IX. ITCS and Interstate Capacity
A. Summary
Three issues have been raised with respect to SoCalGas' long-term contracts for interstate pipeline capacity on El Paso and Transwestern: (1) the amount of interstate capacity which should be reserved for core customers and the estimated cost of that capacity; (2) the amount of interstate capacity that is expected to be stranded during the BCAP period and the allocation of those stranded costs to core and noncore customers through the ITCS account; and (3) the appropriate methodology for both allocating interstate pipeline refunds to customers and recovering Transwestern transition cost recovery (TCR) surcharges from customers.
ORA recommends maintaining the core reservation at its current level of 1044 MMcfd at an estimated cost ranging from $128 million in 2000 to $130 million in 2002. SoCalGas recommends increasing the reservation to 1076 MMcfd at an estimated cost ranging from $136 million in 2000 to $132 million in 2002.
ORA also recommends eliminating the core's responsibility for ITCS costs. ORA agrees with the company's estimated market value of the interstate capacity which will be made available for brokering. However, ORA's estimate for stranded capacity (ITCS) costs is slightly higher than the company's because of ORA's lower core reservation.
ORA further recommends that Transwestern TCR surcharges be recovered from all customers on an equal-cents-per-therm basis. Finally, ORA recommends that the $11.7 million in refunds SoCalGas has received from the interstate pipeline be returned to customers in the same manner in which they were initially recovered.
B. Core Capacity Reservation Costs
ORA recommends that the core reservation be maintained at its current level of 1,044 MMcfd with 744 MMcfd reserved on El Paso and 300 MMcfd on Transwestern. SoCalGas recommends increasing the reservation to 1076 MMcfd based upon the company's forecast of cold year demand for 2002, the last year of the BCAP period. The cost difference between these two estimates is approximately $4 million per year in reservation charges. Adoption of the SoCalGas proposal would reduce ITCS costs by shifting an additional $4 million in cost responsibility to the core. The ORA proposal has no cost allocation impact since it simply maintains the status quo.
SoCalGas notes that the core reservation was initially based upon a forecast of the core's cold year requirements. ORA's proposal ignores the core's cold year requirements and is instead based upon a goal of avoiding additional cost shifts.
ORA points out that the existing reservation is sufficient to meet the core's average year requirements; the 1044 MMcfd reservation level is significantly above average year requirements for each year of the BCAP. Because the cold year forecast upon which SoCalGas' reservation is based is an event which is expected to occur only once every 35 years, given the current excess of interstate capacity into the California market, there is simply no need for the core to continue reserving capacity that it is unlikely to need or use during the BCAP period. To the extent that the core's requirements are in excess of the reservation, it can simply purchase supplies at the border. Indeed, the Commission's recent decisions approving the GCIM authorize SoCalGas to purchase up to 10% of its demand on an annual basis at the California border without being subject to a reasonableness review. (D.97-06-061, p. 9, Conclusion of Law No. 10.)
ORA says that maintaining the reservation at its current level is also appropriate given the likelihood that core capacity costs will be unbundled at some point during the next three years. When this occurs, as it already has on the PG&E and SDG&E systems, core aggregators will no longer be required to take a pro rata share of the core reservation and can instead serve core customers with capacity obtained on the open market. This, in turn, will lower the amount of capacity that the core needs to reserve.7 Increasing the reservation above the current level makes little sense given that the current reservation is likely to be in excess of the core's cold year requirements once core capacity costs are unbundled.
Finally, ORA argues, maintaining the current reservation and allowing the core to meet its cold year requirements through purchases at the border gives at least some recognition to the current inequities in the way interstate capacity costs are recovered. The core pays the full as-billed rate for the capacity reserved on its behalf. This is significantly greater than the market value of the capacity. Noncore customers, on the other hand, have been able to purchase capacity at market prices since the inception of the capacity brokering program. During the early years of capacity brokering, noncore customers were also responsible for a significant amount of stranded capacity costs. However, with SoCalGas' recent step-downs in its capacity holdings on Transwestern and El Paso, the amount of stranded costs have decreased significantly. Maintaining the reservation at its current level will at least give the core some limited opportunity to purchase capacity at a market price and ameliorates this inequity. For all of the above reasons, ORA contends the core reservation should be maintained at its current level of 1044 MMcfd.
SCGC supports SoCalGas. Out of concern for the core SCGC argues that it would be bad policy to bar SoCalGas from reserving adequate levels of capacity to meet projected core demand. It says the Commission must require the core to maintain sufficient capacity to meet its own needs, even under peak-year conditions. Any customer, including the core, must base its capacity reservations on its real need for firm capacity on an ongoing basis. SCGC, believing there is demonstrated need to increase the core's interstate capacity reservation, urges the Commission to approve SoCalGas' recommended core reservation of 1,076 MMcfd.8 The JR adopts ORA's recommended 1044 MMcfd and associated costs.
C. Allocation of ITCS
Since the inception of the capacity brokering program, the core has been responsible for paying the full as-billed rate for interstate capacity reserved on its behalf while the noncore has been free to obtain capacity at the substantially lower market price. In addition to paying more for capacity, the core has also been responsible for a portion of the stranded costs that arise from the fact that the market value of the interstate capacity SoCalGas holds is significantly less than the rate it must pay El Paso and Transwestern under its long-term contracts. The stranded costs, which are the difference between the company's contractual obligations and the revenue obtained through brokering, are recorded in the ITCS account. Until now, the core and noncore have been allocated ITCS cost on an equal-cents-per-therm basis with the core's responsibility capped at a dollar value equal to 10% of the cost of the capacity reserved on its behalf. ORA recommends that the Commission eliminate the core's continuing responsibility for ITCS costs. Adoption of this recommendation would shift approximately $9 million in cost responsibility from the core to the noncore.
ORA cites numerous factors justifying the elimination of the core's responsibility for ITCS costs. First, the core has paid a disproportionate share of SoCalGas' contractual obligations for interstate capacity since the inception of the capacity brokering program. Not only does the core pay an above market rate for the capacity reserved on its behalf, it is also obligated to pay for a portion of the stranded costs associated with capacity that is marketed to the noncore through the capacity brokering program. This allocation was based on the premise that, since all customer classes benefited from slack capacity, all customer classes should share in the stranded costs. (D.92-07-025, 45 CPUC2d 47, 61.) ORA observes that at that time the core was already paying full value for a significant amount of slack capacity, because the core reservation is based upon a cold year requirement which is expected to occur only once every 35 years. This reservation amount exceeds the core's average year requirements by approximately 10%. ORA says that requiring the core to pay significantly above market value for considerably more capacity than can reasonably be expected to be used in a given year and then piling on an additional slack capacity component is simply adding insult to injury.
If this practice was ever fair, ORA believes the time to eliminate it has now arrived. In 1996, SoCalGas reduced its capacity holdings on El Paso and Transwestern by a total of 750 MMcfd. These stepdowns have significantly reduced both the amount of capacity that must be brokered by SoCalGas and the associated stranded costs. Given the magnitude of the benefits to the noncore arising from the elimination of a large portion of SoCalGas' contractual obligations for interstate capacity, ORA believes it is only fair that the noncore finally assume full responsibility for the remaining stranded capacity costs.
SoCalGas and the noncore parties argue that the Commission has considered and rejected ORA's proposal to eliminate the core's allocation of ITCS costs in prior proceedings. (e.g., D.97-04-082 at 69-70.) They contend ORA has not provided new arguments or new evidence in support of its proposal. SoCalGas says the established record on this issue demonstrates convincingly that both core and noncore customers have benefited from lower commodity costs as a result of excess interstate pipeline capacity. The core has paid a small portion of the ITCS contemplated in the capacity brokering implementation decision and should continue to pay a portion of the ITCS costs, subject to the 10% cap, in recognition of the benefit it receives.
This issue is unique to this company. It is not a generic issue appropriate for a statewide proceeding because with the relinquishment of its El Paso capacity, PG&E no longer has any stranded capacity costs to recover on a going forward basis through the ITCS account. Furthermore, the Gas Accord eliminated the core's responsibility for any remaining ITCS costs on the PG&E system.
The JR has resolved this issue by maintaining the status quo.
D. Forecast of ITCS Costs
In the last BCAP, the Commission elected to recover ITCS costs on a forecast basis rather than a recorded basis. In order to develop a forecast of stranded costs, the value of brokered capacity must first be determined. SoCalGas estimated the value at $0.12 per MMBtu based upon publicly available information regarding sales of El Paso capacity to third parties. The estimated value of $0.12 per MMBtu is approximately 34% of the as-billed rate. CCC/Watson recommends using an estimate of $0.24 per MMBtu based upon a simple average of 1998 monthly California border/San Juan basin differentials less fuel and commodity costs. ORA recommends using the company's more conservative estimate because it is more representative of the historical value of capacity. The higher estimate sponsored by CCC/Watson is based on one year of data which is not expected to continue after expiration of El Paso's short-term transportation contracts. The lower estimated value will help insure that ITCS costs are not undercollected. This in turn will insure that customers contemplating bypass at a future date will not be able to avoid these costs.
ORA used SoCalGas' estimated market value of capacity to develop a $26.5 million forecast for ITCS costs in 2000. This is slightly higher than SoCalGas' estimate of $24.5 million because ORA's lower core reservation makes more capacity available for brokering. This in turn, results in approximately $2 million in additional stranded costs.
E. Amortization of ITCS
The change from recovering ITCS costs on a recorded basis to recovery on a forecast basis has the consequence that the ITCS rate now includes two components: one for recovery of the previously recorded ITCS and another for recovery of future ITCS. The total ITCS rate for noncore industrial and commercial customers established by D.97-04-082 was $0.01160 per therm. On June 1, 1999, SoCalGas filed Advice Letter No. 2811 seeking to reduce the ITCS component of rates effective August 1, because the recorded portion of the ITCS account balance from the last BCAP will have been fully amortized as of that date. SDG&E filed Advice Letter 1157, July 2, 1999, to the same effect. ORA and TURN protested both advice letters and instead recommend that the ITCS component remain at its current level.
ORA says the problem with the proposed reduction in the ITCS rate is that it completely ignores the rehearing of D.97-04-082 on the allocation of interstate surcharges arising from the Federal Energy Regulatory Commission (FERC) approved settlements between El Paso and Transwestern and their customers. In D.97-04-082 the Commission allocated the surcharges to core customers. In D.98-07-100 the Commission granted rehearing after finding that it had erred in classifying these costs as something other than ITCS costs and in allocating them in a manner inconsistent with previous decisions. D.99-11-021 modified D.97-04-082, and reallocated $81.1 million of ITCS surcharges from the core to the noncore. The effect of this reallocation is discussed in Section XVI, infra. ORA's position on the proper level of the ITCS component of rates was formed prior to D.99-11-021. Because of overcollections in ITCS accounts and the reallocation of surcharges, we will reduce the ITCS component of rates, thereby lowering rates for all customers. (See Section XVI.)
F. Transwestern TCR Surcharges
The TCR surcharges represent Transwestern's recovery of take-or-pay, buyout, buydown, and contract reformation costs incurred through December 31, 1997. Prior to November, 1996 SoCalGas allocated these costs based on the core/noncore split of capacity rights on Transwestern. On November 1, 1996, SoCalGas reduced its capacity holdings on Transwestern from 750 MMcfd to 300 MMcfd. The remaining 300 MMcfd was assigned exclusively to the core. Since November, 1996, the company has been assigning the TCR surcharges exclusively to the core through the CFCA.
ORA argues that allocation of these costs exclusively to the core is inappropriate. These costs were incurred by Transwestern as a part of the restructuring of the gas industry at the federal level at a time when SoCalGas held capacity to meet the requirements of all of its customers, both core and noncore. ORA points out that the Commission has consistently held for over ten years that transition costs of this nature are the responsibility of all customers. As stated in D.87-12-039:
These (transition) costs date from the era when the utilities bought gas and built their systems with the obligation to serve all types of customers. The purpose of identifying these costs now is to enable them to be shared equally among all current gas users. If the existence of these costs means that all customers cannot enter the newly competitive gas market with a "clean slate," at a minimum, out of a sense of fundamental fairness, we can ensure that everyone carries a slate that is equally dirty...
We view take-or-pay, buy-out and buy-down costs related to pipeline purchases over the past few years as classic transition costs. (Re Rate Design for Unbundled Gas Utility Services, D.87-12-039, 26 CPUC2d 213, 229.)
ORA says that the issue is not whether SoCalGas currently holds Transwestern capacity on behalf of its noncore customers. The issue is the fair recovery of these transition costs from all gas users. Since noncore customers are still gas users they should be held responsible for their fair share of these costs. ORA recommends that these costs, estimated at $659,000 annually, be recovered, like other transitions costs, on an equal-cents- per-therm basis from all customers. ORA further recommends that the CFCA be credited in the amount of $1.849 million and that this amount also be allocated on an equal-cents-per-therm basis. This represents the amount allocated exclusively to core customers since November 1996.
G. Impact of the Joint Recommendation
The JR resolves issues relating to the core's reservation of interstate capacity, the core's responsibility for ITCS costs, and the allocation of Transwestern TCR surcharges. In each instance, the parties agree to maintain the status quo. This reflects ORA's position on the core reservation and SoCalGas' position on ITCS and the Transwestern TCR surcharge. ORA recommendations on the ITCS issue and the Transwestern TCR surcharge, if adopted, would shift approximately $ 10 million in annual costs from the core to the noncore. Since the JR simply maintains the status quo on each of the issues, there is no cost allocation impact.
The JR did not address the ITCS reallocation from core to noncore ordered by D.99-11-021. That reallocation is discussed in Section XVI, infra.
