I. Background
A. Procedural Background
SoCalGas proposed two methodologies for calculating the peaking rate. The first proposal, SoCalGas' preferred alternative, is a market-based rate whereby SoCalGas would negotiate a specific rate with each prospective customer. The second proposal is a cost-based rate that is based on a straight fixed variable methodology.
On July 6, 2000, the Commission adopted ALJ Resolution 176-3042 that preliminarily categorized the proceeding as ratesetting and determined that hearings would be necessary.
On July 28, 2000, the following parties submitted protests to the application: City of Long Beach, Southern California Generation Coalition (SCGC), Watson Cogeneration Company (Watson), California Industrial Group and California Manufacturers & Technology Association (CIG/CMTA), Calpine Corporation (Calpine), Kern River Gas Transmission and Questar Southern Trails (Kern River/Questar), and Southern California Edison Company (Edison). In general, the protesting parties opposed the application and contended that the proposed market-based rate would be anti-competitive and would prevent economic bypass.
On August 22, 2000, a prehearing conference (PHC) was held and a procedural schedule was adopted. Following the PHC, Commissioner Bilas issued a Scoping Memo reiterating the procedural schedule, establishing that the scope of the proceeding was whether the Commission should adopt SoCalGas' market-based, or the alternative cost-based, peaking service rate, and designating the assigned administrative law judge as the principal hearing officer.
Evidentiary hearings took place on October 16-20, 2000, and oral argument was presented on October 31, 2000. Post-hearing briefing was complete by December 11, 2000.
B. History of Peaking Tariff
Following federal regulatory reforms in the natural gas industry, 1 the Commission took steps in 1988 to encourage competition in the gas industry in California. Gas customers were divided into two categories: core customers2 and noncore. 3 Core customers have few competitive options, since utilities, such as SoCalGas, still procure gas for these customers and provide them with firm transportation service. However, gas service to noncore customers was changed by the Commission's regulatory reforms such that these customers could avail themselves of competitive options and buy gas from sources other than the utility. In addition, following further Commission reforms in 1991, interstate pipeline capacity was unbundled so that noncore customers could acquire such capacity from competing pipelines. The policy behind opening the market to competition was the belief that all customers, core and noncore, would benefit from the anticipated lower prices that competition would foster.
Many SoCalGas noncore customers who choose an interstate pipeline for baseload service need to return to the SoCalGas system for peakload service, in order to meet their maximum requirements and to enhance the overall reliability of their gas service. SoCalGas is required by its utility franchise rights to serve all customer load within its service territory. Therefore, SoCalGas is obligated to provide peakload service to bypass customers, at tariffed rates, even though these customers have turned to another provider for their baseload service. Bypassing the SoCalGas system causes a loss of revenue, and providing peak load service at tariffed prices is expensive. This combination of lost revenue and high costs has the potential to increase the cost of basic service for the captive, core customers.
The interstate pipelines are regulated by the Federal Energy Regulatory Commission (FERC). Under FERC rules, these competing gas providers can negotiate a rate. Under this Commission's regulations, however, SoCalGas is obligated to provide service at tariffed rates. Because of this regulatory gap between the rate structures set by FERC and this Commission, noncore customers had an incentive to bypass the SoCalGas system, leaving the core customers paying the tab for stranded capacity.
To correct this gap, the Commission instituted the Residual Load Service (RLS) tariff in Decision (D.) 95-07-046. The RLS tariff was first adopted by the Commission in 1995 to ensure that noncore customers' cost of partially bypassing SoCalGas would not be passed on to the general body of ratepayers. Before establishing this tariff, SoCalGas had been charging an all-volumetric rate structure that did not accurately reflect the utility's cost to provide peaking service to customers that took partial service from a competing pipeline. The RLS tariff was not cost-based (D.95-07-046, at 7, D.97-04-082, at 131), but was market based to ensure that SoCalGas did not lose revenue in the event of a partial bypass (D.95-07-046, at 8, 10) and that it could compete effectively against new pipeline entrants to the SoCalGas territory (D.95-07-046, at 8-9).
The RLS tariff, while allowing SoCalGas to mitigate any revenue loss it might suffer due to partial pipeline bypass, effectively discouraged new pipeline competition in SoCalGas' service territory. In addition, no SoCalGas customer has ever taken service under the RLS tariff. From a customer perspective, the RLS tariff effectively forces a bypass customer to pay for gas twice--once to the new interstate pipeline for baseload service and again to SoCalGas for peaking service--when it utilizes peaking service.
On June 19, 2000, SoCalGas filed an Application requesting approval of a tariff for gas transportation service to any noncore customer that bypasses SoCalGas' service, in whole or in part. SoCalGas designates this a transportation "peaking" rate since bypass customers only use this service in times of peak gas use, because they use a competing interstate pipeline for baseload. In D.00-04-060, Ordering Paragraph 6, the Commission ordered SoCalGas to file the instant application to establish the peaking rate to replace the RLS tariff.
Since the RLS tariff was instituted, numerous parties have argued that it be abolished, contending that it did not promote efficient economic bypass from the SoCalGas system. While the Commission was interested in fostering competitive options to the SoCalGas system, it did not want the remaining customers paying higher rates. Therefore, in D.00-04-060, the Commission, while maintaining the RLS tariff in the interim, concluded that "the RLS tariff should be replaced simultaneous with the effective date of a new peaking tariff." The Commission stated that the peaking rate "should not be the equivalent of the RLS tariff" (Id. At 93-94), but should close the regulatory gap between FERC rate structures for the interstate pipelines and this Commission's rate structure for SoCalGas' system.
1 FERC issued Order 436 in 1986 which provided for an open-access gas transportation program. The open-access rules promoted market-based competition by allowing local distribution companies (LDCs) and end-users to buy gas directly from producers, marketers, and brokers, instead of from the interstate pipeline companies that previously filled this function. 2 Core customers are those who lack alternatives to natural gas service. Most core customers are residential and small commercial customers. 3 Noncore customers are relatively large customers who are capable of switching from natural gas supplied by a utility's natural gas system to alternative fuels such as oil and propane. Noncore customers typically are large commercial, industrial, cogeneration, wholesale, and utility electric generation customers.
