VII. Peaking Rate

A. Background of the Peaking Rate Tariff

The following section addresses the issue of whether SoCalGas' peaking rate tariff should be retained. In addition, we address SDG&E and SoCalGas' proposal to reinstate the multi-unit EG provision as part of peaking rate tariff.69 For the reasons set forth in the discussion, SoCalGas' peaking rate tariff is retained. The proposal to include the multi-unit EG provision as part of the peaking rate tariff is not adopted.

The peaking rate tariff is found in SoCalGas' Schedule GT-PS. The tariff, which refers to "peaking service" rather than "peaking rate," applies to gas transportation service provided to any noncore customer who bypasses SoCalGas, in part or in whole. As we stated, the peaking rate is "the tariff charged to a noncore customer who uses an interstate pipeline for baseload service, and returns to the SoCalGas system for peakload service." (D.01-08-020, page 31, FOF 2.) As described by the witnesses for SDG&E, SoCalGas and TURN, "The peaking rate is merely intended to charge partial bypass customers the cost to the utility of standing by to provide peaking service that might be used only infrequently." (Exhibit 86, page 1.)

The proposal to reinstate the multi-unit EG provision would extend the application of the peaking rate to all electric generation units owned by an entity if one of the plants owned by the entity bypasses the SoCalGas system. The multi-unit EG provision used to be in the RLS tariff, but was eliminated when the peaking rate tariff was adopted. This provision was contained in Special Condition 6 of the former GT-RLS tariff which stated: "For purposes of this tariff schedule, the entire load of a Utility Electric Generating (UEG) customer will be subject to this tariff schedule should one or more of the UEG's facilities meet the criteria for application of this tariff."

B. Criticisms and Proposed Modifications

Several parties favor the elimination of the peaking rate tariff. These parties represent interests that include interstate pipelines, oil and gas producers, cogenerators, manufacturers, independent and municipal electric generators, and LNG project sponsors. Several parties also oppose the proposal to reinstate the multi-unit EG provision.

The parties oppose the peaking rate for a number of reasons, most of which are contained in the following descriptions of their arguments:

The parties who oppose the multi-unit EG provision contend that if it is reinstated as part of the peaking rate tariff, the provision will be difficult to apply and easy to evade through the establishment of ownership by separate legal entities. They also contend that the ability to baseload a high load unit using the competing pipeline, and using SoCalGas to serve the other unit for peaking needs, would be limited or that the impact would be insignificant. They also contend that SoCalGas will collect more revenues than it costs to serve as a result of this provision.

C. Discussion

The peaking rate has been an issue in our proceedings since the interstate gas pipelines began serving customers in California in the early 1990s. In our prior decisions on this subject, the Commission has consistently recognized two main concerns. The first concern is to protect the remaining ratepayers on the system from having to pay the costs of the customers who leave to take gas service from the interstate pipelines. The second concern is to how to permit pipeline competition while ensuring the utility can recover its cost of providing service. These two concerns provided the impetus for the adoption of the RLS tariff in D.95-05-046. When we decided to move from the RLS tariff to a peaking rate, these concerns did not go away, and were still part of our reasoning for having the peaking rate tariff. With these concerns in mind, we discuss the arguments concerning the peaking rate tariff.

The purpose of the peaking rate is to close the regulatory gap between the rate design of the interstate pipelines, which uses a fixed rate structure, and SoCalGas' volumetric rate design. With this regulatory gap, it can be advantageous for certain customers to take baseload service from a competing interstate pipeline, and rely on SoCalGas for their peak needs. The peaking rate is also designed to recover SoCalGas' cost of providing service to customers who bypass or migrate to the competing pipeline, but may call upon SoCalGas to provide them with service in the future. This cost recovery also helps prevent the shifting of costs from those who bypass to the remaining ratepayers on the system.

The prior decisions regarding the RLS and peaking rate tariff have all recognized these kinds of impacts and adopted the tariffs for those reasons. Although the Commission changed the RLS tariff to develop a rate that narrowed the regulatory gap, we expressed the same concerns when we adopted the peaking rate tariff. The evidence presented in this proceeding has not changed the circumstances behind the adoption of the RLS and peaking rate tariff. We still want to encourage pipeline competition, but we need to ensure that bypass does not harm the remaining ratepayers, especially when the bypassing customer returns to SoCalGas for some or all of its gas needs.

There is ample evidence in the record to understand what is likely to occur if we eliminate SoCalGas' peaking rate tariff. The parties who support the elimination of the tariff include certain interstate pipelines and LNG project sponsors who compete, or may compete in the future, against SoCalGas for customers; large industrial and manufacturing customers who consume gas; and electric generators who use gas to generate electricity. The gas usage of these kinds of end-use customers is not trivial. If the peaking rate is eliminated, these pipelines, gas suppliers, and large gas customers have the most to gain.

When these large gas customers begin to migrate to the gas service of these competing pipelines, there is no doubt that there is going to be less throughput on the SoCalGas system. If heavy users of gas leave the system, the throughput volumes will decline dramatically. As a result, the costs of SoCalGas' transmission system will be allocated to fewer remaining ratepayers.

Some of these large gas customers may also be in a position to take their baseload service from a competing pipeline, but rely on SoCalGas for their peaking needs. This allows them to take advantage of the fixed rate and volumetric differences that exist between the rate structure of the competing pipeline and SoCalGas. In the absence of a peaking rate, this advantage is even greater.

If the peaking rate is eliminated, the remaining ratepayers will have to pay higher rates because they will have to bear the costs that the departing customers would have paid.70 The remaining ratepayers, who are going to end up paying more, are the core and the smaller noncore customers. They are likely to remain as captive customers of SoCalGas, and it is highly unlikely that the competing pipelines will compete to serve these kind of customers.

SoCalGas has the obligation to serve all end-users in its service territory. Those who bypass to take service from a competing pipeline will no longer be paying anything to SoCalGas. Due to the obligation to serve, SoCalGas is required to have a system design that is capable of serving all customers, including those who bypass the system, but may one day call on SoCalGas again to provide full or partial service. As a utility service, certain facilities are needed in order to provide that service. Without the peaking rate tariff, when those customers call on SoCalGas to provide service, they would only pay the same rate for their gas as those customers who remain on the system. These returning customers receive the benefit of not paying for the overall costs of the system, but are still able to demand service when they want. This is unfair to SoCalGas and to the remaining ratepayers.

Another way of looking at this issue is that the peaking rate tariff is essentially a rate for providing standby service. There are certainly costs associated with having to provide a standby service. SoCalGas is being asked to standby, with the connections and facilities in place, to provide gas transmission service upon request. From SoCalGas' point of view, these standby costs include all of the costs associated with the transport of gas from the receipt point to the end-user. It is only equitable that someone who wants service on a standby basis should have to pay for a share of the facilities providing the service. That is what the peaking rate tariff is designed to do.71 The peaking rate is higher than the otherwise applicable rate because the tariff is designed to recover some of the costs of providing service from those who use the service infrequently. The peaking rate tariff fairly compensates SoCalGas for standing ready to provide service when the bypassing customer returns to SoCalGas for service.

Another aspect of the peaking rate issue is that the tariff is a voluntary rate and only applies if the bypassing customer knows it will have to take service from SoCalGas at some point. If a customer leaves SoCalGas and takes full service from a competing pipeline all of the time, that person will not have to pay SoCalGas anything. That is a fair and reasonable result because that person is not causing any costs on the SoCalGas system. If, however, that person relies on SoCalGas for partial or full service, that customer should be required to pay for a share of the costs to provide service to that customer.72 That too, is a fair and reasonable result.

The opponents of the peaking rate contend that the tariff has discouraged electric generators from siting their facilities within SoCalGas' territory. They also point to the number of generating units that have been built in PG&E's territory, as opposed to those that have been built in SoCalGas' territory.

We are unpersuaded by this argument. The record shows that more generating units have been built in PG&E's territory than in SoCalGas' territory. However, none of the electric generators that were referenced in the various exhibits submitted testimony as to the reasons why their plants were sited outside of SoCalGas' territory. The testimony also contains a number of other significant reasons why generating plants decide to site at various locations.

The opponents of the peaking rate argue that the system integration decision, D.06-04-033, eliminated the peaking rate for SDG&E. Since the peaking rate no longer applies to SDG&E when it takes service from someone other than SoCalGas, other customers of SoCalGas should be able to take gas service from someone else without having to pay the peaking rate if they return to take full or partial service from SoCalGas.

We made it clear in the system integration decision that the peaking rate did not contemplate the situation where "LNG would be a new supply source for SDG&E and SoCalGas, or that Otay Mesa would become a joint receipt point," and that those "changes should be considered in deciding whether SoCalGas' peaking rate should apply to its noncore customers who procure gas through the Otay Mesa receipt point." (D.06-04-033, page 54.) We concluded that because Otay Mesa would be another receipt point on the integrated system, that the peaking rate did not apply. The bypassing customers who leave SoCalGas are not getting their gas service from a receipt point. Rather, they are receiving gas service from an alternate provider, in which case the peaking rate applies.

We realize that in order to fully address any problems associated with the peaking rate, we will have to carefully examine the underlying issues that led to the creation of the peaking rate. Specifically, we need to take a hard look at how we can close or minimize the regulatory gap created by the use of a volumetric rate design on the SoCalGas system and the interstate pipelines' use of a rate design that recovers the fixed costs of the pipeline in a fixed charge and the variable costs through a volumetric charge. The appropriate time and place to reexamine these issues is in the next BCAP, and eliminating the peaking rate now without addressing the underlying problems that the peaking rate attempts to resolve may cause additional problems.

For all of the above reasons, SoCalGas' peaking rate tariff shall continue in effect.

Having decided to retain the peaking rate, the next issue to address is whether the multi-unit EG provision should be adopted as part of the peaking rate tariff.73 That provision would allow the peaking rate to apply to a situation where an entity that has two or more electric generating units takes baseload service from a competing pipeline for one unit, and service from SoCalGas for the other unit. The argument for adopting such a provision is that the entity can take advantage of the differences in the two rate structures to serve all of its units without having to pay the peaking rate tariff.

During the hearing, it became clear that the administration of the multi-unit EG provision will be difficult. There are likely to be situations where the electric generating units are owned by different entities, but may or may not be owned by a common parent company. That will make it difficult for SoCalGas to detect when the multi-unit EG provision should apply.

In addition, the manner in which the generating units are operated may make it difficult for plant owners to take advantage of the differences in rate structures by baseloading the unit using gas from a competing pipeline, while using the second unit, served by SoCalGas, to meet peaking needs. Also, application of the multi-unit EG provision might also result in SDG&E and SoCalGas recovering more revenue than it should.

For all of those reasons, we do not adopt the proposal to reinstate the multi-unit EG provision as part of the peaking rate tariff.

The peaking rate has been explored in prior SoCalGas BCAPs. We have acknowledged that the differences between the rate structures of the interstate pipelines and SoCalGas can be narrowed even further or eliminated if the rate design for SoCalGas is changed from a volumetric structure to a straight fixed variable rate structure. (See D.00-04-060 [5 CPUC3d 697, 747-748].) Although a customer charge was included as part of the peaking rate tariff that was adopted in D.01-08-020, this rate design change is not satisfactory to those who may want to use the peaking rate. A wholesale change in rate design may be needed if parties want to truly resolve the peaking rate issue,74 promote pipe-to-pipe competition, and protect the captive customers who remain on the system.75 A wholesale redesign of rates, however, may be controversial as well.

The continuing opposition of certain parties to the peaking rate tariff, and the fact that only one customer has signed up for peaking service, indicates that the peaking rate may need to be adjusted further or eliminated altogether. This continuing opposition to the peaking rate also suggests that we need to reexamine SoCalGas' underlying rate structure that gave rise to the peaking rate. Accordingly, SoCalGas will be ordered to propose in its next BCAP a redesign of the peaking service tariff or a total redesign of its rates to ensure that viable partial bypass can occur while allowing pipe-to-pipe competition to occur. In the next BCAP, we intend to fully reexamine the causes of the regulatory gap that have led to the peaking rate including the utilities' rate design, balancing requirements, and other factors. Therefore, upon closing of the regulatory gap, we will sunset the peaking rate at the conclusion of the next BCAP.

69 In D.04-09-022, the peaking rate was raised as an issue by some of the parties in that proceeding. We recognized in D.04-09-022 that the issue was related to the system integration proposal and allowed the parties to raise the issue in this proceeding or in a future BCAP. (D.04-09-022, p. 69.) The scoping memo in this proceeding identified the peaking rate as an issue to be addressed in this phase.

70 We previously stated: "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." (D.00-04-060, p. 89.)

71 The peaking rate contains a demand charge that applies each month, regardless of whether the customer takes peaking service in that month. As we stated when the peaking rate tariff was approved, "This approach fairly compensates SoCalGas for the facilities associated with standing ready to provide firm peaking level service." (D.01-08-020, p. 25.)

72 We decline to lower the peaking rate tariff because the rate is based on class average costs. If the rate is reduced, this would result in other customers subsidizing the partial bypass customers.

73 It is not clear whether SDG&E and SoCalGas intend for this provision to only apply to "utility" electric generation, or whether it should apply to all multi-unit EG units. For purposes of this decision, that distinction does not make a difference.

74 The multi-unit EG issue could also be solved by a redesign of rates.

75 See Exhibit 56 at page 5.

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