COURT OF APPEAL FOR THE FOURTH APPELLATE DISTRICT STATE OF CALIFORNIA (Division One) ~
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Case No. ________________ RATEPAYERS FOR AFFORDABLE CLEAN ENERGY, Petitioner, v. CALIFORNIA PUBLIC UTILITIES COMMISSION, Respondent, and BHP BILLITON LNG INTERNATIONAL INC.; BP ENERGY COMPANY; CALIFORNIA INDEPENDENT PETROLEUM ASSOCIATION; CALIFORNIA MANUFACTURERS & TECHNOLOGY ASSOCIATION; CALPINE CORPORATION; CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS; CHEVRON U.S.A. INC.; CITY OF PALO ALTO; CONOCOPHILLIPS COMPANY; CORAL ENERGY RESOURCES, L.P.; COUNTY OF LOS ANGELES; CRYSTAL ENERGY, LLC; DUKE ENERGY MARKETING AMERICA, LLC; DUKE ENERGY NORTH AMERICA; EL PASO NATURAL GAS COMPANY; EXXONMOBIL CORPORATION; GAS TRANSMISSION NORTHWEST CORPORATION; KERN RIVER GAS TRANSMISSION COMPANY; LODI GAS STORAGE, L.L.C.; MOJAVE PIPELINE OPERATING COMPANY; OCCIDENTAL ENERGY MARKETING INC.; PACIFIC GAS & ELECTRIC COMPANY; QUESTAR SOUTHERN TRAILS PIPELINE COM PANY; SAN DIEGO GAS & ELECTRIC COMPANY; SEMPRA ENERGY; SEMPRA LNG; SOUND ENERGY SOLUTIONS; SOUTHERN CALIFORNIA EDISON COMPANY; SOUTHERN CALIFORNIA GAS COMPANY; SOUTHWEST GAS CORPORATION; THE UTILITY REFORM NETWORK; WESTERN STATES PETROLEUM ASSOCIATION; WILD GOOSE STORAGE INC.; and DOES 1 through 500, Real Parties in Interest. ~
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Verified Petition for Writ of Review of California Public Utilities Commission Proceeding no. R04-01-025; Supporting Memorandum of Points and Authorities [Exhibits Filed Separately]
BRIGGS LAW CORPORATION [BLC file: 1097.02] Cory J. Briggs (State Bar no. 176284) Rebecca E. Pennington (State Bar no. 174488) 5663 Balboa Avenue, No. 376 San Diego, CA 92111-2705 Telephone: 858-495-9082 Attorneys for Petitioner Ratepayers for Affordable Clean Energy ~
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Petitioner Ratepayers for Affordable Clean Energy alleges as follows:
Introductory Statement 1.
This case arises out of Respondent California Public Utilities
Commission’s blind approval of policies facilitating the large-scale use of imported liquified natural gas (“LNG”) in order to meet California’s energy demands without considering all the evidence about LNG and the adverse consequences of relying on it as an energy source. Early in 2004, Respondent initiated proceeding no. R04-01-025, Order Instituting Rulemaking to Establish Policies and Rules to Ensure Reliable, Long-Term Supplies of Natural Gas to California (“Natural Gas Proceeding”). Respondent commenced the Natural Gas Proceeding as part of its “overall effort to adopt policies to implement and fulfill” California’s Energy Action Plan (“EAP”), which was authored jointly by Respondent, the Consumer
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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Power and Conservation Financing Authority, and the Energy Resources Conservation and Development Commission (i.e., the California Energy Commission) in 2003. See Pet’r Exs., P:791. The EAP’s goal is to “ensure that adequate, reliable, and reasonably-priced electrical power and natural gas supplies, including prudent reserves, are achieved and provided through policies, strategies, and actions that are cost-effective and environmentally sound for California’s consumers and taxpayers.” See Pet’r Exs., A:2. 2.
Respondent divided the Natural Gas Proceeding into two
phases, which together constituted Respondent’s “overall evaluation of California’s natural gas infrastructure.” Phase 1’s purpose was “to adopt rules, which will provide guidelines over how the designated utilities should: (1) enter into contracts with interstate pipelines . . . to meet core supply obligations; (2) provide access to LNG supplies of natural gas; and (3) provide access to additional supplies of natural gas transported on interstate pipelines”; the purpose of the second phase (now underway) is to address emergency reserves, information gathering, and rate-setting matters. 3.
Petitioner repeatedly asked Respondent to hold evidentiary
hearings during Phase 1 in order to develop a sound factual record on which a rational LNG-dependent energy policy could be based, and to categorize Phase 1 of the Natural Gas Proceeding as “ratesetting” rather than “quasiVerified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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legislative.” Respondent repeatedly refused both requests, despite its own clear rules dictating otherwise. 4.
Using LNG to meet California’s energy needs brings with it
the potential for many adverse environmental impacts. For example, LNG is highly flammable, and LNG leaking from a container can create a vapor cloud that easily ignites. Thus, in addition to being potential targets for terrorists, LNG facilities also pose a substantial risk of harm due simply to human error or equipment malfunction. 5.
As a fossil fuel, LNG is a major source of greenhouse gases.
In fact, the process of extracting and transporting LNG for use as a fuel at natural-gas-fired power plants results in the production of twenty to forty percent more carbon dioxide than does the fuel-burning process alone. 6.
Despite these and other problems with LNG,1 at the end of
Phase 1, Respondent authorized several Real Parties in Interest to proceed with their plans to meet their natural-gas supply needs with LNG and pass on the cost to ratepayers. Consequently, ratepayers are underwriting the utilities’ investment in a very questionable fuel source. The utilities, in other words, are gambling with the ratepayers’ money. 1
Many other problems with LNG are discussed in Petitioner’s Supporting Memorandum of Points and Authorities, which accompanies this Petition. Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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7.
The essence of Petitioner’s dispute is that Respondent failed
to follow its own rules requiring it to hold evidentiary hearings whenever there are disputed issues of material fact in a proceeding. Respondent’s factual findings at the conclusion of Phase 1 of the Natural Gas Proceeding, set forth in Decision 04-09-022 (“Decision”), were based on evidence that was heavily disputed by Petitioner, who with every opportunity asked for evidentiary hearings so that it could refute the self-serving factual assertions being made by LNG companies and blindly accepted by Respondent as true--that is, without any opportunity for cross-examination or refutation. In light of its very own rules, Respondent should have held evidentiary hearings so that each interested party could present its evidence and crossexamine the other parties in order to bring out the truth about LNG and develop a sound factual record on which a rational LNG-dependent energy policy could be based. 8.
Petitioner also challenges Respondent’s categorization of
Phase 1 of the Natural Gas Proceeding as “quasi-legislative” rather than “ratesetting” because, as with evidentiary hearings, Respondent’s own rules required that Phase 1 be treated as a ratesetting proceeding. 9.
Petitioner brings this action in order to protect California’s
ratepayers and the environment by ensuring that Respondent makes fully Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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informed, reasoned decisions in connection with Phase 1 of the Natural Gas Proceeding and LNG’s impacts on ratepayers, the economy, and the environment. 10.
Petitioner requests that this Court inquire into and determine
the lawfulness of the Decision and Phase 1 and order Respondent to rescind and vacate all regulatory actions taken based on, and approvals given in connection with, the Decision and Phase 1. 11.
Petitioner also requests that this Court grant declaratory and
injunctive relief that declares unlawful and prevents any and all further actions and approvals in connection with any aspect of the Natural Gas Proceeding unless and until Respondent fully complies with all applicable laws.
Jurisdiction and Basis for Review and Relief 12.
This Court has original jurisdiction over this matter pursuant
to Public Utilities Code Section 1756. Petitioner seeks review and relief under Public Utilities Code Section 1756 et seq. and under Code of Civil Procedure Sections 526, 527, 923, and 1060. 13.
Petitioner has no plain, speedy, and adequate legal remedy
against Respondent or Real Parties in Interest. Monetary or other legal
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relief cannot adequately compensate Petitioner or the public for the harm that will arise from Respondent’s failure to hold evidentiary hearings and categorize Phase 1 as ratesetting. The only way for Petitioner to avoid such harm is for this Court to review the Decision, set aside Respondent’s refusal to hold evidentiary hearings and properly categorize Phase 1, order that such hearings be held and that Phase 1 be properly categorized, and grant the injunctive and declaratory relief requested by Petitioner. 14.
There is a current controversy between Petitioner, on the one
hand, and Respondent and Real Parties in Interest, on the other hand, regarding the Natural Gas Proceeding. Petitioner contends that Respondent was legally required to hold evidentiary hearings before issuing its decision in Phase 1 of the Natural Gas Proceeding. Petitioner is informed and believes and on that basis alleges that Respondent and Real Parties in Interest dispute Petitioner’s contention. 15.
Respondent and Real Parties in Interest intend to go forward
with the decisions made during Phase 1 of the Natural Gas Proceeding without complying with all applicable laws. Implementation and adherence to the Decision will irreparably harm Petitioner, ratepayers, and other members of the public in the manner described throughout this pleading. Therefore, a temporary restraining order and preliminary and permanent Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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injunctions against Respondent and Real Parties in Interest should be issued in order to restrain them from taking any further action in connection with the Natural Gas Proceeding without first complying with all applicable laws.
Parties 16.
Petitioner is a non-profit corporation organized under the laws
of the State of California for the purpose of promoting social welfare through advocacy for and public education regarding the development of affordable, environmentally responsible energy resources. Prior to its incorporation, Petitioner successfully intervened in the Natural Gas Proceeding as an unincorporated coalition of individuals and organizations. Petitioner has multiple individual and organizational members who agree with and support its purpose and on whose behalf it acts. Petitioner’s members prior to its incorporation remain members of the corporation. Petitioner’s principal place of business is in San Diego, California. 17.
Respondent is an agency of the State of California, was
created by constitutional amendment and by statute, and pursuant thereto has the primary regulatory authority over privately owned public utilities, including natural-gas and electricity utilities.
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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18.
Petitioner is informed and believes and on that basis alleges
that Real Parties in Interest BHP Billiton LNG International Inc., BP Energy Company, California Independent Petroleum Association, California Manufacturers & Technology Association, Calpine Corporation, Canadian Association of Petroleum Producers, Chevron U.S.A. Inc., City of Palo Alto, ConocoPhillips Company, Coral Energy Resources, L.P., County of Los Angeles, Crystal Energy, LLC, Duke Energy Marketing America, LLC, Duke Energy North America, El Paso Natural Gas Company, ExxonMobil Corporation, Gas Transmission Northwest Corporation, Kern River Gas Transmission Company, Lodi Gas Storage, L.L.C., Mojave Pipeline Operating Company, Occidental Energy Marketing Inc., Pacific Gas & Electric Company, Questar Southern Trails Pipeline Company, San Diego Gas & Electric Company, Sempra Energy, Sempra LNG, Sound Energy Solutions, Southern California Edison Company, Southern California Gas Company, Southwest Gas Corporation, The Utility Reform Network, Western States Petroleum Association, and Wild Goose Storage Inc. each claim an interest in property affected by the acts and approvals challenged in this action by Petitioner or an interest in the implementation of the challenged acts and approvals.
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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19.
The true names and capacities of the Real Parties in Interest
identified as DOES 1 through 500 are unknown to Petitioner, who will seek leave of this Court to amend this pleading to allege the true names and capacities as soon as they are ascertained. Petitioner is informed and believes and on that basis alleges that DOES 1 through 500 claim an interest in property affected by the acts and approvals challenged in this action by Petitioner or an interest in the implementation of the challenged acts and approvals.
Exhaustion of Administrative Remedies 20.
Petitioner was an intervenor in the Natural Gas Proceeding
prior to incorporating and has performed all conditions precedent to the filing of this pleading, thereby exhausting all its available administrative remedies. For example, Petitioner asked Respondent to hold evidentiary hearings during Phase 1 of the Natural Gas Proceeding, but Respondent refused. Further, Respondent has taken no action on Petitioner’s timely request on or about October 12, 2004, for reconsideration of the underlying refusal. See Pet’r Exs., Q:887 et seq. 21.
Petitioner also filed a timely appeal of Respondent’s initial
categorization of the Natural Gas Proceeding as “quasi-legislative” rather
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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than “ratesetting.” After Respondent rejected that appeal, Petitioner again submitted a timely request for reconsideration, but Respondent has taken no action on that request. See Pet’r Exs., Q:887 et seq. 22.
Respondent took final agency action by refusing to hold
evidentiary hearings during Phase 1 of the Natural Gas Proceeding, by not properly categorizing Phase 1 as ratesetting, and then by not acting on Petitioner’s request for reconsideration of the underlying refusals. Ten months have passed with no response to Petitioner’s request.
FIRST CAUSE OF ACTION: Writ of Review for Failure to Hold Evidentiary Hearings 23.
Paragraphs 1 through 22 are incorporated into this Paragraph.
24.
Respondent made sixty findings of fact in the Decision. All
sixty findings of fact were material to the Decision. 25.
Petitioner disputed several findings of fact in the Decision and
many of the factual assertions on which various findings were based. Petitioner notified Respondent about all disputed factual issues. 26.
Respondent was legally required to hold evidentiary hearings
in Phase 1 of the Natural Gas Proceeding because (i) there were disputed issues of material fact and (ii) Phase 1 was not limited to questions of law and policy. Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
Page 11
27.
Respondent did not hold a single evidentiary hearing during
Phase 1 of the Natural Gas Proceeding, despite Petitioner’s requests. Had there been an evidentiary hearing, Petitioner would have introduced evidence to support its position on disputed factual issues, would have cross-examined the proponents of evidence conflicting with its own, and would have offered rebuttal evidence to support its position. 28.
Respondent violated the law by failing to hold evidentiary
hearings during Phase 1 of the Natural Gas Proceeding. Respondent’s failure is the actual and proximate cause of the harm described throughout this pleading.
SECOND CAUSE OF ACTION: Writ of Review for Failure to Categorize Proceeding as “Ratesetting” 29.
Paragraphs 1 through 28 are incorporated into this Paragraph.
30.
Phase 1 of the Natural Gas Proceeding dealt with questions of
policy and fact, did not clearly fit into the “quasi-legislative” category, and involved rates. 31.
Respondent was legally required to categorize Phase 1 of the
Natural Gas Proceeding as “ratesetting” rather than “quasi-legislative.”
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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32.
Respondent refused to categorize Phase 1 of the Natural Gas
Proceeding as “ratesetting” even after Petitioner requested that Phase 1 be so categorized. 33.
Respondent violated the law by failing to categorized Phase 1
of the Natural Gas Proceeding as “ratesetting.” Respondent’s failure is the actual and proximate cause of the harm described throughout this pleading.
Prayer FOR ALL THESE REASONS, Petitioner respectfully prays for all of the following on all causes of action: 1.
A writ of review and mandate and a judgment declaring that Respondent’s conduct during Phase 1 of the Natural Gas Proceeding, including but not limited to its adoption of the Decision and refusal to grant Petitioner’s application for rehearing, was unlawful with respect to the failure to hold evidentiary hearings and the categorization of Phase 1 as “quasi-legislative” rather than “ratesetting,” and that the Decision and all other rulings by Respondent during Phase 1 are therefore invalid, unenforceable, and not effective.
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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2.
A writ of review and mandate and a judgment (i) ordering Respondent to rescind the Decision and all other rulings that it made in Phase 1 of the Natural Gas Proceeding and comply with all applicable laws, including but not limited to all laws governing evidentiary hearings and the categorization of Phase 1 as a “ratesetting” proceeding, before Respondent takes any further action in the Natural Gas Proceeding; (ii) invalidating Respondent’s refusal to hold evidentiary hearings in Phase 1 and categorize Phase 1 as “ratesetting”; and (iii) prohibiting Respondent from making any further decisions, taking any further action, or adopting any further orders with respect to the Natural Gas Proceeding unless and until it holds evidentiary hearings on the issues raised in Phase 1 as required by law and categorizes Phase 1 as “ratesetting.”
3.
An order preliminarily and permanently enjoining Respondent and Real Parties in Interest from relying on, invoking, or otherwise using the Decision or any other ruling in Phase 1 of the Natural Gas Proceeding in any manner or for any purpose whatsoever in law, equity, or otherwise unless and until Respondent holds evidentiary hearings on the issues raised in
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
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Phase 1 as required by law and categorizes Phase 1 as “ratesetting.” 4.
All legal expenses incurred in the prosecution of this Petition and all reasonable attorney’s fees as authorized by law, including but not limited to attorney fees under Code of Civil Procedure Section 1021.5 and Government Code Section 800.
5.
Any further relief that this Court may deem appropriate.
Date: August 12, 2005.
Respectfully submitted, BRIGGS LAW CORPORATION Cory J. Briggs Rebecca E. Pennington
By:
___________________________ Cory J. Briggs Attorneys for Petitioner Ratepayers for Affordable Clean Energy
Verified Petition for Writ of Review of Decision of California Public Utilities Commission Proceeding no. 04-01-025
Page 15
SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES
Certificate of Word Count As required by Rule 14(c) of the California Rules of Court, and based on the “word count” function of the word processor on which this memorandum was written, I certify that are less than 14,000 words in the memorandum, excluding the cover sheet, tables, running footers, and this certificate.
Date: August 12, 2005
By:_________________________ Cory J. Briggs
T ABLE OF C ONTENTS I.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II.
Harm to the Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
III.
Standard of Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
IV.
Analysis and Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A.
Respondent Should Have Conducted Evidentiary Hearings to Develop a Solid Factual Record to Support the Decision in Phase 1 of the Natural Gas Proceeding . . . . 8 1.
Respondent Must Conduct Evidentiary Hearings in All Proceedings Involving Non-Policy or Non-Legal Issues or Disputed Material Facts . . . . . . 9
2.
Respondent Went Far Beyond Policy and Legal Issues in Phase 1 of the Natural Gas Proceeding . . . 10
3.
Petitioner Disputed Numerous Material Facts in Phase 1 of the Natural Gas Proceeding . . . . . . . . . . 11 a.
Petitioner Disputed the Imminent Shortage of Domestic Supplies of Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . 12
b.
Petitioner Disputed the Contribution of Liquified Natural Gas to Diversification in the Supply of Natural Gas . . . . . . . . . . . . . 15
c.
Petitioner Disputed the Price Benefits of Liquified Natural Gas . . . . . . . . . . . . . . . . . . 20
d.
Petitioner Disputed the Flexibility in the Supply of Liquified Natural Gas . . . . . . . . . . 21
Supporting Memorandum of Points and Authorities
Pag e ii
e.
B.
V.
Petitioner Disputed the Potential for Market-Power Abuse of Liquified Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Respondent Should Have Categorized Phase 1 of the Natural Gas Proceeding as “Ratesetting” . . . . . . . . . . . . . . 24 1.
Respondent Must Use the “Ratesetting” Category for All Proceedings Involving the Implementation of Policy, Mixed Questions of Fact and Policy, or Other Issues that Defy Easy Categorization as “Adjudication” or “Quasi-Legislative” . . . . . . . . . . 26
2.
Phase 1 of the Natural Gas Proceeding Involved the Implementation of Policy and M ixed Questions of Fact and Policy, and It Defied Easy “Quasi-Legislative” Categorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Supporting Memorandum of Points and Authorities
Pag e iii
T ABLE OF A UTHORITIES California Judicial Authorities Consumers Lobby against Monopolies v. Public Utilities Commission, 25 Cal. 3d 891 (1979) . . . . . . . . . . . . . . . . . . . . . . . . . 7 Pacific Bell v. Public Utilities Commission, 79 Cal. App. 4th 269 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
California Legislative Authorities Public Utilities Code ยง 1701.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 25 Public Utilities Code ยง 1701.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 25 Public Utilities Code ยง 1756 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 Public Utilities Code ยง 1757 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Public Utilities Code ยง 1757.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7
California Regulatory Authorities1 Public Utilities Commission Rule of Practice and Procedure 6.6 . . . . . . . 25 Public Utilities Commission Rule of Practice and Procedure 7 . . . . . . . . 25 Public Utilities Commission Rule of Practice and Procedure 14.1 . . . . . . . 9 1995 Cal. PUC LEXIS 604 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1996 Cal. PUC LEXIS 856 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2000 Cal. PUC LEXIS 239 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2000 Cal. PUC LEXIS 987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 28 2001 Cal. PUC LEXIS 864 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 27 2004 Cal. PUC LEXIS 189 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2004 Cal. PUC LEXIS 266 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1
Petitioner has provided copies of the authorities cited from the LEXIS database in its Notice of Lodging of Authorities of the California Public Utilities Commission in Support of Petition for Writ of Review (filed concurrently). Supporting Memorandum of Points and Authorities
Pag e iv
I. I NTRODUCTION Petitioner Ratepayers for Affordable Clean Energy has but one goal in this judicial proceeding: making sure that Respondent California Public Utilities Commission follows its own rules. During Phase 1 of the Natural Gas Proceeding, Petitioner not only consistently disputed many of the material facts asserted by various Real Parties in Interest to justify Respondent in taking the action that it eventually took, but also challenged Respondent’s categorization of the Natural Gas Proceeding as “quasilegislative” rather than “ratesetting.” Under Respondent’s long-settled rules and precedents, there must be an evidentiary hearing whenever material facts are in dispute so that the evidence can be tested under crossexamination. Furthermore, in cases involving mixed questions of policy and fact, especially when policy is being implemented (vis-à-vis being formulated), Respondent’s rules and precedents require that the cases be categorized as “ratesetting.” Rather than adhering to its own applicable authorities, Respondent went to great lengths to avoid them.
II. H ARM TO THE P UBLIC The harm from Respondent’s illegal conduct cannot be over-stated. Phase 1 of the Natural Gas Proceeding put California on an ill-conceived, premature course toward dependence on LNG as a major energy source and Supporting Memorandum of Points and Authorities
Page 1
exposes ratepayers to abusive market manipulation through “affiliate transactions” 2 without having first assembled a solid factual record showing LNG’s net benefits for the people of California. See Pet’r Exs., A:8, § VI3 (committing Respondent to evaluating “net benefits of increasing the state’s natural gas supply options, such as [LNG]”). Phase 1 authorized several Real Parties in Interest to terminate domestic natural-gas supply contracts and enter into new supply contracts for LNG, as well as authorizing a receipt point in Otay Mesa for LNG imported from Mexico and establishing an expedited process for the approval of new tariffs to recoup costs associated with acquiring, storing, and distributing LNG. Meanwhile, Respondent failed to conduct a single evidentiary hearing on LNG’s safety, quality, cost, alternatives, or environmental impacts, or on the need to rely on LNG as a fuel source given the availability of domestic natural gas. One of the reasons for holding hearings is to provide a balance of information used by Respondent in dealing with important public issues. In
2
An affiliate transaction is a transaction between energy companies related to each other, usually through common ownership. Such transactions have much greater potential to be manipulative or abusive because they are not the product of open-market, arm’s-length negotiations by companies pursuing only their own respective best interests. 3
Throughout this memorandum, the tab letter for any item cited in Petitioner’s Exhibits is indicated before the colon, and the relevant sequential page number(s) for the item can be found after the colon. Supporting Memorandum of Points and Authorities
Page 2
a recent case dealing with rates, Respondent acknowledged the “natural litigation advantage” that utilities enjoy over the public, quoting with approval an analysis of the consumer-utility imbalance from the early twentieth century: If the Commission depends upon the consumers or the municipalities to present the public side of the controversy, the evidence in most cases will be heavily one-sided. A group of consumers . . . working from the outside with no funds except what “they dig out of their jeans” . . . are pitted against the companies having all the inside experience and knowledge, and able to tap the consumers’ till with confidence that whatever they spend to defeat the consumers will be added to the cost of service and taxed back in the rates which the consumers themselves will have to pay. If the municipalities or the consumers spend a dollar of their own money, the utility will spend two and make them pay in the bargain. Financial resources, experience, inside knowledge, expert affiliations, great things at stake and continuity of interest, combine to give the utilities an overwhelming advantage in the presentation of their cases before Commission and Courts. See 2000 Cal. PUC LEXIS 239, 51 (Lodging Item 3). Pleased that the situation has improved over the years, Respondent nevertheless admitted that problems like “utility control through ‘inside’ information” remain, adding a warning that it “should not rely solely on the information provided to the Commission by company insiders.” Id. at 54.
Supporting Memorandum of Points and Authorities
Page 3
In the instant case, however, Respondent apparently forgot its own admonition, for it was content to base Decision 04-09-022 on information taken straight from the mouths of energy companies and utilities with an enormous financial stake in LNG’s success--e.g., Sempra Energy and its subsidiaries San Diego Gas & Electric Company (“SDG&E”), Southern California Gas Company (“SoCal Gas”), and Sempra LNG. With California’s ability to meet its energy needs hanging in the balance, one would have expected Respondent to test the veracity of the biased information it received from these interested firms before giving LNG the green light as a major energy source for California, before saying, in effect, that LNG’s benefits outweigh its burdens. Evidentiary hearings would have revealed the many negative aspects of LNG so that Respondent could make an informed decision about the wisdom of making California reliant on LNG as a major energy source.4
4
The need for evidentiary hearings was so important that twenty-four members of the U.S. Congress wrote a letter to Respondent’s President, Michael R. Peevey, and the rest of the Commissioners, urging them to hold hearings. See Pet’r Exs., R:998-1000. In response, President Peevey promised to “carefully consider the arguments in favor of evidentiary hearings raised in your letter and in the applications for rehearing before we issue our decision on rehearing.” See id., S:1000, ¶ 3. Eight months has lapsed since President Peevey made that promise, without any ruling from Respondent on Petitioner’s rehearing application. Supporting Memorandum of Points and Authorities
Page 4
Also harmful to the public was Respondent’s categorization of Phase 1 as “quasi-legislative” instead of “ratesetting,” which twice facilitated its reliance on biased information favoring LNG-interested firms. On the one hand, a quasi-legislative proceeding imposed no restrictions of any kind on ex parte communications between interested parties and Commissioners; not even disclosure that a communication took place was required. See P UB. U TIL. C ODE § 1701.4(b) (allowing ex parte communications “without any restrictions”). Had Respondent rightly categorized Phase 1 as “ratesetting,” Petitioner and others would have been able to find out about and participate in ex parte communications and simultaneously put forward evidence to balance out the biased information given to Commissioners by those with a financial stake in seeing LNG used as a major energy source in California. See generally P UB. U TIL. C ODE § 1701.3. On the other hand, categorizing Phase 1 as “quasi-legislative” rather than “ratesetting” insulated Respondent from having to amass “substantial evidence” to support the Decision. Had Phase 1 been properly treated as a ratesetting proceeding, judicial review would have entailed a testing of the record to see whether the findings in the Decision were based on substantial evidence. See P UB. U TIL. C ODE § 1757(a)(4) (limiting judicial review in ratemaking proceeding to whether, among other things, findings in decision
Supporting Memorandum of Points and Authorities
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are “supported by substantial evidence in light of the whole record”). With Phase 1 classified as quasi-legislative, however, there is no authority for a court to test the sufficiency of the evidence behind Respondent’s findings. See P UB. U TIL. C ODE § 1757.1(a) (providing same authorizations as Section 1757(a) for judicial review except testing sufficiency of evidence on which findings are based). In sum, while Respondent arbitrarily put itself beyond the reach of statutes designed to ensure open, informed decision-making, it nevertheless violated its own rules for ensuring that its decisions are factually accurate, thoroughly substantiated, and openly made. These are essential features of every kind of responsible, legitimate decision-making. To give California the best chance for meeting its energy needs, Respondent should have held an evidentiary hearing and should have categorized Phase 1 as “ratesetting.”
III. S TANDARD OF R EVIEW The standard for reviewing Respondent’s Decision is set forth in the Public Utilities Code. Any aggrieved party may seek a writ of review of an order or decision of Respondent “for the purpose of having the lawfulness of the original order or decision . . . determined.” See P UB. U TIL. C ODE § 1756(a). This Court has jurisdiction “to review, reverse, correct, or annul any order or decision of [Respondent] . . . or to enjoin, restrain, or interfere Supporting Memorandum of Points and Authorities
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with [Respondent] in the performance of its official duties, as provided by law and the rules of court.” See id., § 1759(a). Because Respondent treated Phase 1 of the Natural Gas Proceeding as quasi-legislative, however, the Court’s review is limited to asking, as pertinent here, whether the Decision was an abuse of discretion or not supported by the findings,5 whether Respondent proceeded in the manner required by law, or whether Respondent acted without or in excess of its powers or jurisdiction. See id., § 1757.1(a)(1)-(4) (describing scope of review in non-ratemaking or licensing proceedings). Once filed, this matter “shall be preferred over, and shall be heard and determined in preference to, all other civil business except election causes, irrespective of position on the calendar.” See id., § 1767. However, because a writ of review “serves the office of an appeal,” see Consumers Lobby against Monopolies v. Public Util. Comm’n, 25 Cal. 3d 891, 901 (1979), it is “not to be summarily denied on policy grounds unrelated to [its] procedural or substantive merits.” Pacific Bell v. Public Util. Comm’n, 79 Cal. App. 4th 269, 282 n. 8 (2000) (relying on Consumers Lobby against Monopolies, supra).
5
Respondent’s factual determinations may not be reviewed under any standard except as specified in Public Utilities Code Section 1756 et seq. See P UB. U TIL. C ODE § 1757.1(c). Supporting Memorandum of Points and Authorities
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IV. A NALYSIS AND A RGUMENT Petitioner’s discussion of Respondent’s illegal conduct will deal first with the lack of an evidentiary hearing in Phase 1 of the Natural Gas Proceeding and then with its categorization. Each issue is equally important, and each provides an independent basis for this Court to grant the relief requested by Petitioner. (No weight should be ascribed to the order of presentation.)
A.
Respondent Should Have Conducted Evidentiary Hearings to Develop a Solid Factual Record to Support the Decision in Phase 1 of the Natural Gas Proceeding
Respondent ought to have convened evidentiary hearings for Phase 1 of the Natural Gas Proceeding in order to develop a thorough, accurate factual basis for its Decision. The authorities governing Respondent require there to be evidentiary hearings not only when a quasi-legislative proceeding goes beyond policy and legal issues, but when there are disputes over material facts. Phase 1 involved much more than policy and legal issues, and in any event many of the material facts were challenged by Petitioner. As explained below, Respondent’s refusal to conduct evidentiary hearings was improper and warrants a judicial correction.
Supporting Memorandum of Points and Authorities
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1.
Respondent Must Conduct Evidentiary Hearings in All Proceedings Involving Non-Policy or Non-Legal Issues or Disputed Material Facts
Over the years, Respondent has issued numerous decisions requiring evidentiary hearings in cases like Phase 1 of the Natural Gas Proceeding, decisions that approach the subject from either of two directions.6 On the one hand, Respondent may, in exercising its quasi-legislative authority, “adopt rules involving only policy or legal issues without holding evidentiary hearings.” See 1995 Cal. PUC LEXIS 604, 33, 72 (Lodging Item 1) (concluding as a legal matter that “[i]n its quasi-legislative capacity, [Respondent] may adopt . . . rules without conducting evidentiary hearings on issues in which only questions of law and public policy are involved”). On the other hand, evidentiary hearings must be conducted whenever “there are disputed issues of material fact that require sworn testimony to resolve.” See 1996 Cal. PUC LEXIS 856, 4-5 (Lodging Item 2). Accord 2004 Cal. PUC LEXIS 266, 18 (Lodging Item 7) (quoting Respondent’s prior conclusion that “evidentiary hearings are warranted only to the extent there are material factual disputed issues”). 6
The development of these approaches is significant in this case because evidentiary hearings usually are not part of “rulemaking” proceedings. See, e.g., C AL. P UB. U TIL. C OMM’N R. OF P RACTICE AND P ROCEDURE 14.1 (defining “rulemaking” as proceeding involving “written proposals, comments, or exceptions . . . instead of evidentiary hearings”). Phase 1 was a rulemaking proceeding. See Pet’r Exs., C:50, ¶ 1. Supporting Memorandum of Points and Authorities
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As explained below, there should have been evidentiary hearings in Phase 1 under both lines of authority.
2.
Respondent Went Far Beyond Policy and Legal Issues in Phase 1 of the Natural Gas Proceeding
In Phase 1, Respondent directed utility firms (some of the Real Parties in Interest) to provide certain information on non-policy, non-legal topics. To be sure, Respondent requested data from the utilities regarding, among other things, anticipated demand for natural gas between 2006 and 2016, the infrastructure needed to satisfy anticipated demand for natural gas in the same years, their contracts for interstate transportation of natural gas, and cost for accessing new supplies of natural gas. See Pet’r Exs., C:36-41. Respondent’s determinations in Phase 1 were based on responses to these data requests and on various comments and replies received from Real Parties in Interest, Petitioner, and others. See id., P:798. Phase 1 went beyond policy issues and legal issues. Questions about anticipated demand for natural gas, infrastructure, and the cost of access to new LNG supplies are factual matters requiring testimony from experts and, in some cases, cross-examination. How much natural gas will California need in 2006 and 2016 in order to meet its energy needs? Can demand for natural gas be met with domestic and Canadian supplies? What impact will
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efficiency measures and the development of renewable energy sources have on projections for demand? Is there or will there be sufficient infrastructure to deliver enough natural gas to California? How much will it cost to gain access to new supplies of natural gas? None of these questions is a policy or legal question. Every one requires an answer from experts in the fields of economics, engineering, statistics, energy-consumption forecasting, energy conservation and development, demographics, and so on--that is, from persons who are thoroughly familiar with all the empirical data and all the analyses relevant to each topic.7 Because Respondent’s rulings in Phase 1 went beyond mere policy and legal issues, the Court should annul the Decision and order Respondent to conduct evidentiary hearings on the material facts giving rise to the Decision.
3.
Petitioner Disputed Numerous Material Facts in Phase 1 of the Natural Gas Proceeding
There is yet another, independent reason why Respondent should have conducted evidentiary hearings before issuing the Decision in Phase 1;
7
Of course, reasonable experts can disagree about such things. That they can disagree is all the more reason to hold evidentiary hearings and find out whose view is correct and why it is correct. Supporting Memorandum of Points and Authorities
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numerous material facts were in dispute. Several key disputes are discussed below.
a.
Petitioner Disputed the Imminent Shortage of Domestic Supplies of Natural Gas
The fundamental framework assumption underpinning Respondent’s ruling in Phase 1 is that the domestic supply of natural gas is in imminent decline and that LNG supplies must be encouraged to fill the gap.8 One of the leading proponents of this apocalyptic view during the Natural Gas Proceeding was Sempra Energy, who has already started to build an LNG terminal in Baja California to supply natural gas to southern California. Sempra Energy subsidiaries SoCal Gas and SDG&E presented data showing no anticipated growth in natural-gas demand in southern California from the 2002 peak year through 2016. See Pet’r Exs., Q:919. Meanwhile, Sempra Energy itself warned Respondent, with no corroborating evidence, that “California has little choice but to allow the development of LNG terminals--the only decision is where and how.” See id., Q:939. Thus, Sempra Energy’s bald assertion succeeded in convincing Respondent that 8
LNG is imported to the United States after being extracted abroad and shipped by large ocean-going tankers to receiving terminals along the coast. Because LNG is “liquified” for shipping (i.e., cooled until the natural gas changes to a liquid state), it is regasified (i.e., warmed until it changes back to a gaseous state) at the receiving terminal. Supporting Memorandum of Points and Authorities
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there is a looming threat to domestic supplies of natural gas and that LNG should be developed in order to boost supply diversity for declining domestic supplies. Had there been an evidentiary hearing, Respondent would have been presented with evidence to the contrary from Petitioner and would have had to reconcile that evidence (and the contrary evidence from Sempra Energy’s own subsidiaries) with Sempra Energy’s self-serving data. For example, in 2003, the U.S. Department of Energy’s Energy Information Administration, the agency charged with projecting domestic natural-gas supply, projected that North America’s production of natural gas will increase modestly but steadily over the next twenty years. See Pet’r Exs., B:14, ¶ 2. This evidence would have augmented data presented by utilities like SoCal Gas and SDG&E showing that gas usage is currently in decline in California and likely to return to recent (2002) peak levels by the middle of the next decade under a business-as-usual scenario. See id., Q:919. Petitioner would also have had the opportunity to cross-examine Sempra Energy’s witnesses to test the accuracy of their prognostications about the natural-gas supply crisis awaiting California. Overall, Respondent and the public would have benefitted from a complete evidentiary record dealing with this central factual issue.
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Along these lines, it is noteworthy that the majority of Respondent’s Commissioners who voted to adopt the Decision was the same majority who adopted the Energy Action Plan (“EAP”) on Respondent’s behalf in May 2003. Cf. Pet’r Exs., A:9 to P:886. In recognizing its accountability in the EAP as a steward of California’s energy future, Respondent pledged to take important measures in order to “maximize a common understanding and ensure a broad basis for decision-making” on critical energy issues. See id., A:2. Furthermore, the EAP’s “loading order” ranks conservation and efficiency measures first, new generation from renewable resources and distributed generation second, and fossil-fuel sources of energy last. See id., A:4. Because Respondent’s Decision was based on sparse, biased evidence from Sempra Energy and its affiliates, and because it gave priority to importing LNG without ever evaluating the prospects for and implications on efficiency, conservation, and renewable resources, it is impossible to reconcile with the EAP. Interestingly, the order initiating the Natural Gas Proceeding used market manipulation during 2000 and 2001 as a justification for increasing the supply of natural gas to California. See Pet’r Exs., C:30 (noting supply manipulation as reason for crisis). This sensationalist claim would not have held up under cross-examination. As Petitioner would have shown through
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evidentiary hearings, some of the worst abuses occurred during periods of adequate natural-gas supply. The limited availability of natural gas had nothing to do with the adequacy of supplies and everything to do with the manipulation of markets by unscrupulous energy companies. To summarize, Respondent’s ruling in Phase 1 lacked a sufficient evidentiary basis. The absence of a thorough record tells the public that Respondent failed to take a long, hard look at LNG before embracing it as an energy resource for California. Evidentiary hearings would have yielded evidence to help Respondent make responsible findings and conclusions in furtherance of the public interest and, just as importantly, develop the “broad basis for decision-making” to which it committed itself in the EAP.
b.
Petitioner Disputed the Contribution of Liquified Natural Gas to Diversification in the Supply of Natural Gas
Respondent was rightly focused in the Natural Gas Proceeding on ensuring a diverse supply of natural gas for California. As Respondent found, supply diversity will provide maximum benefits for core customers.9
9
Generally speaking, core customers are residential and small commercial customers; the utilities purchase natural gas for core customers and pass on the cost to them. Non-core customers--i.e., industrial users and power plants--buy their natural gas directly from suppliers, so the utilities’ involvement is limited to transporting the gas. Two-thirds of California’s daily consumption (approximately six billion cubic feet) is by non-core customers. Supporting Memorandum of Points and Authorities
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See Pet’r Exs., P:874 (Finding of Fact 1). But the facts did not warrant Respondent’s implicit concession that LNG will promote diversity. See id., P:808-809 (allowing SoCal Gas and SDG&E to expand interstate pipeline capacity to include natural gas from LNG suppliers). Evidence presented during an evidentiary hearing would have called the diversity benefits of LNG into serious question. Before LNG can contribute to supply diversity, it must be reliably available to utilities for distribution to ratepayers. Its reliability, however, is suspect at best. As Respondent explained in Phase 1, LNG will be imported from other countries to terminals in California or Baja California.10 Under one plan in particular, LNG will arrive at Sempra LNG’s proposed terminal in Baja California, be regasified, and then be pushed north into California (via the Otay Mesa receipt point) for distribution to core customers pursuant to long-term contracts with Sempra LNG’s two affiliates, SoCal Gas and SDG&E. See Pet’r Exs., Q:891. With these long-term contracts firmly in place, natural gas entering this State’s distribution pipelines from Mexico will displace domestic supplies, leaving contracts for those supplies to lapse in favor of LNG’s alleged supply diversity. See Pet’r Exs., P:884, ¶ 1
10
Some foreign countries that will supply LNG are still developing and have no long-term record of government stability. See Pet’r Exs., F:568-577; and Q902. Supporting Memorandum of Points and Authorities
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(granting utilities authority to terminate contracts with domestic suppliers of natural gas). In the end, LNG’s reliability will hinge precipitously on the reliability of foreign resources and foreign governments, on the reliability of safe extraction, on the reliability of safe shipping to and regasification at a single LNG facility in Mexico (at least for the near term), on the reliability of safe distribution to core customers of SoCal Gas and SDG&E,11 and on the reliability of the LNG companies and the utilities not making their own profits a higher priority than the public’s well-being. Compounding LNG’s reliability problems are other major drawbacks that are not found with domestic pipeline supplies and that directly impact ratepayers.12 According to a California Energy Commission expert, private investors have made it abundantly clear that long-term supply contracts with financially strong firms like California’s utilities are essential to financing 11
The ability to pass on the costs of building LNG facilities to core customers is the key to the LNG companies’ success. The only way that a company like Sempra LNG can afford to construct its Mexico facility is with private financing, which can only be obtained if there is a solid promise that long-term contracts with investment-grade entities like natural-gas utilities will be in place. Interestingly, these are the same sort of problematic long-term contracts made by Governor Davis in 2001. 12
Among them are potentially enormous safety and environmental risks, reduced control of supply sources, and the significant impacts of supply disruption. See Pet’r Exs., Q:955. One expert from the California Energy Commission suggested that these problems are overlooked because of the money-making potential for LNG companies. See id. (drawing shows money outweighing “high risks”). Supporting Memorandum of Points and Authorities
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for any LNG project. See Pet’r Exs., Q:964 (explaining that LNG facility is capital-intensive and investors need long-term assurance of facility’s viability). But the same expert has argued that the dangers of signing longterm LNG contracts are substantial because (i) California has a mixed history on long-term contracts; (ii) there are risks of over-paying; (iii) there are risks of buying too much; and (iv) it is difficult to balance ratepayer protection with investor needs. See id. Even Respondent was aware of LNG’s reliability problems during Phase 1; long after pointing out that there is already substantial diversity in domestic natural-gas supplies coming to California, Respondent went on to find that: 32.
The viability and costs related to interstate pipeline and storage capacity are more certain than those associated with the new LNG projects that are being proposed to serve California markets.
33.
Because of uncertainties related to LNG projects, it is appropriate to review LNG matters more carefully than those related to interstate pipeline and storage capacity projects.
See Pet’r Exs., P:846-847 (noting diverse supplies of SoCal Gas) & P:878 (Findings of Fact). Given all the evidence, Respondent’s conclusion should have been that LNG reliability requires serious scrutiny before utilities will be granted open access to LNG supplies intended to serve California’s core
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customers. Had there been evidentiary hearings, Respondent would have had the opportunity to scrutinize the evidence on both sides of the LNGreliability divide. Respondent apparently took comfort in the absence of opposition to proposals that would diversify natural-gas portfolios across supply basins. See Pet’r Exs., P:809 (noting no resistance to diverse portfolio approach). However, Respondent’s interpretation committed the mistake of confusing general agreement about diversity with specific acceptance of LNG as a way to increase diversity. There is no evidence in the record to establish that LNG will increase gas-supply diversity. Petitioner asked Respondent to schedule evidentiary hearings on precisely this issue, but the request was denied. See Pet’r Exs., D:70; and E:86. Consequently, Petitioner did oppose the use of LNG to increase supply diversity. Unfortunately, the LNG regime endorsed by Respondent in Phase 1 of the Natural Gas Proceeding thwarts diversity and does nothing to foster reliable long-term supplies of natural gas. The evidence before Respondent hardly demonstrated that LNG will enhance the diversity of California’s supply of natural gas, and what evidence there was showed the opposite. Evidentiary hearings should have been held so that Respondent could fully
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assess the potential of LNG to diversify California’s energy-supply portfolio.
c.
Petitioner Disputed the Price Benefits of Liquified Natural Gas
Beyond the question of supply diversity, whether LNG supplies will have an impact on price was also hotly contested. Proven domestic naturalgas reserves have increased at a greater pace than production in eight of the last nine years. Gas storage has been normal or above normal in the last two years while gas demand has remained relatively static. However, in the last few years natural gas prices have doubled, from less than $3/MMBtu 13 to $6/MMBtu or more. The price of natural gas has been volatile and has not followed competitive market projections. Both the U.S. Department of Energy’s Energy Information Administration (“EIA”) and the California Energy Commission have projected long-term natural-gas prices in the $4/MMBtu range (in 2001 dollars) without LNG.14 The EIA estimates that the cost to bring LNG to the west coast is above $4/MMBtu.
See Pet’r
13
“MMBtu” is shorthand for “million Btu,” with “Btu” being a unit of measure for the heating value of a given volume of gas. 14
Implicit in their projections is the assumption that competitive markets will keep prices marginally above the cost of production. Supporting Memorandum of Points and Authorities
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Exs., B:15. At that price, LNG will not put downward pressure on gas prices in a domestic gas market where gas is selling for $4/MM Btu. Respondent seems to have bought off on Sempra Energy’s claim to the contrary. According to Respondent, The utilities claim that the effect on natural gas prices as a result of access to a new supply is likely to be of much greater benefit than the small transportation rate impact on SoCalGas’ customers. See Pet’r Exs., P:845 (emphasis added). Significantly, there is no evidence in the record to support this claim. How can LNG supplies put downward pressure on the price of natural gas if LNG is as or more expensive than domestic natural gas available to California? Evidentiary hearings were needed to answer this fundamental question.
d.
Petitioner Disputed the Flexibility in the Supply of Liquified Natural Gas
Flexibility in adjusting the supply flow of natural gas to California was another issue that Petitioner disputed. SoCal Gas and SDG&E argued that LNG will improve diversity in the supply of natural gas. See, e.g., Pet’r Exs., P:839-840. In contrast, Petitioner argued that supply flexibility requires suppliers of natural gas to be able to increase or reduce their supply flow quickly in response to changes in demand. LNG suppliers cannot do
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that. Once out to sea, LNG supply tankers making their way from Indonesia, Australia, or anywhere else have no choice but to deliver their cargo, meaning that the flow of LNG from supply tankers cannot be adjusted in real time, as can the flow of natural gas from domestic suppliers. Thus, when it comes time to be introduced into the distribution system, LNG will have to be given priority over domestic supplies. See Pet’r Exs., Q:898-899. Respondent failed to resolve this important factual dispute before it committed California to reliance on LNG.
e.
Petitioner Disputed the Potential for Market-Power Abuse of Liquified Natural Gas
Respondent made it clear that it would “welcome” LNG imported from M exico. See Pet’r. Exs., P:854. Such a positive reception is hard to understand for two reasons. In the first place, Respondent’s own findings strongly suggested that domestic supply options and greater storage capacity are indeed preferable to LNG supplies. See id., P:878 (Findings of Fact 32 and 33). Such findings were reasonable because domestic pipeline operators buy their gas from many suppliers. In contrast, while a single LNG terminal could supply as much as one-fourth to one-third of southern California’s average daily gas demand, LNG supply and transportation are Supporting Memorandum of Points and Authorities
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bundled into one package. Controlling both transportation and supply gives a company more market power to wield. Evidentiary hearings would have exposed the increased risk of market manipulation posed by LNG. See Pet’r Exs., Q:899-900. Second, Respondent has already recognized the potential for marketpower abuse by LNG companies. Just last year Respondent initiated an investigation into the potential of LNG company Sound Energy Solutions to exercise its market power improperly. See 2004 Cal. PUC LEXIS 189, 15 (Lodging Item 6). The same concern should have made Respondent skeptical here since the Decision gave Sempra Energy--acting through SoCal Gas and SDG&E--the potential to manipulate as much as one-third of southern California’s market for natural gas. Giving Sempra Energy so much power over the region’s gas market is at odds with the goal of a “diverse portfolio approach.” See Pet’r Exs., P:874 (Finding of Fact 1). Relying on a single LNG provider for the supply and transportation of natural gas is even more troublesome when the LNG facility is located in a foreign country, completely outside the jurisdiction of Respondent or any federal agency. In this case, Sempra Energy has made clear that it intends to sell half the output of its Mexico LNG facility to Mexico initially and all output to Mexico by roughly 2015. See Pet’r Exs., Q:997, ¶ 1. Nothing is
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less reliable than a supplier whose stated intent is to reduce and eventually cut off the supply of natural gas to the California market. Welcoming such a relationship could not possibly benefit California, as evidentiary hearings would have shown. *
*
*
*
*
As the foregoing discussion reveals, there were numerous disputes over material factual issues arising during Phase 1 of the Natural Gas Proceeding. Petitioner proffered substantial evidence that called into question the many factual premises taken for granted by Respondent concerning shortages of natural gas, diversity benefits of LNG, price benefits of LNG, flexibility in the supply of LNG, and affiliate transactions. Owing to these disputes, Respondent should have held evidentiary hearings, and its failure to do so was unlawful. For these reasons, the Court should annul Respondent’s ruling in Phase 1 and order Respondent to hold evidentiary hearings on all matters disputed by Petitioner.
B.
Respondent Should Have Categorized Phase 1 of the Natural Gas Proceeding as “Ratesetting”
Proper categorization of Phase 1 of the Natural Gas Proceeding was vital to Respondent’s development of an accurate, unbiased understanding
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of the issues. Developing such an understanding required either the prohibition or the regulation of ex parte communications with decisionmakers. In quasi-legislative proceedings before Respondent, however, such communications are neither regulated nor prohibited. See P UB. U TIL. C ODE § 1701.4(b); and C AL. P UB. U TIL. C OMM’N R. OF P RACTICE AND P ROCEDURE 7(d). Had Phase 1 been properly categorized as a ratesetting proceeding, ex parte communications would have been heavily regulated if not banned altogether. See P UB. U TIL. C ODE § 1701.3; and C AL. P UB. U TIL. C OMM’N R. OF P RACTICE AND P ROCEDURE 7(c). While it is impossible to know precisely how many private contacts took place in Phase 1 due to its categorization as quasi-legislative, that they occurred cannot be doubted. Less than a week after the rules regulating ex parte communication expired,15 Sempra Energy sent a letter to just two of Respondent’s five Commissioners--President Michael Peevey and Susan Kennedy16 --and insisted that evidentiary hearings were unnecessary and could upset “financial commitments that must be made by Sempra Energy 15
The rules expired on June 18, 2004, when an administrative law judge determined that an evidentiary hearing would not be required. See C AL. P UB. U TIL. C OMM’N R. OF P RACTICE AND P ROCEDURE 6.6 & 7(e)(3); and Pet’r Exs., H:642 (concluding that no hearing was required for Phase 1). 16
It should not be surprising that Commissioners Peevey and Kennedy were in the majority of Commissioners who voted in favor of the Decision and against the holding of evidentiary hearings. See Pet’r Exs., P:886. Supporting Memorandum of Points and Authorities
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LNG and other LNG project sponsors.” See Pet’r Exs., I:649. Notably, that letter appears nowhere in the docket for the Natural Gas Proceeding and is therefore not part of the record that any of the other Commissioners or members of the public would know about. See Pet’r Exs., T:1029 (showing no entry for letter). Such influence over individual Commissioners and the decision-making process is exactly what a “ratesetting” categorization would have prevented.
1.
Respondent Must Use the “Ratesetting” Category for All Proceedings Involving the Implementation of Policy, Mixed Questions of Fact and Policy, or Other Issues that Defy Easy Categorization as “Adjudication” or “QuasiLegislative”
In recent years, Respondent has provided a number of unequivocal pronouncements on the rules requiring that proceedings like Phase 1 of the Natural Gas Proceeding be categorized as “ratesetting.” For example, back in 2001, Respondent rejected PG&E’s request to have a proceeding that was initially categorized as “quasi-legislative” but later changed to “ratesetting” restored to its initial categorization. See 2001 Cal. PUC LEXIS 864, 1-3 (Lodging Item 5). In rejecting PG&E’s request, Respondent explained that “the ratesetting category is both the catch-all category for proceedings that do not neatly fit into other categories, and that the category is appropriate
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for proceedings presenting issues both of policy and of fact.” See id. at 4. After offering that explanation, Respondent went on to emphasize that it had previously rejected PG&E’s argument that “the ratesetting category only involves cases directly involving the setting of rates.” See id. at 5 (emphasis added). One year earlier, Respondent denied the California Independent System Operator’s appeal of a proceeding’s categorization as “ratesetting.” See 2000 Cal. PUC LEXIS 987, 8 (Lodging Item 4). In a unanimous decision, Respondent described the proceeding in these terms: The basic thrust of this proceeding is to determine the most cost-effective ways of easing electric transmission constraints and associated generation shortfalls that affect each of the California investor-owned utilities and their ratepayers, both in the short term and longer term. This proceeding will involve an evidentiary inquiry into the facts, circumstances and cost impacts of addressing existing electric system constraints. Moreover, as discussed in the [Order Instituting Investigation], this inquiry will serve to “identify whether there is a need for new power plants and whether the Commission should order regulated utilities to construct them or contract for them at prices that approximate costs.” See id., 2-3 (citations omitted). Respondent went on to explain why the proceeding, even though it involved policy-making, was most appropriately treated as a “ratesetting” proceeding: Supporting Memorandum of Points and Authorities
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This proceeding may also develop policies related to how the Commission ensures that existing electric transmission and distribution constraints are remedied. However, even if some incremental policy making will occur in this proceeding, the Investigation is still properly categorized as ratesetting under our Rules of Practice and Procedure, wherein the Commission has determined that ratesetting is the default category (Rule 6.1(c)). In line with this determination, as we have previously stated, the procedures applicable to the ratesetting category are most appropriate for cases in which there is a mix of fact finding and policy making, especially where the policy setting aspects of the case are relatively minor. See id. at 4. Respondent’s conclusion was further bolstered by one of its own prior rulings, from which it quoted: “A proceeding that primarily implements policy, rather than establishing it, and looks at facts specific to a particular utility . . . as in this case is more appropriately handled under the procedures applicable to ratesetting rather than those established for policy making.” See id. at 4 (citations omitted). 17 The foregoing authorities confirm that the “ratesetting” category is to be used for proceedings that implement policy, involve mixed questions of fact and policy, or are not easily categorized as “adjudication” or “quasilegislative.” 17
Respondent also acknowledged one of Petitioner’s principal points: “the categorization of a proceeding affects [Respondent’s] internal procedures.” See id. at 5. Supporting Memorandum of Points and Authorities
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2.
Phase 1 of the Natural Gas Proceeding Involved the Implementation of Policy and Mixed Questions of Fact and Policy, and It Defied Easy “Quasi-Legislative” Categorization
Respondent erred in concluding that Phase 1 was a quasi-legislative and not a ratesetting proceeding, consequently making evidentiary hearings inappropriate and rules governing ex parte communications inapplicable. That conclusion was at odds with Respondent’s own precedents. Phase 1 was identical in all material respects to the 2000 ratesetting proceeding described in the previous section. In the Scoping Memo, Respondent stated that the Natural Gas Proceeding was initiated “to examine what policies and rules need to be in place to ensure that California’s residential and business consumers of natural gas have access to reliable long-term supplies.” See Pet’r Exs., H:634. The Natural Gas Proceeding also involved a mix of factual issues and policy matter, with factual issues predominating. Indeed, it considered Sempra Energy’s roll-in and system-integration proposals, along with PG&E’s own rolled-in proposal and reliability-standards proposal. Furthermore, the Proceeding began to implement the policy by which two specific utilities--SoCal Gas and SDG&E--will conduct their LNG-related activities. And, as pointed out in Duke Energy’s reply to comments on the draft Decision, the proceeding
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raised issues of ratesetting for customers of utilities like SoCal Gas and SDG&E. See id., O:785. Conclusion of Law 13 even prescribed an interim transportation rate for SoCal Gas and SDG&E. See id., P:882. More fundamentally, the policy that moved Respondent to action in Phase 1 had already been formulated in the Energy Action Plan, leaving only its objectives to be realized. Respondent admitted as much when it explained at the outset of the Decision: “The policies adopted in today’s decision . . . is [sic] part of the state’s overall effort to implement and to fulfill the Energy Action Plan’s goals.” See Pet’r Exs., P:791 (emphasis added). Phase 1, therefore, was no more a policy-making proceeding than a judge’s ruling on a motion for summary judgment is a law-making proceeding. Phase 1 also falls within the principle affirmed in Respondent’s 2001 ratesetting proceeding described above. A proceeding need not involve the direct setting of rates in order to constitute a ratesetting proceeding. In this regard, Conclusion of Law 11 confirms that Phase 1 indirectly dealt with rates: “PG&E, SoCalGas and SDG&E should submit, for Commission approval, non-discriminatory open access tariffs for all new sources of supply, including potential LNG supplies.” See Pet’r Exs., P:882. What is more, as noted earlier, it did not take long for Phase 1 to take up the issue of
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rates directly: “Otay Mesa should be designated a common receipt point for both the SDG&E and SoCalGas systems, and an interim transportation rate of either the applicable SDG&E or the SoCalGas tariff rate should apply.” See Pet’r Exs., P:882 (Conclusion of Law 13) (emphasis added). In short, it is not true that Phase 1 dealt exclusively or even largely with policy issues. Respondent made substantial factual determinations regarding the need for LNG and the increased diversity of supply that LNG will provide. Those determinations begged important factual questions that should have been answered only after evidentiary hearings were conducted and all available evidence was presented under the rules regulating ex parte communications with the Commissioners. Respondent refused to hold evidentiary hearings because in its view Phase 1 merely addressed policy issues related to California’s supply of natural gas. As the record shows, Respondent went far beyond policy issues and ventured into the realm of fact-finding and rate-making. Therefore, Phase 1 of the Natural Gas Proceeding should have been categorized as a ratesetting proceeding.
V. C ONCLUSION For all these reasons, Petitioner respectfully urges this Court to grant the relief requested in the Petition. Respondent must not be allowed to take Supporting Memorandum of Points and Authorities
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the unprecedented step of resigning California to dependence on LNG until all the evidence has been presented, tested, and evaluated in accordance with all the rules for ratesetting proceedings. Thorough consideration of the evidence in accordance with these rules is the only thing that the public has in the way of assurance that Respondent is not letting the utilities reach any deeper into the “consumers’ till� than is absolutely necessary.
Supporting Memorandum of Points and Authorities
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