VII. Contract Extension and Open Season
A. Background
PG&E proposes to implement a contract extension and open season process that is substantially the same as the process adopted for 2003 in D.02-08-070. The process would allow for the re-contracting of transmission capacity in 2004, and storage capacity for the 2004-2005 storage season.33 The most significant departure for the open season, is that PG&E proposes to offer a limited amount of capacity for a longer term of up to 15 years, as discussed in the transmission section. Another difference is that negotiated transmission contracts may only be extended at the appropriate maximum allowable rate under the negotiated tariff. The details of PG&E's contract extension and open season process are set forth in Appendix A of Chapter 7 of Exhibit 1.
1. Summary of Proposed Contract
Extension Process
If the Commission adopts PG&E's proposal to continue the Gas Accord market structure beyond 2003, PG&E believes that a re-contracting process is needed to allocate firm rights to PG&E's transmission and storage capacity in a transparent and non-discriminatory manner. PG&E proposes a two-phase process for re-contracting for PG&E's transmission and storage capacity. In the first phase, PG&E proposes to allow existing firm contract holders in 2003 the option to extend their contract from January 1, 2004 until the earlier of the end of the proposed 2004 gas structure period, or the effective date PG&E's gas transmission assets are operated under the jurisdiction of the FERC, if this occurs. The option to extend would be offered to those that meet PG&E's creditworthiness standards as defined in PG&E's Gas Rule 25. The capacity holders would be allowed to re-contract for the same contract quantity as in their existing contracts, or less, as long as the requested contract quantity is reduced by an equal amount in all months.
If capacity holders have capacity for all 12 months of 2003, PG&E proposes that they be offered an option to extend capacity on an annual basis. Seasonal capacity holders would be allowed to extend in 2004 for the same months that were contracted for in 2003. If the capacity was assigned, PG&E proposes to provide the assignee with the contract extension option if the assignee was assigned the rights through the end of the contract. If the assignee was assigned the capacity for only a few months in 2003, and the capacity returns to the assignor before the end of the contract, PG&E proposes to offer the extension rights to the assignor. PG&E will also honor an agreement between the assignee and the assignor regarding who shall have the right to extend, if the parties send a letter to PG&E signed by both parties prior to the close of the contract extension period.
PG&E's contract extension option will be offered at the standard annual tariff rate for annual capacity, and at the seasonal tariff rate for capacity extensions of less than 12 months in a year. PG&E proposes to allow transmission contracts with negotiable rates and terms to be extended at the maximum allowable rate under the negotiated tariff or under the annual firm tariff if the contract is for 12 months.
PG&E proposes that negotiated firm storage capacity holders be offered a new extension price at the start of the contract extension process. The capacity holder can extend the contract at the new price, or release the capacity.
2. Summary of Proposed
Open Season Process
The second phase of PG&E's proposal would take place following the contract extension process. PG&E proposes to hold an open season for any uncontracted annual Redwood or Baja capacity. PG&E proposes to offer up to 400 MDth per day of Redwood Path capacity and 200 MDth per day of Baja Path capacity for a maximum term of 15 years. PG&E would also offer in the open season any unsold or storage capacity not taken by shippers during the contract extension process. The open season would be open to all entities that meet PG&E's Gas Rule 25 creditworthiness standards.
For annual transmission capacity, open season participants will need to specify either the Redwood or Baja path, the delivered daily contract quantity, the contract's reservation charge structure (either SFV or MFV), and the term. PG&E does not propose to offer seasonal or negotiated contracts in the open season. All capacity requests would be binding.
PG&E proposes to limit the capacity requested on any path for any open season participant, including affiliated entities, to the capacity available in the open season. Any entity with a 50% or greater ownership interest in another entity will be considered an affiliated entity. Before applying the award criteria to the capacity requests, PG&E proposes to prorate all capacity requests from affiliated entities until the aggregate request for that path is equal to the capacity available in the open season.
PG&E also proposes to continue to limit the amount of total capacity that affiliated entities can be awarded in the open season and the contract extension process. In D.02-08-070, the Commission adopted a market concentration limit of 30% of the firm capacity, after the capacity set-aside for CPGs, wholesale customers, and SMUD's equity capacity. PG&E proposes the same market concentration limit for 2004. The maximum capacity limit for Redwood has increased to 410 MDthd from 400 MDth/d because of the recent increase in Redwood capacity. The capacity limit on the Baja Path would remain at 240 MDth/d.
PG&E proposes to continue to post the quarterly reports that were approved in D.02-08-070 on its Pipe Ranger web site during the 2004 period.
3. Participation of PG&E
Department in the Open Season
PG&E's Core Procurement Department may require an additional 204 MDth/d of Baja capacity for 2004 to match the firm interstate capacity holdings at Topock. The amount of firm interstate capacity at Topock held by the core is to be decided in Phase II of the El Paso Capacity proceeding. PG&E proposes that any additional capacity for PG&E's Core Procurement Department be directly assigned to the core before the contract extension process. If additional Baja capacity is assigned to the core, the remaining Baja capacity may be insufficient to fully satisfy all customers who may want to exercise their extension rights for 2004. If this occurs, PG&E will prorate the extension rights and notify the customers of this before the start of the contract extension process.
PG&E still owns about 300 MW of gas-fired utility owned electric generation (UEG). PG&E proposes that UEG be permitted to participate in the open season for capacity in 2004, subject to the same rules and restrictions which were approved in D.02-08-070. Under those rules, UEG would be permitted to participate in the open season, and the UEG's capacity request would be subject to the same capacity request limits as the rest of the market. The UEG's capacity requests will be combined with those from PG&E's National Energy Group for purposes of determining the capacity request limit and the market concentration limit. UEG will also be required to submit its capacity request four business days prior to the open season deadline so that PG&E may provide cogenerators with notice of the UEG's bid as required under the cogeneration parity rules. PG&E also proposes to limit the amount of capacity that can be awarded to the UEG in the contract extension and open season process to its MDQ.
4. Other Proposals
Some parties have suggested that for contract extensions of negotiated contracts, the extension price should be the negotiated price. Others propose that a full open season be held, instead of having a limited open season after existing contracts have been extended.
NCGC proposes that the Pipe Ranger website list both the name of the capacity holders, and the amount of capacity reserved by these customers.
B. Position of the Parties
1. CCC/Calpine
PG&E proposes a new contract extension and open season process for re-contracting transmission capacity. Although the proposal is substantially similar to the extension process that the Commission approved in D.02-08-070, one major change is that PG&E proposes that holders of negotiated transmission contracts not be allowed to extend their contracts unless they agree to pay the maximum allowable 2004 rate under the negotiated tariff, or under the firm tariff if the contract is for 12 months. That is, under PG&E's proposal, all existing customers would be allowed to extend their existing backbone and local transmission contracts, except for those with negotiated rates. For the ones with negotiated rates, they must agree to increase their rate for service to the maximum tariff rate in order to extend their contract.
CCC/Calpine contend that this part of PG&E's proposal should be rejected. Instead of providing commercial certainty to gas industry participants, which is what PG&E's contract extension process is supposed to do, PG&E's witness acknowledged that rate increases for formerly negotiated rate customers would be a considerable disruption to their businesses. (4 RT 396.)
CCC/Calpine also assert that the proposed process is not fair because customers that previously had discounted contracts will likely not be able to justify a new discount over a one-year contract term, leaving the customer in an unfair negotiating position with PG&E for 2004.
PG&E argues that it should not be required to extend negotiated contracts at the negotiated rate. CCC/Calpine assert that all of PG&E's contracts for transmission service are regulatory creatures. If the Commission approves the extension of contracts at tariff prices, it can also approve the extension of contracts at negotiated prices.
CCC/Calpine contend that PG&E's witness acknowledged that the proposal for extending contracts could be unduly discriminatory because the Commission's non-discrimination requirement means that PG&E cannot provide unequal access to capacity or provide unequal treatment in respect to rates unless there is a legitimate justification. (4 RT 395.) Without a valid basis for refusing to extend negotiated contracts, that part of PG&E's proposal has a discriminatory effect. PG&E's proposal should be modified to conform its contract extension proposal to match the procedure adopted for negotiated contracts in D.02-08-070.
NCGC proposes that if the open season bids for 2004 transmission or storage capacity exceed the available transmission or storage capacity that remains after the roll over of the 2003 contracts, PG&E should then conduct a full open season for all transmission or storage capacity. CCC/Calpine contend that this proposal should be rejected. NCGC's proposal would essentially render PG&E's contract extension proposal moot if demand is greater than supply.
2. DGS
PG&E proposes to use a contract extension process followed by an open season process. Although the contract extension process allows current capacity holders to maintain their capacity, DGS contends that this process grants existing contract holders rights that are superior to other customers. DGS supports a new open season, rather than a process which favors the extension of existing contracts.
DGS suggests that the new open season provide end-use customers with a priority. To prevent gaming by end-users who have marketing affiliates, DGS suggests that the Commission and PG&E control the open season by barring bids that are in excess of expected demand. Only after end-use customers have been afforded all the capacity that they may desire, marketers and marketing affiliates should then be permitted to submit bids for capacity.
DGS also believes that the rights of PG&E as agent for DWR and the electric vendor need to be addressed. That is, should PG&E acquire backbone capacity to serve the contracts or does the vendor give the capacity to PG&E. The outcome of this could affect how PG&E does its job under the Fuel Supply Plans. DGS states that this can be addressed as part of the approval of the Fuel Supply Plans for PG&E or as part of this decision.
At page 7-6 of Exhibit 1, PG&E proposes that the electric generators, including utility electric generators, be permitted to participate in the open season for capacity in 2004. DGS states that PG&E's UEG open season bidding in the Gas Accord was the single biggest cause of dislocation in the market. PG&E UEG bid approximately 700 MMbtu /d for Redwood capacity, when the total open season offering for the Redwood path was about the same amount. Since PG&E seeks the capacity to be used with its peaker plants, DGS states that PG&E should be restricted to a seasonal bid, or a UEG bid should be restricted to its historic needs. Alternatively, DGS suggests that the Commission offer PG&E's UEG the volumes it seeks. If it is not needed by UEG, then PG&E could make the capacity available in the marketplace and return the revenue to an appropriate electric account.
3. NCGC
NCGC contends that there is no provision in the Gas Accord II settlement, approved in D.02-08-070, which permits 2003 contracts to be rolled over to 2004.
NCGC supports PG&E's proposal to roll over the 2003 transmission and storage contracts to 2004, unless the bids for remaining capacity for 2004 exceed the available capacity. If such a situation develops, NCGC advocates that a full open season be held for all of the transmission or storage capacity. NCGC contends that such a process would be fairer to those customers that did not hold capacity in 2003.
NCGC supports giving noncore end-use customers a preference for capacity through an open season process. NCGC asserts that an open season preference for end-users will assure that end-users have the opportunity, regardless of whether they actually make use of such opportunity, to gain upstream access from the PG&E citygate to interconnections with interstate pipelines and, ultimately, gas producers and marketers in producing basins. NCGC contends that such access can provide insurance against citygate price spikes and substantial basis spreads between upstream points and the PG&E citygate. Also, end-user access to backbone transmission capacity will promote greater competition among gas producers and marketers.
PG&E asserts that an end-user preference may create an incentive for gaming. An end-user that has a marketing affiliate could use its end-user preference to acquire capacity rights ahead of other shippers that may not have an affiliated end-user that can bid for them. NCGC contends that this possible gaming can be addressed by prohibiting an end-user from transferring capacity acquired through the exercise of the end-user preference to an affiliated marketer.
PG&E also notes that there is no need for an end-user preference because any end-user that holds capacity in its own name is very likely to receive a firm capacity award for 2004 if they submit a bid. NCGC contends that if this is likely to occur, there should be no concern about granting an end-user a preference.
NCGC's testimony states that the Pipe Ranger website currently lists the names of capacity holders. NCGC favors augmenting this information by showing the capacity reserved by these customers.
4. PG&E
PG&E proposes to implement a contract extension and open season process that is substantially the same as the one adopted for 2003 in D.02-08-070, with two changes. This process would take place in two steps. The first step is to allow existing firm contract holders in 2003 to extend their contracts through the 2004 period. In step two, an open season will be held for the remaining uncontracted annual transmission or storage capacity.
Two changes are being proposed for the open season. First, the open season will offer a limited amount of transmission capacity for a longer term of up to 15 years. Second, transmission contracts with negotiated rates will only be allowed to extend at the appropriate maximum allowable rate.
PG&E contends that this two-step process will promote stability in the gas market by providing commercial certainty to gas industry participants, provide stability while dealing with the Bankruptcy Court, and minimize potential disruption to PG&E customers.
NCGC asserts that there was no provision in the Gas Accord II settlement, approved in D.02-08-070, which permitted 2003 contracts to be rolled over to 2004. NCGC argues that the Gas Accord II settlement anticipated that a full season would be conducted for 2004 capacity. PG&E contends that the Gas Accord II settlement was silent on contracting for 2004, and did not anticipate that a full open season would be conducted for 2004 capacity.
NCGC suggests that if the demand for capacity exceeds the amount remaining after permitting the roll overs, that a full open season be held. PG&E contends that a full open season is not warranted and is not required, especially since this proceeding is only considering a one-year contracting period. PG&E also contends that it is unlikely that the requests for firm capacity will exceed what is available. PG&E also asserts that NCGC's proposal is not workable given the time constraints of having new contracts in place for January 1, 2004. PG&E also contends that invalidating contracts that have already been extended would be a bad idea. PG&E says that many customers may have hedged their positions, and terminating the contracts would have significant financial implications for such customers.
NCGC supports giving noncore end-use customers a preference for capacity during PG&E's open season. PG&E does not believe this is necessary because under PG&E's proposed contract extension process, end-users or their suppliers will continue to have capacity if they want it. In addition, the market demand for capacity by end-users is very low, and annual firm capacity requests have not exceeded the amount of firm capacity that is available. Also, NCGC's proposal is not desirable because not all end-use customers are in a position to hold backbone capacity. If the demand for firm capacity is high, and if end-users were able to bid for capacity for their marketing entities ahead of other gas marketing companies, some customers could be disadvantaged if their gas supplier could not obtain the appropriate amount of capacity to serve their needs.
CCC/Calpine suggest extending negotiated contracts at the negotiated contract price as part of the open season process. PG&E opposes such a request because it should not be forced to accept the terms of a negotiated contract that was entered into for a specific period of time under particular market conditions.
PG&E also opposes NCGC's proposal that PG&E post the firm capacity holdings of each firm shipper on the Pipe Ranger bulletin board. PG&E opposes the disclosure of this information because of the commercially sensitive nature of the data, and because there are other provisions in place for posting and monitoring market concentration data.
C. Discussion
PG&E proposes to allow existing contract holders to extend their transmission and storage contracts for 2004, followed by an open season for the remaining capacity. Other parties favor a full open season, or that a full open season be held if demand after the extension of existing contracts exceeds the remaining available capacity.
In order to address the type of process that should be authorized, we must return to the issue of what type of gas market structure should be authorized for 2004. As part of PG&E's proposed gas market structure for 2004, PG&E proposes that existing transmission and storage contract holders be allowed to extend their contracts into 2004 under certain conditions, and that any open season be held afterwards for any remaining capacity. The Gas Accord II Settlement Agreement, adopted in D.02-08-070, did not address what kind of process there should be for obtaining transmission and storage capacity for 2004. Thus, PG&E and the other parties were free in this proceeding to propose one or more processes to obtain transmission and storage capacity.
In deciding on what type of process should be adopted for the contracting of transmission and storage capacity, we are constrained by the time remaining before the start of 2004. Ideally, we would have preferred to have issued this decision earlier, which would have provided more time for instituting a process for obtaining capacity in 2004. To conduct a full open season now is impractical, given the late date. Had we more time, we could have addressed whether a full open season34 or the process that PG&E proposes, would be the better choice for obtaining transmission and storage capacity for 2004. We do not need to address that issue in this decision given the time constraints. We will therefore adopt a process for obtaining transmission and storage capacity for 2004 as suggested by PG&E, and as discussed below.
PG&E's process allows existing contract holders in 2003 to extend their contracts for 2004. CCC/Calpine has raised the issue that negotiated contracts should be extended for 2004 based on the same negotiated price. We disagree with this argument.
A negotiated contract and a contract whose price is not subject to negotiation, are two different creatures. The person who takes service at a set price is usually not in a position to obtain a better deal, and must either take what is offered or refuse to take it. The person who has a negotiated contract is usually in a better bargaining position than the person who must take service at a set price. However, the price that is negotiated between the two parties depends on the bargaining positions of both, and the existing and future market conditions that affect the parties and the negotiated price. To allow an extension of a 2003 contract for 2004, at the same price that was negotiated in 2003, would be unfair to both parties. Current and future conditions may affect the price that was previously negotiated. Accordingly, PG&E is permitted to offer an extension of the negotiated contracts as set forth in PG&E's description of its proposed Contract Extension and Open Season process, that is found in Appendix A of Chapter 7 of Exhibit 1.
DGS raised two issues in its opening brief concerning transmission capacity. The first is the capacity rights for transmission of gas associated with the contracts of the California Department of Water Contracts (DWR). The second issue is that a limit should be placed on the amount of capacity that PG&E's UEG can obtain.
The transmission capacity to obtain the fuel for the DWR contracts was not raised in the testimony of any of the parties in this proceeding. Accordingly, that issue does not need to be addressed in this decision. Regarding limiting the amount of capacity that PG&E's UEG can obtain, we believe that PG&E's proposal contains adequate protections.
With respect to NCGC's suggestion to list the amount of capacity by shippers on its Pipe Ranger website, we do not adopt that suggestion. The amount of transmission capacity that a shipper holds could be sensitive business information, which should not be disclosed.
Accordingly, we adopt PG&E's proposal for a contract extension and open season process as set forth in Appendix A of Chapter 7 of Exhibit 1. PG&E is authorized to conduct this contract extension and open season process using the rates developed from today's adopted revenue requirement, related adjustments, proposals, and cost allocation and rate design methods.
