BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) ) ) ) ) ) )

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 COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E ON THE PROPOSED DECISION DOUGLAS K. PORTER GLORIA M. ING JENNIFER SHIGEKAWA Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: ( Facsimile: ( Gloria.Ing@SCE.com Dated: April 3, 2006

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 COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E ON THE PROPOSED DECISION I. INTRODUCTION Pursuant to Rule 77 of the California Public Utilities Commission ( Commission, Southern California Edison Company ( SCE submits the following comments on the March 14, 2006 Proposed Decision of Administrative Law Judge Wong in Phase I of Application No relating to Southern California Gas Company and San Diego Gas and Electric Company s ( SoCalGas/SDG&E proposal to economically integrate the two utilities transmission facilities and treat them as common SoCalGas/SDG&E facilities. In summary: The Proposed Decision errs when it concludes that system integration should be adopted because SoCalGas customers receive the benefit of a new supply source. Although the Energia Costa Azul ( ECA facility is not yet operational, it is under construction and will become operational regardless of the outcome of this proceeding. The fact is that liquefied natural gas from Baja, Mexico, is an existing supply source and does not justify system integration. This proceed is not about whether ECA will be built. It is about the way that one of the two possible paths of the output from that path will be paid for

3 The Proposed Decision errs in considering the effect of the proposed system integration on one potential LNG supplier without looking at the effect on other liquefied natural gas suppliers. The Proposed Decision is written with the intention of sending a positive message to new liquefied natural gas suppliers. Yet it only sends a positive message to suppliers in Baja California, specifically EGA, which is already a committed supply source. The mere fact that two other potential liquefied natural gas suppliers (BHP Billiton and Crystal Energy oppose the proposed system integration is a clear sign that system integration does not send a positive message to all possible liquefied natural gas suppliers. The Proposed Decision errs when it indicates that failing system integration, liquefied natural gas from Baja California (in Mexico is more likely to go east of California. Evidence on the record shows that Coral has contracted for 300 MMCF/day of capacity along the North Baja and Baja Norte lines to bring this gas to Ehrenberg. System integration would raise the price to bring gas into the SoCalGas system at Ehrenberg relative to delivering the gas to east of California making sales to east of California more economically desirable. The Proposed Decision errs by ignoring the evidence on the record that the benefits of lower gas prices will materialize whether liquefied natural gas flows through Otay Mesa or at a different receipt point. SCE also comments on two other issues addressed in the Proposed Decision. II. THE PROPOSED DECISION ERRS IN CONCLUDING THAT CUSTOMERS WILL RECEIVE THE BENEFIT OF A NEW SUPPLY SOURCE AS A RESULT OF THE SOCALGAS/SDG&E SYSTEM INTEGRATION PROPOSAL Under the Proposed Decision, SoCalGas/SDG&E would economically integrate their two systems such that their transmission facilities would be treated as common SoCalGas/SDG&E facilities and customers could access gas supplies from any receipt point on the utilities system

4 at a single integrated rate. There is no dispute in this proceeding that if adopted, there will be an increase in the transportation rates for all SoCalGas customers (except electric generation customers who already experienced a rate increase as a result of the Sempra-wide electric generation rate and a corresponding decrease in the rates for all SDG&E customers. 1 In other words, under system integration, SoCalGas customers would be subsidizing SDG&E customers, and the system integration rates would not be cost based. 2 The Proposed Decision acknowledges this cross-subsidy, but determines that the benefits of gas flowing through Otay Mesa outweigh any rate increase to SoCalGas customers. 3 The Proposed Decision justifies system integration based on its erroneous conclusion that SoCalGas and SDG&E customers receive the benefit of a new supply source : 4 When these factors are considered, the cross-subsidy arguments are less compelling. Instead of shifting costs to SoCalGas customers for the benefit of Sempra LNG and SDG&E customers, a new supply source will be created for all customers in southern California. 5 This new supply source can mitigate the price of gas entering into the southern California market. When the rate increase to SoCalGas customers is balanced against the benefits of gas flowing through Otay Mesa, we are persuaded that these benefits outweigh the concerns over cross subsidies and the rate impact on SoCalGas customers. 6 The Proposed Decision further opines that, as a public policy matter, the Commission should provide regulatory certainty to Sempra LNG and Coral and encourage these specific entities in order to prevent the loss of Mexican liquefied natural gas as a supply source: 1 Proposed Decision, Sections III.G.1 and III.G.2. 2 Proposed Decision, Section III.G.2 where the Proposed Decision states, If a SoCalGas customer were to obtain gas from Otay Mesa, and the system integration proposal is not adopted, that customer would have to pay the pancaked rate of SDG&E and SoCalGas. Under the system integration proposal, the SDG&E customer and the SoCalGas customer would only pay the single integrated rate to access gas from Otay Mesa. For a discussion of why rates should be cost based, please see SCE s October 21, 2005 Opening Brief, Section IV.B. 3 Proposed Decision, Section III.G.2. See also Conclusion of Law No See also Proposed Decision, Section III.G.2 which states, The regasified LNG from this facility can provide a new supply source for customers of SDG&E, and to the customers of SoCalGas through the use of the SDG&E system and the Rainbow Corridor as backbone transmission facilities. (emphasis added 5 Assuming aguendo that the liquefied natural gas from the Energia Costa Azul project is a new supply source for all customers (which it is not, then the Proposed Decision does not address why only SoCalGas customers should pay for system integration. See SCE s Opening Brief, Section IV.A. Since SoCalGas receives no unique benefit from system integration, they should not be the ones solely responsible for the costs. 6 Proposed Decision, Section III.G.2 (emphasis added

5 [T]he Commission has a window of opportunity to decide whether to encourage the entry of LNG into California to help meet the gas needs in southern California or to take a wait and see approach as to whether the California-based LNG projects will be approved or not. If we decide to await the approval status of the other LNG projects proposed for California, we will forgo this window of opportunity of providing regulatory certainty to Sempra LNG and Coral concerning the delivery of LNG from Baja California into the Otay Mesa receipt point. 7 If we reject or defer the system integration proposal, that will send a negative price signal to Sempra LNG and to Coral, and may result in the loss of Baja California LNG as a supply source. Instead of sending that gas into southern California and making the needed investment, Sempra LNG and Coral may decide that it is more economic to market the gas to east-of-california customers by shipping the gas through the Bajanorte and North Baja pipelines to the interconnection with El Paso. 8 It is in California s best interest to take steps now to encourage suppliers to deliver that gas to the southern California market instead of to east-of-california markets. 9 The Proposed Decision s conclusion that SoCalGas and SDG&E customers receive the benefits of a new supply source is a factual error that should be corrected. In fact, liquefied natural gas at the Energia Costa Azul facility is not a new supply source in that Energia Costa Azul is under construction and will become operational regardless of the outcome of this proceeding. As a result, Energia Costa Azul must be considered to be an existing supply source that will exist whether or not system integration is approved. Under the status quo, this existing supply source can flow to SDG&E directly or to SoCalGas under pancaked rates. 10 It is also an existing supply that can flow to California through the Baja Norte and North Baja Pipelines to Blythe. 11 Indeed, SoCalGas/SDG&E s proposal is not about a new supply source. Rather, it is about a new access route (i.e., to the Otay Mesa receipt point from a liquefied natural gas 7 SCE notes that if the Commission were to not approve the SoCalGas/SDG&E application, Sempra LNG and Coral will also have regulatory certainty namely that deliveries to California would be under cost-based rates. Similarly, the Proposed Decision s conclusion that [a]t that point in time, it is appropriate to provide shippers of regasified LNG from Baja California with the opportunity to send this gas into the southern California market ignores the fact that shippers can currently do this under pancake rates or through the Baja Norte and North Baja lines at Blythe. See Section III.G.4. 8 As explained in more detail later, the Proposed Decision does not take into consideration that increasing the rates of SoCalGas transportation customers may discourage the delivery of the liquefied natural gas that would have entered into SoCalGas service territory through the Baja Norte and North Baja lines at Blythe, which may now flow to east of California customers if off-system deliveries is approved by the Commission. 9 Proposed Decision, Section III.G.2 (emphasis added. 10 See Section II.A of SCE s October 21, 2005 Opening Brief. 11 See Section II.B of SCE s October 21, 2005 Opening Brief

6 facility with an existing supply source that is owned or operated by a nonregulated affiliate of SoCalGas/SDG&E. The primary beneficiary of this new route would be Sempra LNG and Coral who will receive a preferential treatment over non-baja project developers. The question therefore is not whether California would be able to receive liquefied natural gas from a new supply source but whether the Commission will treat the SoCalGas/SDG&E as a combined system so as to provide a more favorable access route for a nonregulated affiliate. While SCE strongly supports and has a vested interest in California having supply diversity and reliability, these goals can be met under the status quo and should not be achieved through cost shifting, cost subsidies, and bad ratemaking. It is worth noting that there were two parties to this proceeding, BHP Billiton and Crystal Energy, which are planning, but have not started, construction on LNG facilities. These would in fact be new supply sources, both of which would without a doubt deliver their gas into California, itself. Both of these parties were sufficiently convinced that system integration would not be in their best interest as to actively oppose system integration. 12 In other words, the signal to uncommitted LNG developers in southern California is not positive, it is negative. III. THE PROPOSED DECISION ERRS BY IGNORING THE FACT THAT SYSTEM INTEGRATION MAKES IT MORE ECONOMICAL THAN IT WOULD OTHERWISE BE TO SELL GAS EAST-OF-CALIFORNIA The Proposed Decision does not take into consideration that increasing the rates of SoCalGas transportation customers may discourage the delivery of the liquefied natural gas that would have entered into SoCalGas service territory through the Baja Norte and North Baja lines at Blythe, which may now flow to east of California customers if off-system deliveries is approved by the Commission. 12 See Sections III.F.2 and III.F.3 of the Proposed Decision

7 According to the record, Coral has procured rights to deliver 300 MMcf/day of LNG from the EGA plant to Ehrenberg. This is 7.5 times the capacity (40 MMcf/day which is expected to flow north to SoCalGas from Otay Mesa. 13 There is no dispute in the record that system integration will raise the costs of deliveries into the SoCalGas system at Blythe. As Dr. Alexander testified, the gas which is not otherwise contracted will go where the marketers can make the most money. By raising the cost of deliveries at Blythe into California, system integration will make deliveries to East-of-California relatively more profitable, which will increase not decrease the probability that gas from Baja California will be sold East of California. 14 IV. THE PROPOSED DECISION ERRS BY IGNORING THE FACT THAT DOWNWARD GAS PRICES WILL RESULT REGARDLESS OF THE ACCESS POINT AND REGARDLESS OF WHETHER THE GAS FLOWS INTO CALIFORNIA OR EAST-OF-CALIFORNIA The Proposed Decision expresses concern throughout that gas from the Energia Costa Azul facility will enter through the Baja Norte and North Baja lines and flow to east of California customers instead of California. 15 SCE believes that its witness, Dr. Michael Alexander, was the only witness who addressed the issue of the price effects of liquefied natural 13 This assumes 200 MMcf/day capacity at Otay Mesa. Attachment 3, Table 2 of Exhibit 9 (SoCalGas/SDG&E, Direct Testimony of Smith. See also Tr., Vol. 31, p. 188, lines (SoCalGas/DG&E, Smith (September 13, It is worth noting that LNG suppliers located within Southern California would not have the same incentive to sell east-of-california under system integration, but they are, as indicated above, less likely to build facilities if system integration goes through, as noted by their opposition in this proceeding. 15 See Section III.G.2 of the Proposed Decision which states, Instead of sending that gas into southern California and making the needed investment, Sempra LNG and Coral may decide that it is more economic to market the gas to east-of-california customers by shipping the gas through the Bajanorte and North Baja pipelines to the interconnection with El Paso. See also Section III.G.6 of the Proposed Decision which states, If pancaked rates apply to access gas from Otay Mesa, such a situation will increase the likelihood that the regasified LNG will be delivered to El Paso over the Bajanorte and North Baja pipelines and sold to east-of-california customers

8 gas that flows to east of California customers instead of California. SCE submits that 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 into the Southern California market through Otay Mesa or through a different access point since the market that serves California is the same market as the one that serves east of California customers. As explained by SCE witness Dr. Alexander, the effect of lower gas prices would 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 the supplies competing to serve the market which includes California. 16 V. OTHER CORRECTIONS TO THE PROPOSED DECISION Applicability of the Peaking Rate: In Section III.G.7 of the Proposed Decision, the Proposed Decision discusses the applicability of the peaking rate to SDG&E and determines that since system integration is approved, the peaking rate does not apply to SDG&E. SCE disagrees that the peaking rate is not applicable in the event that system integration is approved. However, parties had differing views as to whether the peaking rate applied in the event that system integration is not approved. Therefore, for clarity, SCE recommends the following change: Change: Accordingly, we conclude that SoCalGas peaking rate tariff should not apply if a noncore customer of SoCalGas, including SDG&E, obtains gas through the Otay Mesa receipt point. 17 Replace with: Accordingly, we conclude that SoCalGas peaking rate tariff should not apply if a noncore customer of SoCalGas, including SDG&E, obtains gas through the Otay Mesa receipt point and system integration is approved. 16 Rebuttal Testimony o Dr. Alexander (SCE, Exhibit 28, pp Section III.G.7, mimeo, p

9 Reference to facts not admitted into evidence: In Section III.G.10 of the Proposed Decision, the Proposed Decision discusses a news article regarding the construction of a power plant in the Moreno Valley and another nearby power plant. 18 SCE is not aware that these facts are part of the evidentiary record and questions their inclusion in the Proposed Decision. Violations of the merger conditions: In Section III.G.11, the Proposed Decision concludes that system integration would not violate the merger conditions in Decision No SCE disagrees with the Proposed Decision s legal conclusion, especially in view of merging of the SDG&E s transmission facilities with SoCalGas backbone transmission system, 19 which violates the merger decision which provides that SDG&E and SoCalGas lines, facilities, franchises, or permits will not be merged with or transferred to the other utility or any other entity See Section III.G.10, mimeo, p See Coral s Opening Brief, p. 14, where Coral states that With the delivery of re-gasified LNG through Otay Mesa, SDG&E s transmission facilities will become a part of SoCalGas backbone transmission system. 20 Decision No , mimeo pp. 2, 58. See also SCE s Opening Brief, pp

10 Respectfully submitted, DOUGLAS K. PORTER GLORIA M. ING JENNIFER SHIGEKAWA By: Gloria M. Ing Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: ( Facsimile: ( April 3,

11 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 COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E ON THE PROPOSED DECISION 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 3rd day of April, 2006, at Rosemead, California. Alejandra Arzola Project Analyst SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California 91770

12 Gloria M. Ing Senior Attorney April 3, 2006 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 COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U338-E ON THE PROPOSED DECISION 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, Gloria M. Ing Enclosures cc: All Parties of Record (U 338-E P.O. Box Walnut Grove Ave. Rosemead, California ( Fax (