XXV. Operating & Maintenance - Gas Storage
(SoCalGas)

SoCalGas operates underground gas storage facilities. In D.01-12-018, the Commission adopted a CSA that modified the market and regulatory framework for regulating the transportation and storage of natural gas on SoCalGas' system. On April 1, 2004, the Commission issued D.04-04-015, which does not establish new polices and does not modify either the CSA or D.01-12-018. However, it was stayed pending the issuance of a decision in Phase I of Order Instituting Rulemaking 04-01-025.²⁵⁰ SoCalGas stated that in this decision the Commission must adopt a revenue requirement for gas storage (to make it financially whole) to be effective from January 1, 2004, until such time as the CSA is implemented. The revenue requirement would be subject to the same memorandum account as all Test Year 2004 revenue requirements adopted in D.03-12-057. In light of the stay on D.04-04-015, it is possible that this revenue requirement will be in effect for some time.

There are five accounts where parties litigated significant issues that we resolve in this decision. Except for those items, we otherwise adopt SoCalGas' end-of-litigation position for gas storage operating and maintenance (O&M) expenses for Test Year 2004. SoCalGas stated that for all gas storage O&M accounts it consistently took a base year of 2001 and then made forecast adjustments. As discussed, we accept the method as appropriate, subject to the specific details of the individual account.

ORA applied a three-year average to 18 accounts, 814 through 837, and for 14, the three-year average was lower than SoCalGas' estimate, and ORA accepted the estimates.²⁵¹ ORA took exception to two accounts, 814 and 824.

A. SoCalGas Account 807 - Gas Acquisition Costs

The SoCalGas Comparison Exhibit, Ex. 149, reflected a difference of $186,000 in the results of operations spreadsheets for SoCalGas and ORA. The parties agreed that Account 807 should be reduced by $186,000 associated with upgrading technology for the Gas Acquisition Group; these costs should have been capitalized.²⁵² The adopted revenue requirement reflects this change.

B. FERC Account 814 - Engineering and Supervision

SoCalGas forecast a large increase in Account 814 - Engineering and Supervision which was explained in terms of significant changes due to the Cushion Gas Project adding 14 billion cubic feet of inventory capacity, a new geologic model to manage and diagnose the storage fields²⁵³ as well as Pipeline Integrity Management and other changes identified for planning and management control.²⁵⁴ SoCalGas also argued that an average, as used by ORA, ignored the upward trend in costs in the most recent years. ORA did make an addition to the average to reflect Pipeline Integrity²⁵⁵ but we are not convinced that the average, which ignores both the recorded trend and all specific detailed changes, is more appropriate than SoCalGas' estimate. We will adopt SoCalGas' 2004 estimate of $6.647 million.

Local 483 raised objections to the level of supervision and crew sizes at the storage facilities. It argues that all stations - compressor and storage - should have two-person crews at all times for both safety and site security reasons. Specifically, Local 483 proposes an increase of 14 full-time equivalent positions would provide better protection for terror threats and emergencies including fires and leaks.²⁵⁶

SoCalGas responded that it has increased its expert security and has added lights, cameras, etc., to enhance security. We do not think that Local 483's members can be expected to provide any enhancement to security. Local 483 personnel have not been shown to be trained as security experts. We accept SoCalGas' assertion that the new automatic monitoring systems can accurately and instantly detect and report leaks or equipment failures and new security measures will detect intrusions.

SoCalGas pointed out that some positions were eliminated because two storage fields have been closed and because of increased automation and computerization of compressor and storage field operations.²⁵⁷ We have seen no evidence that SoCalGas has been operating in an unsafe manner and that automation has had any adverse effects. We will not adopt any adjustment to increase labor at storage fields and compressor stations.

Local 483 also argued that SoCalGas violated its contracting policies. We do not find that Local 483 supported its assertion that SoCalGas unreasonably violates its own contracting policies and practices.²⁵⁸

Local 483 proposed that all penalties or fines that may be imposed by governmental agencies for spills of hazardous materials or other violations of rules, procedures and regulations should not be recoverable through rates. Local 483 did not assert or identify any charges as embedded in the test year estimates.²⁵⁹ We need not resolve the abstract; depending on circumstances at the time, it may be reasonable to allow recovery. For example, we allow recovery of hazardous waste clean up within certain parameters and subject to our review. We will not adopt this proposal.

C. FERC Account 824 - Other Expenses

ORA used a three-year trend and opposed as inadequately supported the requests for enhanced security, change in capitalization policy and additional environmental monitoring costs. But we cannot find an average as adequate to address known changes. ORA's testimony did not describe what would have been adequate to document the costs for these increased activities. TURN argued that one cost component, increased security, was already in effect even though recorded costs were declining.²⁶⁰ We will adopt the applicant's estimates but note that any shortfall in actual expenditures on labor will be captured in the TLCBA.

D. Other Gas Storage Adjustments

Several accounts, 825 - Storage Wells Royalties, 832 - Maintenance of Reservoirs and Wells, and 835 - Maintenance of Measurement & Regulation Station Equipment were changed in SoCalGas' errata, Ex. 5E with the result that the figures varied from those reviewed by ORA. Absent specific proposals from other parties, we adopt these and any other updates in the SoCalGas end-of-litigation position.

E. SoCalGas Account 832 - Maintenance of Reservoirs and Wells

TURN proposed a disallowance of 50% of the increase for maintenance of wells and reservoirs and argued that SoCalGas did not adequately account for the 2001 increase in costs. The rate of this increase is very high: 23% over 2001 (and 2001 costs were already high), with overruns in the well rework activity at Aliso Canyon.²⁶¹ Although we have generally been reluctant to accept recommendations for blanket reductions without specific supporting calculations, we made an exception here. These costs are not labor, and cannot be captured in the TLCBA should the estimate prove to be too high. SoCalGas did not brief this issue, and we accept the arguments made by TURN that the proposed increase is too high. We will adopt TURN's adjustment for $0.252 million in Test Year 2004.

F. O&M - Gas Transmission

There are six accounts where ORA litigated significant issues that we resolve in this decision. SoCalGas provided an overview of the gas transmission functions and an explanation of the costs recorded in each account. In addition the applicant explained how the activities and costs changed from the base year to the test year.²⁶² This was consistent with the general SoCalGas and SDG&E method of forecasting previously discussed. Except for those items and Accounts 855 and 859 below, we otherwise adopt as reasonable SoCalGas' end-of-litigation position for gas transmission O&M expenses for Test Year 2004.

1. Three-Year Average Method

ORA accepted the forecast method, explanations and results for eight accounts (plus changes to two others discussed below) where the applicant's estimates were lower than an estimate based on an average of those accounts. For the four others, ORA proposed a three-year average with only two specific factor adjustments for Pipeline Integrity and capitalization.²⁶³ ORA's testimony again cited only a lack of a detailed analysis of the estimate by SoCalGas. The original testimony (Ex. 4) was not voluminous (20 pages) but did provide sufficient descriptions of programs and changes. In rebuttal Ex. 94, SoCalGas provided further explanations and showed that it had answered detailed data requests by ORA. Although we have expressed concern over the relatively large amount of rebuttal, and the primary obligation for SoCalGas (and SDG&E) is to "make the case" in the direct or initial showing, ORA did not explain to us why we cannot rely on the estimates as proposed by SoCalGas.

The use of an average mutes trends up or down, assuming that a trend would even be relevant. To be relevant, it would be necessary to show that activities were essentially constant in nature and the cause of the trend, such as the trend in customer growth, was stable and predictable. We are not offered any reasonable justification why we should use an average method of forecasting instead of a forecast that is based upon known or expected changes to the base year.

For Accounts 851, 856, 860 and 865, we will rely on the explanations and justifications offered by the applicant and we will not default to a three-year average. Again, any shortfall in actual expenditures on labor will be captured in the TLCBA.

2. Other Gas Transmission Adjustments

Account 850 - Engineering and Supervision and Account 859 - Other Expenses were changed in SoCalGas' errata, Ex. 4E and Ex. 6E with the result that the figures varied from those reviewed by ORA. Absent specific proposals from other parties, these up-dates in the end-of-litigation position for SoCalGas are adopted.

3. Account 855 - Electric Fuel

SoCalGas forecasted $1.345 million in expense to operate the Sylmar compressor station and it conceded that these costs could be recovered in the BCAP where the Commission addresses gas commodity acquisition and other related costs. But, SoCalGas pointed out these are new costs not already recoverable through prior orders of the Commission and that a decision in the next BCAP may lag this decision and certainly lags the January 1, 2004 effective date of the memorandum account authorized by D.03-12-053 in this proceeding.²⁶⁴

TURN recommended that we defer the issue to the BCAP. We are mindful that if the estimate is in error, SoCalGas would, all other things being constant, over- or undercollect by some amount, but there is no reason to deny any opportunity to recover 2004 operating expenses for this station. ORA accepted the forecast and TURN did not dispute the forecast, only the timing of recovery.

We will authorize SoCalGas to recover in rates the forecast $1.345 million in expense in this proceeding. To delay authority to the BCAP would be to deny recovery of costs prior to that decision even though the station now operates electrically.

4. SoCalGas Account 857

TURN proposed disallowing 50% of the costs for maintaining additional equipment at Kramer Junction and North Needles, arguing that SoCalGas will not hire any new personnel to monitor this equipment.²⁶⁵ In its Reply, SoCalGas argued that even if existing employees perform the work with overtime the expense should be recoverable. Oddly, this is a situation where SoCalGas is criticized for not proposing to hire additional employees, only overtime by existing employees would provide the labor to perform the tasks. We will not make the adjustment, and if the labor cost is not expended, then the TLCBA will return it to ratepayers.

5. SoCalGas Account 859 - Other Expenses

TURN expressed a concern that the applicant was over-compensating for inflation on $495,000 in Department of Transportation fees and operating permit costs and proposed that the costs should not be subject to non-labor inflation.²⁶⁶ SoCalGas responded in rebuttal that the fees are mileage based and the fee rate has been rising at the rate of inflation. SoCalGas stated that other costs for waste disposal, etc., will increase its costs too.²⁶⁷ We will accept SoCalGas' estimates; it does not appear that the cost estimates are over-adjusted for inflation.

6. Local 483 Issues

Local 483 made its first formal appearance before the Commission as an interested party in this proceeding. In the discussion where we reject the Proposed Settlement for SoCalGas, and briefly in Account 814 - Engineering and Supervision, we have already discussed some of Local 483's concerns. Admitted into the record are 13 exhibits (a total of 40 were identified but 27 were not received into evidence), including Ex. 850, which was four pages of prepared direct testimony by the president of Local 483, that contained 11 specific recommendations. Local 483 did not file briefs although parties to the Proposed Settlement were directed by ruling to file a litigation position brief as if there was not a settlement proposal. In its brief, SoCalGas argued only that if we adopted the recommendations we must include funding in the revenue requirement.²⁶⁸ We lack any summation by Local 483 on its final recommendations.

We will briefly review the recommendations of Local 483.²⁶⁹

1. Local 483 recommended that the incentive compensation programs should not be funded. We addressed this issue in depth elsewhere and found the programs to be within the market rate of compensation. Local 483 raised the issue that in collective bargaining its members declined SoCalGas' last offer. We will not consider a recommendation based on Local 483's collective bargaining position; we adopt labor expenses based upon the expected number of employees and, for represented employees, the outcome or forecast of collective bargaining agreements. We cannot allow our ratesetting proceedings to become an alternative bargaining arena.

2. Local 483 proposes that all hazardous spills should be reported to the Commission's staff²⁷⁰ and cleanup costs should not be borne by customers. It is not established and Local 483 did not show that test year 2004 contains an allowance for amortizing past fines or for anticipated fines. We will not make any determination here; any attempt to recover fines can be addressed if and when the company seeks specific recovery. We have no evidence on the benefit or need for reporting to the Commission staff nor has it been shown in this record that we have any enforcement jurisdiction. We will not establish new reporting requirements.

3. Local 483 proposes that 14 more employees, two at all compressor stations and storage fields at all times could be a terrorist deterrent. We addressed this previously and do not adopt it. Local 483 also suggested that additional workers would reduce the backlog on work orders. The specific accounts are addressed elsewhere and we adopt an appropriate labor estimate based on the record in the specific discussion of each account.

4. Local 483 argued for one more specialist position for cathodic protection maintenance and inspection. We also adopt the labor estimate elsewhere that adequately addresses cathodic protection equipment inspection and maintenance. We will not act separately on this recommendation.

5. Local 483 expressed its concerns about other fines and assessments that may have occurred that should not be recovered in rates. Again, there is no evidence in the record that any actual or anticipated fines are in the Test Year 2004 estimates and we will not act on this recommendation.

6. Local 483 asked for an independent study of SoCalGas' contracting practices. This appears to be a collective bargaining issue. We rely upon ORA to perform an exhaustive review of SoCalGas' business practices as a part of its review of test year forecasts. Implicit in that is the expectation that ORA can identify instances where contracting may or may not be an appropriate alternative. We set rates based upon economic considerations and not on policy choices that otherwise favor or disadvantage full-time employees, represented or not. We will not act on this recommendation.

7. Local 483 offered the opinion that management and non-represented employees who smoke should make higher employee contributions to medical plan costs. It did not offer that this should also apply to its own represented members or other represented workers that smoke. No evidence was offered that this was practicable or subject to any quantification. We will not act on this recommendation.

8. Local 483 suggested that a formal utilization plan for storage fields and compressor stations should be prepared. No brief that might have constructed an argument for this was filed and we have no other findings that suggest SoCalGas' operations are not efficient. We will not act on this recommendation.

9. Local 483 recommended that SoCalGas should obtain building and safety permits when it "makes new installations or additions to buildings, electrical systems or anything else unrelated to gas piping for Transmission and Storage that would otherwise require a building permit and inspection."²⁷¹ Under cross-examination SoCalGas' witness responded, "I think that all electrical installations need to be done to code to protect the safety and reliability. There is a precedent in the state court of appeals that says that utilities are not required to seek local permits for infrastructure required to actually move the molecules or the electrons. And based on that, there are times when we do not get permits."²⁷² It is our intention that in adopting Test Year 2004 revenue requirements that SoCalGas (and SDG&E) will operate their system safely and will, at all times, ensure that the proper design, construction and maintenance practices are used, their systems will comport with all applicable Commission General Orders, and that all necessary permitting shall be obtained. We need not act on Local 483's recommendation.

²⁵⁰ D.04-04-015, OP 4, mimeo., p. 81.

²⁵¹ Ex. 301, Chapter 6, and Sempra opening litigation brief, p. 116.

²⁵² Sempra opening litigation brief, p. 245.

²⁵³ Ex. 108, p. 4.

²⁵⁴ Ex. 6, pp. 15-19 and Ex. 101, p. 12.

²⁵⁵ Ex. 301, Table 6-2.

²⁵⁶ Ex. 850, Recommendation 3 on un-numbered p. 3.

²⁵⁷ Ex. 108, pp. 6-9.

²⁵⁸ Ex. 850, Recommendations 7 and 8 on un-numbered p. 3.

²⁵⁹ Ex. 850, Recommendations 2, 5 & 6 on un-numbered pp. 2 and 3.

²⁶⁰ TURN opening litigation brief, p. 54.

²⁶¹ TURN opening litigation brief, pp. 54-56.

²⁶² Ex. 4, pp. MDM-7 through MDM-19.

²⁶³ Sempra opening litigation brief, p. 109.

²⁶⁴ Sempra opening litigation brief, p. 111.

²⁶⁵ TURN opening litigation brief, p. 50.

²⁶⁶ Ex. 501, p. 3.

²⁶⁷ Ex. 131, pp. MDM-3 and MDM-4.

²⁶⁸ Sempra opening brief, p. 112, and p. 120.

²⁶⁹ All discussion is based upon the positions of Local 483 in Ex. 850.

²⁷⁰ The Consumer Protection and Safety Division has a Safety and Reliability Branch.

²⁷¹ Ex. 851, un-numbered p. 4, paragraph 11.

²⁷² Transcript, p. 1,372, lines 13-19.