Background

The Commission explained the purpose of this proceeding in D.04-09-022. The rulemaking docket was opened in response to new reports, recent Federal Energy Regulatory Commission (FERC) orders, and ongoing changes in the natural gas market, which indicated that there may not be sufficient natural gas supplies or infrastructure to meet the long-term needs of the state's residential and business consumers. The Commission concluded that it needed to act in 2004 to ensure that: (1) energy efficiency and renewable energy programs help moderate the potential future supply imbalance; (2) there is sufficient firm interstate and intrastate pipeline capacity to serve California; (3) storage facilities will be fully and beneficially utilized; and (4) the utilities and their customers would have access to new natural gas supplies.

The Commission determined that it needed to decide a number of issues in 2004, due to the long lead time needed to construct LNG facilities and due to certain deadlines in 2004 involving the expiration of existing interstate pipeline capacity contracts and open seasons for certain pipelines, including pipelines related to proposed LNG projects. The Commission considered LNG to be an important new source of natural gas supply.

Because of deadlines facing the utilities and other participants in the natural gas market, the Commission established two phases in this rulemaking. The initial rulemaking ordered the respondents utilities to file, by February 24, 2004, Phase I proposed guidelines prescribing how they would:

12. enter into contracts with interstate pipelines (whether new contracts or renewals of existing contracts) to meet core supply obligations;

13. provide access on intrastate pipelines to LNG supplies; and

14. provide access to interconnecting facilities with interstate pipelines to increase California's access to natural gas supplies.


The initial rulemaking identified the following as issues for Phase II:

15. how the designated utilities should provide emergency reserves consisting of slack intrastate pipeline capacity, contracts for additional firm interstate pipeline transportation rights, and supplies of natural gas in storage dedicated for emergency needs;

16. The process by which the utilities would keep the Commission informed about the infrastructure and services provided to noncore customers, and to propose a crediting mechanism in the event a noncore backstop recovery charge is adopted; and

17. new ratemaking policies that will be consistent with the goal of ensuring adequate and reliable long-term supplies of natural gas at reasonable rates to California.


The Commission resolved Phase I issues in D.04-09-022. After various rounds of proposals and comments, the Assigned Commissioners issued a Scoping Memo on February 28, 2005, that identified the specific questions to be addressed in Phase II as follows:

· Should the natural gas quality specifications for California be revised, and if so, how?

· Should the Commission adopt a standardized operational balancing agreement or certain specific criteria for upstream pipelines connecting to the gas utility's transmission system?

· Can the California gas utilities' existing infrastructure and operations adequately protect California from short-term or long-term natural gas shortages caused by interruptions in natural gas supply?

· Should the Commission order the gas utilities to provide emergency reserves for California in the form of additional intrastate capacity or slack capacity, additional interstate capacity, and/or additional in-state natural gas storage?

· Should independent gas storage facilities be permitted to directly connect with other market participants such as California producers, electric generators, or other noncore customers, which Public Utilities Code sections are relevant to this issue, and should the Commission be concerned with bypass?

· Should the Commission form a working group to monitor the infrastructure and services provided to noncore customers and to keep the Commission informed about the situation so that the Commission can consider whether the utilities should provide a backstop function for noncore customers?

· Should the Commission order the utilities to provide a backstop function for noncore customers who fail to provide for their own gas supply needs?

· Should the Commission adopt a crediting mechanism or another mechanism so that noncore customers who procure their own supplies do not have to pay for any such backstop function?

· Should the cost allocation issues regarding emergency reserves or a backstop function be addressed now or deferred until such time the Commission decides whether or not to adopt emergency reserves or the backstop function?

· Should the Commission determine in this proceeding whether the gas utilities' backbone transmission capacity is sufficient to accept maximum withdrawals from all gas storage facilities during peak periods, if emergency gas storage reserves are authorized, or should the Commission defer this issue until such time as it decides whether or not to adopt an emergency gas storage reserve?

· Are the current at-risk ratemaking provisions consistent with the goal of ensuring adequate and reliable long term natural gas supplies, and should the at-risk provisions remain in place or be eliminated for the gas utilities?

· Should PG&E remain at risk for noncore throughput, while at-risk ratemaking is eliminated for SoCalGas and SDG&E?

· Should the Commission address whether a balancing account should be established for PG&E's core local transmission revenue requirement in this proceeding or should this issue be addressed in PG&E's 2008 gas market structure proceeding? If it is to be addressed here, should such an account be established?

In a revised scoping memo issued May 11, 2005, the assigned Commissioners expanded the scope of Phase II to examine electric utility plans to supply, transport and store natural gas for electric generation in those plants for which the utility is responsible to provide the gas.

The Commission held hearings on infrastructure adequacy issues beginning June 22, 2005, and ending September 1, 2005. The Commission held hearings on gas quality issues beginning December 12, 2005, and ending December 16, 2005. The administrative law judge (ALJ) declared Phase II of this proceeding submitted as of the receipt of reply briefs on February 1, 2006.