Merger partners Sempra Energy and KN Energy contend that QuestarPipeline, which claims their marriage would subvert gas andelectric competition in southern California, is seeing monsterswhere none exist. Nevertheless, they agreed to make certainconcessions to Questar to remove a potential threat to their mergertransaction.

Specifically, the energy companies insist Questar gave themcredit for far too much power when it said their merger wouldprovide them both “motive and method” to block the entry of itsproposed gas pipeline, Southern Trails Pipeline, into the southernCalifornia gas market. Southern Trails, which is awaiting FERCapproval to be converted to a gas pipeline, would run 690 milesfrom the San Juan Basin to Long Beach, CA.

Their “motive,” according to Questar, would be to preventSouthern Trails from competing directly with Southern CaliforniaGas, an LDC subsidiary of Sempra Energy, for generation andindustrial customers in southern California. Unlike most pipelinescoming into California, Southern Trails would not have to gothrough SoCalGas to serve its customers, but would be able to do sodirectly 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 SanJuan basins – is a 50-50 partnership between KN and Questar.Questar contends a merged Sempra-KN would have both “incentive andability” to disrupt gas flow on TransColorado, cutting off supplysources from Southern Trails and ultimately the southern Californiamarket.

“This theory makes no sense,” Sempra and KN told FERC [EC99-48].”Even if KN could restrict the availability of capacity onTransColorado…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 accessto essentially the same supplies, whether at the California border,or in the San Juan Basin. Thus, the outcome of competition betweenthem will turn entirely on their respective transportation rates.Stifling flows of TransColorado gas into the San Juan Basin wouldnot 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 onSouthern Trails.” Most importantly, it will allow “Questar to holdtwo-thirds of TransColorado’s capacity [200,000 Mcf/d] – and moreif available – at the same rate that Questar and KN had previouslyagreed…” Currently, KN and Questar each hold 100,000 Mcf/d ofTransColorado capacity, and the TransColorado partnership isresponsible for marketing the remaining 100,000 Mcf/d.Additionally, KN agreed it would not oppose or prevent SouthernTrails’ interconnections with the TransColorado line.

These concessions should “remove any possible suggestion that KNwill be able…to withhold TransColorado capacity and thus somehowskew competition between Southern Trails and SoCalGas,” Sempra andKN told FERC. They asked the Commission to deny Questar’s requestfor a hearing on the proposed merger.

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

KN and Sempra believe Questar has overemphasized the importanceof the role ofTransColorado in serving the California market.They noted that the total certificated capacity of TransColorado is300 MMcf/d, which is less than one-eight of the 4 Bcf/d of suppliesthat Southern Trails would have access to through multiple sources- the San Juan, Permian and Anadarko basins, and Rocky Mountainproduction. “Thus, even if KN, ignoring applicable Commissionregulations and its contractual obligations, were somehow toembargo shipments on the TransColorado line altogether, its actionswould have a minimal effect on the supplies available to theSouthern Trails line at Blanco” in New Mexico.

Furthermore, KN and Sempra contend they would, in effect, beshooting themselves in the foot if they were to disrupt gas flow onTransColorado. “…[D]iminished flows on TransColorado would yielddiminished revenues to KN as part owner of that line. Moreover,higher delivered gas prices in southern California would make theelectric generation plants served by SoCalGas and [San Diego Gasand Electric] less competitive in relation to plants outsideCalifornia as well as non-gas fired plants within California,leading to a loss of throughput, and thus a loss of transportationrevenues, for SoCalGas and SDG&E.”

Susan Parker

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