2. Purpose of the Rulemaking

This OIR was issued in response to new reports, recent Federal Energy Regulatory Commission (FERC) orders, and ongoing changes in the natural gas market, which indicate 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.

In order to ensure reliable, long-term natural gas supplies to California at reasonable rates, it was determined that the Commission must make certain decisions in 2004 with regard to the California natural gas utilities that 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. A number of decisions and analyses related to these issues must be made this year, due to the long lead time to construct LNG facilities and due to certain deadlines in 2004 involving the expiration of existing interstate pipeline capacity contracts. In a separate rulemaking, R.01-08-028, the Commission is addressing natural gas energy efficiency programs and is exploring how to increase demand reduction efforts, including increasing funding for natural gas energy efficiency programs.

In this rulemaking, PG&E, SoCalGas, SDG&E and Southwest have been named as Respondents. The utilities were required to respond to data requests attached to the OIR and to submit proposals to address how California's long-term natural gas needs should be met with interstate and intrastate pipeline expansions, more flexible storage operations and access to proposed LNG facilities. The Commission invited all other interested parties to respond to the Respondents' proposals and to participate in this rulemaking.

Due to deadlines facing the utilities and/or other participants in the natural gas market, two phases were established in this rulemaking. In Phase I, the Respondents were required to address in their proposals those matters, which may require a Commission decision prior to October 2004.

The OIR ordered the Respondents to file, by February 24, 2004, Phase I proposals for rules providing guidelines for how they should:

1. enter into contracts with interstate pipelines (whether new contracts or renewals of existing contracts) to meet core supply obligations;

2. provide access on intrastate pipelines to LNG supplies; and

3. provide access to interconnecting facilities with interstate pipelines to increase California's access to natural gas supplies.

The OIR stated that Phase II would address those matters that can be decided by the end of this year and ordered the respondents to file their Phase II proposals regarding the following:

1. how the designated utilities should provide emergency reserves consisting of slack intrastate pipeline capacity, contracts for additional firm interstate pipeline transportation rights, and supplies of natural gas in storage dedicated for emergency needs;

2. the process by which the utilities would keep the Commission informed about the infrastructure and services provided to noncore customers, and to propose a crediting mechanism in the event a noncore backstop recovery charge is adopted.

3. new ratemaking policies that will be consistent with the goal of ensuring adequate and reliable long-term supplies of natural gas at reasonable rates to California.

This decision addresses Phase I issues only.