CPUC Warns of More Large Marketer-Pipeline Deals
Allowing interstate gas pipelines to sell capacity at
market-based rates, without first requiring a showing of a
competitive market or mitigation measures, could set the stage for
more allegedly "anticompetitive" contract arrangements between
pipes and marketers - similar to the one between Dynegy Marketing
and Trade and El Paso Natural Gas, warned California regulators.
Other gas marketers could "simply duplicate Dynegy's strategy
and artificially increase transportation rates unless...safeguards"
to check abuse of market power are in effect should FERC permit
market-based rates for short- or long-term transportation services,
the California Public Utilities Commission said last week in
preliminary comments on the mega-notice of proposed rulemaking
(NOPR) and notice of inquiry (NOI).
"If they're able to artificially inflate prices in this
[California] market, then pipelines or marketers will recognize
that they can do it to any market. And if there isn't a rate cap,
there's going to be major, major problems," cautioned Harvey Y.
Morris, principal counsel for the CPUC, in an interview with NGI.
"Without rate cap protection, there would be certain times when the
sky would be the limit for what people could charge for
This doesn't mean that the CPUC is against market-based rates,
he said. "We're very much into relying on the market where we can."
But "there [are] a lot of problems in the market with
anticompetitive conduct or the ability to exercise market power,"
which California is feeling "first hand right now," that FERC needs
to address before it can even think about removing rate caps and
allowing market-based rates, Morris believes.
Kathryn L. Patton, Dynegy's director of regulatory counsel, said
she agreed with a number of the CPUC's remarks - that pipelines
shouldn't be allow market-based rates without first showing they
lack market power and they shouldn't be permitted to transfer their
market power to others. But she took issue with its "collateral
attack" on the Dynegy-El Paso contract arrangement. She doubted the
Commission's proposed lifting of price caps would trigger more such
deals. "I don't necessarily agree because people still have to make
the commitment of the demand charges, which is not something people
Morris believes the Dynegy-El Paso arrangement, which was
negotiated in December 1997, is the result of what can happen when
pipelines and/or marketers flex their market power. The marketer
purchased almost 1.3 Bcf/d of turned-back capacity on El Paso,
which was all of the pipeline's remaining unsubscribed capacity at
the time. The Dynegy deal has come under considerable fire since
then, as shippers on El Paso have accused the marketer of
withholding capacity from the market to drive up prices. The CPUC
fears certain issues explored in the NOI, as well as proposals in
the mega-NOPR, could bring more Dynegy/El Paso-like deals.
Of particular concern to California regulators is the request in
the NOI for industry comments on the issue of permitting
market-based rates for turned-back capacity [RM98-12]. In addition,
it said the NOPR's proposal to lift the FERC-imposed rate cap on
short-term capacity indirectly would remove any market rate ceiling
on turned-back capacity, given that turnback "more or less"
competes with capacity in the short-term market [RM98-12]. The
California agency contends that such actions by FERC would
eliminate the "only" protection against the abuse of market power -
by pipes or "other entities" - that presently exists for
The CPUC doubts that FERC's auction proposal would be a
sufficient mitigative measure to prevent the "hoarding or
withholding of capacity rights," as it has accused Dynegy of doing
in the California market. "...[I]t is not clear how or whether such
auctions will work. Moreover, with interstate pipelines and certain
LDCs challenging or resisting the FERC's auction procedures, it is
unclear whether or not such mitigation measures will be enacted or
be sufficient," it said. The pipelines want to "water the auction
down a lot" so, in the end, "it might not be an effective tool,"
Still, he's not totally down on auctions. "Maybe if a workable
auction could be put into effect and it really did stop people from
withholding capacity from the market, maybe that would be the
solution." But, he conceded, "those are a lot of what-ifs."
The CPUC and others insist Dynegy's acquisition of almost 1.3
Bcf/d of turned-back capacity on El Paso, compounded by little
competition from released capacity in the California market, was
largely to blame for the two- to three-fold jump in the
transportation rate differential on El Paso and Transwestern
Pipeline last year. The differential reflects the difference
between California border prices and Southwest producing basin
"This enormous increase in the rate differential resulted from
Dynegy hoarding the otherwise unsubscribed capacity [on El Paso]
and refusing to release unused capacity except under illusory
offers with rates and conditions which were much too high and
onerous...," the California agency said. The CPUC, marketers and
end-users challenged the El Paso-Dynegy contract arrangement as
being anticompetitive, but FERC refused to take action on the
grounds that ratepayers were protected from abuse of market power
under the rate caps, it noted. The CPUC contends, however, pipeline
customers will lose that protection if FERC proposals to remove
rate caps become a reality.
"The point of this illustration of the Dynegy situation is to
recognize that there are not just hypothetical problems with the
FERC's proposals. The Dynegy situation is a real problem which has
already artificially inflated California border prices for an
entire year. It is imperative, particularly in turnback situations
(with minimal competition from capacity releases), that effective
and appropriate safeguards are in place to mitigate the exercise of
market power before the FERC removes any rate caps," the CPUC told