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SoCal Restructuring Under Close Industry Scrutiny

SoCal Restructuring Under Close Industry Scrutiny

Southern California Gas Co.'s proposed restructuring plan has been pushed aside by six new confidential alternatives because certain aspects of the utility's plan have been deemed anticompetitive and have the potential to allow gaming at the Topock, AZ, receipt point, according to observers and participants in discussions taking place at a downtown Los Angeles hotel.

The discussions are designed to produce a restructuring settlement that must be filed with the California Public Utilities Commission by Sept. 6 or the parties involved will be drawn into a lengthy hearing process. The close scrutiny from all segments of the gas industry and the time constraints set by the CPUC have led SoCal to propose a postponement of the settlement deadline to Dec. 6 which would push scheduled hearings into late winter. A prehearing conference currently is slated for Sept. 1 and hearings are expected to start this fall. Most parties, however, see the request as further stalling by the utility and are unlikely to go along with a postponement.

In the meantime, SoCalGas is expected to produce a counterproposal, responding to the six alternatives, and distribute it to the parties by Sept. 3, prior to another all-parties meeting in Los Angeles Sept. 9.

A key to the settlement is opening up SoCalGas' tradable access rights to transmission and storage and developing secondary markets for those rights. Pacific Gas and Electric, for the most part, offers these already. SoCalGas' proposal is described as "very different" from the PG&E's system already in place. They both involve auctions, but after that the similarity ends. SoCalGas proposes to auction off receipt-point interstate capacity on an annual basis but would not unbundle any of the intrastate transmission; that tariff would still be paid in addition to the new price set for receipt-point capacity.

In addition, SoCalGas proposes what some of the parties are calling "a dramatic change" to a daily balancing requirement. "Almost all of the parties have expressed considerable concern with that approach," one of settlement participants said.

"In its initial proposal, SoCalGas was setting a plan that still maintains a utility-controlled transportation and deters competition the way they are proposing to set up auction rights," according to a Texas-based trader who focuses on the western U.S. and has reviewed a copy of the initial proposal, which involves receipt-point interstate auctions and a daily balancing scheme.

"I don't think anyone is really thrilled about going to daily balancing," according to the trader. "I don't know if the telemetry is in place on the end-use meter side to the degree it is really needed. I think it is for the larger facilities, but not for the smaller facilities."

This trader who spoke on the condition of anonymity speculated that SoCalGas is feeling the heat of two competing proposed new interstate pipelines (Questar and Kern River) into the heart of its service area, and it wants to use the settlement as a means of holding those competitors at bay with its current proposal. "I think they should unbundle in a way that allows competitive forces to make their way to where there isn't any clear advantage for anyone," the trader said. "From a purely trading perspective, you potentially create some confusion with SoCal's proposed auction points."

One of the shippers on SoCalGas' system, the City of Long Beach Gas and Electric Department, has not offered any alternatives, according to Elizabeth Wright, the city utility's energy manager. However, she said the city utility is concerned that whatever emerges as an auction for interstate and intrastate capacity rights does not pare down the number of suppliers participating in its regular bid program for short-term supplies.

"Our concern is that [the new auction system] may shrink the pool of available suppliers, and we could get caught in a chicken-egg situation," Wright said. "We go out currently for monthly solicitations and ask for qualified bidders for the upcoming months. Now we're concerned that we will want suppliers to assure us that they have this auctioned capacity accessible in order to bid into a program, but we realize they may not want to pick up that capacity unless they have a contract with us."

A key to the settlement is opening up SoCalGas' tradable access rights to transmission and storage and developing secondary markets for those rights. Pacific Gas and Electric Co. for the most part offers these already; SoCalGas does not. Increased transparency and clarity in both major gas distributors' systems is also part of the settlement talks.

One aspect of the desired SoCalGas changes is to create a series of citygates within the gas-only utility's service territory. One observer described it as a "Los Angeles Loop," with three receipt points based on three transmission pipelines into the major distribution system serving most of southern and central California. This is a preferred alternative among traders to SoCalGas' proposed receipt points, which one source thought might increase the chance of the system being gamed and market power abused. There is a potential for that to occur at the California-Arizona border (Topock) where there is a "constraint" point for bringing in economical San Juan Basin supplies. And under its proposal, SoCalGas originally was suggesting it maintain the "lions share" of the capacity rights at that point, according to the observer who has reviewed the gas utility's initial proposal.

"There is the potential to game by taking over control of Topock through the bids," the source said.

Richard Nemec, Los Angeles

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