Re-Cap of CA Capacity Release Deals No Silver Bullet

Not surprisingly, the energy industry last week was almost evenly split over the issue of whether FERC should re-impose price caps on short-term capacity-release transportation to the California border, with California regulators, utilities, industrial customers and producers in favor of the action, while interstate gas pipelines, power marketers and independent generators serving the state, and local distribution companies (LDCs) want to stick with the status quo.

The clincher, however, was that both sides acknowledged that re-capping capacity-release transactions may not have much measurable impact on taming natural gas prices at the California border, given that capacity-release deals at above-maximum tariff rates accounted for only a small slice of the overall volume of interstate transportation capacity into the state during the period when gas prices soared in Southern California. They further noted that re-capping released capacity at maximum tariff rates would simply drive more capacity-holders to the California border to do unregulated bundled commodity-capacity deals.

Capitol Hill and state lawmakers have pinned a large part of the blame for the huge run-up in gas prices in California since mid-2000 on FERC's experimental freeing of short-term transportation from the maximum rate ceilings imposed on longer-term, firm deals, but state regulators and industry were quick to point out that there were a number of other factors at work.

The California Public Utilities Commission (CPUC) cited the alleged manipulation of gas prices by El Paso Merchant Energy Co. and affiliate El Paso Natural Gas; the explosion on the El Paso pipeline last August; and the capacity-allocation difficulties on the El Paso system. Enron pointed to the huge increase in gas demand in California; the shortage of intrastate takeaway capacity; and the full capacity at which interstate pipelines have been operating.

These factors "have all contributed much more heavily to California's high natural gas prices than did the lifting of the price cap for short-term capacity releases, since such short-term capacity is just not being released, even without a price cap limiting the revenues such capacity can attract," the CPUC told FERC [RP01-180]. Consequently, it believes that re-instituting the price cap alone will not be enough to solve California gas price worries.

Nevertheless, it "should have at least some downward impact on the price of gas at the California border, although probably not a large enough impact to be termed 'significant,'" the CPUC said. Given this prospect, it said it favored FERC re-instituting the rate cap on capacity-release transportation to the state's border, and also taking additional measures to capture more of the market.

The CPUC called for the Commission to impose a cap on bundled commodity/transportation deals, which account for many of the transactions now, and are likely to expand if FERC should re-impose a price cap on capacity releases. The two actions, it stressed, must go hand-in-hand. "...[W]e do know that if both capacity releases and the California border prices are capped, border prices will be brought under control and there should be no detrimental effect on shippers' ability to obtain short-term firm capacity."

Specifically, the CPUC urged FERC to adopt a cap of 120% of the reported average commodity sales price, plus 100% of the as-billed rate for interstate transportation. "A 20% premium over the commodity price should be more than sufficient to allow for a fair return, while providing overdue relief to California consumers." The CPUC proposed that the caps be enforced on an "interim basis" until the Southern California market is no longer constrained.

FERC issued a request-for-comments last month on the issue of re-instituting the price caps on capacity releases. The Commission took this action in response to separate petitions by San Diego Gas and Electric (SDG&E) and Los Angeles Department of Water and Power (LADWP). The petitioners also urged FERC to turn its sights to the bundled commodity-transportation market.

SDG&E said that "to bring interstate pipeline capacity prices back down to realistic levels approaching the pipelines' maximum tariff rates [and to] send a clear message to the market of its concern over this issue...the Commission should provide some level of discipline to the market for bundled capacity/commodity products by adopting reasonable reporting requirements for natural gas sales to California." FERC last month called for comment on a proposal to require all sellers to California to report detailed information on all their transactions (see NGI, May 28).

Current data shows that transactions at the California border for bundled capacity-commodity deals are big business, representing from 29% to 55% of the total interstate pipeline capacity serving the state from November 2000 through May 2001, SDG&E noted. While capacity-release deals have fallen off, the utility said the "general trend" signals an increase in the volume of short-term released capacity at prices above pipelines' maximum tariff rates in the future, "perhaps influenced to some extent by the prospect of Commission oversight of the bundled capacity-commodity market." With this as a distinct possibility, it stressed the need for FERC to re-cap capacity releases to California as well.

Duke Energy Trading and Marketing LLC warned FERC that re-capping capacity deals, particularly as California enters the summer season, could be counterproductive. "Re-capping the secondary market for released capacity would disrupt the capacity markets into California, and could very well have the unintended consequence of exacerbating the volatility of gas prices in California, both in the near and long term," it said. This is a "particularly inopportune time to be experimenting with market-disrupting `fixes' that could prove more harmful than helpful."

In separate filings, Enron North America Corp. and the Interstate Natural Gas Association of America (INGAA) agreed that re-capping capacity-release transactions would have a "negligible" effect on California gas prices because capacity-holders, in an effort to circumvent the cap, would simply do more unregulated bundled deals at the state border. "Much trading activity has already moved to the border, likely as a result of the problems [associated with] getting firm delivery rights through the interstate pipelines on into the intrastate market," said Enron.

The American Gas Association (AGA), an LDC trade group, urged the Commission to continue with its experiment and keep the price caps off. As the Sept. 30, 2002 deadline for the end of the experiment approaches, "AGA would hope the Commission would open an inquiry to explore the results of the experiment throughout the nation and consider continuing the program, leaving the cap off released capacity."

In the event FERC should re-impose the price cap, the Independent Petroleum Association of America, which represents independent producers, believes the Commission should take steps to prevent pipelines from transferring capacity to their affiliates to avoid Commission scrutiny.

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