95 FERC 61,259 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION

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1 95 FERC 61,259 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION Before Commissioners: Curt Hébert, Jr., Chairman; William L. Massey, and Linda Breathitt. North Baja Pipeline LLC Docket Nos. CP , CP , CP , and CP PRELIMINARY DETERMINATION ON NON-ENVIRONMENTAL ISSUES (Issued May 18, 2001) On October 31, 2000, North Baja Pipeline LLC (North Baja) filed, in Docket Nos. CP and CP , an application for a certificate of public convenience and necessity under section 7(c) of the Natural Gas Act (NGA) to construct and operate a 79.8-mile natural gas pipeline and NGA section 3 authorization and a Presidential Permit for gas export facilities. North Baja's proposed project would provide up to 500,000 Mcf per day of capacity from an interconnection point with El Paso Natural Gas Company (El Paso) near Ehrenberg, Arizona, to a point on the international border between Yuma, Arizona, and Mexicali, Baja California, Mexico. North Baja's pipeline project is the U.S. portion of an integrated U.S.-Mexican pipeline being proposed to meet the requirements of the rapidly growing market for natural gas service in northern Baja California, Mexico, and southern California. As a new pipeline company, North Baja requests, in Docket No. CP , a blanket certificate pursuant to Subpart G of Part 284 of the regulations to provide openaccess transportation service for its customers. In Docket No. CP , North Baja requests a blanket certificate pursuant to Subpart F of Part 157 of the Commission's regulations to perform routine construction activities and operations. We are making a preliminary determination on the non-environmental issues in this proceeding. These findings support issuance of North Baja's requested authorizations, subject to the conditions discussed herein. However, this order does not consider or evaluate any of the environmental issues in this proceeding. Those issues are

2 Docket No. CP , et al still pending and will be addressed in a subsequent order when the environmental review and analysis are complete. Thus, final approval and issuance of certificates is dependent on a favorable environmental review and nothing in this order limits our actions regarding our environmental analysis. In general, in this order, the Commission determines that the proposed project will provide substantial public benefits with minimal adverse impacts. The proposed project's primary gas markets are Mexican electric generation plants and a Mexican gas distribution system. This order finds that serving the needs of Mexico is consistent with the public interest, in accordance with section 3 of the NGA and the North American Free Trade Agreement (NAFTA). 1 North Baja will also directly serve the growing energy needs in western United States markets. A portion of the electric production from the La Rosita Plant in Mexicali, Mexico, will be exported into the United States to relieve the critical shortages of electricity in California. The North Baja pipeline also will be used to deliver gas for use as fuel in the electric generating plant operated by Otay Mesa Generating Company (Otay Mesa) in San Diego, California. 2 I. BACKGROUND North Baja is a limited liability company formed under the laws of the State of Delaware. North Baja is owned by PG&E Gas Transmission Holdings Corporation, which is a wholly-owned subsidiary of PG&E Gas Transmission Corporation, a company engaged in developing, owning and operating natural gas pipeline facilities, including PG&E Gas Transmission, Northwest Corporation (PG&E Transmission), which is subject to the Commission's NGA jurisdiction and regulation. North Baja currently has no facilities and is not engaged in any natural gas transportation operations. Upon acceptance of the requested certificate of public convenience and necessity, North Baja 1 North American Free Trade Agreement Implementation Act, Pub. L (December 8, 1993) 107 Stat. 2057; Implementation of the North American Free Trade Agreement Act, Executive Order No , 58 Fed. Reg (December 30, 1993). 2 On April 6, 2001, Otay Mesa filed, in Docket No. CP , a request for a Presidential Permit and authority to site, construct, operate and maintain natural gas import facilities at the U.S.-Mexico border near San Diego, California. In that filing, Otay Mesa indicates that it will rely on pipeline transportation services by North Baja, which will transport Otay Mesa's gas in the U.S., deliver it at the Mexican border near Ehrenberg, Arizona to the Gasoducto Bajanorte pipeline an Transportadora de Gas Natural de Baja California (Transportadora), which will redeliver the gas to Otay Mesa's proposed import facilities.

3 Docket No. CP , et al will become a natural gas company engaged in the transportation of natural gas in interstate commerce and will be subject to the Commission's NGA jurisdiction. II. PROPOSALS A. Docket No. CP North Baja's proposed 79.8-mile pipeline will be comprised of approximately 11.5 miles of 36-inch diameter pipeline extending from the Ehrenberg Compressor Station in Arizona under the Colorado River to a point near Blythe, California, and 68.3 miles of 30-inch diameter pipeline extending from Blythe, California, to the interconnect with a pipeline designated as Gasoducto Bajanorte to be constructed in Mexico. The two pipelines will interconnect at the U.S.-Mexican border near Mexicali. Gasoducto Bajanorte will be constructed, owned and operated in Mexico by Sempra Energy Mexico (Sempra). Sempra has filed an application with the Mexican Comision Reguladoro De Energia (CRE) to construct and operate Gasoducto Bajanorte. 3 Gasoducto Bajanorte would transport gas west through Mexicali and on to Tijuana, Mexico, where it will interconnect with Transportadora's existing bi-directional pipeline. 4 In addition to the proposed pipeline, North Baja's other proposed NGA section 7(c) facilities include (1) the Ehrenberg Compressor Station consisting of four 6,270 horsepower (hp) compressor units and appurtenant facilities; (2) a 1,500 foot long, 36- inch diameter pipeline connecting the Ehrenberg Compressor Station with El Paso's existing meter southwest of Ehrenberg, Arizona; and (3) the Ogilby Meter Station and interconnection facilities with Gasoducto Bajanorte at the U.S.-Mexican border near Mexicali, Baja California, Mexico. North Baja estimates that it will cost approximately $146 million to construct its portion of the integrated project, including the proposed NGA section 3 export facilities described below. The North Baja pipeline is designed to provide up to 512,500 Dth per day of transportation service to the international border near Mexicali. The bulk of the demand for this service comes from new gas-fired electric generation serving the northern 3 On December 15, 2000, the CRE granted Sempra a permit, in CRE Docket No. S27-G-624-0, to construct the proposed 135-mile Gasoducto Bajanorte Project. 4 The Transportadora pipeline runs from an interconnection with the facilities of San Diego Gas and Electric Company (SDG&E) at the San Diego/Tijuana border to Rosarito, Mexico.

4 Docket No. CP , et al Mexico and southern California power grids. To determine interest in their integrated project, North Baja and Gasoducto Bajanorte held a joint open season. As a result, the following shippers executed precedent agreements 5 for service on both the North Baja pipeline and the Gasoducto Bajanorte pipeline. In the April 25 supplemental filing, North Baja indicated that it now had long-term agreements in place for 100% of its pipeline capacity starting in January Shipper Quantity Term Anticipated Use Energy Azteca X (InterGen Energy) CEG Energy Options Inc. (CEG Energy) 7 172,000 Dth/d 25 years 750 MW La Rosita /InterGen Plant 6 Mexicali, Mexico 48,000 Dth/d 25 years 500 MW Otay Mesa Plant San Diego, California Gasoducto Rosarito Distribuidora de Gas Natural de Mexicali Comision Federal de Electricidad (CFE) 63,000 Dth/d increasing to 98,000 Dth/d 16,000 Dth/d increasing to 24,500 Dth/d 32,000 Dth/d increasing to 210,000 Dth/d 7 years 550 MW Presidente Juarez/Rosarito Plant Tijuana, Mexico 20 years Local distribution Mexicali, Mexico 20 years Not specified in April 25 supplemental filing Termoelectica De Mexicali, S. de R.L. de C.V. 105,000 Dth/d 20 years Not specified in March 12 supplemental filing 5 On March 12, 2001, North Baja submitted a supplement and filed an executed precedent agreement with Termoelecticia De Mexicali, S. de R.L. de C.V. On April 25, 2001, North Baja submitted another supplement and filed an executed precedent agreement with Mexico's Comision Federal de Electricidad (CFE) and amendments for Energy Azteca's and Gasoducto Rosarito's precedent agreements MW of the La Rosita/Intergen Plant's output is dedicated to Mexico's CFE and 250 MW will be exported to the U.S. Western grid. On February 6, 2001, the CFE granted Energia Azteca an export permit for exporting up to MW (thousand kilowatt hours) to the United States of America. 7 North Baja stated in its certificate application that "upon North Baja commencing service, CEG Energy Options Inc. will become a marketing affiliate of North Baja within the meaning of section and of the Commission regulations." North Baja also indicated that it will comply with the Commission's Marketing Affiliate Rules as set forth in section of the regulations.

5 Docket No. CP , et al North Baja asserts that the executed precedent agreements demonstrate that there is sufficient market demand to justify the construction of the proposed pipeline. North Baja has filed copies of these precedent agreements. In executing these agreements, each shipper elected to pay negotiated rates. In order to preserve commercially sensitive information, North Baja redacted the specific rate terms from each copy of the filed precedent agreement. However, North Baja states that it will disclose these terms through posting on North Baja's web site on the first day of service. North Baja proposes an in-service date of September 1, 2002 for the project. North Baja maintains that additional demand is likely to develop in the near future. North Baja emphasizes that Mexico's Comision Federal de Electricidad's (CFE) has a preference for gas-fueled compressors to meet Mexico's future growth in electric generation. The CFE plans to convert 11 oil-fueled electric generation plants over to natural gas within the next 10 years. North Baja also states that electric demand in the North Baja region of Mexico is experiencing rapid growth, with electric demand in the area growing an average of 7.6% between 1993 and 1998 and expected to continue growing at approximately the same rate into the future. In its application, North Baja specifically points to other electric generation plants on the U.S. western grid and in Mexico that could be attached and served by either the North Baja pipeline or the Gasoducto Bajanorte pipeline: (1) the certified 500 MW Blythe Energy plant near Blythe, California; (2) the 500 MW Yucca Plant in Yuma, Arizona; (3) a planned 470 MW plant in San Luis Rio de Colorado, Mexico; (4) a planned 250 MW plant designated as the Energia de Mexicali or AEP Plant in Mexacali, Mexico, and (5) a future 500 MW plant designated as the Sempra Energy Project in Mexacali, Mexico. According to North Baja's certificate application, these electric generation plants potentially represent an additional 380,000 Dth/d of natural gas demand. North Baja further predicts that an additional 125,000 Dth/d of gas demand could result from conversion of liquefied petroleum gas to natural gas, and additional transportation demand also may develop on Distribuidora de Gas Natural de Mexicali's local distribution system. North Baja would provide open access firm transportation service under proposed Rate Schedule FTS-1, and interruptible transportation service under proposed Rate Schedule ITS-1, under rates, terms, and conditions set forth in its pro forma tariff. North Baja proposes to offer both negotiated rates and cost-based recourse rates designed using a straight-fixed variable rate structure. In addition, North Baja proposes to offer parking and lending service under proposed Rate Schedule PAL-1. North Baja's proposed maximum ITS-1 and PAL-1 rates equal $ /Dth and are 100 percent load factor

6 Docket No. CP , et al equivalents of the proposed maximum FTS-1 recourse rates, which include a monthly reservation rate of $ and a commodity rate of $ /Dth. North Baja proposes a fuel reimbursement percentage rate of 0.85%. North Baja states that its proposed tariff conforms to the standards recommended by the Gas Industry Standards Board (GISB) 8 and the requirements of the Commission's Order Nos and 637., 10 B. Docket No. CP In the application in Docket No. CP , North Baja requests a Presidential Permit and authorization under NGA section 3 to construct, operate and maintain facilities at the U.S.-Mexico border for exporting and importing natural gas. The border facilities would consist of a 30-inch diameter pipe which will commence in California approximately 500 feet from the international boundary near Mexicali, Mexico. On the Mexican side of the border, the border facilities would interconnect with Gasoducto Bajanorte pipeline facilities to be constructed, owned and operated in Mexico by Sempra. North Baja indicates that it does not intend to either purchase or resell, or import or export, natural gas for its own account, but proposes only to provide transportation service through its proposed facilities. North Baja's shippers will be solely responsible for obtaining any necessary authorization to import or export natural gas over the facilities Standards For Business Practices of Interstate Natural Gas Pipelines, Order No. 9 Pipeline Service Obligations and Revisions to Regulations Governing Self- Implementing Transportation; and Regulation of Natural Gas Pipelines After Wellhead Decontrol, Order No. 636, FERC Stats. & Regs., Regs. Preambles 30,939, reh'g, Order No. 636-A, FERC Stats. & Regs., Regs. Preambles 30,950, reh'g, Order No. 636-B, 61 FERC 61,272 (1992), remanded in part, sub nom., United Distribution Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 1996), cert. denied, Associated Gas Distributors v. FERC, No (1996), order on remand, Order No. 636-C, 78 FERC 61,186 (1997), order on remand, Order No. 636-D, 83 FERC 61,210 (1998). 10 Regulation of Short-Term Natural Gas Transportation Services, and Regulation of Interstate Natural Gas Transportation Services, Order No. 637, III FERC Stats. & Regs., Regs. Preambles 31,091, reh'g, Order No. 637-A, III FERC Stats. & Regs., Regs. Preambles 31,099, reh'g, Order No. 637-B, 92 FERC 61,062 (2000).

7 Docket No. CP , et al C. Docket Nos. CP and CP North Baja seeks, in Docket No. CP , a blanket certificate pursuant to Subpart G of Part 284 of the Commission's regulations to provide open-access transportation of natural gas for others. In Docket No. CP , North Baja requests a blanket certificate pursuant to Subpart F of Part 157 of the Commission's regulations to perform certain routine activities and operations. III. NOTICE, INTERVENTIONS, COMMENTS and PROTESTS Notice of North Baja's applications in Docket Nos. CP , CP , CP , and CP was published in the Federal Register on November 15, 2000 (65 Fed. Reg. 68,988), with motions to intervene due on November 29, Numerous parties filed timely, unopposed motions to intervene. 11 Several parties filed untimely, unopposed motions to intervene. The Commission finds that granting these motions will not delay, disrupt, or otherwise prejudice this proceeding or place an additional burden on existing parties. Therefore, for good cause, shown, these late-filed motions to intervene in this proceeding are granted, as indicated in Appendix A to this order. Duke Energy North America, LLC, Dynenergy Marketing and Trade, Energia Azteca X, S. de R.L. de C.V., Sempra Energy International, California Independent System Operator Corporation (California Independent), and the Secretary of Energy of Mexico, Ernesto Martens, filed comments supporting North Baja's proposed project, citing to the need for natural gas in the Mexican state of Baja California. Arizona Electric Power Cooperative, Inc. (Arizona Electric), El Paso Electric Company (El Paso Electric) and El Paso Municipal Customer Group (El Paso Customer Group) filed opposing comments and Southwest Gas Corporation (Southwest Gas) filed a protest. North Baja filed an answer and a supplemental answer to the adverse comments and protest. Our procedural rules generally do not permit answers to comments and protests. 12 In order to insure a complete and accurate record, however, we find good cause to accept North Baja's answer and supplemental comments. 11 Timely, unopposed motions to intervene are granted by operation of Rule 214 of the Commission's rules of Practice and Procedure. 18 C.F.R (2000) CFR (a)(2).

8 Docket No. CP , et al In support of North Baja's proposed project the Secretary of Energy of Mexico, Mr. Martens, states that CFE, Mexico's electric power regulatory agency, has a 1000 MW power plant in Rosarito and has already tendered a 750 MW combined cycle plant near Mexacali. Secretary Martens also states that there are at least three other power plants currently in development in the region. Because the power grids in the United States and Mexico are integrated, new gas-fired electric generation in Mexico will not only serve load in Mexico but will also be capable of serving load in California. The demand for natural gas to serve these plants is expected to be around 400 MMcf/d. In addition, the Secretary states that Baja California, Mexico has several industrial businesses as well as a local gas distribution company in Mexicali that may require greater volumes of natural gas in order to cover their constant demand of this fuel..." Several parties, however, express concerns regarding the availability of upstream capacity on El Paso's system. Arizona Electric, El Paso Electric, El Paso Customer Group and Southwest Gas raise concerns about whether sufficient capacity exists on El Paso's system to permit the operation North Baja's proposed project without degradation of service to El Paso's existing shippers. All of these parties are shippers on El Paso's system and are concerned by the prospect that North Baja's shippers will require approximately 500 MMcf per day of supplies to be delivered from El Paso's system to North Baja's proposed pipeline. These parties ask the Commission to require North Baja to demonstrate that there is sufficient available upstream capacity to support the level of operations contemplated in North Baja's proposal without adversely impacting El Paso's existing shippers. The El Paso Customer Group argues that a primary focus of the Commission's current policy statement 13 on new pipeline construction is to balance the interests of shippers on competing pipelines, especially from an economic perspective. This group submits that its members' interests as captive shippers on an upstream pipeline must also be measured, and that it is unclear whether El Paso has the capacity to deliver 500 MMcf per day of gas at North Baja's proposed Ehrenberg compressor Station without degrading services or creating adverse rate impacts on El Paso's current shippers. Southwest Gas points out that the downstream services for North Baja's shippers represents nearly 15% of El Paso's current capacity. Southwest Gas contests North Baja's 13 Certification of New Interstate Natural Gas Pipeline Facilities, 88 FERC 61,227 (1999); order clarifying statement of policy, 90 FERC 61,128 (2000); order further clarifying statement of policy, 92 FERC 61,094 (2000).

9 Docket No. CP , et al submission that it has satisfied the Commission's policy statement and questions if the proposed project will benefit California's electric market if sufficient upstream capacity does not exist on El Paso's system. Southwest Gas maintains that North Baja is required to demonstrate sufficient upstream capacity in order to support a finding that approval of North Baja's application is required by the public convenience and necessity. North Baja responds by stating that its shippers are willing to assume the risk and responsibility of retaining upstream capacity. North Baja maintains that the Commission has approved proposals where the shippers contracting for new downstream pipeline capacity had assumed the risk of securing supplies and upstream transportation and that the uncertainty regarding upstream capacity in this case should not preclude certification. North Baja further notes that approximately 1.2 Bcf/d of El Paso's currently-contracted capacity will become available before North Baja's proposed in-service date, and that shippers could rely on interruptible or released capacity, marketer services, or otherwise obtain capacity through the secondary market. 14 North Baja also points out that the Policy Statement only requires the Commission to evaluate the impact of a project on the captive customers of competing pipelines. 15 Because El Paso will not be a competing pipeline, North Baja asserts that the Commission is not required to evaluate the impact of the proposed project on El Paso's captive customers. North Baja maintains that it is El Paso's responsibility to ensure that service to its shippers is not degraded, and that shippers should raise their concerns with El Paso or in a Commission proceeding regarding El Paso. Finally, North Baja theorizes that by providing an access to a new market, El Paso's existing shippers could receive a benefit, for any shippers that may want to release capacity, since the North Baja project could enhance the value of the upstream El Paso capacity. 14 At the time North Baja submitted its response, El Paso had not completed the open season for the 1.2 Bcf/d of capacity held by El Paso Merchant Energy (EPME). On March 8, 2001, El Paso filed a supplement in Docket No. RP that identified the parties who were awarded contracts to replace EPME. In all, El Paso executed contracts with 30 distinct entities for the entire 1.2 Bcf per day of capacity subject to EPME's expiring contract. As described below, several of these shippers that received EPME's capacity have executed precedent agreements for service on North Baja's proposed downstream pipeline. 15 Policy Statement at 61,748.

10 Docket No. CP , et al Some of the interveners and commenters protest North Baja's proposal based on environmental issues. The environmental issues include, among others, the impact of the pipeline on: (1) soils, including the impact on farming practices and soil erosion; (2) water resources, including the impact on wells and well water; and (3) reliability and safety, including proximity of the pipeline to homes and businesses. Additionally, the Commission received proposed major route alternatives and variations. These issues and the proposed route alternatives will be addressed in a draft Environmental Impact Statement, (EIS) that the Commission staff will distribute and mail to all interveners and commenters. As part of the environmental review process, interested groups and individuals will have ample opportunity to comment on the draft EIS. The draft EIS will provide specific instructions on the procedures for submitting comments. After the comments on the draft EIS have been reviewed, a final EIS will be prepared. The final EIS will address any new significant issues raised and respond to comments received on the draft EIS. The final EIS also will be published and distributed to all interveners and commenters. The Commission will address all remaining issues in a subsequent order after the final EIS is distributed. The non-environmental issues that have been raised with regard to North Baja's proposed construction are discussed in more detail below. IV. DISCUSSION North Baja's applications pertain to facilities and services involved with interstate commerce subject to the jurisdiction of the Commission, therefore, the proposals are subject to the requirements of section 3 and subsection (c) of section 7 of the NGA. A. Pipeline Proposal in Docket No. CP On September 15, 1999, the Commission issued a Policy Statement to provide guidance as to how we will evaluate proposals for certificating new construction. 16 The Policy Statement established criteria for determining whether there is a need for a proposed project and whether the proposed project will serve the public interest. The Policy Statement explains that in deciding whether to authorize the construction of major new pipeline facilities, the Commission balances the public benefits against the potential 16 Supra n.13.

11 Docket No. CP , et al adverse consequences. Our goal is to give appropriate consideration to the enhancement of competitive transportation alternatives, the possibility of overbuilding, subsidization by existing customers, the applicant's responsibility for unsubscribed capacity, the avoidance of unnecessary disruptions of the environment, and the unneeded exercise of eminent domain in evaluating new pipeline construction. Under this policy, the threshold requirement for pipelines proposing new projects is that the pipeline must be prepared to financially support the project without relying on subsidization from the existing customers. The next step is to determine whether the applicant has made efforts to eliminate or minimize any adverse effects the project might have on the applicant's existing customers. The Commission also considers potential impacts of the proposed project on other pipelines in the market and those existing pipelines' captive customers, or landowners and communities affected by the route of the new pipeline. If residual adverse effects on these interest groups are identified after efforts have been made to minimize them, the Commission will evaluate the project by balancing the evidence of public benefits to be achieved against the residual adverse effects. This is essentially an economic test. Only when the benefits outweigh the adverse effects on economic interests will the Commission then proceed to complete the environmental analysis where other interests are considered. 1. Subsidization and Impacts Because North Baja is a new entity, there are no concerns regarding subsidization or adverse impacts on the applicant's existing customers' services. Further, the proposed pipeline will serve new markets, particularly electric generation projects not currently served by other pipelines. Accordingly, the proposed project will have no adverse impacts on other competing pipelines or captive customers on competing pipelines' systems. Recently, El Paso's system has evolved from an underutilized system to one that is fully subscribed. 17 As a result, El Paso's captive customers have expressed concerns regarding whether El Paso will be able to continue reliable and economic natural gas transportation service for its existing shippers, as well as service for North Baja's shippers. The Commission recognizes that El Paso's captive customers are entirely dependent upon that system for delivery of their natural gas supplies. However, El Paso's captive customers have the protection that they seek under the Commission's right of first 17 See El Paso Customer Group comments at page 6.

12 Docket No. CP , et al refusal (ROFR) regulations set forth in (d)(2). The Commission explained in Order No. 637 that the ROFR "... is based on the customer's reliance on the pipeline for its historic service. It protects existing customers by providing them with the right to continue their existing service by matching the highest competitive bid for the service, up to the maximum rate and up to a period of five years. At the same time, by requiring that existing customers match competitive bids, the right of first refusal recognizes the role of market forces in determining contract price and term." 18 Thus, our regulations and El Paso's tariff provide the captive customers with assurance for a reasonable period of time that they can continue to receive reliable service from El Paso at just and reasonable rates to satisfy those captive customers' historic requirements. The Commission does not agree with parties that maintain that North Baja must show that sufficient capacity exists on El Paso before the Commission grants a certificate for construction of the proposed pipeline. As correctly noted by North Baja, the Commission recently addressed a similar issue in Questar Pipeline Company. 19 In that proceeding, parties contested the proposed construction because the expansion shippers' upstream and downstream arrangements had not been completed or fully explained. The Commission responded by stating: While the details regarding how Questar Gas will receive its additional volumes have not been finalized, the Commission does not find this a persuasive reason for disapproving the proposed project. Our regulations do not require potential shippers to have all of their downstream (or upstream) arrangements in place before a construction project is authorized. 20 The Commission further explained in Questar that our Policy Statement has generally placed the risks of new construction on the pipeline and the shippers who have opted to participate in the proposed project. Consequently, we denied the protests which were based on uncompleted downstream and upstream arrangements in Questar. In this 18 Order No. 637 at 31, Questar Pipeline Company, 93 FERC 61,279 at 61, (2000). See also, PG&E Gas Transmission, Northwest Corporation, 84 FERC 61,204 at 62,001 (1998), reh'g denied, 85 FERC 61,325 at 62,282 (1998); Maritimes & Northeast Pipeline, LLC, 76 FERC 61,124 at 61,671 (1996) FERC at 61,933.

13 Docket No. CP , et al case, North Baja's shippers have assumed the risk of securing the necessary upstream and supply transactions. We note that North Baja's shippers will have a number of options available to obtain capacity on El Paso, including seeking: (a) released capacity; (b) service from marketers that hold firm capacity on El Paso's system; (c) capacity becoming available from existing shippers' expiring contracts; and (d) system expansion proposals by El Paso. There is no evidence that these customers' service would be adversely affected. To the extent that North Baja shippers obtain the requisite upstream capacity on El Paso in an otherwise nondiscriminatory manner, there should be no detrimental impact to El Paso's existing customers' services or rates. The North Baja shippers already have secured some of the necessary capacity for upstream transportation on El Paso's system. In its February 6, 200 data response, North Baja states that Energia Azteca has contracted with Coral Energy Resources L.P. (Coral Energy), a marketer that obtained 14,500 Mcf per day of firm capacity in El Paso's recent open season for the 1.2 Bcf per day of capacity being released by El Paso Merchant Energy. In that open season, CEG energy also obtained approximately 37,000 Mcf per day of firm capacity. Gasoducto Rosarito and Distribuidora also make arrangements for transportation of some of their supplies by marketers that hold capacity on el Paso. In addition, on March 15, 2000, El Paso filed an amendment to its pending project application in Docket No. CP to add 230 MMcf/d of transmission capacity to its system. While El Paso initially will use the proposed new capacity to cushion the impacts of forthcoming maintenance projects, the new capacity will be available for new firm service following those maintenance projects. El Paso also indicated in the March 15 filing that it was conducting a open season to assess system demand with a view toward further expansions on its system. Given, the data responses and the recent filings by El Paso, the Commission believes that the North Baja shippers will have realistic opportunities to complete any unfinished upstream arrangements without adversely impacting El Paso's existing customers. Our review indicates that there could be an adverse impact from this project on affected landowners in the event North Baja is unable to negotiate necessary easements. In this regard, we note that over 70 percent of the proposed pipeline route consists of either public lands, lies within dedicated road rights-of-way or has already been acquired by North Baja. Thus, less than 30 percent of the 79.8-mile pipeline route will require easements from private landowners. As we discuss in more detail below, the project will serve the increasing gas demands in southern California, Arizona, northern Mexico, and other parts of the interconnected western power grid. Thus, the Commission finds that the potential for adverse impact on landowners is outweighed by the demonstrated public need for this project. We further note that any certificate issued to North Baja will

14 Docket No. CP , et al include all mitigation measures found appropriate by the Commission in the course of performing its environmental review of North Baja's proposal. Also, Mexico's Secretary of Energy, Ernesto Martens, filed comments in this proceeding indicating the Mexican government's need for natural gas to supply gas-fired electric generation in Baja California, Mexico. We have also seen evidence that Mexico's need for electricity is growing dramatically. For example, Mexico's Ministry of Energy's web site reports that Baja California's demand growth for electricity is 7.7% per year. 21 According to the Department of Energy (DOE), the Office of Energy Information Administration (EIA) has compiled statistics reflecting Mexico's increasing reliance on U.S. electrical exports to meet its needs. EIA reports that, whereas net exports of electricity from the U.S. to Mexico were approximately 52,000 MWs in 1996, exports were 1,481,000 MW in 1997; 1,035,000 in 1998; and 964,000 MW in The planned construction of electric generation in Mexico would, at a minimum, displace some of these exports. Secretary Martens states that Mexico's new electric generation plants will be gas-fired plants. To meet the growth in electric demand in the Baja California region of Mexico, it is projected that a new 500 MW power plant (requiring approximately 85,000 Mcf per day of gas) will need to be constructed every three to four years. Also, DOE's Office of Fossil Energy reports that "natural gas use in Mexico has become an increasingly important energy source. Most demand forecasts for Mexico project that the annual growth rates will be between 8 and 10 percent during the foreseeable future." 23 In recognition of the need to expand the natural gas supply system in Mexico, the CRE has already approved Sempra's application to construct the Gasoducto Bajanorte pipeline to receive gas from North Baja's proposed pipeline. Significantly, both Baja California, Mexico's and California's need for electric generation plants and for expansions of their gas transmission systems are inextricably linked. Both the electric grid and natural gas system in Baja California are interconnected with the respective networks in California. 24 For example, a portion of 21 Web Cite at 22 Mexico's Office of Fuels Programs, Fossil Energy, Form FE-781R, "Annual Report of International Electric Export/Import Data." 23 "Natural Gas Imports and Exports", Third Quarter Report 2000 (Report 2000). 24 North Baja's northern California electric grid and natural gas network are not connected to any of Mexico's other electric and natural gas infrastructures.

15 Docket No. CP , et al the generation from the Energia Azteca Plant in Mexicali, Mexico is earmarked for the United States. 25 The only sources of natural gas currently feeding Baja California, Mexico are (1) San Diego Gas & Electric's (SDG&E) pipeline which is interconnected with Mexico's Transportadora pipeline 26 and (2) SoCalGas' 25,000 distribution line into Mexicali, Mexico. North Baja reports that both lines are capacity constrained and incapable of serving the planned growth of electric generation in Baja California, Mexico. 27 On the other hand, North Baja and the Gasoducto Bajanorte system, which has been approved by the Mexico government to receive gas from North Baja's proposed pipeline, are specifically designed and planned, in part, to serve the growth of generation in Baja California. North Baja's February 6 data response attached a paper entitled the "January 2001 System Impact Study/Facilities Study" which documents the joint initiative by the CFE, the Imperial Irrigation District, and SDG&E to analyze and determine any transmission system upgrades needed to interconnect the Energia Azteca Plant to their respective systems. One of North Baja's shippers, CEG Energy, is arranging for transportation of gas supplies to serve the Otay Mesa Power Plant in San Diego County, California. Given these developments, we are persuaded that the public interest requires approval of North Baja's proposed pipeline to meet the demand for energy and to expand the infrastructures for natural gas and electricity in both southern California and Baja California, Mexico. On March 14, 2001, the Commission issued an order entitled "Removing Obstacles To Increased Electric Generation And Natural Gas Supply" in Docket No. EL In light of the severe electric energy shortages facing California and other 25 The CRE granted Energia Azteca's export permit to export up to 299 MW on December 20, According to North Baja's February 6 Data Response 2(c), the generation from the Energia Azteca Plant would flow onto Imperial Irrigation District's system. 26 This international connection is currently relied on to serve the Presidente Juarez/Rosarito Power Plant located south of Tijuana, Mexico. 27 North Baja's Februrary 12 Data Response Nos. 1(a) and 1(b). North Baja emphasized the gas curtailments and notices of potential curtailments occurring in the San Diego area in the past year.

16 Docket No. CP , et al areas of the western United States in recent months, the Commission announced certain actions that it is taking to help increase electric generation supply and delivery in that region in order to protect consumers from supply disruptions. As part of this effort, the Commission announced that it would do what it can to increase pipeline capacity where appropriate. Our March 14 order recognized that California's energy crisis has reached a stage where the time to react is critical. Approval of North Baja's proposed project is consistent with our March 14 order in Docket No. EL Therefore, we find that a preliminary determination supporting approval of the construction and operation of North Baja's proposed pipeline project is required by the public convenience and necessity. 2. Rates and Tariff North Baja proposes to provide firm transportation service under Rate Schedule FTS-1 and interruptible transportation service under Rate Schedule ITS-1, with services available at both recourse and negotiated rates. Additionally, North Baja proposes to provide parking and lending services under Rate Schedule PAL-1. The terms and conditions are set forth in its pro forma tariff. North Baja entered into long-term precedent agreements with its six shippers. All of the shippers have elected to pay negotiated rates. North Baja has filed copies of the agreements but redacted the rate information as commercially sensitive. North Baja states that it will disclose these terms through posting on its Internet web site on the first day of service, in keeping with section of the Commission's regulations. To comply with the Alternative Pricing Policy Statement 28, North Baja is being required, as discussed below, to file additional information on its negotiated rates when it begins providing such service. North Baja's rates are based on $146,000,000 of plant investment, less a $4,866,667 reserve for depreciation (30-year depreciation schedule), plus $141,710 of working capital, less $966,562 of deferred income taxes, for a total rate base of $140,308,481. The plant investment is entirely made up of the cost of facilities, including land acquisition, damages, environmental, survey, labor, engineering and inspection, legal and other fees, administrative overheads, AFUDC and contingency. 28 Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 FERC 61,076 (1996).

17 Docket No. CP , et al The proposed capital structure and rate of return are: Weighted Ratio Cost Cost Long Term Debt % 5.95% Common Equity % 4.20% Rate of Return 10.15% North Baja's proposed capital structure of 70% debt and 30% equity are consistent with recent Commission orders. 29 The proposed 14% return on equity and 8.5% debt cost are consistent with recent Commission orders approving major construction projects. 30 The Commission notes that in recent months interest rates have declined, however, North Baja has stated that it will seek the most favorable financing terms available in the marketplace at the time the project is financed. When North Baja makes its filing to place tariff sheets into effect, it must revise its initial rates reflecting any change in the cost of debt. North Baja's proposed total cost of service is $26,463,927. This includes a 10.15% after tax rate of return of $14,241,311, depreciation, state and federal taxes, other taxes, and O&M expenses of $1,133,682. North Baja is fully subscribed on a firm basis. Therefore, North Baja does not anticipate transporting a significant amount of gas on an interruptible basis. Additionally, North Baja states that since its system will be only 79.8 miles long with limited linepack and no connection to storage, it will not be in a position to offer significant amounts of parking and lending service. Therefore, North Baja has allocated $500,000 to interruptible and park & loan services for a net cost of service of $25,963,927, allocating $25,852,933 to the demand component and $110,994 to the commodity component. North Baja designed its recourse rates by using the straight fixed variable (SFV) method and using 6,150, of demand billing determinants and 29 See Gulfstream Natural Gas System, L.L.C., (preliminary determination), 91 FERC 61,119 (2000). 30 See Independence Pipeline Company, et al., 89 FERC 61,283 (1999), and Vector Pipeline L.P., 85 FERC 61,083 (1998). 31 North Baja calculated its demand billing determinants as follows: 500,000 (system design capacity in Mcf/d) multiplied by (Dth conversion factor), then multiplied by 12 months.

18 Docket No. CP , et al ,356, of commodity billing determinants. North Baja proposes an FTS reservation rate of $ /Dth and an FTS commodity rate of $ /Dth. North Baja proposes to charge the 100 percent load factor equivalent of the maximum FTS-1 recourse rate, $ /Dth, for rate schedules ITS-1 and PAL-1. Also, North Baja would retain 0.85% for fuel charges for its services under the FTS-1 and ITS-1 Rate Schedules. North Baja submitted pro forma tariff sheets providing for firm and interruptible transportation services, and parking and lending service. North Baja states that the terms and conditions of its tariff are structured to conform to the requirements of the Commission s Order Nos and Additionally, North Baja submitted pro forma tariff provisions to reflect its proposal to enter into negotiated rates with its shippers. In Section 37 of its pro forma tariff, North Baja incorporates by reference Version 1.4 of the Gas Industry Standards Board standards. This generally complies with Order No. 587-M, 35 which requires the implementation of Version 1.4 by May 1, However, in order to fully comply, North Baja must not only list the Version number, but also the individual standard numbers. Any order issuing a certificate to North Baja will be conditioned on North Baja's filing an actual tariff 60 days prior to the in-service date that reflects the GISB standards as revised by the Commission at that time. In addition, the standards in North Baja's tariff must either be incorporated by reference or incorporated verbatim, but not both. North Baja must file a chart that identifies the location of the GISB standards incorporated into the tariff verbatim. While, North Baja states that its pro forma tariff is in compliance with Order No. 637, this order will not determine that compliance. At the same time that North Baja files its actual tariff, it must file tariff sheets in compliance with Order Nos. 637, 637-A, 32 North Baja calculated its commodity billing determinants as follows: 512,500 (system design capacity in Dth/d) multiplied by 365, then multiplied by 90% (presumed load factor). 33 Supra footnote no Supra footnote no RM , Standards For Business Practices Of Interstate Natural Gas Pipelines, 93 FERC 61,223 (2000).

19 Docket No. CP , et al B, and subsequent orders that the Commission has issued in other proceedings addressing compliance with Order Nos. 637, 637-A and 637-B.. Consistent with the Commission's actions in Trunkline LNG Company, 36 North Baja is required to make a filing within the first three years of its actual operation showing the actual costs and revenues. In that proceeding, the Commission will be able to examine North Baja's claimed operating costs and make determinations regarding its recourse rates and other areas discussed above. In the three year restatement filing, North Baja is required to provide updated cost-of-service data, in the form specified by section of the Commission's regulations, including cost of plant in service and compression gas flow analysis, which includes compression and operating pressure of its facilities. 3. Engineering In NGA section 7(c) proceedings, the Commission will review and approve the design capacity of a project so that the maximum amount of firm capacity is known and certificated, and the proper relationship between design capacity and the billing determinants for the project's rate design is established. Based on our review of the record, the Commission concludes that the North Baja facilities are properly designed to provide the services it intends to provide. B. Exports Facilities in Docket No. CP On January 11, 2001, the Commission submitted a draft Presidential Permit for North Baja's construction and operation of international border facilities to the Secretaries of State and Defense, informing each of North Baja's applications, providing copies of a draft permit, and soliciting their views. Replies on behalf of the Secretaries of Defense and State were received on March 6 and 8, 2001, respectively. 37 The designee of the Secretary of State and the designee of the Secretary of Defense responded and concurred with the issuance of the permit. The Secretary of State requests that the permit contain language noting that plans for works must be presented to the FERC 61,198 (1998). 37 Executive Order requires that the Commission obtain the favorable recommendations of the Secretaries of State and Defense prior to issuing a Presidential Permit.

20 Docket No. CP , et al International Boundary and Water Commission for review and approval under the 1970 Boundary Treaty. North Baja's siting, construction, operation, and maintenance of the proposed pipeline facilities at the international border between the United States and Mexico for the purpose of importing and exporting natural gas are subject to the jurisdiction of the Commission under section 3 of the NGA. Section 3 of the NGA requires parties seeking to import natural gas from another country or exporting natural gas to another country to first obtain authorization from the Commission. Section 3 also states that "the Commission shall issue such order upon application, unless, after opportunity for hearing, it finds that the proposed exportation or importation will not be consistent with the public interest." Section 3 further provides that "... the exportation of natural gas to a nation with which there is in effect a free trade agreement requiring national treatment for trade in natural gas, shall be deemed to be consistent with the public interest, and applications for such importation and exportation shall be granted without modification or delay." NAFTA established an international trade agreement among the governments of the United States of America, Canada, and the United Mexican States. NAFTA was ratified by the three countries' national legislatures in 1993 and went into effect on January 1, Specifically, we note that NAFTA's Article 606 states: Each Party shall seek to ensure that in the application of any energy regulatory measure, energy regulatory bodies within its territory avoid the disruption of contractual relationships to the maximum extent practicable, and provide for orderly and equitable implementation appropriate to such measures. Based on our review of North Baja's application, we find that North Baja's proposal to site, construct, operate, and maintain the border facilities to transport volumes of natural gas will facilitate the growing international trade between the United States and Mexico. Accordingly we make a preliminary determination in that the issuance to North Baja of a Presidential Permit and NGA section 3 authorization to site, construct, operate and maintain the proposed border facilities, will not be inconsistent with the public interest, subject to the conditions to be set forth in the Presidential Permit, including the language requested by the Secretary of State, and completion of our environmental review.