III. Positions Of The Parties

A. SoCalGas

SoCalGas plans to make design changes at two of its underground natural gas storage fields, Aliso Canyon in Los Angeles County, and La Goleta in Santa Barbara County. The maximum total field inventory at Aliso Canyon is 161.5 Bcf, which consists of 70 Bcf of working gas space and 91.5 Bcf of cushion gas. Of the cushion gas, 78.1 Bcf is considered recoverable. The maximum total field inventory at La Goleta is 54.5 Bcf, which consists of 13.5 Bcf of working gas space and 41 Bcf of cushion gas. The La Goleta cushion gas is made up of 32.6 Bcf of recoverable cushion gas and 8.4 Bcf of unrecoverable cushion gas.

According to SoCalGas, at the time these storage fields were constructed, the cost of natural gas was relatively low, so the fields were designed with relatively high amounts of cushion gas. Through a combination of drilling new wells and reworking several existing wells, the redesign of these storage fields will allow SoCalGas to provide the same level of current deliverability with less cushion gas at both storage fields. SoCalGas contends that the project will provide the means to realize substantial value from the 14 Bcf of cushion gas that will no longer be needed, and which will be sold on the open market.

The current deliverability at Aliso Canyon at zero Bcf of working gas inventory is 1041 million cubic feet per day (MMcf/d). The field deliverability with 7 Bcf less of cushion gas is estimated by SoCalGas to be 834 MMcf/d. However, SoCalGas contends that the reoptimization of Aliso Canyon at 7 Bcf below zero working gas inventory will increase deliverability back to 1041 MMcf/d, thereby providing the same level of service. Although SoCalGas is still analyzing the most economically beneficial method of drilling new wells and rework of existing wells, SoCalGas estimates that the project for Aliso Canyon can be done at a cost of approximately $12 million.

The current deliverability at La Goleta at zero Bcf of working gas inventory is 250 MMcf/d. The field deliverability with 7 Bcf less of cushion gas is estimated to be 79 MMcf/d with existing wells and current operations. By reworking 4 or 5 existing wells and making some operational changes, SoCalGas estimates that it can maintain the same 250 MMcf/d withdrawal rate from zero to minus 7 Bcf working inventory. SoCalGas estimates that this work can be done for approximately $3 million.²

Since the purpose of the cushion gas is to provide minimum reservoir pressure, less cushion gas will be needed to provide the current levels of deliverability at both fields. Thus, the project will make available for withdrawal and sale 7 Bcf of cushion gas at each of the two fields for a total of 14 Bcf.

After approval of the application, SoCalGas proposes to sell the 14 Bcf of gas to the highest bidders. This gas inventory could be withdrawn at any time over the November 2001 to March 2002 period, subject to SoCalGas' existing winter balancing rules. The successful purchasers could also purchase firm withdrawal rights from SoCalGas' unbundled storage program.

SoCalGas contends that the removal of the 7 Bcf of cushion gas from each of the fields will allow it to offer more working gas inventory space for customers, and will improve the operational flexibility of the storage field. The gas storage inventory capacity at each field will be increased by 7 Bcf after the excess cushion gas has been sold and withdrawn. This will allow SoCalGas to sell up to 44 Bcf of unbundled storage to the marketplace, rather than the 30 Bcf that was established in the 2000 Biennial Cost Allocation Proceeding (BCAP). This extra storage capacity will provide customers with additional flexibility to hedge against high-cost and potentially unreliable winter supplies.

The lower reservoir pressure will also improve the performance of the existing compressors since they will be able to inject gas at a higher rate. For the last five years, the average volume injected at Aliso Canyon was 51 Bcf per year. It would take 116 days to inject this gas into storage if the compressors were running at maximum output. After the 7 Bcf of cushion gas is removed from Aliso Canyon, the same volume of 51 Bcf per year can be injected in 108 days. Similarly, for La Goleta, during the last five years, the average volume injected at La Goleta was 9 Bcf per year. This normally takes 62 days to inject this gas into storage. After the redesign, SoCalGas asserts that the same volume can be injected into La Goleta in 57 days.

SoCalGas also asserts that the project will reduce injection and operating costs. SoCalGas estimates that for Aliso Canyon, it will save about 78,000 Mcf of fuel in a typical injection year. At an assumed cost of $5/Mcf of gas, this would amount to a savings of about $390,000 per year. SoCalGas also estimates a reduction of 22,700 lbs. of NOx emissions for a typical injection year as a result of burning less fuel for injection. Since Aliso Canyon is part of the South Coast Air Quality Management District's RECLAIM program, the annual savings in RECLAIM trading credits would amount to approximately $300,000. These trading credits would be made available to other users of these trading credits.

For La Goleta, SoCalGas estimates that the redesign will result in annual injection fuel cost savings of $40,000. SoCalGas also estimates that reduced fuel consumption will lead to the reduction of 1000 lbs. of NOx emissions per year.

SoCalGas states that it will apply to the Division of Oil, Gas and Geothermal Resources (DOGGR or Division) of the California Department of Conservation for the permits necessary to drill and to rework the wells. SoCalGas plans to submit detailed plans to the DOGGR, which will include specific drill depths, surface and bottomhole locations, casing programs, blowout prevention plans, and other relevant information. SoCalGas states that DOGGR has granted permits for thousands of well drilling and rework projects that are virtually identical to this project. SoCalGas plans to use the same type of drilling equipment and techniques employed by oil and gas producers.

SoCalGas states that the only potential negative environmental issue that has been identified is ground subsidence caused by reducing the reservoir pressure when the cushion gas is removed. SoCalGas asserts that the magnitude of change in reservoir pressure for this project is much less than in depletion of a normal producing oil or gas reservoir.

According to SoCalGas, DOGGR has the responsibility under the Public Resources Code to oversee the drilling and operation of oil and gas wells and reservoirs. No other permit requirements are foreseen. SoCalGas requests that the Commission utilize DOGGR's expertise to determine if a review under the California Environmental Quality Act (CEQA) is needed for this project. SoCalGas also proposes that DOGGR be designated as the lead agency for the CEQA review, and that the Commission be designated as a responsible agency.

SoCalGas contends that the project is exempt from CEQA for several reasons. First, no Commission approval of the sale of the cushion gas is required under Pub. Util. Code § 851, and no discretionary Commission approval is required under any provision of law before SoCalGas can make the improvements. The only substantive Commission authorization which SoCalGas seeks is related to the ratemaking treatment of the project.

Second, SoCalGas contends that even if approval under § 851 is required, the project is exempt from CEQA review under the Class 1, 4 and 11 categorical exemptions, and statutorily exempt under Public Resources Code Section 21080(b)(2), as interpreted by § 15269(c) of Title 14 of the California Code of Regulations (CEQA Guidelines). The Class 1 categorical exemption includes the operation or minor alteration of existing public utility facilities, involving negligible or no expansion of use beyond that previously existing. (CEQA Guidelines, § 15301(b).) SoCalGas asserts that DOGGR has recognized that this exemption applies to conversions of existing wells, such as the work that is contemplated for some of the wells in this project.

The Class 4 categorical exemption includes minor alterations to land. SoCalGas asserts that DOGGR has interpreted this exemption to include drilling operations that result only in minor alterations with negligible effects to the existing condition of the land, water, air, and/or vegetation. (CEQA Guidelines, § 1684.2.) SoCalGas contends that the drilling of the new wells will be conducted in existing cleared areas, and that no grading or vegetation removal will be required. Also, none of the drilling will be located in an area, or performed in a manner, that could affect a stream or other water body. SoCalGas states that DOGGR has relied on this exemption in the past to exempt new wells drilled in existing oil and gas fields by SoCalGas or other persons.

The Class 11 categorical exemption applies to the construction of minor structures accessory to existing commercial, industrial, or institutional facilities. (CEQA Guidelines, § 15311.) SoCalGas contends that this exemption applies because the proposed wells are accessory to an on-going gas storage facility.

Under Public Resources Code Section 21080(b)(2), as interpreted by § 15269(c) of the CEQA Guidelines, an "emergency" is defined as a "sudden, unexpected occurrence, involving a clear and imminent danger, demanding immediate action to prevent or mitigate loss of, or damage to life, health, property, or essential public services." SoCalGas contends that California faces a need for additional electrical power supplies, and that much of the electric generation capacity in California is fueled with natural gas. During the winter of 2001-2002, natural gas service could be curtailed to meet electric generation needs. Unless more natural gas is made available, California will experience more sudden and unexpected blackouts. SoCalGas cites Governor Davis' proclamation of January 17, 2001 declaring a state of emergency with respect to the imminent threat of a widespread and prolonged electricity outage. SoCalGas asserts that the proposed project is intended to help prevent electricity blackouts from occurring.

Due to SoCalGas' belief that the categorical exemptions or statutory exemption applies, SoCalGas has not tendered a Proponent's Environmental Assessment with its application.

SoCalGas believes that the benefit to customers of making this gas available for the 2001-2002 winter season, in addition to the ongoing benefits, is substantial. At the time SoCalGas filed this application, there were low gas storage inventories, and projections that summer electrical generation demand would likely combine to produce low gas storage levels going into the 2001-2002 winter. The redesign of the two storage fields will make another 14 Bcf of storage available to serve SoCalGas' customers, and protect them from the possibility of curtailment. The 14 Bcf of gas, or about 90 MMcfd (14,000 MMcf divided by 151 winter days) is the equivalent of about a 2.5% increase in existing system capacity.

In addition, high California border prices for gas make this project financially attractive. According to SoCalGas, the futures markets are indicating that natural gas prices will average $10/Mcf during the 2001-2002 winter. The book value of the cushion gas is 31 cents/mcf. The market value of SoCalGas' proposal, net of taxes and necessary investments, will be about $64 million.³ According to SoCalGas, the market value of the gas in question exceeds the cost of extraction by an 8 to 1 factor. SoCalGas states that prompt action is necessary to achieve the financial benefits because over the long term, California border prices are expected to decline from current levels.

With regard to the project's schedule, SoCalGas believes that it is most advantageous if the gas resulting from this project can be made available for the winter of 2001-2002. In order to make the cushion gas available by that time, the well work must be started by August 15, 2001. Since 30 days will be needed after the Commission approves the project to commence the drilling operations, SoCalGas states that a Commission decision is needed by July 15, 2001. If approval of the application is delayed past this date, SoCalGas contends that this will reduce the amount of net gain, as well as the net present value of any net gain.

SoCalGas proposes that the Commission address the application in two phases so that the project can be timely implemented to realize the capacity and financial benefits. In the first phase, SoCalGas recommends that the Commission issue a decision on an expedited basis concluding that Commission approval under Pub. Util. Code § 851, or any other provision of law, is not required for the sale of the cushion gas under the circumstances described in the application. SoCalGas contends that § 851 only applies to the sale of assets that are necessary or useful for the provision of utility assets. Since the 14 Bcf of cushion gas would no longer be necessary or useful, Commission authorization under § 851 is not required.⁴ In the alternative, if the Commission interprets § 851 or another provision of the law to require Commission approval before SoCalGas is permitted to sell the cushion gas, SoCalGas requests that the Commission grant such authorization as being in the public interest.

In the first phase, SoCalGas also requests that the Commission authorize SoCalGas to retain the sale proceeds in the sum of: (1) the book cost of that gas; and (2) the cost of the additional facilities that SoCalGas will install to make the sale of the cushion gas possible. SoCalGas contends that it is only reasonable that it be allowed to retain the cost of the additional facilities because of the substantial investment involved, and the resulting benefits to SoCalGas' customers. If this treatment is authorized, SoCalGas would remove the book cost of the gas sold from rate base upon receipt of the sale proceeds, and it would not book the cost of the additional facilities to rate base. This type of treatment would not result in an increase in SoCalGas' rates to its customers. SoCalGas further states that it "is not seeking Commission assurance that it will be able to recover in rates any remainder of these costs if the sale proceeds do not exceed their sum...."

In the second phase, SoCalGas proposes that the Commission address the ratemaking treatment of the net gain on sale and related taxes, the reduction in future operating costs, the allocation of benefits among customer classes, and any other ratemaking issues that may arise out of the project and sale of the cushion gas. SoCalGas believes that it would be reasonable for it to share in a portion of the $64.3 million in net gain. SoCalGas proposes and agrees to account for the net gain on sale from the time of receipt of the sale proceeds in an interest-bearing tracking account, and that the amount in this account be subject to disposition by the Commission in the second phase.

B. Office of Ratepayer Advocates

The Office of Ratepayer Advocates (ORA) filed a protest to the application. ORA opposes SoCalGas' request for a finding that Commission approval under Pub. Util. Code § 851 is not required to reclassify and sell the cushion gas that resides in the two storage fields. ORA contends that the cushion gas is property that is necessary and useful in the performance of SoCalGas' duties, and falls within the requirements of § 851.

ORA supports SoCalGas' proposal to reclassify and sell the cushion gas on the condition that 70% or 9.8 Bcf of the 14 Bcf of reclassified gas be allocated to core customers at book cost. ORA recommends that the remaining 4.2 Bcf be sold in a competitive sealed bidding procedure, and that the net proceeds be allocated between SoCalGas and noncore customers. ORA contends that the proceeds from the sale of the remaining gas would cover the book value of the gas and the cost of the additional facilities. ORA contends that the 70% allocation is analogous to the historical cost allocation to core customers of the revenue requirement associated with storage facilities.

ORA is opposed to giving electricity generators or qualifying facilities a priority to bid on the reclassified cushion gas unless the gas is used to generate electricity that will be sold to California ratepayers at reasonable prices. ORA contends that the cushion gas should serve as an additional source of flowing supply to the SoCalGas system to help alleviate potential gas curtailments, enhance system integrity this summer and winter, increase storage inventory on the system, and to moderate gas prices at the California border.

C. The Utility Reform Network

The Utility Reform Network (TURN) filed a protest to the application as well. TURN supports the spending of approximately $14 million for the well drilling and improvements necessary to increase the inventory level of the two storage facilities, and to reclassify and sell the resulting 14 Bcf in working gas. However, TURN prefers that the reclassified cushion gas be sold, at book value plus the costs associated with the capital improvements, to SoCalGas' Gas Acquisition Department for use by core customers. TURN contends that such a sale will provide assurance that core customers will have sufficient gas in the event of a cold winter.

TURN recommends that merchant generators should not be given a priority to purchase the cushion gas unless they pass through the savings in lower electric prices, preferably under a contract with the California Department of Water Resources. Qualifying facilities should not be given a priority since their payments for electricity would not be reduced.

Another option that TURN favors is to give Pacific Gas and Electric Company's (PG&E) Core Procurement Department a priority to the reclassified cushion gas at a reasonable price. TURN states that PG&E will face similar problems in obtaining baseload or term commitments for natural gas in the coming winter season as it did during this past winter. TURN states that PG&E's core customers experienced huge price increases this past winter due to PG&E having to purchase daily border supplies. TURN contends that the low-cost cushion gas should be sold to PG&E rather than selling it at high border prices to marketers. TURN asserts that those marketers may be the same companies that refused to sell gas to PG&E, and reaped substantial benefits from the high border gas prices.

A third option that TURN suggests is to give the Gas Acquisition Department of SoCalGas a priority for at least a portion of the gas. TURN contends that this will minimize the cost-shifting from San Diego Gas & Electric Company's (SDG&E) core customers to SoCalGas' core customers that would result from the portfolio consolidation proposal submitted by SoCalGas and SDG&E in Application 01-01-021.

TURN does not agree with SoCalGas that the Commission must decide the auction methodology before implementing a project which has low costs and provides immediate and vital benefits. TURN states that the Commission should order SoCalGas to start all necessary activities as soon as it resolves any CEQA issues, and provide a memorandum account to record the associated costs. The issue of the gas sale needs to be resolved in sufficient time to ensure that the gas can be withdrawn starting in November. TURN recommends that the Commission order SoCalGas to sell the gas to its Gas Acquisition Department at a price necessary to recover the book costs and incremental capital and operating expenses, or alternatively, that the Commission allow another round of pleadings to address the sale of gas.

TURN agrees that the cost allocation and ratemaking issues be deferred to a second phase. However, TURN objects to SoCalGas' proposal that the additional storage inventory of 14 Bcf be allocated to the unbundled storage program. TURN recommends that the allocation of the storage capacity be addressed in a second phase of this proceeding.

D. California Industrial Group and California Manufacturers & Technology Association

The response of the California Industrial Group (CIG) and California Manufacturers & Technology Association (CMTA) states that the Commission should consider whether there are more appropriate uses for the reclassified gas that maximizes the benefit to the system rather than maximizing SoCalGas' revenue. That is, the Commission should examine whether there are other system uses for the gas, including whether there are adequate storage inventories for the winter season that would maximize system efficiency and help minimize the possibility of curtailments and stringent balancing requirements.

CIG and CMTA oppose any priority being given to electricity generators and qualifying facilities to purchase the reclassified cushion gas. CIG and CMTA contend that such a preference would be blatantly discriminatory, and would be unwise from a policy perspective because the Commission could become involved in examining the benefits of competing gas uses against ever-shifting economic and technical circumstances.

E. Duke Energy North America, LLC and Duke Energy Trading and Marketing, L.L.C.

Duke Energy North America, LLC (DENA) and Duke Energy Trading and Marketing, L.L.C. (DETM) support SoCalGas' application. DENA and DETM state that the release of up to 14 Bcf of cushion gas will increase the capacity of the SoCalGas system to deliver gas by about 90 MMcfd, which should reduce the possibility of natural gas curtailments next winter. DENA, which operates the South Bay generating plant in San Diego, was subject to natural gas curtailments this past winter.

DENA and DETM state that it would be prudent for the Commission to take steps to ensure that electricity generators and qualifying facilities have sufficient gas supplies at all times at reasonable prices to continue operating their plants during the current electricity crisis. One of the ways to accomplish this is to give a priority to the electricity generators and qualifying facilities to bid on enough of the reclassified cushion gas to ensure that they can keep their generators operating without interruption.

F. Division of Oil, Gas, and Geothermal Resources

DOGGR responded in a letter dated May 10, 2001.⁵ DOGGR states that before a new well can be drilled, or before the physical condition of a well can be changed, the well operator must receive written approval from the State Oil and Gas Supervisor (Supervisor). For new wells and the altering of existing wells, approval depends primarily on the following: protection of all subsurface hydrocarbons and fresh waters; protection of the surface environment; use of adequate blowout prevention equipment; and the use of approved drilling and cementing techniques.

As of May 10, 2001, DOGGR had not received any notice of intent to drill or a notice to perform well operation for either the Aliso Canyon or La Goleta storage fields. However, DOGGR reviewed SoCalGas' application, which outlined the well work which SoCalGas plans to do. DOGGR understands that the proposed wells are to be drilled on existing pads. Based on such information, if a notice of intent to drill or perform well operations is filed with DOGGR for these proposed operations, it would consider the new wells as minor alterations to land, which are categorically exempt from CEQA. The rework of existing wells in the Aliso Canyon and La Goleta fields would also be exempt from CEQA because these are existing facilities.

G. Southern California Edison Company

Southern California Edison Company (SCE) supports the release of additional gas capacity so long as SoCalGas' proposal does not negatively impact the use of available storage. SCE believes that the Commission should evaluate any unintended impacts on the availability of storage for the 2001-2002 winter season, and that the Commission should consider what, if any, conditions may be necessary on SoCalGas' storage operations to meet peak day demands.

SCE agrees with SoCalGas that the additional capacity could be highly beneficial to gas and electric consumers in the coming winter. In addition, the additional capacity may reduce the chance of curtailment to noncore customers, which might have a positive effect on the supply of electricity.

SCE recommends that the Commission consider whether safeguards should be placed on the competitive auction that is proposed by SoCalGas. One such safeguard is for the Commission to consider whether there should be a limit on the amount of gas that any one entity could obtain through the auction.

With respect to whether electric generators and qualifying facilities should be given a priority over other bidders for the sale of the reclassified cushion gas, SCE believes that the Commission needs to carefully consider the long term implications of authorizing preferences of one class of customer over another. SCE is of the opinion that ratemaking practices that involve preferences or subsidies do not protect the long term interests of ratepayers.

Instead of imposing preferences to ensure reliable electric power, SCE contends that the Commission should adopt policies that facilitate forward electric energy contracting. SCE states that forward electricity contracts would place the burden of securing firm gas supplies on the power supplier, and would eliminate the need for the Commission to impose preferences.

If the Commission decides to establish a priority for the gas, SCE recommends that it be done through the California Department of Water Resources (DWR). The Commission could then request that DWR purchase and administer a quantity of storage gas to be used by DWR to facilitate the generation of electricity during periods that the gas supply may be interrupted. DWR could then direct the gas to the least cost electric generator at the time.

H. Southern California Generation Coalition

The Southern California Generation Coalition (SCGC) filed a response in support of the applicant. SCGC states that the project would produce a temporary increase in SoCalGas' capacity to deliver gas to its customers by approximately 90 MMcf per day without burdening the interstate pipelines or SoCalGas's backbone intrastate pipelines. This increase in system capacity, together with the withdrawal and sale of cushion gas from SoCalGas' Montebello storage facility (Application A.00-04-031), should be enough so that SoCalGas' customers will avoid curtailments during winter 2001-2002. In addition, after the 14 Bcf of reclassified cushion gas is withdrawn from Aliso Canyon and La Goleta, this would increase the working inventory storage capacity by 14 Bcf. This additional storage capacity will offset the loss of inventory capacity at Montebello.

SCGC prefers to have all ratemaking issues decided at the outset. However, in order to expedite the processing of the application, SCGC supports SoCalGas' proposal to leave all ratemaking issues, other than the recovery of the cost of the project and the removal of cushion gas costs from ratebase, to a second phase of this proceeding. SCGC suggests that these ratemaking issues may be handled in SoCalGas' upcoming BCAP.

SCGC supports SoCalGas' request that the Commission give favorable consideration to SoCalGas' request for an exemption from the CEQA requirements.

With respect to whether electricity generators and qualifying facilities should be given a priority to bid on the reclassified cushion gas, SCGC has not had an opportunity to fully consider all of the implications of such a proposal. SCGC points out that one possible effect is that this could reduce the pool of bidders, which could reduce the net gain on sale.