After a three-year investigation, an administrative law judge (ALJ) at the California Public Utilities Commission (CPUC) issued a proposed order Tuesday, concluding that Southern California Gas Co. (SoCalGas) manipulated its incentive gas-buying program and abused its market power to drive up gas prices and increase price volatility at the Southern California-Arizona border in 2000 and 2001.

ALJ Charlotte F. TerKeurst’s proposed decision calls for SoCalGas to refund customers $28 million and make substantial changes to its gas cost incentive mechanism (GCIM). In essence, the draft decision finds that SoCalGas constrained supplies, driving up prices at the border, and profited from its actions through its GCIM.

Although both of Sempra’s utilities are named in the proceeding, the first phase concluded that “no party has alleged that any actions of San Diego Gas and Electric Co. contributed to the gas price increases during the subject period.” Issues regarding Sempra and its affiliates are being looked at in the second (1-B) phase of the CPUC probe.

The refunds are recommended for what the proposed decision called “ill-gotten profits.” If the five-member CPUC agrees to take the action, the refunds would not cover “potential culpability” for possible harm done to noncore gas market participants. The first phase (1-A) findings will be referred to the office of the state attorney general, which is conducting a separate probe of Sempra Energy and its subsidiaries.

A spokesman at the attorney general’s office said Wednesday it will review the ALJ’s draft, but it “certainly can’t hurt” the attorney general’s probe.

SoCalGas came out swinging Wednesday, charging that the proposed decision was “flawed, politically motivated.” The utility said it provided uninterrupted service and saved $200 million in gas costs during the energy crisis. William Reed, senior vice president for regulatory and strategic planning at the utility, blasted the ALJ for ignoring “substantial evidence” provided by the Sempra utilities that points to other uncontrollable factors such as a major interstate pipeline explosion and weather. He called the draft “one-sided and inconsistent.”

“We believe this is a politically motivated piece orchestrated by only one of the five CPUC commissioners — Loretta Lynch — whose term ends this year (Dec. 31) and who was removed from her position as [CPUC] president due to her inept leadership during California’s energy crisis,” Reed said in the prepared statement. “For more than two years, Commissioner Lynch has done whatever she could to disadvantage SoCalGas, SDG&E and other Sempra Energy companies; this proposed decision is simply another part of a long-running vendetta.”

Reed predicted that the “obvious biases shown by the ALJ and Lynch will not prevail when the other four members have an opportunity to cast their votes on this matter.” He said SoCalGas expects the proposed decision to be rejected by the full commission. “We are proud of our success in keeping our customers’ costs significantly lower than other utilities during [the] very difficult (2000-2001) period.”

The ALJ’s proposed decision calls for new rules and safeguards in applying the GCIM, including an April 1, 2005 discontinuance of hub services and gas sales to core customers. In addition, it recommended that SoCal’s flawed GCIM be changed to more closely resemble the mechanism used at Pacific Gas and Electric Co.

“We note that several changes in California’s natural gas market since 2000 have reduced the differences between the SoCalGas and PG&E utility systems that originally may have necessitated differences between their respective procurement incentive mechanisms,” the ALJ said. “These changes include the requirement that the El Paso pipeline provide path-specific rights to firm capacity holders and other improvements to El Paso’s system, and a requirement that SoCalGas file in December a proposal to implement firm access rights.”

The ALJ said the two most significant differences between so-called GCIM and the PG&E utility “core procurement incentive mechanism” (CPIM) are: (1) the GCIM uses SoCalGas’ actual monthly net purchase volumes while the CPIM uses a benchmark independent of the utility’s own purchase decisions; and (2) hub service and noncore gas sales revenues are included in SoCal’s mechanism, but not in the PG&E CPIM.

“Because SoCalGas’ GCIM profits between June 2000 and March 2001 were the result of market manipulation and an exercise of market power at the expense of core customers, we find that shareholder receipt of those profits was not reasonable,” said TerKeurst.

The proposed decision, however, does add the caveat that it was not attempting to determine the utility’s “intent” during the 10-month period and acknowledged during the 2000-01 period there were times when “any increase in inelastic demand or decrease in supply (flowing from out-of-state producing basins, in-state production, or storage withdrawal) could have a disproportionate and at times exponential effect on (Arizona-California) border prices.”

TerKeurst added that this conclusion was “critical in examining the effect of SoCalGas’ actions on gas prices in the context of other, potentially larger dislocations in the market.”

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.