OFO Settlement Summary

OFO. These three letters can quickly rock a shipper's boat.

This summary is a guide to understanding the OFO Settlement. It will help you make the most of new operational information Pacific Gas and Electric Company's California Gas Transmission (CGT) now offers in response to customers' requests. A solid understanding of the Settlement is required for any shipper interested in smooth sailing while navigating the way to the Citygate.

Background

Operational Flow Orders (OFOs) occur when the supply of gas on CGT's system is significantly out of line with demand. System inventory must be kept within specific operating tolerances to retain the pipeline's physical integrity. As an open access pipeline, CGT has no gas supply and no demand of its own. Acceptable pipeline inventory levels can only be maintained if shippers match their supply and demand.

Some storage assets are reserved for pipeline balancing. When these storage assets are not adequate to bring inventory to acceptable levels, CGT issues an OFO to alert shippers of the need to balance the pipeline system.

CGT Hears Customer Input

In the fall of 1998, CGT began discussions about OFOs with its customers. Customers shared concerns that OFOs are difficult to predict, create uncertainty in the marketplace and that compliance is costly. Further, they never anticipated the Gas Accord to be accompanied by such frequent OFOs.

Negotiations on these issues resulted in the OFO Settlement Agreement which the California Public Utilities Commission (CPUC) approved February 17, 2000. Implementation of the Agreement will occur April 1, 2000.

Settlement

The OFO Settlement Agreement addresses three main objectives:

• Improve the visibility of system operations, making OFOs easier for customers to predict
• Reduce the impacts of OFOs
• Reduce the number of system-wide OFOs

The Settlement's effectiveness will be monitored and reviewed by the Gas OFO Forum. CGT sees this forum as an ongoing, evolutionary process where customers can express which aspects of the Settlement work best and which aspects might be improved. If you wish to take part in this Forum, please contact your CGT Account Services Representative.

Settlement Information

The CGT Pipe Ranger Web site is the primary source for information on the OFO Settlement. The complete document is available at OFO Settlement Agreement (a .pdf file).

Wider OFO Limits

Previously, an OFO may have been called if inventory was forecast to be outside a 350 MMcf band (200 MMcf above or 150 MMcf below target inventory). Now, an OFO will only be called if inventory is forecast to fall outside pipeline inventory limits. The pipeline inventory limits are 600 MMcf apart, representing a significantly wider range inventory may fluctuate without an OFO being issued.

Lower and upper pipeline inventory limits will change based on the forecast of total system demand. If the total system demand for any particular gas day is low, between 1,500 and 2,800 MMcf, pipeline inventory limits will be set at 3,900 and 4,500 MMcf. If the total system demand for any particular gas day is high, between 2,800 and 3,900 MMcf, pipeline inventory limits will be set at 4,000 and 4,600 MMcf. The demand forecast and pipeline inventory limits for the current Gas Day and the three succeeding days can be viewed on Pipe Ranger's Pipeline Status Page.

Easing the Pain

Customer comments revealed that OFO compliance can be costly. Through the OFO Settlement, CGT enacts two changes aimed at reducing the costs of OFO compliance. First, the noncompliance charge for Stage 1 OFOs is reduced from $1.00/Dth to $0.25/Dth. There are now 4 stages of OFOs shown below:

Second, CGT agrees not to bill certain minor noncompliance charges. Balancing entities will not be billed for noncompliance charges in any month when their total noncompliance charges are $1000 or less. This exemption does not apply during EFOs or Involuntary Diversions.

To retain the economic incentive for customers not to incur imbalances, the commodity cashout prices for Tier I Cashouts in Schedule G-BAL are changed from 95% to 75% of the Weighted Overdelivery Index, and from 105% to 125% of the Weighted Underdelivery Index.

How Do I Use Operations Information?

Customers requested additional operations data to assist them in spotting developing OFO situations. CGT's Web site now contains a wealth of such information. You now have access to pipeline inventory data and the same forecasts used by the CGT pipeline operators. This will significantly improve your ability to predict OFOs. Savvy shippers closely monitor this information. When an OFO appears likely, they will take steps to balance their supply and demand prior to an OFO announcement. Pipeline Status offers several layers of detail helpful to understanding the current pipeline inventory situation. The OFO/EFO Outlook page displays the latest OFO status. Wondering if an OFO was issued for today or tomorrow? This page will tell you. But you say you want more notice than one day? Then it is time to dig deeper. Below the OFO/EFO Outlook page, CGT now supplies detailed operations data to help predict high or low inventory situations more than one day in advance. System Inventory Status summarizes the inventory forecast for the next three days. Here you will see if the pipeline inventory limits are forecast to be exceeded. If so, an OFO will most likely be issued. The System Inventory Summary gives yet another layer of detail, showing how close the forecast is to the limits. Supply and Demand Forecast and Storage Activity Forecast give greater detail still, providing the amount of injection or withdrawal being used for pipeline balancing. Of course, none of this data can guarantee perfect knowledge of an OFO more than one day in advance. But, by studying these components of CGT's system, you will be as aware of the prospects for an OFO as possible.

Customer-specific OFOs

Customers have requested that CGT employ more customer-specific OFOs. By targeting shippers with the greatest imbalance, customer-specific OFOs allow those shippers with more closely balanced supply and demand to continue business as normal. The burden of daily balancing is placed more directly upon the customers actually causing the imbalance.

To meet this request, the Settlement defines the criteria CGT will use to decide when to call a customer-specific OFO. Such an OFO will be issued if there are ten or fewer balancing entities that, in aggregate, could bring pipeline inventory back to a manageable level by balancing their supply and demand. Balancing entities are:

• Noncore Balancing Aggregation Agreement (NBAA) agents
• Core Procurement Groups (CPGs)
• Individual end-use customers who do not have an NBAA agent

Only customers with forecast imbalances exceeding both 5000 Dth and the OFO tolerance band will be candidates for customer-specific OFOs.

In deciding if there are ten or fewer entities that could resolve an inventory problem, CGT will use a Performance Factor to account for customers' expected compliance in balancing supply and demand once an OFO is issued. This Performance Factor is the relief actually achieved by customer-specific OFOs divided by the relief forecast when CGT issues a customer-specific OFO. The Performance Factor is initially set at 100%. CGT may adjust this factor, but must give 14 days notice.

If operating experience or market conditions suggest that a customer-specific OFO will not be effective, CGT retains its rights to call a system-wide OFO.

If you are the subject of a customer-specific OFO, you will want to know quickly! Customers requested CGT give as much notice as possible for each OFO. When a customer-specific OFO is called CGT agrees to give general notice on the Web site by 7:30 a.m., Pacific time, the day prior to flow, or as soon as possible thereafter. Affected balancing entities specifically targeted by a customer-specific OFO will be notified by 8:00 a.m., PT, the day prior to flow, or as soon as possible thereafter. CGT also agrees to provide secondary notification of OFOs via e-mail and Blast Paging, with INSIDEtracc continuing to be the primary source of OFO notification.

Core Procurement Group Imbalances

Imbalances for Core Procurement Groups (CPGs) will also become easier to manage with implementation of the Settlement Agreement. For the first time, Operating Imbalances may be traded against Cumulative Imbalances during the regular monthly imbalance trading period.

These two types of balances may be traded if they are from the same month's imbalance statement. Because of metering and timing differences, the Operating Imbalances and Cumulative Imbalances from a given monthly statement are not actually incurred in the same month. For example, the May statement reflects Cumulative Imbalances incurred in April and Operating Imbalances incurred in February. Because they are from the same imbalance statement they may be traded against each other.

To help smooth out the repayment of Operating Imbalances and to minimize their impact on system imbalances, an Operating Imbalance Carryover Account will be established.

Billing and supply adjustments will now be made to the Carryover Account. Each month, untraded Operating Imbalances are moved to this account. Also each month, one-twelfth (1/12) of this account balance is considered the first transaction for that CPG. In this way, the impact of untraded Operating Imbalances and adjustments are spread out over 12 months. If this account has a balance of less than 5000 Dth, the CPG may elect to have the entire balance considered the first transaction rather than just 1/12.

Storage Allocation to Balancing

Many customers would like to see more storage assets used to help balance the pipeline; however, few customers want rates to increase!

The costs of storage assets used for pipeline balancing are part of all customers' transportation rates. These storage assets currently provide 50 MMcf/d of firm injection, 70 MMcf/d of firm withdrawal and 2.2 Bcf of inventory. As requested by customers, CGT provided a report detailing the costs of adding storage capability to pipeline balancing. The Settlement Parties agree that, due to concerns about increased rates and the uncertainty of the benefits, no further assets will be allocated to balancing at this time.

Monitoring Change

CGT will issue quarterly reports on OFOs and the impact of implementing the Settlement Agreement. After six months, if system-wide OFOs are not reduced by at least 25%, CGT will analyze the situation and make further recommendations.

CGT will continue to listen to its customers and look for better ways to serve them. While OFOs may be necessary to ensure the integrity of the pipeline, CGT strives to implement them as reasonably as possible.