II. Background

PG&E's application was filed on October 8, 2001 in response to D.01-09-016. D.01-09-016 directed PG&E to file an application proposing a market structure and rules for its intrastate gas transmission system and storage system for the period beginning January 1, 2003, when most of the provisions of the Gas Accord were to expire.⁴ PG&E's application proposed that the existing Gas Accord market structure, rates, and terms and conditions of service be extended for a two-year period, i.e., through the end of 2004, or until PG&E's assets were transferred to the jurisdiction of the Federal Energy Regulatory Commission (FERC) as requested in PG&E's Chapter 11 bankruptcy filing. Protests and responses to PG&E's application were filed.

Following the January 7, 2002 prehearing conference, the assigned Commissioner and administrative law judge (ALJ) issued a scoping memo and ruling (scoping memo) on February 26, 2002. The scoping memo described the primary issue as whether the existing Gas Accord structure and rates should be extended for an additional two years. The scoping memo also identified other outstanding issues, and set the evidentiary hearings for August 2002.

On May 20, 2002, PG&E and 13 other parties filed a "Joint Motion For Approval Of Gas Accord II Settlement Agreement And Request For Shortened Comment Time," and a "Joint Motion To Change The Procedural Schedule For Litigation Of Scoping Memo Issues." On June 4, 2002, PG&E filed a motion to supplement the Gas Accord II Settlement Agreement with the signature pages of four additional parties. In a July 9, 2002 ruling, the ALJ granted the joint motion to change the procedural schedule, and the motion to add the additional signature pages to the settlement. Granting the motion to change the procedural schedule allowed us to focus on whether the proposed Gas Accord II Settlement Agreement should be adopted.

On August 22, 2002 in D.02-08-070, we granted the joint motion to approve the Gas Accord II Settlement Agreement. Pursuant to the settlement agreement, the market structure, rates, and terms and conditions of service for PG&E, which were adopted in D.97-08-055 and modified in D.00-02-050 and D.00-05-049, were extended through December 31, 2003 for gas transmission, and through March 31, 2004 for gas storage. The procedures and guidelines for contracting for gas transmission and storage services, as agreed to in the Gas Accord II Settlement Agreement, were also approved.

As part of the settlement, PG&E and the other settling parties reserved the right to seek a rate increase or to address the structure, rates, and terms and conditions of service for gas transmission and storage services for the period beginning January 1, 2004.

Due to the one-year extension, the issue of what PG&E's gas structure and rules for the time period after 2003 should look like, as well as the other issues identified in the scoping memo, remained outstanding. In ALJ rulings dated September 30, 2002, December 9, 2002, and February 14, 2003, the schedule for resolving these issues was established. The September 30, 2002 ruling directed PG&E to include a cost of service study in its prepared testimony for the purpose of evaluating "what the gas structure for 2004 should look like, and whether the existing Gas Accord structure should be continued in 2004." (ALJ Ruling, September 30, 2002, p. 7.) The ruling also directed PG&E to include a rate proposal for 2004.

In response to the rulings, PG&E filed its "Gas Accord II Amended Application" on January 13, 2003, along with its prepared testimony. PG&E's cost of capital testimony was stricken from this proceeding in the February 14, 2003 ALJ ruling.⁵ The other parties served their prepared testimony on February 28, 2003, and the rebuttal testimony of all the parties was served on March 24, 2003. Eleven days of evidentiary hearings were held in April 2003. Eighteen opening briefs were filed, and sixteen reply briefs were filed. Following the filing of reply briefs on June 2, 2003, the proceeding was submitted for our consideration.

⁴ In D.01-09-016, the Commission referred to the market structure and rules for the period beginning January 1, 2003 as Gas Accord II. ⁵ The ruling also stated that if the cost of capital proceeding for test year 2004 was not completed in time to be inputted into the rates that are being considered in this proceeding, the cost of capital established in D.02-11-027 should be used as a placeholder.