The full Joint Recommendation is 22 pages long and is attached to the September 24, 1996, motion for adoption filed by its sponsoring parties: DGS, New Mexico, and TURN. The Joint Recommendation is summarized in Appendix D to this decision, taken from a workshop document.
Briefly, the Joint Recommendation would: (1) retain Line 300 and Line 400 as assets in PG&E’s rate base; (2) treat Line 401 as a separate, unbundled facility with its own rate base and revenue requirement; (3) reserve specific capacity amounts for core customers; (4) establish an IPO to manage core and UEG procurement; (5) offer noncore access to Line 400 and Line 401 at monthly posted prices; (6) offer access to Line 300 by auction; (7) credit noncore capacity brokering revenues back to noncore customers; and (8) allocate constrained receipt point capacity by price. The current crossover ban and RPCA rules would end. The new market structure would become effective January 1, 1998. The Joint Recommendation would not resolve litigation of Rule 1 allegations, Line 401 capital costs, ITCS amortization, or CPIM proposals.
According to its backers, the Joint Recommendation offers a competing vision of future gas markets in California, and would neutralize but not cure the conflict of interest inherent in the Gas Accord. It would promote competition, retain for PG&E ratepayers the economic value of original system facilities, retain incremental ratemaking for Line 401, and eliminate balancing account treatment for original system facilities assigned to the noncore. Today’s Northern California gas prices are determined by Southwest gas prices; Line 300 prices under the Joint Recommendation would be lower than Line 300 prices under the Gas Accord. Although the existing record supports the concepts in the Joint Recommendation, further implementation proceedings would be required.
Parties to the Gas Accord generally oppose the Joint Recommendation. CIG and CMA together and PG&E point out that the majority of noncore end users support the Gas Accord, not the Joint Recommendation. Various parties argue that the Joint Recommendation would be a step away from unbundling, flexible service options, and secondary capacity markets. The Commission has supported these market features in past decisions. Other failings, according to Gas Accord parties, are lack of detail, rate uncertainty during upcoming years, the risk that burnertip gas prices will rise, discrimination problems under posted pricing for Line 400 and Line 401, possible confiscation of utility property inherent in capacity brokering guarantees, and the need to litigate current Commission proceedings. Amoco opposes capacity allocation by price. CCC fears the Joint Recommendation will cause problems with cogenerator parity as required by PU Code § 454.4. Enserch believes the worst feature of the Joint Recommendation is imposition of an untested market structure. Several parties characterize the Joint Recommendation as a subsidy scheme for Southwest producers and pipeline companies.
Apache and CAPP, which did not sign the Gas Accord, argue that fully rolled-in, postage stamp gas transmission rates would resolve many market problems. Norcen, which also opposes incremental rates for Line 401, would extend the proposed IPO to operation of all PG&E transmission facilities, unless PG&E divests those assets.
The sponsors admit that the Joint Recommendation is more narrow in scope than the Gas Accord, and there are fewer supporters of the Joint Recommendation than of the Gas Accord, in part because unlike PG&E the sponsors cannot offer financial inducements to prospective partners. The sponsors claim that PG&E’s conclusion that the Joint Recommendation will result in higher gas prices than the Gas Accord is misleading and implausible. They believe Line 300 auction prices would exceed Gas Accord rates only in extreme and temporary conditions. Finally, they assert that rate uncertainty should be expected in deregulated markets, and is minor relative to uncertainty in gas supply prices.
The Joint Recommendation has several appealing features. Its principal virtue is that it would allow market forces, not PG&E, to control Line 300 prices, thereby removing much of the potential for ratepayer harm associated with PG&E’s conflict of interest. The Line 300 auction proposal would keep the net costs of Southwest gas low, except in periods of very high demand. This would effectively prevent the transfer of roughly $0.15/Dth in economic value from California end users to northern interests under the Gas Accord. Second, the Joint Recommendation would retain incremental ratemaking for Line 401, avoiding subsidies by original system ratepayers and the undermining of public confidence in future market tests for new capacity. Allocation of receipt point capacity by price would be a fair way to let market participants compensate the holders of valuable pipeline space. The IPO proposal is an intriguing idea. It would further reduce PG&E’s conflict between shareholder and ratepayer interests, but we are not entirely comfortable with adopting it based on the current record.
We appreciate customer desires for rate certainty, but we will not criticize the Joint Recommendation for variability in market prices. As the sponsors suggest, price uncertainty often accompanies deregulation of rates. Rate certainty becomes a service attribute with market value, and customers can buy the certainty they need. In response to arguments that the Joint Recommendation market structure is untested, it seems to share that quality with the Gas Accord market structure, more or less in equal measure. Nor will we condemn the Joint Recommendation for its reduced scope compared to the Gas Accord. The record on many contested issues--the decision to construct, ITCS amortization, and conditions of service on Line 401, for example--is complete, and PEPR testimony has been served.
On the other hand, the Joint Recommendation contains two serious flaws. We agree with PG&E and its allies that the Joint Recommendation would be contrary to our preference for unbundled utility service. It would be a step backward in what we believe is a natural progression toward customer choice among flexible service options. We are also troubled by the inconsistency between auction pricing of Line 300 capacity and posted pricing for Line 400 capacity. Without expressing a preference for either approach, we are concerned that the disparity in methods could introduce unanticipated and harmful market manipulation. It is not necessary to study PG&E’s arguments regarding confiscation of utility property. We can make the necessary findings regarding the Joint Recommendation without resolving that issue.
Based on the record before us, we cannot find that the Joint Recommendation is reasonable. The move away from unbundling is unacceptable and cannot be balanced against the advantages of the Joint Recommendation. The inconsistency of pricing schemes can be offset to some degree by the benefits of the Joint Recommendation, but we will not adopt it as a package.
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