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(Original submitted to CPUC on January 24, 2008. The errata-corrected version is provided below.)

Introduction: California natural gas utilities should not enter into long-term contracts for LNG. LNG conflicts with state and national energy independence and climate change reduction policies. Long-term LNG contract commitments will involve California unnecessarily in geopolitical struggles to secure and maintain LNG supplies.

The lifecycle greenhouse gas (GHG) emissions associated with the combustion of LNG are approximately 25 percent greater than the lifecycle GHG emissions associated with the combustion of domestic natural gas currently supplying the
California market. Substituting of LNG for domestic natural gas is in conflict with the state’s GHG reduction mandate. The additional nitrogen oxide (NOx) emissions from the combustion of LNG will further pollute California cities. The poorer quality of LNG may damage combustion equipment and compromise existing natural gas distribution systems.

LNG is expensive and unnecessary. U.S. domestic natural gas supplies will increase significantly over the next 15 years. Natural gas demand is projected to be relatively static at domestic natural gas prices that are well below LNG prices. Record natural gas storage levels have been reached in recent years due to increasingly mild winters and strong and increasing domestic production.

Canadian natural gas exports to the United States and California are likely to remain stable over the next 10 to 15 years at the domestic natural gas price levels projected by the LNG industry. Since 2000, Califonia’s natural gas demand has fallen considerably. The IOUs forecast demand to remain flat for at least the next decade. In contrast, the CEC has consistently forecast steady growth over resent years and continues to forecast a steady growth in demand.

Data of natural gas consumption show the CEC demand forecasts have been much higher than actual consumption. All of these factors, which significantly affect the validity of the CEC gas demand forecasts, must be considered by the CPUC prior to requiring the IOUs to enter into long-term contracts for LNG.

North America has adequate supplies of natural gas from existing supply basins and existing LNG terminals. Sempra Energy, developer of the Costa Azul LNG terminal in Baja California, has indefinitely suspended further work on its proposed LNG terminal in Port Arthur, Texas precisely because the domestic natural market is saturated with supply options.

LNG imports have many serious deficiencies that should rank LNG at the bottom of natural gas supply options available to California. These would apply to any LNG project on the West Coast. These serious deficiencies include:

• Considerably higher lifecycle GHG emissions than domestic natural gas;
• Potential for higher NOx emissions compared to combustion of domestic natural gas;
• Potential for combustion equipment damage and accelerated deterioration of existing
pipeline distribution systems;
• High cost relative to domestic natural gas alternative;
• High potential for geopolitical and price risk due to inherent unreliability of LNG
supplies from Indonesia, Russia, and potentially the Middle East;
• Potential of LNG supplier(s) to exercise market power over California natural gas market during periods of peak demand.

Specific serious deficiencies with LNG imports from Costa Azul LNG include:
• Potential for affiliate transaction abuse between Sempra, SDG&E, and Southern
California Gas Company (SoCalGas);
• Not located in California or the U.S. and therefore not subject to CPUC or FERC
emergency power.

For all of these reasons, as more fully set forth below, the CPUC should not change its current natural gas contracting policies for IOUs and should not allow, much less require, the IOUs to enter into long-term contracts for LNG.