Discussion

Today's decision is limited to the issue of whether CEQA should apply to the activities that were examined and resolved in D.04-09-022, the Phase I decision.

RACE's argument for the application of CEQA to the Phase I decision centers around the proposition "that the CPUC is taking action through this rulemaking proceeding that will either directly, indirectly, or cumulatively have an adverse impact on the environment." (RACE November 29, 2005 Reply to Supplemental Responses, p. 2.) RACE acknowledges and "fully understands that the CPUC is not currently approving or causing the construction of any specific facility." (Ibid.) RACE further acknowledges in its reclassified petition for modification at page 4 that even though there is a "lack of a specific project and the lack of immediate adverse impacts, this proceeding should be subject to review under CEQA."

CEQA is triggered when a public agency exercises its discretionary power to carry out or approve a project that may have a significant physical impact on the environment. Before CEQA is triggered, the public agency conducts a preliminary review to determine whether CEQA applies to the proposed activity or if the activity is exempt from CEQA. If the activity is not a "project" or is exempt from CEQA, the CEQA inquiry does not need to proceed further. If the agency determines that CEQA is applicable to the project, the agency must consider whether the project will have a significant physical impact on the environment. If it is determined that the project will not have a significant physical impact on the environment, the agency is to issue a negative declaration. If the agency determines that the project will have a significant physical impact on the environment, an environmental impact report must be done. (See Title 14, Cal. Code Regs. §§ 15002, 15060, 15061;¹⁶ see Pub. Resources Code §§ 21065, 21080.)

Section 15060(c) of the CEQA Guidelines provides that an activity is not subject to CEQA if:

"(1) The activity does not involve the exercise of discretionary powers by a public agency;

"(2) The activity will not result in a direct or reasonably foreseeable indirect physical change in the environment; or

"(3) The activity is not a project as defined in Section 15378."

In order for CEQA to apply, there must be a project. A "project" is defined in §15378 of the CEQA Guidelines as follows:

" `Project' means the whole of an action, which has a potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, and that is any of the following:

(1) An activity directly undertaken by any public agency ...

(2) An activity undertaken by a person which is supported in whole or in part through public agency contracts, grants, subsidies, loans, or other forms of assistance from one or more public agencies;

(3) An activity involving the issuance to a person of a lease, permit, license, certificate, or other entitlement for use by one or more public agencies."

Section 15378(b)(2) of the CEQA Guidelines specifically provides that a "project" does not include "Continuing administrative or maintenance activities, such as ... general policy and procedure making...."

In order for CEQA to apply, there must also be a significant effect on the environment. (CEQA Guidelines, § 15061.) A "significant effect on the environment" is defined in §15002(g) of the CEQA Guidelines to mean "a substantial adverse change in the physical conditions which exist in the area affected by the proposed project."

To determine whether a "project" was contemplated by the activities which led up to the issuance of the Phase I decision, D.04-09-022, we need to examine the procedural steps that we went through. As stated in the "Purpose of the Rulemaking" section beginning at page 5 of D.04-09-022, this rulemaking was issued in response to concerns that "in the long-term, there may not be sufficient natural gas supplies and/or infrastructure to meet the future requirements of all California residential and business consumers." (See OIR, p. 2.) In the rulemaking, we stated:

"In order to ensure reliable, long-term natural gas supplies to California at reasonable rates, the Commission must make certain decisions in 2004 with regard to the California natural gas public utilities, which the Commission regulates, so that: (1) increased demand reduction efforts (e.g., energy efficiency and renewable energy programs) help moderate the potential supply imbalance in the future; (2) sufficient firm interstate and intrastate pipeline capacity will be available to serve California; (3) the benefits and flexibility of storage facilities will be fully appreciated and utilized; and (4) access to imported natural gas supplies (e.g., from LNG facilities) will be available to meet the new challenges we face." (OIR, pp. 2-3.)

The rulemaking did not propose that construction activity be undertaken by a public agency, or that an activity be undertaken by a person supported by public agency contracts, grants, subsidies, loans, or other forms of public assistance.

In the rulemaking we established two phases and directed the gas utilities to file proposals for Phase I and Phase II. The Phase I issues were to be addressed by the Summer of 2004 because of "the long lead time to construct LNG facilities and due to certain deadlines in 2004 involving existing interstate pipeline capacity contracts and open seasons for new pipelines, including pipelines related to LNG projects." (OIR, p. 3.) We stated in the rulemaking that:

"The scope of Phase I of the OIR is to adopt rules, which will provide guidelines over how the designated utilities should: (1) enter into contracts with interstate pipelines (whether new contracts or renewals of existing contracts) to meet core supply obligations; (2) provide access to LNG supplies of natural gas; and (3) provide access to additional supplies of natural gas transported on interstate pipelines." (OIR, p. 24.)

In the rulemaking, we preliminarily determined the category of this proceeding to be quasi-legislative, and that a decision for Phase I would be based on the filed pleadings without evidentiary hearings. In the June 18, 2004 Phase I scoping memo and ruling, the assigned Commissioners reiterated that Phase I was "to address policy issues in a timely manner...," and confirmed "that the issues raised by the respondents and the other parties should be categorized as quasi-legislative," and that no hearings would be held. (June 18, 2004 Scoping Memo, pp. 6, 9.)

RACE then filed an appeal of the categorization of Phase I as a quasi-legislative proceeding. RACE's appeal made three arguments, including the argument that the "Commission in Phase I needs to evaluate whether additional natural gas supplies, in the form of LNG, will benefit California," and that "this evaluation needs to take place before the Commission puts LNG contracts and LNG connection costs into ratebase." (D.04-07-030, p. 2.) We denied RACE's appeal in D.04-07-030, stating that because the Phase I decision "will only address policy issues, and is not establishing rates for a specific company," that the categorization of Phase I as a quasi-legislative proceeding was correct.¹⁷

The Phase I proposals were filed by the utilities in February 2004, and responses and replies to the proposals were filed in March and April of 2004. None of the utilities or LNG project sponsors requested as part of this rulemaking that a "lease, permit, license, certificate, or other entitlement" be authorized so that they could build a specific project.¹⁸ (See CEQA Guidelines, §§ 15060(a), 15378(a)(3).)

At the outset of this rulemaking, we decided that the Phase I issues should be resolved by reviewing the Phase I proposals and comments instead of holding evidentiary hearings. As provided for in Rule 14.1 and 14.2 and Pub. Util. Code § 1701.1(c), a rulemaking is appropriate when the Commission is establishing policy in the form of rules, regulations, and guidelines for a class of public utilities.

The essence of a rulemaking proceeding is for the Commission to develop regulatory policies. The CEQA Guidelines specifically state that "general policy and procedure making" is not a project under CEQA. As set forth in the CEQA Guidelines, CEQA is intended to be used in conjunction with a governmental agency's discretionary approval of a project that has the potential for either direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment, and which involves the issuance of a lease, permit, license, certificate, or other entitlement. (CEQA Guidelines, §§ 15040, 15357, 15378.)

As discussed above, the assigned Commissioners and the Commission have consistently viewed the Phase I issues as policy matters. D.04-09-022 at page 41 notes that "The focus of this proceeding is to ensure that policies and rules are in place to ensure long-term supplies of gas." Since Phase I only involves policy determinations by this Commission without causal connection to future physical impacts to the environment, CEQA review is not required.

Furthermore, the utilities and the LNG project sponsors did not request as part of this proceeding, that the Commission authorize or issue any lease, permit, license, certificate or other entitlement to them. We specifically stated the following in the "Supply Access" section at page 41 of D.04-09-022:

"At the outset of this LNG discussion, we point out that we are not deciding in this decision whether certain proposed LNG projects should be built in California, or on the West Coast. Instead, today's decision is only addressing what needs to be in place for potential sources of LNG supply to connect to the gas transmission and distribution systems of the California gas utilities. Such an analysis furthers the Energy Action Plan's goal of ensuring that California has a reliable supply of reasonably priced natural gas. ...

"Today's Phase I decision addresses the access policies that need to be in place to allow potential sources of LNG to access the utilities' gas systems. Earlier in this decision, we discussed how diverse gas supplies, including potential sources of LNG, can benefit California. However, the issue of whether individual LNG projects should be built in California, in Federal waters offshore of California, or in Mexico, is or will be addressed in the applicable regulatory proceedings examining each individual project." (D.04-09-022, pp. 41-42.)

Nowhere in the ordering paragraphs of D.04-09-022 did we approve the building of any project, nor did we authorize any lease, permit, license, certificate or other entitlement.¹⁹ Instead, we directed the gas utilities to submit "non-discriminatory open access tariffs for all new sources of supply, including potential liquefied natural gas (LNG) supplies," and allowed SoCalGas and SDG&E "to establish receipt points, as needed, at Otay Mesa, Salt Works Station and Center Road Station, or at other receipt points." D.04-09-022 also designated Otay Mesa as a common receipt point for both SoCalGas and SDG&E.²⁰ We do not believe that allowing these open access interconnections to occur is an essential step in a chain of events which will lead to a change in the physical environment. (See Kaufman & Broad, 9 Cal.App.4th at 474.)

In addition, CEQA does not require the analysis of potential environmental impacts that are remote and speculative. (See e.g., Pala Band of Mission Indians, 68 CalApp.4^th at 576.) D.04-09-022 reflects the uncertain status of LNG projects on the west coast.²¹ For example, at page 20, we noted a party's concern about "the uncertainty of new sources of supply such as LNG...." At page 39 of D.04-09-022, we recognized "the uncertainties over how the LNG markets in California will develop...." In discussing the issue of rolled-in versus incremental ratemaking treatment for utility infrastructure improvements, we noted the uncertainties over when LNG projects will ultimately be developed, the significant hurdles facing the projects before the projects can be completed, and that the "potential construction costs to accept and redeliver significant volumes of gas at multiple new receipt points varies widely, depending on which new sources of supply actually materialize and the volumes to be delivered at each new receipt point." (D.04-09-022, p. 65.)²²

We also note that the recent enactment of the Energy Policy Act of 2005 provides that the Federal Energy Regulatory Commission (FERC) has the jurisdiction to authorize LNG terminals in the United States, and that the Commission may participate in that FERC hearing. (See D.05-11-010.)

All of the actions that we have taken regarding the Phase I issues leading up to D.04-09-022, and FERC's authority over the siting of LNG terminals, can only lead us to conclude that the activities related to the Phase I issues in this proceeding did not amount to a "project" within the meaning of CEQA, and CEQA therefore does not apply to the Phase I activities that were undertaken in connection with the Phase I decision. Instead, the activities relating to the Phase I issues that were addressed in D.04-09-022 are policy-related actions, which are exempt from CEQA. (CEQA Guidelines, §§ 15060, 15061, 15378.) Accordingly, RACE's reclassified petition to modify D.04-09-022, which seeks to apply CEQA to the Phase I activities which were reviewed and resolved in D.04-09-022, is denied.

¹⁶ Chapter 3 of Division 6 of Title 14 of the California Code of Regulations is cited herein as the "CEQA Guidelines."

¹⁷ D.04-07-030 also noted that RACE had requested through its March 9, 2004 motion that the Commission schedule evidentiary hearings in this proceeding. That motion was denied in the ALJs' ruling of March 18, 2004, which pointed out that Rules 14.1 and 14.2 and Pub. Util. Code § 1701.1(c) support the Commission's right to use a rulemaking to establish policy.

¹⁸ We note that a request for authorization to build a specific project would have required the utility to file a separate application as required under Rules 15 and Rule 18.

¹⁹ In Friends of Mammoth v. Board of Supervisors (1972) 8 Cal.3d 247, 262, the California Supreme Court held that a project involves "the issuance of permits, leases and other entitlements" to a private party by the governmental agency.

²⁰ Ordering paragraph 7.a. of D.04-09-022 authorized an interim transportation rate for gas deliveries through Otay Mesa. However, in D.05-10-045, this interim transportation rate was eliminated.

²¹ Where the future development is unspecified and uncertain, no purpose would be served by an environmental review that could only speculate as to possible future environmental consequences. (See, e.g., Lake County Energy Council v. County of Lake (1977) 70 Cal.App.3d 851, 854-855; Topanga Beach Renters Association v. Department of General Services (1976) 58 Cal.App.3d 188, 196.)

²² In this regard, our actions in D.04-09-022 are similar to the facts in Kaufman & Broad where CEQA did not apply because the school district's creation of the facilities district did not commit it to build any specific school expansion or development project. (Kaufman & Broad, 9 Cal.App.4th at 475-476.)