XI. Storage
A. Summary
In D.93-02-013 (48 CPUC2d 107), the Commission unbundled noncore storage services for SoCalGas. Under this new regime, storage capacity and the related costs are first allocated to core customers and load balancing services. The remaining storage capacity and related costs are then allocated to the unbundled noncore storage program.
The allocation of costs between the core, load balancing, and the unbundled storage program is based upon three factors: (1) the estimated marginal costs for inventory, injection, and withdrawal capacity; (2) the amount of storage capacity needed to meet the core's peak day requirements, and (3) the amount of storage needed to provide balancing services. As with the transmission function, the process begins with the development of a resource plan which estimates the amount of investment needed to meet growth over a 15-year planning horizon. The storage marginal cost for each function is determined by dividing the total investment by the growth in demand. Marginal cost revenues for the core and unbundled storage program are then determined by multiplying the marginal costs for each function by the amount of capacity allocated to the core and the unbundled storage program.
Only those noncore customers desiring storage services contribute to the recovery of the unbundled storage program's revenue requirement. The costs associated with any unsubscribed capacity is given transition cost treatment and is recovered from all customers through their transportation rate. (Re Natural Gas Procurement and Systems Reliability Issues, D.93-02-013, 48 CPUC2d 107, 130.) The differences between the company and ORA with respect to storage issues relate to the withdrawal reservation for the core, the estimated marginal costs for all three functions, and the continuation of balancing account protection for the unbundled storage program.
B. Storage Marginal Costs
The ORA and SoCalGas storage marginal cost estimates are set forth in the following table.
TABLE 5
Fixed Costs
Injection $/Mcfd |
Withdrawal $/Mcfd |
Inventory $/Mcf | |
ORA 2000$ |
33.51 |
13.64 |
0.22 |
SoCalGas 1999$ |
19.81 |
11.65 |
0.21 |
Variable Costs
Injection $/Dth |
Withdrawal $/Dth | |
ORA 2000$ |
0.0128 |
0.0178 |
SoCalGas 1999$ |
0.0124 |
0.0173 |
ORA accepted the company's storage resource plan. Consequently, all of the differences in the marginal cost estimates are the result of methodological differences. ORA includes a replacement cost adder for each of the storage functions while SoCalGas does not. The appropriateness of including a replacement cost adder has already been addressed in an earlier section of this opinion. (Section VI C.)
C. Core Withdrawal Reservation
SoCalGas proposes no changes in the core reservations for inventory capacity (70 Bcf) and injection capacity (327 MMcf). However, it does propose an increase in the withdrawal capacity reservation from 1985 MMcfd to 2082 MMcfd. ORA recommends retaining the current reservation on the ground that there has been no cost-benefit analysis to justify the proposed increase in the reservation. TURN proposes decreasing the reservation to 1782 MMcfd. TURN's analysis takes issue with SoCalGas' estimate of the amount of flowing supply available on a peak day. It is also based upon a cost-benefit analysis indicating that the purchase of flowing supplies on a peak day is considerably more economical than the reservation of additional withdrawal capacity on a year round basis.
SoCalGas' basis for the proposed increase in the withdrawal reservation is the forecasted increase in the core's peak demand. The company increased the reservation level in proportion to the increase in peak demand. ORA asserts that the proposed increase is unaccompanied by any cost-benefit analysis. The company has failed to demonstrate that this approach to meeting growth in peak day demand is economical given the availability of flowing supplies. SoCalGas does not take issue with the ORA contention that flowing supplies could make up the difference on a peak day. Nor does SoCalGas demonstrate that an increase in the withdrawal reservation is the cheapest alternative. Under those circumstances, argues ORA, the proposed increase in the reservation should be rejected in favor of the status quo.
TURN was the only party to present a cost-benefit analysis on the most economical alternative for meeting the core's peak day requirements in an environment of significant excess interstate capacity. That analysis indicates that not only should the forecasted increase in the core's peak day demand be met through flowing supplies, the current reservation could actually be reduced by 200 MMcfd given SoCalGas' underestimation of the amount of flowing supplies available on a peak day. TURN's analysis of the economics of using flowing supplies versus storage withdrawal capacity assumed a cost of gas ten times higher than the current cost of gas. Even with this assumption, the analysis demonstrated significant savings to the core from using flowing supplies rather than storage withdrawals to meet the residual portion of peak day requirements. SoCalGas' rebuttal to TURN's analysis consisted of two sentences:
Severe peak day events in Chicago gas markets (as well as here in the California electric PX market) indicate that the price of peak day supplies can exceed $20/mcf. TURN's recommended 1782 MMcfd storage withdrawal reservation must be rejected because their analysis is too casually based upon speculative gas cost figures that have no reliable historical basis. (SoCalGas, Watson, Ex. 71, pp. 3-4.)
ORA submits that TURN's analysis of the economics of using flowing supplies versus storage withdrawal capacity is much more convincing than SoCalGas' unsubstantiated assertions regarding the possibility of gas prices exceeding $20/mcf. ORA supports TURN's lower withdrawal reservation as an alternative to simply maintaining the status quo. ORA contends that SoCalGas' proposal does little more than reduce its potential risk in the increasingly competitive noncore storage market by assigning additional costs to captive customers.
D. Noncore Storage Balancing Account
SoCalGas is currently exposed to virtually no risk for the costs allocated to its storage operations. The storage costs allocated to the core market remain bundled in core rates and are subject to 100% balancing account protection through the CFCA. The costs allocated to load balancing services also remain bundled in rates and are allocated to core and noncore customers. The stranded costs associated with the unbundled storage program are treated as transition costs and given 100% balancing account protection through the NSBA.9
ORA recommends that the NSBA be eliminated and that SoCalGas be fully at risk for costs allocated to the unbundled storage program. At the same time, it should be granted increasing pricing flexibility with respect to its noncore storage services. ORA believes these steps are needed to level the playing field between the incumbent utility and independent storage providers such as Wild Goose and Lodi Gas Storage (Lodi).
SoCalGas proposes to retain the NSBA unless four conditions are met: (1) the core retains sufficient storage capacity to meet its reliability requirements; (2) regular daily balancing is instituted; (3) SoCalGas is given pricing flexibility similar to independent storage providers; and (4) the company is free to sell and manage its unbundled storage assets. It further recommends that that issue be addressed in the GIR proceeding rather than this BCAP.
Since 1992 the Commission has been concerned with the development of an independent competitive storage market in California. The Commission's first step in that direction was the unbundling of storage costs for both SoCalGas and PG&E so that noncore customers could choose their own storage service providers in the event independent storage services became available. The next step was the granting of a certificate of public convenience and necessity (CPC&N) to Wild Goose, the first independent storage provider to receive a certificate in California. The Commission is currently considering the request of Lodi for a CPC&N.
Given the emergence of competition in the storage market, ORA says the time has come to move the process a step further by leveling the playing field between SoCalGas and its potential competitors. Independent storage providers do not have balancing accounts to protect them from risk in the marketplace, nor are they limited in the prices they can recover from the marketplace. ORA believes it is unfair for SoCalGas to continue receiving balancing account protection for its unbundled storage costs when no similar protection is accorded new market entrants. As a further step in moving toward a competitive storage market, it recommends that NSBA protection be eliminated and the utility be granted pricing flexibility comparable to that available to independent storage providers.
This recommendation is identical to one ORA made in the SoCalGas PBR proceeding. SoCalGas opposed the PBR recommendation, arguing it was precluded by the Global Settlement. Since the Global Settlement has expired, it now argues that the issue should only be addressed in the GIR proceeding. This is not a generic issue. SDG&E has no storage facilities of its own and the Gas Accord resolved the issue for PG&E by placing shareholders fully at risk for its unbundled storage program. Since it is not a generic issue it is appropriately addressed in this BCAP.
E. Impact of the Joint Recommendation
The JR would resolve the issue of the core withdrawal reservation as well as the issues surrounding the unbundled storage program. The parties agree to a core withdrawal reservation of 1935 MMcfd. This is the midpoint between the TURN and SoCalGas recommendations. The parties also agree to limit the costs allocated to the unbundled storage program to $21 million and to provide 50/50 balancing account protection together with upward pricing flexibility capped at 120% of the current tariff rates. The $21 million is $11 million less than the fully scaled marginal cost revenues that would flow from the other elements of the joint recommendation. This $11 million shortfall would be allocated to NSBA and recovered from all customers on an equal-cents-per-therm basis.
The JR provides a reasonable resolution of the storage issues notwithstanding the complaints of WHP and SCGC. It represents a significant step toward leveling the playing field between SoCalGas and new market entrants. Although SoCalGas will not be fully at risk for its unbundled storage program, the 50/50 balancing account protection represents significant movement in that direction.
SCGC complains that the level of risk is really only 64/36 because the storage program is only allocated $21 million rather than the fully scaled amount of $31 million. Since SoCalGas is accepting a significantly greater level of risk for the unbundled program it is reasonable for the level of risk to be set close to the unscaled marginal costs. The $21 million figure accomplishes this. That amount is close to the embedded cost of the facilities and is actually greater than the unscaled marginal costs.
WHP avers that it is participating in this proceeding because the rates and terms for storage service by SoCalGas will directly impact WHP's ability to compete for customers in SoCalGas' service territory; its ability to compete will also depend on the implementation of the Commission's "let the market decide" policy to level the playing field for all storage providers as they compete for business. SoCalGas' testimony concerning the continuance of the NSBA and the conditions it would require to be met in order to agree to give up the subsidy provided by that account and become completely at risk for its noncore storage costs generated WHP's interest. WHP firmly believes that the legislative and Commission policy of advancing storage competition will never become a reality in California as long as monopoly storage providers are allowed to reach into captive ratepayers' pockets to make up for noncore storage revenue shortfalls.
In implementing its position WHP urges the Commission to:
1. Reject the "All Other Storage Issues" provisions of the JR.
2. Reject the transmission resource plan recommended in the JR as contrary to existing Commission LRMC methodology.
3. Eliminate the NSBA. This elimination of the NSBA can occur without considering SoCalGas' conditions to that elimination. However, should the Commission determine to address those conditions in this BCAP, WHP recommends:
· Reject the SoCalGas condition that the core be allocated sufficient storage as unrelated to the issue of elimination of the NSBA.
· Reject the SoCalGas condition that regular daily balancing be implemented as unnecessary to the elimination of the NSBA.
· Allow SoCalGas sufficient pricing flexibility for its unbundled storage services and asset management flexibility, on the condition that SoCalGas' storage and transportation tariffs do not inhibit fair competition in SoCalGas' service territory.
4. Ensure that only storage costs are in storage rates, and that they are not included in transportation rates.
5. Ensure that the default rates of utility storage services, if continued to be priced with LRMC methodology, is not manipulated by SoCalGas' resource plans or other means that prohibits fair competition by other storage providers.
For the reasons discussed in other portions of this opinion we are adopting the JR. Our analysis of WHP's objections to the "All Other Storage Issues" leads to our conclusion that they are without merit. First, we do not "ensure" our findings on costs and allocations. Long run marginal costs are based upon estimates of costs, estimates of sales, and predictions of the future conduct of many parties. We hope we have reasonable estimates; we "ensure" nothing other than our belief that our decision is reasonable based on the evidence.
Second, WHP complains about the NSBA. The JR moves towards WHP's position. Presently the NSBA is a 100% balancing account assuring SoCalGas' storage revenue. The JR moves to a 50/50 balancing account. Moving half way toward a party's position should not be disparaged.
The parties opposing the JR also argue that its treatment of the unbundled storage program either ties our hands or may be inconsistent with what we ultimately adopt in the GIR proceeding. Neither is the case. We are free to address whatever storage issues we deem appropriate in the upcoming cost/benefit phase of the GIR proceeding. The parties to the JR simply recommend that the changes not have any cost allocation implications prior to 2003. Furthermore, the JR expressly provides that storage issues may be reconsidered in the event that significant changes to storage operations or balancing rules are proposed in the GIR proceeding.
In summary, the storage provisions of the JR represent a reasonable interim step toward leveling the playing field between the utility and new market entrants. That step should be taken now since the timing of final Commission action in other proceedings is uncertain.
