BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) ) ) ) ) ) ) REPLY BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E)

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA In the Matter of the Application of San Diego Gas & Electric Company (U 902-G and Southern California Gas Company (U 904 G for Authority to Integrate Their Gas Transmission Rates, Establish Firm Access Rights, and Provide Off- System Gas Transportation Services A REPLY BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E DOUGLAS K. PORTER GLORIA M. ING WALKER A. MATTHEWS, III Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: ( Facsimile: ( Gloria.Ing@SCE.com Dated: November 4, 2005

2 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA In the Matter of the Application of San Diego Gas & Electric Company (U 902-G and Southern California Gas Company (U 904 G for Authority to Integrate Their Gas Transmission Rates, Establish Firm Access Rights, and Provide Off- System Gas Transportation Services A REPLY BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E I. INTRODUCTION Pursuant to the procedural schedule set forth by Administrative Law Judge ( ALJ Wong at the evidentiary hearings in Southern California Gas Company and San Diego Gas and Electric Company s ( SoCalGas/SDG&E Application ( A No , 1 Southern California Edison Company ( SCE submits the following Reply Brief in the above-referenced proceeding. II. SYSTEM INTEGRATION IS NOT NECESSARY TO ACHIEVE THE PRICE BENEFITS ASSOCIATED WITH LIQUEFIED NATURAL GAS ACCESS INTO THE CALIFORNIA MARKET Proponents of the SoCalGas/SDG&E system integration proposal have emphasized that one of the benefits of system integration is that it would encourage new supplies to enter the California market and thus place downward pressure on gas prices. For example, proponents have stated: 1 Tr., vol. 32, p. 395 (September 14,

3 System integration promotes gas-on-gas competition by equalizing the cost of intrastate transmission across the Southern California region as a whole for all new supplies, achieving the nondiscriminatory open access the Commission also ordered with respect to new supplies delivered at any receipt point on the SDG&E and/or SoCalGas system. 2 ORA elaborated on this issue emphasizing how adoption of system integration would encourage new supplies coming in at Otay Mesa and place downward pressure on prices. 3 Sempra LNG further elaborates on how this downward pressure on prices will occur: By providing for the same delivery cost for supplies delivered at Otay Mesa on behalf of customers located in SoCalGas service territory as for supplies delivered to a SoCalGas receipt point, the cost of delivering LNG into SoCalGas service territory will e lower than would otherwise be the case. This will force sellers of other natural gas supplies in Southern California to reduce their prices to a greater extent than would otherwise be the case to compete with these delivered supplies. This then serves to maximize downward pressure on prices. 4 The proponents logic is flawed in several ways. First, as a threshold matter, the Commission should be mindful that SoCalGas/SDG&E s system integration application is not about a new supply source to California, rather it is about a new access route (i.e., to the Otay Mesa receipt point from a proposed LNG facility owned by a nonregulated affiliate of SoCalGas/SDG&E. Under the status quo, California would be able to receive liquefied natural gas from the Energia Costa Azul LNG facility in Mexico. Therefore, the question before the Commission is whether the Commission will treat SoCalGas/SDG&E as a combined system so as to provide favorable ratemaking treatment for a nonregulated SoCalGas/SDG&E by providing an access route into the combined system. For the reasons set forth in SCE s Opening Brief and in this Reply Brief, SCE believes that the answer should be a resounding no. Second, assuming that there will be liquefied natural gas supplies to Southern California through Otay Mesa, the amount would be temporary and relatively small. As discussed in SCE s Opening Brief, Coral Energy Resources ( Coral commitment to deliver Mexican liquefied 2 Sempra LNG s Opening Brief, p Sempra LNG s Opening Brief, p. 3 (citing Tr., Vol. 3, pp (ORA, Sabino (ORA s testimony at the evidentiary hearings. 4 Sempra LNG s Opening Brief, p

4 natural gas to Southern California through Otay Mesa is conditional. 5 Assuming that Coral goes forward, of the 1 Bcf of Mexican liquefied natural gas available from the Energia Costa Azul LNG facility, 500 MMcf/d will initially go to Mexico with the balance to follow once the Baja California market in Mexico grows to consume the facility s full output. 6 It is only for an interim period of time that Southern California could receive 300 MMcf/d of liquefied natural gas through the Baja Norte and North Baja pipelines at Blythe, 150 MMcf/d of liquefied natural gas through Otay Mesa into the SDG&E system, and 50 MMcf/d available through Otay Mesa into the SoCalGas system. 7 Under such circumstances, the use of ratemaking gymnastics in order to adopt the SoCalGas/SDG&E systemwide integration makes no sense. Third, to the extent that there will be downward gas prices as a result of the addition of liquefied natural gas as a supply source, this benefit would occur regardless of whether liquefied natural gas entered the Southern California market through Otay Mesa or through a different access point. As explained by SCE witness Dr. Alexander, bringing liquefied natural gas into Southern California through Baja Norte would also mean an increase in commodity supply and would result in the same downward prices as bringing the liquefied natural gas in through Otay Mesa. 8 Further, as explained by Dr. Alexander, the effect of lower gas prices could materialize even if the gas were shipped east and never entered California. That is, what is key is that the addition of a new supply source takes pressure off of the supplies competing to serve the California market. 9 Finally, assuming that all Southern California customers benefit from the addition of liquefied natural gas entering California (which would happen regardless of whether system integration is adopted, proponents of system integration have never answered why SoCalGas customers should be the only customers who pay for the cost of system integration when all customers benefit. Another question that proponents cannot answer is why SoCalGas customers 5 SCE s Opening Brief, pp SCE s Opening Brief, pp. 6-7 (citing Exhibit 28, Attachment which is Sempra LNG s website, p. 2 of 4. 7 See SCE s Opening Brief, pp Rebuttal Testimony of Dr. Alexander (SCE, Exhibit 28, p Rebuttal Testimony of Dr. Alexander (SCE, Exhibit 28, pp

5 should pay for the cost of system integration when the benefits of liquefied natural gas supply will materialize regardless of whether the liquefied natural gas flows through Otay Mesa or through some other receipt point. Proponents cannot answer these questions because there is simply no good answer to cost shifting, cost subsidies, and bad ratemaking. III. SOCALGAS/SDG&E S SYSTEM INTEGRATION PROPOSAL WILL NOT RESULT IN THE ADDITIONAL OPERATIONAL BENEFITS CITED BY PROPONENTS Proponents to the system integration proposal claim that adoption of the proposal could enhance system reliability. 10 However, proponents again focus on additional supplies as opposed to what the SoCalGas/SDG&E application is really about, namely, a new access route for an unregulated affiliate of SoCalGas and SDG&E. Quite frankly, system integration purposely and knowingly results in a ratemaking policy that confers an economic benefit for SoCalGas and SDG&E s nonregulated affiliate and not to other suppliers. Sempra LNG complains, As the map above illustrates, it does not makes sense to force LNG shippers from Baja to pay unnecessary transportation cost for hundreds of additional miles when LNG from Baja, upon reaching the TGN system in Tijuana, has but several miles to reach the Otay Mesa receipt point at the U.S. Mexico border. 11 SoCalGas/SDG&E and Coral frame the issue of system integration in terms of equal access to the Southern California market. 12 However, SCE submits that the California and Mexico geography is what it is and that the supply route should be a market decision based on cost based rates. As summarized by SCE witness Dr. Alexander, system integration does not call for an equal footing. It calls for everyone to pay their full cost of transportation EXCEPT for suppliers of Mexican liquefied natural gas through Otay Mesa. 10 Sempra LNG s Opening Brief, p. 8 (citing ORA s testimony in Ex. 24 at p. 19 and Coral s testimony in Ex. 11 at p Sempra LNG s Opening Brief, p SoCalGas/SDG&E s Opening Brief, p. 5; Coral s Opening Brief, p

6 While systemwide integration proponents use the buzz words gas-on-gas competition, 13 what they are actually talking about is subsidized-gas on unsubsidized-gas competition. 14 IV. SOCALGAS/SDG&E S SYSTEM INTEGRATION PROPOSAL WOULD VIOLATE CPUC DECISION NO ON THE MERGER OF THE TWO UTILITIES stated that: As indicated in SCE s Opening Brief, 15 in Decision No , the Commission [N]o lines, facilities, franchises, or permits of either SoCalGas or SDG&E will be merged with or transferred to the other utility or any other entity. Both utilities will remain as they are today regulated in their tariff utility services by the Commission, having no change in the status of their outstanding securities or debt, having the same assets and liabilities. 16 SoCalGas and SDG&E should] operate as stand-alone distribution companies in two separate geographic areas with two distinct program/product lines. 17 In Coral s Opening Brief, Coral states, [s]ystem integration is necessary to establish Otay Mesa as a receipt point and to provide for the imminent delivery of re-gasified LNG from Baja California. With the delivery of re-gasified LNG through Otay Mesa, SDG&E s transmission facilities will become a part of SoCalGas backbone transmission system. 18 The merging of SDG&E s transmission facilities with SoCalGas backbone transmission facilities is a clear violation of D Therefore, the Commission should not approve the SoCalGas/SDG&E systemwide integration because it would violate Decision No SoCalGas/SDG&E s Opening Brief, pp. 2, 5-9; Coral s Opening Brief, pp. 4, Exhibit 28, Rebuttal Testimony of Dr. Alexander, SCE, pp SCE s Opening Brief, pp Decision No , mimeo p. 2 (emphasis added. 17 Decision No , mimeo p Coral s Opening Brief, p. 14 (emphasis added

7 V. THE JOINT RECOMMENDATION RAISES ISSUES THAT ARE RELATED TO PHASE II AND WHICH CANNOT BE ADOPTED IN THIS PHASE In conjunction with the filing of the Opening Briefs in this proceeding, Coral, Sempra LNG, BHP Billiton, and TURN submitted a Joint Recommendation which they claim will resolve certain issues in the system integration phase of this proceeding. SCE submits that the Joint Recommendation cannot be adopted in this proceeding because it raises issues that belong in Phase II of this proceeding. For example, issues such as the cost allocation and funding of expansion of Otay Mesa takeaway capacity, 19 shippers access rights, 20 and scheduling priority 21 are all issues that do not relate to the economic integration of SoCalGas/SDG&E transportation rates (i.e., Phase I. Since the Commission has already determined that the issue of system integration should be bifurcated from the issue of firm access rights, 22 it is inappropriate to rule on the above-referenced issues in this phase of the proceeding. 19 Paragraphs 3-6 of the Joint Recommendation. 20 Coral s Opening Brief, p Paragraphs 7 9 of the Joint Recommendation. 22 See May 24, 2005 Scoping Memo

8 VI. CONCLUSION Wherefore, for the reasons stated in SCE s Opening Brief and this Reply Brief, the Commission should reject SoCalGas/SDG&E s system integration proposal. November 4, 2005 Respectfully submitted, DOUGLAS K. PORTER GLORIA M. ING WALKER A. MATTHEWS, III /s/ Gloria M. Ing By: Gloria M. Ing Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: ( Facsimile: ( Gloria.Ing@SCE.com

9 CERTIFICATE OF SERVICE I hereby certify that, pursuant to the Commission s Rules of Practice and Procedure, I have this day served a true copy of REPLY BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E on all parties identified on the attached service list(s. Service was effected by one or more means indicated below: Transmitting the copies via to all parties who have provided an address. First class mail will be used if electronic service cannot be effectuated. Placing the copies in sealed envelopes and causing such envelopes to be delivered by hand or by overnight courier to the offices of the Commission or other addressee(s. Placing copies in properly addressed sealed envelopes and depositing such copies in the United States mail with first-class postage prepaid to all parties. Directing Prographics to place the copies in properly addressed sealed envelopes and to deposit such envelopes in the United States mail with first-class postage prepaid to all parties. Executed this 4th day of November, 2005, at Rosemead, California. /s/ Alejandra Arzola Alejandra Arzola Project Analyst SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California 91770

10 Gloria M. Ing Senior Attorney November 4, 2005 Docket Clerk California Public Utilities Commission 505 Van Ness Avenue San Francisco, California RE: A Dear Docket Clerk: Enclosed for filing with the Commission are the original and five copies of the REPLY BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E in the above-referenced proceeding. We request that a copy of this document be file-stamped and returned for our records. A self-addressed, stamped envelope is enclosed for your convenience. Your courtesy in this matter is appreciated. Very truly yours, /s/ Gloria M. Ing Gloria M. Ing Enclosures cc: All Parties of Record (U 338-E P.O. Box Walnut Grove Ave. Rosemead, California ( Fax (

11 EXECUTIVE SUMMARY SCE understands the Commission s desire to lower gas costs to California by encouraging an alternative gas source (liquefied natural gas. However, to be quite frank, SCE does not understand why the Commission would ever want to adopt the SoCalGas/SDG&E system integration proposal. System integration would result in favorable ratemaking treatment for a nonregulated affiliate of SoCalGas and SDG&E. System integration does not call for competition on an equal footing. It calls for everyone to pay their full cost of transportation EXCEPT for suppliers of Mexican liquefied natural gas through Otay Mesa. This is not gas-on-gas competition but rather subsidized-gas on unsubsidized-gas competition. System integration results in cost shifting and cost subsidies. The merging of SDG&E s transmission facilities with SoCalGas backbone transmission facilities under the system integration proposal is a clear violation of the SoCalGas/SDG&E merger conditions. SCE agrees that there may be price benefits from liquefied natural gas entering California (which would happen regardless of whether system integration is adopted. However, proponents of system integration have never been able to answer: Why should SoCalGas customers be the only customers who pay for the cost of system integrations when all customers benefit? Why should SoCalGas customers pay for the cost of system integration when the cost benefits of liquefied natural gas supply will materialize regardless of whether the liquefied natural gas flows through Otay Mesa or through some other receipt point? SCE submits that proponents cannot answer these questions because there is simply no good answer to cost shifting, cost subsidies, and bad ratemaking. Fortunately, the price benefits touted by the applicants can be achieved without system integration. Liquefied natural gas can enter into the California market through access points, which would increase commodity supply and result in the same downward prices as bringing gas in through Otay Mesa. The bottom line is that adoption of the SoCalGas/SDG&E system integration proposal is a bad idea. The proposal is not about a new supply source to California, rather it is about a new access route from a proposed LNG facility owned by a nonregulated affiliate of SoCalGas and SDG&E. The proposal favors a nonregulated affiliate. It results in cost shifts and cost subsidies. Because it is not about a new supply source, the price benefits can be achieved regardless if system integration is adopted. The proposal should be rejected. -

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