VI. Off-System Deliveries

A. SDG&E and SoCalGas' Proposal

In D.04-09-022, the Commission directed SoCalGas to make a showing in this proceeding about providing firm off-system delivery to PG&E. SDG&E and SoCalGas propose to offer two types of off-system delivery service to PG&E.

The first is firm backhaul service. SDG&E and SoCalGas propose to conduct an open season for firm backhaul service to PG&E that would require new facilities at either the Adelanto/Kramer Junction area or Kern River Station. If sufficient interest is expressed through the open season, SDG&E and SoCalGas propose to determine whether the project costs should be rolled-in or whether this project should be priced on an incremental basis, and to submit the project to the Commission for approval.

The second service that SDG&E and SoCalGas propose is interruptible off-system service through backhaul.⁶⁶ This service utilizes off-setting transactions on both the SoCalGas and PG&E system to serve a customer on the PG&E system that purchases gas from a gas supplier located on the SoCalGas system. This service would be interruptible because it depends on there being sufficient forward haul deliveries from PG&E into SoCalGas. SDG&E and SoCalGas propose that a 75/25 ratepayer/shareholder incentive sharing mechanism apply to these interruptible off-system revenues, with a $5 million per year cap on the shareholder portion. SDG&E and SoCalGas contend that this will ensure that the maximum amount of interruptible capacity is offered, and that firm capacity cannot be profitably withheld from the market. The rate for this interruptible off-system service would be a negotiated volumetric rate up to a maximum rate of 16 cents per Dth.

B. Criticisms and Proposed Modifications

PG&E is concerned that the off-system proposal offers firm delivery at either Kern River Station or Kramer Junction. Kern River Station is the existing bi-directional interconnection point between PG&E and SoCalGas, and is closer to the PG&E citygate than Kramer Junction. PG&E points out that the proposal fails to consider the indirect operational or cost impacts on PG&E resulting from the siting of this delivery point. PG&E supports the proposal to let the market decide the location of the delivery point, so long as the prospective shippers are fully informed of all the costs on the SoCalGas system, as well as on the PG&E system.⁶⁷ PG&E recommends that SDG&E and SoCalGas be required to include the potential for increased costs on the PG&E system in their communications and materials for off-system service. The rebuttal testimony of SDG&E and SoCalGas acknowledges PG&E's concern and agrees to work with PG&E so that the potential costs can be communicated to potential off-system shippers seeking to deliver gas to PG&E.

DRA is not convinced that new facilities will be needed to provide firm off-system service. DRA recommends that the Commission direct SoCalGas to provide further evidence on whether new facilities will be needed to provide firm off-system service. BHP proposes that path-specific rates be considered due to the different locations of potential shippers.

Several parties expressed concern about the rate for interruptible off-system service. Some contend that there should be no charge because backhaul is being used, while others contend that the rate should reflect the actual cost or the short-run marginal cost of providing the service.

TURN and SCGC raised concerns about the proposed 75/25 sharing mechanism. TURN proposes an incentive of 10%, while SCGC asserts that no incentive is needed.

Sempra LNG proposes that the FAR reservation charge be refunded back to the shipper in the event of an off-system sale. Sempra LNG contends that since the end-user of the gas is not an SDG&E or SoCalGas customer, no additional costs on the system are being incurred, and the PG&E customer will end up paying more for the gas if the FAR reservation charge is not refunded to the shipper.

SCGC proposes that the Commission prohibit the use of SoCalGas' storage facilities to support the delivery of gas to PG&E's system. SCGC contends that such a restriction is needed because storage use is in high demand, and if it is used for delivering gas to PG&E, that will increase the cost of storage. SDG&E, SoCalGas and several other parties oppose SCGC's proposed prohibition of using storage to support off-system deliveries.

C. Discussion

This proceeding limited the issue of off-system service to PG&E only. While recognizing this limited scope, several parties continue to advocate that the Commission expand off-system deliveries to other interconnections besides PG&E. We first address the off-system service to PG&E, followed by a brief discussion of whether off-system services should be expanded in the future.

None of the parties object to the idea of having SDG&E and SoCalGas provide off-system delivery service to PG&E. As mentioned by many of the parties, off-system service provides gas suppliers with another market to sell their gas. This is especially attractive to the LNG project sponsors who seek to provide gas supplies at various west coast locations. Off-system service will benefit northern California because additional gas supplies will be able to flow to customers of PG&E. These additional gas supplies flowing through the transmission systems of SDG&E, SoCalGas, and PG&E are likely to put downward pressures on the price of natural gas for the benefit of the entire California market. Off-system deliveries can also reduce transmission costs if system throughput is increased on the SDG&E and SoCalGas system as a result of these deliveries. With these benefits in mind, we believe that appropriate measures should be taken to encourage off-system deliveries to PG&E.

PG&E prefers that the off-system delivery from SoCalGas occur at Kern River Station, but recognizes that potential shippers may decide another location is more preferable. We will let the market decide which location is more preferable for off-system deliveries to PG&E. However, the determination as to where the off-system delivery point should be needs to consider all of the potential costs on the SDG&E and SoCalGas system, and on PG&E's system. SDG&E and SoCalGas acknowledge that they will work with PG&E to obtain PG&E's costs. We expect PG&E to provide these potential costs to SDG&E and SoCalGas when potential shippers express an interest in firm off-system service to PG&E. We also expect SDG&E and SoCalGas to inform potential shippers of PG&E's costs as well as their own.

SDG&E and SoCalGas propose to hold an open season for firm off-system delivery, and then to file an application for approval. In that application, the utilities expect to ask that the project costs either be rolled-in or that it be priced on an incremental basis. DRA's concern about what facilities are needed, and BHP's concern about the rate structure, can be raised as issues when the application is filed.

BHP recommends that SoCalGas' wholesale transmission tariff be changed so that LNG suppliers can make off-system deliveries to PG&E. We do not adopt BHP's suggestion. The LNG suppliers are different from wholesale customers of SoCalGas. As pointed out by SDG&E and SoCalGas, wholesale service is offered only to utilities or municipalities that transport natural gas across the SoCalGas system for their customers. In addition, the off-system service is different from that of a wholesale service. Accordingly, BHP's proposal is not adopted. The proposed Schedule No. G-OSD, attached to Exhibit 15, is a more appropriate tariff to use for providing off-system delivery service.

SDG&E and SoCalGas propose that the rate for interruptible off-system service be a negotiable volumetric charge up to 16 cents per Dth. Several parties contend that the rate should be zero or lower than the 16 cents. Coral Energy suggests that the rate be set between three to five cents per Dth. Others have suggested that the rate be set at the actual cost or the short run marginal cost of providing the service, but no one provided testimony on how much that should be.

The main argument for a zero or lower rate is that the use of backhaul does not require, or it requires very little, transportation on the SoCalGas system. Instead, the backhaul depends on the use of forward haul transportation on the SoCalGas system that has already been paid for. SDG&E, SoCalGas and Watson/IP/CCC/CMTA essentially argue that in order for the backhaul to occur, the entire transmission system is being used to allow the off-system delivery to occur.

Our view is that in order for the backhaul to occur, the shipper requesting the off-system delivery must still send out gas onto SoCalGas' system in order for the gas to be delivered to the PG&E customer. Although the shipper's gas may not travel the full distance to the interconnection with PG&E, some use of the SoCalGas transmission system will occur. The transmission rate that is paid for on the forward haul on SoCalGas' transmission system needs to be taken into consideration as well, since SoCalGas is receiving revenue for the forward haul's usage on the transmission system. With these factors in mind, the 16 cents rate is too high. Since the off-system backhaul proposal was based on our desire to encourage access to additional gas supplies,⁶⁸ a 16 cents rate is likely to discourage potential shippers from wanting to make an off-system delivery to PG&E. As suggested by Coral Energy's witness, a fixed rate of five cents per Dth for interruptible off-system service to PG&E appears reasonable. This amount will encourage off-system service, as opposed to a higher rate, and it also recognizes that the shipper requesting the off-system service on a backhaul basis does not place as much of a cost burden on the SoCalGas system. For those reasons, a fixed charge of five cents per Dth shall apply on the gas volumes delivered under the interruptible off-system service to PG&E.

SDG&E and SoCalGas propose a 75/25 sharing incentive mechanism for interruptible off-system service revenues, subject to a $5 million annual cap. TURN proposes that the incentive be limited to 10% of the revenues, subject to the annual cap. SCGC proposes to eliminate the incentive mechanism. With a lower interruptible off-system service rate, this should encourage potential gas shippers to use this service. SoCalGas is also obligated under the proposed G-OSD tariff to "make available physical displacement capability at the receipt points on an interruptible basis ... ." (Ex. 15, Schedule No. G-OSD, Special Condition 9.) If gas marketers have excess supplies that they want to sell in northern California, they will seek out the availability of this interruptible service. Accordingly, the proposals for a sharing incentive mechanism for interruptible off-system service revenues are not adopted.

Sempra LNG proposes that the shipper receive a credit-back of the FAR reservation charge when a shipper makes an off-system delivery to a PG&E customer. SDG&E and SoCalGas oppose Sempra LNG's proposal, and assert that such revenues should be credited to end-use customers on the system. Since we are no longer adopting the credit-back mechanism, the unbundling of the five cents FAR reservation charge will result in a reduction in the end-user's transmission rate. Sempra LNG's credit-back concern is moot as a result of the adoption of the unbundling of the FAR reservation charge.

SCGC seeks to prohibit the use of SoCalGas' storage services to support the off-system delivery of gas to PG&E's system. SCGC is concerned that potential gas suppliers seeking to deliver into PG&E's system will increase the demand for storage, which will result in higher storage prices and less storage space.

We are not persuaded that potential suppliers of gas should be prevented from using the gas storage facilities of SoCalGas. As SDG&E and SoCalGas point out, if demand for storage exceeds the supply, this will drive the need for expansion of storage facilities. In addition, if storage revenues from SoCalGas' unbundled storage program exceed $21 million, ratepayers are entitled to a 50% share of the revenues. Ratepayers benefit if storage revenues are maximized. If gas suppliers are unable to use storage, this will deter them from transporting gas to PG&E, and will deprive PG&E customers with an additional source of gas. For those reasons, SCGC's proposal is not adopted.

The proposal to offer interruptible off-system service to PG&E by backhaul is approved, subject to our modifications, as discussed above. The proposal to use an open season process to solicit interest in firm off-system service, and to file an application for approval, is also approved. SDG&E and SoCalGas shall file an AL with the tariffs and services needed to implement these two services. The AL shall be filed within 45 days of the effective date of this decision. The tariffs and services shall be consistent with our discussion of these two services. The AL is subject to protest, and such protests shall be filed within 20 days after the AL has been filed. The AL shall be served as described in the FAR system discussion.

Several parties suggest that off-system deliveries to other pipelines are needed. We recognize that the suppliers of gas would like to pursue markets other than just PG&E. With the potential for large quantities of LNG to reach California, the opening of new markets is of tremendous importance to these shippers. To the extent the opening of new markets utilize the facilities of California-regulated gas utilities, that can help to reduce the transmission rates of California customers. The flow of additional gas supplies through the transmission systems of the California utilities should also result in more competition among gas suppliers. However, the use of SoCalGas' transmission facilities to transport gas to points outside of California raises FERC jurisdictional issues pertaining to the Hinshaw exemption of SoCalGas' transmission system, and has operational ramifications for intrastate transmission. (See 15 U.S.C. § 717(c).)

As we move forward with the FAR system, and with the recent completion of R.04-01-025 in D.06-09-039, we believe the time for us to consider off-system deliveries to pipeline interconnections other than PG&E will soon be here. Much of that will depend on whether the LNG project developers are successful in their efforts to bring LNG to California. The LNG project that is the furthest along estimates that regasified LNG will flow from Baja California in the early part of 2008. If other LNG projects are successful in their permitting efforts, those projects will follow. Accordingly, we will permit SDG&E and SoCalGas to file an application, no earlier than May 1, 2008, to offer off-system service to pipeline interconnections other than PG&E. By that time, we will have a clearer picture of what LNG projects are likely to be built, and what, if any, gas flows will be coming from LNG suppliers into California. The application shall address the impact of the Hinshaw exemption on the proposed service to other pipelines, and how this proposed service may impact the daily operations of the two utilities with respect to all their intrastate customers.

⁶⁶ The proposed tariff for this service appears in Schedule No. G-OSD in Exhibit 15.

⁶⁷ In order to minimize costs to northern and southern California customers and shippers, PG&E prefers that off-system deliveries from the SoCalGas system be made at Kern River Station.

⁶⁸ See D.04-09-022, page 74.