchase gas from a supplier other than PG&E.

SPURR is also opposed to ORA/TURN's proposal to reduce the penalty for diverted gas supplies to the market price of the gas. SPURR contends that a penalty over and above the market price is necessary in order to provide an incentive for PG&E to purchase gas supplies for its own core portfolio.

SPURR also supports lowering, but not eliminating, the diversion charge. If the diversion charge were eliminated entirely, that is likely to discourage shippers from delivering gas onto the PG&E system. That would likely result in a downward supply reduction spiral, which would affect all end-users on the system to their detriment. SPURR estimates that a diversion fee surcharge of $10 per Dth above the price of gas is likely to prevent suppliers from leaving the market.

SPURR states that the gas suppliers' confidence could be restored if the Commission takes action to assure that all gas revenues received by PG&E will be applied exclusively to pay for PG&E's gas purchases.