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,"
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
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
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."