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Capacity-Gaming Complaint Remanded to FERC

Capacity-Gaming Complaint Remanded to FERC

The D.C. Circuit Court of Appeals has remanded FERC's rejection of a 1997 complaint in which Southern California Edison accused Southern California Gas (SoCalGas) of gaming the secondary market for firm capacity on key transportation links between the low-cost San Juan producing basin and the California border.

The court said the Commission's decision not to pursue the market power issues raised by Edison in the complaint was both "arbitrary and capricious." Edison accused SoCalGas, the dominant holder of interstate capacity into southern California, of withholding large amounts of unused firm capacity from the market by steadfastly refusing to negotiate competitive prices for the release of that capacity. FERC denied the utility's complaint on the ground that the prices sought by SoCalGas for its capacity releases did not exceed the maximum tariff rate allowed for interstate gas pipelines in the primary capacity market.

But FERC's oversight is "not...limited" to rate matters, the court opined. "That the rate charged in a particular instance is just and reasonable still leaves in place...other possible grounds for Commission action." Specifically, it noted Section 5 of the Natural Gas Act (NGA), in addition to giving FERC jurisdiction over "unjust" and "unreasonable" rates, provides it with authority over unjust and unreasonable practices, and over "unduly discriminatory" or "preferential" rates or practices.

In rejecting the complaint, the court further said the Commission assumed - mistakenly so - that a releasing shipper, such as SoCalGas, "could not be better situated to abuse market power than a pipeline." Although such an assumption "probably makes sense ordinarily," FERC overlooked the impact of the volumetric Interstate Transportation Cost Surcharge (ITCS) in this case. "While revenue losses on unmade sales constrain an ordinary monopolist's ability to reduce output and raise prices, the ITCS enables SoCal to give its own [affiliates] artificially low prices, and to price sales to others at unacceptable prices, with no sacrifice of transportation revenue whatever," wrote Circuit Judge Stephen Williams for the court.

The ITCS, which the California Public Utilities Commission established in 1991, permits SoCalGas to recover from its customers the difference between what it pays for interstate pipeline capacity and the actual rate it receives for released capacity. It was intended to help utilities recover stranded costs, but Edison contends SoCalGas has used the ITCS to manipulate the secondary capacity market in southern California. The ITCS, in effect, permits SoCalGas to recover all of its capacity reservation costs - mostly from noncore customers, such as Edison - while withholding capacity from the secondary market, the utility charged. In 1997, when the complaint was filed, SoCalGas had about 393 MMcf/d of unused capacity that was available for release.

The court also said it was not swayed by the Commission's "final rationale" for not pursuing Edison's complaint, which was that it might limit participation in the secondary market in southern California and possibly elsewhere. "There is no reason why a decision to examine market-power issues here need expose all shippers to possible scrutiny; the Commission could, by the terms of its decision, simply limit possible objects of investigation to those capacity-holders who are faced with the same perverse incentives as SoCal with the ITCS," the court said.

In remanding the case, the court instructed FERC take another look at possible damages against Edison. Due to changes in the electricity industry over the past few years, "the facts underlying Edison's claimed aggrievement are now unclear," it noted. When Edison first filed its complaint, it "owned a number of gas-first electricity generation plants, and was harmed in this capacity by higher gas prices," the court said, but it sold the plants in 1998. Edison contends, however, that it continues to be "adversely affected" since electricity prices closely track natural gas prices in the southern California market.

SoCalGas counters that other market changes - particularly its merger with San Diego Gas & Electric - don't favor the kind of market-power abuse alleged by Edison. "But manipulation of the downstream electricity-generation market does not exhaust the possible benefits to SoCal from abuse of its market power in the gas transportation market," the court said. "Edison points to the energy futures markets and to competition between electricity and core gas services. We leave these to be considered by the Commission."

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