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Attached please find, in ASCII text format, the Rebuttal Testimony of R.=20
Thomas Beach on behalf of the Indicated Electric Generators. Please contact me if you have any questions. Christa Goldblatt Office Manager Crossborder Energy christag@crossborderenergy.com 510-649-9790 "There is hope, but not for us." -- Franz Kafka - att1.htm Exhibit No. 18 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Investigation on the Commission's Own Motion to ) Consider the Costs and Benefits of Various Promising ) Revisions to the Regulatory and Market Structure ) I. 99-07-003 Governing California's Natural Gas Industry and to ) Report to the California Legislature on the ) Commission's Findings. ) ) REBUTTAL TESTIMONY OF R. THOMAS BEACH ON BEHALF OF INDICATED ELECTRIC GENERATORS IN SUPPORT OF THE COMPREHENSIVE SETTLEMENT AGREEMENT R. Thomas Beach Principal Crossborder Energy 2560 Ninth Street, Suite 316 Berkeley, California 94710 Telephone: 510-649-9790 Facsimile: 510-649-9793 E-mail: tomb@crossborderenergy.com On behalf of Indicated Electric Generators May 5, 2000=0F, Subject Index INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . .1 SCGC / TURN EXAGGERATE THE DIFFERENCES BETWEEN THE PG&E AND SOCALGAS SYSTEMS. . . . . . . . . . . . . . . . . . . . . .2 The Commission Should Focus on a Statewide, Consistent Structure for t= he=20 Gas Utilities Moving Forward, Not on Whether PG&E and SoCalGas Have Had Similar Problems in the Past . . . . . . . . . . . . . . . . .2 SoCalGas' Backbone System Serves the Same Function as PG&E's, and Can = Be Unbundled in a Manner Similar to the PG&E Gas Accord .3 The Benefits of the Gas Accord's City-Gate Market Have Been Substantia= l=20 for Electric Generators . . . . . . . . . . . . . . . . . . . . . .3 Customers Have Not Had to Hold Capacity or Pay Demand Charges to Reali= ze=20 These Benefits . . . . . . . . . . . . . . . . . . . . . . .4 SCGC'S AND TURN'S COST / BENEFIT ANALYSIS OF TRANSMISSION UNBUNDLING IGNORES THE BENEFITS AND OVERSTATES THE COSTS . . . . . . .4 SCGC / TURN Fail to Recognize the Benefits of Transmission Unbundling4 Unbundling will provide competitive benefits in the city-gate=20 market4 The Comprehensive Settlement reduces rates for EG customers6 The Comprehensive Settlement reduces risks for EG customers6 SCGC / TURN Greatly Overstate the Impact of Demand Charges.7 =0F, BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Investigation on the Commission's Own Motion to ) Consider the Costs and Benefits of Various Promising ) Revisions to the Regulatory and Market Structure ) I. 99-07-003 Governing California's Natural Gas Industry and to ) Report to the California Legislature on the ) Commission's Findings. ) ) REBUTTAL TESTIMONY OF R. THOMAS BEACH ON BEHALF OF INDICATED ELECTRIC GENERATORS IN SUPPORT OF THE COMPREHENSIVE SETTLEMENT AGREEMENT My name is R. Thomas Beach. I am principal consultant with the firm=20 Crossborder Energy. My business address is 2560 Ninth Street, Suite 316, Berkeley,=20 California 94710. My experience and qualifications are described in Attachment RTB-1 to the dire= ct=20 testimony that I served in this proceeding on May 4, 2000. I. INTRODUCTION This rebuttal testimony responds to the direct testimony of the Southe= rn=20 California Generation Coalition (SCGC) and The Utility Reform Network (TURN) in suppor= t=20 of their "Post- Interim Settlement Agreement" (PISA), which was submitted to the Commission= =20 on April 3, 2000. The sponsors of this rebuttal testimony include past, present, and= =20 future electric generation customers of the Southern California Gas Company (SoCalGas) and San Diego G= as=20 and Electric (SDG&E). The sponsors of this testimony are all signatories to and=20 supporters of the Comprehensive Settlement Agreement that over 20 parties filed on April 17,= =20 2000. For the reasons set forth below, the sponsors of this testimony do not support the= =20 SCGC / TURN PISA to the extent that it fails to unbundle intrastate transmission, a step tha= t=20 is one of "the most promising options" that the Commission has identified for the restructuring= =20 of the SoCalGas system. I recommend, instead, that the Commission adopt the Comprehensive= =20 Settlement Agreement, which moves forward on all of the Commission's "most promising= =20 options," including unbundling intrastate transmission. The Comprehensive Settlement Agreement= =20 enjoys broad support from the full range of stakeholder interests in the southern=20 California gas market. II. SCGC / TURN EXAGGERATE THE DIFFERENCES BETWEEN THE PG&E AND SOCALGAS SYSTEMS. In D. 99-07-015, at page 14, the Commission identified the creation of= a=20 system of firm, tradeable intrastate transmission rights as one of its "most promising=20 options" for the further restructuring of the SoCalGas system. A significant element in that=20 determination was the Commission's desire to follow the model of the PG&E Gas Accord, and thus to= =20 encourage statewide consistency in its gas restructuring program. The SCGC / TURN PI= SA=20 now asks the Commission to re-consider that finding, and to defer any further unbundling= =20 of intrastate transmission service on the SoCalGas system. In support of that aspect of= =20 the PISA, the witnesses for SCGC / TURN testify (1) that the unbundled transmission syste= m=20 adopted for PG&E under the Gas Accord responded to a unique set of problems that have n= ot=20 been present in southern California, (2) that there are significant structural and=20 operational differences between the PG&E and SoCalGas systems, and (3) that the Gas Accord structure has no= t=20 benefitted end- use customers in northern California. None of these assertions are correct= . A. The Commission Should Focus on a Statewide, Consistent Structure= =20 for the Gas Utilities Moving Forward, Not on Whether PG&E and SoCalGas Ha= ve Had Similar Problems in the Past. SCGC / TURN witness Mr. Florio describes at length the problems that l= ed=20 to the adoption on transmission unbundling for PG&E in the Gas Accord settlement. = =20 He views PG&E's difficulties as far more extensive than those that SoCalGas now faces, thus= =20 justifying more "extreme measures" such as the unbundling of intrastate transmission. SCGC= /=20 TURN Testimony, at Section 2.1.1.2. In my view, both PG&E and SoCalGas have faced the same types of=20 problems, even if the economic distortions on the PG&E system have been greater. On both systems= ,=20 shippers have not had a system of firm capacity rights, allocated by non-discriminatory, open= =20 access procedures, to govern who had access to what receipt point. On the PG&E system, the attem= pt=20 to discriminate against PGT Expansion volumes that sought to use PG&E's Line 400 resulted i= n=20 the "crossover" problems at Malin. Similarly, SoCalGas' "windowing" procedures have not=20 provided firm, non- discriminatory access at SoCalGas' receipt points. "Windowing" has=20 restricted the access of competitive gas supplies to receipt points such as Wheeler Ridge, just as t= he=20 "crossover ban" limited the competition to sell gas at Malin onto PG&E's Line 400. Furthermore, SoCalGas has also faced the same sort of "conflict of=20 interest" charges as PG&E. SoCalGas' core procurement department has been criticized for=20 monopolizing the Hector Road receipt point, to the benefit of SoCalGas' shareholders through the Ga= s=20 Cost Incentive Mechanism. See D. 99-07-015, at pages 15 - 18. However, the Commission should not decide the future structure for=20 California's gas industry on the basis of whether SoCalGas' past problems have resembled=20 PG&E's past difficulties. For electric generators, what is important is that the=20 structures that the Commission adopts in both parts of the state should solve these problems and should be= =20 consistent on a statewide basis. The new electric market is a statewide market. There are= =20 already at least two merchant electric generators (Dynegy and Duke) and a number of QF projects= =20 under common ownership that operate in more than one gas utility service territory. =20 Another merchant plant developer (Calpine) has made no secret of its intent to operate plants=20 statewide. This trend promises to increase competition in the electric market. To encourage this= =20 trend, the Commission should focus on carrying through on D. 99-07-015's promise to increase the= =20 statewide consistency of California's natural gas restructuring program. The unbundling of=20 intrastate transmission was a key element of the PG&E Gas Accord, and should be a foundation of the furth= er=20 restructuring of the SoCalGas system, as well. B. SoCalGas' Backbone System Serves the Same Function as PG&E's, and= =20 Can Be Unbundled in a Manner Similar to the PG&E Gas Accord. Mr. Florio claims that the "network" nature of the SoCalGas system=20 argues against following the Gas Accord model for unbundling backbone transmission service= =20 for SoCalGas. Yet Mr. Florio concedes that SoCalGas' mainline facilities that extend from= =20 the Los Angeles basin to the interstate pipelines on the California / Arizona border do resemble= =20 interstate pipelines. SCGC / TURN, at Section 2.1.1.3. SoCalGas' lines running north from the L.A= .=20 Basin to the Wheeler Ridge interconnects also are clearly backbone facilities similar to= =20 PG&E's. With respect to local transmission, SoCalGas' network of local transmission lines inside= =20 the L.A. Basin is similar to PG&E's network of local transmission lines in its load centers i= n=20 the Bay Area and Central Valley. Indeed, both the PG&E and SoCalGas systems can be consider= ed=20 to be "spokes" of backbone lines transporting gas from the interstate pipeline receipt=20 points to "hubs" of networked local transmission facilities. The two systems differ in the=20 length and number of the "spokes" (SoCalGas' are shorter and more numerous), but operationally these= =20 components serve the same function. In my view, there is just as strong an operational basi= s=20 for unbundling SoCalGas' backbone and local transmission facilities and services as there= =20 was for unbundling PG&E's. C. The Benefits of the Gas Accord's City-Gate Market Have Been=20 Substantial for Electric Generators. Mr. Weil downplays the benefits that the Gas Accord has produced throu= gh=20 competition among suppliers in the PG&E city-gate market that the Gas Accord created. = =20 First, he appears to cite the existing data as showing "average benefits of around 2 cents or mo= re=20 per MMcf/d." SCGC / TURN, at Section 2.2.2. As cited in my direct testimony, the actual= =20 benefits have been more than 2 cents per mmcf/d $0.03 to $0.08 per Dth. Mr. Weil opines tha= t=20 such savings are not significant for core customers. Ibid., at Section 2.2.2. Regardless of= =20 whether one agrees with him, such competitive reductions in transportation costs are very important= =20 for electric generators, whose total transportation rate is likely to be roughly $0.35 p= er=20 Dth, and who, as Ms. Yap states, "sell into a highly competitive PX market." SCGC / TURN, at=20 Section 2.4.1. For an electric generator, a 10 to 20% reduction in gas transportation charges is= =20 well worth pursuing, as shown by SCGC's active participation on SoCalGas BCAP issues that would low= er=20 SoCalGas' EG rates by far smaller amounts. D. Customers Have Not Had to Hold Capacity or Pay Demand Charges to Realize These Benefits. Mr. Weil also asserts that the fact that relatively few end use=20 customers hold backbone transmission capacity on the PG&E system shows that unbundling under the Ga= s=20 Accord has not benefitted customers. He opines that this is due to the high transaction= =20 costs associated with holding capacity. SCGC / TURN, at Section 2.2.3. Ms. Yap also describes at= =20 length how the transaction costs associated with managing transmission capacity tends to= =20 force end users to buy from marketers. Ibid., Section 2.3.1. She concludes that unbundling has be= en=20 "great for marketers" but "not good for customers." Ibid., at Section 2.3.1. This testimony ignores the fact that marketers do not exist independen= t=20 of their customers. If a marketer's services do not add value for the customer, then that=20 marketer will not remain in business for long. Under the Gas Accord, most noncore end users in northern= =20 California have been buying gas from marketers in the PG&E city-gate market. However, the= =20 available data on PG&E city-gate gas prices discussed above show that end users have=20 realized significant savings from these purchases, compared to the option of buying gas at the= =20 California border and managing their own transportation to the city-gate. These city-gate=20 purchases have not involved paying demand charges or incurring transaction costs associated with managi= ng=20 capacity. Competition among marketers has assured that customers benefit from=20 marketers' efficiencies in managing transportation costs. III. SCGC'S AND TURN'S COST / BENEFIT ANALYSIS OF TRANSMISSION UNBUNDLING IGNORES THE BENEFITS AND OVERSTATES THE COSTS. SCGC and TURN attempt to present a cost / benefit analysis of=20 transmission unbundling, largely through the testimony of Ms. Yap, in an effort to show that the cos= ts=20 outweigh the benefits. Ms. Yap ignores several significant benefits from unbundling,=20 greatly exaggerates the possible costs, and presents unsubstantiated assertions about the impacts o= f=20 unbundling on generators in the Los Angeles basin. A. SCGC / TURN Fail to Recognize the Benefits of Transmission=20 Unbundling. 1. Unbundling will provide competitive benefits in the city-gat= e=20 market. The experience with transmission unbundling under the PG&E Gas Accord = has demonstrated that end use customers realize competitive benefits from the= =20 creation of a city-gate market. The city-gate market moves gas-to-gas competition between supplier= s=20 closer to the customer, and allows the customer to avoid risks associated with paying=20 demand charges or managing backbone transportation. Those customers who believe they can=20 achieve greater profits by managing their own transportation have that option, and since not all=20 transportation rights on the PG&E system are held by marketers, it is obvious that such customers do= =20 exist. Mr. Weil doubts that the city-gate benefits seen on the PG&E system wi= ll=20 materialize, due to "Southwest supply dominance" at SoCalGas receipt points. SCGC / TURN, a= t=20 Section 2.2.2. Presumably this refers to the fact that gas prices tend to= =20 trade within a narrow range of a few cents per Dth at all of the receipt points into the SoCalGas system. Ibid.= ,=20 at Section 2.3.1. The price differentials at the SoCalGas receipt points are much lower than the= =20 significant price differentials that have existed between Topock, Arizona, and Malin, Oregon,= =20 the two major receipt points into the PG&E system. However, recently the Malin / Topock= =20 price difference has been due almost entirely to the $0.10 to $0.12 per Dth transportation rate= =20 differential between PG&E's Redwood and Baja paths. Over the most recent year for which data is= =20 available, Malin prices have been essentially equivalent to Topock prices, when adjusted for= =20 the downstream transportation rate differences. This integration of the Malin and Topock= =20 markets has been the result of rising Canadian prices relative to U.S. markets, which has produc= ed=20 a competitive equilibrium between Canadian and domestic supplies serving northern=20 California. Yet over this year the benefits of PG&E city-gate purchases has actually increased, even= =20 though there was very little difference between Malin and Topock prices delivered to the end user= . =20 From May 1999 through April 2000, PG&E city-gate prices have been $0.05 per Dth to $0.11= =20 per Dth lower than the comparable cost of border purchases plus PG&E's full backbone=20 transportation rates. This data is summarized in my Table 1. Contrary to the SCGC / TURN testimony,= =20 this recent experience suggests that the price benefits from competition at a new=20 SoCalGas city-gate may be just as large as those actually observed on the PG&E system. Table 1 Natural Gas Market (May-99 through Apr-00) $/MMBtu Gas Prices Malin Topock PG&E City-gate California Border: 2.44 2.56 City-gate Market: 2.71 PG&E Transportation: Redwood Baja Firm: 0.32 0.22 As-Available: 0.38 0.26 Price of Border Purchases at City-gate Firm: 2.76 2.78 As-Available: 2.82 2.82 Benefits of City-gate overBorder Purchases Firm: 0.05 0.07 As-Available: 0.11 0.11 Data Source: Natural Gas Intelligence 2. The Comprehensive Settlement reduces rates for EG=20 customers. Transmission unbundling, as proposed in the Comprehensive=20 Settlement, will result in a modest reduction in transportation rates for electric generators. My direc= t=20 testimony discussed how transmission unbundling under the Comprehensive Settlement will reduce = EG=20 rates by $3 million per year in 2002, or about $0.01 per Dth, compared to the SoCalGas= =20 rates adopted in the recent BCAP decision, D. 00-04-060. In addition, the Comprehensive=20 Settlement unbundles transmission rates on an embedded cost basis, removing roughly half of the = EG=20 rate from SoCalGas' complex, contentious long-run marginal cost rate design. This wi= ll=20 enhance the certainty and stability of SoCalGas' EG rate a particularly important=20 factor to EG customers that may seek to build new gas-fired capacity on the SoCalGas system. 3. The Comprehensive Settlement reduces risks for EG=20 customers. Ms. Yap comments at length on how "if a generator's fundamental= =20 risk increases, investors demand more net income from the operation to compensate them for that=20 increased level of risk." SCGC / TURN, at Section 2.4.3. In my view, the Comprehensive Settlement=20 reduces a number of important risks for electric generators, compared to the SCGC / TURN PIS= A,=20 as follows: =0F0 SoCalGas shareholders will assume 100% risk for the recovery o= f=20 unbundled backbone transmission costs. This protects electric generation customers= =20 from bearing higher backbone transmission costs if SoCalGas discounts backbone rates = or=20 if declining throughput leads to reduced backbone transmission revenues. =0F0 The Comprehensive Settlement prices transmission services on a= n=20 embedded cost basis through August, 2006. This removes the calculation and allocatio= n=20 of marginal transmission costs as an issue in the next SoCalGas BCAP case. =0F0 The Comprehensive Settlement uses a defined 79% load factor to= =20 price backbone transmission service through the term of the settlement. This=20 removes the risk that declining throughput on the SoCalGas system could raise backbone transmissi= on=20 rates in the next SoCalGas BCAP case. =0F0 The Comprehensive Settlement reduces customers' risk for reven= ues=20 from unbundled storage services to 25% in the second year (beginning in April,= =20 2002), while the SCGC / TURN PISA maintains the 50% risk adopted in D. 00-04-060 through= =20 2002. =0F0 The Comprehensive Settlement unbundles SoCalGas' transmission,= =20 storage, and balancing services. This will offer electric generators a number of new=20 opportunities to reduce their costs, including (1) city-gate gas purchases, (2) self-balancing = or=20 competitive balancing services, and (3) new, competitive storage services. In my=20 opinion, these opportunities reduce the risk that generators in the Los Angeles Basin will be= =20 caught in a "price squeeze" between their gas costs and their electric revenues, because they= =20 will have more ways in which to reduce their gas costs. B. SCGC / TURN Greatly Overstate the Impact of Demand Charges. The use of demand charges for backbone transmission service appea= rs=20 to be the focal point of SCGC / TURN's opposition to transmission unbundling. Throughout their= =20 testimony, SCGC / TURN overstate the impact of demand charges: =0F0 Ms. Yap's Figure 1, showing the impact of a customer's load fa= ctor=20 on its average transportation rate, assumes that the customer's entire rate is= =20 collected in a demand charge. SCGC / TURN, at Section 2.4.1. She fails to note that the demand= =20 charge for firm backbone transmission under the Comprehensive Settlement will be only abou= t=20 22% of the total EG rate under the SFV rate option, and just 12% of the rate under th= e=20 alternative backbone rate with a 50% demand component. =0F0 Ms. Yap presents the results of "a study of more than half of = the=20 generators in the Los Angeles basin" that purports to show that "SFV-style" demand=20 charges could increase annual fixed costs by "as much as 20 percent." SCGC / TURN, at= =20 Section 2.4.2. I have examined the workpapers for this study, obtained in by Southern= =20 California Edison in discovery, and it is based on wholly unrealistic assumptions for= =20 how generators will buy gas under the Comprehensive Settlement. First, the study assumes tha= t=20 each generator will contract at the SFV rate proposed in the Comprehensive Settlement= =20 for a quantity of firm backbone capacity based on the generator's theoretical maximum ga= s=20 use in a day (that is, its generating capacity in MW, times its average heat rate,= =20 times 24 hours). Apparently, this assumption is made regardless of whether the plant has=20 actually ever used that much gas in a single day. The plants studied are mostly intermediate-load= =20 or peaking units, and almost certainly never operate at anything approaching full capacity for= =20 all 24 hours of a day. As a result of this assumption, the plants studied are assumed to=20 contract for 1,426 MDth per day of backbone capacity. According to the study, these units=20 represent 43% (i.e. less than one- half) of the gas-fired capacity in the Los Angeles Basin. If all= =20 generators in the basin contracted for capacity in this way, electric generators alone=20 would demand 3,316 MDth per day of capacity, or 93% of SoCalGas' total receipt point capacity= ! =20 There is obviously no such demand today for firm service to electric generators on the= =20 SoCalGas system. Second, the study assumes that the generators will make no effort to=20 broker, release, or sell the massive amount of excess capacity that they have bought and will= =20 derive no revenues from such off-peak capacity sales. Thus, the study's dire picture of the impact of demand charges on= =20 low-load factor generators assumes that such generators massively over-contract for=20 capacity, and fail to take advantage of the numerous means available under the Comprehensive= =20 Settlement to reduce or eliminate their demand charge risks: The Comprehensive Settlement offers an optional backbone rate wit= h=20 a 50% demand charge that almost halves the demand charge risk, but offers the= =20 same firm priority as the SFV demand charge. Under the comprehensive settlement, interruptible service at=20 volumetric rates is always available at no more than a 20% premium over firm backbone rates,= =20 and may even be available at less than the firm backbone rates, particularly duri= ng=20 low-demand periods. With a backbone rate of $0.0719 per Dth, this premium is no more= =20 than $0.0144 per Dth. Ms. Yap observes (in Section 2.3.1) that the interstate pipelines= =20 supplying SoCalGas have at least 1,000 MMcf/d (or 30%) more capacity than SoCalGas'=20 intrastate system. She does not recognize that SoCalGas' backbone system also has more= =20 than 900 MMcf/d of excess capacity, plus substantial excess storage capacity. Due t= o=20 this excess intrastate capacity, it is difficult to imagine a scenario, for the=20 foreseeable future, in which a low- load factor generator would ever have to pay more than the maximu= m=20 interruptible rate for "virtually firm" backbone service. I have re-calculated the results of the SCGC / TURN study, under= =20 the assumption that generators in the Los Angeles basin take interruptible service, i= n=20 order to avoid demand charges, at the full $0.0144 per Dth premium for interruptible=20 service. In this case, the generators' annual fixed costs increase by just six-tenths of one= =20 percent (0.6%). In reality, I expect that interruptible or released firm service wil= l=20 be available for much of the year at all-volumetric rates that are much less than the maximum= =20 interruptible rate. The Comprehensive Settlement will establish an active market for= =20 the trading of backbone capacity on the SoCalGas system. This will provide a=20 means for electric generators to rationalize their holdings of intrastate capacity,= =20 and may be a source of firm capacity at volumetric rates. Again, the SCGC / TURN study of th= e=20 impact of demand charges assumes that generators do not use this secondary market. Ms. Yap fails to recognize that low-load factor generators will b= e=20 able to avoid paying demand charges (and save money on intrastate transportation, as= =20 well) by buying gas in the city-gate market. Ms. Yap's primary concern with the city-ga= te=20 market appears to be the fear that marketers will be able to charge a significant= =20 premium for city-gate sales during periods of capacity constraints. SCGC / TURN, at Section= =20 2.3.1. Ms. Yap's testimony fails to explain her assertion that the city-gate marke= t=20 could become a "bottleneck" on the SoCalGas system. Upstream of the city-gate= =20 market, SoCalGas will have over 900 MMcf/d of excess backbone capacity, plus significan= t=20 amounts of unused storage capacity. Ms. Yap's "bottlenecks" and marketer-manipulated high prices have= =20 not materialized in two years' of experience with the PG&E city-gate market, even=20 though PG&E has less excess transmission capacity and far less storage capacity than= =20 SoCalGas. PG&E city- gate prices did experience one brief spike, due to very high dema= nd=20 during the cold snap just prior to Christmas in 1998, but on average PG&E city-gate=20 prices have provided significant benefits to end users, compared to purchases at the= =20 California border. In addition, the data that Mr. Weil cites on the parties holding=20 capacity on the PG&E system shows that 75 parties hold capacity on the Redwood path alone, an= d=20 does not suggest any undue concentration of capacity holdings on the PG&E backbone=20 system. Ibid., Table 1, Section 2.2.3. Furthermore, the Comprehensive Settlement has numerous provisions= =20 to ensure that any one marketer will be unlikely to accumulate a dominant share of= =20 capacity to the SoCalGas city-gate market. First, noncore end use customers will have the= =20 initial two open seasons in which to subscribe to up to 50% of the available backbone=20 capacity, without competition from marketers. This should ensure that end users th= at=20 are interested in holding capacity will be able to acquire the capacity that they= =20 desire, and is likely to lead to an even greater number of holders of capacity than resulted fr= om=20 the Gas Accord open season, in which end users and marketers competed together. =20 Second, the Comprehensive Settlement limits any one party from holding, at the end of the= =20 open season process, more than 40% of the intrastate capacity from any individual SoCalGas= =20 receipt point. Third, if any party attempts to withhold firm intrastate capacity, in an=20 effort to drive up prices, that capacity will be available for SoCalGas to sell as interruptible= =20 service, and SoCalGas will have a strong incentive to market such capacity, because it is 10= 0%=20 at risk for the recovery of backbone transmission costs. The SCGC / TURN testimony tries to portray low-load factor generators = as=20 caught in a "price squeeze" between capped PX prices and increased fixed operating cost= s=20 due to the imposition of demand charges for intrastate transmission. SCGC / TURN,=20 Section 2.4.3. The testimony paints a grim picture of plants closing, and jobs lost, in the Lo= s=20 Angeles Basin. However, there are a number of elements in this picture that simply do not= =20 add up: =0F0 The testimony appears to assume that low-load factor generators pay= the=20 SFV demand charges, and take none of the steps discussed above to mitigate or=20 eliminate the impact of demand charges. =0F0 The testimony does not recognize that there will be a $3 million do= llar=20 reduction in rates to the EG class as a result of the Comprehensive Settlement. =0F0 The testimony asserts that the increases in operating costs as a re= sult=20 of demand charges will be serious enough to force plants to close. Even accepting SCGC /=20 TURN's inflated figure of a 20% increase in fixed costs, SCGC / TURN provide no financial dat= a=20 that substantiates their assertion that an increase of this magnitude is likely to force = a=20 significant number of plants to close. =0F0 SCGC / TURN fail to appreciate the logical way to avoid the "price= =20 squeeze" that they so fear: buy gas in the SoCalGas city-gate market. City-gate buyers will= =20 avoid paying demand charges, so their fixed operating costs will not increase. In additio= n,=20 the SoCalGas city-gate market is likely to be the gas market that is most tightly linked to= =20 electric prices in southern California, because it will be the closest market to the generators'= =20 point of consumption and because almost 60% of noncore loads on the SoCalGas / SDG&E system are= =20 electric generators. As a result, generators buying gas in the SoCalGas=20 city-gate market will have the highest assurance that changes in their gas costs will be reflecte= d=20 in changes in electric prices, thus reducing the risk of a "price squeeze between gas and=20 electric prices. This has certainly been the case in northern California. Straightforward=20 statistical analyses that I have performed show that the PG&E city-gate gas price is more highly=20 correlated to PX electric prices than are gas prices in any other market in the state, presumabl= y=20 because electric generators in northern California use that market and because it is th= e=20 closest market to the generators' burner tips. =0F0 SCGC / TURN attempt to argue that the closure of low-load factor pl= ants=20 in the Los Angeles Basin, due to the imposition of demand charges, will have=20 serious implications for electric reliability. SCGC / TURN, at Section 2.4.5. At the same time= ,=20 SCGC / TURN argue that generators will not be able to recover demand charges because les= s=20 than 20% of the capacity in the basin is under Reliability Must-Run (RMR) contracts an= d=20 that there is "intense competition" for available RMR contracts. Yet the lack of RM= R=20 contracts in the basin is due to the fact that there is enough capacity in the basin to= =20 provide more-than- adequate reliability and to assure that few generators can exercise=20 local market power. If some generators in the Los Angeles Basin go out of business due to=20 demand charges, a more likely scenario than blackouts is that PX prices will rise in southern= =20 California, the ISO will make available more RMR contracts in the basin, and those contracts wi= ll=20 provide a higher level of cost recovery, thus offsetting the impact of the demand charg= es. This completes my rebuttal testimony.
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