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Questar: Sempra-KN Combo Would Stifle Competition

Questar: Sempra-KN Combo Would Stifle Competition

Questar Pipeline has called on FERC to jettison the proposed merger of powerhouses Sempra Energy and KN Energy, insisting the deal would "undermine" competition in the natural gas and electric markets in southern California.

Hitting closer to home, Questar contends a merged Sempra-KN would have the "motive and the method" to block the entry of its proposed gas pipeline, Southern Trails Pipeline, into the southern California gas market. The "motive," it claims, would be to prevent Southern Trails from competing directly with Southern California Gas (SoCalGas), an LDC subsidiary of Sempra Energy [EC99-48].

Southern Trails, which is seeking FERC approval to be converted to an interstate gas pipeline, could pose a real threat to SoCalGas because it has the potential to supply gas directly to generators and other customers in the Los Angeles Basin, Questar said. Because it already has a right-of-way into Long Beach, CA, Southern Trails would be "uniquely positioned" to serve its customers without having to go through SoCalGas like other pipelines.

The "means" to block entry is KN Energy's control over the capacity of TransColorado Gas Transmission, which is central to Questar's vision to serve California. Although TransColorado is a 50-50 partnership between KN Energy and Questar, KN Energy has effective control over two-thirds of the certificated capacity of the pipeline, according to Questar. It has sole control over one-third of TransColorado's capacity and it has a partial stake in another third, which requires its consent to market.

"If the FERC allows Sempra and KN to merge...[they] will have the incentive and ability to disrupt the TransColorado project and thereby [cut off] supply sources from Southern Trails and ultimately the southern California market," Questar noted.

The TransColorado pipeline is a vital link in Questar's plan to supply the southern California market with cheaper Rocky Mountain gas supplies in competition with higher priced gas sourced from the San Juan Basin, Questar said. Without it, the planned Questar-TransColorado-SouthernTrails delivery chain to California would be impossible.

Since the Southern Trails' gas pipeline was first proposed, Questar contends SoCalGas has been doing everything in its power to stop it. It "attempted to convince the City of Corona [CA] to withdraw a franchise agreement that authorized Southern Trails...to continue operating the line under city streets; [it] has attempted to cause an increase in the level of franchise fees paid by Southern Trails to various cities; and Sempra has pushed [state] legislation that would increase the burdens on competing pipelines by adding a substantial surcharge for 'public purpose' programs," Questar charged.

Additionally Sempra has "manipulated" its rates in an attempt to attract potential shippers away from Southern Trails, the Salt Lake City, UT-based pipeline said (see related story this issue). "While the FERC certainly should view lower prices as a good result, the prior history of similar SoCalGas rate reductions indicates that the decreases will be short-lived - they will last only until the competitive threat is gone."

One of SoCalGas' "most lethal weapons" in the fight against Southern Trails' competitive entry is its "Residual Load Service Tariff" (RLS), which requires any SoCalGas shipper that takes part of its service on another pipeline to pay for up to 100% of its service on the LDC - even if the shipper isn't using it. "This is extremely punitive to partially bypassing customers, and Questar has found that it affects Southern Trails' ability to compete for customers in the region...Significantly, none of Sempra's anticompetitive actions - including the RLS - have been able to stop Southern Trails from proceeding with its project. The proposed merger, however, raises a new and unfair hurdle that seriously threatens to undermine Southern Trails' ability to compete against Sempra."

The effects of SoCalGas' alleged anticompetitive actions will be "felt beyond the gas markets," in the California electricity market, Questar said, given that the role of gas in setting the marginal electricity price continues to grow. "Therefore, Sempra's incentive and ability post-merger to keep gas prices high can and will have significant effects on the electric market in southern California by driving up electric prices."

But Questar believes Southern Trails, if approved by FERC, could help to keep power prices in check because it would reduce the dominance of SoCalGas as a gas supplier for electric generation in California. "...[I]t was not surprising that many of the bids that Southern Trails received in response to its recent open season were either from electric generators or from shippers planning to serve electric generators."

Questar pointed out that Sempra has everything to gain from higher gas and power prices. They would increase the value of its 680 MW of generating capacity that Sempra will hold at the end of this year, and would boost the profitability of its brokering and marketing affiliate, Sempra Energy Trading. "Once [Sempra Energy Trading] has locked in a particular price position in the electric market, it can manipulate the price of gas (and therefore the price of power) to make its position more profitable," the pipeline said. "This appears to be the most troubling concern because such price manipulation in the electric market is very difficult to detect and can get lost in a morass of paper trades."

Susan Parker

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