First we address the applicability of Pub. Util. Code § 854. We conclude that under the facts presented in this application, the Commission must approve the authority sought. Generally, we think it is prudent public policy to review and approve changes in the ownership and control of certificated natural gas storage utilities, whether those changes occur directly, or indirectly through corporate intermediaries. Such review should help to ensure the continued economic viability of such utilities and to prevent market manipulations that may affect not only their own customers but also larger ratepayer groups.
Moreover, as the instant transaction illustrates, indirect ownership may provide the potential for substantial influence and give rise to actual control, within the context of Corp. Code § 160(a). While the Lodi Holdings Agreement attached to the revised Unit Purchase Agreement states that Western Hub will provide day-to-day management of LGS' operations as Company Manager, Western Hub will no longer retain full discretion to set longer-term plans, including major fiscal policy. Instead, it will share that decision-making authority, equally, with WHP Acquisition. Further, since either equity owner has authority to remove the Company Manager, WHP Acquisition, acting alone, conceivably could remove Western Hub from that position, whereupon the two equity owners would then have to agree to appoint a replacement. We do not suggest that these aspects of the parties' agreement are problematic under the circumstances, but note that they describe a change in the structure of corporate control that affects various elements of actual control. So that we may continue to monitor LGS' operations in a meaningful way, we condition our approval by imposing the following reporting requirement. Should Western Hub cease to serve as Company Manager of Lodi Holdings for any reason, we direct LGS to promptly advise the Director of the Commission's Energy Division, in writing, of that fact and of the reasons for the change.
Next we consider how the indirect change of control will affect LGS, its customers and the market place. Joint Applicants assert: "the transaction effects no change in the LGS' name, rates, or conditions of service." (2002 Amendment at 10.) Joint Applicants do not seek the transfer of LGS' CPCN; rather, LGS will continue to hold it and will continue to offer natural gas storage at market-based rates, pursuant to D.00-05-048. We stress that unless and until modified, all terms and conditions D.00-05-048 mandates (e.g., a general liability policy of $1 million and umbrella policy in the amount of $50 million per occurrence) will continue to apply to LGS. Likewise, LGS must continue to operate in conformance with its tariff, filed with the Commission on July 13, 2001, and with any subsequent amendments of that tariff.
ArcLight brings substantial financial resources to the proposed transaction in return for its equity investment (the assignment of its rights under the construction loan to Lodi Holdings). We note, approvingly, that the proposed transaction avoids the likelihood of LGS' near-term default on the construction loan and probable bankruptcy. Thus, LGS will be able to continue to serve its customers, without interruption. The 2002 Amendment states that LGS has three customers with firm storage contracts with initial terms a year or longer (one of these has less than a year remaining). LGS also provides short-term firm and interruptible service to several customers. With Western Hub serving as the Company Manager, day-to-day management and operations will continue under the same management that has been in place since certification.
The Application states that following issuance of D.00-12-026, LGS began the search that has led to the proposal before us today:
. . . LGS' existing investors began exploring alternative sources of additional equity capital in order to complete construction of the Lodi Facility, as was clearly contemplated in D.00-12-006 (citation omitted). (Application at 12.)
Construction is now complete. The 2002 Amendment states that Phase I became operational on January 2, 2002, providing approximately 9 Bcf of storage with injection and withdrawal capacity of approximately 300 MMcf/d. Phase II was completed this past summer. As of August 30, 2002, the Lodi Facility has had storage capacity of 12 Bcf, with approximately 400 MMcf/d of injection capacity and 500 MMcf/d of withdrawal capacity.
We know that the natural gas storage market, while still relatively new, is not the same market that existed when we approved LGS' certificate. Recently, in our review of the application of Wild Goose Storage, Inc. (Wild Goose), for approval of its proposed expansion project, we examined market power in the gas storage market in California and the western United States.11 We found evidence of a highly concentrated market for storage injection and withdrawal in both the northern California and statewide California markets and a significant market share for Wild Goose. Though we were unable to conclude definitively, on the record of that proceeding, "whether Wild Goose possesses and can exercise market power," we imposed a number of reporting requirements and rescinded certain, other reporting relaxations, "to monitor the situation more fully in the future." (See Wild Goose Expansion, D.02-07-036, mimeo. at pp. 16-17 and Finding of Fact 12.) We also prohibited Wild Goose from engaging in any storage or hub services transactions with its parent company or any affiliate owned or controlled by its parent.
The Lodi Facility has a smaller inventory capacity than Wild Goose (12 Bcf of working gas compared to 29 Bcf for the expanded Wild Goose facility) but the physical attributes of its storage reservoir permit highly flexible storage operations. The peak injection capacity at the Lodi Facility (400 MMcf/d) nearly matches Wild Goose (450 MMcf/d) and its peak withdrawal capacity is substantial (500 MMcf/d, compared to Wild Goose's 700 MMcf/d). Moreover, only 200 MMcf/d of Wild Goose's peak withdrawal capacity moves through Line 167, the major transmission line into Sacramento. The Lodi Facility's 500 MMcf/d of peak withdrawal capacity and Wild Goose's remaining 500 MMcf/d, will compete directly for transmission access to the Bay Area load center. D.02-07-036 found that during peak periods for storage withdrawal, PG&E's transmission system may have insufficient capacity to accommodate all demands for transportation of natural gas (i.e. whether from an in-state storage facility or from the California border) on an "as-available" basis.12
Considering these realities, the draft decisions that reviewed Joint Applicants' initial proposal (which would have given Aquila, Inc. an indirect ownership interest in the Lodi Facility) questioned assertions that LGS would be unable to exercise market power in the gas storage market. The proposal before us today provides Western Hub with a financial partner that does not have an active energy market involvement at this time or the financial problems of Aquila, Inc. Our greatest concerns about the possible exercise of market power or possible abuse of affiliate relationships are allayed, but the fact remains that the natural gas storage market is a heavily concentrated one.
So that we may better monitor the evolving natural gas market, and as a condition of our approval of the change of ownership (with continued market-based rate authority), we will impose the same reporting requirements on LGS that we have imposed on Wild Goose. Specifically, with the exception of the agreement by which Western Hub will serve as Company Manager for Lodi Holdings, we will prohibit LGS from engaging in any storage or hub services transactions with its ultimate parents, Western Hub and ArcLight (or their successors) or any other affiliate owned or controlled by either of those entities. In addition, we will direct LGS to promptly inform the Commission of the following changes in status that would reflect a departure from the characteristics the Commission has relied upon in approving market-based pricing: LGS' own purchase of other natural gas facilities, transmission facilities, or substitutes for natural gas, like liquefied natural gas facilities; an increase in the storage capacity or in the interstate or intrastate transmission capacity held by affiliates of its parents or their successors; or, merger or other acquisition involving affiliates of its parents, or their successors, and another entity that owns gas storage or transmission facilities or facilities that use natural gas as an input, such as electric generation.
We will also require LGS to provide the Commission with service agreements for short-term transactions (one year or less) within 30 days of the date of commencement of short-term service, to be followed by quarterly transaction summaries of specific sales. If LGS enters into multiple service agreements within a 30-day period, LGS may file these service agreements together so as to conserve the resources both of LGS and the Commission. The quarterly transactions summaries should list, for all tariffed services, the purchaser, the transaction period, the type of service (e.g., firm, interruptible, balancing, etc.), the rate, the applicable volume, whether there is an affiliate relationship between LGS and the customer, and the total charge to the customer. For long-term transactions (longer than one year), LGS should submit the actual, individual service agreement for each transaction within 30 days of the date of commencement of service. To ensure the clear identification of filings, and in order to facilitate the orderly maintenance of the Commission's records, long-term transaction service agreements should not be filed together with short-term transaction summaries.
The storage contracts reports required by the preceding paragraphs should be provided to the Director of the Commission's Energy Division within 60 days of the date of issuance of this decision on an initial basis and thereafter, as specified.
11 Wild Goose was the first competitive, natural gas storage utility to receive a CPCN from the Commission. LGS was a party to the recent expansion proceeding. 12 As-available (interruptible) transportation service is the lowest priority transportation service available to noncore customers on the PG&E system.