XV. RLS Tariff
A. Arguments
SCGC, CCC/Watson, Kern River, Questar, and Edison recommend that the Commission order SoCalGas to eliminate the RLS tariff. The RLS tariff allows SoCalGas to impose a higher unit rate for transportation service to customers that partially bypass its system. Under the RLS tariff, SoCalGas may charge a rate for residual load service that is up to an amount equal to the product of the current tariff rate times the ratio of the customer's load factor before bypass to its load factor after bypass.11 Thus, partial bypass customers face the prospect of paying an RLS rate that is so high as to make partial bypass uneconomic. The parties' experience is that the threat of incurring the higher RLS rate for residual service undermines the economic attractiveness of alternative pipelines, particularly for EG customers with multiple facilities.
The RLS tariff was implemented by the Commission in D.95-07-046 (60 CPUC2d 505) to close a regulatory gap which would unfairly reward noncore customers for partially bypassing SoCalGas. In this proceeding, the parties requesting termination of the RLS tariff are either competitors of SoCalGas seeking to gain a competitive advantage through regulation or customers that have considered in the past, or are actively considering, bypass projects. SoCalGas advocates that the RLS tariff should remain in full force and effect, modified only in certain minor respects to account for changes created by electric industry restructuring.
SoCalGas observes that arguments against the RLS tariff in this BCAP are similar to arguments made and rejected in its 1996 BCAP, where the Commission considered arguments to terminate the RLS tariff by some of the same parties making the same arguments in this proceeding. The Commission concluded that the RLS tariff, as implemented in D.95-07-046 and amended slightly to incorporate certain SoCalGas-requested changes, should remain in effect. (D.97-04-082, at 134.) In so concluding, the Commission reviewed and rejected a variety of complaints. The Commission described the purpose and the general methodology of the RLS tariff:
In D.95-07-046, the Commission approved a modified SoCalGas proposal to implement a load-specific flexible rate design for noncore customers who choose to partially bypass SoCalGas' transportation system. This design is known as the Residual Load Service (RLS) tariff.
The RLS was implemented in order to close a regulatory gap which would have unfairly rewarded noncore customers for partially bypassing SoCalGas. This gap arises because SoCalGas, due to utility franchise rights, is required to serve all customer load within its service territory. Without the RLS, other gas transportation providers would have been able to contract with SoCalGas' noncore customers to provide their baseloads at lower, negotiated rates and leave SoCalGas obligated to serve those customers' high-cost peaking loads at tariffed rates. The losses resulting from this loss of noncore base load, combined with the requirement to serve high cost residual load at tariffed rates, would have been borne by SoCalGas' shareholders and remaining captive customers. The RLS was implemented to ensure that noncore customers' costs of partially bypassing SoCalGas internalize the externalities that their bypass places on the general body of ratepayers (D.95-07-046 slip op. at 15).
Under the RLS, SoCalGas is allowed to negotiate rates for gas transportation with each noncore customer who decides to bypass. Rates must be negotiated between a floor equal to SoCalGas' short-run marginal cost and a default ceiling rate equal to the product of the current tariff and the ratio of the customer's load factor before bypass to the load factor after bypass. (Id. at 13.) The RLS does not apply to off-spec gas, refinery produced gas or gas produced and consumed within the service area of a wholesale consumer. (Id. at 17.) The RLS was approved for an interim period, until implementation of the instant BCAP. (D.97-04-082, at 127-128.)
SoCalGas says the foregoing discussion is as accurate now as it was in 1997. So too is the language from SoCalGas' 1996 BCAP decision where the Commission describes the necessity for the RLS tariff to remain in place.
. . . in order to discourage bypass which would leave SoCalGas providing high-cost peak rate service at low tariffed rates to customers who partially bypass. Without the RLS tariff, SoCalGas' class average volumetric rate structure would provide "poor price signals to noncore customers and may promote uneconomic bypass by providing an under priced insurance policy to customers with market alternatives." (D.97-04-082, at 134.)
In making this determination, the Commission considered and rejected various arguments which have been repeated in this 1999 BCAP proceeding.
Kern River and Questar (the Pipelines) have brought the argument against the RLS tariff up-to-date. They assert that its function to discourage any attempt to partially bypass the SoCalGas system is anti-competitive with the result completely at odds with the Commission's commitment to fair competition in general and to competition among pipelines as announced in D.98-03-073, which approved the merger of the parent corporations of SoCalGas and SDG&E. The Pipelines note that the CEC has recommended eliminating the RLS tariff due to its anti-competitive effects.12 They urge the Commission to join the CEC in recognizing the anti-competitive effects of the RLS tariff and to eliminate it immediately.
The Pipelines contend that when the Commission first adopted the tariff in D.95-07-046, it could not have possibly contemplated the impact the tariff would have on the emerging competitive market in electric generation. Nowhere in the Commission's Yellow Book or Blue Book, nor even in the Commission's Preferred Policy Decision,13 is there a prediction that within two years of the issuance of the Policy Decision the basic elements of a more competitive electric generation market would be in place, complete with the sale of virtually 100% of the gas-fired generation of the three largest investor-owned electric utilities in California. Even more surprising is the explosion of interest in the construction of new electric generation plants, designed with efficient clean-burning combined-cycle turbine technology. But not surprising, the threat of the high RLS tariff rate is so ominous that the tariff has never been used, and SoCalGas has always succeeded in getting customers considering such bypass to remain full requirements customers.
The Pipelines say that the impact of the RLS tariff is not limited to economic theory. Their witnesses, representing competing pipelines seeking to enter the southern California market, uniformly reported that customers were unwilling to commit to their projects in a binding manner so long as the RLS tariff was in effect. They say the anti-competitive effect of the RLS tariff is dramatically illustrated by the fact that the Questar Southern Trails project has firm commitments for capacity on its eastern segment, which delivers to the California border, but, as a result of the RLS tariff, no commitments on its western segment, which traverses southern California.
The Pipelines' witnesses testified that new generators, the ones that are locating along the Kern-Mojave corridor, are not exposed to RLS. They argue that when one set of electric generators has an RLS penalty and another set does not, it is an uneven playing field. SoCal's load will be bypassed not by gas pipeline, but by wire; which is the biggest flaw of residual load service. This phenomenon is dramatically reshaping the electric market in southern California, in the Pipelines' opinion. They said the developers of new EG merchant plants have intentionally located their plants away from the Los Angeles basin, the heart of the southern California electric load center, and have sited their facilities where they can either access FERC-regulated interstate pipelines, operate outside of the service territory of SoCalGas, or take advantage of the postage-stamp electric transmission rates in California to "bypass by wire" and transmit electricity generated outside of SoCalGas' territory to serve load which in the past was served by electric generation in the Los Angeles basin.
The Pipelines contend the effect of the RLS tariff is not merely to shift generation plants around California like pieces on a giant monopoly board. They point to the serious harm being done to investors in California's utility infrastructure, harm which they contend is unlawful because it is unduly discriminatory. They pose an example of a generator who operates a peaking power plant, and takes all of its gas demands from SoCalGas. This customer will impose a variable, low load factor demand on SoCalGas as it attempts to serve the fluctuating peaks in electric demand during a given day, month, or year. This customer will pay only the tariffed transportation rate of SoCalGas. In contrast, if an existing generation customer of SoCalGas were to baseload a portion of its demand with an alternative pipeline and to continue to serve its peaking load from SoCalGas that customer would pay a substantial additional penalty on its transportation bills, even if its remaining demand on the SoCalGas system was identical in every way to that of the hypothetical peaking plant. Both customers would impose the same costs on the system to serve the same variable load. The Pipelines ask, is there any reason to place such disparate rate treatment on customers who impose identical demands on SoCalGas' system? They argue strongly that there is not, and that such a result would constitute unlawful discrimination in rates in contravention of Pub. Util. Code § 453.
The Pipelines believe that SoCalGas, by adhering to monopoly utility defensive tactics, and seeking to threaten customers into remaining on the system, is unwittingly encouraging even more bypass, discriminating against the existing generators in its service territory, severely eroding its own markets and revenues, and encouraging jobs and investment to flee southern California for the north or for out of state locations.
The Pipelines maintain that the RLS tariff is not cost based. Not only is the operation of the RLS tariff unrelated to cost incurrence, but in most cases it will impose greater costs on customers who impose lower transmission costs on the system. A customer who shifts from taking full requirements from SoCalGas to partial requirements - in other words, a customer who is the target of the RLS tariff - will in most cases reduce its cold year annual throughput, which is the basis for allocating transmission costs. But under the RLS tariff, that customer will be charged a higher rate, a multiplier of the otherwise applicable tariff rate, because its load factor will have declined after the change in service. So although this customer imposes lower transmission costs on the system, it will be required under the RLS tariff to pay higher rates. Thus, it is clear that the RLS tariff has no basis in cost causation. The RLS tariff punishes customers solely for the offense of having lower load factors, even though they are not imposing greater costs on the system. In short, in the opinion of the Pipelines, there is no rational economic basis for retaining the RLS tariff.
The Pipelines state that SoCalGas cannot substantiate its claim that bypass will always result in a reallocation of costs to other ratepayers - the Pipelines believe the zero sum game is dead. They claim that SoCalGas continually implies that other customers will suffer from any bypass, in the face of mounting evidence that this is not true. They believe elimination of the RLS tariff, with its anti-competitive effects, would encourage new pipelines to come into the basin and promote repowering of existing plants, to provide reliability and increase SoCalGas throughput. Most importantly, utility ratemaking in such a competitive environment is not a zero sum game. Witnesses have testified to the change in the "static, steady state environment" which existed prior to electric deregulation. The Pipelines conclude that SoCalGas is very likely losing load as a result of the RLS tariff and could actually gain revenue and throughput by getting rid of it, embracing bypass, and encouraging the repowering of plants within the Los Angeles basin.
SoCalGas and TURN strenuously object to abolishing the RLS tariff. They argue that the attempt is no more than a transparent exercise in profiting the interstate pipelines and shifting costs from large customers to captive customers. Their argument, succinctly stated, is: The RLS tariff only prevents uneconomic partial bypass; therefore it is not anti-competitive. The interstate pipelines could obviate the problem by increasing capacity to provide peaking service, but they don't because they cannot sell that capacity. The RLS tariff is market based because it competes with other pipelines; cost based tariffs are needed to protect ratepayers without competitive choices; where there is competition a market based tariff is reasonable. Eliminating the RLS tariff will shift fixed costs to full requirement ratepayers. Revenue allocation is based on forecast throughput. If more noncore customers (including EG and others) obtain base load gas from competitors, the noncore throughput will decline. Since the company's revenue requirement for fixed costs remains constant, the lost throughput will lead directly to higher core rates in the next BCAP. Because storage will provide peaking service without the need to oversize pipeline capacity, the pipelines should encourage new storage providers.
CCC/Watson argues that the RLS tariff is a tying arrangement in violation of antitrust laws. SoCalGas, to the contrary, asserts federal antitrust laws concerning tying arrangements do not apply to the regulated utility industry. As a state regulated entity, SoCalGas is immune from antitrust liability under the doctrine of state action. (Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307 (1943).) Active regulation by the CPUC qualifies SoCalGas for this exemption.
B. Discussion
We are not persuaded that the RLS tariff should be abolished at this time. We have reviewed the discussion in D.95-07-046, D.97-04-082, and D.98-03-073 (the merger decision) regarding the RLS tariff and competition and find that the arguments in favor of retaining the tariff have weight, but that weight is rapidly being shed. We have set forth some of the arguments above and will not repeat them.
That significant changes have occurred in the electric industry since 1995 is obvious: the divestiture of generating facilities by the electric utilities, gas pipeline competition, the ISO for transportation of electricity, and the PX for pricing electricity. Competition between electric generators is here, and a substantial portion of that competition is between gas-fired generators. But we cannot fail to realize that the RLS tariff is ineluctably tied to the equation that throughput loss equals increased rates for the remaining SoCalGas customers. Contrary to the assertions of those who would do away with the RLS tariff, this is a zero sum game. The Pipelines say abolish the RLS tariff and "the rising tide of generation will lift all throughput" (R.B. 16). From our view of the evidence, that tide rises slowly.
We acknowledge that pipeline competition has benefited all ratepayers (gas and electric) by causing the cost of gas to drop and we recognize the threat of "bypass by wire" as new generators locate outside the reach of the RLS tariff. But those conditions do not change the fact that less throughput on the SoCalGas system means higher rates for all captive ratepayers on the system. Two things are assured should the RLS tariff be immediately abolished: (1) the large noncore users on SoCalGas' system will migrate to the Pipelines for baseload and take peaking service from SoCalGas, and (2) the captive ratepayers of SoCalGas will pay higher rates.
The tension between competition, the revenue requirement, and the burden of responsibility for the revenue requirement (ratepayers or shareholders) has not been lessened between 1995 and the present. The evidence in this proceeding shows significant changes in regulation over the recent past, but those changes do not provide a basis for us to predict that abolishing the RLS tariff immediately will bring the same benefits to gas ratepayers that pipeline competition has brought. There is evidence that since pipeline competition was initiated gas prices have been reduced. However, the Pipelines' contention that if large users leave SoCalGas' system ratepayer costs will lessen is speculation. It is an anomalous situation that a market based peaking tariff has no customers. But precipitously removing the RLS tariff in this BCAP without ameliorating the effects of the abrupt change assures higher rates for captive customers.
What we have described are the short-term effects of removing the RLS tariff. However, it is apparent to us that in the long term the RLS tariff's detriments will outweigh its benefit. There is no doubt the game is changing. Gas and electric industry restructuring should not be impeded by attempts to reconcile new conditions to past economic theory; rather, theory must be modified to encompass the emerging changes. At this time we are confident that the RLS tariff keeps rates down for all SoCalGas customers, except those who would partially bypass. But, the evidence persuades us that perpetuating the RLS tariff will have the pernicious effect of causing an increase in rates resulting from throughput being substantially reduced as SoCalGas is bypassed by new large customers. SoCalGas' own forecast shows a decline in electric generation throughput from 285.4 MMDth in 1999 to 226.8 MMDth in 2001, a drop of over 20%; and a drop in noncore C&I throughput from 147.0MMDth in 1999 to 137.1 MMDth in 2001. Those opposing the RLS tariff attribute this drop, in part, to the effect of the tariff barring new entrants and forcing relocations. Although the RLS tariff can lock in customers now located in SoCalGas' territory, it is expected to cause potential customers to locate outside the territory. SoCalGas is fighting the concerns of 1995; we must resolve the current issues of energy restructuring.
Nor should we take a parochial view of gas regulation. In adopting a Sempra-wide EG rate we were persuaded that it is in the public interest to consider the effect level transportation rates would have on PX prices for electricity and the resulting effect on electricity purchasers. In regard to the RLS tariff our reach is further than gas costs for electric generation; we take cognizance of the effect of gas costs on large industrial gas users. We should not be in the business of discouraging low costs.
The Pipelines and other argue that the RLS tariff is anticompetitive. We are not persuaded. Competition can take many forms. There is the competition between pipelines: SoCalGas v. Pipelines. One would expect that two competitors would compete based on price, quality of service, meeting customers needs, better product, etc. But what the evidence shows is that Pipelines refuse to compete on the basis of quality of service. Customers want peaking service; Pipelines say peaking service is uneconomic for them. It is not SoCalGas that refuses to compete; it is Pipelines. We accept Pipelines' assertion that it is uneconomic to increase the capacity of their pipes to provide peaking service. That is their choice and they should not be heard to complain. Faced with the choice of improving service by increasing capacity or attempting to persuade the Commission to change SoCalGas' tariffs, Pipelines chose the cheaper route: try to persuade the Commission.
From the customers' viewpoint the competition is different. Here there are two choices: SoCalGas or Pipelines. The customer without a peaking requirement has a routine choice based on price, quality of service, etc. Clearly there is a competitive choice. The customer with a peaking requirement has a problem. It can accept SoCalGas for full service; it can abandon its peaking requirement and choose based on price etc.; it can move out of SoCalGas' territory or not enter in the first place; or it can persuade the Commission to abolish the RLS tariff. The choice is economic. By coming to the Commission these customers have, like the Pipelines, chosen the cheaper route.
In this equation we cannot exclude the captive customer of SoCalGas; the customer who has no choice of pipelines but is responsible for SoCalGas' revenue requirement. To the extent that customers with choice leave SoCalGas
the remaining customers must absorb the lost contribution to margin. This raises a policy question regarding the efficiency of the RLS tariff which we have heretofore consistently resolved in favor of retaining the tariff.
So, we do not believe the RLS tariff harms competition between pipelines; and we believe customers with peaking needs have alternatives that do not require abolishing the RLS tariff. But we are deeply concerned with the effect of the RLS tariff's driving large users out of SoCalGas' territory and inhibiting large users from entry. This directly impacts captive customers. Apparently SoCalGas, as it defends the RLS tariff, doesn't see the tariff as the cause of this migration, or, perhaps it doesn't care as it has the captive customers to fall back on. However, we are especially concerned with the effect of rates on captive customers. We must attempt to stem the erosion of throughput while not relinquishing the value of a peaking tariff. Consequently, we continue the RLS tariff for one year while giving SoCalGas the opportunity to propose a peaking tariff. SoCalGas shall file an application for proposed peaking rate tariff within 60 days of the effective date of this decision.
In our opinion the RLS tariff should be replaced simultaneous with the effective date of a new peaking tariff. It is our intention that this occur within one year of the effective date of this decision. This will give all parties the opportunity to determine how best to position themselves in the post-RLS tariff world. We must allow SoCalGas to make such modifications to its tariffs as are necessary to allow it to compete effectively with the bypass pipelines. There are significant differences between FERC tariff rates based upon straight-fixed variable rate design and SoCalGas' existing all-volumetric rates. All volumetric rates put SoCalGas at an inherent disadvantage in a partial bypass situation. Absent the RLS tariff, the different rate structures offered by SoCalGas and bypassing interstate pipelines would provide an unjustified advantage to
customers that partially bypass SoCalGas. SoCalGas asserts it is willing to engage in a fundamental reexamination of its rate design if the RLS tariff is abolished. We agree that SoCalGas should be permitted to propose a revision of its volumetric rate design. We express no opinion on the content of a proposed peaking tariff, except that it not be the equivalent of the RLS tariff.
