Capacity-Gaming Complaint Remanded to FERC
The D.C. Circuit Court of Appeals has remanded FERC's rejection
of a 1997 complaint in which Southern California Edison accused
Southern California Gas (SoCalGas) of gaming the secondary market
for firm capacity on key transportation links between the low-cost
San Juan producing basin and the California border.
The court said the Commission's decision not to pursue the
market power issues raised by Edison in the complaint was both
"arbitrary and capricious." Edison accused SoCalGas, the dominant
holder of interstate capacity into southern California, of
withholding large amounts of unused firm capacity from the market
by steadfastly refusing to negotiate competitive prices for the
release of that capacity. FERC denied the utility's complaint on
the ground that the prices sought by SoCalGas for its capacity
releases did not exceed the maximum tariff rate allowed for
interstate gas pipelines in the primary capacity market.
But FERC's oversight is "not...limited" to rate matters, the
court opined. "That the rate charged in a particular instance is
just and reasonable still leaves in place...other possible grounds
for Commission action." Specifically, it noted Section 5 of the
Natural Gas Act (NGA), in addition to giving FERC jurisdiction over
"unjust" and "unreasonable" rates, provides it with authority over
unjust and unreasonable practices, and over "unduly discriminatory"
or "preferential" rates or practices.
In rejecting the complaint, the court further said the
Commission assumed - mistakenly so - that a releasing shipper, such
as SoCalGas, "could not be better situated to abuse market power
than a pipeline." Although such an assumption "probably makes sense
ordinarily," FERC overlooked the impact of the volumetric
Interstate Transportation Cost Surcharge (ITCS) in this case.
"While revenue losses on unmade sales constrain an ordinary
monopolist's ability to reduce output and raise prices, the ITCS
enables SoCal to give its own [affiliates] artificially low prices,
and to price sales to others at unacceptable prices, with no
sacrifice of transportation revenue whatever," wrote Circuit Judge
Stephen Williams for the court.
The ITCS, which the California Public Utilities Commission
established in 1991, permits SoCalGas to recover from its customers
the difference between what it pays for interstate pipeline
capacity and the actual rate it receives for released capacity. It
was intended to help utilities recover stranded costs, but Edison
contends SoCalGas has used the ITCS to manipulate the secondary
capacity market in southern California. The ITCS, in effect,
permits SoCalGas to recover all of its capacity reservation costs -
mostly from noncore customers, such as Edison - while withholding
capacity from the secondary market, the utility charged. In 1997,
when the complaint was filed, SoCalGas had about 393 MMcf/d of
unused capacity that was available for release.
The court also said it was not swayed by the Commission's "final
rationale" for not pursuing Edison's complaint, which was that it
might limit participation in the secondary market in southern
California and possibly elsewhere. "There is no reason why a
decision to examine market-power issues here need expose all
shippers to possible scrutiny; the Commission could, by the terms
of its decision, simply limit possible objects of investigation to
those capacity-holders who are faced with the same perverse
incentives as SoCal with the ITCS," the court said.
In remanding the case, the court instructed FERC take another
look at possible damages against Edison. Due to changes in the
electricity industry over the past few years, "the facts underlying
Edison's claimed aggrievement are now unclear," it noted. When
Edison first filed its complaint, it "owned a number of gas-first
electricity generation plants, and was harmed in this capacity by
higher gas prices," the court said, but it sold the plants in 1998.
Edison contends, however, that it continues to be "adversely
affected" since electricity prices closely track natural gas prices
in the southern California market.
SoCalGas counters that other market changes - particularly its
merger with San Diego Gas & Electric - don't favor the kind of
market-power abuse alleged by Edison. "But manipulation of the
downstream electricity-generation market does not exhaust the
possible benefits to SoCal from abuse of its market power in the
gas transportation market," the court said. "Edison points to the
energy futures markets and to competition between electricity and
core gas services. We leave these to be considered by the