II. Background

The origin of this proceeding can be traced back to our efforts regarding the assessment of the market and regulatory framework of California's natural gas industry in Order Instituting Rulemaking (R.) 98-01-011.¹ In that rulemaking, we considered and identified appropriate reforms to the natural gas market structure in California with the objectives of fostering market competition and benefiting California natural gas consumers.²

As a result of the rulemaking process, the Commission issued D.99-07-015. This decision identified the most promising options for changes to the regulatory and market structure of California's natural gas industry.³ The options revolve around a market structure that "preserves the utilities' traditional role of providing fully-integrated default service to core customers, while clearing obstacles to the competitive offering of gas commodity, transmission, storage, balancing and other services for all customers in the service territories of regulated local distribution companies throughout the state." (D.99-07-015, page 2.)

In D.99-07-015, we acknowledged that the Gas Accord structure, implemented in PG&E's service territory, could be enacted in SoCalGas' service territory. (D.99-07-015, page 3.)⁴ We also stated that "We consider the creation of a statewide system of tradable intrastate transmission rights to be worthy of closer examination in the next phase of this proceeding."⁵ (D.99-07-015, pages 14, 141, COL 1.)

I.99-07-003 was issued concurrently with D.99-07-015. In this investigation, the Commission asked the parties to prepare a more detailed analysis of the costs and benefits associated with the more promising structural changes. The Commission also encouraged all stakeholders to develop and agree on "a comprehensive set of terms for restructuring the gas industry in a manner consistent with [D.99-07-015]." (I.99-07-003, page 3.)⁶ This process resulted in three settlement proposals, which we addressed in D.01-12-018.⁷

In D.01-12-018, the Commission adopted the Comprehensive Gas OII Settlement Agreement (CSA), with certain modifications. The CSA was to modify the regulatory and market structure for regulating the transportation and storage of natural gas on the SoCalGas and SDG&E systems. With the adoption of the CSA, customers were to have access to firm tradable transmission rights on SoCalGas' backbone transmission system, and the costs associated with intrastate backbone transmission were to be unbundled from transportation rates. The CSA also placed SoCalGas at-risk for the recovery of its backbone transmission costs.⁸ D.01-12-018 also provided that the utilities' retail core procurement department would continue to reserve interstate capacity, intrastate backbone transmission capacity, and storage capacity to meet the requirements of retail core procurement customers. The CSA market structure would have allowed noncore customers to acquire intrastate backbone transmission capacity through an open season, or to purchase gas at the city gate. D.01-12-018 anticipated that the availability of firm tradable transmission rights would allow customers to place an increased reliance on long-term contracts.

In D.01-12-018, the Commission ordered SoCalGas to file advice letters (ALs) to implement the CSA. SoCalGas filed nine ALs to establish an implementation schedule, tariffs and rules. Eight of the nine ALs were protested. On February 27, 2003, the Commission issued Resolution G-3334, which consolidated and denied the ALs without prejudice. In the resolution, we ordered SoCalGas to file an application to implement D.01-12-018.

On June 30, 2003, SoCalGas filed Application (A.) 03-06-040. SoCalGas proposed two options in its application. Option 1 is the "compliance case," which proposed to implement the tariff provisions that are in compliance with the CSA adopted in D.01-12-018. Option 2 was described as the "preferred case," which contained recommended changes to D.01-12-018. Protests and responses were filed. On September 29, 2003, assigned Commissioner Brown issued a scoping memo that limited the scope of A.03-06-040 to the compliance case filing.⁹ Following the evidentiary hearings, we issued D.04-04-015.

D.04-04-015 adopted tariffs to implement D.01-12-018. However, we recognized that the regulatory structure adopted in D.01-12-018, which we were implementing in D.04-04-015, might not be consistent with the direction being taken in R.04-01-025.¹⁰ For that reason, we issued a stay of D.04-04-015 until a decision was reached in Phase I of R.04-01-025. In staying D.04-04-015, we stated, "Although we are staying implementation of this decision, we fully support a market structure that includes firm tradable rights." (D.04-04-015, page 70.)

In D.04-09-022, the Phase I decision in R.04-01-025, we continued the stay of D.04-04-015 until further notice.¹¹ We also ordered SDG&E and SoCalGas to file an application regarding their system integration and FAR proposals. (D.04-09-022, pages 67, 73, 93, OP 8.)¹² As a result of the continuing stay of D.04-04-015, the CSA and its system of firm transmission rights have not been implemented for SoCalGas and SDG&E.

SDG&E and SoCalGas filed their proposals for system integration and FAR in this proceeding on December 2, 2004. The system integration proposal was bifurcated from the FAR proposal and the off-system delivery issues. In D.06-04-033, we approved the system integration proposal.

Thereafter, a ruling was issued to set the procedural schedule for addressing the remaining issues in this proceeding. This proceeding was categorized as ratesetting and that hearings were necessary. Over 100 exhibits and 12 days of evidentiary hearings make up the record in this phase of the proceeding. This phase was submitted on September 27, 2006.

¹ The rulemaking process involved the use of a staff report, comments on the report and to a list of questions, a full panel hearing, working groups, hearings, briefs, and oral argument. (See D.99-07-015, pages 5-9.)

² As we noted in Decision (D.) 98-08-030, our use of the term "market structure" refers to the way in which "gas and related services are provided to customers." (81 CPUC2d 527, 530.)

³ The most promising options identified in D.99-07-015 include the following: more vigorous consumer protection rules; removal of limits on participation in the core aggregation program; development of a secondary market to trade access rights to transmission and storage assets; and better flow of information.

⁴ The Commission adopted PG&E's Gas Accord market structure and rates in D.97-08-055 (73 CPUC2d 754). The Gas Accord established the access rules to PG&E's backbone and local transmission system, and to PG&E's storage system. The Gas Accord structure was extended most recently in D.04-12-050, and remains in place through December 31, 2007.

⁵ The "next phase of this proceeding" occurred in Order Instituting Investigation (I.) 99-07-003.

⁶ The Commission addressed the "most promising options" for PG&E in D.00-02-050 and D.00-05-049.

⁷ The three settlement proposals are known as the Interim Settlement Agreement, the Post-Interim Settlement Agreement, and the CSA.

⁸ The CSA also addressed the following: creation of firm tradable storage rights and a secondary market to trade those rights; separate balancing for the core and noncore to eliminate the potential for cross-subsidization; anonymous monthly imbalance trading; the trading of operational flow order imbalance rights; reducing restrictions for participation in the core aggregation transmission program; and eliminating core subscription service. (D.01-12-018, page 3.)

⁹ The scoping memo in A.03-06-040 ruled that the preferred case option sought to modify many of the elements of the approved CSA, and would have required a substantial re-examination of the policies and programs adopted in D.01-12-018. Since the focus of A.03-06-040 was to adopt implementing tariffs, the issues were limited to the proposed tariffs in SoCalGas' compliance case.

¹⁰ The focus of R.04-01-025 was to establish policies and rules to ensure that reliable, long-term supplies of natural gas will flow to California. The rulemaking was opened due to concerns that there may not be sufficient natural gas supplies or infrastructure to meet the future gas needs of California.

¹¹ Among other things, D.04-09-022 addressed access to the intrastate gas pipelines by liquefied natural gas (LNG) suppliers, authorized SDG&E and SoCalGas to establish Otay Mesa as a joint receipt point, and adopted the presumption that LNG suppliers are to pay the infrastructure costs for their projects and that requests for rolled-in or alternative ratemaking treatment could occur by filing an application. (D.04-09-022, pages 3-4.)

¹² SDG&E and SoCalGas proposed in R.04-01-025 that the Commission adopt their transmission system integration proposal and their FAR proposal. Due to the rate effects of the system integration proposal, and how the changes adopted in D.04-09-022 might impact the FAR proposal, we ordered SDG&E and SoCalGas to file these proposals in a new application.