<http://secure.scientech.com/images/spacer.gif>	  <http://secure.scientech.com/images/spacer.gif>	
  <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg>	  <http://secure.scientech.com/images/spacer.gif>	  <http://secure.scientech.com/_IA_TEST/Corner_TR.jpg>	
	  <http://secure.scientech.com/rci/wsimages/ia_banner02.gif>		
  <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg>		  <http://secure.scientech.com/_IA_TEST/Corner_BR.jpg>	



  <http://secure.scientech.com/images/spacer.gif>	 <http://secure.scientech.com/rci/details.asp?ProductID=971>




  <http://secure.scientech.com/images/spacer.gif>	  <http://secure.scientech.com/images/spacer.gif>	
	  <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg>
  <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg>		  <http://secure.scientech.com/_IA_TEST/Corner_TR.jpg>	
	
SPONSORS

  <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/main/ad_redirect.asp?URL=http://wwwthestructuregroup.com>
  <http://secure.scientech.com/images/spacer.gif>

INFORMATION PRODUCTS

 <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp>   <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp>   <http://secure.scientech.com/images/spacer.gif>

CONFERENCES

  <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/main/ad_redirect.asp?URL=http://cpunmsu.edu/>Center for
Public Utilties
The Basics:
Practical Skills for a Changing Utility   <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/specialpages/New_Rate_Card.asp>   <http://secure.scientech.com/images/spacer.gif>	
  <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg>		  <http://secure.scientech.com/_IA_TEST/Corner_BR.jpg>	

December 17, 2001 



Competition Approved for California's Intrastate Natural-Gas Pipelines 



By Will McNamara
Director, Electric Industry Analysis




[News item from Associated Press] California state power regulators voted Dec. 11 to deregulate further the transmission of natural gas within Southern California, a decision hailed by the industry and derided by consumer advocates. The California Public Utilities Commission (CPUC) voted 3-2 to approve a proposal that allows Southern California Gas Co., the nation's largest gas utility, and San Diego Gas & Electric Co. (SDG&E) to sell space on their "backbone" transmission pipelines. These pipelines carry natural gas from out of state to a smaller distribution system in California that then transports it to homes, businesses, factories, and power plants.

Analysis: This controversial vote by the CPUC took place last week, but has not received a great amount of industry analysis. This is rather surprising because the vote carries enormous potential impact for the way in which natural-gas capacity is bought and sold along pipelines owned by Southern California Gas Co. and SDG&E in the southern part of the state. Considering the fiasco that opening the state's electric market became over the last year, it is a risky move for California's regulators to open a competitive market for the right to transport gas along these pipelines at this time, even though the issue has been under debate at the commission for years. However, the rationale for the decision is that the new system will allow customers to better control the point from which their natural-gas supply originates, which theoretically should lower costs and preserve space along the pipelines that the customers don't need. Critics of the plan, especially The Utility Reform Network (TURN), say that allowing competition along the natural-gas pipelines in California could allow fewer companies to control most of the pipeline space, which could in fact cause the opposite of the intended effect and drive up energy costs. A case that has been used by both sides of the debate is that of El Paso Corp., which found itself in a lengthy lawsuit this year when it was charged with giving preferential access to its pipeline to one of its affiliates, which allegedly played a role in driving up energy costs in the state.

Before analyzing the potential impact of the CPUC's ruling, let's first establish specifically what the ruling entails and some background of the companies involved. Put into a nutshell, the ruling creates a competitive market for the right to transport and store natural gas along the pipelines owned by Southern California Gas and SDG&E, which are both subsidiaries of San Diego-based Sempra Energy (NYSE: SRE). As noted, Southern California Gas is ranked as the largest natural-gas distribution utility in the country and serves a territory of 23,000-square-miles that ranges from central California to the Mexican border.

Following a standard that is already in place among interstate pipelines, including the ones that transport power into California, both of these companies will now be allowed to sell large industrial customers space on their intrastate "backbone" pipelines, giving customers firm transportation rights on the pipelines. The pipelines are referred to as "backbone" because they are part of the smaller distribution system that transports power to factories and power plants (along with homes and businesses). It is important to note that the CPUC's ruling impacts only large consumers of natural gas in California, which includes electric generating plants. Residential and small business consumers that use natural gas will continue to have regulated gas-transmission costs. 

Under the new auction system, power producers and industrial natural-gas customers of the two companies will bid to buy pipeline space, with preference being given to those bidders that intend to reserve space for the longest period of time. According to the CPUC, the ruling creates three "tiers" of accessibility to the capacity on the pipelines. The first tier includes residential and small business customers, who are not included in the new competition and will automatically have about 1,044 million cubic feet per day of capacity on the pipelines reserved for their use. The second tier includes industrial customers who will now be able to participate in the competition, and will be allowed to bid on half of the remaining capacity. The third tier includes all other market participants, including natural-gas marketers, which will be allowed to bid on whatever capacity is left. Both Southern California Gas and SDG&E reportedly intend to phase in auctions by the end of 2002 for their largest customers to transport natural gas. The auctions will be for transmission rights that can be traded to other parties. 

The CPUC also established two different levels of payment options for the bidding process. As one option, bidders can pay a fixed price of 7.2 cents per million British thermal units (MMBtu) that would cover all of the capacity on the pipeline that they have reserved, regardless if it is ultimately used or not. As a second option, bidders can pay for only 50 percent of the reserved capacity at the fixed price of 7.2 cents per MMBtu, and 50 percent at a higher price that only applies to the capacity that they ultimately use. In addition, the ruling allows for the trading of capacity space, an important point that critics claim could allow buyers to gain more control over the pipeline than allotted in the ruling. 

As noted, the measure passed the CPUC in a 3-2 vote. The ruling will remain in place until 2006, at which time the commission can decide to renew it. The three commissioners that supported the measure were Richard Bilas, Henry Duque and Geoffrey Brown. Loretta Lynch, president of the CPUC, and Carl Wood voted against the measure. Wood said he opposed the measure because it was based on data accumulated before natural-gas prices dramatically increased during the winter of 2000-2001.

Another reason why the three commissioners voted to approve this measure was a belief that deregulating gas transmission in the state would help to keep large customers from leaving intrastate pipelines in favor of using interstate pipelines, which are not regulated by the CPUC. An exodus among industrial users from intrastate pipelines, according to the three commissioners, could leave residential and small business consumers with higher costs associated with maintaining the pipelines. However, regulators were quick to qualify their vote by saying the decision to allow competition for the cost of transporting natural gas for industrial users did not represent total deregulation. Instead, the commissioners said that the ruling simply amounts to "less regulation." 

As I mentioned, the case against El Paso Corp. (NYSE: EPG) was used as an example to support both sides of the debate over allowing competition among the natural-gas intrastate pipelines. The case against El Paso Corp. is a very complicated one, but it essentially comes down to one core issue. The case revolves around allegations that during the period of May to November 2000, El Paso improperly shared market-sensitive information with one of its affiliates, which drove up natural-gas prices, pre-empted competition from non-affiliated companies and resulted in extra costs for fuel in the range of $3.7 billion for Californians. El Paso Corp. has consistently maintained that it engaged in no wrongdoing. According to a report issued by the state Assembly, natural-gas prices in California increased from $6.6 billion in 1999 to $12.3 billion in 2000 to $7.9 billion for only the first three months of 2001. In October, El Paso Corp. was absolved of the charges of manipulating natural-gas prices in California, but an investigation continues regarding any improper sharing of information between affiliates. The relevance of this case is that those opposed to opening up California's intrastate pipelines to capacity believe the new rules could allow for one company to step in and gain control over a portion of the pipeline and thereby be able to drive up price.

Those in favor of the CPUC's new ruling say the comparisons to the El Paso case are unfounded. For starters, the ruling restricts companies from owning more than 30 percent of the pipeline, which theoretically should prevent a company from gaining an ability to control prices. Critics, however, say that the ruling allows for the trading of capacity space, which could potentially provide a loophole that would give a company control over more than 30 percent of pipeline capacity. 

The issue of potential price spikes associated with natural gas is one of the remaining questions that only time will be able to answer. Critics of the ruling such as TURN say allowing competition among the natural-gas pipelines creates the same market dynamics as deregulation of the state's electricity market, which some say opened the door to gaming and market manipulation. In other words, TURN argues, the CPUC ruling opens the door for one company to enter the market and buy up a significant amount of capacity along the intrastate gas pipelines, thereby giving that company the opportunity to control prices. As the new ruling won't take effect until another year when Southern California Gas and SDG&E begin receiving bids for capacity space on their pipelines, we won't know any time soon if prices will be impacted. However, critics claim that a sharp downturn in temperatures in California during the winter season that drives up demand could be the first indicator of whether or not the new ruling will lead to a sharp increase in energy prices.

Moreover, the opening of competition along capacity space on California's intrastate natural-gas pipelines is a surprising departure from the state's discontinuation of deregulation within the power sector. It is too early to tell how the new ruling will impact energy prices, and of course this question is the source of great debate (with one side saying that prices will drop and the other side saying that prices will increase). Perhaps the larger issue, however, is the control over the state's pipelines that could be impacted by this ruling. Even 30-percent capacity control, the amount that the CPUC is opening to competition, would be considered excessive by some other states. For instance, in Texas 20-percent control is considered a maximum standard. Again, whether or not the allowance of competition will spark the abuse of capacity control on the intrastate pipelines is something that remains to be seen. We do know that electric competition in California became a disastrous experiment, but even with this history the state is moving forward with bringing competition to its intrastate natural-gas pipelines. 


An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/> 


  _____  

We encourage our readers to contact us with their comments. We look forward to hearing from you. Nancy Spring  <mailto:nspring@scientech.com>

Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Jane Pelz  <mailto:jpelz@scientech.com>at 505.244.7650. Advertising opportunities are also available on our Website. 

  _____  

Our staff is comprised of leading energy experts with diverse backgrounds in utility generation, transmission and distribution, retail markets, new technologies, I/T, renewable energy, regulatory affairs, community relations and international issues. Contact consulting@scientech.com <http://consulting@scientech.com> or call Nancy Spring at 505.244.7613. 

  _____  

SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer colleagues to receive our free, daily IssueAlert articles, please register directly on our site at secure.scientech.com/issuealert <http://secure.scientech.com/issuealert/>. 

If you no longer wish to receive this daily e-mail, and you are currently a registered subscriber to IssueAlert via SCIENTECH's website, please visit <http://secure.scientech.com/account/> to unsubscribe. Otherwise, please send an e-mail to IssueAlert <mailto:IssueAlert@scientech.com>, with "Delete IA Subscription" in the subject line. 

  _____  

SCIENTECH's IssueAlert(SM) articles are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. 



Copyright 2001. SCIENTECH, Inc. All rights reserved.
  <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=12/17/2001>