6. Discussion

Prior to settlement, the focus of the application in this proceeding shifted from auction of Montebello to withdrawal of all economically recoverable gas and salvage of the remaining property; however, the parties' differences continued to focus largely on ratemaking issues, as they had in A.98-01-015. Though TURN was not a party to A.98-01-015, it joined in these ratemaking concerns in this proceeding. For example, parties' PHC statements identify the following as among the polarizing issues going forward: the apportionment of gain on sale; treatment of the impact of income taxes; the date for removal of Montebello's costs from base rate margin.

With one exception, the Amended Settlement proposes the same resolution of these issues, now, that the parties proposed in November 2001. The only difference is that they now recommend an increase in the size of the up-front reduction in rates from $28.3 million to $44.1 million. In order to approve the Amended Settlement, we must conclude that the resolution it proposes is in the public interest.

Our assessment is significantly influenced by the pleadings filed by SoCalGas, ORA, and TURN in response to the questions in the recent ACR. TURN answered only selected questions, as it was unable to gather the technical and operational data required for a more complete response in the short time provided. Both SoCalGas and ORA have tendered declarations in support of their factual assertions, signed respectively by Stephen A. Watson, SoCalGas' Capacity Planning Manager, and Mark Pocta, the ORA Program and Project Supervisor with responsibility for this proceeding. These three parties, together with Edison and SCGC, are signatories to the Amended Settlement; in addition, each of them independently urges us to approve the Amended Settlement promptly.⁸

The recent ACR asked a number of questions about the merits of the parties' November Settlement in today's natural gas market and expressed concerns about "increases and projected increases in natural gas prices, limitations on available transmission capacity, and utilization of available storage". (April 25, 2001 ACR, p. 3.) Below, we examine the parties' recent responses as well as other information compiled in the record of this proceeding in order to weigh the impacts of abandonment of Montebello on SoCalGas' continued ability to serve its customers and to assess the reasonableness of the ratemaking mechanisms proposed.

6.1 Operational and Market Factors

Operational value of Montebello storage capacity: The record developed in A.98-01-015 and supplemented since the filing of this application establishes that Montebello is an inefficient, costly storage field located in the proximity of a residential neighborhood and has not been used, operationally, for the last four years. As SoCalGas' explains, "Montebello was chosen [for sale] because it is a small field that had high operating costs, low on-going revenue potential, high salvage value, and is situated in a non-strategic location". (Prepared testimony of Stephen A. Watson, April 2000, p. 9, referenced in SoCalGas ACR response, p. 6.)

Those factors have not changed in the last six months. Montebello's injection/withdrawal capability is very low, with deliverability of 100-200 MMcfd for a couple of days at low inventory levels, compared to other SoCalGas storage fields such as Playa Del Rey (which though even smaller, can deliver nearly 400 MMcfd at near zero working gas inventory), Aliso Canyon (over 1000 MMcfd at near zero working gas inventory), La Goleta (over 250 MMcfd at near zero working gas inventory), or Honor Rancho (400 MMcfd at near zero working gas inventory).⁹ Furthermore, the physics of the Montebello reservoir limit its working inventory capacity to 11.7 Bcf. Since the working gas inventory in Montebello is 3 Bcf at present, withdrawing more than 3 Bcf risks damage to the reservoir's continued viability as a gas storage field. ORA points out that while theoretically "SoCalGas could sell injection, withdrawal and inventory capacity available at Montebello ... from an operational and physical standpoint, the Montebello facility would simply continue to sit idle under current operating conditions." (ORA ACR response, p. 7.) Moreover, the 26 Bcf of working and cushion gas now stored at Montebello would remain unavailable.

SoCalGas' other storage fields in Southern California together have 105 Bcf of inventory capacity.¹⁰ Both SoCalGas and ORA state that this total capacity, if fully injected, is physically more than enough to avoid gas curtailments on the SoCalGas system next winter. ORA, TURN, and SoCalGas agree that the potential for inadequate storage next winter is not due to insufficient storage capacity but rather to the extremely high demands on existing transmission to serve competing uses - daily consumption, including high demand by electric generation customers, versus transportation to storage fields for injection. Moreover, according to the parties, retention or sale of Montebello would have no impact on SDG&E's capacity to meet the maximum daily demand for gas on SDG&E's system.

Impact of abandonment on transmission capacity constraints: ORA, TURN, and SoCalGas agree that withdrawal of the working and cushion gas at Montebello will provide flowing supply that will ease transmission capacity constraints in the near term, effectively adding an average of 50 MMcfd of transmission capacity to the SoCalGas system for about seven months, and a lesser amount thereafter. As these parties point out, because the gas stored at Montebello is already in the Los Angeles basin, it does not need to be transported over interstate pipelines or SoCalGas' backbone transmission to reach customers.

ORA notes that "[g]as curtailments will ultimately depend on may factors over the next several months, but remain a possibility" and then concludes "[t]he approval of the Montebello withdrawal and sale of cushion gas will definitely alleviate the possibility of gas curtailment". (ORA ACR response, p. 3.)

Impact of abandonment on winter 2001/02 storage: SoCalGas stresses that abandonment will have no negative effect on winter storage for the core or the noncore. ORA, TURN, and SoCalGas all note that the 3 Bcf of working gas will be used for the benefit of core procurement customers - if the working gas is not needed before next winter, it will be stored in other fields. ORA explains, persuasively, why the Commission should not mandate that SoCalGas store the Montebello cushion gas:

... The sale of cushion gas will add over 50 MMcfd of gas to the SoCalGas system. There is no need to dictate that the gas be stored because it serves no purpose to do so. In essence, the sale of the cushion gas will act as an incremental flowing supply source to the system. Similar to any flowing gas supply, it can either be stored or burned by the customer.

If total flowing supply into the system (including the sale of cushion gas) is greater than demand then net injection into storage will occur and by default gas is stored on the system (in this case, the incremental addition of cushion gas implicitly resulted in gas being injected into storage). If flowing supply is equal to demand then no net injection into storage would occur, but by virtue of the cushion gas being on the system it will have added to system storage by eliminating withdrawal that would have taken place absent the incremental supply of cushion gas. By adding to flowing gas supply, the cushion gas will reduce the potential for gas curtailment during very high demand periods when flowing supply may be inadequate to meet demand. (ORA ACR response, p. 5.)

Impact of abandonment on gas prices: The parties all recognize that Southern California border prices have been extremely volatile over the last six months and continued high prices are forecast. SoCalGas has provided the following CERA forecasts through 2002:

3rd Quarter 2001 $13.48/dth

4th Quarter 2001 $ 8.46/dth

2002 $ 4.73/dth

While no one can know what the border of price will actually be in the future, ORA, TURN and SoCalGas agree that theory predicts continued high prices as long as the system continues to operate at or near capacity. Release of the Montebello cushion gas into the system should tend to exercise downward pressure on the market price of gas, ORA and SoCalGas agree, including the price of gas delivered to SoCalGas' system at the California border.

The Amended Settlement proposes that SoCalGas lock in the price of 75% of the cushion gas production in the first two years using various hedging instruments. That mechanism does not permit "gaming" of the market and thus, will not influence the price of gas, according to ORA and SoCalGas. SoCalGas states that in offering the gas for sale to the market, it has no ability to obtain anything above market price for the gas. Moreover, whatever the market price is, ratepayers benefit as well as shareholders, since gain will be shared equally under the Amended Settlement's gain on sale proposal.

6.2 Ratemaking

Proposed ratepayer/shareholder sharing ratio: TURN, ORA and SoCalGas continue to agree that the proposal that ratepayers and shareholders split the gain resulting from sale of the Montebello assets on a 50/50 is fair to both groups. In addition, the parties assert that the tax effects of the allocation of gain on sale (including so-called "Year 2" effects) are resolved in the way most favorable to ratepayers among the options reasonably under discussion.

The parties stress that the Amended Settlement is an integrated package which represents compromises by each of them. TURN and SoCalGas, particularly, state that their litigation positions would be different in some respects - but that the Amended Settlement represents concessions warranted in order to avoid the cost, uncertainty and delay of litigation.

The treatment of gain on sale of utility property has been essentially a case by case assessment and ratepayer/shareholder sharing ratios vary widely. Thus, past Commission decisions offer an array of illustrative examples but no precedent, whether the focus is depreciable property or nondepreciable property, such as the cushion gas which would yield most of the gain in this proceeding. Nonetheless, the 50/50 split proposed in the Amended Settlement is within the range of outcomes the Commission has approved in the past. In SoCalGas' view, a shareholder allocation such as this one provides an incentive to utility management to bring forward, between general rate case or PBR cost-of-service proceedings, proposals that will provide significant reductions in rates for customers.

Timing of ratebase reduction: Under the Amended Settlement, Montebello will be removed, permanently, from SoCalGas' base rate margin 60 days after Commission approval. The result is a $14.1 million reduction in rates. SoCalGas claims that this point is a substantial concession on its part and results in a mid-cycle adjustment and the foregoing of about $20 million in revenues under the presently applicable PBR formula, which is not scheduled for possible revision until 2003.

Ratepayer Allocation: The 70/30 allocation between core and noncore customers of the ratepayer gain on sale represents the general allocation of storage costs between these customer groups over the course of several past biennial cost allocation proceedings (BCAPs). The allocation of the ratebase reduction among customer classes follows allocation among these classes of the costs of Montebello in rates.

Impact of Delay: Earlier pleadings filed in support of the November Settlement well as the recent ACR responses filed in support of the Amended Settlement stress that any delay in approval of the Amended Settlement risks loss or diminishment of the substantial monetary and operational value the Montebello gas offers. Each week or month that market prices decrease above the current high, shareholders and ratepayers lose value. For ratepayers, delay also means that the Montebello assets remain in ratebase and thus, a component of the monthly rates they pay.

6.3 Other Considerations

Review of the Amended Settlement in light of the factors highlighted by the all-party settlement guidelines leads to the following observations. Regarding the first guideline, we note SoCalGas, ORA, TURN, Edison, and SCGG are the only parties, no other person or entity has sought to intervene for any purpose, and the executed Amended Settlement is unopposed.

With respect to the second, we are persuaded that the interests of the utility and its various customer groups, whether core or noncore ratepayers, have been asserted by and are adequately represented by these parties. The parties' identities are separate and their interests, substantially distinct. There is no evidence of collusion. With the exception of TURN, each of these parties also participated actively in the evidentiary hearings held in A.98-01-015 and all of them, including TURN, filed prehearing conference statements. Thus, at the time the parties entered into settlement negotiations, initial positions had been developed, subjected to detailed analysis and tested by cross-examination. We note that settlement negotiations in this proceeding commenced more than two years after A.98-01-015 was filed and more than a year after it was submitted for decision. In addition, the fact that all the signatories to the November Settlement executed the Amended Settlement shows that each one continues to support abandonment of Montebello and sale of the gas in today's market.

As for the third guideline, the parties represent that the Amended Settlement comports with statute and prior Commission decisions and in particular, has been designed to avoid conflict with or modification of D.00-09-034, which approved the CSD/SoCalGas settlement in I.99-04-022. For example, the $14.1 million ratebase reduction is separate from and does not include any ratebase adjustments attributable to the mineral rights rescission process ordered in D.00-09-034. Any revenues attributable to oil produced in association with gas recovery, which under the Amended Settlement is to be credited towards the calculation of gain on sale, will be limited to oil for which SoCalGas owns the mineral rights at the time of production. Oil revenues with respect to any mineral rights that are owned by others at the time of production, including persons to whom mineral rights are returned pursuant to D.00-09-034, will not be counted in this ratemaking calculation.

The parties meet the fourth guideline because the detail in the Amended Settlement and its appendices, as updated, provide the clarity and information necessary for us to implement the Amended Settlement and, should we need to do so, to enforce it.