V. Discussion - Providing a Gas Service Priority to Electricity Generators in the Event of a Natural Gas Shortage or Diversion Is Not Required at This Time

A change in curtailment policy to provide special gas service priority to selected customers should be adopted only if such a change has a rational basis and promotes the goals of efficient, reliable service. We must weigh the benefit that providing gas service priority to electric generators provides to Californians, and the harm that a change in curtailment policy may produce.

First, granting a service priority to electric generators in the event of a natural gas shortfall or curtailment is unlikely to produce any benefits over the next year because California has adequate gas supplies that make a service disruption highly unlikely. Second, the proposed changes in policy to provide a gas priority to electric generators create a system of incentives that discourage generators from purchasing the tariffed services now available that can enable customers to avoid a loss of gas even when supplies are short. Third, the policy changes proposed by CGC and others are overly broad, and could lead to the curtailment of gas to hospitals, food processors, prisons, plants and refineries, even when adequate electric power is available and blackouts are not imminent. Fourth, ensuring compliance with tariffs that give electric generators a service priority would require a complicated and costly enforcement mechanism. We discuss each of these points below.

Granting Electric Generators a Gas Service Priority Will Not Provide Californians With Any Benefits Because Adequate Gas Supplies Make Curtailments and Diversions Unlikely This Year

A change in gas curtailment policies produces social benefits to the extent that it changes real world outcomes in a direction that promotes the public interest. For the next year, changes in gas curtailment policies should have no beneficial effect on generators, for California has adequate gas supply in both PG&E's and SoCalGas' service because the evidence shows that territories and no curtailments or diversions are likely this year.

PG&E states, and no party provides contravening comments, that its array of service options and the physical capabilities of its infrastructure will enable it to meet the gas demands of core and noncore customers over the next twelve months. Moreover, under PG&E's tariffs, those customers holding storage rights can receive priority for gas withdrawals that should enable them to avoid curtailments.

SoCal Gas provides a similar picture. SoCal Gas has not curtailed either firm or interruptible gas in over a decade, and does not envision doing so this year. In addition, timely Commission adoption of D.01-06-018 in the Montebello Storage Field proceeding, will enable the use of "cushion" gas over this summer, and thereby enable SoCal Gas to increase its injections into gas storage. Finally, SoCal Gas is making substantial investments in gas compression facilities that will increase the overall capacity of its gas infrastructure this winter. The result of these actions is to make gas curtailments and diversions a remote possibility.

Since both PG&E and SoCal Gas anticipate no gas shortages or resulting diversions or curtailments over the next 12 months, a change in gas service priorities should have no consequences for the supply of gas available to electric generators.

Granting Electric Generators a Gas Service Priority Diminishes the Incentives for Them to Use Gas Storage Prudently

PG&E and SoCalGas correctly point out that under their current tariffs, those companies holding gas storage capacity can purchase gas injection and withdrawal services that enable them to avoid disruptions of service even when gas supplies are short. ORA also points out that current curtailment priorities place responsibility for developing contingency plans for ensuring gas supply on the noncore customer. We concur that it is far better for customers to take steps to insure gas supplies in the event of a shortage than for this Commission to establish a system of service preferences that provide special treatment for some customers.

If a customer has guaranteed access to flowing gas, then there would be no need for that customer to acquire and store gas as a hedge against a supply shortage. Granting a service priority to electric generators decreases their incentives to use gas storage or other services that increase the reliability of their gas supply. Thus, granting electric generators priority for their gas service may increase the likelihood that gas shortages will result because there will be no need for these large-volume customers to use gas storage to ensure reliability of their gas supply.

Proposed Gas Priorities for Electric Generators are Overly Broad and Could Produce Unfair Burdens on Other Noncore Customers

The tariff changes proposed by CGC would grant gas service priorities for flowing gas to all electric generators throughout the entire year. This preferential treatment is overly broad. Despite CGC's assertion that the curtailment priorities would apply only to those generators who lack stored gas, the proposed tariff language provides unconditioned preferences to electric generators. It would, for example, give all electric generators access to flowing gas in times of shortage even when they hold gas in storage. These preferential policies, as proposed by CGC, could result in the curtailment of gas to hospitals, prisons, and other essential facilities in order to provide access to flowing gas for electric generators that hold gas. Such an outcome is inconsistent with the statutory goals of providing reliable supplies of gas to all customers.

Second, it is unclear that energy producers need such a broad grant of preferential access to flowing gas. Although CGC rightly points out that all gas storage is now subscribed, it provides no information on the extent to which generators need more storage or would benefit from the proposed preferences. Although the electricity producers Tractabel and SMUD join CGC in support for preferences, energy producers Aquila, Calpine, DENA, DETM, EPUC/IP/CAC, IEP, PCES and Wild Goose all oppose changes in gas service priorities. This large group of energy companies who fail to join in the request for preferential treatment suggests that many companies have taken the prudent steps needed to obviate the need for special treatment.

Third, it is unclear that the broad policy changes proposed by CGC, Tratabel, and SMUD are necessary to avoid blackouts. We note that under the proposed policy, gas will flow to electric generators even when alternative generation is available on the electric grid. Thus, the new policy could curtail customers even when electric blackouts are not a threat. In such a situation, the policy will produce no social benefits and impose real costs on those curtailed.

Finally, granting special priorities to electric generators will impose unfair burdens on other noncore customers. In particular, should curtailments occur providing an exemption from gas curtailments to electric generators will, dramatically increase the curtailments that others will face. Both PG&E and SoCalGas note that electric generators account for almost two-thirds of noncore gas consumption. Under the proposed preferential service policies, a gas shortage totaling about one-third of the noncore gas demand would leave electric generators unaffected yet it would shut down all other noncore gas users. SoCalGas points out that manufacturers using gas are essential to the California economy, and disruptions will substantially harm these customers. It is therefore not surprising that CLFP and CIG-CMTA, users of both gas and electricity, oppose a policy of providing preferences to electric generators. Others note that noncore gas serves many essential facilities, such as schools, hospitals, universities, and prisons. Ultramar, a refiner of petroleum products, points out the essential nature of its service and asks that the Commission grant priority access to gas supplies for refineries as well as for electric generators.

In contrast to the broad preferences proposed by CGC, Mirant proposes a much narrower policy - limiting gas priority to "must run" plants when they are dispatched to preserve system reliability. Although this limited policy makes more sense, it still remains unclear that such a policy will promote the interests of Californians. As noted above, the availability of gas supplies over the next 12 months make a grant of special priorities unnecessary. In addition, granting preferences to even a few generators diminishes the incentive to secure supplies using gas storage and other tariffed services, and, should curtailments occur, would disrupt supplies to many essential facilities.

These comments make clear that setting priorities for gas service would require a careful consideration of the many users of gas and the importance of their goods and services for California. A simple "electric generator" approach to setting priorities is not a reasonable approach to such a complex issue. Moreover, the adequacy of gas supplies this year makes immediate action unnecessary.

Policies That Give Preferences to Electric Generators Would Require Complicated Implementation and Enforcement Programs

PG&E convincingly points out that the proposed changes in curtailment priorities will prove complex to implement. The complexity necessarily arises since gas diversions and curtailments, when needed, take place at the "backbone" transmission level, while the proposed new service priorities require implementation at the "end-user" or distribution level.

This shift in curtailment policy from the transmission to the distribution level decreases the control of the gas distribution company. In particular, a distribution company will no longer be able to divert gas in times of short supply from a wholesale gas supplier, the current practice, without knowing whether the gas is destined for an electric generator or some other type of facility. Thus, only a penalty and enforcement scheme can ensure compliance by end-users and gas suppliers with curtailment orders. Furthermore, implementing new curtailment priorities that treat customers unequally will require engineering and system modeling and intermediate decisions, such as determining the level of "protected" load for each generation facility. Although the presence of complexities is not determinative, they do show that implementing these changes will have real and certain costs.

Within the Class of Electric Generators, Should the Commission Provide Priorities to Those with the Most Efficient Heat Rates in the Event of a Gas Curtailment?

Although our discussion has shown that it is not practical, not efficient, and not fair to provide electric generators with priorities over other gas customers, it appears that setting priorities to allocate gas within the class of electric generators may serve the public interest at times of gas curtailment. Mirant, in particular, has broached this issue by noting the special role that "must-run-plants" can play when they are dispatched to preserve system reliability. Similarly, when gas is in short supply, directing gas destined for electric generators to the facilities with the most efficient heat rates may best meet the public's need for reliable electricity.

In times of natural gas curtailments, the social and economic costs of electricity disruptions may overwhelm the business economics of power production. At such times, the public interest may require the allocation of gas to those generators whose functioning insures the reliability of electricity supply, not to those generators who are necessarily the cheapest producers of electricity. In such situations marked both by the scarcity of power and the divergence between the costs to society and the costs to a generator, we cannot reasonably expect that a pure market mechanism will produce the best allocation of gas among electric generators.

We note, however, that our rulemaking did not ask whether the Commission should develop rules for allocating gas among electric generators in times of gas curtailments. We are particularly interested in determining whether the Commission could and should allocate gas among electric generators based on considerations of the generator's heat rate and how the generator's operations affect the reliability of the grid during times of gas curtailments.

Unfortunately, we have almost no record in this proceeding concerning how to set priorities among electric generators in the event of a curtailment. To investigate this issue, we will establish a cycle of comments and replies that will result in another decision in this proceeding. We will not, however, delay the issuance of this decision. Such a delay would likely increase the uncertainty that routinely surrounds regulatory decision-making and could prove disruptive to the functioning of the natural gas market in California. Thus, we will issue decisions in this rulemaking as soon as we resolve an issue, rather than issuing a single omnibus decision at some future date.