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Sempra, KN Defend Merger Against Market Power Claims

Sempra, KN Defend Merger Against Market Power Claims

Merger partners Sempra Energy and KN Energy contend that Questar Pipeline, which claims their marriage would subvert gas and electric competition in southern California, is seeing monsters where none exist. Nevertheless, they agreed to make certain concessions to Questar to remove a potential threat to their merger transaction.

Specifically, the energy companies insist Questar gave them credit for far too much power when it said their merger would provide them both "motive and method" to block the entry of its proposed gas pipeline, Southern Trails Pipeline, into the southern California gas market. Southern Trails, which is awaiting FERC approval to be converted to a gas pipeline, would run 690 miles from the San Juan Basin to Long Beach, CA.

Their "motive," according to Questar, would be to prevent Southern Trails from competing directly with Southern California Gas, an LDC subsidiary of Sempra Energy, for generation and industrial customers in southern California. Unlike most pipelines coming into California, Southern Trails would not have to go through SoCalGas to serve its customers, but would be able to do so directly if approved by FERC.

And the "method" to block Southern Trails' entry, Questar said, would be KN's interest in TransColorado Gas Transmission. TransColorado - a 290-mile line that connects the Piceance and San Juan basins - is a 50-50 partnership between KN and Questar. Questar contends a merged Sempra-KN would have both "incentive and ability" to disrupt gas flow on TransColorado, cutting off supply sources from Southern Trails and ultimately the southern California market.

"This theory makes no sense," Sempra and KN told FERC [EC99-48]. "Even if KN could restrict the availability of capacity on TransColorado...such a strategy would be manifestly futile. Southern Trails and SoCalGas will compete solely as transporters, not as sellers, and shippers on the two pipelines will have access to essentially the same supplies, whether at the California border, or in the San Juan Basin. Thus, the outcome of competition between them will turn entirely on their respective transportation rates. Stifling flows of TransColorado gas into the San Juan Basin would not advantage SoCalGas in relation to Southern Trails."

Nevertheless, Sempra and KN agreed to make certain concessions "to obviate any possible concern as to the effects of the merger on Southern Trails." Most importantly, it will allow "Questar to hold two-thirds of TransColorado's capacity [200,000 Mcf/d] - and more if available - at the same rate that Questar and KN had previously agreed..." Currently, KN and Questar each hold 100,000 Mcf/d of TransColorado capacity, and the TransColorado partnership is responsible for marketing the remaining 100,000 Mcf/d. Additionally, KN agreed it would not oppose or prevent Southern Trails' interconnections with the TransColorado line.

These concessions should "remove any possible suggestion that KN will be able...to withhold TransColorado capacity and thus somehow skew competition between Southern Trails and SoCalGas," Sempra and KN told FERC. They asked the Commission to deny Questar's request for a hearing on the proposed merger.

Questar sees the TransColorado pipeline as a vital link in its plan to supply the southern California market with "cheaper" Rocky Mountain gas supplies in competition with gas sourced from the San Juan Basin. Without it, its vision of a TransColorado-Questar-Southern Trails delivery chain to California would be impossible. Sempra and KN, however, question whether Rocky Mountain gas really is cheaper than San Juan gas.

KN and Sempra believe Questar has overemphasized the importance of the role of TransColorado in serving the California market. They noted that the total certificated capacity of TransColorado is 300 MMcf/d, which is less than one-eight of the 4 Bcf/d of supplies that Southern Trails would have access to through multiple sources - the San Juan, Permian and Anadarko basins, and Rocky Mountain production. "Thus, even if KN, ignoring applicable Commission regulations and its contractual obligations, were somehow to embargo shipments on the TransColorado line altogether, its actions would have a minimal effect on the supplies available to the Southern Trails line at Blanco" in New Mexico.

Furthermore, KN and Sempra contend they would, in effect, be shooting themselves in the foot if they were to disrupt gas flow on TransColorado. "...[D]iminished flows on TransColorado would yield diminished revenues to KN as part owner of that line. Moreover, higher delivered gas prices in southern California would make the electric generation plants served by SoCalGas and [San Diego Gas and Electric] less competitive in relation to plants outside California as well as non-gas fired plants within California, leading to a loss of throughput, and thus a loss of transportation revenues, for SoCalGas and SDG&E."

Susan Parker

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