The California Public Utilities Commission rejected the proposed Sacramento Natural Gas Storage LLC facility in a 3-2 vote on July 12.

For the commissioners that voted against the project, which would have used a depleted natural gas reservoir as a 7.5-Bcf gas storage facility, the risk of gas migration through unknown faults in the reservoir rock posed too great a threat to the densely populated Sacramento neighborhood.

"Things do happen that we don't expect, despite our best intentions and despite our best plans," Commissioner Mike Florio said. "In this instance, I believe that is simply too big a risk to take given the marginal need for this facility."

Sacramento Natural Gas would have offered the Sacramento Municipal Utility District an alternative gas supply in the event of interruptions from PG&E Corp. subsidiary Pacific Gas and Electric Co.'s gas transmission system, shielding SMUD from supply constraints and price spikes, its proponents argued. A project application was originally filed in 2007, and SMUD and Sacramento Natural Gas had already signed a 20-year agreement for gas storage services.

But Commissioner Catherine Sandoval, who opposed the project, contended that establishing a gas storage facility underneath a neighborhood was not in line with industry best practices and noted a number of California storage locations that have few or no structures, let alone residences.

Commissioner Mark Ferron agreed, acknowledging that the project would no doubt provide SMUD with additional flexibility but said the probability of curtailment was small.

"It may be desirable but it is not essential and ... it seems to be at variance with the gas industry's best practices for gas storage," Ferron said.

But CPUC President Michael Peevey said those opposed to the project were misguided, noting that while the probability of curtailment is low, the probability of the gas escaping was much lower.

"I have to say with all due respect that Item 33b [in opposition to Sacramento Natural Gas] is lacking in analysis and is based on faulty logic," Peevey said.

The commission's decision reflected the public comment that opened the meeting, during which more than a dozen Californians spoke out against the facility while only five appeared in support of it. Fears about water contamination and explosions, along with concerns over property value and health impacts dominated the public discussion, while a handful of people touted the potential economic benefits of the facility and their confidence in its safety.

"I am certainly not opposed to the construction of necessary energy infrastructure in the state of California ... I have voted and will continue to vote for many infrastructure projects, including those that have significant environmental impacts, when they are truly necessary ... [but] I think in this instance we cannot make the finding that this is truly necessary," Florio said.

Peevey and Commissioner Timothy Simon both said they plan to file statements of dissent.

Copyright 2012 SNL Financial LC. All Rights Reserved.

(Originally published July 18, 2012, in SNL Daily Gas Report.)