State Reviews Marginal Cost Pricing for Gas LDC

While examining cost allocation and rate design for natural gas distribution services provided by Pacific Gas and Electric Co., a local distribution company (LDC), the California Public Utilities Commission (CPUC) has concluded that the long-run marginal cost method it adopted in 1992 was not proving effective in producing prices observed in fully competitive markets. The CPUC found that the changes necessary to reform the cost allocation and underlying resource planning process for the LDC produced class revenue requirement figures that "only slightly shift cost responsibility from noncore to core customers. As an example, the existing costing procedure significantly understated costs for transmission and storage, allowing the utility to offer discounts to potential bypass customers based on rates including little or no capital costs, the CPUC said. At the same time, the utility was recovering over $100 million in new investment in transmission system from other customers. In addition, the emerging competition envisioned when the discounting procedures was approved "has not emerged," the CPUC concluded. Nevertheless, the CPUC reaffirmed its commitment to develop a competitive market for energy services. It rejected a proposal by the LDC to maintain a formal rate-adjustment procedure for transportation discounts awarded to noncore customers. It found that ratepayer-sponsored discounting to compete with alternate fuels is anticompetitive and harms, rather than helps, consumers.