II. SoCalGas' Proposed Peaking Rates

In its June 19, 2000, application, SoCalGas proposed two alternative Peaking Service Rates: a "market-based" rate and a "cost-based" rate. SoCalGas prefers the market-based rate, but proposes the alternative in the event the Commission does not approve the market-based tariff rate.

SoCalGas contends that both the market-based and the cost-based proposals for peaking rates are designed to send efficient price signals to partial bypass customers in the marketplace so that uneconomic bypass is discouraged and shifting of costs to SoCalGas' captive customers is avoided. Bypass can be economic or uneconomic. Economic bypass occurs when a customer's alternative energy cost is less than SoCalGas' incremental cost of service. Uneconomic bypass occurs when a customer's alternative energy cost exceeds SoCalGas' incremental cost of service, but is less than SoCalGas' tariffed rates.

SoCalGas is concerned that without a price incentive to foster only economic bypass, interstate pipelines will serve the low-cost, high load factor baseload requirements of bypass customers and SoCalGas will be forced to serve the high-cost, low load factor peaking or swing loads of these customers. The peaking tariff must establish a balance point of encouraging bypass and entry into the market by competitors, but not at the expense of core customers who could be left paying higher rates to subsidize the bypass customers. SoCalGas is concerned that if there is uneconomic bypass, resulting in a significant loss of noncore throughput, the core customers could be responsible for up to $51 million of annual transportation revenues that would be undercollected. ⁴

Both SoCalGas rate proposals share four common elements: (1) monthly customer charge; (2) Public Purpose Programs (PPP) charges; (3) daily balancing; and (4) applicability provisions. SoCalGas presents these elements in the context of the market-based, and then the cost-based, tariffs.

SoCalGas wants to ensure that the new tariff does not repeat the mistakes of the RLS tariff--discouraging new pipelines and bypass customers. As presented below, SoCalGas posits that either one of its proposals would accomplish those objectives.

A. Market-Based Peaking Rate

Under a market-based peaking tariff, SoCalGas would negotiate with the partial bypass customer to agree to a rate between a floor of SoCalGas' short-run marginal cost (SRMC) and a ceiling which consists of a "revenue cap" formulated to guarantee that the partial bypass customer always avoids at least SoCalGas' long-run marginal cost (LRMC). SoCalGas alleges that this would allow it to compete on a par with the interstate pipelines that charge a customer a rate based on the capacity it uses on the system. Under the straight-fixed variable (SFV) approach to rate design, SoCalGas claims higher utilization rates will lower the per unit charge. Under SoCalGas' current volumetric rate, the costs of providing service during peak usage are recovered over all the projected units. SoCalGas maintains that this skews the cost comparisons for the customer when choosing between a capacity-based SFV charge and the volumetric charge and places SoCalGas at a competitive disadvantage.

SoCalGas' proposes the following formula for the revenue cap.

Revenue Cap = (default tariff*total annual volume) - (LRMC*annual bypass volume)

SoCalGas claims that the revenue cap guarantees that the customer always retains an incentive to engage in bypass that is economic. SoCalGas further asserts that the first term equals the customer's total cost without bypass and that the cap ensures that the total cost to the customer will decrease by an amount equal to at least the LRMC that the utility avoids. Therefore, SoCalGas maintains, if the competitor offers a bypass alternative at a rate that is below the utility's long-run marginal cost, which means that the bypass is economic, the customer will have the clear incentive to accept that opportunity for economic bypass.

SoCalGas contends that a market-based peaking service tariff will prevent core customers from bearing a higher burden for cost recovery avoided by the bypassing customers, will provide an incentive to the utility to be more competitive vis-à-vis alternative suppliers, and will send the right signal to potential investors in both pipeline and new large-volume consumers.

In support of its market-based rate proposal, SoCalGas assures the Commission that the rate negotiations will take place in a competitive environment with the bypass customers having alternatives. If no agreement is reached, the bypass customer would pursue a more attractive alternative and not take peaking service from SoCalGas. At that point, SoCalGas's obligation to serve the bypass customer would extinguish. As examples, SoCalGas suggests some of the following alternatives to its peaking service: (1) additional pipeline capacity; (2) secondary capacity sold in a liquid and competitive market; (3) hub services, such as park and loan sold by pipelines and utilities; (4) access to non-SoCalGas owned storage via displacement from pipeline to pipeline; (5) unbundled off-system storage; (6) alternative independent storage services; and (7) swaps, electricity/gas price arbitrage.

To further bolster the attractiveness of the market-based rate, SoCalGas contends that it is "not the equivalent of the existing RLS tariff." Specifically, the ceiling on the RLS tariff was determined by the ratio of the customers' pre-bypassed load factor to post-bypassed load factor. The market-based rate references SoCalGas' costs, otherwise applicable tariff rate, and the customer's actual bypass volumes. In addition, under the market-based proposal, the floor would be SoCalGas' SRMC and the ceiling would be calculated pursuant to a formula that guarantees that a customer taking partial bypass service from SoCalGas will avoid at least SoCalGas' class-average LRMC. SoCalGas does admit, however, that in some cases, the ceiling rate under the market-based rate could be in excess of the ceiling rate under the RLS tariff.

SoCalGas does not perceive this as a detriment, however, since the ceiling rate is bounded by SoCalGas' ability to charge in excess of the customer's competitive alternative. SoCalGas contends that there are plenty of cheap alternatives for the customers and the customer always avoids SoCalGas' LRMC. SoCalGas views this as the definition of economic versus uneconomic bypass. If the bypass pipeline has a lower stand alone cost than SoCalGas' LRMC, the customer will bypass. But the customer will not bypass if the customer's cost to do so is more than the marginal cost of utility service.

Generally, with the exception of TURN, all protesting parties argue against a market-based peaking rate. The other participants see SoCalGas as having market power so the competitive market necessary for a market-based rate does not exist. Furthermore, many are concerned that without rate restraints, SoCalGas would have no incentive to negotiate a rate much below the ceiling rate, and that would prevent large customers from signing up with competing pipelines. Such an outcome would discourage further pipeline competition and be detrimental to construction of new gas-fired electric generation plants.

B. Cost-Based Peaking Rate

To address the concerns of the opponents of the RLS tariff that a market-based rate repeats the negative aspects of the tariff, SoCalGas also proposes a cost-based peaking rate similar to the SFV demand charge based rates of interstate pipelines. This rate is not a negotiated rate, like a market-based rate, but is a tariff rate that is posted and does not vary except when rates are changed in SoCalGas' regular ratesetting proceeding. Under SFV pricing, the entire fixed cost of transportation is collected through a demand charge, with only the variable (i.e., fuel-related) costs collected through a volumetric charge. The customer selects a maximum daily quantity (MDQ) to reserve capacity on the utility system to meet its peaking requirements. There would be an over-run charge so as to provide an incentive for partial bypass customers to select an MDQ high enough to meet their needs.

The cost-based proposal collects the majority of transportation costs through a monthly demand charge that has both a customer charge and a reservation charge. The customer charge will collect the total cost of the customer-related facilities using the annualized cost of customer related facilities adopted in the 1999 BCAP as a reasonable proxy. The revenue associated with the customer-related facilities has been adjusted by the LRMC scaler to approximate the total cost of these facilities. The reservation charge is comprised of the noncore related-LRMC facilities cost plus all non-fuel-related charges for transportation, such as the cost of SoCalGas' various regulatory accounts, including the Interstate Transition Cost Surcharge (ITCS). The rate also has a volumetric transportation rate that includes only SoCalGas' variable transportation costs.

SoCalGas proposes to collect PPP charges, and in particular the California Alternative Rates for Energy (CARE) surcharge, from the partial bypass customer based on the total natural gas consumed by the customer, not just the volume transported by the utility. CARE assists low-income families in paying for utility service. To maximize the funds available, and minimize the impact to the general ratepayers SoCalGas proposes that the CARE surcharge should continue to be collected from the bypass customer so they do not forego their fair share for this social program.

SoCalGas also favors using daily balancing as an appropriate tariff condition for peaking service customers so they are held to the same standards required by alternative providers. Daily balancing requires the customer to manage its own gas supply in a manner that does not adversely affect other customers on the system. SoCalGas claims that the interstate pipelines require strict daily balancing by their customers because absent daily balancing, partial bypass customers could shift their load to the SoCalGas system when there is a price arbitrage opportunity or a disruption of service on the pipelines.

The cost-based proposal also retains the applicability provisions established in the initial decision establishing the RLS tariff (D.95-07-046) and upheld in the subsequent BCAP proceedings in 1996 (D.97-07-082) and 1999 (D.00-04-060).

Several respondents and intervenors presented testimony challenging SoCalGas' cost-based rate. Others, such as ORA and Watson, presented their own cost-based proposal.

TURN prefers the market-based proposal put forth by SoCalGas, but can support the cost-based plan. TURN, however, does not believe that customers who have obtained service from a competitive pipeline supplier should have any right to demand the cost-based rate from SoCalGas.

CIG and CMTA favor eliminating hurdles to gas competition and assert that the only way to entice interstate pipelines to initiate service into SoCalGas' territory is to have several large customers, such as electric generators or refineries, etc. take bypass service. These large customers oppose SoCalGas' cost-based proposal as being anti-competitive since it allows recovery of the full fixed cost of transportation in the demand charge and fuel-related costs through a volumetric rate.

Calpine opposes SoCalGas' cost-based proposal on numerous grounds, and particularly because it imposes the peaking rate on all facilities held by a common owner if any single facility has a competitive alternative to SoCalGas--a carryover from the RLS tariff. Calpine also does not want the peaking rate to apply to new customers, since SoCalGas' existing pipeline was not designed to accommodate potential future customers.

Kern River and Questar oppose SoCalGas' proposal because it allows for more cost recovery than for the costs associated with a true peaking rate.