BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the Matter of the Application of Southern California Gas Company to Establish Regulatory Authority Over the Access for Natural Gas Provided by California Gas Producers / ))
)
)
)
) / A.04-08-018
OPENING BRIEF OF
SOUTHERN CALIFORNIA GAS COMPANY (U 904 G)
STEVEN D. PATRICK
Attorney for
SOUTHERN CALIFORNIA GAS COMPANY
555 West Fifth Street, Suite 1400
Los Angeles, California 90013-1011
[Telephone: (213) 244-2954]
[Facsimile: (213) 629-9620]
April 7, 2006 [E-mail:
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TABLE OF CONTENTS
I. INTRODUCTION AND SUMMARY 1
II. ARGUMENT FOR ADOPTION OF THE IA/OBA 4
A. Access Rights 5
B. Interconnection Costs 7
C. NAESB Scheduling Standards 7
D. Balancing Provisions 7
E. Quality Specifications 10
F. Term 10
G. Capacity Studies and New Producer IA/OBAs 10
H. Creditworthiness 11
I. The IA and OBA Operate As An Integrated Whole 12
III. ARGUMENT AGAINST ADOPTION OF THE PRO FORMA 12
A. Free Storage Should Not Be Used to Subsidize Oil and Gas Producers via Extremely Lax Balancing Arrangements. 13
B. The Commission Should Resolve Access Disputes 16
C. Producers Must Pay for the Full Costs of Capacity Studies 17
D. Producers’ Credit Risk of $3 Million Bad Debt Annually can be Avoided. 18
E. The Existing SoCalGas Gas Quality Enforcement Protocols are Reasonable and Protect Customers. 19
F. SoCalGas Must Adjust Delivery Pressure for the Benefit of all its Customers. 21
G. The Pro Forma’s O&M Cost Recovery Proposal is Unreasonable 22
The Pro Forma Should Not Be Approved 23
IV. ARGUMENT AGAINST CONSIDERING CERTAIN SCGC PROPOSALS 23
SCGC’s Proposal to Modify the Definition of MDV Rights in Emulation of the Interstate Framework Should Not Be Addressed In This Proceeding 23
V. THE GAS QUALITY SPECIFICATIONS OF EXXON MOBIL’S AGREEMENTS WITH SOCALGAS ARE SUBJECT TO THE COMMISSION’S JURISDICTION OVER SOCALGAS’ GAS QUALITY TARIFF SPECIFICATIONS 24
VI. CONCLUSION 27
16
TABLE OF AUTHORITIES
Cases
1993 FERC Lexis 1606 27
Sutter Butte Canal Co. v The Reid Road Commission of California, 202 Cal. 179, (1927) 25
Statutes
Cal. Code of Civ. Pro. 1285 et. Seq. . 16
Cal. Pub. Util. Code Sec. 700 et. seq. 27
Tariff Rule 30.I.1 26, 27
Other Authorities
Cal. Const., art. XII, Sec. 5 & 6 27
16
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the Matter of the Application of Southern California Gas Company to Establish Regulatory Authority Over the Access for Natural Gas Provided by California Gas Producers / ))
)
)
)
) / A.04-018-018
OPENING BRIEF OF
SOUTHERN CALIFORNIA GAS COMPANY U 904 G)
I.INTRODUCTION AND SUMMARY
Pursuant to the Joint Stipulation filed in A.04-01-034[1] SoCalGas filed its Application in this proceeding on August 16, 2004. Therein, SoCalGas asked the Commission to approve a form of agreement which would contain “standard non-discriminatory access provisions” governing the entry of California produced gas into SoCalGas’ natural gas system under the authority and jurisdiction of this Commission. Historically, such California produced gas entered SoCalGas’ system pursuant to individually negotiated, bi-lateral agreements (“Access Agreements”) between each producer seeking to deliver gas to its customers on SoCalGas’ system, resulting in some inevitable disparity over time among the terms of the various Access Agreements.
Granting SoCalGas’ proposal here will promote the public interest by making available to SoCalGas’ customers a reliable quantity of California gas supplies which meet all required specifications of the gas marketplace, this Commission and SoCalGas’ operating requirements. Secondly, SoCalGas’ proposal will better ensure that the operational integrity of its system is maintained and that the risk of harm due to the entry of gas which does not meet all of its gas quality specifications is prevented. Finally, SoCalGas’ proposal will place the entry of California gas production, from all sources, and the receipts of interstate gas on an equal footing for entry into the SoCalGas system.[2].
Specifically, in reviewing the referenced Access Agreements in preparation for the instant Application, SoCalGas determined that on the whole, the terms of access for California gas production received from California gas producers differed greatly from those terms of access accorded to out-of-state suppliers to the SoCalGas system.
In comparing the particulars of these forms of access, SoCalGas testified that great disparities existed between the term of these types of agreements and that, on the whole, the terms of the California Access Agreements contained significant subsidies which benefited the producers at the expense of SoCalGas’ ratepayers. SoCalGas also determined that these subsidies were not provided to out-of-state suppliers and could find no basis in policy or law for their continued existence, but instead were merely an historical artifact of the transition to the unbundled gas market place.[3] SoCalGas determined that it was in the best interest of its ratepayers to eliminate these unjustified subsidies, especially since they are not available to interstate supplies.
SoCalGas therefore, developed two agreements, the Interconnection Agreement (“IA”) and the Operational Balancing Agreement (“OBA”), (collectively the “IA/OBA”) to govern the entrance of California produced gas into its system which will remove these unwarranted subsidies and ensure all gas entering its system has the opportunity to do so on consistent, nondiscriminatory terms.
The Producers [4] on the other hand, urge the Commission to adopt a modified form of an existing Access Agreement (the “Pro Forma”) which continues the current advantageous terms of access for their gas, fails to provide terms of access for California produced gas which would be consistent with those accorded interstate suppliers, keeps the existing subsidies while at the same time enhancing them and making them permanent and, significantly, removes interpretation of the terms of thereof from the jurisdiction of the Commission. There is simply no justification in policy or law for the Commission to sanction disparate terms of access to the detriment of interstate suppliers and to endorse enhanced subsidies, at ratepayer’s expense, all for the benefit of such a profitable group of oil and gas companies doing business in today’s economy.
The Commission is thus presented with a very clear choice by the Producers and SoCalGas represented by the form of agreement they each offer, as each form of access agreement is a well crafted, integral whole which fairly represents the objectives of the party offering it to the Commission for approval.
SoCalGas’ IA/OBA provides non-discriminatory access to SoCalGas’ system for all California gas producers placing them on an equal footing with interstate suppliers thereby enhancing gas on gas competition, and does so with little or no ratepayer subsidization based arbitrarily on the source of gas.
The Producers’ Pro Forma, on the other hand, would enhance and enshrine ratepayer subsidies to California oil and gas producers and ensure that California gas production has a permanent unfair advantage over interstate supplies.
SoCalGas submits it is unnecessary to provide these subsidies because current energy prices provide ample incentives for producers to develop economically recoverable supplies. SoCalGas’ unrefuted testimony demonstrated that the 2004 net income of the Producers in this case ranged from a low of $1.7 billion to a high of $25.3 billion. The 2005 profits of these companies are even higher.
The Pro Forma is effectively designed to allow producers to treat themselves more like favored end users on SoCalGas’ system rather that what they are: very profitable suppliers.
The Commission’s choice should be for unsubsidized and fair competition for the benefit of ratepayers. Approving SoCalGas’ Application as filed will ensure this result.
II.ARGUMENT FOR ADOPTION OF THE IA/OBA
SoCalGas’ purpose in this Application is to establish, with CPUC approval, standard, nondiscriminatory access provisions for California producers that are similar for all interstate suppliers to SoCalGas. Historically, there have been dozens of separate Access Agreements with California producers that have evolved over time. These Access Agreements have also differed from SoCalGas’ operational balancing agreements with interstate suppliers in certain respects (i.e., imbalance and cash-out provisions). Also, producers have expressed concerns about whether the terms and conditions of these different Access Agreements have been administered in an even-handed manner from producer to producer. (Ex. 9, pp.2-3); Tr. Vol. 3; pp.354-355)
Consequently, in order to address these and other concerns, and consistent with the terms of the Revised Joint Stipulation in A.04-01-034, SoCalGas proposes to replace each of its California producer Access Agreements with a standardized IA/OBA that would treat California producers substantially like all other suppliers to the SoCalGas system. (Id.) This new IA/OBA would replace current Access Agreements as they expire or are terminated [5] and would have the following principal terms and conditions:
A. Access Rights
SoCalGas asks the Commission to recognize a new right through its adoption of the IA/OBA by which producers would be granted an “interconnect quantity” denominated as equivalent to a producer’s current Maximum Daily Volume or MDV. Currently, there is enough capacity on SoCalGas’ Line 85 and Coastal zones such that all current producers will have such access rights. SoCalGas proposes to make these access rights tradable so producers would be able to trade or assign their MDVs amongst themselves.[6] (Id. Pp.2-4) The Producers endorse this proposal.
Like an interconnect capacity with interstate suppliers and existing Access Agreements, the MDV only guarantees access into the system at the receipt point. Whenever there are multiple sources of supplies competing for space through the same transmission system, SoCalGas must allocate space according to its allocation procedures.[7] Under a firm access rights priority procedure, SoCalGas proposes that a party (producer, end-use customer or marketer) would be required to hold firm transportation rights on the SoCalGas system. SoCalGas proposes that California production be subject to the same firm and interruptible transportation rules as will eventually be established by the Commission for the entire SoCalGas system in A.04-12-004. This will include the same scheduling rules and procedures, the same fees, and the same trading and priority rights, though SoCalGas is not advocating in this proceeding any proposals SoCalGas may be advocating therein.
SoCalGas also intends to establish a system of interruptible nominations (nominations above the minimum interconnect capacity) on Line 85 and in the Coastal zones so that California producers will be able to take advantage of interconnect capacity not being used by other producers and/or higher total take-away capacity on particular days. SoCalGas testified this system should be operational in second quarter 2006. (Tr. Vol. 1, p 93) Unless otherwise directed by the Commission in A.04-12-004, producers will need to compete with other suppliers to use the space available on Line 85 and Coastal zones on both a firm and interruptible basis. (Id. pp.92-94)
The system of firm and interruptible service works well on the interstate system, enhances competition among suppliers and ensures the maximum efficient use of SoCalGas’ gas system for the benefit of ratepayers and should be approved by the Commission.
B. Interconnection Costs
SoCalGas proposes that, consistent with the D.04-09-022, California producers will remain obligated, through terms of an agreement, to be responsible for all costs required to construct, operate and maintain all piping, valves, metering, control, odorization and gas quality measurement devices for interconnection to deliver producer gas into SoCalGas’ system, consistent with SoCalGas requirements. (Ex. 9, p. 4) No parties disagree with this proposal and it should be approved by the Commission.
C. NAESB Scheduling Standards
SoCalGas proposes that all California supplies will be nominated and scheduled every day in accordance with the NAESB nomination and confirmation standards that have been adopted by SoCalGas in its Rule 30, while the upstream producers or their agents will be required to confirm such nominations prior to SoCalGas accepting deliveries (“scheduled quantities”). (Id.) No parties disagree with this proposal, and it should be approved by the Commission.
D. Balancing Provisions
SoCalGas testified that one of the main purposes of an OBA with an interstate pipeline is to ensure that the supplier “schedules what it delivers and delivers what it schedules.” (Id.) Adherence to this principle maintains system reliability and avoids subsidizing the connected supplier with free storage services. To date, however, the operative balancing requirement in the majority of California producer Access Agreements only requires the producer to deliver within +/-10% of the amount scheduled on a monthly basis without any provisions for imbalance penalties. (Id. p. 6)
SoCalGas testified that compared with current interstate suppliers, such balancing provisions are so generous that California producers, as parties who sell gas as a commodity through SoCalGas’ system, have taken advantage of the 10% monthly balancing provision to the detriment of the system, SoCalGas ratepayers and other users. (Id.) SoCalGas further testified that since interstate pipelines are precluded from selling gas as a commodity they do not have any financial incentive to create, and thus do not create, such imbalances. SoCalGas testified that its IA/OBA will replace these “incentivized” balancing provisions with a set of balancing provisions consistent with the terms of OBAs in effect for interstate pipelines consistent with the historical operation of the interstate pipelines and SoCalGas’ proposals in R.04-01-025. These provisions include and provide for:
· A cumulative daily imbalance tolerance of +10% of the producer’s interconnect capacity.
· A 7-day opportunity to payback the total cumulative imbalance.
· Payback to the near zero tolerance (or in-balance) level.
· A producer pay-back term which would require payment to SoCalGas of 150% of the highest California border spot price as reported by Gas Daily during the imbalance period for scheduled quantities in excess of delivered quantities compensating SoCalGas for the backup service provided for the supplier.
· A SoCalGas payment to the producer at 50% of the lowest California border spot price as reported by Gas Daily during the imbalance period for deliveries greater than scheduled quantities, which SoCalGas would use to reduce its Lost & Unaccounted for gas cost (LUAF). (Id.)
The last provision set out above is not in most OBAs with interstate suppliers either because SoCalGas or the supplier has automated flow controls.[8] SoCalGas’ mirror provision of the underdelivery cash-out OBA provision is intended to incent California producers to remain, as interstate suppliers do, within the cumulative imbalance tolerance except for exceptional operational emergencies. (Id.) However, SoCalGas testified that based on its experience that it is not confident that the mirror of the OBA under-delivery cash-out provision will be sufficient to stop gaming among the marketers/agents who use California production because of the incentives to gain from taking advantage of the system in a manner unavailable to interstate suppliers. Therefore, SoCalGas testified that it reserves the right to create symmetry with interstate supplies by installing flow controls (at the interconnector’s expense) on producers who deliver significant[9] quantities of non-scheduled gas into its system on more than three OFO days within a 12-month period. (Id. p. 5) SoCalGas submits that this capability to install flow controls in the manner described will likely prove a sufficient deterrent to gaming and therefore may not have to actually install such controls.