California regulators have taken a potentially precedent-settingstep by asking FERC to condition a certificate for Questar’sproposed Southern Trails Pipeline on the company first agreeing torecover from in-state customers the costs of social programs thatwould be potentially stranded by its bypass of Southern CaliforniaGas (SoCalGas).

The West Zone of the proposed gas pipeline, which would begin atthe California border and extend to Long Beach, CA, would bypassthe California LDC to deliver gas potentially to the Arco LongBeach Refinery Complex and other state customers, thus enablingthem to circumvent the “intent” of California law requiring utilitycustomers to pay for public-purpose programs for low-incomeresidents and energy efficiency/conservation, the California PublicUtilities Commission (CPUC) said in its protest [CP99-166]. “TheFERC should either deny Questar’s certificate application or remedythe…problems” associated with the stranding of social costs.

Not surprisingly, the LDC poised for bypass-SoCalGas-made asimilar plea to FERC. Given that California already is acapacity-saturated market, “the only advantage that the SouthernTrails pipeline may have to partial transportation service by adistribution company is the avoidance of any state-mandatedsurcharges or cost associated with social programs,” SoCalGasnoted. If Southern Trails is built, it either will drive up thesocial costs for remaining SoCalGas customers or it will result inunder-collection of such costs, it said. It joined the CPUC inasking FERC to require the proposed Questar pipeline to recover”any existing or future surcharges” from customers on its WestZone.

This marks the first time that FERC has been asked to addressthis issue-to hold the customers of bypassing pipelines liable forpotentially stranded social costs. This definitely is a “case offirst impression,” said Harvey Y. Morris, principal attorney forthe CPUC. The agency believes there is support for its request inOrder 888, which would permit a customer-specific surcharge to beadded to interstate transmission rates in cases where stateregulators don’t have the authority to recover stranded costs.

Morris said the CPUC raised the issue in the Questar certificateproceeding because it’s the “first new bypass” in the state.Questar is seeking FERC authority to convert a 700-mile former Arcooil pipeline, which runs primarily between northwestern NewMexico’s Paradox Basin and Long Beach. It plans to have it inservice by mid-2001. Morris also believes the issue could apply toKern River, which recently held an open season to build a lateralto Long Beach.

In addition to “thwart[ing] the state’s efforts to fundthese…public-purpose programs,” the CPUC said it objected toQuestar’s proposed pipeline because it would promote “uneconomicbypass” in the state. “Indeed, if Questar is able to serveCalifornia end-users by beating SoCalGas’ rates, not due tooperating more efficiently but due to the absence of legallyimposed public-purpose program costs on Questar (while SoCalGas isrequired to make its customers pay for such costs), a FERCcertificate to Questar would promote uneconomic bypass rather thaneconomic bypass,” the state regulators contend.

The CPUC believes the best solution is for FERC to requireQuestar to impose a volumetric surcharge on its rates to recoverthe same costs for social programs from its West Zone customersthat they would have otherwise had to pay if they were being servedby SoCalGas. Initially, the surcharge should be $0.07294/Dth($0.07213/Dth for the state’s low-income assistance program and$0.00081/Dth for energy efficiency programs), said the CPUC, whichnoted this was the current rate that the Arco Refinery paid toSoCalGas for public-purpose programs.

Separately, SoCalGas also questioned the need for the Questarpipeline. It said it has made “numerous attempts” to releasecapacity in the area to be served by Southern Trails’ East Zone.”SoCalGas had no takers for this capacity despite rates lower thanSouthern Trails East Zone rate of 38 cents.” It noted it currentlyis offering to release 80,000 MMBtu/d of capacity on the El Pasosystem from the Chaco Plant (point of origin of Southern Trails) tothe California-Arizona border at a rate of 27 cents per MMBtu/dthrough August 2006, and equivalent volumes on Transwestern at 75%of maximum rate through October 2005.

SoCalGas contends that construction of Southern Trails wouldonly add to an already glutted California market, creating morestranded costs/unsubscribed capacity and reducing the secondarymarket value of pipeline capacity.

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