Discussion of Comments

Although SDG&E protests the application of this new methodology starting with February 2000 as retroactive ratemaking, SDG&E's analysis errs. SDG&E misstates our analysis and argument. We do not overturn the methodology that assigns firm interstate pipeline costs to the core and creates a WACOG for gas commodity costs. We are, however, asserting that when SDG&E began to book border gas, which includes both the commodity cost of gas and the transport costs of this gas, then this action failed to comply with a principle stated in a clear line of Commission decisions. That principle is that core ratepayers should pay for the reliable firm interstate capacity used for their gas procurement and that noncore ratepayers should pay for the interstate pipeline capacity used to serve them. (I.00-08-003, mimeo., p.3.)

Further, we reject SDG&E's claim that our actions today constitute retroactive ratemaking. The protest of the advice letters by ORA and I.00-08-003 give adequate notice that SDG&E's rates may fail to comply with Commission decisions. We further note that the procedures adopted in I.00-08-003 to establish accounts to track under and over collections and to permit subsequent disposition by the Commission conform to standard ratemaking procedures.

SDG&E's statement that language of I.00-08-003 supports its contention that gas rates fully comply with existing decisions both misinterprets the OII and ignores clear contravening language. Ordering Paragraph 5 of the OII states that "costs recorded in the tracking account and all costs reflected in AL 1184-G and subsequent advice letters may be reallocated by the Commission between the core and noncore to reflect the Commission's decision in this proceeding regarding the appropriate allocation of costs." Thus, SDG&E is wrong to interpret dicta in the OII as endorsing SDG&E's position that any reallocation of prior costs constitutes retroactive ratemaking.

Finally, LIF's reply comments properly characterize the actions taken in today's decision. Our decision remedies the wrongs in SDG&E's gas pricing methodology identified in ORA's protests. The decision also resolves the issues identified in the OII and associated with the balancing accounts that the OII created. Both these actions fall within the Commission's legal authority as interpreted by the courts.

Findings of Fact

1. The current methodology for calculation the gas prices for core and non-core gas users misallocates some costs of gas transport, with core consumers paying more than the costs that they caused. Non-core customers pay fewer costs than they cause.

2. Between February 2000 and October 2000, the period for which this record includes historic costs, Option 2, the border price method, would lead to a $1.7 million decrease in core rates and a $1.7 million increase in non-core gas rates when compared to the flawed methodology used by SDG&E.

3. Option 2, the Border Price Method, places the costs of gas transportation for the gas procured to serve core customers on those customers; it places the costs of gas transportation for the gas procured to serve non-core customers on those customers.

4. Option 1, the Total WACOG methodology, fails to assign gas transportation costs accurately to the customer class that incurs the costs.

5. ORA first protested the gas prices charged by SDG&E in February 2000, and continued to protest every advice letter until the commencement of the Commissions investigation into this matter in August of 2000.

6. I.00-08-003 stated that AL 1184G and subsequent advice letters and the costs incurred after the adoption of the OII could be reallocated.

7. I.00-08-003 stated that the range of remedies for the flawed methodology for pricing procured gas would include the reallocation of costs dating from February 2000.

8. A reallocation of costs from core customers to non-core customers consistent with Option 2 dating from February 2000 is reasonable.

9. A surcredit on the bills of core customers lasting for a 12-month period can reasonably reimburse core customers for the overpayment of gas transportation costs.

10. I.00-08-003 ordered SDG&E to continue to apply the flawed methodology pending the outcome of this inquiry.

11. Booking undercollections to SDG&E's non-core PGA offers a reasonable method for recovering undercollections because non-core customers benefited from the flawed pricing methodology used by SDG&E.

12. It is reasonable to implement the change in procurement pricing methodology starting with the first gas pricing advice letter filed after adoption of this decision.

13. Implementing Option 2, the Border Price Method, on a prospective basis is not reasonable because such an implementation schedule would leave core customers paying approximately $2 million in gas transport costs for which they were not responsible, even after ORA had publicly identified and protested flaws in the pricing methodology.

Conclusions of Law

1. The Border Price Method is reasonable and should be used to set prices for all gas that SDG&E procures.

2. SDG&E should rebate to core gas customers overcharges for gas resulting from the currently used flawed pricing methodology.

3. The overcharges in any month should equal difference between gas charges produced by the currently used flawed methodology and the gas charges resulting from application of the Border Price Method.

4. The total amount of overcharges that should be rebated should equal the sum of all differences calculated for the period from February 2000 until the implementation of the Border Price Method.

5. Core gas consumers should receive surcredits on gas bills lasting for 12 months sufficient to rebate the total amount of overcharges.

6. SDG&E should recover from non-core gas customers the undercharges resulting from the currently used flawed methodology.

7. The undercharges in any month should equal the difference between gas charges produced by the Border Price Method and the currently used flawed methodology.

8. The total amount of undercharges that should be recovered should equal the sum of all differences calculated for the period from February 2000 until the implementation of the Border Price Method.

9. SDG&E should be able to recover the undercharges (in amount no more than that rebated to core customers) by booking these charges to the non-core PGA for subsequent recovery.

10. This proceeding is closed.

ORDER

IT IS ORDERED that:

1. San Diego Gas & Electric (SDG&E) shall implement the Border Pricing Methodology in its first monthly advice letter setting gas procurement prices following the adoption of this order. The advice letter shall be effective subject to Energy Division's finding that the advice letter complies with this order.

2. SDG&E shall file an advice letter within 30 days of the adoption of this order to establish a surcredit on the gas procurement price charged to core customers. The surcredit shall rebate over a 12-month period all overcollections that have accrued since February 2000 due to flaws in the current methodology for pricing procured gas. The advice letter shall be effective on the second monthly advice letter following adoption of this decision subject to Energy Division's finding that the advice letter complies with this order. Once all overcollections are rebated, the surcredit expires.

3. SDG&E may file an advice letter within 30 days of the adoption of this order to book to the non-core PGA the undercollections of gas costs from non-core customers that have accrued since February 2000 due to flaws in the current methodology for pricing procured gas. The advice letter shall be effective on the second monthly advice letter following adoption of this decision subject to Energy Division's finding that the advice letter complies with this order.

4. This proceeding is closed.

This order is effective today.

Dated May 3, 2001, at San Francisco, California.

LORETTA M. LYNCH

President

HENRY M. DUQUE

RICHARD A. BILAS

CARL W. WOOD

GEOFFREY F. BROWN

Commissioners