In approving the Gas Accord, we must clarify our intentions about several issues related to PG&E’s gas transportation service.
We accept the Gas Accord’s resolution of reopened proceedings on PG&E’s decision to construct Line 401, but we must review the record in order to address deceit claims made by Norcen.
PG&E submits that there is no lawful basis to reopen the finding of reasonableness in D.94-02-042. PG&E cites the legal doctrine of res judicata, under which a matter decided by a court of competent jurisdiction is decided finally.
In reply briefs, TURN, Norcen, and Edison counter PG&E’s res judicata argument by citing Commission authority under Public Utilities (PU) Code § 1708. Edison has since disavowed its position, but its legal arguments are part of the record.
We reject PG&E’s argument that reopening the decision to construct is unlawful. PU Code § 1708 specifically allows the Commission to rescind, alter, or amend any of its orders or decisions after notice and opportunity to be heard. Although res judicata rules apply generally to Commission orders, they should be administered more flexibly than in the judicial system. [ Arakelian Farms, Inc. v. Agricultural Labor Relations Bd. , 49 Cal. 3d 1279, 1290 (1989).] In the present circumstance, the discovery of new evidence provided ample justification for the reopening.
According to PG&E, the existence of the McLeod memo was revealed in earlier cross-examination, and PG&E did not mislead the Commission or the parties by not volunteering its contents. The McLeod memo reveals a set of reasons for building the expansion project that are somewhat different from the reasons set forth in PG&E’s testimony, but PG&E claims its testimony sets forth the actual reasons that management made its decision, not the reasons supported by PG&E staff in the memo. PG&E argues that Norcen’s Rule 1 allegations are not based on new evidence, but are only another version of a contract suit against PGT now underway in a different forum; Norcen’s attempt to rescind its contract for firm service on the PGT portion of the expansion belongs in court, not before the Commission.
In laying a foundation for its deceit claim, Norcen makes several arguments against the reasonableness of PG&E’s decision to construct. First, Norcen asserts that there was not sufficient market demand for Line 401 to avoid underrecovery of the revenue requirement. Instead, PG&E relied on the commitments of shippers with signed contracts on the PGT portion of the expansion. Those shippers would "of necessity" use Line 401 for transportation service in California. [ Exhibit 455, Bates 000679.] Norcen points out that the reasons for the recommendation to build contained in the McLeod memo are different from the reasons in PG&E’s earlier testimony. The McLeod memo emphasizes the irrevocable commitment of upstream shippers, PG&E’s "first mover" advantage over a pipeline proposed by Altamont Gas Transmission Company (Altamont), and loss of a $44 million supplemental payment from TransCanada PipeLines Ltd. (TransCanada) if the expansion project was canceled. Norcen’s witness Sheldon Reid testified that Norcen never intended to take Line 401 service, but signed a contract for PGT service in order to deliver Canadian gas to Malin. [ Tr. 70:9093.] Norcen assumed that downstream shippers taking that gas would have access to rolled-in rates in California. Norcen accuses PG&E of sharp business practices because PG&E surreptitiously planned to pursue the crossover ban at the time Norcen signed its PGT contract.
TURN argues that PG&E unreasonably went forward with the expansion based on a view of market demand rooted in PG&E’s attempts to avoid or reverse two Commission requirements: incremental ratemaking, and firm contracts for Line 401 capacity. El Paso agrees with Norcen that the Altamont threat and the TransCanada payment were major drivers of the decision to construct. New Mexico claims that PGT subscriptions did not necessitate Line 401 loads, because PG&E had notified PGT shippers that lack of market support would result in reduced physical facilities on the California side. New Mexico argues that sufficient firm contracts for Line 401 service were not in place, that supply basin economics did not support the project, and that Altamont and TransCanada considerations are insufficient for a finding of reasonableness. CAPP concurs that market support for the expansion was inadequate, and asks for Commission findings that will assist individual shippers entrapped by PG&E into PGT capacity commitments.
We are faced with new evidence that falls into three categories: (1) the McLeod memo and supporting documents and testimony; (2) discovery documents and testimony presented by Norcen, El Paso, and TURN; and (3) information about stranded cost risks addressed in A.89-04-033, the Line 401 certification proceeding. We have carefully reviewed this evidence, but we have not attempted to reinterpret or recharacterize evidence taken during earlier phases of this proceeding.
The McLeod memo sets forth reasons to construct Line 401 that clearly differ from reasons in PG&E’s earlier testimony. During 1993 hearings, PG&E presented five related factors in support of its October 25, 1991, decision to commence construction of the expansion project: [ Exhibit 6, p. GJB - 7.] (1) upstream PGT capacity was fully subscribed, confirming market intent to support the overall expansion project; (2) more than 80% of Line 401 capacity was subscribed by firm shippers, although their commitments included various termination rights; (3) PG&E proceeded only after contracts with anchor shippers Edison and SDG&E were fixed; (4) there was no shipper interest in Line 401 capacity that might be less than upstream PGT capacity; and (5) Canadian gas at the northern end of the pipeline was abundant and competitively priced. The McLeod memo does not present its reasons as succinctly, but summarizes three: (1) although there was uncertainty about rate design issues before this Commission, revenue recovery was not an issue because California shippers were irrevocably contracted on upstream pipeline segments; (2) target throughputs were attainable, due to sound economics and full subscription of PGT capacity; and (3) deferral of the project was an ineffective option because it would increase construction and financing costs. The memo goes on to discuss project economics, management of regulatory risk, and competitive positioning. The project economics are supported in the attached study by McKinsey & Company. Regulatory risks resided primarily on the California segment of the pipeline. The expansion’s competition was the Altamont project. Cancellation risked loss of the TransCanada payment.
Notwithstanding this discrepancy in PG&E’s testimony, we will not change our ruling on the reasonableness of PG&E’s decision to construct its expansion. PG&E was placed at risk for any revenue shortfalls due to the undersubscription of its Line 401, and, therefore, PG&E’s shareholders had to absorb the revenue shortfalls to the extent that Line 401 was not fully subscribed, was not fully utilized, or was utilized but at discounted rates. Moreover, nobody forced PGT’s expansion shippers to sign firm service agreements with PGT. PG&E apparently believed that the full subscription to PGT’s expansion inevitably would result in market support for PG&E’s Line 401.
We are concerned, however, that PG&E might not have testified in our previous proceeding as to the whole truth when it omitted in its 1993 testimony mention of competition from Altamont or the TransCanada payment and when it mischaracterized the level of firm commitments to its Line 401.
In D.94-02-042, the Commission found the decision to construct to be reasonable because the certification decision did not assign stranded costs to shareholders, other Commission decisions protected shareholders from indirect costs of stranded capacity, and discounting limits would minimize stranded costs. [ D.94 - 02 - 042, Finding of Fact 11, 53 CPUC2d 215, 248 (1994).] New evidence on actual market transactions show that discounting limits do little to minimize stranded costs. The limits are low enough--approximately $0.08/Dth--that PG&E retains a strong incentive to favor Line 401 sales over brokering of unused Southwest capacity, resulting in increased ITCS obligations to original system ratepayers. [ Exhibit 228.] Yet, in A.89-04-033 itself and in the subsequent amended application, PG&E assured the Commission: [ Exhibits 532 and 533.]
"The cost of the service provided by the Expansion Project will cover the incremental costs of the new facilities and will not include any costs of PG&E’s existing gas transmission system. Under this cost allocation proposal, PG&E’s existing gas customers will be insulated from any risks associated with the Expansion Project, unless they also receive service on the Expansion Project." (Emphasis added.)
* * *
"Under this incremental cost allocation proposal, PG&E’s existing utility gas customers who do not also receive service over the Expansion Project are insulated from any costs or risks associated with the Expansion Project." (Emphasis added.)
Two PG&E witnesses testified to the meaning of the promise. The first witness was Richard Clarke, PG&E’s Chairman of the Board and Chief Executive Officer in 1989, when PG&E filed A.89-04-033. In response to a question by the ALJ, Clarke testified: [ Tr. 72:9488, regarding Exhibit 532.]
Q Does it mean that existing gas customers will be insulated from risks associated with stranded costs?
A I don’t see that here. But I guess to pursue, if stranded can be easily defined and distinguished from slack, then I assume that would also flow.
Slack capacity is capacity in excess of demand needed to generate the benefits of competition. Stranded capacity is unused capacity beyond slack capacity.
The second witness was Geoffrey Bellenger, PGT’s Manager of Gas Supply and Regulatory Affairs in 1989. The quoted excerpts from A.89-04-033 were prepared under his supervision. Bellenger noted that the first excerpt is found under the heading "Financing and Rates" and goes to the cost allocation proposal in the application. In response to questions by the ALJ about specific meaning, Bellenger testified: [ Tr. 73:9586, regarding Exhibit 532.]
A And I think what it’s saying is that PG&E existing customers will not have to pay any of the costs of the pipeline expansion project.
And in this context, in 1989, it can only be talking about the direct costs of the project--the costs that are used to establish the revenue requirement and the rates--and that the risks associated with the project would be PG&E’s ability to recover that revenue requirement in the market.
Q Why do you think it’s limited to direct costs?
A Because if there was any indication at the time from the Commission, or anywhere else, that PG&E would be exposed to indirect costs, I just have to believe that there would have been something in the application to address that issue.
And my own personal recollection: At the time we put this together, there was no such indication. And this was a traditional approach to financing and ratemaking; and this was to give the Commission the assurance that the direct costs of the project would not be borne by the existing ratepayers.
In D.94-02-042, the Commission found that shareholders should not bear the costs of stranded capacity on interstate pipelines or PG&E’s original pipeline system. It did so in large part because the certification decision did not explicitly assign indirect stranded costs to shareholders. The Commission stated: [ D.94 - 02 - 042, 53 CPUC2d 215, 227 (1994).]
"In D.90-12-119, we could also have assigned to shareholders the costs of stranded capacity, but we did not. To make such an assignment now would unfairly impose a new performance standard on PG&E."
We now see that this performance standard was not new, but was embodied in the explicit promises made by PG&E in A.89-04-033. PG&E stated unequivocally that original system ratepayers would be "insulated from any costs or risks associated with the Expansion Project." PG&E witness Bellenger attempts to limit those risks to the direct costs of Line 401, on the grounds that PG&E had no notice to the contrary. We cannot accept this limitation. The meaning of the risk protection statements in A.89-04-033 is unambiguous. No interpretation is necessary. PG&E’s Chairman of the Board at the time admits as much, as long as stranded capacity is distinguished from slack capacity.
PG&E’s assumption of revenue requirement risks and agreement to bear ITCS costs under the Gas Accord is a logical consequence of its earlier commitments. Thus, while we will not change our finding on PG&E’s reasonableness to construct its expansion, we believe that PG&E should bear more responsibility for its risks and stranded costs than it has in the past and we find that the Gas Accord provides a reasonable resolution of this issue.
Norcen asks for specific relief in its dispute with PG&E. Norcen seeks: (1) findings that PG&E’s decision to construct the expansion was unreasonable, and that PG&E deceived the market into becoming captive to PG&E’s designs, which were antithetical to market signals; (2) use of 95% load factors in Line 401 rate calculations; (3) an order requiring PG&E to accept permanent release of Norcen’s contracted capacity on PGT and Canadian pipelines, without adverse economic consequences to PG&E ratepayers; and (4) an order setting hearings to determine the amount and extent of stranded costs caused by PG&E, and eventual removal of stranded capacity from rate base and removal from rates of the costs of stranded interstate capacity.
These seem to be the key events within a massive record: On January 22, 1991, FERC issued the decision that allowed shippers to use Malin as a delivery point on the PGT portion of the expansion. On January 29, 1991, PGT wrote potential shippers a letter assuring them that PGT would keep them informed as events unfold at FERC and the Commission. [ Exhibit 521.] On February 20, 1991, PG&E Vice President John Keyser wrote PGT President Stephen Reynolds to warn that failure to contract for firm capacity on the PG&E segment of the expansion would result in California physical facilities that do not match PGT expansion capacity. [ Exhibit 476.] On the same day, PG&E transmitted a package of documents--including the Keyser letter--to prospective shippers. [ Exhibit 480, Attachment 2, ref. Item 8.] Norcen (or Bonus Energy, Inc., Norcen’s predecessor in interest) received the Keyser letter. On February 26, 1991, Reynolds wrote Commission President Patricia Eckert to propose, among other actions, what is now known as the crossover ban. [ Exhibit 477.] On April 23, 1991, PG&E filed with FERC a pleading seeking the crossover ban. [ Exhibit 498.] Sheldon Reid, now Vice President of Norcen, testified that Norcen did not receive either a copy of the FERC pleading or news of its existence before April 25, 1991, when Norcen signed its firm service contract with PGT. [ Tr. 69:9007.]
Norcen asserts that the failure of PG&E or PGT to inform Norcen of utility intentions to pursue the crossover ban, in the face of Norcen’s intention not to take service on Line 401, was part of a covert campaign to force PGT shippers to use Line 401 for deliveries to Northern California. According to Norcen, such strong-arm efforts were deceitful and contrary to shipper intentions, and they justify the requested relief. CAPP supports Norcen’s request for findings of impropriety, but concedes that the Commission is not empowered to administer the requested contract remedies.
PG&E and PGT argue that Norcen’s allegations of deceit or breach of promise are unsupported by the facts. They point to a Norcen internal memorandum dated February 5, 1991, which expresses concern about PGT’s "stated position on ‘no cross-over’ between the new PGT Expansion and the new PG&E Expansion at Malin...." [ Exhibit 480, Attachment 5.] The memo suggests that Norcen knew of PGT’s intent before it signed its PGT contract. PG&E and PGT claim the dispute between Norcen and PGT is a contract matter that should be decided by the courts, not the Commission. PG&E notes that the alleged misdeeds by PG&E and PGT occurred prior to execution of Norcen’s contract with PGT. Therefore, contract principles cannot be applied.
We will not make the findings sought by Norcen. Although we are concerned about some of PG&E’s actions, we will not grant Norcen the relief it seeks. At most, PG&E and PGT sent mixed signals to shippers. The February 5, 1991, Norcen memorandum clearly shows that Norcen understood PGT’s position regarding crossover. The February 20, 1991, letter from PG&E to PGT indicates that PG&E’s solution to mismatched demand for PGT and PG&E service was to build less capacity in California. In a deposition before Norcen attorneys, PGT Senior Vice President Paula Rosput understood that some successful PGT bidders might not seek to contract for firm capacity south of Malin. [ Exhibit 537, pp. 191 - 194.] Yet PGT’s Manager of Gas Supply and Regulatory Affairs testified that there was no shipper interest in Line 401 capacity that might be less than upstream PGT capacity. The PG&E steering committee endorsed that assessment in October 1991, six months after the PGT portion was fully subscribed, despite the fact that firm capacity commitments had not filled Line 401. Obviously PG&E did not carry out its threat to build less than matching capacity south of Malin. Did PG&E interpret shipper reluctance to sign Line 401 contracts as a bluff rather than a lack of interest? Did PG&E really believe those shippers would eventually contract for matching Line 401 capacity "of necessity?" If so, what was the point of the warning in the February 20, 1991, letter regarding lower than matching capacity in California? We do not have good answers to these questions, but we do not intend to interpret the mixed signals sent during contract negotiations.
Turning to other relief requested by Norcen, load factors within rate calculations are resolved by the Gas Accord. We will deny Norcen’s request for an order to accept release of Norcen’s PGT capacity. As a policy matter, Norcen’s contract dispute with PGT belongs in the court where it began, not before the Commission. We need not address the jurisdictional arguments of PG&E and PGT. Finally, it is not necessary to convene hearings on stranded costs.
In the motion that led to the reopening of the decision to construct, Norcen and TURN recommend that the Commission assess whether PG&E’s nondisclosure of the McLeod memo violated Rule 1 of the Commission’s Rules of Practice and Procedure. Norcen and TURN submit that if PG&E had properly disclosed the McLeod memo, there is a strong expectation that the Commission would alter its findings that PG&E’s decision to construct was reasonable.
Rule 1 is a code of ethics that requires any person appearing before the Commission to agree "never to mislead the Commission or its staff by artifice or false statement of fact or law." Such misleading conduct can include omission of facts that might influence a Commission decision, if the omission is intentional or caused by reckless or grossly negligent actions. In the present context, reckless behavior can be acts or omissions that are heedless or inattentive to material consequences. [ Black’s Law Dictionary, Revised Fourth Edition, p. 1435 (1968).]
We perceive two possible areas of misbehavior. First, PG&E may have misled the Commission in PG&E’s testimony on the reasons behind the management decision to construct the expansion. Omitted from the reasons PG&E provided for its decision to construct its expansion was its intention to gain the first mover advantage over the competing Altamont project, and the potential loss of a $44 million payment from TransCanada. As well, it appears that fewer shippers had contracts for Line 401 capacity than what PG&E represented to the Commission. The McLeod memo shows that in October 1991 PG&E held signed contracts for less than 25% of Line 401 capacity, [ Exhibit 455, Attachment 1, Bates 000687.] contradicting the earlier assertion that more than 80% of Line 401 capacity was subscribed by firm shippers. PG&E characterized the Edison and SDG&E commitments to Line 401 as being "fixed," but contracts were not yet signed. As discussed above, we no longer question the reasonableness of PG&E’s decision to construct, even after review of the McLeod memo, but it appears that the disparities between PG&E’s earlier testimony and the later-revealed McLeod memo may constitute a Rule 1 violation. Moreover, if PG&E’s witness knowingly misled the Commission with PG&E’s earlier testimony, this would constitute a felony under Section 2114 of the California Public Utilities Code.
Second, should the Commission impose penalties on PG&E for failure to provide the McLeod memo to other parties in response to explicit discovery requests? Edison, the Indicated Expansion Shippers, and New Mexico requested information of the type contained in the McLeod memo. In its Data Request No. 2, Q6, Edison requested "all documents that relate to PG&E’s determination that there was sufficient demand to justify construction of the Project." [ Edison March 10, 1995, response to motion to reopen, attached Exhibit "A", p. A - 2.] The McLeod memo certainly contains such information, and PG&E provided Edison with five paragraphs from the memo, claiming business confidentiality and attorney-client privilege for the rest of the document. PG&E did not provide or identify all documents as requested, but provided the excerpted paragraphs from internal documents "illustrating" factors considered by PG&E. In his first data request, consultant Thomas Beach, then a witness for the Indicated Expansion Shippers and more recently a witness for successor organization CAPP, sought identification of withheld documents and "a copy of all data requests obtained from any other party and all responses provided by PG&E to such data requests." [ Norcen and TURN February 24, 1995, motion to reopen, attached Exhibit 3, Question A.6 and Question B.2.] Beach later specifically asked for PG&E’s answer to Edison’s Second Data Request, Q6. [ Norcen and TURN February 24, 1995, motion to reopen, attached Exhibit 5, Question 4.] Neither CAPP nor the Indicated Expansion Shippers received a copy of the redacted McLeod memo that PG&E provided to Edison. New Mexico asked PG&E to provide all documents that discuss load factors for firm or as-available service on Line 401. [ New Mexico March 10, 1995, response to motion to reopen, attached Exhibit "A", Question 16.] The McKinsey & Company study attached to the McLeod memo discusses demand forecasts, throughput levels, and utilization percentages, arguably the same measures of expansion project usage as load factor. New Mexico did not receive from PG&E either the McLeod memo or its identification as a confidential document.
The evidence in dispute, and PG&E's failure to produce or identify the McLeod memo in discovery, causes us to be very concerned that PG&E may have violated our rules, including Rule 1 of the Commission's Rules of Practice and Procedure. Unfortunately, the parties to the Gas Accord, including ORA, erroneously believed that they could settle the alleged Rule 1 violations, and therefore, the termination of the Rule 1 allegation proceeding is a part of the Gas Accord.
The sanctity of the Commission's rules is not a matter that private parties or the ORA can settle. Violations of our rules cannot be forgiven or traded for other concessions. Only the enforcement staff of the Commission (e.g., Consumer Services Division or other authorized enforcement staff) can negotiate a settlement with a utility involving Rule 1 violations, subject to an independent determination by the Commission as to whether or not to approve that settlement. The settlement of such violations should not be merged into a settlement of other unrelated issues.
For this reason, when the Commission sees provisions settling Rule 1 violation allegations in a settlement involving private parties or the ORA, or any other provision parties have no lawful authority to settle, we will disregard the provision and consider it an ultra vires or unauthorized act. Under Rule 51.7 of the Commission's Rules of Practice and Procedure, we normally would allow parties a reasonable time to decide if Commission modifications to a settlement are acceptable. However, we do not consider striking an unauthorized or ultra vires provision to be a modification of a settlement, since the provision is a legal nullity. Therefore, if we consider the settlement to be otherwise in the public interest by striking unauthorized or ultra vires provisions, we do not view that as modifying the settlement under Rule 51.7 of our rules,
and we instead consider the adoption of the settlement to be binding on the parties under Rule 51.8 of the Commission's Rules of Practice and Procedure. Accordingly, we will ignore the Rule 1 provision of the Gas Accord.
After the alternate proposed decision of Assigned Commissioner Richard A. Bilas and Commissioner Josiah L. Neeper was mailed on June 11, 1997, PG&E met with representatives of the Commission’s Consumer Services Division in order to negotiate a settlement and attempt to obviate the need for an Order to Show Cause proceeding concerning PG&E’s alleged Rule 1 violations. On July 1, 1997, the Consumer Services Division submitted to the Commission a settlement between PG&E and the Consumer Services Division concerning the alleged Rule 1 violations (hereinafter the "Rule 1 Settlement"). The Rule 1 Settlement is attached to this order as Appendix E. [ Since private parties, other than the company allegedly committing the Rule 1 violations, have no right to participate in settlement concerning the alleged Rule 1 violations, there would be no reason to apply the comment periods normally provided under Rule 51.4 of our Rules of Practice and Procedure to the Rule 1 Settlement. Accordingly, pursuant to Rule 87 of our Rules of Practice and Procedure, we will sua sponte waive the 30-day comment period and 15-day reply period in Rule 51.4 in order to expeditiously rule on the Rule 1 Settlement.]
The major provisions under the Rule 1 Settlement provide that, without admitting that it has committed a Rule 1 violation, PG&E would make a payment of $850,000 to the General Fund for the State of California, which would not be recorded as an operating expense by PG&E for ratemaking purposes. PG&E has further agreed in the Rule 1 Settlement that its professional-level employees, who routinely practice before the Commission, would take an ethics training course of at least four hours (and up to one full day) regarding the preparation and processing of discovery and prepared testimony.
After reviewing the Rule 1 Settlement between PG&E and Consumer Services Division, we conclude, pursuant to Rule 51.1(e) of our Rules of Practice and Procedure, that the settlement is a reasonable resolution of the alleged Rule 1 violations in light of the whole record, that it is consistent with law, and that it is in the public interest. We therefore adopt the Rule 1 Settlement in its entirety.
PG&E’s agreement under the Rule 1 Settlement to pay $850,000 represents a substantial compromise by PG&E of alleged improprieties which, if proven, could lead to very serious consequences. Moreover, PG&E’s agreement to have its employees, who routinely appear before the Commission, attend at least four hours of ethics classes, should help ensure that in the future PG&E’s employees will not misrepresent matters or mislead the Commission whether or not PG&E employees have done so in the past.
In view of PG&E’s substantial compromises in the Rule 1 Settlement, we see no point to issuing an Order to Show Cause instead of approving the Rule 1 Settlement. Indeed, the Rule 1 Settlement avoids a protracted Order to Show Cause proceeding, and it is not clear that the proceeding would have resulted in fines equivalent to the amount of money PG&E has already agreed to pay. Moreover, PG&E’s agreement to have employees attend an ethics training course should help prevent problems in the future.
We want to emphasize to PG&E that we will not tolerate any violations of our rules. We will not allow utilities or any other parties to play fast and loose with our rules, and we expect PG&E management to take extra steps to ensure that its employees or agents strictly adhere to our rules and regulations when they represent PG&E in Commission proceedings.
In comments to the ALJ’s proposed decision, TURN argues that adoption of the Gas Accord will preclude revisions to PG&E’s rates and services that might otherwise be ordered in the wake of the Commission’s upcoming Natural Gas Strategic Plan (Plan). Several Gas Accord signatories disagree, claiming that the settlement will encourage progress toward future policy changes by resolving regulatory disputes over PG&E’s past actions.
PG&E asserts that the Gas Accord is consistent with the Plan and will not tie the Commission’s hands in the future. PG&E states: [ PG&E Reply Comments on the ALJ’s Proposed Decision, filed April 30, 1997, p. 3.]
"The Accord does not preclude the Commission’s review of numerous other issues, such as core rate deaveraging or customer rate design, which are currently examined in Biennial Cost Allocation Proceedings. The Accord makes significant movement toward a more competitive procurement market, but does not limit additional steps, such as an examination of the role of utility core procurement as core aggregation increases. …In addition, the Accord does not address changes in reliability standards, qualifications for electric generation rates in a post-divestiture environment, or the interactions of the electric industry and natural gas market unbundling at the distribution level. All of these important issues can be appropriately addressed in a state-wide strategic review."
PG&E is correct that approval of the Gas Accord does not preclude the Commission from moving forward on various other important natural gas issues. Our intention in the Plan is to review the structure of the industry and specific approaches to rate decisions, unbundling, market entry and related topics so as to promote a more competitive marketplace. While there are significant differences between the electric and natural gas industries, we intend to consider the electric industry model (and direct access for all customers classes in particular) for its applicability to the natural gas industry. It is possible that the natural gas strategic plan will lead to consideration of issues similar to or extended from issues addressed in the Gas Accord. It is our intention to fulfill the intent of the Gas Accord to provide stable and predictable backbone transmission rates throughout the Gas Accord period, as well as to see that its other provisions are fairly and properly implemented. However, if necessary, we will not hesitate to consider whether changes to Gas Accord issues should be made before the end point of the Accord in order to facilitate overarching policy goals. While we will respect the spirit of the settlement, it is not necessary to pledge that in the natural gas strategic plan the Commission will not consider changes to the Gas Accord given appropriate notice and due process.
We will not delay approval of the Gas Accord in order to consider the Plan, but we intend to hold PG&E to its word that our approval of the Gas Accord will not limit the Commission’s authority if the Plan requires changes to PG&E’s ratemaking structure or to PG&E’s services. Even without PG&E’s recognition of possible changes, we may revisit Gas Accord issues pursuant to PU Code § 1708.
Although we are approving the Gas Accord, we remain concerned that the partially rolled-in rates for Line 400 and Line 401 are contrary to our incremental ratemaking principles. PG&E was authorized to build Line 401 based upon its pledge to utilize incremental rates, and PG&E assured us at that time that PG&E’s existing customers would not have to pay for Line 401 costs. Approval of partially rolled-in rates for noncore customers is reasonable here, but only because noncore representatives have agreed to it in the Gas Accord, presumably in return for other benefits. Full roll-in of Line 401 costs would increase core rates and would significantly conflict with our policies. However, the Gas Accord does not provide for fully rolled-in rates; it protects core retail and core wholesale ratepayers from the unjustifiable increase in rates which would result from the rolled-in rates. Therefore, our finding that the Gas Accord is in the public interest is predicated on the fact that the core retail and core wholesale customers will continue to benefit from low, vintaged rates on Line 400 and will not have to pay for Line 401 costs. We would strongly disfavor any future PG&E request for full roll-in of Line 401 costs if such roll-in would increase either core or noncore rates (absent an all-party settlement), whether such a request occurred before or at the expiration of the Gas Accord.
TURN raises an important issue about PG&E’s core procurement practices. TURN fears that penalties accruing under the adopted CPIM may not be sufficient to deter PG&E from taking actions that benefit shareholders to the detriment of core customers. TURN then suggests that an independent procurement officer (IPO) can mitigate this problem. PG&E responds: [ PG&E Supplemental Report Describing the Post 1997 Core Procurement Incentive Mechanism (CPIM), dated October 18, 1996, pp. 1 - 8 and 1 - 9.]
"[E]mploying a performance-based ratemaking mechanism does not remove a utility’s procurement practices from the scrutiny of the Commission. The Post-1997 CPIM assumes a quarterly and annual reporting requirement. If Southwest gas became the least-cost supply option and PG&E continued to procure more-expensive Canadian supplies for the core, such behavior would certainly come to the Commission’s attention. PG&E assumes that penalties for behavior favoring shareholder interests at the expense of core interests would not be limited to those accrued under the CPIM."
* * *
"[I]f the Commission believes that an independent procurement mechanism may be an appropriate alternative, the Commission could initiate a proceeding to evaluate the concept and set a procedural schedule for such examination after a decision on the Gas Accord is issued."
We agree with PG&E that the CPIM will not be the sole device by which the Commission will protect PG&E’s ratepayers to the extent that PG&E puts its shareholder interests ahead of ratepayer interests and PG&E unreasonably purchases gas at prices higher than available alternatives. We can consider this matter in affiliate abuse proceedings and other proceedings, and disallowances or penalties for PG&E’s behavior favoring shareholder interests over ratepayer interests are not just limited to scenarios in which Southwest gas is the lowest cost core supply. We intend to look carefully at any situation where utility costs of core procurement are unreasonably high due to PG&E’s conflicts of interests. Possibilities include CPIM operations, interstate gas swaps with affiliated pipeline operations, and affiliate abuses in general. In order to stay informed about PG&E’s core procurement practices, we will require PG&E to file core procurement reports quarterly and annually as provided in the Gas Accord.
While we do not place total reliance on PG&E’s CPIM for protecting PG&E’s ratepayers, we nevertheless believe that the CPIM is in the public interest for increasing PG&E’s incentive to minimize its procurement costs for its core customers. Therefore, subject to our continued oversight to address any procurement abuses, we will approve the revised 1994-97 CPIM, as well as the post-1997 CPIM. Moreover, the Commission may still initiate a proceeding to consider requiring an IPO, so we reserve the right to do so notwithstanding our approval of the CPIM.
We will not find that the Gas Accord is reasonable or in the public interest without mitigation of PG&E’s future conflict of interest under the settlement wherein PG&E will continue to favor its Malin to on-system path (Line 400/401) over its Topock to on-system path (Line 300) or its California production to on-system path (California Gas Production Path). We cannot allow PG&E to maximize transportation rates on Line 300 or its California Gas Production Path by refusing to discount the tariff rate, then discounting rolled-in Line 400/401 service to compete with these other rates at the burnertip.
On June 11, 1997, Assigned Commissioner Richard A. Bilas and Commissioner Josiah L. Neeper mailed an alternate proposed decision to all parties, which indicated that the Commission intended to issue an Order Instituting Rulemaking (OIR) to address a proposed discounting rule. In the comments filed on the alternate proposed decision, numerous parties urged the Commission to address the discounting rule in the order on the Gas Accord rather than in a separate OIR proceeding. Therefore, on June 24, 1997, Commissioner Richard A. Bilas issued an Assigned Commissioner’s Ruling Regarding Alternate Decision asking parties to comment on two issues. The first issue was a proposed rule that "PG&E shall offer a commensurate discount on Line 300 whenever offering any discount for Line 400/401 or Line 401 Service. This rule does not apply to off-system sales." The parties to the Gas Accord were specifically requested to indicate if they all could accept this rule, in which case it could be accepted into the Alternate Order. The second issue was whether to adopt TURN’s proposal of crediting $94.1 million to the Core Fixed Cost Account (CFCA). Comments were due by July 1, 1997, and nine comments were filed on that date.
In comments responsive to the Assigned Commissioner’s Ruling, almost all of the signatories to the Gas Accord stated (or authorized others to state) that they supported or did not oppose a discounting rule (with certain clarifications) as an amendment to the Gas Accord. [ In sharp contrast to the discounting rule, most of the signatories to the Gas Accord indicated that adoption of TURN’s CFCA proposal would substantially modify and upset the balance in the Gas Accord. In addition, supporters of the Gas Accord challenged the support in the record for the TURN CFCA proposal, and indicated problems of attempting to address the TURN CFCA proposal in a rulemaking proceeding. After reviewing all of these comments, we have decided not to adopt TURN’s CFCA proposal.] However, in its July 1, 1997 comments, the City of Palo Alto, a signatory to the Gas Accord, objected to having the discounting rule become part of the Gas Accord. Therefore, on July 2, 1997, Assigned Commissioner Richard A. Bilas and Commissioner Josiah L. Neeper mailed a revised, alternate proposed decision to all parties, which noted the City of Palo Alto’s opposition to the discounting rule and again indicated that the Commission intended to address this matter in a separate OIR. The July 2, 1997 revised, alternate proposed decision clarified that the proposed discounting rule would require PG&E to offer to all shippers a commensurate discount (i.e., penny for penny) on Line 300 and its California Gas Production Path whenever offering any discount to any shipper for similar Line 400/401 services (e.g., as-available services).
The July 2, 1997 mailing of the revised, alternate proposed decision resulted in another round of initial and reply comments. In their initial comments, the signatories to the Gas Accord (except the City of Palo Alto) represented that they supported or did not oppose amending the Gas Accord to include the discounting rule as clarified in the July 2, 1997 revised, alternate proposed decision. In its July 14, 1997 reply comments, the City of Palo Alto stated that after further consideration of this issue, it no longer objects to inclusion of the discounting rule as part of the Gas Accord.
In view of the above, all of the signatories to the Gas Accord have now elected to accept the discounting rule as an amendment to the Gas Accord, and, therefore, under Rule 51.7 of our Rules of Practice and Procedure, the Commission may approve the Gas Accord, as amended by the discounting rule, without addressing this matter in a separate OIR proceeding. Moreover, even opponents of the Gas Accord (such as TURN and New Mexico) have stressed the need to implement a remedy to PG&E’s conflicts of interest at the time that the Gas Accord is implemented.
In view of all of these comments, we therefore find good cause for amending the Gas Accord and imposing the following discounting rule on PG&E when it implements the Gas Accord. Whenever PG&E offers any shipper (e.g., a marketer, aggregator, or end-user) a discount on its Malin to on-system path (Line 400/401), PG&E is required to contemporaneously offer a commensurate discount (i.e., penny for penny ) to all shippers for similar services on its Topock to on-system path (Line 300) and its California Gas Production Path. (Hereinafter, this will be referred will be as the "commensurate discount rule"). By similar services, we mean that PG&E’s offer of discounts for as-available (or interruptible) service on Line 400/401 must be matched by PG&E’s offer of commensurate discounts for as-available (or interruptible) service on Line 300 and its California Gas Production Path. Similarly, if PG&E offers discounts for firm service on Line 400/401, it must offer the same discount for firm service on Line 300 and its California Gas Production Path. PG&E’s offer of such discounts must take place contemporaneously, which means that PG&E may not offer or make known its intent to offer Line 400/401 discounts earlier in time than offers of discounts on Line 300 and its California Gas Production Path.
Because our finding of PG&E’s conflict of interest centers on PG&E’s marketing of its on-system paths, we are not at this time imposing this discounting requirement when PG&E offers discounts for its Malin to off-system (Line 401) rates. [ We reserve, however, the right to further consider imposing such a requirement to the extent that this Line 401 exception to the discounting rule allows PG&E or marketers to circumvent the discounting rule or it is shown that PG&E’s conflict of interest affects discounts on its Line 401 rates or service.] It is because we have made an explicit finding that PG&E has a conflict of interest favoring its Line 400/401 service over its Line 300 service that we need to address this problem with this commensurate discount rule. However, we have not found that PG&E has a conflict of interest favoring its Line 300 service over its Line 400/401 service. Therefore, we reject without prejudice CAPP’s suggestion that there should be a reciprocal condition requiring discounts of Line 400/401 rates whenever PG&E discounts Line 300 rates. However, if CAPP or any other party were to establish that PG&E has a conflict of interest favoring its Line 300 service over its Line 400/401 service, we would consider CAPP’s proposed discounting requirement at that time.
We believe that this discounting rule will help mitigate PG&E’s conflict of interest favoring the marketing of its Line 400/401 service over its Line 300 service. If PG&E discounts the Line 300 rate and California Gas Production Path rate when it discounts Canadian path rates, then Southwest gas and in-state production will not have to overcome the hurdle of a maximum tariff rate while Canadian gas reaches California using discounted transportation service. Discounted Line 400/401 rates might still be higher than the tariffed Line 300 rate and the California Gas Production Path rate, but the Canadian supply price advantage would allow Canadian producers gas to undercut Southwest and California gas prices at the burnertip. It would be unfair and unduly discriminatory to allow PG&E to prop up the market clearing price by refusing to discount Line 300 rates or California Gas Production Path rates while discounting its Line 400/401 rates. A fair discounting rule would be consistent with discounting practices authorized earlier in this proceeding in D.94-02-042. [ 53 CPUC2d 215, 239 - 240 (1994).]
We conclude that imposing a discounting rule is not inconsistent with adoption of the Gas Accord and does not disturb its provisions. Discounting is mentioned in several places in the Gas Accord document, [ Appendix B, pp. 7, 8, 31, 34, 47, 48.] but we find no explicit provision that gives PG&E unbridled discretion over discounting among competing services when PG&E’s Line 400/401 rates are higher than its Line 300 rates, and PG&E is prohibited from providing unduly discriminatory discounts. Moreover, all signatories to the Gas Accord have now elected to accept this discounting rule as an amendment to the Gas Accord.
Both TURN and New Mexico have pointed out that PG&E could shift discounts on Line 400/401 upstream to discounts on PG&E’s subsidiary, PGT, in order to circumvent this rule and to never offer discounts on Line 300 or its California Gas Production Path. As New Mexico further points out in its July 1, 1997 comments on the Assigned Commissioner Ruling and as we have found in this order, we cannot anticipate all future PG&E and market responses to PG&E’s conflict of interest. Just as we did not predict backbone credit exchange agreements or the expansion shippers’ numerous transactions to circumvent our crossover ban, we cannot predict how PG&E and/or marketers may attempt to circumvent the commensurate discount rule we have just adopted.
While we will not institute a rulemaking at this time and have instead imposed a discounting rule as part of this order, we agree with New Mexico that we have to continue to scrutinize PG&E’s conduct and any further problems that may result from PG&E’s conflicts of interest. Therefore, we are requiring PG&E to publicly file with our Energy Division on or before March 1, 1999 and serve all parties on the Gas Accord service list in A.92-12-043, et al. a market assessment report that covers pipeline system operations from the implementation date of the Gas Accord through the end of 1998. In addition to the type of information which PG&E provided in the market assessment report it previously filed herein, PG&E shall include in its market assessment report a detailed and meaningful report of each and every discount transaction (e.g., indicating level of discount, shippers, length of discount, dates of discounts, type of service) which PG&E offered and/or entered into (from the implementation date of the Gas Accord through December 31, 1998) for Line 401 rates, Line 400/401 rates, Line 300 rates and California Gas Production Path rates and which PGT, PG&E’s subsidiary, offered or entered into for its rates to California and/or to the Malin delivery point.
The public disclosure of these discounts is necessary so that parties can address and we can determine whether our commensurate discount rule has been circumvented or whether our requirement is insufficient to remedy problems caused by PG&E’s conflict of interest. However, we have required after the fact reporting in order to mitigate any competitive harm which could otherwise occur to PG&E from such a public disclosure.
To the extent that we were to subsequently determine after reviewing this report that the commensurate discount rule is insufficient to redress PG&E’s conflict of interest and anticompetitive behavior, we could consider and impose further measures, such as broadening PG&E’s commensurate discount requirement to match Line 401 rate discounts (and/or PGT’s Malin delivery rate discounts) or requiring PG&E to divest Line 300 and/or its California Gas Production Path. Therefore, it could prove counterproductive for PG&E and/or others to attempt to game our commensurate discount rule and render it meaningless. Having found that PG&E has a conflict of interest and recognizing how PG&E could undermine fair competition from non-Canadian suppliers, we intend to scrutinize PG&E’s discounts and take appropriate actions in the future, if necessary, in order to provide an effective remedy. We are hopeful, however, that PG&E and others will take this warning seriously and comply with both the letter and the spirit of our commensurate discount rule so that further actions on our part in this regard are not necessary.
The side deal between Edison and PG&E, formally identified as an amendment to Edison’s contract for firm Line 401 transportation service, includes a "transaction price," which is a one-time payment from Edison to PG&E. The transaction price was submitted to the Commission pursuant to the confidentiality protections of PU Code § 583, but those protections expired on May 16, 1997. The negotiated transaction price is $80 million. The ratemaking treatment of this amount by Edison and PG&E is uncertain. Should the $80 million be used to decrease PG&E’s capital costs or revenue requirements? Should the $80 million be credited to its ratepayers?
We will not order any specific ratemaking treatment in this decision, but we will require PG&E to clarify its intentions by advice letter concerning Edison’s payment and any other side deal payment. Any interested party may respond to PG&E’s proposed ratemaking treatment, and we will thereafter decide this matter in a Commission resolution.
Under the Gas Accord, it is unclear whether PG&E or ratepayers will be responsible ultimately for revenue shortfalls caused by distribution discounts. PG&E’s motion for adoption states, "After implementation of the Gas Accord, PG&E will no longer collect any revenue shortfalls from ratepayers and will assume 100 percent shareholder responsibility. Under the Gas Accord, PG&E will be permitted to discount transmission and distribution rates on a nondiscriminatory basis but will be at risk for any resulting revenue shortfalls." [ PG&E motion filed August 21, 1996, pp. 15 - 16.] Although this text appears in a section on EAD discounts, the text provides no basis from limiting its discussion to only EAD revenue shortfalls from discounts.
The Gas Accord itself states, "PG&E will have the option in BCAP proceedings of demonstrating the reasonableness of any discounted distribution contracts that will continue into the prospective period. If the Commission finds the discounts to be reasonable, PG&E will be allowed to recover the forecasted revenue shortfalls during the prospective period." [ Appendix B, Paragraph III.C.8.f, p. 48.]
We will resolve this ambiguity against PG&E. There is no ambiguity that PG&E shareholders will bear 100% of the responsibility for revenue shortfalls from transmission rate discounts. For PG&E to be "at risk" for any resulting revenue shortfalls from distribution rate discounts, it must mean, at the very minimum, that there is a strong presumption that PG&E shareholders should bear 100% of the responsibility for revenue shortfalls resulting from discounts in distribution rates. Therefore, while PG&E has an option to seek in BCAP proceedings forecasted revenue shortfalls from distribution discounts, PG&E has a very heavy burden to first demonstrate that the discount is reasonable. In addition, in light of PG&E’s conflict of interest favoring its Line 400/401 transportation, we cannot foresee any situation whereby we would find distribution rate discounts reasonable in conjunction with Line 400/401 service.
Footnotes are bracketed and in blue