II. SoCalGas' Proposed Peaking Rates

In its June 19, 2000, application, SoCalGas proposed two alternative Peaking Service Rates: a "market-based" rate and a "cost-based" rate. SoCalGas prefers the market-based rate, but proposes the alternative in the event the Commission does not approve the market-based tariff rate.

SoCalGas contends that both the market-based and the cost-based proposals for peaking rates are designed to send efficient price signals to partial bypass customers in the marketplace in order to discourage uneconomic bypass and the resulting cost shift to SoCalGas' captive customers.²

SoCalGas is concerned that without a price incentive to foster only economic bypass, interstate pipelines will serve the low-cost, high load factor baseload requirements of bypass customers and SoCalGas will be forced to serve the high-cost, low load factor peaking or swing loads of these customers. It argues that the peaking tariff must establish a balance point of encouraging bypass and entry into the market by competitors, but not at the expense of core customers who could be left paying higher rates to subsidize the bypass customers. SoCalGas alleges that uneconomic bypass will result in a significant loss of noncore throughput and a shift in annual transportation costs to core customers of up to $51 million. ³

Both SoCalGas rate proposals share four common elements: (1) monthly customer charge; (2) Public Purpose Programs (PPP) charges; (3) daily balancing; and (4) applicability provisions. SoCalGas presents these elements in the context of the market-based, and then the cost-based, tariffs.

SoCalGas states it wants to ensure the new tariff does not repeat the mistakes of the RLS tariff--discouraging new pipelines and bypass customers. SoCalGas posits that either one of its proposals would accomplish those objectives.

A. Market-Based Peaking Rate

Under a market-based peaking tariff, SoCalGas would negotiate with the partial bypass customer to agree to a rate between a floor of SoCalGas' short-run marginal cost (SRMC) and a ceiling which consists of a "revenue cap" formulated to guarantee that the partial bypass customer always avoids at least SoCalGas' long-run marginal cost (LRMC). SoCalGas believes this tariff would allow it to compete on a par with the interstate pipelines that charge a customer a rate based on the capacity it uses on the system. Under its proposed straight-fixed variable (SFV) rate design, SoCalGas claims higher utilization rates will lower the per unit charge.⁴ Under SoCalGas' current volumetric rate, the costs of providing firm service are recovered over all the projected units. SoCalGas maintains that this skews the cost comparisons for the customer when choosing between a capacity-based SFV charge and the volumetric charge and places SoCalGas at a competitive disadvantage. SoCalGas proposes the following formula for the revenue cap.

Revenue Cap = (default tariff*total annual volume) - (LRMC*annual bypass volume)

SoCalGas claims that the revenue cap guarantees that the customer always retains an incentive to engage in economic bypass. SoCalGas further asserts that the first term equals the customer's total cost without bypass and that the cap ensures that the total cost to the customer will decrease by an amount equal to at least the LRMC that the utility avoids. Therefore, SoCalGas maintains, if the competitor offers a bypass alternative at a rate that is below the utility's long-run marginal cost, which means that the bypass is economic, the customer will have the incentive to accept that opportunity for economic bypass.

SoCalGas contends that a market-based peaking service tariff will (1) prevent core customers from bearing a higher burden for the costs avoided by the bypassing customers, (2) provide an incentive to the utility to be more competitive vis-à-vis alternative suppliers, and (3) send the right signal to potential investors in both pipeline and new large-volume consumers.

In support of its market-based rate proposal, SoCalGas assures the Commission that the rate negotiations will take place in a competitive environment with the bypass customers having alternatives. As examples, SoCalGas suggests some of the following alternatives to its peaking service: (1) additional pipeline capacity; (2) secondary capacity sold in a liquid and competitive market; (3) hub services, such as park and loan sold by pipelines and utilities; (4) access to non-SoCalGas owned storage via displacement from pipeline to pipeline; (5) unbundled off-system storage; (6) alternative independent storage services; and (7) swaps, electricity/gas price arbitrage. If SoCalGas and its customer cannot reach agreement on a negotiated rate, the bypass customer would pursue a more attractive alternative and not take peaking service from SoCalGas. At that point, SoCalGas's obligation to serve the bypass customer would extinguish. SoCalGas contends that the market based rate follows the Commission's directive in D.00-04-010 to propose an alternative that is "not the equivalent of the existing RLS tariff." SoCalGas points out that it calculated the RLS tariff using the ratio of the customers' pre-bypass load factor to post-bypass load factor. The market-based rate references SoCalGas' costs, otherwise applicable tariff rate, and the customer's actual bypass volumes. In addition, under the market-based proposal, the floor would be SoCalGas' SRMC and the ceiling would be calculated pursuant to a formula that guarantees that a customer taking partial bypass service from SoCalGas will avoid at least SoCalGas' class-average LRMC. SoCalGas does admit, however, that in some cases, the ceiling rate under the market-based rate could be in excess of the ceiling rate under the RLS tariff.

SoCalGas does not perceive this as a detriment, however, since the ceiling rate is bounded by SoCalGas' ability to charge in excess of the customer's competitive alternative. SoCalGas contends that there are plenty of cheap alternatives for the customers and the customer always avoids SoCalGas' LRMC. If the bypass pipeline has a lower stand alone cost than SoCalGas' LRMC, the customer will bypass. But the customer will not bypass if the customer's cost to do so is more than the marginal cost of utility service.

Generally, with the exception of TURN, all protesting parties argue against a market-based peaking rate. The other participants see SoCalGas as having market power so the competitive market necessary for a market-based rate does not exist. Furthermore, many are concerned that without rate restraints, SoCalGas would have no incentive to negotiate a rate much below the ceiling rate, and that would prevent large customers from signing up with competing pipelines. Such an outcome would discourage further pipeline competition and be detrimental to construction of new gas-fired electric generation plants.

B. Cost-Based Peaking Rate

SoCalGas also proposes a cost-based peaking rate similar to the SFV demand charge-based rates of interstate pipelines. This rate is not a negotiated rate, like a market-based rate, but is a tariff rate that is posted and does not vary except when rates are changed in SoCalGas' regular ratesetting proceeding. The customer selects a maximum daily quantity (MDQ) to reserve capacity on the utility system to meet its peaking requirements. SoCalGas would impose an over-run charge to provide an incentive for a partial bypass customer to select an MDQ high enough to meet its needs.

The monthly demand charge includes a customer charge and a reservation charge. The customer charge would collect the total cost of the customer-related facilities using the annualized cost of customer related facilities adopted in the 1999 BCAP as a reasonable proxy. The revenue associated with the customer-related facilities has been adjusted by the LRMC scaler to approximate the total cost of these facilities. The reservation charge would be calculated at the long run marginal cost of noncore related transportation facilities plus all non-fuel-related charges for transportation, such as the cost of SoCalGas' various regulatory accounts like the Interstate Transition Cost Surcharge (ITCS). The rate also has a volumetric transportation rate that includes only SoCalGas' variable transportation costs.

SoCalGas proposes to collect PPP charges, and in particular the California Alternative Rates for Energy (CARE) surcharge, from the partial bypass customer based on the total natural gas consumed by the customer, not just the volume transported by the utility. CARE assists low-income families in paying for utility service. To maximize the funds available, and minimize the impact to the general ratepayers SoCalGas proposes that the CARE surcharge should continue to be collected from the bypass customer based on its pre-bypass volumes, so that partial bypass customer does not forego its fair share for this social program.

SoCalGas also favors using daily balancing as an appropriate tariff condition for peaking service customers so they are held to the same standards required by the interstate pipelines. Daily balancing requires the customer to manage its own gas supply in a manner that does not adversely affect other customers on the system. Without daily balancing, partial bypass customers could shift their load to the SoCalGas system when there is a price arbitrage opportunity or a disruption of service on the pipelines.

The cost-based proposal also retains the applicability provisions established in the initial decision establishing the RLS tariff (D.95-07-046) and upheld in the subsequent BCAP proceedings in 1996 (D.97-07-082) and 1999 (D.00-04-060).

Several respondents and intervenors presented testimony challenging SoCalGas' cost-based rate.

TURN prefers the market-based proposal put forth by SoCalGas, but can support the cost-based plan. TURN, does not believe, however, that customers who have obtained service from a competitive pipeline supplier should have any right to demand the cost-based rate from SoCalGas.

CIG and CMTA favor eliminating hurdles to gas competition and assert that the only way to entice interstate pipelines to initiate service into SoCalGas' territory is to have several large customers, such as electric generators or refineries, etc. take bypass service. These large customers oppose SoCalGas' cost-based proposal as being anti-competitive since it allows recovery of the full fixed cost of transportation in the demand charge and fuel-related costs through a volumetric rate.

Calpine opposes SoCalGas' cost-based proposal on numerous grounds, and particularly because it imposes the peaking rate on all facilities held by a common owner if any single facility has a competitive alternative to SoCalGas--a carryover from the RLS tariff. Calpine also does not want the peaking rate to apply to new customers, since SoCalGas' existing pipeline was not designed to accommodate potential future customers.

Kern River and Questar oppose SoCalGas' proposal, alleging that it allows for more cost recovery than for the costs associated with a true peaking rate.

Other parties, such as ORA and Watson, presented their own respective cost-based proposals.