I. Background

A. Procedural Background

In D.00-04-010, Ordering Paragraph 6, the Commission directed SoCalGas to propose a replacement for its Residual Load Service tariff, known as the RLS tariff. On June 19, 2000, SoCalGas filed this application, in which it proposed two methodologies for calculating a replacement peaking rate for the RLS tariff.

On July 6, 2000, the Commission adopted ALJ Resolution 176-3042 that preliminarily categorized the proceeding as ratesetting and determined that hearings would be necessary.

On July 28, 2000, the following parties protested the application: City of Long Beach, Southern California Generation Coalition (SCGC), Watson Cogeneration Company (Watson), California Industrial Group and California Manufacturers & Technology Association (CIG/CMTA), Calpine Corporation (Calpine), Kern River Gas Transmission and Questar Southern Trails (Kern River/Questar), and Southern California Edison Company (Edison).

On August 22, 2000, the assigned administrative law judge held a prehearing conference (PHC) and adopted a procedural schedule. Following the PHC, Commissioner Bilas issued a Scoping Memo reiterating the procedural schedule, establishing that the scope of the proceeding was whether the Commission should adopt SoCalGas' market-based, or the alternative cost-based, peaking service rate, and designating the assigned administrative law judge as the principal hearing officer.

Evidentiary hearings took place on October 16-20, 2000, and parties presented oral argument on October 31, 2000. Post-hearing briefing was complete by December 11, 2000.

B. History of the RLS Tariff

Following federal regulatory reforms in the natural gas industry, the Commission took steps beginning in 1988 to encourage competition in the gas industry in California.¹ Generally, we have focused on making available more competitive options to those customers we believed could benefit most by exercising choices in their gas supplies. As a result, the current regulatory framework recognizes two separate groups of natural gas consumers in California: core and noncore customers. Residential and small commercial customers comprise the core group, which generally lacks alternatives in buying gas supplies. The gas utilities (such as SoCalGas) procure gas for the majority of these customers and provide them with pre-determined amounts of transportation and storage services. Noncore customers are relatively large commercial, industrial, cogeneration, generation and wholesale customers. In the early 1990s, the Commission unbundled interstate pipeline capacity and storage costs from rates so that these customers would have more options, including the ability to procure the gas commodity, interstate pipeline capacity, and storage from sources other than the utility. Most noncore customers are free to plan for their respective gas needs, and contract with the local gas utility accordingly for intrastate transportation and storage services.

In the mid-1990's, the Commission became increasingly concerned that SoCalGas' noncore customer would partially bypass the SoCalGas system in favor of taking base load service from a competing interstate pipeline. Interstate pipelines are regulated by the Federal Energy Regulatory Commission (FERC). Under FERC rules, interstate pipelines charge rates developed under a Straight-Fixed Variable rate design, through which they recover all fixed costs in a set demand charge. Interstate pipelines can offer to negotiate a rate lower than the FERC-set tariff rate with potential customers. SoCalGas, by contrast, offers a tarriffed, volumetric rate for its natural gas transportation capacity. The regulatory gap between federal and state rate structures created an incentive for customers to take baseload service from competing interstate pipelines, leaving remaining customers paying the tab for stranded capacity.

To counter this incentive, the Commission instituted the Residual Load Service (RLS) tariff in Decision (D.) 95-07-046. The RLS tariff was first adopted by the Commission in 1995 to ensure that noncore customers' cost of partially bypassing SoCalGas would not be passed on to the general body of ratepayers. The RLS tariff was not cost-based (D.95-07-046, at 7, D.97-04-082, at 131), but was market based to ensure that SoCalGas did not lose revenue in the event of a partial bypass (D.95-07-046, at 8, 10) and that it could compete effectively against new pipeline entrants to the SoCalGas territory (D.95-07-046, at 8-9).

The Commission established the RLS tariff prior to restructuring the electricity industry in California, and at a time of significant excess interstate pipeline capacity to the California market. Since that time, conditions in the California natural gas and electricity markets have changed dramatically. Numerous parties have argued that the RLS tariff be abolished, contending that it does not promote efficient economic bypass from the SoCalGas system. Parties have argued that the tariff is anti-competitive, thwarts competition for gas transportation service in SoCalGas' service territory, and deprives customers of additional reliability and potential benefits of gas-on-gas competition. The Commission acknowledged these concerns in April 2000, in the context of SoCalGas' BCAP proceeding. In that BCAP decision, the Commission directed SoCalGas to propose a replacement to the RLS tariff because it was concerned about the long-term adverse consequences of the RLS tariff:

(I)t is apparent to us that in the long term the RLS tariff's detriments will outweigh its benefit. There is no doubt the

game is changing. Gas and electric industry restructuring should not be impeded by attempts to reconcile new conditions to past economic theory; rather theory must be modified to encompass the emerging changes. At this time we are confident that the RLS tariff keeps rates down for all SoCalGas customers, except those who would partially bypass. But, the evidence persuades us that perpetuating the RLS tariff will have the pernicious effect of causing an increase in rates resulting from throughput being substantially reduced as SoCalGas is bypassed by new large customers...Although the RLS tariff can lock in customers now, it is expect to cause potential customers to locate outside the territory. SoCalGas is fighting the concerns of 1995; we must resolve the current issues of electric restructuring. (D.00-04-010, pp. 95-96.)

In D.00-04-060 the Commission acknowledged that the RLS tariff should continue in the interim, but concluded that "the RLS tariff should be replaced simultaneous with the effective date of a new peaking tariff." The Commission stated that the peaking rate "should not be the equivalent of the RLS tariff" (Id. At 93-94), but should close the regulatory gap between FERC rate structures for the interstate pipelines and this Commission's rate structure for SoCalGas' system. In D.00-04-060, Ordering Paragraph 6, the Commission ordered SoCalGas to file the instant application to establish the peaking rate to replace the RLS tariff.

On June 19, 2000, in response to this directive, SoCalGas filed an application requesting approval of a tariff for gas transportation service to any noncore customer that bypasses SoCalGas' service, in whole or in part. SoCalGas designates this a transportation "peaking" rate since bypass customers only use this service in times of peak gas use, because they use a competing interstate pipeline for baseload service.