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STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

August 19, 2004 Alternate to Agenda ID# 3743

TO: PARTIES OF RECORD IN RULEMAKING 04-01-025

Enclosed is Alternate Draft Decision of Commissioner Lynch to the Draft Decision of Administrative Law Judge (ALJ) Fukutome and ALJ Wong previously mailed to you on July 20, 2004.

When the Commission acts on this agenda item, it may adopt all or part of it as written, amend or modify it, or set aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Public Utilities Code Section 311(e) requires that an alternate to a draft decision be served on all parties, and be subject to public review and comment prior to a vote of the Commission. Rule 77.6(d) provides that comments on the alternate draft decision be filed at least seven days before the Commission meeting.

Comments on the alternate decision must be filed and served August 26, 2004. Reply comments are due August 31, 2004.

Pursuant to Rule 77.3 comments shall not exceed 15 pages. Finally, comments must be served separately on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service. Please also provide an electronic copy of the comments and reply comments to Trina Horner at tah@cpuc.ca.gov.

 /s/ ANGELA K. MINKIN by Phil Weismehl 

Angela K. Minkin, Chief

Administrative Law Judge

ANG: epg

Enclosure

COM/LYN/tah/mel ALTERNATE DRAFT

Decision ALTERNATE DRAFT DECISION OF COMMISSIONER LYNCH (Mailed 8/19/2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Rules to Ensure Reliable, Long-Term Supplies of Natural Gas to California.

Rulemaking 04-01-025

(Filed January 22, 2004)

TABLE OF CONTENTS

TITLE PAGE

OPINION ON PHASE I ISSUES 22

1. Summary 22

2. Purpose of the Rulemaking 55

3. Procedural History 77

4. Respondent's Proposals 99

5. Comments and Reply Comments 1111

6. Interstate Pipeline Capacity Contract Procedures 1111

7. Supply Access 4242

8. Comments on Draft Decision 8484

9. Assignment of Proceedings 8484

Findings of Fact 8585

Conclusions of Law 9191

ORDER 9393

OPINION ON PHASE I ISSUES

1. Summary

This decision addresses the Phase I proposals of Southern California Gas Company (SoCalGas), San Diego Gas & Electric Company (SDG&E), Pacific Gas & Electric Company (PG&E) and Southwest Gas Company (Southwest). These proposals were filed in accordance with this Order Instituting Rulemaking (OIR) and address interstate pipeline capacity contracts, liquefied natural gas (LNG) access, and interstate pipeline access.

The OIR was opened to ensure that California does not face a natural gas shortage in the future. Through the OIR and today's decision, we further the stated goal of the Energy Action Plan to:1


"Ensure that adequate, reliable, and reasonably-priced electrical power and natural gas supplies, including prudent reserves, are achieved and provided through policies, strategies, and actions that are cost-effective and environmentally sound for California's consumers and taxpayers." (Energy Action Plan, p. 2.)

The policies adopted in today's decision, which are summarized below, is part of the state's overall effort to implement and to fulfill the Energy Action Plan's goal.

Diversified interstate pipeline capacity portfolios, with staggered terms, maximize opportunities to benefit core customers with enhanced supply reliability and gas price stability. Subject to the Commission review process discussed below, we grant the utilities authority to negotiate reduced amounts of capacity and to terminate the expiring contracts with El Paso Natural Gas Company (El Paso), Transwestern Pipeline Company (Transwestern), and Gas Transmission Northwest Corporation (GTNC) in conjunction with preserving the utilities' rights of first refusal for firm capacity on these interstate pipelines.

A flexible, expeditious interstate pipeline capacity approval process will provide utilities with the opportunity to acquire core capacity in the most efficient and cost effective manner. At the same time, we must retain adequate safeguards and oversight to ensure the reasonableness of capacity acquisitions. This decision adopts capacity contract approval procedures that are modified from those proposed by the utilities to satisfy our, as well as other parties' concerns regarding regulatory oversight, including the need for formal Commission approval, the capacity planning range, the consultation/agreement process, and the degree of review in pre-approving LNG contracts.

We decline at this time to modify the existing policies governing utility acquisition of storage resources to serve core customers.

New gas supplies should have the opportunity to interconnect with the utility system and should be allowed to compete on an equal footing with existing supplies. PG&E, SoCalGas and SDG&E are ordered to submit, for Commission approval, non-discriminatory open access tariffs for new sources of supply.

Regarding ratemaking for LNG access, it is presumed that LNG suppliers will pay the estimated system infrastructure costs associated with their projects. However, requests for rolled-in, or any alternative ratemaking treatment, will be allowed through the application process and addressed on a case-by-case basis. LNG suppliers will also be responsible for the costs to interconnect with the utilities' pipelines.

Due to the complexities and ratemaking implications, we will address the SoCalGas and SDG&E requests to implement its transmission system integration and firm access rights proposals in a separate application to be filed within three months of this decision.

We will initiate an evidentiary hearing process in Phase II of this proceeding to consider the cost and benefits associated with LNG, including California's long-term need for additional natural gas supplies, price effects of LNG, environmental impacts, and the effect of increasing California's dependence on foreign energy supplies. In Phase II we will also consider adoption of standardized operational balancing agreements to connect all new upstream gas pipelines that interconnect with the pipelines of SDG&E and SoCalGas, and to address the concerns raised by the parties regarding the use of a standardized operational balancing agreement.

There are a number of issues concerning LNG gas interchangeability and gas quality specifications in general. In the near future in Phase II, we will be conducting a technical workshop in coordination with other state agencies regarding the gas quality specifications.

Regarding the interconnect at Kramer Junction, some of the parties recommend that the capacity allocation method be changed, and that the distinction giving primary preference to gas flows from El Paso and Transwestern be eliminated. Today's decision does not eliminate this preference because the core customers of SoCalGas may be adversely affected. However, SoCalGas' updated proposal to allocate receipt point capacity based on the physical capacity and expected flows of SoCalGas' North desert Transmission Zone, while preserving core supplies, is adopted.

Any further consideration of SoCalGas' peaking rate should be addressed in the Biennial Cost Allocation Proceeding (BCAP) of SoCalGas or in SoCalGas' system integration/firm access rights application.

1 The Energy Action Plan is a joint effort by this Commission, the California Energy Commission, and the Consumer Power and Conservation Financing Authority. These three state agencies are cooperating to guide the development of California's energy future.

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