IV. Should the Commission At This Time Alter Gas Service Priorities in the Event of a Natural Gas Shortage or Diversion?

The issue of whether the Commission should change curtailment priorities at this time is the central question in this rulemaking. A total of 23 parties filed comments in this proceeding. Twelve expressed unequivocal opposition to a change in current gas service priorities. Seven parties filed comments that do not take a position on this particular issue, but address general gas policy questions related to service reliability. Finally, four parties expressed support for granting preferential service priorities to customers who generate electricity or produce energy. We summarize the responses of the parties on this central issue below.

PG&E Opposes Changes in Curtailment Rules

PG&E opposes a change to the current priority-of-service rules at this time. PG&E supports its position by noting that its array of service options and the physical capabilities of the PG&E gas system are such that all core and noncore customers, including electric generators, should be able to satisfy their gas demands over the next twelve months without the need for involuntary diversion or system-wide curtailments during times of peak electricity demand.³ PG&E also notes that under its tariff, gas withdrawn from storage has a higher priority than all other noncore gas flowing under firm contracts. This offers electric generators and other noncore customers a mechanism for obtaining the highest priority for their gas supply during a period of involuntary gas diversions. PG&E explains that its gas supply difficulties last winter resulted from the financial difficulties that eventually led to its bankruptcy, not from deficiencies in gas supply or gas infrastructure. Thus, PG&E contends that no problems of gas supply mandate radical changes.

PG&E states that demand by electric generators accounts for up to two-thirds of noncore load. Charges to the priority rules would cause other customers in this service category, including hospitals, military bases, prisons, and refineries, to be subject to severe interruptions in the event of a gas curtailment. Therefore, PG&E cautions against ad hoc revisions in service priorities.

PG&E further notes that since gas marketers commonly serve a mix of electric and non-electric customers, there is no realistic way to implement an involuntary diversion so as to ensure that electric generators actually receive a higher priority than other noncore customers. PG&E states that it may be impossible to police the actions of marketers to insure that they do not continue providing gas to end-users who lack a service priority.

In PG&E's view, implementing a service priority for electric generators would require both an enforcement scheme and penalties. Implementing a policy reflecting new curtailment priorities requires substantial engineering and system modeling and a raft of intermediate decisions, such as determining the amount of "protected" load for each facility. The complexity of implementation in part arises because diversions currently take place at the "backbone" transmission level, while the proposed curtailment priorities require implementation at the end-use level.

PG&E's reply comments reiterate its major themes and assert that CGC, the major proponent of changes in curtailment priorities, has failed to show that generators cannot make effective use of storage and other services to meet their service demands. PG&E notes that several significant gas-fired generators oppose and others do not endorse a blanket change in service priorities. Finally, PG&E notes that the Gas Accord II proceeding, which it anticipates filing shortly, offers a more comprehensive venue for considering the issues of gas services, service priorities, and gas rates.

SoCalGas Opposes Changes in Curtailment Rules

SoCalGas opposes the introduction of a noncore priority system based on the "relative value to society," as determined by regulators, of a gas customer's product. SoCalGas contends that reversing long-standing gas policies will produce an inequitable outcome and that such a change in service priorities is not needed.

SoCalGas notes that it has not curtailed firm or interruptible service in a decade, and does not anticipate the need to do so this year. Instead of focusing regulatory attention on establishing service priorities for customers, SoCalGas recommends that the Commission focus its efforts on ensuring that the natural gas infrastructure is sufficient to provide reliable service to all. SoCal Gas highlights the importance of several regulatory proceedings before the Commission that, if resolved in a timely fashion, will have dramatic consequences for the availability of gas over the next year.

SoCalGas states that a change in service priorities should not affect customers because it does not believe that any curtailments will occur this year. SoCalGas, unlike PG&E, sees no difficulties in implementing a revised system of service priorities. Should curtailments, however, occur, SoCalGas anticipates that giving electric generators a special priority will have a major impact on California's manufacturing output, amusement parks, hotels, hospitals, universities, government facilities, and employment.

SoCalGas notes that providing electric generators with special priorities creates a disincentive for the generators to store gas. For all the reasons noted, SoCalGas concludes that no change in curtailment priorities is needed at this time.

ORA Opposes Changes in Curtailment Rules

ORA opposes any changes in gas curtailment priorities. First, ORA characterizes the current policy of pro rata curtailments as a vast improvement over past practices that cut electric generators first. Second, ORA holds that giving priority to electric generators creates a disincentive for them to store gas. Third, ORA notes that curtailing noncore customers can cause significant economic harm. ORA concludes that for these reasons, changes in curtailment priorities are unwise.

ORA believes that the current curtailment policies aptly place responsibility for developing contingency plans on the noncore customer. Changing the current curtailment priorities, ORA contends, would exacerbate the potential for deeper gas curtailments because the new allocations would obviate the need for the largest gas consumers to store gas, thereby placing more demands on the transmission system to meet peak demands with flowing gas.

In reply comments, ORA states that those proposing changes to curtailment priorities have failed to demonstrate that the customers receiving a preference serve a higher public good than that served by other noncore customers. ORA points out that "no evidence at all" demonstrates that electric generators serve a higher public good than other noncore gas customers, which include hospitals, prisons, military bases, and food processing facilities. ORA concludes by reaffirming its position that no changes in service priorities are warranted.

Energy Producers Oppose Changes in Curtailment Rules

Aquila, a natural gas marketer, opposes changes in the current system of curtailment priorities. Aquila notes that the current system permits customers to purchase the level of reliability that they desire.

DENA states that it believes that setting a priority for gas service to electric plants may not prove practical. Instead, it recommends that the Commission focus its regulatory energies on improving the gas infrastructure.⁴ DENA and DETM, filing joint reply comments, state that since it appears that gas curtailments are unlikely, the Commission should not give a high priority to revising curtailment rules at this time.

EPUC/IP/CAC urge caution in changing priorities, and warn of unintended consequences. They conclude that the Commission should retain the current service priorities. They ask for a comprehensive exploration of curtailment issues should the Commission decide to change regulations. In particular, they note that the curtailment of gas can affect the production of critical fuels and that unexpected shutdowns of natural gas can damage sensitive production equipment.

IEP, an association of owners and operators of projects using cogeneration, solar-thermal, wind, biomass, geothermal and fossil fuel facilities, opposes any change to current curtailment priorities. Instead, it asks that the Commission institute an expedited parallel investigation to identify short and long-term upgrades to the gas transmission infrastructure.

PCES, a gas marketer, calls for retention of the current curtailment priorities. It argues that the gas market currently functions well, and that there is no need for new regulations. It also points out that the administration of a curtailment policy is inherently flawed for it eliminates price signals in markets. Instead, it requires administrators to make the difficult determination of the relative "values" of the different productive uses of gas.

Calpine opposes any changes in current curtailment policies. Calpine notes that under the current system, gas purchasers may choose the level of reliability that they desire.

Finally, Wild Goose Storage opposes changes in policy that would give gas-fired generators priority over other noncore customers in times of gas curtailment or diversion. Wild Goose believes that the effects of such a change may prove highly complex. Instead, it believes that the Commission should require electric generators to place a certain number of days' gas supply in storage in anticipation of diversions or curtailments. In the longer term, Wild Goose requests that the Commission change its rules to promote transmission system upgrades and to promote gas storage.

In Reply Comments, Wild Goose reiterates that the Commission should "stay away from choosing one group over the other and to instead provide additional incentives to promote the development of necessary infrastructure." Wild Goose asks the Commission to end this proceeding with a decision rejecting a special priority for electric generators.

Energy Users Oppose Changes in Curtailment Rules

CLFP adamantly opposes providing generators with special priorities in the event of gas curtailments. CLFP states that such a policy can jeopardize millions of tons of perishable food.

CIG-CMTA opposes giving electric generators a special service priority. CIG-CMTA notes that available tariffed services enable a customer to choose the level of reliability desired. CIG-CMTA asks that before the Commission adopts changes that it require electric generators to demonstrate that they have fully used alternatives and still cannot acquire the reliability that they need.

In Reply Comments, CIG-CMTA notes that CGC fails to justify the need for new curtailment policies. Moreover, it contends that such a change would disrupt other noncore customers' contractual arrangements.

SCE, WHP, Long Beach, TURN and Palo Alto Did Not State a Position on Changing Curtailment Rules

Several parties filed comments not readily classified as supporting or opposing a change in curtailment policies. SCE, WHP, Long Beach, and TURN took no position concerning the proposed revisions to curtailment priorities. Palo Alto asked the Commission to exercise caution in revising the current curtailment priorities.

Mirant Supports a Priority for "Must-Run Plants" When Dispatched to Preserve System Reliability

Mirant recommended a different change in current curtailment policy to give a priority only to "reliability must-run plants" during times when the California ISO dispatches them to preserve system reliability.

CGC, SMUD, and Tractabel Support Priority for Electric Generators; Ultramar Supports Priority for All Energy Producers

Four respondents filed comments supporting the granting of special priorities to electric generators. CGC supports the proposal that electric generation usage of natural gas should be assigned a higher priority than non-electric generation uses of gas by non-core customers. CGC argues that these are not "normal times," that 200 hours of blackouts are expected this summer and that the electric system is operating outside of "reasonable bounds." CGC maintains that a regulatory-induced loss of generation caused solely by CPUC curtailment rules is unacceptable. It therefore recommends specific changes in curtailment rules to give electric generators priority.

In Reply Comments, CGC notes that SoCal Gas has not permitted generators to upgrade from interruptible to firm service, and therefore recommends a special priority for electric generators, regardless of the level of service purchased. It further states that current supply conditions suggest that no curtailments will be necessary, and that the impact of a revision in service priorities would prove slight. It concludes by arguing that the rule change would act as an insurance policy against disrupting electric generation during the current electricity crisis.

SMUD supports a rule change to give priority to gas-fired electric generation. Similarly, Tractabel, the indirect owner of two cogeneration facilities, supports granting a service priority to all gas-fired generators, including cogenerators.

Finally, Ultramar, a refining and marketing company, agues that refiners of petroleum products should receive the same high priority as electric generators for natural gas service.