Gas Accord II Workshop Transmission Pricing Options

1. Gas Accord II Workshop Transmission Pricing Options

2. Purpose of Presentation • To present in more detail the transmission pricing options discussed at the October 12, 2000 Workshop • To solicit ideas and feedback from parties. Agenda • Transmission Pricing Options • Backbone-Only Rates • Local Transmission Pricing Options • Rebundle Noncore Local Transmission and Backbone Rates • Overview of EG rate issues

3. 2003 Transmission Pricing Under Current Structure (1) Local Transmission Single Average Volumetric Local Transmission Rate. Non-bypassable to on- system end-users in Gas Accord I CoreNoncore LT Revenue Requirement – 2003 Prelim. ($ mil.) $87 $63 Cold Year Winter January Allocator 58% 42% LT Rates - 2003 Preliminary estimate ($/Dth) .28 .14 Backbone Rates Path-Specific Rates for Redwood, Baja, Silverado 2003 Preliminary- $/Dth @ 100% Contract Usage: Core Noncore Redwood Annual Firm Transport .14 .29 Baja Annual Firm Transportation .21 .21 Silverado Annual Firm Transportation .15 .15 (1) Assuming the 2003 preliminary cost of service and status quo Gas Accord I rates design presented at the October 12, 2000 Workshop.

4. 2003 Transmission Pricing Current Design Structure Concerns: • Certain noncore customers have sought backbone-only rates to avoid paying the 14 cent/dth local transmission rate component. • 2000 BCAP Settlement agreed to defer discussion of a backbone-only rate issue • OII Settlement Agreement agreed to address the issue outside the OII Settlement

5. Proposed Objectives to Evaluate Rate Design Alternatives • Rate design should recover PG&E’s cost of service • Rate design should meet the Commission’s approval ~ be in the public interest and represent a reasonable compromise of competing interests • Pricing should be competitive and responsive to end-user concerns • Rate design should minimize litigation during Gas Accord II period • Rate design should minimize overall adverse ratepayer impacts and promote rate stability • Rate design should facilitate active gas on gas competition

6. Backbone and Local Transmission Pricing Options • Retain Current Rate Design Structure • Offer a Backbone-Only Service • Customers who are physically direct-connected to backbone facilities would avoid paying a local transmission rate component • This option could be done in conjunction with some modification to local transmission rate design • Do Not Offer Backbone-Only Service • Modify noncore local transmission rate design to reduce the incentive for customers to seek backbone-only rates and to remove some of the cost averaging. • Rebundle noncore local and backbone transmission costs and rates

7. Option II. Offer Backbone-Only Service

8. Backbone-Only Rates Design Structure: • Applicable to noncore customers who are physically connected to backbone • Applicable to new and existing customers. • Customers receiving this level of service would pay backbone, customer access and customer class charges only and would be exempt from the local transmission rate component

9. Backbone-Only Rates • Under a backbone-only rate structure, fixed local transmission costs would be spread among fewer core and noncore customer loads • At various levels of backbone-only service, assuming current cost allocation and rate design methods, rates would increase for all remaining core and noncore local transmission customers as follows:

10. Backbone-Only RatesIssues and Considerations • Rate design is consistent with PG&E’s current distribution-local transmission service level rate segmentation • Would settle backbone-only litigation during Gas Accord II period • Qualifications and eligibility would require further analysis • Operational and safety considerations • Possible incremental costs of establishing this service • Would raise local transmission rates for all remaining customers possibly giving an economic incentive for additional customers to build connections to the backbone causing an LT rate “death spiral” • Could be done in conjunction with noncore local transmission rate design modifications to reduce economic incentives for some customers to build connections to the backbone • To prevent a LT rate “death spiral”, some cost shifting from LT to BB may be necessary to accommodate an on-system backbone-only service option

11. Backbone-only Rates with noncore LT cost shift to BB • A noncore local transmission cost shift to noncore backbone of 3–7 cents (25% -50% of noncore LT costs) may reduce the incentive for some noncore customers to build to the backbone under this service option • The following shows illustrative 2003 rate impacts of a 7 cent or 50% noncore LT cost shift to BB, compared to the status quo rate design structure:

12. Backbone-only Rates with noncore LT cost shift to BB Rate Design Issues and Considerations • May be effective in lowering LT rates enough to mitigate customers from seeking backbone-only rates • Some level of cost shift from noncore LT to BB in conjunction with a backbone-only service option would present a reasonable compromise of competing noncore interests • Minimizes adverse ratepayer impacts and manages rate stability under a backbone-only service option • Higher backbone rates may be absorbed by marketers and not end-users

13. Option III. Do Not Offer Backbone Only Service. Modify Noncore Local Transmission Rate Design

14. Noncore Local Transmission Rates • The noncore class is comprised of 1,266 customers with widely varying usage … from 50,000 – 500,000,000 therms annually • A single $0.14 per dth volumetric noncore local transmission rate reflects a high degree of averaging

15. Noncore Local Transmission Pricing Options • Status Quo – Average rate for all noncore customers • Declining Tier Rates - based on size (annual usage) or cost to serve noncore segments 3. Zone Rates - based on customer distance from the backbone 4. Combination of all or some of the above

16. Declining Tier Noncore LT Rate Option • Under this rate design option, the noncore class is segmented into four tiers based on annual usage in therms (rolling 12 months). Customers pay the applicable tier rate for all usage in a given month. • Illustrative 2003 noncore local transmission declining tier rate design impacts are presented below, both with and without the impacts of a 7 cent or 50% noncore LT cost shift to BB.

17. Declining Tier Noncore LT Rate Option Rate Design Issues and Considerations • Tier design by itself would not lower noncore LT rates enough to mitigate customers from seeking backbone-only rates • Any additional LT rate decrease for the large customers would require a significant and unacceptable LT rate increase for smaller noncore customers • Tier design, in conjunction with some local transmission cost reallocation, may be effective in lowering LT rates enough to mitigate customers from seeking backbone-only rates • Removes some cost averaging, compared to current rate design • Without considering the rate effects of LT bypass, rate design may disadvantage small customers over LT rate design currently in effect • As with any rate change, reaching agreement may be contentious

18. Zone Noncore LT Rate Option • Under this rate design option, the noncore class is segmented into three zones based on surveyed distance from the backbone (in miles, as the crow flies). • Illustrative 2003 noncore local transmission zone rate design impacts are presented below, both with and without the impacts of a 7 cent or 50% noncore LT cost shift to BB.

19. Zone Noncore LT Rate Option Rate Design Issues and Considerations • Zone rate design may reduce the incentive of some Zone 1 customers to seek backbone-only rates. • Zone design, in conjunction with some local transmission cost reallocation, may be effective in lowering LT rates enough to mitigate customers from seeking backbone-only rates • Removes some cost averaging, compared to current rate design • Without considering the rate effects of LT bypass, rate design may disadvantage Zone 3 customers over LT rate design currently in effect • Implementation may be difficult to administer and bill for customers with several meter locations • May induce Zone 2 or 3 customers to build-out to Zone 1 • As with any rate change, reaching agreement may be contentious

20. Option IV. Rebundle Noncore Local Transmission and Backbone Costs and Rates

21. Rebundle Noncore LT and Backbone Costs and Rates Certain parties have suggested a noncore transmission rate design that includes a rebundling of noncore local transmission and backbone costs into a single average volumetric postage stamp rate.

22. Rebundle Noncore LTand Backbone Costs and Rates Rate Design Issues and Considerations • Rate design would raise the citygate price (Topock + Baja = citygate), increasing costs to end-users • Reflects more cost averaging than current path-differentiated backbone rate design using path specific embedded costs • Receipt point capacity allocation issue (firm, as-available, MDQ’s, other) • Allocation based on MDQ may result in over-nominations of capacity • Issue of how to manage and price flows to/from storage providers • Issue of cost responsibility for rate discounting • Possible return to noncore balancing accounts to manage additional risk • Requires incremental costs to implement (system changes, etc) • Reaching agreement may be contentious

23. Overview of EG Rate Issues

24. Current EG Rate Structure • Two Customer Classes: Cogeneration Class – serves all cogen volumes up to the cogen gas allowance of 9,683 Btu/kWh (BCAP Settlement increased this by 10% allowable under the Gas Accord to 10,681 Btu/kWh) Electric Generation Class – serves all transmission-level generators including UEG, municipalities and merchant plants • Gas Accord Rate Parity: • Distribution rate parity between UEG and Cogen’s, including discounts • Backbone rate parity on a path-specific basis between UEG and Cogen customers who hold capacity in their own name • Current EG / Cogen Rate: • Single average volumetric rate. Cogen distribution costs have been spread evenly to all EG customers (not just UEG) and Cogen customers in the customer class charge

25. Overview of EG Rate Issues EG Rate Issues Raised By Parties: • Amend or Repeal Cogen Parity under PUC 454.4 • Single Electric Generation Class • Elimination of the Cogeneration Gas Allowance • Segmentation of the EG Class • Size • Service Level • Core / Noncore • Elimination of the Collateral Discount Rule