IV. Discussion

The RLS tariff does allow SoCalGas to mitigate any revenue loss it might suffer due to partial pipeline bypass. However, we are concerned that it has effectively discouraged new pipeline competition in SoCalGas' service territory. To the extent the tariff provides a means for SoCalGas not to compete, California gas consumers have fewer options available to them. And, from a customer perspective, the existing RLS tariff effectively forces a potential bypass customer to pay for firm gas transportation service twice--once to the new interstate pipeline for baseload service and again to SoCalGas for the full amount of capacity the customer used prior to bypassing the utility.

California is experiencing unprecedented levels of demand. As ORA points out, last summer saw a significant increase in gas demand on the SoCalGas system, and on a number of days gas flows into the system were at or near maximum volumes. We can reasonably expect that these relatively high demand levels will continue, considering California's successful efforts to install incremental gas-fired electric generation within the state. Given the potential benefits of additional capacity, a reasonable expansion of interstate pipeline capacity into Southern California should have substantial long-term benefits that outweigh the potential costs of bypass. An expansion of interstate capacity should put downward pressure on the price of capacity and the delivered cost of gas at the California border, as well as ensure sufficient gas infrastructure to meet the state's growing demands; those elements should benefit all ratepayers. In support of this theory, ORA offers the example that constructing even one relatively small new interstate pipeline into California could save SoCalGas ratepayers alone between $10.2 and $51.1 million, if the existence of that pipeline reduces gas prices by only $0.01-0.05 per decatherm.

We are also concerned that the potential costs of bypass are overstated. SoCalGas testified to a worst-case analysis of the potential lost revenue if both the Southern Trails Pipeline and Kern River Expansions are filled to capacity with load currently served by SoCalGas. This scenario would result in 420 mmcf/d in throughput reduction, or approximately 25% of SoCalGas' total noncore throughput. SoCalGas estimated that this loss would result in a $51 million undercollection. Allocated evenly between core and noncore, SoCalGas estimated the lost throughput could raise core rates 2% and noncore rates 50%. However, as ORA points out, the $51 million estimate includes the 2000 ITCS cost component, which is significantly reduced in 2001 and can reasonably be expected to continue at low levels, given the relatively high value of interstate capacity to California. It also assumes that the two interstate pipelines are filled with existing SoCalGas load, not with new load. In fact, any incremental facility added in SoCalGas' service territory that elects to take peaking service from SoCalGas could actually contribute new load to the system.

We believe the fundamental purpose of a peaking rate is just that: to make available a peaking service option to shippers on the SoCalGas system. We evaluate the different proposals from the standpoint of fairly compensating the utility for providing peaking rate service, not from the perspective of punishing a customer for taking peaking rate service.

A. Market-Based Peaking Rate

We do not believe that SoCalGas' market-based proposal reflects market realities, and are concerned that it produces unwanted results.

Our concerns are based largely on the grounds that customers served by SoCalGas have no practical alternative to peaking service provided by the utility. There is no market for peaking rates; no other pipeline offers a peaking rate in competition with SoCalGas. Further, as ORA and Watson have explained, off-system or independent storage projects can only provide peaking service through the use of the SoCalGas-controlled pipeline system. Alternate fuels are more expensive than natural gas, may produce higher air emissions, and require additional time and expense to switch systems and technologies.

Further, the record shows that the market-based rate is likely, in many cases, to impose costs on shippers that are actually higher than the cost to shippers under the current RLS tariff. We test the SoCalGas revenue cap with a hypothetical example. We assume for the purpose of the hypothetical that the default tariff is 4 cents per therm and the customer's total annual volume is 100,000 therms or 100 Mtherms. Table 1 shows the results of the hypothetical under varying bypass volumes, LRMC scenarios, and bypass rates.

Table 1

SoCalGas Peaking Rate Revenue Cap

Total Vol. Therms	Bypass Vol. Therms	Default Rate ¢/therm	LRMC ¢/therm	Bypass Rate ¢/ therm	Rev. Cap $	Rev. Cap ¢/therm	Total Cust Cost $
100,000	80,000	4	3	2	1600	8.00	3200
100,000	60,000	4	3	2	2200	5.50	3400
100,000	40,000	4	3	2	2800	4.67	3600
100,000	30,000	4	3	2	3100	4.43	3700
100,000	20,000	4	3	2	3400	4.25	3800
100,000	80,000	4	2	1	2400	12.00	3200
100,000	60,000	4	2	1	2800	7.00	3400
100,000	40,000	4	2	1	3200	5.33	3600
100,000	30,000	4	2	1	3400	4.86	3700
100,000	20,000	4	2	1	3600	4.50	3800

It is clear that SoCalGas' revenue cap formula produces perverse results because, as the utility's LRMC and bypass rate go down, the revenue cap stays the same, while the total cost for the customer goes up. SoCalGas' revenue cap has little to do with marginal cost or economic bypass and much to do with keeping the customer cost the same even though the competitive pipeline offers a lower rate and the utility marginal cost is lower. Furthermore, the revenue cap goes up as the customer's bypass volume goes down. We believe SoCalGas' market based rate would provide customers with an incentive to bypass the SoCalGas system altogether and could, in certain situations, prove to be more punitive than the RLS tariff.

B. Cost-Based Peaking Tariff Rate

We believe a cost-based peaking rate best reflects the true cost of providing the service. The cost-based rate we adopt for SoCalGas' peaking tariff will include the components as described below.

1. Customer Charge

The customer charge is designed to collect the total cost of the customer-related facilities through a monthly charge. SoCalGas uses the annualized cost of customer-related facilities adopted in the 1999 BCAP as a proxy for an assessment of the meter and associated facilities. SoCalGas then adjusts the revenue associated with the customer-related facilities by the Long Run Marginal Cost (LRMC) scaler to approximate the total cost of these facilities.

The monthly customer charge in SoCalGas' otherwise applicable tariff, GT-F for retail noncore customers, does not recover the full cost of the customer-related facilities. For GT-F customers, a portion of the customer-related costs is collected through the customer's volumetric transportation rate. For full-requirements customers, the utility has a reasonable expectation of recovering the customer-related costs. However, the utility may not know the extent to which a bypass customer will take service from the utility. Therefore, it is reasonable to permit SoCalGas to collect the full cost of the customer-specific facilities as part of a monthly customer charge in the peaking rate tariff.

Not all customers currently have a monthly customer charge as a part of their tariff. SoCalGas points out, for example, that large electric generators and wholesale customers do not have a monthly customer charge. We believe it is more equitable to adopt a consistent approach of using the annualized customer charge for all peaking service customers. SoCalGas proposes a monthly customer charge of $800 to $19,000 depending on the customer class. ORA and Watson agree that SoCalGas should collect the full cost of customer-related facilities as part of a monthly charge. We will adopt this proposal.

2. Public Purpose Program Charge

SoCalGas proposes to collect the PPP charge from the partial bypass customer based on the customer's total natural gas consumption at the facility.

Since SoCalGas submitted its testimony, Assembly Bill (AB) 1002 became law. Under the provisions of AB 1002, customers of interstate pipelines are mandated to pay a volumetric public purpose program surcharge to the Board of Equalization. The CPUC implemented AB 1002 in December 2000. The customers of public utility companies are required to pay the surcharge as a separate line item on their bills effective July 1, 2001. Prior to July 1, 2001, the customers continue to pay the costs of public purpose programs included in their volumetric transportation rates. SoCalGas' proposal to charge its peaking rate customers a public purpose program surcharge based on their total usage including volumes delivered on interstate pipelines, is now moot.

On the bills of its peaking tariff customers, SoCalGas shall show a separate line item public purpose program surcharge to be collected volumetrically in compliance with AB 1002. The surcharge will be based on the public purpose program surcharge rates adopted by the Commission in Resolution G-3303 and will only apply to the customer's volumes served by SoCalGas. The customer will pay the public purpose program on the volumes served by an interstate pipeline, to the Board of Equalization.

3. Reservation Charge for Firm Peaking Service

For reliability purposes, the gas utility designs its transmission and distribution system to meet the demands placed upon it on an abnormal peak day. In designing customer class rates, the utility's costs are allocated to various customer classes using marginal cost allocators. The marginal demand measure (MDM) for the distribution system is the coincident peak month demand, while the MDM for the transmission system is the cold year throughput. (D.00-04-060, p. 98.) The coincident peak demand is the demand of the entire customer class at the time of the system peak. The noncoincident peak demand represents the highest demand day of the individual customer during the year.⁷

A peaking rate should reflect the cost the customer imposes on the system when the customer takes peaking service. Although the customer might use the peaking service to meet its own noncoincident demand, the utility is primarily concerned about whether it has to build additional capacity to meet the additional demands placed upon it in order to meet the needs of the customers served under the firm peaking tariff. A firm peaking rate based upon the customer class noncoincident demand, on the other hand, does not reflect that the peaking customer class' highest demand may not impose any additional demands on the system if it occurs at a time when the overall system demand is not at its peak.

The demand charge for firm peaking service should be customer-class specific. As ORA points out, an average peaking rate applied to the entire noncore class has the effect of assigning distribution costs to transmission-only level customers, such as certain industrial and electric generation customers, resulting in those customers contributing for costs they do not cause. The customer class-specific approach is consistent with the SoCalGas standard tariff, which separates the noncore class into specific groups, including Commercial & Industrial, Electric Generation, and Wholesale. We recognize that the interstate pipelines do not charge customer class-specific rates, and that this is not entirely consistent with interstate rate design. However, interstate pipelines do not distinguish between core and noncore, or between noncore customers, or even between the different reliability needs of different customer classes. This approach is consistent with our policy of recognizing the varying levels of reliability and costs associated with different customer groups, and will reflect the actual costs firm peaking customers impose on the system.

The demand charge should also be clear and relatively easy to calculate to avoid disputes. It must be based on information readily available or obtainable by SoCalGas, and it must provide sufficient information to allow SoCalGas to accurately plan for future capacity needs. Although we do not adopt SoCalGas' Cost-Based Rate proposal in its entirety, it is appealing because it is based on a standard tariff rate that is posted and does not vary except when rates are changed in SoCalGas' regular ratesetting proceedings.

The monthly reservation rate will be calculated based on the currently authorized end-use customer rate for the specific customer class, adjusted to exclude customer costs, ITCS, and balancing account costs. The excluded costs will be collected separately through monthly customer charges and/or volumetric charges. The customer must select a maximum daily quantity (MDQ) to reserve capacity. The reservation rate will be applied to the customer's MDQ to determine the monthly demand charge.

To provide partial service customers with an incentive to select an MDQ high enough to meet their needs, an overrun charge will be applied to all volumes in excess of a customer's MDQ. The overrun charge will be 150% of the default tariff. Volumes in excess of a customer's MDQ will be considered interruptible and customers will have no assurance that capacity in excess of the reserved MDQ will be available.

This approach fairly reflects the demands placed on the SoCalGas system over the course of a year. The demand profiles of noncore customers in general, and of electric generators in particular, have shifted over the past year as we have seen spring and summer peaks almost equal to SoCalGas' historical winter peak. We believe it is prudent to account for this emerging trend in the peaking rate. Furthermore, this approach ensures that customers who happen to have low or even zero throughput on the system peak day - which historically is in the winter heating season - pay their fair share on average over the course of a 12-month cycle. If the last year's trend continues, those same customers' very high peaking throughput other times during the year could contribute to peaks at other times in the year that are very close to the annual coincident peak.

The firm peaking rate demand charge will apply each month, regardless of whether the customer takes peaking service in that month. This approach fairly compensates SoCalGas for the facilities associated with standing ready to provide firm peaking level service. We recognize that customers taking firm peaking service will not be able to release or broker this capacity on the SoCalGas system. We balance that concern against the need to compensate the utility for the costs of standing ready to serve on a firm basis, and to ensure that the remaining full-requirements customers do not bear those costs.

Given the current volatile nature of the natural gas and electric generation markets, we will monitor carefully the effectiveness of the cost based peaking rate we adopt today. We take note of the fact that since the record was submitted in this proceeding, the electric generation and natural gas markets in California have undergone significant upheaval. If necessary, we will revise the charge after sufficient time and experience with this tariff.

4. Interruptible Peaking Rate

In addition to the firm peaking service, we believe SoCalGas should make available an interruptible peaking service at a volumetric rate instead of a monthly demand charge. An interruptible rate affords customers the opportunity to most efficiently manage their natural gas capacity options.

We clarify that SoCalGas will not be obliged to build facilities to serve interruptible peaking customers taking service at a volumetric-only rate, and such customers will have no assurance that peaking service will be available. We further caution customers that we observe demand patterns have changed over the last 18 months on the SoCalGas system. Customers should carefully consider this trend if they want a higher level of assurance that peaking service will be available when they need it in order to maximize the benefits of multiple supply and capacity sources, and to meet their electricity supply commitments to California.

Watson has proposed that the rate for interruptible peaking service should be a volumetric rate set at 120% of the peaking demand charges at 100% load factor, plus the volumetric portions of the firm peaking rates. We agree that the volumetric rate should reflect a premium over firm service. However, we recognize that the 120% is somewhat arbitrary, suggested to be consistent with a settlement proposal in a separate SoCalGas proceeding and with the interruptible tariff on the PG&E system. We do not believe the SoCalGas volumetric peaking rate needs to parallel either of these elements. The settlement proposal is contained in a comprehensive restructuring package pending before the Commission. Furthermore, the 120% volumetric rate on the PG&E system is for standard interruptible service, not the peaking interruptible service, not the peaking interruptible service we establish here.

We also are concerned that 120% of the peaking demand charge will not adequately reflect the potential swings in customer demand. Peaking service is, almost by definition, subject to widely varying demand levels. A higher interruptible rate will reflect the higher degree of load volatility, and will provide a better incentive to customers to carefully evaluate their peaking rate options. We will adopt an interruptible rate set at 150% of SoCalGas' default tariff rate at 100% load factor. As with the demand charge for firm peaking service, we will monitor closely the effects of this interruptible peaking service on the southern California natural gas capacity market, and will modify the tariff as necessary. Consistent with our findings regarding the customer change above, we believe it is reasonable to permit SoCalGas to collect the full cost of customer specific facilities as a monthly customer charge.

5. Other Non-Fuel Related Charges

SoCalGas proposes to collect all other non-fuel related costs in the monthly reservation charge. These other costs include transition cost accounts, such as the ITCS, the Sempra-wide rate surcharge, and other various balancing accounts.

Generally, balancing account costs - such as the ITCS - reflect transition costs that are not related to the costs incurred by SoCalGas to build its system to serve its customers. Further, the ITCS and Sempra-wide rate are currently collected from all customers on a volumetric, equal-cents-per-therm basis. We will continue this approach for these surcharges, as well as any other balancing account surcharges that are currently authorized to be collected on this basis.

6. Daily Balancing

SoCalGas advocates requiring customers to balance their gas nominations and deliveries to +/-5% on a daily basis and +/-1% on a monthly basis. Daily balancing requires the customers to manage their own gas supplies in a manner that does not adversely affect other customers on the system. The customer would also be expected to maintain uniform hourly deliveries and usage to the extent practical. If the customer anticipates significant variations in its deliveries or usage during the day, SoCalGas will attempt to accommodate the customer's expected load profile. In such cases, the customer and SoCalGas will establish a protocol that provides sufficient notification for the utility to meet the customer's load profile.

All the interstate pipelines serving SoCalGas' market have daily balancing requirements, and some even have tighter provisions. ORA agrees with the daily balancing requirement advanced by SoCalGas.

On the other hand, Watson's proposal to allow for a full range of balancing choices would disproportionately benefit customers with erratic load profiles that do not align their deliveries with their consumption pattern over customers that make an effort to match their burns and deliveries. Monthly balancing would allow bypass customers to avoid imbalance penalties on the interstate pipeline and realize price arbitrage opportunities not available on the interstate pipeline. Under current natural gas market conditions, where the price of gas is very high, more relaxed balancing provisions might encourage the peaking customers to use SoCalGas' balancing as a price arbitrage tool which would impose additional burdens on captive customers.

We prefer daily balancing, because it requires customers to manage their own gas supplies in a manner that does not adversely impact other customers. We will adopt the proposal put forth by SoCalGas.

7. Service Interruption Credit

SoCalGas currently offers its GT-F customers a Service Interruption Credit (SIC) as part of Rule 23. SoCalGas proposes to exempt partial bypass customers from the SIC provision. ORA agrees that partial bypass customers should not be afforded a SIC. We agree, to the extent that customer has elected to take interruptible peaking service at a volumetric rate. On the other hand, a customer taking firm peaking service and which has paid a firm reservation charge for that service, is entitled to the same compensation for service interruptions as a customer taking baseload service under SoCalGas' standard tariff. We clarify that the service interruption credit should only apply to the volumes interrupted up to the level of volumes used to calculate each firm peaking rate customer's respective monthly demand charge.

8. General Tariff Provisions

The SoCalGas cost-based rate proposal submitted in this proceeding was based on the company's revenue requirement adopted in the 1999 BCAP as well as the coincident demand which is based on the BCAP adopted throughput. Since the submission of the record in this proceeding, however, SoCalGas has updated its rates at the end of 2000, pursuant to the annual update allowed under the provisions of the BCAP process. Therefore, we order SoCalGas to file, within 20 days after the issuance of this decision, an advice letter containing its peaking rate tariff updated for its year 2000 revenue requirement, but based on the coincident peak demand adopted in the 1999 BCAP.

SoCalGas proposes that the tariff be updated effective January 1 each year to reflect adjustments to PBR base margin and updates to the noncore balancing accounts. We agree.

SoCalGas should file an advice letter within 10 days of the issuance of this decision in compliance with the modified cost-based tariff we adopt today.

9. Applicability Provisions

Almost all parties except SoCalGas and TURN support the implementation of a peaking tariff on a facility-by-facility basis rather than imposing it on a customer basis, thereby subjecting total loads of generators with multiple facilities to the tariff. As ORA points out, there is no rationale for such an application. Under the SoCalGas proposal, if an existing generator develops a new power plant and decides to take service for that power plant from a competing interstate pipeline, then the generator will not be able to take SoCalGas peaking service for that plant without subjecting all of the plants it owns to the peaking tariff. This provision is unreasonable and could prove to be so onerous that it might in fact promote bypass of SoCalGas' system by electric generators. Certainly, it may discourage development of new generation facilities. A peaking service tariff applied to each facility individually will help to maximize the available tools to California shippers in keeping gas costs low.

Watson and other parties suggest that new generation facilities should be exempt from a peaking tariff. We reject this proposal as discriminatory. There is no precedent for this Commission to set different rates for new customers who might move into a utility's territory even if they impose additional costs on the utility's system. Similarly, we cannot allow a customer to be exempt from a tariff just because the customer is new. As we have stated earlier in this decision, the goal of the peaking rate is to fairly compensate SoCalGas for this service, not to punish a particular customer or subset of customers for electing to diversify their supply options. The firm peaking service we have designed in this order allows both existing and new customers to impose special demands on SoCalGas' system; we believe those customers should pay their fair share for that privilege.