V. Discussion

The events of the last several weeks have unfolded at a rapid pace. The utilities, interested parties, and the Commission have all tried to stay abreast of recent developments.

As the electricity crisis evolved, PG&E as a provider of both electricity and natural gas, began to feel the financial effects on the gas side of its business. PG&E took a series of actions at the state and federal levels in an attempt to prevent the electricity crisis from affecting gas service to PG&E's customers. On January 18, 2001, PG&E filed A.01-01-024, which seeks a Commission finding of an imminent gas supply emergency in PG&E's service territory. The application also seeks a Commission order directing SoCalGas to provide mutual assistance to supply PG&E with core gas supplies. This was followed by the January 22, 2001, PG&E filing of its petition to modify D.00-12-064 to allow it to pledge its gas and electric customer accounts receivable. In response to A.01-01-024, and the increasing likelihood of noncore gas diversion and curtailments, ORA/TURN filed the emergency petition that is before us today.

The Commission in D.01-01-062 acted on PG&E's petition to modify D.00-12-064. D.01-01-062, which was issued on January 31, 2001, authorized PG&E to pledge its current and future gas customer accounts receivable and core gas inventory for the purpose of procuring gas supplies for PG&E's core customer and storage gas for core customers.

Pursuant to Ordering Paragraph 7 of D.01-01-062, the Energy Division has informed us that PG&E has been able to enter into some gas supply contracts with suppliers using the pledge of the gas accounts receivable and core gas inventory credit tools. Although some core gas supplies will flow as a result of

these contracts, it is still uncertain at this point in time whether the diversion of noncore gas supplies will be necessary in order to serve the demands of core customers. In preparation of a "worst case" scenario, i.e., diversions are needed, we address ORA/TURN's emergency petition.

The action we take today is based on the extraordinary circumstances and events taking place. The situation remains fluid. If diversions of noncore gas are necessary as a result of PG&E's inability to procure core gas supplies, then the modifications described below should apply. If the situation turns more favorable, and no diversion of noncore gas is needed to fulfill the gas needs of PG&E's core customers, then our modifications detailed below should not apply.

By virtue of the Commission's adoption of the PG&E Gas Accord settlement in D.97-08-055, that settlement sets forth various rules pertaining to PG&E's intrastate transmission and storage systems. Among the rules covered are OFO, EFO, and diversion charges. (73 CPUC2d at pp. 806, 813-814.) The various rules contained in the Gas Accord settlement were implemented in Resolution G-3288.

Nabisco's contention that Rule 14 should not apply to the situation at hand is without merit. The adoption of the Gas Accord settlement restructured the way that PG&E provides natural gas service to its customers. The settlement specifically addresses the terms and conditions of PG&E's intrastate transmission and storage systems, including an involuntary supply diversion. (73 CPUC2d at pp. 806, 814.) Since the settlement covers all aspects of the operation of PG&E's intrastate gas system, PG&E's Gas Rule 14 covers involuntary diversion of noncore gas supplies for whatever reason, including supply problems due to a lack of credit.

The next issue to address is whether the charges or penalties associated with an OFO, EFO, and involuntary diversion, should continue to apply in the situation that faces us today. ORA/TURN and others contend that at the time the Gas Accord was being negotiated and adopted by the Commission, no one ever contemplated that diversions of noncore gas might occur on a recurring or constant basis due to PG&E's financial condition. Others who oppose the petition contend that such an event was contemplated at the time, or that the charges and penalties should still apply since they are analogous to liquidated damages.

Our review of the Gas Accord settlement and the quotations provided by the parties lead us to conclude that the parties to the Gas Accord settlement and the Commission did not contemplate that the settlement, and the rules governing PG&E's gas system, were designed to address a scenario of frequent or constant diversions of noncore gas in order to protect gas service to core customers. PG&E Gas Rule 14-G states in pertinent part:


"When operational conditions exist such that supply is insufficient to meet demand and deliveries to Core End-Use Customers are threatened, and subject to the obligations of Core Procurement Groups to utilize all available capacity associated with supply, PG&E may divert gas supply in its system from Noncore End-Use Customers to Core End-Use Customers. Emergency Flow Order (EFO) provisions will be deemed to apply under these conditions."

The above provision contemplates that core supply is insufficient to the gas demand, and that all available capacity must be utilized. In the situation that faces us today, the gas suppliers readily acknowledge that natural gas is available in the marketplace but that it is priced at the market rate. Thus, there is plenty of gas available at a certain price. In addition, there is no present capacity constraint on PG&E's system to prevent gas supplies from flowing. The diversion of noncore gas is viewed as a drastic measure in order to obtain gas supplies when there are no other supplies available, and capacity is being fully utilized. We can only conclude that a diversion of noncore gas, as contemplated in Rule 14-G, did not envision the set of circumstances under which PG&E may have to divert noncore gas supplies in order to meet the gas demand of its core customers.

In addition, we face highly, unusual circumstances. As widely reported, and cited in other proceedings related to the energy shortage facing California, on January 17, 2001, Governor Davis issued a Proclamation which declared a state of emergency regarding the shortage of electricity available to California utilities. On January 19, 2001, President Clinton declared a natural gas supply emergency in the central and northern regions of California. The Secretary of the Department of Energy issued a "Temporary Emergency Natural Gas Purchase and Sale Order" which expired on February 7, 2001 at 12:01 a.m. Thus, what faces us today is an energy shortage and a natural gas emergency. ORA/ TURN's petition must be viewed within that context.

On January 26, 2001, in D.01-01-056, we granted a limited waiver of penalties for two customers on interruptible electric rate programs. We also suspended the penalty provisions in those tariffs for interruptible electricity service customers who fail to curtail at the request of the utility. The reason for suspending the penalties was because of the electricity crisis resulting from the unavailability of supply and the increases in price for electricity. The Commission also stated that interruptible customers were experiencing more frequent curtailments than they thought they were going to be subject to. As a result, the penalties were forcing customers to decide whether to curtail their electric service on a more frequent basis, or to pay the significant penalties. Given the economic and social consequences of the interruptible customers' choices, the Commission decided to suspend these penalties for interruptible electric customers.

The situation described in D.01-01-056 is not unlike the situation that faces us now. If PG&E is forced to divert noncore gas supplies, the charges and penalties associated with an OFO, EFO, and involuntary diversion are required under PG&E's tariffs. We agree with ORA/TURN that the OFO and EFO charges, as well as the diversion charge, will only increase the cost of gas to core customers.

Consumers of gas have experienced significant increases in the price they pay for gas. If diversions of noncore gas become the rule rather than the exception in order to provide service to core customers, the charges associated with an EFO and involuntary diversion will add up quickly, which will impact core customers.

We will waive the OFO and EFO noncompliance charges contained in PG&E's Gas Rule 14 for core procurement customers if diversion of noncore gas supplies occurs due to PG&E's lack of credit and its inability to procure core gas supplies directly from gas suppliers. The waiver of such charges is appropriate because a diversion will require an EFO to issue. (See PG&E Gas Rule 14-G.) An OFO may issue as well in the event the system needs to be protected. If PG&E is forced to divert noncore supplies in order to serve core customer needs, that will mean PG&E has very few options available to procure needed gas supplies. This is likely to result in frequent diversions of noncore supplies, and the issuance of EFOs and OFOs. Given the state of emergency, the declaration of a natural gas emergency, and the steps the Commission took in D.01-01-056 we believe that waiver of the OFO and EFO charges for core procurement customers is justified.

As for the involuntary diversion charge of $50 per Dth, we will not modify or reduce that amount. We agree that noncore customers should be compensated for the diversion, and that the $50 per Dth charge is an appropriate charge that should continue. We recognize that gas prices have risen dramatically, but we do not believe that lowering the diversion charge to the actual market price will fully compensate noncore customers and suppliers. Such a reduction is also likely to cause gas suppliers and noncore customers to cease the flow of gas into California. Given the few gas supply alternatives left to PG&E, this is not an attractive option. The amount of the charge provides a sufficient incentive for noncore customers and gas suppliers to decide whether they should continue to flow gas in order to help alleviate PG&E's predicament, or to curtail or shutdown their businesses.

We decline at this point to modify the other charges and penalties that the parties have raised.

The waiver of the OFO and EFO charges should not be viewed as a solution to PG&E's financial problems or to the gas supply issue that endangers the public health and safety of gas customers in PG&E's service territory. We urge the Governor and the Legislature to take all necessary and immediate action to ensure that natural gas supplies continue to flow to PG&E's service territory. If we are forced to rely on diverted gas in order to serve the needs of core customers, that will only cause the bills of core customers to increase.

To implement today's modification of PG&E's Gas Rule 14, PG&E shall file an advice letter within 10 days suspending the OFO and EFO noncompliance charges only if PG&E cannot directly procure sufficient quantities of natural gas to serve its core customers as a result of its current financial condition, and it has to divert noncore gas supplies in order to serve its core customers. The Director of the Energy Division (Director) will review the advice letter and tariff for compliance with this decision. Once approved by the Director, the advice letter and tariff will be effective as of today.

ORA/TURN have suggested that PG&E be directed to keep the Commission informed about the current storage and supply situation. That is currently being addressed in A.01-01-024.

Draft decisions are generally subject to a 30-day review and comment period as provided for in Public Utilities Code § 311(g)(1). However, § 311(g)(2) provides that this 30-day period may be reduced or waived in an unforeseen emergency situation. Rule 77.7(f)(9) provides that the Commission may waive the period for review if the Commission determines, on the motion of a party or on its own motion, that "public necessity" requires waiver of the 30-day period for public review and comment. Public necessity includes a situation where the failure to adopt a decision before the expiration of the 30-day review and comment period would cause significant harm to the public health or welfare. The failure to timely act on the petition to modification could result in the non-delivery of natural gas to core customers in the middle of the peak winter season. Such a situation endangers the public health and welfare of the citizens of this state. Therefore, the 30-day public review and comment period on this draft decision is waived.

Findings of Fact

1. On January 16, 2001, ORA/TURN filed their emergency petition to modify the decision regarding PG&E's Gas Accord and Resolution G-3288.

2. ORA/TURN request the Commission to take immediate action, or shorten the time for responses.

3. An ALJ issued shortening the time for responses to the petition.

4. The Commission provided notice in its agenda that action would be taken on this item at the February 8, 2001 Commission meeting.

5. Gas curtailment, diversion and constraint conditions are described in PG&E's Gas Rule 14.

6. Resolution G-3288 approved the specific tariff language in Rule 14.

7. Rule 14 addresses the conditions regarding an OFO, EFO, and diversion.

8. ORA/TURN propose that the OFO and EFO noncompliance charges to core procurement customers be waived, and that the involuntary diversion charge of $50 per Dth be reduced.

9. As the electricity crisis evolved, PG&E began to feel the effects on the gas side of its business.

10. D.01-01-062 authorized PG&E to pledge its current and future gas customer accounts receivable and core gas inventory for the purpose of procuring gas supplies for PG&E's core customers and storage gas for core customers.

11. The Energy Division has informed the Commission that PG&E has been able to enter into some gas supply contracts using the pledge credit tool.

12. It is uncertain at this point in time whether the diversion of noncore gas supplies will be necessary.

13. Various federal and state orders have been issued concerning the energy shortage in California.

14. D.01-01-056 suspended the penalties associated with the interruptible electric rate programs.

15. The situation described in D.01-01-056 is not unlike the situation that faces us.

16. If PG&E is forced to divert noncore gas supplies, the charges and penalties associated with an OFO, EFO, and involuntary diversion are required under PG&E's tariffs.

17. The OFO, EFO and the diversion charge will only increase the cost of gas to core customers.

18. Consumers of natural gas have experienced significant increases in the price they pay for gas.

19. If diversions of noncore gas become the rule, the charges associated with an EFO and involuntary diversion will add up quickly, which will impact core customers.

20. The $50 per Dth diversion charge is an appropriate charge that should continue because that amount provides a sufficient incentive for noncore customers and suppliers to decide whether they should continue to flow gas or to curtail or shutdown their businesses.

Conclusions of Law

1. The argument that Rule 14 should not apply to PG&E's situation is without merit because Rule 14 covers involuntary diversion of noncore gas supplies.

2. The parties to the Gas Accord settlement and the Commission did not contemplate that the settlement, and the rules governing PG&E's gas system, were designed to address a scenario of frequent or constant diversions of noncore gas in order to protect gas service to core customers.

3. The Commission should waive the OFO and EFO noncompliance charges contained in PG&E's Gas Rule 14 for core procurement customers if diversion of noncore gas supplies occurs due to PG&E's lack of credit and its inability to procure core gas supplies directly from gas suppliers.

4. Given the state of emergency, the declaration of a natural gas emergency, and D.01-01-056, the waiver of the OFO and EFO charges under the conditions described is justified.

5. The involuntary diversion charge of $50 per Dth should not be modified or reduced.

6. PG&E should be directed to file an advice letter to implement this decision.

7. ORA/TURN has justified why their petition was not filed within the first year of the issuance of D.97-08-055.

8. On the Commission's own motion, the 30-day public review and comment period on today's decision is waived.

ORDER

IT IS ORDERED that:

1. The January 16, 2001 emergency petition to modify Decision (D.) 97-08-055 and Resolution G-3288 that was filed by the Office of Ratepayer Advocates and The Utility Reform Network is granted in part as described below. All other relief requested in the petition and by other parties in connection with this petition is denied.

2. D.97-08-055 and Resolution G-3288 shall be modified to reflect the following:

3. The Commission, through a ruling of the President of the Commission, may require PG&E to withdraw the tariff based on the modification approved today, and submit an updated tariff, if the conditions surrounding the energy shortage situation in California changes.

This order is effective today.

Dated February 15, 2001, at San Francisco, California.

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