Background

SDG&E procures gas for both its "core" customers and for those "non-core" customers who choose its service. As a condition for its authority to procure gas for these two different markets, SDG&E must keep the costs to serve the core and non-core customers separate.

One key cost of gas is the cost of transporting gas from the gas producing basins to California. Decision (D.) 91-11-025 and D.92-07-025 ordered SDG&E to include the costs of interstate pipeline reservations of transmission capacity for core customers in the gas rates for core customers. Similarly, the decisions ordered SDG&E to include the cost of interstate pipeline capacity needed to serve non-core customers in the gas rates for non-core customers. Although this is an extremely simple and logical principle, shifting characteristics of natural gas markets have produced a complicated picture of SDG&E's compliance with this principle.¹

The rates for natural gas are in a constant state of flux. SDG&E has been revising its non-core procurement rates for natural gas monthly since 1986. Pursuant to D.96-05-071, SDG&E began filing monthly revisions to its core procurement rates for natural gas starting on June 5, 1996.

From February to July 2000, ORA has protested the monthly advice letter filings of SDG&E.² In its protests, ORA argues that SDG&E has been misallocating gas transport costs between core and non-core customers, resulting in overcharges to core customers. ORA therefore recommends a change in the methodology for pricing gas. In these protests, ORA further recommends that the Commission address the retrospective implications of SDG&E's procurement pricing.

In response, SDG&E claims that it has been following a methodology approved by the Commission in D.96-05-071 and D.97-07-061 and that no retrospective changes in rates are appropriate. San Diego acknowledges, however, that recent changes in gas markets have indeed resulted in the misallocation of transport costs that ORA identified.

On August 3, 2000, the Commission issued Investigation (I.) 00-08-003 to revise SDG&E's "ratemaking associated with gas procurement for its core and non-core customers." (I.00-08-003, mimeo p. 1.) The Commission confirmed "Nothing the Commission has said since has contradicted the principle that non-core customers would also pay for the interstate capacity used by them." (Id., p. 8.) The Commission stated that it was "convinced that the core ratepayers of SDG&E are paying some of the costs of interstate pipeline capacity that should be allocated to non-core customers, resulting in inequities between the core and non-core." (Id., p. 8.) The order directed SDG&E to answer specific questions and made provisions for comments on the responses.³ The order also

consolidated advice letters (AL) AL 1184-G, AL 1188-G, AL 1195-G, AL 1197-G, AL 1201-G, and AL 1206-G into the investigation to consider ORA's protests, as well as all future SDG&E advice letters relating to gas procurement costs filed pursuant to D.96-05-071.

Investigation 00-08-003 also provided notice that the Commission might "reallocate the costs discussed in this order between the core and the non-core so as to avoid cross-subsidization." (Id., p. 9.)⁴ The order specifically stated that costs subject to reallocation include all those covered commencing with AL 1184-G. (Id.)⁵ Finally, the order required the establishment of an account to track these procurement costs, but required SDG&E to use the existing methodology until further direction by the Commission. (Id.)⁶