XVII. Cost Allocation

A. Marginal Cost Estimation

All marginal cost issues have been addressed in earlier sections of this decision.

B. Establish Base Margin

In the SoCalGas' PBR proceeding, ORA recommended that $14 million in capital costs associated with the construction of Lines 6902 and 325 be excluded from ratebase. This recommendation was based upon provisions of the Global Settlement requiring that all capital costs relating to increases in noncore load be placed below the line. This treatment was to remain in place so long as the ratemaking treatment in the Global Settlement remained in effect. (D.97-07-054, Slip Opinion, p. 78.) Since the Global Settlement expired in August, SoCalGas is proposing to include these capital costs in ratebase. This would increase the revenue requirement by approximately $2.66 million. ORA has no objection to including these costs in rate base now that the Global Settlement has expired.

SoCalGas proposes to eliminate the existing zone rate credit and roll in the revenue requirement associated with the Wheeler Ridge interconnection facility, which will create an annual revenue requirement increase of $6.83 million per year. The justification for rolling in the Wheeler Ridge revenue requirement is discussed in Section X. SoCalGas' proposal will be adopted.

C. Allocation of Base Margin

The marginal cost revenue is developed by taking the marginal costs for each function, such as distribution or transmission, and multiplying it by the MDM. In general, the MDMs are the forecasts of throughput which drive investment decisions to meet anticipated demand. For instance, the MDM for the distribution system is the coincident peak month demand, while the MDM for the transmission system is the cold year throughput. In this BCAP, SoCalGas used its 1999 throughput forecast for the MDMs while ORA used the average throughput of years 2000, 2001, and 2002.

The sum of the marginal cost revenue from each of the functional categories (customer, distribution, transmission, and storage) determines the total marginal cost revenues. Rarely, if ever, will the marginal cost revenues match the total authorized gas margin (revenue requirement). A scaling function is performed so that total revenue collected from the customers will meet the authorized gas revenue requirement. The ratio of the marginal cost revenue for each customer class versus the total system marginal cost revenue determines the EPMC scaler. For example, if the core class is responsible for 80% of the marginal cost revenues, it will be allocated 80% of the revenue requirement.

There is no dispute between the parties regarding the methodology for allocating the base margin. The differences are the result of different marginal cost estimates as well as different throughput assumptions. In addition, ORA included the throughput for both Rosarito and DGN (Mexicali) in its forecast.

Including Rosarito throughput for cost allocation purposes is consistent with D.99-09-071, where the IB tariff was rejected. Including DGN throughput is consistent with the Commission finding in D.98-12-024 that the contract rate should be the sum of the LRMC and any exclusions and that SoCalGas should be responsible for any shortfalls. The throughput associated with discounted contracts are typically included in the forecast for cost allocation purposes.

D. Allocation of Non-base Margin Costs

All regulatory balancing account balances have been updated and will be included with the implementation of new BCAP rates. ORA has generally relied upon the balances depicted in the SoCalGas application with the following exceptions.

· ORA estimated ITCS costs at $72 million to reflect the ORA recommendation in the 1996 BCAP rehearing that the Transwestern and El Paso surcharges be reallocated to noncore customers.

· ORA allocated exclusions (transition costs) to DGN consistent with the Commission's decision in D.98-12-024.

· ORA removed the Rosarito credit revenue consistent with its recommendation that Rosarito shippers pay a full cost of service rate.

We have adopted the ORA recommendations with ITCS costs as modified by this decision.

E. Care and DAP

1. CARE Costs

CARE program costs, with certain exceptions, are recovered from all customers on an equal-cents-per-therm basis. Ultramar proposes placing a cap on the recovery of CARE costs from SoCalGas' largest industrial customers. It recommends a cap of 15 million therms per year which represents the average annual usage for transmission level G-30 customers. According to its witness:

CARE costs are categorically different from SoCalGas' other costs. CARE is a social program designed to provide economic assistance to low-income customers. As such, the costs represent a Commission-sanctioned cross-subsidy of one group of customers by another. There is no sense in which customers such as Ultramar are receiving something of economic value here in exchange for each therm delivered. Indeed, under SoCalGas' proposed allocation method the reverse is true. The cost borne by the subsidizing shipper grows with each therm delivered.

ORA contends that this argument does little more than state the obvious since an equal-cents-per-therm allocation always results in larger customers contributing more than smaller customers. Nevertheless, this is the allocator the Commission has traditionally chosen to spread the recovery of costs that no one wants to pay. It doesn't matter if the costs relate to social programs or are some type of transition cost resulting from the restructuring of the gas industry. The point is not how much of the CARE program costs are being borne by the largest customers on the system. The point is, ORA argues, that an equal-cents-per-therm allocator has been considered a fair means of recovering costs for well over a decade and there is no need to create an exception now.

Of SoCalGas' approximately 1,194 noncore commercial/industrial customers, eight of them (including Ultramar) have annual gas usage exceeding 15 million therms representing approximately 37% of the total noncore G-30 load and 37% of the noncore CARE costs under the current CARE allocation methodology. The proposal by Ultramar of placing a 15 million therm cap on the CARE surcharge would reduce the eight customers' CARE responsibility from 37% to 14%, and result in a $1 to 2 million shift of CARE costs from G-30 customers to core customers.

Ultramar has not convinced us that the eight largest users on SoCalGas' system should pay proportionately less than everyone else to meet the costs of a social program. Its request is denied. We adopt ORA's recommendation.

2. DAP Costs

SoCalGas proposes to assign all $18 million in DAP costs to residential customers. TURN objects to this allocation and instead recommends that they be treated like CARE costs and allocated on an equal-cents-per-therm basis. ORA takes no position on this issue.

TURN maintains that SoCalGas' allocation is contrary to the statutory requirements of §§ 739.1 and 2790(a). It says DAP encompasses what is traditionally knows as "weatherization," as authorized by § 2790(a):

The commission shall require an electrical or gas corporation to perform home weatherization services for low-income customers, as determined by the commission under Section 739, if the commission determines that a significant need for those services exists in the corporation's service territory, taking into consideration both the cost effectiveness of the services and the policy of reducing the hardships facing low-income households.

TURN argues that by statutory definition, DAP is a program of assistance to low-income electric and gas customers. Section 2790(a) specifies that eligibility is determined as under § 739, which stipulates in § 739.1(a) that:

The commission shall establish a program of assistance to low-income electric and gas customers, the cost of which shall not be borne solely by any single class of customer. The program shall be referred to as the California Alternate Rates for Energy or CARE program.

This broad cost allocation has traditionally been applied to the CARE program, but it should be applied to the DAP program as well, in TURN's opinion, because DAP is designed to serve exactly the same ratepayers as CARE. The purpose of both programs is to serve the social and equitable goal of promoting affordable rates, not just to promote conservation or business goals.

SoCalGas points out that TURN has attempted previously to redirect the responsibility for DAP costs from residential customers to a broader base of customer classes in the 1993 BCAP proceeding. This issue was resolved in the JR by adopting the SoCalGas position.

F. DGN Contract

SCGC argues that the rate treatment of SoCalGas' long-term gas transmission service contract with Distribuidora de Gas Natural de Mexicali (DGN), a Sempra affiliate, should be consistent with the rate treatment of SoCalGas' other wholesale customers. Specifically, SCGC declares that SoCalGas be required to use the same LRMC methodology for allocating costs to DGN that it uses for its other customers.

In our decision approving the DGN contract, we determined that "after the Global Settlement period is concluded, the DGN contract should be allocated costs similar to that of a wholesale customer, including the cost of exclusions." (D.98-12-024, slip op. at Finding of Fact 18.) However, SoCalGas has failed to include any portion of the $4.5 million in exclusive use facilities dedicated to Mexicali service in its proposed customer cost LRMC for DGN. SoCalGas intends to treat the DGN pipeline extension facilities as incremental facilities.

SCGC recommends that SoCalGas be ordered to increase the customer cost LRMC for DGN by $457,021 to reflect the costs of the Mexicali exclusive use facilities. SCGC's recommendation will not be adopted. The allocation "similar to that of a wholesale customer" in this proceeding is a marginal cost allocation based on the NCO method, which is $22,034, and is adopted.