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 its in-state customers the costs of social programsthat would be potentially stranded by its bypass of SouthernCalifornia Gas (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 these socialcosts.

Not surprisingly, the LDC poised to be bypassed – SoCalGas -made a similar plea to FERC. Given that California already is acapacity-saturated market, “the only advantage that the SouthernTrails pipeline may have [over]…a distribution company is theavoidance of any state-mandated surcharges or cost associated withsocial programs,” SoCalGas noted. If Southern Trails is built, iteither will drive up the social costs for remaining SoCalGascustomers or it will result in under-collection of such costs, itsaid. It joined the CPUC in asking FERC to require the proposedQuestar pipeline to recover “any existing or future surcharges”from customers on its West Zone.

This marks the first time that FERC has been asked to addressthis issue – to hold the customers of bypassing pipelines liablefor potentially stranded social costs. This definitely is a “caseof first 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 Questarcertificate proceeding because it’s the “first new bypass” in thestate. Questar is seeking FERC authority to convert a 700-mileformer Arco oil pipeline, which runs primarily between northwesternNew Mexico’s Paradox Basin and Long Beach. It hopes 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. It believes the best solution is for FERC torequire Questar to impose a volumetric surcharge on its rates torecover the same costs for social programs from its West Zonecustomers that they would have otherwise had to pay if they werebeing served by SoCalGas.

Initially, the surcharge should be $0.07294/Dth ($0.07213/Dthfor the state’s low-income assistance program and $0.00081/Dth forenergy efficiency programs), said the CPUC, which noted this wasthe current rate that the Arco Refinery paid to SoCalGas forpublic-purpose programs.

“The FERC’s condition should not require the initial rate as apermanent rate because that may be unfair to Questar (sinceSoCalGas’ rates approved by the CPUC change from time to time) andmay be unlawful.” Instead, Questar should be required to”periodically submit limited rate filings to change the surchargewhenever the CPUC changes the intrastate rates for SoCalGas,” theCalifornia regulators said.

Separately, SoCalGas also questioned the need for the Questarpipeline. It noted that it has made “numerous attempts” topermanently or temporarily release capacity in the area to beserved by Southern Trails’ East Zone. “SoCalGas had had no takersfor this capacity despite rates lower than Southern Trails EastZone rate of 38 cents.” It noted it currently is offering torelease 80,000 MMBtu/d of capacity on the El Paso system from theEl Paso Chaco Plant (point of origin of Southern Trails) to theCalifornia-Arizona border at a rate of 27 cents per MMBtu/d throughAugust 2006, and equivalent volumes on Transwestern at 75% ofmaximum rate through October 2005.

Susan Parker

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.