Direct Testimony on Phase 1 of the Triennial Cost Allocation Proceeding Issues

Transcription

1 Application No.: Exhibit No.: SCE-1 Witness: Robert Grimm (U -E) Direct Testimony on Phase 1 of the Triennial Cost Allocation Proceeding Issues Before the Public Utilities Commission of the State of California Rosemead, California June, 01

2 Direct Testimony on Phase 1 of the Triennial Cost Allocation Proceeding Issues Table of Contents Section Page Witness I. OVERVIEW...1 Robert Grimm II. THE UNBUNDLED STORAGE SHARING MECHANISM SHOULD NOT BE CHANGED FROM THE 00 PHASE 1 BCAP SETTLEMENT ADOPTED IN D A. SoCalGas s Proposal Is Not Supported and Unfairly Shifts Significant Risks to Ratepayers... B. The Commission Should Retain the Current Mechanism or Replace It with a Single Auction... III. IV. THE MONTHLY BALANCING SHOULD NOT BE CHANGED FROM THE CURRENT % BALANCING REGIME... THE REQUIREMENT THAT SOCALGAS POST THE TERMS OF ITS UNBUNDLED STORAGE TRANSACTIONS ON ITS ELECTRONIC BULLETIN BOARD MUST BE RETAINED FOR MARKET TRANSPARANCY... V. THE LIMITED AMOUNT OF GAS STORAGE INJECTION AVAILABLE DURING THE WINTER MONTHS SHOULD BE SHARED EQUITABLY BETWEEN CORE AND THE UNBUNDLED PROGRAM... ATTACHMENT RCG-1

3 I. OVERVIEW SoCalGas/SDG&E are proposing to make several changes in Phase 1 of their 01 Triennial Cost Allocation Proceeding (Phase 1) that could alter the balance of the market to the detriment of their customers without sufficient justification and support for the changes. SCE recommends a more cautious and deliberate approach that limits changes to those needed to support daily operations of SoCalGas/SDG&E. SoCalGas/SDG&E s Phase 1 filing seeks for the authority to tighten the daily and monthly balancing requirements while at the same time reducing the amount of storage available to the unbundled storage program, thus limiting the ability for customers to manage daily and monthly imbalances. The Phase 1 filing also seeks to eliminate SoCalGas s requirement to post the actual prices paid by parties for storage products, which would effectively eliminate market price transparency. Finally, after reducing the available supply of gas storage products and eliminating price transparency, both of which will likely increase the price of storage services, the Phase 1 filing seeks to modify the sharing mechanism to increase the shareholder profits from this at risk unbundled storage program. This testimony will discuss changes proposed by SoCalGas/SDG&E in the Phase 1 filing that should be denied or modified. The testimony will sequentially address the items identified in the Assigned Commissioner scoping document Scoping Memo and Ruling of Assigned Commissioner ( Scoping Memo ), filed March 1, 01, A , paragraph, pp. -. SCE will not address scope items 1,,,,,, and in this direct testimony. 1

4 II. THE UNBUNDLED STORAGE SHARING MECHANISM SHOULD NOT BE CHANGED FROM THE 00 PHASE 1 BCAP SETTLEMENT ADOPTED IN D Scoping Memo Item states this proceeding will examine whether the Commission should authorize the proposed changes to the unbundled storage sharing mechanism. SCE recommends that the Commission deny the proposed change to revenue sharing and offer SoCalGas the option to retain its current sharing mechanism or eliminate the sharing mechanisms from the unbundled storage program altogether. SoCalGas proposes to change the unbundled storage sharing mechanism allocation from the existing 0% ratepayers/% shareholders to 0% ratepayers/0% shareholders, or eliminate the sharing mechanism and offer a one-time auction each year. SoCalGas s primary stated basis for this change is it does not provide enough incentive for SoCalGas to creatively and aggressively market its assets, to the ultimate benefit of customers. A. SoCalGas s Proposal Is Not Supported and Unfairly Shifts Significant Risks to Ratepayers SoCalGas already has the incentive to aggressively market its storage because it is entitled to % of the earnings. It is unclear what SoCalGas would do differently with its marketing if it retains a higher percentage of earnings for its shareholders. If SoCalGas has been dissatisfied with its earnings under the existing revenue sharing, it is free to more aggressively market its storage under the existing framework. The sharing mechanism is 0/ (customer/shareholder) sharing for the first $1 million of earnings; / sharing for the next $1 million of earnings; and 0/0 sharing for earnings over $0 million, subject to a $0 million shareholder earnings cap. Prepared Direct Testimony of Steve Watson, A , December 1, 01, p. 1, lines -. Id., at p. 1, lines -. Id., at p. 1, lines -.

5 The ability for SoCalGas to increase storage revenues through aggressive marketing belies its testimony that states that revenues are down because of external forces, such as revolutions in gas production technologies, rather than because of a lack of marketing effort. After stating that external forces are the cause of the reduced revenues, Witness Watson concludes that one of two possible solutions should be employed. First, he concludes that a higher portion of revenue sharing would cause the unbundled program to somehow overcome the external forces that have caused revenues to lag, or alternatively, he proposes that the Commission accept the fact that the current program does not provide sufficient incentive and that SoCalGas could simply offer a one-time auction each year. Witness Watson suggests that creating an increased incentive to SoCalGas would create an incentive for SoCalGas to step up its marketing efforts and increase revenues. In spite of the challenging market forces he identifies, Witness Watson suggests that if sales could potentially increase by a significant margin 1% the customer allocation would increase by $1. million while the SoCalGas allocation would increase by $ million. According to witness Watson s initial assumptions of base revenues of $ million and 01 unbundled sales of $0 million, this leaves $ million of revenue for sharing and allocates $. million to customers and $0. million to shareholders. Using these values, SCE has calculated the values of payments that customers and shareholders would receive under various circumstances, including: the 1% increase in revenue; a.% increase in revenue; no increase in revenue; and a % reduction in revenue. Witness Marelli asserts that shareholder earnings have been reduced because revolutions in gas production technologies, natural gas price volatility is much lower than in the past. Prepared Direct Testimony of Gwen Marelli, A , December 1, 01, p., lines 1-0. Further Witness Watson states, [i]t is unrealistic to believe it (unbundled storage) will generate significantly more than that ($ million in unbundled storage revenues in ) with fewer assets in the future. Prepared Direct Testimony of Steve Watson, A , December 1, 01, p. 1, line 1 p. 1, line. Prepared Direct Testimony of Steve Watson, A , December 1, 01, p. 1, lines -1. Id., p. 1, lines 1-1. Id., p. 1, lines -1. Id., p. 1, lines -.

6 Table II-1 Revenue Changes to Customers and Shareholders ($Million) Change in Revenue Customers Customer Change Shareholders Shareholder (0/0) from (0/0) from $ 0. 1% Increase $.1 $1. $. $.0.% Increase $. $0.0 $. $.0 No Increase $. ($1.) $1. $1. % Decrease $0. ($.0) $0. $ Table 1 shows that customers would receive a lower allocation unless revenues increase by at least.%, while SoCalGas would receive increased revenues unless revenues drop by %. SoCalGas s proposal to change the sharing mechanism to 0/0 should be rejected because it is likely to harm ratepayers and has not been demonstrated to be needed to appropriately incent SoCalGas to prudently market unbundled storage services. Thus, the risk associated with the possibility that marketing will significantly increase revenues is bore primarily by ratepayers while largely insulating SoCalGas. B. The Commission Should Retain the Current Mechanism or Replace It with a Single Auction SCE recommends that the current mechanism be retained. In the alternative, SCE recommends that the Commission provide SoCalGas the option to retain its current sharing mechanism or eliminate the sharing mechanisms from the unbundled storage program altogether. The unbundled program could be managed as a single auction each year where storage injection, withdrawal, and inventory are auctioned. The auction could have products ranging from 1 month to three years with offers selected based on the NPV of each offer. All revenues received from the auction would go ratepayers. Additionally, products could be traded among market participants in a secondary market.

7 Eliminating the sharing mechanism would eliminate risk to SoCalGas and, assuming the market clears at the market price, would maximize revenues to ratepayers because they would retain 0% of the revenues. SCE recommends that the Commission deny the proposed change to revenue sharing and offer SoCalGas the option to retain its current sharing mechanism or eliminate the sharing mechanisms from the unbundled storage program altogether.

8 III. THE MONTHLY BALANCING SHOULD NOT BE CHANGED FROM THE CURRENT % BALANCING REGIME Scoping Memo Item states this proceeding will examine whether the Commission should authorize the change to five percent monthly balancing from the current %. SoCalGas/SDG&E are proposing to reduce the amount that a customer could be out of balance at the end of each month from +/- % to +/- %. This proposed reduction should be rejected because SoCalGas/SDG&E have not provided sufficient support to justify the reduction and because there have been, and will be, significant rules changes that should be implemented and observed before making this additional change. The monthly imbalance tolerance provides customers with a mechanism to manage unexpected variations in gas load or supplies and to support the system during OFOs. For example, consider a generator that expects its gas use during a day to be at least some minimum amount but could be up to a some maximum amount. If a high OFO is called or is likely to be called, instead of purchasing gas to match its estimated gas burn, the generator may purchase only the minimum gas it knows it will burn to help keep the SoCalGas/SDG&E system from being oversupplied. Such an outcome will result in a negative customer imbalance if the gas burn exceeds the minimum gas delivery. Alternatively, if a low OFO is called or likely to be called, the generator may purchase its maximum forecast gas burn, again to support the SoCalGas/SDG&E gas system. Such an outcome will result in a positive customer imbalance if the gas burn is less than the maximum gas delivery. In either of these examples, it appears counterproductive to penalize a customer for acting in the best interest of the gas system. Witness Watson asserts the conclusory statement that under deliveries over the course of a month allow customers to basically get free, involuntary loans of gas from storage customers. Scoping Memo, p.. Prepared Direct Testimony of Steve Watson, A , December 1, 01, p., lines -1.

9 This statement is overly simplistic. The impact of the imbalances of any individual customer imbalances cannot be considered in isolation. In fact, SoCalGas/SDG&E have hundreds of thousands of noncore customers and, at any point in time, some customers are likely to have positive imbalances and some customers are likely to have negative imbalances. It is far more likely that if a single customer is under delivered it is borrowing its gas from a customer that has over delivered and has a positive imbalance, rather than from storage. On a customer by customer basis, it should not matter to SoCalGas whether an individual customer is over delivered or under delivered so long as the system is in balance. And, as the gas system operator, SoCalGas/SDG&E have the ability to call an OFO on any day that the system imbalance exceeds established levels to ensure operations are safe and reliable. Further, SoCalGas/SDG&E have not shown that there is a customer preponderance to be out of balance in a systematic manner that is causing system reliability concerns. In fact, the SoCalGas/SDG&E system has been able to provide % monthly balancing tolerances to their customers for decades. Accordingly, there s no demonstration that the current monthly balancing range causes operational harm to SoCalGas/SDG&E, and no evidence that it is not working or that it cannot continue to work. As was mentioned above, SoCalGas/SDG&E is seeking to implement new OFO rules that will improve the ability to manage daily imbalances. SoCalGas/SDG&E are also making significant revisions via the other proposals in this Application and the recent low OFO modifications 1 that will affect the daily operations of customers in ways that cannot be known without significant experience with these new rules. SCE recommends that the Commission retain the current % monthly balancing tolerance because there is no evidence to support that a change is needed for system reliability and because SoCalGas/SDG&E are proposing many related changes in Phase 1 that need to be assessed in practice before considering a change to monthly balancing tolerances. 1 Decision , issued June 1, 01.

10 IV. THE REQUIREMENT THAT SOCALGAS POST THE TERMS OF ITS UNBUNDLED STORAGE TRANSACTIONS ON ITS ELECTRONIC BULLETIN BOARD MUST BE RETAINED FOR MARKET TRANSPARANCY Scoping Memo Item states this proceeding will examine whether the requirement that SoCalGas post the terms of its unbundled storage transactions on its Electronic Bulletin Board should be eliminated. 1 SoCalGas should retain the requirement to post its storage deals immediately on its Electronic Bulletin Board (EBB) to support price transparency. SoCalGas is the only direct gas storage provider in Southern California and the provider of the only firm storage available to its customers. As a result, customers seeking gas storage in southern California have no practical alternative to SoCalGas storage. If SoCalGas did not have the requirement to post storage deals on its EBB, an unfair pricing advantage would be created. SoCalGas, as the only direct seller of storage in southern California, would have full knowledge of the price that each customers is paying, but customers would not have a basis to understand the market price for storage. Further, since the posting requirement is the current accepted practice for establishing a market clearing gas price in southern California, it should be retained unless the posting is harmful to the gas storage market. The requirement should be retained because SoCalGas has not demonstrated harm to the gas storage market as a result of posting gas storage deals on its EBB. Indeed, market price transparency is a basic tenant of ensuring a competitive market. Although Witness Watson proposes that the current posting requirement be eliminated, his justification actually undermines his proposal and supports retaining the posting requirement. Initially, he states that it should now be obvious that SoCalGas does not have the ability to manipulate prices in the unbundled storage market. 1 He also asserts that the posting requirement 1 Scoping Memo, p.. 1 Prepared Direct Testimony of Steve Watson, A , December 1, 01, p. 1, lines -.

11 1 1 1 is unnecessary because unbundled storage customers only pay what is warranted so posting the prices paid by others in unnecessary. 1 However, understanding the price that other market participants are paying is a critical element to understanding the value of storage services. Removing price transparency could lead to pricing differentiation due to SoCalGas s dominant market position and the inability of individual customers do know the range of prices that other market participants were willing to pay. For example, Witness Watson acknowledges, [i]f [SoCalGas] did [have the ability to manipulate prices] it would be able to generate much greater revenue than it has. 1 The possibility of the market manipulation raised by Witness Watson is troubling and is basis enough to retain measures to assure market transparency. SoCalGas has not provided any evidence to indicate that the posting requirement is harmful to the market. FERC pipelines have numerous posting requirements to ensure price transparency, and there is no reason to do otherwise with SoCalGas, particularly given SoCalGas s shareholder incentive. The Commission should not eliminate the posting requirement that effectively provides price transparency. 1 Id., p. 1, lines -. 1 Id., p. 1, line (emphasis added).

12 V. THE LIMITED AMOUNT OF GAS STORAGE INJECTION AVAILABLE DURING THE WINTER MONTHS SHOULD BE SHARED EQUITABLY BETWEEN CORE AND THE UNBUNDLED PROGRAM Scoping Memo Item states this proceeding will examine whether the Commission should authorize changes in the allocation of storage injection and withdrawal capacity to the balancing function, and what effect this will have on rates and capacities. 1 SoCalGas proposes that no firm storage injection be available to the unbundled storage program. Witness Watson describes the rationale for setting the core firm withdrawal requirements during the winter and the firm core injection during the summer, but does not provide any rationale for the allocation for core winter injection or summer withdrawal. 1 SCE recommends that a reasonable amount of storage injection and withdrawal should be allocated to the unbundled storage program. SCE recommends that storage injection and withdrawal rights for countercyclical service (summer withdrawal and winter injection) should reflect countercyclical load. Table of Witness Watson s testimony 1 identifies the Phase 1 case proposed inventory, injection, and withdrawal allocation for Balancing, Core, and Unbundled storage. Based on the values identified in Witness Watson s testimony, core has a need for MMcfd of injection rights during the summer and, MMcfd of withdrawal rights during the winter. 0 However, Witness Watson does not describe any specific reliability or other need for core injection during the winter or for withdrawal during the summer. A review of the values in Witness Watson s Table show that the core summer withdrawal is proposed to be 1,01 MMcfd and the unbundled program is proposed to be 0 MMcfd. There is 1 Scoping Memo, p.. 1 Prepared Direct Testimony of Steve Watson, A , December 1, 01, p., lines -. 1 Id., p., Table. 0 Id., p., lines -.

13 no evidence provided to support providing core over times more withdrawal capacity during its low load period than to unbundled program during the noncore s peak load period. In fact, according to the Southern California Gas 01 California Gas Report Redacted Workpapers 1 for the years 01, 01, and 01, the average core demand for gas during the summer months is 1. MMcfd while the average noncore summer gas demand is 1,. MMcfd. Thus, SoCalGas proposes that core be allocated enough storage withdrawal to meet approximately 1% of its average daily summer load and unbundled program approximately 1% of its average summer load. Using these values, core represents.% of the demand during the summer months and noncore represents.% of the summer demand. Based on the demand of the system, the unbundled program that primarily supports the noncore and its countercyclical load profile should be allocated. % of the available withdrawal during the summer and. % of the available injection during the winter. SCE proposes that the summer unbundled withdrawal allocation be MMcfd and the core summer withdrawal allocation be 1 MMcfd. This allocation would allow both the core and noncore to meet approximately % of its average daily summer load through storage withdrawal. Similarly, SCE proposes that the allocation of winter injection for the unbundled program be.% of the available 10 MMcfd or 1 MMcfd and the allocation of winter injection for the core should be MMcfd or.% of the available injection. 1 Southern California Gas Company 01 California Gas Report Redacted Workpapers, pp. 1-1.

14 Attachment RCG-1 Southern California Edison Company Qualifications and Prepared Testimony of Robert Grimm

15 QUALIFICATIONS AND PREPARED TESTIMONY OF ROBERT GRIMM Q: Please state your name and business address for the record. A: My name is Robert C. Grimm and my business address is Walnut Grove Avenue, Rosemead, California. Q: Briefly describe your present responsibilities at SCE. A: I currently hold the position of Strategic Planning Manager in SCE s Energy and Environmental Policy Department. One of my responsibilities is to develop regulatory strategies and positions on behalf of Southern California Edison in natural gas proceedings before the California Public Utilities Commission, the Federal Energy Regulatory Commission and any other regulatory or legislative bodies. Q: Briefly describe your educational and professional background. A: I graduated with an MBA from Saint Mary s College of California in Moraga, CA and with a B.S. in Mechanical Engineering from the University of California in Davis, CA. I am a registered professional engineer in the State of California (license #M01). I have been employed by SCE since 00 and have worked on natural gas issues since joining SCE. I began working in the energy industry in 1 and before joining SCE, my employment included approximately two years at the California Independent System Operator and 0 years at Pacific Gas & Electric Company. Q: What is the purpose of your testimony in this proceeding? A: The purpose of my testimony in this proceeding is to sponsor Exhibit No. SCE-1. Q: Was this material prepared by you or under your supervision? A: Yes, it was. Q: Insofar as this material is factual in nature; do you believe it to be correct? A: Yes, I do. Q: Insofar as this material is in the nature of opinion or judgment; does it represent your best judgment? A-1

16 A: Yes it does. Q: Does this conclude your qualifications and prepared direct testimony? A: Yes, it does. A-