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CPUC Cites Dynegy; Urges FERC Keep Caps

CPUC Cites Dynegy; Urges FERC Keep Caps

Controversial arrangements between pipelines and marketers - similar to the one awarding Dynegy Marketing and Trade sole control of 1.3 Bcf/d of the remaining unsubscribed capacity on El Paso Natural Gas - could proliferate if FERC should uncap prices in the short-term capacity market without first ensuring that adequate safeguards are in place for pipeline customers, California regulators warned.

"The Dynegy situation illustrates how easy it was for a pipeline or unregulated marketer to artificially inflate transportation rates and California border prices for an entire year. And if such artificial increases are possible in the California market with 1 Bcf/d to 2 Bcf/d of excess interstate pipeline market, it would be even easier for pipelines or marketers to artificially increase prices in markets that have less excess pipeline capacity," the California Public Utilities Commission (CPUC) said in supplemental comments on the notice of proposed rulemaking (NOPR) and notice of inquiry (NOI).

The CPUC has blamed Dynegy for driving up prices for firm transportation between the southwestern producing basins and the California border, both in the primary and secondary capacity markets, by withholding El Paso capacity from shippers, and also for causing increases in natural gas prices at the California border. Citing the gas marketer's influence, the regulators noted Southern California Gas managed to get 33%-89% of the as-billed rate (ABR) for releases of short-term capacity in 1998 - the first year of the Dynegy-El Paso contract. "This [was] a far cry from the range of 3% to 39% of the ABR which the California LDCs received for capacity releases prior to the Dynegy-El Paso contracts." It represented a 200%-300% increase in the capacity-release rates, but still was below the rate cap. If FERC should abandon the price ceiling, it would erase "the only protection that presently exists for ratepayers."

The CPUC said FERC's proposed mandatory daily auction of short-term capacity could "theoretically" prevent potential market abuses in an uncapped market, but in the end it questions whether an auction would be workable.

El Paso quickly responded to the CPUC's remarks, insisting that gas prices at the California/Arizona border decreased in 1998 and that other factors - aside from the Dynegy contract - were responsible for the increase in the basis differentials between the southwestern producing basins and the California/Arizona border during that year.

The pipeline contends the average price of natural gas at the border fell 10% to $2.24 in 1998 from $2.50 for the previous year. And while it agrees the basis differentials between the California/Arizona border and southwestern producing basins were "generally higher" in 1998, El Paso says the CPUC "ignores the fact that basis differentials have fallen sharply since early December 1998, to the point where basis differentials throughout the month of January 1999 were approximately equal to the differentials that existed in late 1997."

It further noted that "several factors wholly unrelated to the Dynegy contract" - such as reduced demand in the Midwest and weather-induced demand increases in the California market - were "substantial factors" accounting for the rise in basis differentials during 1998.

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