----- Forwarded by Donna Fulton/Corp/Enron on 05/25/2001 05:36 PM -----

	Nancy Bagot
	05/25/2001 05:11 PM
		 
		 To: Shelley Corman/Enron@EnronXGate, Mary Kay Miller/ET&S/Enron@ENRON, Drew 
Fossum/Enron@EnronXGate, Robert Kilmer/Enron@EnronXGate, Janet 
Butler/Enron@EnronXGate, Dari Dornan/ET&S/Enron@ENRON, Glen 
Hass/ET&S/Enron@ENRON, Bambi Heckerman/Enron@EnronXGate, Frazier 
King/Enron@EnronXGate, Teb Lokey/Enron@EnronXGate, Dorothy 
McCoppin/Enron@EnronXGate, Ray Neppl/Enron@EnronXGate, Maria 
Pavlou/Enron@EnronXGate, Janet Place/Enron@EnronXGate, Michele 
Winckowski/Enron@EnronXGate, Donna Fulton/Corp/Enron@ENRON, Linda 
Robertson/NA/Enron@ENRON, Tom Briggs/NA/Enron@Enron, John 
Shelk/NA/Enron@Enron, Carin Nersesian/NA/Enron@Enron, Steven 
Harris/ET&S/Enron@ENRON, Joe Hartsoe/Corp/Enron@ENRON
		 cc: 
		 Subject: Briefing on FERC CA Natural Gas Infrastructure conference

This memo by Nancy Bagot, ETS, and Donna Fulton, Enron Corp, summarizes what 
we heard at yesterday's FERC conference and gets to the heart of the issue in 
California on the gas side.

The FERC Technical Conference yesterday was held by FERC staff and was kept 
to very technical, facility and service issues.  Staff did not allow any 
discussion of pricing, because that would be handled in other forums. 
Commissioners did not make an appearance at the conference, though some of 
their staffers were in attendance.

Like many FERC Technical Conferences, the May 24th conference on California 
Natural Gas Transportation Infrastructure boiled down to parties blaming 
other parties for the situation in the California market.  Generally, (1) 
interstate pipelines and others believe more infrastructure is needed, both 
to California and within California   (and some blame SoCalGas, lack of 
adequate take-away capacity, failure to provide open access transmission, and 
allocation procedures), (2) SoCalGas blames the CPUC and believes that, 
although this is a tight year, service commitments will be met and things are 
fine, and (3) the CPUC and CEC believe things are not out of control going 
forward, that their own open proceedings are adequate to handle any gas 
issues in California, and  that CPUC &decisions are coming.8  

For FERC Staff, there are two issues at hand: is the problem the mismatch 
between interstate and intrastate capacity (and what amount of infrastructure 
should be added into and within California), and/or is it the allocation 
methodology at a few highly-constrained delivery points into the state.  
Overall, there is basic agreement that there are problems with both.

The State

Both the CPUC and the CEC described the intrastate pipeline system as 
adequate with just minor changes and enhancements, certainly to serve core 
customers and likely to serve non-core customers.  Like the LDCs, the state 
representatives are concerned that building to develop a cushion in a 
difficult year may not bode well for facilities in &normal8 years in the 
future, leaving intrastate capacity stranded.  Also, both agencies ticked off 
a laundry list of proposed LDC enhancement projects and regulatory changes 
that are designed to improve the delivery system.  According to the CPUC and 
CEC, demand in the state is not going to explode ) getting LDC storage back 
up to normal levels should make the difference.

FERC Staff questioned  the CPUC and CEC speakers at length on the operations 
of the state LDC systems, allocation methods, and the availability of firm 
capacity on SoCalGas in particular.  There was great concern among Staff 
about the inability for a non-core customer to contract for specific capacity 
for primary firm service on SoCal.  The CPUC noted that there is a 
comprehensive settlement before the Commission to unbundle SoCal capacity and 
allow for tradable primary capacity on an open access system, but the 
Commission has not yet acted on that settlement.  When asked why the CPUC has 
not acted on the settlement that has been pending for a year, the witness 
said that there were not three votes.

The LDCs

Only PG&E and SoCalGas appeared before FERC.  Both were adamant that there 
was adequate capacity for current demand, as proven by the lack of  
curtailments over the past year.  They also agree that a primary question is 
how to agree on the adequate amount of capacity ) though it,s generally held 
there should be a 15-20% excess, is that for a normal weather year or a dry 
hydro year?  

For SoCal in particular, Lad Lorenz claimed that demand would drop in the 
next five years, with normal weather and a reduction of EG load which would 
bypass their system (being built directly along interstates pipelines).  If 
capacity were built to match an excess reserve margin, he wanted to know who 
would pay for the capacity.  The central policy question for SoCal comes down 
to defining excess capacity and modeling for excess based either on matching 
interstate capacity or customer demand (based on contracts).  SoCal believes 
it should respond to the latter.  However, the LDC cites the CPUC as an 
obstacle for responding to customers, and is looking to the CPUC to accept 
its comprehensive settlement which will unbundle its capacity and allow for 
tradable primary capacity rights.

For PG&E, the situation is different because it functions very much like an 
open access interstate pipeline. It does not have the allocation and 
scheduling issues that are on the SoCal system; however, there is still a 
mismatch between interstate and intrastate capacity.  PG&E, like SoCal, 
claims that its system is adequate to meet current demand, though they are 
planning some enhancements. They do agree with SoCal on the difficulty in 
planning for uncertainty, but in general the northern California LDC is not 
facing the difficulties of its southern counterpart.

Staff questions underscore the more difficult situation on the SoCal system, 
as nearly all questions focused on SoCal,s allocation method, firm capacity 
availability for non-core customers (which include industrials and electric 
generation) and possible disconnects between its local and backbone systems.  
FERC also queried about interstate and intrastate mismatches at Topock and 
Wheeler Ridge, and whether these would be worsened with the addition of more 
interstate capacity.  SoCal consistently answered that its proposed 
comprehensive settlement on unbundling would resolve most issues, but the 
CPUC will not act on it.

Interstate Pipelines

With every interstate pipeline serving California planning expansions and 
four entirely new pipelines on the drafting table, the pipelines call to arms 
was for more capacity into the state.  Demand projections by the pipeline 
representatives were vast and optimistic, an example being the Sonoran 
Pipeline prediction of a 3 ) 4 Bcf shortfall.  And each pipe can point to 
booming open season results as proof of the need for more infrastructure.  
Posing an obstacle to this infrastructure development is SoCalGas, lack of 
capacity and the major problem of allocation ) SoCal currently can only offer 
secondary capacity to any new interstate capacity.  

FERC Staff agreed that the SoCal allocation is a problem and further proof 
that there is a mismatch between intra and interstate capacity.  SoCal 
responded that any new interstate capacity at certain desirable points will 
only degrade existing service and again blamed the CPUC and the pipes, 
allocations.  The other concern expressed by Staff is the divergent demand 
forecasts of the LDCs, CPUC & CEC, and the pipelines.

Others

The financial community (Credit Suisse and Merrill Lynch) pointed to a 
dysfunctional market in California and told FERC that pipelines must be given 
certainty on returns and the regulatory structure.  The message was for FERC 
to stay the course, without price caps or changes to the marketing affiliate 
rules, and for California to fix itself, especially the CPUC (the weakest 
link).

Producers and End Users are concerned that existing shippers, rights are 
protected and rates remain unaffected by expansions that may later be 
stranded.  There is concern over additional capacity into constrained 
delivery points that are already pro rationed, especially in light of the 
recent nomination gaming debacle at Wheeler Ridge.  

The California Generators claimed that they were not convinced that SoCal 
will be unloaded by bypassing EG.  They claimed that there are disincentives 
in California regulation to SoCal's building capacity - specifically the 
Performance-based Rate mechanism and the Gas Cost Incentive mechanism.  Under 
these programs, SoCal gets to keep 50% of peaking service revenues, thus 
giving SoCal incentive to advantage their own storage services.  SoCal gets 
to keep tens of millions annually under these mechanisms. 

Closing Staff Concerns

To wrap up, FERC Staff asked why it is Topock in particular that is always 
discussed, and it was explained that access to multiple pipelines at Topock 
has set it up as the preferred delivery point into California.  However, with 
allocation changes at Topock kicking in, the problems are moving to Wheeler 
Ridge.

There was also a debate over which is the real problem ) intrastate capacity 
or intrastate scheduling.  SoCal again emphasized that it is not a capacity 
issue but the mechanism (blame the CPUC for not approving the unbundling 
settlement), California Generators believe it,s all about capacity (blame 
SoCalGas).

Future Comments

Comments can be filed in this proceeding by June 25.  Since the SoCal 
settlement received so much attention and continues to await action by the 
CPUC, should we get supporters of that settlment to file with the FERC 
stating that this was a fix to some of the problems on SoCal's  system and 
the CPUC has sat on it?  

We should find out who is planning to file comments.  Though much was said at 
the technical conference, many speakers brought slides, and there was a Court 
Reporter, Commissioners and their staffers will not likely read the whole 
transcript.  We could file to emphasize the points that are made in 
Jennifer's gas talking points.  


Future Comments

Comments can be filed in this proceeding by June 25.  Since the SoCal 
settlement received so much attention and continues to await action by the 
CPUC, should we get supporters of that settlment to file with the FERC 
stating that this was a fix to some of the problems on SoCal's  system and 
the CPUC has sat on it?  

We should find out who is planning to file comments.  Though much was said at 
the technical conference, many speakers brought slides, and there was a Court 
Reporter, Commissioners and their staffers will not likely read the whole 
transcript.  We could file to emphasize the points that are made in 
Jennifer's gas talking points.